Here's another recent Wall Street Journal Notable & Quotable that deals with current US federal government financial problems. But it quotes someone from quite long ago, reminding us that government stimulus plans typically overlook something:
"Frederic Bastiat on justifying government spending only based on 'that which is seen,' while ignoring 'that which is not seen.'
French economist Frederic Bastiat in "That Which Is Seen, and That Which Is Not Seen," 1850:
I lose patience, I confess, when I hear this economic blunder advanced in support of . . . a project. "Besides, it will be a means of creating labor for the workmen."
The State opens a road, builds a palace, straightens a street, cuts a canal; and so gives work to certain workmen—this is what is seen: But it deprives certain other workmen of work, and this is what is not seen.
The road is begun. A thousand workmen come every morning, leave every evening, and take their wages—this is certain. If the road had not been decreed, if the supplies had not been voted, these good people would have had neither work nor salary there; this also is certain.
But is this all? Does not the operation, as a whole, contain something else? At the moment when M. Dupin pronounces the emphatic words, "The Assembly has adopted," do the millions descend miraculously on a moon-beam into the coffers of MM. Fould and Bineau? In order that the evolution may be complete, as it is said, must not the State organize the receipts as well as the expenditure? Must it not set its tax-gatherers and tax-payers to work, the former to gather, and the latter to pay?
The sophism which this work is intended to refute is the more dangerous when applied to public works, inasmuch as it serves to justify the most wanton enterprises and extravagance. When a railroad or a bridge are of real utility, it is sufficient to mention this utility."
These latter paragraphs make Bastiat's point- projects worth society's capital need not wait for nor depend upon federal government funding. Excepting cases of military spending and wartime efforts like the Manhattan Project, the long term economic benefits of which, outside of defense purposes, I am not specifically aware, there isn't any significant government spending which can't be undertaken by the private sector instead.
Currently, federal funding is used as a substitute for state and local funding, because the latter two must typically run balanced budgets. Roads, government building such as schools, and even public employees, are all potential uses to which scarce state and local taxpayer dollars must be allocated. To simply declare them all vital and rely on federally-sourced, borrowed money, is to ignore Bastiat's insight that the better projects are already being funded locally.
Showing posts with label Stimulus. Show all posts
Showing posts with label Stimulus. Show all posts
Sunday, October 23, 2011
Monday, August 08, 2011
Economics, Cycles & Politics
As I listened to this past Friday's dismal job growth numbers and persistent high unemployment, coupled with the prior Friday's dismal GDP growth numbers, it occurred to me that, due to the misleading mythology allowed to grow up around FDR's presidency, the US now seems destined to borrow and spend its way to ruin thanks to empirically discredited Keynesian economic policies.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
Let's go back to basic macroeconomics. Before Keynes.
Economies move in cycles. If there were no presumption on the part of governments to attempt to repeal the laws of economic cycles, then we'd see what was prevalent in pre-1930s America and elsewhere. Expansions eventually slow as Samuelson's accelerator-multiplier (see also here) theory kicks in,
"Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.
Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.
Instead of 10% more materials each year to make my products, this year, I need only 5% more.
My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.
While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.
Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers."
Contraction follows expansion, then recession, followed by recovery and, subsequently, expansion.
Before America had the world's reserve currency, was the free world's economic hegemonist, and could basically print or borrow dollars at will, that's how most economies behaved.
Yes, you will now hear Keynesians decry over-savings, or the paradox of thrift, as ex-PIMCO managing director Paul McCulley did in a Bloomberg television interview on Friday afternoon. He now looks like some wild-haired ape-man, with an even more virulent streak of Keynesianism, now that he has no responsibility to PIMCO to appear the least bit economically sane.
But those arguments only appeared as Keynes wrote the General Theory and mistakenly believed that pump-priming, deficit spending, call it what you will, could actually and benevolently affect long term economic conditions positively.
We know now, decades later, that Keynes' theory was simply a sop to human desire for immediate gratification, while ignoring the very real longer-term consequences of debt, higher taxes, and reduced personal economic freedoms.
The linked post from last week, discussing the true nature of WWII as a time of immense savings and lowered consumption, setting the stage of the US economy's rapid growth in the 1950s, puts the lie to McCulley's contention regarding the so-called paradox of thrift.
The reality is that savings are collected and invested, eventually forming capital and underpinning healthy economic growth in the private sector, when natural economic forces are allowed to operate.
I believe that, much like the current mistaken belief by many that cutting social welfare programs like Social Security, Medicare, or Medicaid, constitutes a broken societal promise, the real question is whether the cure is worse than the disease.
Those social programs will never operate in a sustained fashion, designed, as they all were, with fatal flaws.
So, too, does Keynesian theory on government stimulus exist in a sort of fantasy world of arithmetic, rather than human, behavior. The reality is that the forced spending doesn't create lasting employment or economically-viable industries, but it leaves very real debt and a need for future spending reductions or increased taxes.
What was wrong with simply allowing natural economic cycles to operate in the first place, if the policies which economists have been able to develop as a method of repealing the laws of economic cycles bring side-effects which have ultimately proven worse than the original condition of naturally-occurring phases in economic cycles?
If the US federal government didn't have the monetary power of the world's reserve curency, combined with politicians of both parties who, once elected President, Senator, Representative or Fed Chairman, work furiously to retain those positions, do you really think we'd seriously be spending trillions of borrowed money to try to remove recessions and contractions from our economic cycles?
This folly has been primarly a politically-generated error. The health of the American economy doesn't require Keynesian stimulus spending- only the political careers of federal elected officials.
Monday, August 16, 2010
Disingenuous Economic Reporting In The WSJ
Before I took a brief sabbatical from writing this blog earlier this month, I had saved a Wall Street Journal front page article on which to comment. The column, from July 27, was entitled Next Step on Economy Hinges on Debate Over Stimulus.
I found the piece entirely disingenuous in that it gave significantly more weight to the pro-stimulus argument, despite absolutely no credible economic research or other evidence that such actions have ever worked in a large, modern economy.
Consider this quote from the article,
"But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence."
Never mind that we know from Amity Schlaes,' and others research, that the gigantic 1930s FDR-led stimulus programs failed. Or that the current programs have failed to meet the few objectives voiced for them.
Some people will continue to apologize for and excuse any and all manner of stimulus spending.
A more recent Journal piece by Alan Meltzer, as well as a statement attributed in the July column by Carmen Reinhart, both focus on modern consumers behaving differently, by expecting higher future taxes, when government deficit spending rises. This was never even imagined by Keynes and his minions.
Another misleading aspect of the article is that it fails to note that, when the US embarked on its failed stimulus programs of the 1930s, the national debt was far smaller, on several measures, than it currently is. And the nation hadn't run an almost constant annual budget deficit, along with legislating ever-greater future social spending promises, for nearly 80 years!
Thus, now, global investors are much better informed about the continual propensity of the US to spend money it doesn't have. Sooner or later, even high T-bill rates won't adjust for the risks of the US simply failing to generate sufficient tax revenues to pay debt interest.
The WSJ is a serious national daily business newspaper. If it can't manage to publish realistic, credible lead stories on its front page, who are we to trust to tell consumers and investors the truth about the recent macroeconomic mistakes of the US federal government?
I found the piece entirely disingenuous in that it gave significantly more weight to the pro-stimulus argument, despite absolutely no credible economic research or other evidence that such actions have ever worked in a large, modern economy.
Consider this quote from the article,
"But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence."
