COMPANIES: INDUSTRIES:
The Emerging Economic Order
(c) Jack Ohman
Beginning of a New World Epoch
Paul A. Samuelson
President Barack Obama's 2008 electoral landslide victory averted a global financial meltdown. Had Republican Sen. John McCain won that election, present U.S. GDP would have been even lower than it is now, by more than 15 percent! And similar losses in global productivity would also have taken place.
Unemployment Rockets
October Jobs Report: A True Witches' Brew
Liz Wolgemuth
In what will no doubt boost skepticism over the Obama administration's message of stimulus success, the unemployment rate in October rocketed to 10.2 percent, a figure much higher than economists had expected and just 0.6 percentage points away from the post-World War II high seen in 1982. While unemployment snapped back down swiftly in the early-1980s recession, it is widely expected that job creation will be slow in this recovery.
Economy: Cities Where Jobs Recovery Will Be Slowest
Liz Wolgemuth
While the nation's job market is awful overall -- thousands of Americans are exhausting their unemployment benefits daily -- it's clear that the true jobs picture is as varied as the nation's topography. With the promise of a recovery on the horizon, new data show that the employment upturn will be regional as well
Forget Inflation, Deflation Is a Bigger Danger
Mortimer B. Zuckerman
Inflation typically results from 'too much money chasing too few goods.' Today, too much supply is chasing too little demand. That, coupled with consumers' need to save money to rebuild their finances, raises the risk of deflation, not inflation. And as workers compete for scarce jobs and companies underbid one another for sales, both wages and prices will remain under pressure.
Economy: Finding Opportunity in the Recession
Matthew Bandyk
Of all the industries devastated by the recession, the media has been one of the most notoriously affected. According to the Bureau of Labor Statistics, 65,000 media jobs were cut in 2008 -- nearly 4 percent of the industry's total. Newspapers are perhaps the biggest loser, with more than 9 percent of jobs eliminated in 2008. However, ...
Unemployment and Foreclosure: If You Don't Have a Job, How Will You Pay the Mortgage
Ilyce Glink
When it comes to foreclosure, the problem isn't just the 7.2 million jobs that have been lost during this great recession. There are millions of Americans who took a huge pay cut to keep their companies going. Unpaid furloughs and 10 to 25 percent pay cuts mean tens of millions of Americans are having a much harder time paying their bills -- and their mortgages are at risk as well.
Latin American Economy Will Do Well, but Not Great
Latin American Current Events, News & Affairs - Andres Oppenheimer
The news that Brazil and Mexico have come out of the recession and are poised for solid growth in 2010 should be celebrated, and both countries' leaders should be given credit for their sound economic management. But in the global economic context, the two Latin American giants' recovery will be modest.
The Dollar and the Deficits
C. Fred Bergsten
The dollar is under attack on two fronts. Private investors are driving it lower in the foreign exchange markets. Monetary authorities are questioning its role as the world's key currency. There is an obvious linkage between the two attacks: expectations of further falls in the dollar's value will accelerate the prospect that foreign central banks will switch to euros
U.S., China and the Emerging Economic Order
Henry Kissinger
The assumption that the end of the recession will restore the familiar global economic system ignores the psychological and political upheaval that has taken place.
A vast tide of liquidity coupled with America's appetite for consumer goods had sent enormous amounts of dollars to China that, in turn, China lent back to us for still more buying.
Economy: Past Stormy Weather and What May Follow
Paul A. Samuelson
The Fed and the majority of the consensus forecasters fear that this expected recovery might be a weak one that does little to reduce Main Street's unemployment. And it may also imply that future private consumer and investment spending will continue to be anemic. That would mean that at the global level there might not be the replay of the old-time drama in which the American locomotive comes to the rescue of depressed economies.
Divine Debt Trumps All
Victor Davis Hanson
In modern America, debt -- whether national, state or trade -- now plays the same overarching role as the ancient Greek notion of fate. And the president, Congress and the states for all their various agendas are impotent since they must first pay back trillions that have long ago been borrowed and spent.
Joseph Stiglitz Left's Favorite U.S. Nobel Economist
Andres Oppenheimer
U.S. Nobel laureate Joseph Stiglitz has become a sort of rock star in left-of-center Latin American countries for his vocal criticism of free-for-all capitalism. But in a wide-ranging interview, he offered some advice that many of his fans in the region may not want to hear.
The Dollar's Fate, in the Longer Term
Paul Kennedy
There is a most interesting debate going on at present in the academic community about the longer-term fate of the U.S. dollar as the supreme reserve currency for foreign-exchange transactions and, more importantly, for the currency holdings of national governments, global companies and the producers of oil, gas and other raw materials.
The Dilemmas of the Dollar
by Barry Eichengreen
Legions of pundits have argued that the dollar's status as a reserve currency has been damaged by the credit crisis of 2007-9. The crisis has not exactly enhanced the attractions of the United States as a supplier of high-quality financial assets. It would be no surprise if the disfunctionality of U.S. financial markets diminished the appetite of foreign central banks for U.S. debt securities.
Low and Behold the Price of Oil
by Edward L. Morse
The rapid fall and then rebound in oil prices over the past year surprised many people. But it was not unusual: commodities markets are cyclical by nature and have a history punctuated by sudden turning points. Although this generally makes it difficult to forecast prices, it is safe to say that commodities markets will remain lower over the next few years than they have been over the past five.
General Motors: 'Cash for Clunkers' a Huge Success
Amanda Ruggeri
Not everyone supported the Senate's passage of a bill that boosted "cash for clunkers" by $2 billion, effectively extending it through Labor Day. But it's hard to argue that the program, which gives rebates to people who trade in old cars for more fuel-efficient vehicles, hasn't made the auto industry happy. That's true for General Motors ...
Growth With Equity: Brazil's Path to Economic Recovery
by Patrus Ananias
The financial crisis has left few corners of the global economy unscathed, but many of the loudest cries reflecting the deepest pain are largely ignored. These are the cries of the world's poorest citizens whose suffering is not measured in battered portfolios and retirement plans but in their daily survival
Government Bailout
(c) Paul Tong
Opportunity Cost of the Bank Bailout
Arianna Huffington
The lopsided 'recovery.' Banks that received billions in taxpayer handouts now reporting massive profits and setting aside record amounts for executive bonuses, and the American people continuing to face 9.5 percent unemployment, 10,000 foreclosures a day and vital services being cut.
Boomers, Housing and Retirement:
A Symbiotic Relationship Unravels
By Mark Miller
The housing market is showing some tentative signs of recovery. But if you're a baby boomer relying on housing wealth to help fund
retirement, don't hold your breath. True, the most recent Standard and Poor's/Case-Shiller home price index showed that U.S. home
prices rose in May on a month-to-month basis for the first time since
Is the Economic Marriage Between China and U.S. on the Rocks?
Niall Ferguson Interview
China and America had effectively fused to become a single economy: Chimerica. The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing. As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. The unintended effect of this was to help finance the U.S. current account deficit at very low interest rates. Without that, it's hard to believe that U.S. financial markets would have bubbled the way they did from 2002 to 2007.
Nine Reasons the Economy is Not Getting Better
Mortimer B. Zuckerman
We are now looking at unemployment numbers that undermine any confidence that we might be nearing the bottom of the recession. The appropriate metaphor is not the green shoots of new growth. A better image is to look at the true total of jobless people as a prudent navigator looks at an iceberg
House Votes to Give Cash for Clunkers Another $2 Billion
Amanda Ruggeri
After "cash for clunkers" proved so popular that it threatened to run out of cash within its first week, the House pushed aside the other items on its agenda today to save it, passing a bill that allots another
4 Things to Know About the Cash-Strapped 'Cash for Clunkers'
Matthew Bandyk
The government set aside $1 billion for the "cash for clunkers" program, which is meant to give $3,500 or $4,500 vouchers to people who
trade in their gas-guzzling vehicles for new, fuel-efficient ones. But now that the
Cash for Clunkers Program Has Its Roadblocks
Kathy Kristof
If you want to trade in your junker for a new vehicle under the federal government's 'cash for clunkers' program, you'll have to act fast. Plus, qualifying for the vouchers isn't as simple as you might think. In fact, you'll need to know three things to decide whether it's a good deal for you.
Making Sense of 'Cash for Clunkers'
Matthew Bandyk
With new-car sales slumping, automotive companies have been looking for ways to get consumers back into showrooms. Washington checked one item off car companies' wish list when it passed the Consumer Assistance to Recycle and Save Act of 2009 -- commonly known as 'Cash for Clunkers' ...
Why June Jobs Report Is So Depressing
Liz Wolgemuth
The brutal truth about the
Unemployment Reaches 9.5 Percent, Highest in 26 Years
Amanda Ruggeri
The Labor Department's job report this morning may not be surprising, but it's still disappointing: The unemployment rate rose in June to 9.5 percent, making it the worst in 26 years. The rise, from 9.4 percent in May, is slight. However, it keeps the economy on track to hit a 10 percent unemployment level by the end of the year, as analysts have predicted.
Would Second Stimulus Create Jobs?
Liz Wolgemuth
Americans are stumbling through a job market that is overwhelmed with supply, stripped of security, and skimmed of hours and benefits, and the unemployment rate has already climbed much higher than officials had forecast. So, the real question is, what could a second Obama administration stimulus do that the first one couldn't? To answer that, it's necessary to know how the first $787 billion package has disappointed.
Accurately Counting Stimulus Jobs Proving Tough
Amanda Ruggeri
As Americans become more skeptical of the administration's promise that the stimulus package will create or save 3.5 million jobs, there's an added frustration: Even if the $787 billion act is successful in creating work, Americans may never know. That's because counting the jobs involves estimating what would have happened without legislation, a slippery task even if the economy weren't so volatile.
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We've Gone From Saving Wall Street in Order to Save Main Street to Just Saving Wall Street
Arianna Huffington
Remember how, when taxpayers were being asked to fork over billions of dollars to bail out Wall Street, we were told it was essential to saving Main Street? Well, in just a few months, we've gone from saving the banks in order to save the economy to just saving the banks. It's the opposite of mission creep.
Editorial Cartoon by David Horsey
Happy Economic Recovery vs. An Anemic One
Paul A. Samuelson
The number-one question preoccupying economists, policy agents of government and Main Street families is this:
Will "recovery" from the current U.S. financial meltdown arrive before the end of 2009? Or, failing that, will it at least arrive early in 2010?
Geopolitical Consequences of the Financial Crisis
Roger C. Altman
It is now clear that the global economic crisis will be deep and prolonged and that it will have far-reaching geopolitical consequences. The long movement toward market liberalization has stopped, and a new period of state intervention, reregulation, and creeping protectionism has begun.
Economic Crisis will Create the Social Heroes of Tomorrow
Alvin and Heidi Toffler
The economic crisis now gripping the world is going to go away. We may not know precisely when, where and how. But one thing is certain. Nothing is likely to blow away the waves of change that have marked human history
House Prices, Mortgage Interest Rates Key to Housing Market Recovery
By Ilyce Glink
With housing prices falling and mortgage interest rates rising, it's hard to say the housing market has bottomed out. And, yet, there are some reasons for a more optimistic housing forecast, according to Mark Zandi, chief economist for Moody's Economy.com
10 Most Dollar-Discounted Housing Markets
By Luke Mullins
As the historic real estate bust continues to gut home prices throughout the country, property owners everywhere are scrambling to attract buyers. For some home sellers, that might mean chipping in for closing costs; others might try to sweeten the deal by handing out perks, like a free parking spot. But for many homeowners, the most efficient way to sell a home in a depressed market is to simply drop the listing price.
Joseph Stiglitz:
Will Capitalism Survive Wall Street Apocalypse
Matthew Bandyk
A few days after writing about how the United States is not heading towards socialism, Joseph Stiglitz suggests that might not be true about the rest of the world. Stiglitz argues that the lesson many Third World nations might take from the financial crisis is that capitalism is fundamentally flawed.
Asia Economy: Tamed Asian Tigers, Distressed Chinese Dragon
by Brian P. Klein and Kenneth Neil Cukier
Since the 1960s, Asian economies have focused primarily on exports. It was the key to success in Japan, South Korea, Hong Kong, Singapore, and Taiwan. Much of Southeast Asia and China soon followed suit. Over the past decade, the region's exports have increased from 37 percent to 47 percent of GDP. By hitching their wagons to exports, however, Asian countries left themselves vulnerable to a drop-off in Western consumption
Whistling Past Economic Graveyard: Audacity of Misplaced Hope
by Arianna Huffington
When Tim Geithner unveiled the Public Private Investment Program, he said that dealing with these assets was a "core" part of solving the financial crisis. But the banks would much rather keep pretending that their toxic assets are not that toxic, and worth much more than they really are -- a risky charade the relaxed mark-to-market rules allow them to continue to pull off
Not Going to Be Economic Depression
Global Economic Viewpoint
Last week at the Milken Global Conference, three Noble Laureates in Economics sat down to discuss the global recession -- Gary Becker (Nobel Prize, 1992), Roger Myerson (Nobel Prize, 2007) and Myron Scholes (Nobel Prize 1997).