Never mind that we know from Amity Schlaes,' and others research, that the gigantic 1930s FDR-led stimulus programs failed. Or that the current programs have failed to meet the few objectives voiced for them.
Some people will continue to apologize for and excuse any and all manner of stimulus spending.
A more recent Journal piece by Alan Meltzer, as well as a statement attributed in the July column by Carmen Reinhart, both focus on modern consumers behaving differently, by expecting higher future taxes, when government deficit spending rises. This was never even imagined by Keynes and his minions.
Another misleading aspect of the article is that it fails to note that, when the US embarked on its failed stimulus programs of the 1930s, the national debt was far smaller, on several measures, than it currently is. And the nation hadn't run an almost constant annual budget deficit, along with legislating ever-greater future social spending promises, for nearly 80 years!
Thus, now, global investors are much better informed about the continual propensity of the US to spend money it doesn't have. Sooner or later, even high T-bill rates won't adjust for the risks of the US simply failing to generate sufficient tax revenues to pay debt interest.
The WSJ is a serious national daily business newspaper. If it can't manage to publish realistic, credible lead stories on its front page, who are we to trust to tell consumers and investors the truth about the recent macroeconomic mistakes of the US federal government?
Tuesday, October 13, 2009
Steve Wynn On The Stimulus, Jobs & Tax Policy
I wrote this post on my companion blog today. Because of some of the political overtones and asides in Wynn's remarks, I originally put it in a political context.
But, on reviewing the clips, I think it deserves to be cross-posted here, as well.
But, on reviewing the clips, I think it deserves to be cross-posted here, as well.
Tuesday, July 07, 2009
More Stimulus?
Unbelievable as it sounds, members of Congress are pleading for another deficit-busting stimulus bill.
Apparently they are worried because the ill-designed first $787B bill didn't work. Much of the spending went to transfer payment programs, some went to temporary road-building jobs, and much is planned for out-years.
There were critics of the bill which warned of this result, but Congress passed it so fast there literally was not enough time from the bill's being written, and then voted on, for any one of them to have actually read the bill.
Meanwhile, last week's unemployment rate went to 9.6%. Far higher than the 8% this administration assumed when it pushed for the stimulus bill.
A common definition of insanity is doing the same thing again, but expecting different results. That's where we seem to be with our economy, unemployment and stimulus bills.
Perhaps, if anything were to be done, it would be to shift existing, unspent so-called stimulus funds to direct income tax rebates, in advance.
At least doing this would insure that the money is spent now, by consumers, rather than politicians.
Apparently they are worried because the ill-designed first $787B bill didn't work. Much of the spending went to transfer payment programs, some went to temporary road-building jobs, and much is planned for out-years.
There were critics of the bill which warned of this result, but Congress passed it so fast there literally was not enough time from the bill's being written, and then voted on, for any one of them to have actually read the bill.
Meanwhile, last week's unemployment rate went to 9.6%. Far higher than the 8% this administration assumed when it pushed for the stimulus bill.
A common definition of insanity is doing the same thing again, but expecting different results. That's where we seem to be with our economy, unemployment and stimulus bills.
Perhaps, if anything were to be done, it would be to shift existing, unspent so-called stimulus funds to direct income tax rebates, in advance.
At least doing this would insure that the money is spent now, by consumers, rather than politicians.
Wednesday, June 03, 2009
The Price of US Domestic Economic Folly
While reading Mary Anastasia O'Grady's excellent editorial in a recent Wall Street Journal concerning Venezuelan dictator Hugo Chavez' dependence upon a weakening US dollar to maintain power and stave off economic collapse, I was reminded of how foolish the recent and current administration's exclusive focus on domestic economics has been. How much it has damaged, and will continue to damage US economic and, eventually, military power throughout the world.
O'Grady's piece concentrated on the effects on Venezuela, a major oil exporter, as the US dollar had strengthened prior to our recent financial/economic debacle. This rise in the dollar's value put extreme pressure on Venezuela's economy, because oil is priced in US dollars. Thus, the stronger dollar resulted in fewer dollars flowing into the country, which heavily imports food, equipment, and, according to O'Grady, so much as to make it essentially totally dependent upon dollars for currency with which to purchase imports.
Now that the dollar is weakening, in light of a US political system gone insane, rescuing GM, AIG, Fannie Mae, Freddie Mac, and Chrysler, plus spending literally trillions of dollars on 'stimulus' plans, the price of various commodities, including oil, is rising. This is relieving economic pressure on oil producing countries with hostile intentions toward the US.
As I reflected on O'Grady's column, I realized how very little is written or discussed on this topic in the business media. Or in the political realm, either, for that matter.
In my youth, I was acutely aware of LBJ's folly in debauching the dollar to pay for the Vietnam war and the many misguided programs of his "Great Society" initiative. Inflation rose, and shortly thereafter, so did taxes. LBJ's lack of comprehension of basic domestic and international economics, both fiscal and monetary, resulted in a 'lost decade' in America, although I don't think I've really seen it referred to quite that way.
From the late 1960s until Reagan's election in 1980, the US economy's growth slowed under more regulation, higher taxes, inflation, and a weaker dollar. Trade was not as large a component of GDP 30-40 years ago, so the weaker dollar's impact on exports, especially with a large Soviet bloc, was much less pronounced than it is today.
What the world saw back in LBJ's day was a US that wanted to borrow from the world, or print, money to spend on non-investment items- war material and social programs. Investors fled the dollar and its inflation, realizing the folly of America's spending binge at the expense of the rest of the world's capital needs.
It's much the same now. Only we have the 1960s-1970s as a guide to what will happen again. Probably faster and more harshly, since there are some important changes since LBJ's day:
-a more balanced, less US-dominated global economic product
-more industrialized countries which don't require US goods
-better communications and information dispersion, allowing global realization of US economic policies and their implications
-larger, deeper, freer and faster-moving international capital markets
-major foreign governments with interest in seeing a weaker US in a position to exploit our economic mistakes, and an ability to do so by being part of the global economic system
The best way I can express what I see is to summarize what the current administration is, in effect, saying to the rest of the world, in an economic sense,
'We in America want to reduce our standard of living and productivity levels by imposing on ourselves massive penalties in the form of pollution and energy-usage regulations.
Meanwhile, we are also choosing to abandon our prior policy of letting private sector companies fail. Thus, we've borrowed and printed money to 'save' several failed financial institutions, two car producers, and, in directly, an entire union, the UAW.
At the same time, to stave off the real and healthy consequences of such failure, which would be Schumpeterian recycling of resources from failed to new enterprises, especially amidst a naturally-occurring recession phase of our economic cycles, we have committed to borrowing or printing in excess of one trillion dollars for 'stimulus' spending.
Not to be satisfied with imperfection, and lacking any sort of patience to save our own profits to fund the foregoing spending, we are also planning to embark on a wholesale federalization of our healthcare sector.
All of this takes money. A lot of money. Several trillion dollars which, frankly, we don't have, and won't generate for decades, at the rate at which we are dampening economic growth, private investment and entrepreneurship.
We'd rather not wait for our own capital generation for any of these spending programs. Instead, we'd like you, the rest of the world, to lend us your capital by buying our Treasury securities.
In return, we'll probably print more dollars, too, and debase the value of the very Treasuries we want you to buy. We hope we can inflate our way out of this mess by simply devaluing our liabilities, while you don't notice.
Won't you please help our country indulge ourselves in immediate gratification on a level nobody else on the planet can afford? Even as we dismantle the confidence in, and workings of, a predominantly free-market economy which used to deliver growth and profits which could help fund a modest portion of these wants?'