All three agreed that this is not going to be a depression and that the free-market economy is fundamentally healthy.
Why No One Can Guess When
Main Street Recovery will Occur
Paul A. Samuelson
Federal Reserve Chairmen Ben Bernanke glimpses a possible recovery by year end. He is a cautious scholar, backed by the best forecasters in the world at the Federal Reserve Board.
I would be a rash fool to quarrel with this quasi-optimistic view that by year end some stability will occur. You and I should hope that there will indeed be a glimmer of light at the end of the tunnel ahead. But shift our vision now to the future. Even if the short run prospect for a 2009-2010 recovery turns out to be good, I must warn once again that the long-run outlook for the U.S. dollar is hazardous.
Free-Market Economy Fundamentally Healthy
Global Economic Viewpoint
Last week at the Milken Global Conference, three Noble Laureates in Economics sat down to discuss the global recession -- Gary Becker (Nobel Prize, 1992), Roger Myerson (Nobel Prize, 2007) and Myron Scholes (Nobel Prize 1997).
All three agreed that this is not going to be a depression and that the free-market economy is fundamentally healthy.
Brazil, China & India Can Mitigate Global Crisis
Global Economic Viewpoint
Brazil, India and even China will not be able, by themselves, to correct the dysfunctions that produced the global crisis. But it is true that the economic power of these three countries can mitigate its negative consequences. ...
The Global Economy: Worse & Worser
Today's global economic debacle shares a disturbing number of similarities with the early stages of Japan's "lost decade" of the 1990s.
Without good policy and better luck, the world may well fall into a prolonged period of slow GDP growth, high unemployment, and stagnant living standards like that which unfolded in Japan almost 20 years ago.
Today's Global Economic Debacle: The Japan Fallacy
As the United States sinks deeper into recession, many observers fear the country could reprise Japan's "lost decade," the decade of stagnation that followed its mammoth property bubble in the late 1980s. But this fear is unawarranted.
Even the United States can Manage Itself into Economic Irrelevance
Chris Thomas
America has been the greatest of all nations for a long time. But we should not forget, especially at a crucial juncture like this, that with enough bad decisions and enough political incompetence, we can indeed manage ourselves into decline.
Deng Undone: China Halts Market Reform
Since the present Communist Party leadership took power, fresh market-oriented liberalization has been minor. Such policies have been wound down and supplanted by renewed state intervention. In privatization, prices, even foreign trade and investment, the PRC was heading away from the market well before the financial crisis erupted.
Why China & U.S. Not Ready to Upgrade Ties
Calling on the United States and China to do more together has an undeniable logic. Both Washington and Beijing are destined to fail if they attempt to confront the world's problems alone, and the current bilateral relationship is not getting the job done.
But elevating the bilateral relationship is not the solution. It will raise expectations for a level of partnership that cannot be met and exacerbate the very real differences that exist between Washington and Beijing.
Larry Summers: Brilliant Mind, Toxic Ideas
by Arianna Huffington
According to most commentators, the president's press conference went a long way toward taking the spotlight off the roiling anger over AIG, bonuses and Wall Street abuses -- and putting it back where the president wants it: on the imperative need to pass his budget.
But the best laid plans of our remarkable president may be laid to waste by a bank rescue plan that is the product of exhausted ideas put together by men far too beholden to Wall Street.
To understand why a man as brilliant and accomplished as Summers can be so wrong about what to do with the banks and Wall Street, it would be useful to turn to "The Innovator's Dilemma," by Harvard Business School professor Clayton Christensen.
Book Recommendation for Prof. Paul Krugman
Book Recommendation for Prof. Paul Krugman originally appeared on About.com Economics on Thursday, November 19th, 2009 at 15:22:26.
I agree with both Paul Krugman and Brad DeLong here:
Brad DeLong says that the loss of public trust due to the kid-gloves treatment of bankers has raised the probability of another Great Depression, because the public won't support another round of bailouts even if it becomes desperately necessary. I agree -- but I think the bigger cost is that we've greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it's all confounded in their minds with the deeply unpopular bailouts.
It is not the general public that is confounded here, Prof. Krugman. Small concentrated interests, whether they be the farm lobby or Wall Street, will always use governments to exploit large-scale diverse interests. Particularly when the line between Wall Street and the Treasury Department are blurred.
I believe it is time for all economists to re-read The Logic of Collective Action.
Why Use CPI as Our Measure of Inflation, When Other Measures Matter More?
Why Use CPI as Our Measure of Inflation, When Other Measures Matter More? originally appeared on About.com Economics on Thursday, November 19th, 2009 at 09:55:44.
Veronique de Rugy in Where's That Inflation?:
In an email message, Murphy adds: "I believe we are currently witnessing a bubble in Treasury debt. I consider the current yields on 10-year U.S. government bonds to be absurdly low, just like the price of housing was absurdly high in early 2006. After this bubble bursts, investors will slap themselves on the forehead and say, 'What were we thinking? Why did we rush into Treasurys even as the government told us it was planning to double the federal debt burden in a decade?' "
The majority position currently seems to be that a housing bubble that burst caused our current economic woes. During the previous recession, many blamed the poor economic conditions on a stock market bubble that burst. In both instances we saw very high levels of asset price inflation.
The St. Lawrence University economist Steven Horwitz agrees both that inflation is already happening and that it is widely misunderstood. Monetarists, he says, were "too focused on aggregates like 'the' price level, which led economists to ignore the way inflation could distort individual prices at the microeconomic level, causing resource misallocation in the process." Virtually all economists now agree, for example, that the Fed's low interest rates inflated housing prices earlier in the decade. Yet as the prices of houses went up, few economists worried about inflation because the CPI looked relatively stable, due in part to a decrease in energy prices. When housing started to crash in 2007, many economists thought the Fed should inject still more funds into the system to stave off further declines. They failed to see that the Fed had distorted relative prices in the first place.
If asset price inflation is the problem, then why are we even looking at the CPI as a measure of how overheated (or underheated) the economy is? According to the above narratives economic woes were not caused by rises in the price of orange juice or golf clubs or vacations. It seems to me that either our choice of indicator of the price level is wrong or our narratives about what caused the last two recessions are wrong.