Never mind our petty domestic 'needs' and wants- healthcare, union jobs, a never-receding economy, pollution-free energy at no added cost. The international consequences of our current economic madness may, for the first time in a century, cause the US to lose its economic and, as a result, military power and influence just as two centers of power not aligned with American interests- China and the Arab world- stand ready to take advantage of our mistakes.
In my lifetime, I don't think I've seen quite so dangerous a confluence of American economic stupidity, preoccupation with domestic affairs, deliberate ignorance of the international consequences of that economic stupidity, and the existence of other powers able to capitalize on our folly.
O'Grady's piece concentrated on the effects on Venezuela, a major oil exporter, as the US dollar had strengthened prior to our recent financial/economic debacle. This rise in the dollar's value put extreme pressure on Venezuela's economy, because oil is priced in US dollars. Thus, the stronger dollar resulted in fewer dollars flowing into the country, which heavily imports food, equipment, and, according to O'Grady, so much as to make it essentially totally dependent upon dollars for currency with which to purchase imports.
Now that the dollar is weakening, in light of a US political system gone insane, rescuing GM, AIG, Fannie Mae, Freddie Mac, and Chrysler, plus spending literally trillions of dollars on 'stimulus' plans, the price of various commodities, including oil, is rising. This is relieving economic pressure on oil producing countries with hostile intentions toward the US.
As I reflected on O'Grady's column, I realized how very little is written or discussed on this topic in the business media. Or in the political realm, either, for that matter.
In my youth, I was acutely aware of LBJ's folly in debauching the dollar to pay for the Vietnam war and the many misguided programs of his "Great Society" initiative. Inflation rose, and shortly thereafter, so did taxes. LBJ's lack of comprehension of basic domestic and international economics, both fiscal and monetary, resulted in a 'lost decade' in America, although I don't think I've really seen it referred to quite that way.
From the late 1960s until Reagan's election in 1980, the US economy's growth slowed under more regulation, higher taxes, inflation, and a weaker dollar. Trade was not as large a component of GDP 30-40 years ago, so the weaker dollar's impact on exports, especially with a large Soviet bloc, was much less pronounced than it is today.
What the world saw back in LBJ's day was a US that wanted to borrow from the world, or print, money to spend on non-investment items- war material and social programs. Investors fled the dollar and its inflation, realizing the folly of America's spending binge at the expense of the rest of the world's capital needs.
It's much the same now. Only we have the 1960s-1970s as a guide to what will happen again. Probably faster and more harshly, since there are some important changes since LBJ's day:
-a more balanced, less US-dominated global economic product
-more industrialized countries which don't require US goods
-better communications and information dispersion, allowing global realization of US economic policies and their implications
-larger, deeper, freer and faster-moving international capital markets
-major foreign governments with interest in seeing a weaker US in a position to exploit our economic mistakes, and an ability to do so by being part of the global economic system
The best way I can express what I see is to summarize what the current administration is, in effect, saying to the rest of the world, in an economic sense,
'We in America want to reduce our standard of living and productivity levels by imposing on ourselves massive penalties in the form of pollution and energy-usage regulations.
Meanwhile, we are also choosing to abandon our prior policy of letting private sector companies fail. Thus, we've borrowed and printed money to 'save' several failed financial institutions, two car producers, and, in directly, an entire union, the UAW.
At the same time, to stave off the real and healthy consequences of such failure, which would be Schumpeterian recycling of resources from failed to new enterprises, especially amidst a naturally-occurring recession phase of our economic cycles, we have committed to borrowing or printing in excess of one trillion dollars for 'stimulus' spending.
Not to be satisfied with imperfection, and lacking any sort of patience to save our own profits to fund the foregoing spending, we are also planning to embark on a wholesale federalization of our healthcare sector.
All of this takes money. A lot of money. Several trillion dollars which, frankly, we don't have, and won't generate for decades, at the rate at which we are dampening economic growth, private investment and entrepreneurship.
We'd rather not wait for our own capital generation for any of these spending programs. Instead, we'd like you, the rest of the world, to lend us your capital by buying our Treasury securities.
In return, we'll probably print more dollars, too, and debase the value of the very Treasuries we want you to buy. We hope we can inflate our way out of this mess by simply devaluing our liabilities, while you don't notice.
Won't you please help our country indulge ourselves in immediate gratification on a level nobody else on the planet can afford? Even as we dismantle the confidence in, and workings of, a predominantly free-market economy which used to deliver growth and profits which could help fund a modest portion of these wants?'
Never mind our petty domestic 'needs' and wants- healthcare, union jobs, a never-receding economy, pollution-free energy at no added cost. The international consequences of our current economic madness may, for the first time in a century, cause the US to lose its economic and, as a result, military power and influence just as two centers of power not aligned with American interests- China and the Arab world- stand ready to take advantage of our mistakes.
In my lifetime, I don't think I've seen quite so dangerous a confluence of American economic stupidity, preoccupation with domestic affairs, deliberate ignorance of the international consequences of that economic stupidity, and the existence of other powers able to capitalize on our folly.
Thursday, March 05, 2009
Where Will Sovereign Stimulus Funding Come From?
Yesterday's equity market rise was allegedly due, in part, to hopes of China's stimulus plan and news of possible economic near-expansion.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
However, I find this confusing.
We have recently experienced significant deleveraging in the private capital markets. Debt and equity prices are far below their year-ago levels. The S&P500 Index has declined more than 50% in the past year.
Now, with the destruction of capital values on a scale not seen in decades, two large governments intend to fund large spending programs with debt.
Who will buy this debt? Where is the money, given the significant capital losses of the past year?
Even my sixteen year-old daughter understands instinctively that if $1T is spent using mostly printed money, the dollar will be worth less. Of course, if buyers of US debt were found, their interest rate demands are almost certainly going to be crippling.
China and the US together tapping capital markets for between 1 and 2 trillion dollars is incomprehensible.
It's the equivalent of these two nations telling the world,
'We don't want our citizens to feel any pain whatsoever right now. So we're going to borrow or print several hundred billion dollars and dispense it to our people, giving them money on which to live, hoping it will restart our economies. Then, later, we'll buy the debt, yuan and dollars back.'
Why would anyone in their right mind by this idea? Or the debt to fund it?
It's ludicrous. Isn't it much more reasonable for governments to be cutting tax rates and letting people retain more of their own money? Perhaps local governments will have infrastructure projects which are economically viable.
But to engage in wasteful, nationwide spending as an excuse to spare citizens the pain of their earlier bad financial choices, on the face of it, cannot work in the long run.
Either the money will be wasted, and/or the immense debt loads, at high interest rates, will result in dampened GDP growth rates for a decade or more.
In the worst case, nobody can buy this debt, the spending is funded by printing presses, and inflation rates on a scale that will make the Carter era look tame may be with us. It would seem that there is simply not enough capital to fund these immense governmental spending plans and provide for private uses of capital at the same time.
Wednesday, February 18, 2009
Stimulus & Resource Allocation- Part Two
Yesterday's post focused on the many, many economists who have reminded us that FDR's New Deal didn't work, and the recently-passed so-called stimulus bill won't, either. I wrote, in part, of Gary Becker's and Kevin Murphy's Wall Street Journal piece,
"In this, they are in agreement with Dick Armey and his harking back to Hayek in noting that Keynes never explained the mechanism whereby a government can make similar, economic-productivity seeking resource allocations that individuals and households make at the microeconomic level."
I concluded by observing,
"What is missing from Congress' and the administration's calculations is a common sense notion of how one can really effect immediate spending on what our society believes are the most important projects, from an economic and productivity perspective."