More on this topic: Should We Adjust Prices For Inflation?
Exceedingly High Tax Rates and the Poverty Trap
Exceedingly High Tax Rates and the Poverty Trap originally appeared on About.com Economics on Friday, November 13th, 2009 at 11:50:17.
Another topic I have discussed before - see How Good Intentions Lead to Crushing Marginal Tax Rates on the Working Poor.
FreeExchange wonders if effective marginal tax rates of above 100% really do create a poverty trap:
Here is what I'd like to see CBO, or someone, put together: a statistical investigation into whether or not the trap actually traps. It's not that I don't understand the negative incentive effects at work here, it's just that those aren't the only factors being considered by individuals deciding how much to work.
I do not find it particularly plausible that someone earning $10,000 a year would accept above-100% marginal tax rates because it is the only way they will be able to earn $40,000+ levels of income in the future. I suspect that an income level that high would be seen as too far off.
If the line shown above ended with the dip just below the $40,000 level, the effects of the change in implicit tax rate would be clear. But it doesn't. Notably, it continues to the right, on a steady upward slope. And one assumes that the only way to move from a point to the left of that dip to a point on the right of that dip, which is where you want to be, is to go through the dip. Any worker opting to return to a lower income level would essentially be cutting off the possibility of moving to the fat part of the line with the next raise.
That being said, I think there are reasons to wonder how much the poverty trap actually traps. Because the tax and transfer system is so unbelievably complicated, I suspect that ex-ante people do not realize exactly how high marginal tax rates are. They only discover, ex-post that their 'take' would have been higher had that not attempted to increase their market income.
More Government Policies Promoting The Consumption of Junk Food
More Government Policies Promoting The Consumption of Junk Food originally appeared on About.com Economics on Thursday, November 12th, 2009 at 14:42:54.
From CBC News:
Fast food, coffee and newspapers are some of the items the Ontario government says will be exempt from a controversial blended sales tax the province will implement next year.
Taxing everything else but excluding fast food is a de facto subsidy on fast food, which contributes to a rise in chronic diseases such as Type II diabetes. A Starbucks tall cafe mocha, with 25 grams of sugar, will be exempt from taxation. Is this really the kind of thing governments anywhere should be promoting?
"It's important for Ontarians to know that today's announcement is about far more than not raising coffee prices," Ontario Finance Minister Dwight Duncan said in front of the backdrop of a Tim Hortons franchise in Toronto's west end.
I have said it three times this week (see here, here and here) - if we want the government to be improving the health of the population, and obvious first step would be for the government to get rid of the laws that contribute to poor health!
Inflation as an Arbitrary Concept - Part II
A continuation of Inflation as an Arbitrary Concept. Peter G. Klein left a comment that indicates that Scott Sumner and I are not the only economists leery of the concept of inflation:
Mike, you and Scott have some distinguished predecessors. Gottfried Haberler made I have to admit, my knowledge of the history of thought in economics is quite limited, so I quite enjoyed learning this (it was new to me). I decided to do some additional research (a.k.a. a Google search), and found Gottfried Haberler: A Centenary Appreciation, a summary of the man's work. I found it quite enlightening. I figure there have to be more economists to take this view - any other names to add to the list? I still suspect, though, that we are in the minority. Too many textbooks treat the concept of inflation as an objective concept that we try our best to estimate. It is not, because our basket of goods changes over time and any attempts to account for this are based on subjective 'judgment calls'. Inflation as an Arbitrary Concept - Part II originally appeared on About.com Economics on Thursday, November 12th, 2009 at 09:58:02.
the same argument in his 1927 book _The Mean of Index Numbers: An Inquiry in the
Concept of the Price Level and the Methods of Its Measurement_. E.g.: "The relative
position and change of different groups of prices are not revealed, but are hidden
and submerged in a general index. Not the movement of the general price level, but
the chronological succession of special price and price combinations ... are regarded
as significant for the waves of business life.... Such a general index rather conceals
and submerges than reveals and explains those price movements that characterize and
signify the movement of the cycle."
How to Control Health Care Costs
How to Control Health Care Costs originally appeared on About.com Economics on Thursday, November 12th, 2009 at 09:41:48.
A continuation of How the U.S. Government Can Increase Health Without Spending More Than a Cent and The Ongoing Ridiculousness of the Health Care Debate.
I tend to look at the problem differently than 'controlling cost' - to me, the problem is more 'How do we get the healthiest population possible at the lowest cost?' (which is related, but different). The New York Times brought out 9 experts to give their ideas. Of those, I believe two of the nine recommendations would work as intended. First, Arnold Kling:
The key to containing health care costs is to reduce spending on medical procedures that have high costs and low benefits. In order to do that, you have to increase the share of spending that is paid for by patients and reduce the share that is paid for by third parties, so that consumers will think twice about high-cost, low-value procedures.
Prof. Kling recognizes that the problem is a demand-side one as much as a supply-side one. My recommendations have been to reduce demand by promoting healthy living and lowering pollution. This is another way of reducing demand.
Secondly, Prof. Herzlinger:
There is a way to raise revenues and also control costs: Congress could simply extend the present tax exclusion of employer-sponsored health insurance to a cash-out of those costs as additional salary that employees could use to buy their own health insurance. This approach would motivate insured employees to treat their health insurance as if they paid for it directly and appeal to taxpayers.
I have always found the tax treatment of health care plans odd. As an employer in Canada, if I give a worker an extra $200 a month in salary, the employee is forced to pay income and payroll taxes on that amount. However, if I give an employee $200 worth of health care insurance, no taxes are paid on that by the employees (provided that certain conditions are met). As an employer, either form of remuneration counts as an expense, so the tax implications for the firm are the same. Thus the tax system is biased in favour of giving employees expensive health care plans.
Overall, though, I find it frustrating that so many of the proposed policies are expensive 'supply side' solutions to what is, at least in part, a demand side problem.
How the U.S. Government Can Increase Health Without Spending More Than a Cent
a.k.a. Mike Moffatt's one cent health care plan - a continuation of an earlier post - The Health Risks of Obesity. A RAND study suggests that obesity causes an increase in chronic medical conditions of 67 percent. Similarly living in poverty increases the rate of chronic medical conditions of 58 percent. These naturally lead to an increase in costs to health care:
Obese individuals spend more on both services and medication than daily smokers and heavy drinkers. For example, obese individuals spend approximately 36 percent more than the general baseline population on health services, compared with a 21 percent increase for daily smokers and a 14 percent increase for heavy drinkers. Obese individuals spend 77 percent more on medications. Only aging has a greater effect -- and only on expenditures for medications.