Just a week ago, in a Wall Street Journal editorial entitled "Forget About Survival of the 'Fittest,' NYU professor of psychology Gary Marcus noted that it is not the case that we can assume all Americans spend money or make financial decisions equally wisely. Using some examples of the evolution of species, Marcus contends that, in fact, the process results in 'good enough' adaptation far more often than it results in perfection.
Why does this have bearing on the current topic of economics, the stimulus bill, and resource allocation? Because the manner in which money is allocated and used- either saved or spent, and how- affects what happens to the trillion dollars that the current administration and Congress have just put down on the roulette table for all of us American taxpayers.
Perhaps, rather than borrow a trillion dollars, and then dole it out in many politically-motivated ways to many Americans, with the poorest getting the most money, we should just halt tax collections for a year or two. Last year's federal tax take was, conveniently, about a trillion dollars.
Thus, rather than channel this immense pile of money through the very leaky, sticky bucket that is Washington, the states and municipalities, why not just not ask for taxes, instead?
Talk about instant stimulus! It doesn't get more immediate than that! Plus, you avoid the Keynesian problem that government can't replicate the economic resource allocating behavior of the best, most rational and successful citizens.
In an email to my business partner concerning what I took away from Marcus' editorial, I wrote,
"Might the lessons not be these?
If you are fit to amass wealth by earning high incomes, you are probably fairly rational. Thus, your spending of your greater-than-average wealth is fairly sensible, economic and rational.
If, however, you are poor, and underachieve, and the government gives you the equivalent of $10K/household, you may not use it at all rationally, economically, or sensibly.
Thus, extreme transfers of, say, $1T from those who made it, or will have to repay it, to those who would/could never earn it, pretty much insure, as Hayek would expect, less-than-economic use of the money.
Might not poorly-educated, not-so-intelligent young sports and entertainment phenoms be another good example of this? How many of those superstars end up poor and destitute before they turn 40 or 50?"
He replied,
"That’s why tax cuts would likely maximize optimum decision-making at the end points of the system: Specifically, a higher proportion of any overall tax cut would flow to the largest taxpayers, i.e., those “fit to amass wealth by earning high incomes,” and their superior decisions will maximize the productivity."
Furthermore, rather than innumerable local governments asking for federal spending on local projects that they would never bother to pay for locally, now, local and state governments, aware of an extra trillion dollars available in taxpayer pockets, could float their best projects, with the costs properly assumed locally. If the projects were genuinely necessary, economically productive, and worthwhile, communities will undertake the spending to complete them.
If not, then they weren't worthwhile expenditures of our money in the first place.
Clearly, the senseless act of the federal government borrowing a year's worth of tax receipts, just to sprinkle it back onto taxpayers according to its own, politically-driven resource allocation methods, is more wasteful and of dubious value than simply letting each of us keep our tax payments this year.
The more economically successful, rational Americans will thus be in a position to most influence near-term prosperity and growth by exercising their already-proven economic judgments with even more money. The size of the stimulus would actually be greater than that of the so-called stimulus bill, and we would all be comforted knowing that our most productive, economically-driven decision-makers were given the most money with which to make fresh economic decisions.
For the purpose of national survival and growth, we would give the "fittest" members of our society the most resources with which to facilitate those objectives. They have always been the ones to provide jobs for the less fit. Why should we expect it to work differently now? Certainly, nobody believes that the federal government is better at knowing which businesses and jobs to create than our most economically fit citizens are, do they?
Tuesday, February 17, 2009
Stimulus & Resource Allocation- Part One
There has been much ink, electronic and chemical, spilled over the so-called stimulus package that passed Congress last week.
The horrifying details abound. So many pages that it would have been impossible for a member of Congress to read it completely and intelligibly in the forty eight hours available prior to the vote.
That our President, when campaigning, made all sorts of promises about having the legislation available on a website for five days for citizens to read and on which to comment. Never happened.
The same President, his advisers and cabinet nominees spent no time whatsoever authoring the bill. Rather, he tossed it to liberal House Democrats to write, making it, in effect, a bill with which the President had absolutely nothing to do, save stump for it in the poorest communities he could find.
I will bet you that he hasn't even read the bill himself, in full.
On my desk is a pile of recent Wall Street Journal articles predicting various sorts of doom that will follow from this latest Congressional and administration excess.
On February 2nd, Harold Cole and Lee Ohanian, both professors of economics, the latter known for his work at UCLA on this topic, wrote "How Government Prolonged the Depression." The title is self-explanatory. The details are captivating and scary.
On February 11th, Peter Ferrara, a policy development officer in Reagan's White House, wrote "Reaganomics vs. Obamanomics." Since Reaganomics actually worked, and led to two decades of fairly monotonic rises in GDP and incomes, with low inflation, this would seem to be a very important piece. It is. Ferrara notes that Reagan cut tax rates across the board, controlled government spending so that nondefense discretionary spending actually decreased, deregulated key industry sectors to boost productivity and production, while endorsing tight monetary policy.
Just the opposite of all four of these is now being planned and implemented.
On February 10th, Gary Becker and Kevin Murphy wrote "There's No Stimulus Free Lunch." Becker, an economic Nobel laureate, and Murphy, an economics professor at University of Chicago and a Hoover Institute fellow, explode a number of myths about the stimulus bill being spread by the administration and Congress.
One is Vice-Presidential economics adviser Jared Bernstein's falsehoods that the bill results in a "Keynesian multiplier effect" of 1.5. He and the administration's head of CEA, Christina Romer, allegedly modeled this effect, but they appear to be the only economists in America, with the likely exception of Paul Krugman, who believe it. Murphy and Becker explain why the true multiplier effect is more likely far below 1, but probably above zero.
The authors doubt that the torrent of spending can be controlled and/or shut off when the economy reaches full employment, meaning it will likely lead to significant inflation. They also question the efficacy of spending so much money in such a short period of time. In this, they are in agreement with Dick Armey and his harking back to Hayek in noting that Keynes never explained the mechanism whereby a government can make similar, economic-productivity seeking resource allocations that individuals and households make at the microeconomic level.
Finally, Becker and Murphy note that the longer run impact of taxes and interest on borrowed money, to pay for the stimulus bill, will substantially negate many of the results promised for the bill.
On February 6th, George Melloan wrote an informed piece reviewing the global effects of Treasury borrowing to pay for this stimulus bill. He writes, ominously,
"Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970's, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return to stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package."
I think Melloan is being conservative in his use of the adjective "potential" in his last sentence. There's nothing potential about what is going to happen as a result of this gigantic pork barrel bill.
Then we come to Journal columnist Daniel Henninger's "Exactly How Does Stimulus Work?," on February 12th.
Henninger pokes fun at the President's reference, in Elkhart, Indiana, to the Keynesian multiplier, calling the weatherization of homes,
"an example of where you get a multiplier effect."
Does anyone believe the President could define or give an example of what a Keynesian multipier effect is, and how it works?
I can, having taken a boatload of economics courses in my past, and continued to remain abreast of macroeconomics since business school. I have actually read Keynes' "General Theory."
What troubles me now is a sort of denial of our economic experiences of the 1930s on a par with those who, for example, deny that the Holocaust ever occurred.
Surely, if Congress and our President publicly stated that the Holocaust never happened, they'd be the subject of outrage, anger, and calls for retraction of their statements.
But their assertion that FDR's "stimulus" worked is the economic equivalent of claiming that the Holocaust was imaginary. Both are demonstrably false statements.
In the years since my entry into the work force, I have seen at least two crucial developments in global financial markets which would have brought FDR's stimulus program to a grinding, failed halt much sooner than it did.
One, of course, is linked, floating exchange rates. No Treasury Secretary or Finance Minister was ever so disciplined as those who have served after the end of fixed exchange rates. Inflation and interest rates bite much harder and faster now that they cannot be so disguised or manipulated by governments.
The other is global liquidity of private capital at the speed of electrons. Again, government finance officers now must contend with immediate votes on their fiscal and monetary policies by hundreds of billions of dollars of fast-moving private capital.
That's why American equity markets plunged some 5% upon the passage of the stimulus bill and Tim Geithner's ineffectual stumbling over his ever-planned, never-revealed financial sector "plan."
What is missing from Congress' and the administration's calculations is a common sense notion of how one can really effect immediate spending on what our society believes are the most important projects, from an economic and productivity perspective.
I will address that point in part two of this post.
The horrifying details abound. So many pages that it would have been impossible for a member of Congress to read it completely and intelligibly in the forty eight hours available prior to the vote.
That our President, when campaigning, made all sorts of promises about having the legislation available on a website for five days for citizens to read and on which to comment. Never happened.
The same President, his advisers and cabinet nominees spent no time whatsoever authoring the bill. Rather, he tossed it to liberal House Democrats to write, making it, in effect, a bill with which the President had absolutely nothing to do, save stump for it in the poorest communities he could find.
I will bet you that he hasn't even read the bill himself, in full.
On my desk is a pile of recent Wall Street Journal articles predicting various sorts of doom that will follow from this latest Congressional and administration excess.
On February 2nd, Harold Cole and Lee Ohanian, both professors of economics, the latter known for his work at UCLA on this topic, wrote "How Government Prolonged the Depression." The title is self-explanatory. The details are captivating and scary.
On February 11th, Peter Ferrara, a policy development officer in Reagan's White House, wrote "Reaganomics vs. Obamanomics." Since Reaganomics actually worked, and led to two decades of fairly monotonic rises in GDP and incomes, with low inflation, this would seem to be a very important piece. It is. Ferrara notes that Reagan cut tax rates across the board, controlled government spending so that nondefense discretionary spending actually decreased, deregulated key industry sectors to boost productivity and production, while endorsing tight monetary policy.
Just the opposite of all four of these is now being planned and implemented.
On February 10th, Gary Becker and Kevin Murphy wrote "There's No Stimulus Free Lunch." Becker, an economic Nobel laureate, and Murphy, an economics professor at University of Chicago and a Hoover Institute fellow, explode a number of myths about the stimulus bill being spread by the administration and Congress.
One is Vice-Presidential economics adviser Jared Bernstein's falsehoods that the bill results in a "Keynesian multiplier effect" of 1.5. He and the administration's head of CEA, Christina Romer, allegedly modeled this effect, but they appear to be the only economists in America, with the likely exception of Paul Krugman, who believe it. Murphy and Becker explain why the true multiplier effect is more likely far below 1, but probably above zero.
The authors doubt that the torrent of spending can be controlled and/or shut off when the economy reaches full employment, meaning it will likely lead to significant inflation. They also question the efficacy of spending so much money in such a short period of time. In this, they are in agreement with Dick Armey and his harking back to Hayek in noting that Keynes never explained the mechanism whereby a government can make similar, economic-productivity seeking resource allocations that individuals and households make at the microeconomic level.
Finally, Becker and Murphy note that the longer run impact of taxes and interest on borrowed money, to pay for the stimulus bill, will substantially negate many of the results promised for the bill.
On February 6th, George Melloan wrote an informed piece reviewing the global effects of Treasury borrowing to pay for this stimulus bill. He writes, ominously,
"Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970's, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.
Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return to stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package."
I think Melloan is being conservative in his use of the adjective "potential" in his last sentence. There's nothing potential about what is going to happen as a result of this gigantic pork barrel bill.
Then we come to Journal columnist Daniel Henninger's "Exactly How Does Stimulus Work?," on February 12th.
Henninger pokes fun at the President's reference, in Elkhart, Indiana, to the Keynesian multiplier, calling the weatherization of homes,
"an example of where you get a multiplier effect."
Does anyone believe the President could define or give an example of what a Keynesian multipier effect is, and how it works?
I can, having taken a boatload of economics courses in my past, and continued to remain abreast of macroeconomics since business school. I have actually read Keynes' "General Theory."
What troubles me now is a sort of denial of our economic experiences of the 1930s on a par with those who, for example, deny that the Holocaust ever occurred.
Surely, if Congress and our President publicly stated that the Holocaust never happened, they'd be the subject of outrage, anger, and calls for retraction of their statements.
But their assertion that FDR's "stimulus" worked is the economic equivalent of claiming that the Holocaust was imaginary. Both are demonstrably false statements.
In the years since my entry into the work force, I have seen at least two crucial developments in global financial markets which would have brought FDR's stimulus program to a grinding, failed halt much sooner than it did.
One, of course, is linked, floating exchange rates. No Treasury Secretary or Finance Minister was ever so disciplined as those who have served after the end of fixed exchange rates. Inflation and interest rates bite much harder and faster now that they cannot be so disguised or manipulated by governments.
The other is global liquidity of private capital at the speed of electrons. Again, government finance officers now must contend with immediate votes on their fiscal and monetary policies by hundreds of billions of dollars of fast-moving private capital.
That's why American equity markets plunged some 5% upon the passage of the stimulus bill and Tim Geithner's ineffectual stumbling over his ever-planned, never-revealed financial sector "plan."
What is missing from Congress' and the administration's calculations is a common sense notion of how one can really effect immediate spending on what our society believes are the most important projects, from an economic and productivity perspective.
I will address that point in part two of this post.
Thursday, February 05, 2009
Dick Armey On Hayek vs. Keynes
Former GOP House Majority Leader and economic professor Dick Armey wrote an insightful column in yesterday's Wall Street Journal. Eschewing a detailed analysis of the current mega-spending bill which the President and Democratic majorities in both Houses of Congress wish to pass, Armey instead returns to fundamentals of economics. He begins by writing,
"In the long run, we are all dead," John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. "
It is significant to Armey that Keynes never answered for the long term impacts of his great idea, governmental deficit spending.
Armey continues by drawing a contrast rarely made, between Keynes and his contemporary and critic, Fredrick Hayek,
"According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes "was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods." Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.
Keynes's thinking was a decisive departure from classical economics, because arbitrary "macro" constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, "some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics."
Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that "aggregate demand" drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers. Government spending is, according to Keynes's construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run."
This is a really significant point, because Armey reminds us, or, if necessary, teaches us that, prior to Keynes entirely theoretical addition of 'macro' economics to the then-dominant microeconomics, the former was largely a definitionally equivalent of money supply, velocity and GDP, arising from the summation of microeconomic activity.
Prominent Keynesians such as Paul Samuelson, through his best-selling textbook, conveniently trotted out Say's law and gently mocked it, neglecting to ever include Hayek's contrasting views.
In the current era, however, Hayek's intellectual descendants are more numerous and vocal. Armey closely marries the political with the economy, uniting the two parts of the originally-named study of political economics by continuing,
"A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.
It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations."
This passage nicely captured a key, real issue in applied Keynesianism. I've noted that the effects of huge deficits, at this time, will likely cause significantly higher inflation and interest rates for Americans. Moreover, Armey, and Buchanan, address the human behavior realities of public deficit spending which Keynes ignored.