Want to improve the health of the U.S. population? You can do so in three steps: "In what is certain to become a world-wide debate on the use of economic sanctions to tackle obesity, a group led by academics from Yale and Harvard universities proposed a "cola war", with a 1 cent tax per fluid ounce on sweetened beverages, raising the price of the average can of cola by 15 to 20 per cent. They say this would cut calorie consumption from drinks by a minimum of 10 per cent (enough to prompt weight loss) and contribute almost $15bn towards the health costs of obesity." These three steps would greatly improve health outcomes in the United States and not cost the U.S. government a thing. Lives would improve as chronic disease would be reduced - the benefits go beyond financial costs. Furthermore, health care resources would be freed up to be used elsewhere. This is a far, far more sensible plan than increasing government spending and only treating people after they get sick. How the U.S. Government Can Increase Health Without Spending More Than a Cent originally appeared on About.com Economics on Tuesday, November 10th, 2009 at 17:44:02.
Inflation as an Arbitrary Concept
In Should We Adjust Prices For Inflation? I discuss my concerns with the concept of inflation. The short story is, because our 'representative basket of goods' changes over time due to technological and social changes, there is simply no objective way to measure changes in the 'price level' (that is, there is no such thing as a 'changing price level' in an objective sense. I was delighted to see that Scott Sumner agrees with me:
Inflation is an arbitrary concept that has never been clearly defined, or at least defined in a way that relates to how it is actually measured.
He then links to an earlier blog post - Six reasons to abolish inflation, which ends with:
What's the use of inflation? It's worthless. Let's get rid of it. Take it out of our models. Take it out of our policy rules. If indexing is required then use wage inflation. If you can't afford to do that for Social Security, tell old folks they'll get wage inflation minus 1%. Remind them that although at age 70 they'll be playing golf and taking cruises, by 90 they'll mostly be sitting around watching TV. And by that time even 60 inch 1080P Pioneer Kuros will be considered so crappy that Walmart will be almost giving them away.
I know that Sumner is being 'provocative' (his words), but he is right on the money. I am actually rather shocked to find another economist who agrees with my views on inflation. Inflation as an Arbitrary Concept originally appeared on About.com Economics on Tuesday, November 10th, 2009 at 17:25:02.
The Ongoing Ridiculousness of the Health Care Debate
The Ongoing Ridiculousness of the Health Care Debate originally appeared on About.com Economics on Thursday, November 5th, 2009 at 08:20:24.
One thing I find frustrating about the whole health care debate, on both sides, is the presumption that more doctors and hospitals and technologies (either paid by the private or public sector) is the lowest cost way of improving the health of the population. But given how many illnesses are caused by lifestyle (overeating, excessive drinking, smoking) or environmental (pollution) factors, we need to be considering other solutions to improve health. A Pigovian tax on sources of air pollution offset by lower income taxes would improve the health of the population, be a net benefit to the economy (by replacing an economically damaging tax with a less damaging one) and come at zero financial cost. Why do I feel like I am the only economist, on either the left or the right, talking about these things?
More here: One Economist's Thoughts On the Health Care Debate.
Understanding Cross-Price and Own-Price Elasticity of Demand
It is a common topic in first year microeconomics courses that often confuses students. I hope this walkthrough helps - Price Elasticity - How to Use Cross Price and Own Price Elasticity. Understanding Cross-Price and Own-Price Elasticity of Demand originally appeared on About.com Economics on Saturday, October 31st, 2009 at 17:15:41.
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Treating Wall Street Like the Mafia
Perhaps Senate Banking Committee Chairman Chris Dodd (D-Conn.)
thinks of himself as a modern day John Sherman. In 1890, Ohio
Sen. Sherman set out on a mission to establish “just competition”
laws and level the economic playing field. His quest culminated
in the dismantling of monopolies—such as American Tobacco and
Standard Oil—and the passage of new laws prohibiting malicious
competitive practices. In a similar way, Dodd now seeks the power
to tear apart any company he considers a risk to the national
economy. But unlike Sherman, Dodd isn’t out to create the best
possible conditions for competition to thrive. He’s out for
blood.
Dodd’s plan for overhauling Wall Street regulations, released
last week, includes a proposed new organization: the Agency for
Financial Stability (AFS). This new regulator
would be tasked with identifying and addressing “systemic
risks posed by large, complex companies as well as products and
activities that can spread risk across firms.” This represents
one piece of the most extensive proposal to reform financial
services regulation—topping even the ridiculousness of the
Obama
plan and Barney
Frank plan. Which is saying a lot.
The financial crisis has made off with
nearly $30 trillion in global wealth. Dodd believes Wall
Street banks and other financial institutions are the chief
culprits in this dubious economic caper. And to exact revenge, he
will push for some of the toughest, most expansive regulatory
powers to date.
To do this, Dodd plans to go Elliot Ness on Wall Street, using
economists and accountants as if they were FBI agents. Only
instead of targeting Al Capone and Big Angelo Lonardo, these
number-crunchers would be given nearly limitless power to hunt
down systemic risks inside America’s financial institutions.
Here’s one of the biggest problems with this (and with the Obama
and Frank plans, too): the government offers only a dangerously
vague definition of what constitutes a financial institution. So
not only would Goldman Sachs and JP Morgan Chase qualify, but
firms like Wal-Mart, Ford, and Texas Instruments—not exactly the
companies you think of when discussing Wall Street
regulation—might be subject to higher compliance standards as
well. It all depends on the subjective whims of the Agency for
Financial Stability.
As outlined in the Dodd plan, AFS would be an independent agency,
one whose chairman was appointed by the president and confirmed
by the Senate. It would also have a 9-member board comprised of
federal financial regulators and an independent expert.
The structure is similar to President Obama’s proposed Financial
Services Oversight Council. Both of these proposed overseers
would monitor the market for systemic risks, and would possess
the authority to collect information from financial institutions
as needed. The major difference is that where the Obama council
would only have the power to designate firms as “Tier 1”
companies, a category that would require stricter regulation,
Dodd’s agency would actually have the power to break-up those
companies considered too big to fail.
In other words, an Agency for Financial Stability would enjoy
unprecedented power over the private sector. Presently, if the
government wants to take a large firm apart, it must first take
its case to court, proving that the company is either a monopoly
or that it is maliciously attacking its competitors.