Returning to Hayek, Armey writes,
"Hayek, who famously debated Keynes in a series of articles after the release of "General Theory," gave what I believe to be the most devastating critique of government action to stimulate "aggregate demand." Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments' artificial inflation of money and credit.
Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest.
"The real question," according to Hayek, "is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole."
Again, Hayek tackled Keynes on aspects of his theory for which the General Theory has no response. It's easy to see in Hayek's critique the brilliance he possessed in noting how Keynes casually swept away the microeconomic resource allocation mechanisms which underpin all economics, and simply assumed away the very real problem of how government would better allocate resources, sans price signals, than individuals would with the same resources, or more.
If there were ever a valid argument for preferring tax cuts for individuals and corporations over government spending, Hayek delivered it.
Armey concludes with a very common sense summation of Hayek's observations,
"In reality, no one spends someone else's money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it."
Let's hope Dick Armey is right, and that American voters let their Congressional members know it.
"In the long run, we are all dead," John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. "
It is significant to Armey that Keynes never answered for the long term impacts of his great idea, governmental deficit spending.
Armey continues by drawing a contrast rarely made, between Keynes and his contemporary and critic, Fredrick Hayek,
"According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes "was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods." Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.
Keynes's thinking was a decisive departure from classical economics, because arbitrary "macro" constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, "some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics."
Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that "aggregate demand" drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers. Government spending is, according to Keynes's construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run."
This is a really significant point, because Armey reminds us, or, if necessary, teaches us that, prior to Keynes entirely theoretical addition of 'macro' economics to the then-dominant microeconomics, the former was largely a definitionally equivalent of money supply, velocity and GDP, arising from the summation of microeconomic activity.
Prominent Keynesians such as Paul Samuelson, through his best-selling textbook, conveniently trotted out Say's law and gently mocked it, neglecting to ever include Hayek's contrasting views.
In the current era, however, Hayek's intellectual descendants are more numerous and vocal. Armey closely marries the political with the economy, uniting the two parts of the originally-named study of political economics by continuing,
"A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.
It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations."
This passage nicely captured a key, real issue in applied Keynesianism. I've noted that the effects of huge deficits, at this time, will likely cause significantly higher inflation and interest rates for Americans. Moreover, Armey, and Buchanan, address the human behavior realities of public deficit spending which Keynes ignored.
Returning to Hayek, Armey writes,
"Hayek, who famously debated Keynes in a series of articles after the release of "General Theory," gave what I believe to be the most devastating critique of government action to stimulate "aggregate demand." Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments' artificial inflation of money and credit.
Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest.
"The real question," according to Hayek, "is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole."
Again, Hayek tackled Keynes on aspects of his theory for which the General Theory has no response. It's easy to see in Hayek's critique the brilliance he possessed in noting how Keynes casually swept away the microeconomic resource allocation mechanisms which underpin all economics, and simply assumed away the very real problem of how government would better allocate resources, sans price signals, than individuals would with the same resources, or more.
If there were ever a valid argument for preferring tax cuts for individuals and corporations over government spending, Hayek delivered it.
Armey concludes with a very common sense summation of Hayek's observations,
"In reality, no one spends someone else's money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it."
Let's hope Dick Armey is right, and that American voters let their Congressional members know it.
Wednesday, February 04, 2009
Mr. Citrus Opines on Chinese Imports, Gold & The Recession
I ran into a friend on Sunday with whom I had a fascinating 'catch up' conversation.
While I thought I'd first written about him almost two years ago, it seems, when I search this blog for references to him, I can't find any. So I must have only intended to write the post I imagine recalling.
For both anonymity, and appropriateness, I shall call my friend Mr. Citrus.
You see, he owns and operates the dominant fresh citrus juice-for-cooking-and-beverage business in the US. You know those little lemon- and lime-shaped plastic squeezie things you find in the produce aisle? That's him.
And of all the gyms in the world, he happens to belong to mine. Well, my old one, and, probably, soon, my new one, as well.
One day, I'll write more elaborate post about Mr. Citrus, but for now, suffice to say he's a European immigrant of more than a decade. He conceived his business- the importation of fresh, dated lemon and lime juice- shortly after arriving in the States. While it's been a long haul, he has overtaken the once-king of the market, RealLemon.
Just in case someone from a competitor finds this post via Google, I will keep the information he shared with me somewhat disguised.
Mr. Citrus told me that January sales were up at one of the highest rates ever. To him, it is logical, as he saw sales growth like this during a prior recession.
I asked about a similar-looking squeezie product I'd recently seen, and he dismissed it as a knock-off which isn't coming close to bothering his business. When I observed that I found it at a local, large grocery chain, where his products are absent, he snorted and said,
'(That chain) has the most corrupt buyers in the business. They have a supplier of lime juice who is local to their corporate headquarters, and someone is getting paid off to stock them. Therefore, they only want my lemon juice.'
Back a few years ago, when he explained the nature of his operations, which I'll share in another post, I asked him why a local premium grocery chain's fresh, soft fruit prices were double that of the other major chains. He replied that, due to a quirk in that chain's distribution process, they double-shipped those fruits to a local warehouse, then back to each store, incurring added costs.
From such small details, pricing gaps can occur.
On Sunday morning, however, our discussion turned to US macroeconomics, the recession and the 'stimulus' package. Being from Europe, still traveling there frequently, and a quintessential small, entrepreneurial businessman, I was interested in Mr. Citrus' opinions.
First, he agreed that the so-called stimulus won't work. But, thanks to global economic weakness, he doesn't think the immense added US debt will drive the price of the dollar down. Rather, he felt, it will drive up interest rates to fund the debt, as well as stoke inflation.
He continued by sharing that he had observed what asset strategies did well in the 1930s. Consequently, he's buying residential real estate in Switzerland, for use as a main residence, if necessary, as well as precious metals. This is a guy who has at least one other local business besides citrus distribution, and could easily afford to scoop up local, undervalued real estate. But he's not.
Then he launched into a well-reasoned argument, in common with some leading economists, that the US is about to foolishly rely on an unfriendly power, i.e., China, to hold and continue funding our debt. Being European, he is fairly sensitive to currents of international economics and influence.
On that subject, he began to recount a recent business event which ended with him impassioned and red-faced.
Mr. Citrus' business practices all adhere to ISO 9000 standards. As he put it, they are the international gold standard for importation. So when a Federal inspector visited his offices recently to inquire as to his various certifications for importation, Mr. Citrus greeted him by saying something like,
'I'm glad someone finally asked to see my ISO 9000 certificate. You're the first person who has done so.'
He was shocked when the government agent replied,
'Well, that's very nice. But it doesn't meet our USDA rules.'
I won't bother with the details of the apparently-heated interchange that followed, which left Mr. Citrus agitated just in retelling the story.
But he made two very interesting points.
First, he noted that by insisting on a totally separate set of import rules, the USDA risked making US businesses globally less competitive, since they would focus on a rule set unique to the US, but inappropriate for global business.
Second, as he noted to the government agent, the USDA rules allow one exception- China. If you ship anything from China, the importation rules are suspended.
Mr. Citrus then drew the obvious conclusion. China, he said, had used its financial influence with America to obtain for itself carte blanche exemptions to import regulations and standards to which all other countries are held.
In his conversation with the agent, Mr. Citrus noted the expense he incurred to comply with ISO 9000. And that, maybe now, he'd simply reroute all his shipments through China, in order to lessen costs and quality.
He doesn't really intend to do this, but the threat was ironic.
And his story was very eye-opening. If this has already happened prior to flooding global financial markets with another trillion dollars in US obligations, what other standards will Congress and the current administration relax, on the quiet, in order to fund our debt?
While I thought I'd first written about him almost two years ago, it seems, when I search this blog for references to him, I can't find any. So I must have only intended to write the post I imagine recalling.
For both anonymity, and appropriateness, I shall call my friend Mr. Citrus.
You see, he owns and operates the dominant fresh citrus juice-for-cooking-and-beverage business in the US. You know those little lemon- and lime-shaped plastic squeezie things you find in the produce aisle? That's him.
And of all the gyms in the world, he happens to belong to mine. Well, my old one, and, probably, soon, my new one, as well.
One day, I'll write more elaborate post about Mr. Citrus, but for now, suffice to say he's a European immigrant of more than a decade. He conceived his business- the importation of fresh, dated lemon and lime juice- shortly after arriving in the States. While it's been a long haul, he has overtaken the once-king of the market, RealLemon.
Just in case someone from a competitor finds this post via Google, I will keep the information he shared with me somewhat disguised.
Mr. Citrus told me that January sales were up at one of the highest rates ever. To him, it is logical, as he saw sales growth like this during a prior recession.
I asked about a similar-looking squeezie product I'd recently seen, and he dismissed it as a knock-off which isn't coming close to bothering his business. When I observed that I found it at a local, large grocery chain, where his products are absent, he snorted and said,
'(That chain) has the most corrupt buyers in the business. They have a supplier of lime juice who is local to their corporate headquarters, and someone is getting paid off to stock them. Therefore, they only want my lemon juice.'
Back a few years ago, when he explained the nature of his operations, which I'll share in another post, I asked him why a local premium grocery chain's fresh, soft fruit prices were double that of the other major chains. He replied that, due to a quirk in that chain's distribution process, they double-shipped those fruits to a local warehouse, then back to each store, incurring added costs.
From such small details, pricing gaps can occur.
On Sunday morning, however, our discussion turned to US macroeconomics, the recession and the 'stimulus' package. Being from Europe, still traveling there frequently, and a quintessential small, entrepreneurial businessman, I was interested in Mr. Citrus' opinions.
First, he agreed that the so-called stimulus won't work. But, thanks to global economic weakness, he doesn't think the immense added US debt will drive the price of the dollar down. Rather, he felt, it will drive up interest rates to fund the debt, as well as stoke inflation.
He continued by sharing that he had observed what asset strategies did well in the 1930s. Consequently, he's buying residential real estate in Switzerland, for use as a main residence, if necessary, as well as precious metals. This is a guy who has at least one other local business besides citrus distribution, and could easily afford to scoop up local, undervalued real estate. But he's not.
Then he launched into a well-reasoned argument, in common with some leading economists, that the US is about to foolishly rely on an unfriendly power, i.e., China, to hold and continue funding our debt. Being European, he is fairly sensitive to currents of international economics and influence.
On that subject, he began to recount a recent business event which ended with him impassioned and red-faced.
Mr. Citrus' business practices all adhere to ISO 9000 standards. As he put it, they are the international gold standard for importation. So when a Federal inspector visited his offices recently to inquire as to his various certifications for importation, Mr. Citrus greeted him by saying something like,
'I'm glad someone finally asked to see my ISO 9000 certificate. You're the first person who has done so.'
He was shocked when the government agent replied,
'Well, that's very nice. But it doesn't meet our USDA rules.'
I won't bother with the details of the apparently-heated interchange that followed, which left Mr. Citrus agitated just in retelling the story.
But he made two very interesting points.
First, he noted that by insisting on a totally separate set of import rules, the USDA risked making US businesses globally less competitive, since they would focus on a rule set unique to the US, but inappropriate for global business.
Second, as he noted to the government agent, the USDA rules allow one exception- China. If you ship anything from China, the importation rules are suspended.
Mr. Citrus then drew the obvious conclusion. China, he said, had used its financial influence with America to obtain for itself carte blanche exemptions to import regulations and standards to which all other countries are held.
In his conversation with the agent, Mr. Citrus noted the expense he incurred to comply with ISO 9000. And that, maybe now, he'd simply reroute all his shipments through China, in order to lessen costs and quality.
He doesn't really intend to do this, but the threat was ironic.
And his story was very eye-opening. If this has already happened prior to flooding global financial markets with another trillion dollars in US obligations, what other standards will Congress and the current administration relax, on the quiet, in order to fund our debt?
Monday, February 02, 2009
Robert Shiller's Wacky Spending Recommendation
Last Tuesday's Wall Street Journal featured an editorial by Yale economist Robert Shiller entitled, "Animal Spirits Depend on Trust." It may well be the wackiest, nuttiest piece yet in defense of the pork-laden "stimulus" bill now rolling through the Democratic-controlled Congress.
Shiller begins by stating,
"President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen."
It's hard to believe that anyone could criticize this massive spending bill as being too small. But Shiller does just that. In order to justify his premise, Shiller then launches into a refresher on- what else- Keynesian economics. Referring to Keynes major work, The General Theory ..., Shiller writes,
"But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.
A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered."
What Shiller fails to note is that nobody has ever demonstrated that artificial, government-funded spending of a specialized or short-term nature, can restore 'animal spirits.' I would venture to suggest that only private capital can do that. As I wrote here recently, Paul Samuelson's genius in devising the accelerator-multiplier theory was recognizing what natural rhythms of economic cycles must occur, and how, for growth to return to an economy.
Never the less, Shiller continues,
"The danger at this point is that if the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then confidence will continue to plummet. The Obama administration estimated its initial $775 billion stimulus package would shave about 1.8% off the unemployment rate from what it would otherwise be. Even so, by the time any package takes full effect the unemployment rate may be substantially higher than it is today.
So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high. The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so, at rates with realistic risk premiums."
Surely, this is very scary stuff. Can you imagine the mediocre civil servants at Treasury setting 'credit targets?' My God! This is sounding like the last Soviet 7-year plan.
Rather than such meddling in capital markets raising public confidence, it almost certainly will destroy such confidence. The current, badly-implemented and conceived TARP program, which, by the way, Shiller lauds, has caused investors to step back from bank equities, since it's not clear what will happen next with Federal intervention.
Shiller concludes his loopy editorial with this stunning piece of advice,
"In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed."
Honestly, it's hard to believe someone stupid enough to write this is a professor at any major US university. If pulling out of recessions were really as simple as government spending a few hundred billions, we'd have done that in the past, and could point to it as a success.
But you can't. Because it has never happened. Economic cycles have to wait for those 'animal spirits' which so fascinated Keynes to naturally recover. Not be fooled by some trumped-up government printing press activity.
In the current situation, what we would see, were Shiller's raving to be implemented, is much higher inflation and interest rates, as buyers of US dollars and Treasuries correctly viewed the implicit devaluation of US government dollar-denominated obligations.
Let's hope nobody takes Shiller seriously, and that he visits his university's medical center to get the appropriate medication that will control this type of lunacy in the future.
Shiller begins by stating,
"President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen."
It's hard to believe that anyone could criticize this massive spending bill as being too small. But Shiller does just that. In order to justify his premise, Shiller then launches into a refresher on- what else- Keynesian economics. Referring to Keynes major work, The General Theory ..., Shiller writes,
"But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.
A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered."
What Shiller fails to note is that nobody has ever demonstrated that artificial, government-funded spending of a specialized or short-term nature, can restore 'animal spirits.' I would venture to suggest that only private capital can do that. As I wrote here recently, Paul Samuelson's genius in devising the accelerator-multiplier theory was recognizing what natural rhythms of economic cycles must occur, and how, for growth to return to an economy.