Yet not only would Dodd’s AFS write rules for capital
requirements, leverage limiting, and risk management compliance,
it would also have the authority to treat Wells Fargo or UBS like
the Bonanno crime
family.
Which means that the risk of undue political influence is
palpable. Let say’s enough people come to believe that Goldman
Sachs is secretly controlling the Treasury Department, as
Rolling Stone’s Matt Taibbi
so viciously claimed. All those people need to do is pressure
the government into taking the company apart on the grounds that
it’s size has become too critical to the economic health of the
nation. There are certainly enough anti-Goldman Sachs staffers on
Capitol Hill to make that happen. And it doesn’t take a follower
of Ayn Rand to imagine a scenario where flimsy justifications
like “to expand competition” and “create a fair playing field”
start rolling off the tongues of aggressive AFS agents.
Nor is the Agency for Financial Stability the only part of the
Dodd plan worth worrying about. His regulatory overhaul proposal
also includes a Consumer Financial Protection Agency, similar to
the one currently being considered in the House. Even more
aggressive than Rep. Frank’s version, this consumer agency would
also ultimately protect
the market to death.
The Wall Street Journal
pointed out last week that the Dodd overhaul plan would open
up anyone who associates with someone accused of fraud to civil
suits, even if prosecutors have no proof or are just on a fishing
expedition. The Dodd proposal also repeats the errors of the
Obama plan on issues like derivative reform, hedge funds, and
executive compensation.
There are a few good ideas in the proposal. Consolidating federal
banking rules into a single regulator could do a lot to simplify
and refocus banking rules. Though that reform shouldn’t be kept
separate from consumer protection concerns, and it would be
inappropriate for the regulator to force the various charters
under its supervision into one-size-fits-all regulations.
The Dodd plan also requires large firms to provide “funeral
plans” outlining how they could be quickly and effectively
shutdown in the case of an emergency. In theory, this is just a
part of responsible risk management. But the Dodd plan treads
into dangerous waters by giving AFS the authority to approve or
reject such plans.
In the end, the Dodd plan is on the highest order of hubris.
Politicians in Washington honestly believe they can fix the
economy and prevent future calamity. Sure, they weren’t quite
right when they “fixed” the system after Enron, or when they
“reformed” the rules under Clinton, or when they “fixed”
everything after the Savings and Loan
Crisis. But this time will be different! At least Elliot Ness
knew enough to change tactics after several initial failures to
capture Al Capone.
The current financial crisis was largely brought about by
well-intentioned regulations that just got it wrong. We thought
that 8 percent was enough capital for banks to hold onto in case
they ran into trouble. We thought that subprime mortgage-backed
securities were decreasing risk. We were wrong on both counts. We
can’t anticipate
every risk. Under the Dodd plan—like the Obama and Frank
plans before it— we’ll be proven wrong once again.
Anthony
Randazzo is a policy analyst for Reason Foundation.
Ron Paul's Fed Audit Bill Passes House Financial Services Committee
From
MarketWatch:
The measure was approved by the House Financial Services
Committee as it considered broad bank regulatory reform
legislation, and included a package of other measures weakening
the Fed's power and capping how much it can lend or guarantee.
The committee is now poised to pass the entire bill and has
scheduled its final vote on the legislation for December 1.
Lawmakers also agreed to provisions that would require the Fed
to work with other regulators before acting as a
lender-of-last-resort.
"If you care about transparency of the Fed, you would allow a
look at monetary policy," Paul said. "We're dealing with
trillions of dollars that doesn't get audited. There is no
reason why the world can't know, eventually, what the Fed is
doing."
Paul's measure, which was approved by a vote of 43 to 26, would
require the Government Accountability Office to audit the
central bank's interest rate policy, agreements with foreign
governments, foreign central banks and the International
Monetary Fund. It also would permit audits of a roughly $800
billion Fed mortgage-backed securities purchase program, which
could grow to $1.25 trillion, Paul said.
The GAO would be instructed to complete a Fed audit within 12
months of passage of the bill.
For background, see my November Reason magazine
feature on how this unlikely bill took anti-Fed thought from
the fringes to the mainstream
Worse Than Taxes
Bill O'Reilly is mad at me because I'm not mad enough about
taxes.
Last week on The
O'Reilly Factor, we talked about California's and New
York's enormous budget deficits and planned tax increases. Those
states would have big surpluses had they just grown
their governments in pace with inflation. But of course they
didn't. Now the politicians act like their current deficits are
something imposed on them by the recession.
But that's nonsense. They created the problem with their reckless
spending.
Let's look at the particulars. Had the government of New York
state grown at the rate of population and inflation over the past
10 years, it would have a $14 billion surplus today.
Instead, spending grew at twice the rate of inflation. So
New York has a $3 billion
deficit.
To dent California's deficit, bureaucrats will withhold an extra
10 percent from every taxpayer—at least from those who don't flee
the state. New York planned to raise the price of new license
plates, but then backed off. The visible tax was unpopular. But
the hidden taxes grow.
Hidden taxes are more pernicious because they disguise what we
pay for government. We blame merchants, not our legislators, for
the high price of gasoline, liquor, cigarettes, and phone calls,
but the money goes to the political thieves.
New York imposes a gas tax of 61 cents a gallon—almost a quarter
of the cost of the gas. New York City taxes cigarettes at $4.25 a
pack. Washington state collects $26 per gallon of hard liquor.
Illinois politicians take a sneaky cut when you buy junk food:
They add 6.25 percent to the cost of soda and candy.
My phone bill lists seven different taxes—unintelligible stuff
like a "Public Safety Commission Surcharge" and an "MCTD tax."
The payroll tax is one of the biggest hidden taxes. You assume
that you know what you pay because it's listed on your paycheck,
but that's actually only half of it. Employers must pay an equal
amount—money that otherwise would have been part your salary.
O'Reilly was most indignant about the visible taxes. "You,
Stossel, are going to be paying 45 percent of your money to the
government!" he said. I replied that I already pay more than
that, since I live in New York City.
But I apparently was not indignant enough, because later in his
show he told comedian Dennis Miller, "Stossel doesn't get it."
O'Reilly is right about my not being furious. It's not that taxes
don't anger me. They do. But I'm more angry about the arrogance
of the ruling class. It reminds me of Walter Williams' riff:
"Politicians are worse than thieves. At least when thieves take
your money, they don't expect you to thank them for it."
Taxes, even counting hidden taxes, are not the real measure of
what the thieves take. The true burden of government, the late
Milton Friedman said, is the spending level. Taxation is just one
way government gets money. The other ways—borrowing and
inflation—are equally burdens on the people. (State governments
can't inflate, but they sure can borrow.)
O'Reilly told me that America is ready for a tax revolt. I hope
he's right. But I don't think it will happen until more people
see the ruling elite for what it is: a gang of arrogant bullies
that has the audacity to believe that they know how to direct our
lives better than we do.
That's why, bad as the taxes are, I'm more upset about ObamaCare,
Medicare, the "stimulus," the auto bailout, the bank bailouts,
the Fannie/Freddie bailouts, the trillions in guarantees, and on
and on.
The politicians' spending schemes represent presumptuous
interference in our lives. They are an assault on our autonomy.
John Stossel will soon host Stossel on the Fox
Business Network. He's the author of Give Me a Break and
of Myth, Lies, and Downright Stupidity.
COPYRIGHT 2009 BY JFS PRODUCTIONS, INC.
DISTRIBUTED BY CREATORS.COM
Globalization With a Human Face
Free trade is never more necessary—or vulnerable—than in times of
economic distress. The current global downturn is no exception.
Protectionist barriers have shot up all over the world, including
the United States. Earlier this year, Congress killed a pilot
program allowing Mexican trucks to transport goods across America
and included “Buy America” provisions in the stimulus bill
banning foreign steel and iron from infrastructure projects
funded by the legislation. More disturbingly, President Barack
Obama, after chiding Congress for flirting with protectionism,
initiated his own ill-advised affair by imposing a 35 percent
tariff on cheap Chinese tires.
If the world manages to avoid an all-out trade war of the kind
that helped trigger the Great Depression after the U.S. imposed
the Smoot-Hawley tariffs in 1930, it will be in no small part due
to the efforts of one man: Jagdish N. Bhagwati, an ebullient and
irreverent 76-year-old professor of economics at Columbia
University. Bhagwati has done more than perhaps any other person
alive to advance the cause of unfettered global trade.
A native of India, Bhagwati immigrated to the United States in
the late ’60s after a brief stint on the Indian Planning
Commission, where he learned first-hand the insanity of an
economic approach that tried to modernize a country by cutting it
off from world trade. Since then, he has devoted his efforts,
both in academia and in the popular press, to showing that there
is no better way of improving the lot of both advanced countries
and the developing world than through free trade. His
path-breaking contributions to trade theory have put him on the
short list for a Nobel Prize in economics.
Though a dogged trade advocate, Bhagwati is anything but
dogmatic. He is a free spirit who draws intellectual inspiration
from many disparate ideological camps. A self-avowed liberal, he
is also something of a Gandhian social progressive, though Gandhi
himself supported economic autarky. Bhagwati works with numerous
Third World NGOs on a host of human rights issues. Yet he has no
problem taking on these groups—or his famous student, Nobel
laureate Paul Krugman—when they question the benefits of trade.
In fact, he devoted his 2004 magnum opus, In Defense of
Globalization, to a point-by-point rebuttal of these
critics. Although he doesn’t vote Republican because he dislikes
the party’s nationalistic jingoism, he readily declares that
Democrats pose a far bigger threat to international exchange than
Republicans.
This summer Shikha Dalmia, a senior analyst at the Reason
Foundation, interviewed Bhagwati in his New York office.
reason: You have been on the short list for a
Nobel Prize in economics for your contribution to trade theory.
Could you explain what your main contribution is?
Jagdish Bhagwati: My breakthrough in trade
theory was very simple, as all breakthroughs are. Back in the
1950s, when the case for free trade was widely regarded as less
compelling analytically than today, protectionists had one very
powerful argument on their side. They noted that a country
necessarily benefits from free trade only when markets are
perfect—that is to say, only when market prices reflect true
social costs can we expect these prices to guide allocation
correctly. Take pollution. Say your production process makes you
spew things into the air and water but you do not have to pay for
this pollution. Then the social cost of harming others is not
being taken into account by you and hence your production costs
are less than the “correct” social costs.
So you could take two points of view. The time-honored view was
that when there is such “market failure,” or what might be better
called a “missing market,” the case for free trade was
compromised and any form of protectionism was justified. I argued
that if you had a market failure, fix that, and you are back to
perfect markets and the legitimacy of free trade. So, for
example, you can have a polluter-pay principle on the
environment. If you do that, then there’s no damaging spillover
which has not been taken into account.
The proper policy response then is not to abandon free trade but
rather to fix the market failure and then to embrace free trade.
This was a revolutionary thought. For 200 years, serious
economists had abandoned free trade in the presence of market
failures of one kind or another.
reason: In Defense of Globalization was
addressed to non-academic critics of free trade and globalization
who claim that globalization does not have a human face. What was
your argument?
Bhagwati: When I was in Seattle in 1999, when
everything went haywire as far as trying to get a new round of
trade negotiations, I realized that the young people who were
agitating, and some of the older folks also, were not interested
in whether trade was good for national income and prosperity.
They were claiming that globalization has an adverse impact on a
whole lot of social issues—gender equity issues, environmental
issues, the effects of globalization on the polity and democratic
rights. In short, to use the fetching phrase, they were concerned
that economic globalization lacked a human face.
My book addressed precisely such issues. I found that, contrary
to the fears of the critics, most social agendas were advanced
rather than handicapped by globalization. Globalization, I
concluded, had a human face.
Take women’s issues, for example: If you look at what happens to
the gender gap on pay inequality, it turns out that you can make
a perfectly solid argument that in fact it’s narrowed rather than
widened as a result of international trade. The reason is very
simple: If a man is paid twice as much as a woman, when they are
both equally competent, that is inefficient. So when you are
engaged in international competition, you’re really not going to
be able to indulge your prejudice in this way. This will lead to
more demand for women and less for men, bringing pressure to bear
on their relative wages in the direction of greater pay equality.
Two brilliant young women, Sandra Black and Elizabeth Brainerd,
did their dissertation at Harvard on this hypothesis. They found
that in two decades in internationally traded industries in the
United States, the gender wage gap narrowed faster than in
non-traded industries. Trade had thus been good for an important
social objective, not a drag on it.
reason: You still hear the argument—President
Obama made it during his campaign—that we want fair trade, not
free trade.