Never the less, Shiller continues,
"The danger at this point is that if the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then confidence will continue to plummet. The Obama administration estimated its initial $775 billion stimulus package would shave about 1.8% off the unemployment rate from what it would otherwise be. Even so, by the time any package takes full effect the unemployment rate may be substantially higher than it is today.
So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high. The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so, at rates with realistic risk premiums."
Surely, this is very scary stuff. Can you imagine the mediocre civil servants at Treasury setting 'credit targets?' My God! This is sounding like the last Soviet 7-year plan.
Rather than such meddling in capital markets raising public confidence, it almost certainly will destroy such confidence. The current, badly-implemented and conceived TARP program, which, by the way, Shiller lauds, has caused investors to step back from bank equities, since it's not clear what will happen next with Federal intervention.
Shiller concludes his loopy editorial with this stunning piece of advice,
"In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed."
Honestly, it's hard to believe someone stupid enough to write this is a professor at any major US university. If pulling out of recessions were really as simple as government spending a few hundred billions, we'd have done that in the past, and could point to it as a success.
But you can't. Because it has never happened. Economic cycles have to wait for those 'animal spirits' which so fascinated Keynes to naturally recover. Not be fooled by some trumped-up government printing press activity.
In the current situation, what we would see, were Shiller's raving to be implemented, is much higher inflation and interest rates, as buyers of US dollars and Treasuries correctly viewed the implicit devaluation of US government dollar-denominated obligations.
Let's hope nobody takes Shiller seriously, and that he visits his university's medical center to get the appropriate medication that will control this type of lunacy in the future.
Monday, December 01, 2008
Current Economic Disagreements: Recession & Stimulus
Today's statement by the NBER that the US entered a recession at the end of 2007, based upon a consistent pattern of monthly job losses.
On CNBC this afternoon, Larry Kudlow clarified the NBER definition of a recession. As echoed in this article,
"According to the NBER, a recession is "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade". Those are the four measures it will be examining forensically as 2008 progresses, and it puts employment data at the top of its list of influences since it is the broadest monthly indicator."
Therefore, today's announcement by the NBER conflicts with a quarterly-GDP-based measurement of a recession, but is, evidently, within the NBER's own definitional framework.
As such, this weekend's article by Amity Schlaes, entitled "The Krugman Recipe for Depression," has become much more relevant. With an official seal of approval on the current recession, political powers that be, or will be, are sure to demand more and larger stimulus packages.
Ms. Schlaes begins her piece by noting,
"Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book "The Return of Depression Economics," emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn't spend enough.
He's also arguing that some writers and economists have been misrepresenting the 1930s to make the effect of FDR's overall policy look worse than it was. I'm interested in part because Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right." "
The argument between the two highlights the two opposing views of what should be done, or not done, by Congress in the current economic situation. The two camps each base their current recommendations upon their reading of the results of FDR's massive, never-before-or-since equalled, society-changing spending programs of the 1930s.
Krugman, a newly-anointed Nobel Laureate in Economics, has used this position to launch intensely nasty attacks upon the current administration's approach to economics. With his gleaming, newly-minted medal, Krugman is sure to be an oft-quoted and -cited 'expert' for those wishing to pass legislation to spend hundreds of billions of taxpayer dollars in the months ahead.
As Ms. Schlaes puts it,
"Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%." "
Will any of it work?
Schlaes continues in her piece,
"The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.
This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.
The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.
Later, Lee Ohanian of UCLA studied New Deal unemployment by the number of hours worked. His picture was similar to Mr. Lebergott's. Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level. To be sure, Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire."
The evidence Ms. Schlaes cites is pretty unequivocal. One wonders on what Krugman bases his objections. But, there's more.
Schlaes asks why so much Federal 'stimulus' and intervention, for nearly a decade, accomplished so little in terms of employment. Her response,
"What kept the picture so dark so long? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.
As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.
Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly."
Ms. Schlaes hits the nail on the head. In order to avoid a rerun of the failed economic (and social) policy mistakes of the 1930s, we have to acknowledge what worked, and what did not.
Perhaps, before we get to that stage, we should heed Fed Chairman Ben Bernanke's response to a question after his prepared address in Texas this afternoon. When asked how the current economic situation compares with the Great Depression, Bernanke said they are not even close, and not at all comparable at this time. He then continued by reminding us that, prior to and in the Depression:
-unemployment rose to 25%
-money supply fell by 10% per year for several consecutive years
-GNP fell by roughly a quarter
-about 1/3 of the nation's banks failed
We are nowhere near any of those benchmarks. Thus, Ms. Schlaes' important closing paragraph,
"We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid."
On CNBC this afternoon, Larry Kudlow clarified the NBER definition of a recession. As echoed in this article,
"According to the NBER, a recession is "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade". Those are the four measures it will be examining forensically as 2008 progresses, and it puts employment data at the top of its list of influences since it is the broadest monthly indicator."
Therefore, today's announcement by the NBER conflicts with a quarterly-GDP-based measurement of a recession, but is, evidently, within the NBER's own definitional framework.
As such, this weekend's article by Amity Schlaes, entitled "The Krugman Recipe for Depression," has become much more relevant. With an official seal of approval on the current recession, political powers that be, or will be, are sure to demand more and larger stimulus packages.
Ms. Schlaes begins her piece by noting,
"Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book "The Return of Depression Economics," emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn't spend enough.
He's also arguing that some writers and economists have been misrepresenting the 1930s to make the effect of FDR's overall policy look worse than it was. I'm interested in part because Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right." "
The argument between the two highlights the two opposing views of what should be done, or not done, by Congress in the current economic situation. The two camps each base their current recommendations upon their reading of the results of FDR's massive, never-before-or-since equalled, society-changing spending programs of the 1930s.
Krugman, a newly-anointed Nobel Laureate in Economics, has used this position to launch intensely nasty attacks upon the current administration's approach to economics. With his gleaming, newly-minted medal, Krugman is sure to be an oft-quoted and -cited 'expert' for those wishing to pass legislation to spend hundreds of billions of taxpayer dollars in the months ahead.
As Ms. Schlaes puts it,
"Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%." "
Will any of it work?
Schlaes continues in her piece,
"The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.
This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.
The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.
Later, Lee Ohanian of UCLA studied New Deal unemployment by the number of hours worked. His picture was similar to Mr. Lebergott's. Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level. To be sure, Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire."
The evidence Ms. Schlaes cites is pretty unequivocal. One wonders on what Krugman bases his objections. But, there's more.
Schlaes asks why so much Federal 'stimulus' and intervention, for nearly a decade, accomplished so little in terms of employment. Her response,
"What kept the picture so dark so long? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.
As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.
Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly."
Ms. Schlaes hits the nail on the head. In order to avoid a rerun of the failed economic (and social) policy mistakes of the 1930s, we have to acknowledge what worked, and what did not.
Perhaps, before we get to that stage, we should heed Fed Chairman Ben Bernanke's response to a question after his prepared address in Texas this afternoon. When asked how the current economic situation compares with the Great Depression, Bernanke said they are not even close, and not at all comparable at this time. He then continued by reminding us that, prior to and in the Depression:
-unemployment rose to 25%
-money supply fell by 10% per year for several consecutive years
-GNP fell by roughly a quarter
-about 1/3 of the nation's banks failed
We are nowhere near any of those benchmarks. Thus, Ms. Schlaes' important closing paragraph,
"We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid."
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