Bhagwati: In the United States the phrase “fair
trade” holds a lot of sway, because fairness is an important
issue here. In the United States it’s the equality of
opportunity, not of outcome, that matters. We have a
fairness-oriented culture. The Europeans, who are actually more
stratified—they’re more into equality of outcome. The social
mobility of people is much less, so they want the state to
intervene and redistribute. They’re more into justice and we’re
more into fairness.
So if you want to be a protectionist in the U.S., you’ve got to
say that these Japanese or these Indians are trading unfairly.
People will much more readily give you protection if they think
the other guy is a wicked unfair trader.
President Obama hasn’t really understood the case for free trade
because I don’t think he’s been too interested in trade. His
background is as an activist working with the poor people, so he
hasn’t thought about these issues. So he ends up listening to
other people, and a lot of people who are protectionist are
around him, particularly the unions, who are afraid of
international competition. But they dress up the fair trade
argument in altruism, that they’re doing it to raise the labor
standards and wages of workers in India and Brazil and so on and
so forth, when in fact, they’re doing it to protect their own
workers from competition. The president doesn’t seem to realize
that this is something which other people, whom you pretend
you’re trying to help, actually see as a naked, cynical ploy.
Instead of pandering to union fear, Obama has got to engage them.
You have got to help these doubting Thomases confront their
fears. He’s got to say that trade with the poor countries is
actually helping, not hurting, you. The unions’ main fear is that
unskilled jobs are disappearing. They see these jobs being taken
up elsewhere where the labor is cheap. But they can’t hold onto
these jobs anyway. What they get in return from trade are cheap
products that they need as consumers. So free trade moderates the
downward pressure on their real wages.
Big portions of the wages of poor workers go toward low quality
textiles, for instance. That is well-established. But if you look
at the structure of protectionism, if you go and buy something
from Anne Klein that’s going to be expensive, but it carries no
tariff at all because these high-end designers compete on
variety. Tariffs matter where the competition is on prices. So
the low-quality items which poor people buy end up carrying
higher tariffs than high-end items that rich people buy.
reason: So free trade’s harm to union workers as
producers is minimal, but the harm to them as consumers would be
very great if we didn’t have free trade?
Bhagwati: Yes. So what President Obama has to do
is basically change the ethos in this country so that it
understands that the United States has profited enormously from
free trade. Free trade has rescued India and China from poverty,
yes. But the U.S. working class has also profited from
international trade.
He’s got to make an eloquent case like that. He’s got to see that
this is something that needs as much attention and as much of his
eloquence as the speech he made on race after he got into trouble
over his pastor.
But then to move the case of free trade forward, the Obama
administration has to show global leadership, because the U.S. is
the biggest trading country. He has got to make sure that the
stimulus package and everything that he does is completely
consistent with openness. I think he’s got to understand this is
not something he can keep postponing and postponing.
When President Clinton came in the first year, he was into Japan
bashing and he hadn’t made up his mind on whether he wanted trade
or not, because he had advisors on both sides. So his first year
was extremely tentative. Then he made up his mind and was
fiercely pro-trade after that. President Bush, the junior, he too
gave into steel tariffs when he first came in, but after the
first year, when he found his feet, he was very pro-trade.
President Obama doesn’t have that luxury because the weaknesses
are showing in the way the stimulus is being designed and played
out. So someone has to tell him very clearly that he doesn’t have
the luxury of most presidents, which is to use a first year to
find your feet on trade. He’s got to be out there and he’s got to
provide the leadership. He’s got to bring in the people who
waiver and dither, the AFL-CIO, the Democrats who are indebted to
the AFL-CIO, and say: “Look, you’re wrong. Here, let’s have a
debate.” There are lots of Democratic economists who’d be able to
engage these guys in a proper debate.
reason: In recent years, the opposition to free
trade hasn’t just come from left-wing unions, but also people on
the right who fear that outsourcing will cause the U.S. to lose
its economic edge as it imports high-value-added products and
exports low-value-added ones. How do you respond to that?
Bhagwati: It’s an irrelevant argument. To say
that the United States should be exporting high-value items
rather than low-value items is itself a fallacy. But America’s
great comparative advantage lies in innovation. For someone like
me who has come from India it is very obvious that this country
is full of innovators. When I was a student I read about
Britain’s Industrial Revolution. And it was powered by all kinds
of people, inventing the spinning jenny and so on. They were like
little Americans, you know, thinking of new ways of doing things
and making a buck. Almost every other American I know is thinking
about something, some way to do something. We are a highly
inventive people, and technology therefore is our driving force.
It’s not savings and investments which are driving our
productivity. It’s technology and innovation and immigrants like
me—not me in particular—lots of people who come here and by the
second generation go through the mill and become Colin Powell or
Orlando Patterson at Harvard.
Nobody can compete with us in the long run, in my view, because
these are not advantages which people in traditional societies
can reproduce. So we’re always going to be doing high value.
We’ll lose the high value we generate to others quickly because
now technology diffuses very fast. But then we’ll have new ideas,
new technologies.
reason: Which side poses the bigger threat to
free trade, conservatives on sovereignty, neo-mercantilist
grounds, or liberals on equity and environmental grounds?
Bhagwati: In the U.S., I think the Democrats are
the biggest threat to free trade. I don’t see the right-wing
threat to globalization in terms of sovereignty as being a major
one, frankly.
Conservatives are principled people, so they have Edmund Burke
type of reservations about continuous change and so on. But they
are not people who are going to undermine the rule of law when it
comes to trade. Even their arguments against immigration are
rule-of-law arguments. Anti-globalization noises saying we’ve
lost our sovereignty and so on and so forth, it’s not going to
get very far in the U.S. system.
The threat from the left, on the other hand, is much more serious
because they oppose free trade on equity grounds. I love America.
I have settled in it. But there is a tendency, particularly on
the part of the Democrats, to become totally self-righteous on
everything and this is the way it has to be and if you disagree,
then you’re a Republican. I mean, that’s the way they argue it.
It’s unbelievable. They don’t want to argue the merits of the
case.
reason: Why do you think Republicans are better
on free trade than Democrats?
Bhagwati: Both the last Bush and Ronald Reagan
believed in America. They thought that their own people could
win. That made them more prone to accept international
competition and trade.
They carried that attitude over into politics, of course. For
instance, President Reagan won the Cold War by pushing Gorbachev
to the limit. But he was lucky. President Bush went into Iraq
with the same attitude, and that was unfortunate.
But since they both believed that Americans would win, they were
good on international trade, although maybe for the wrong
reasons. Democrats don’t believe that America can remain number
one, and hence they cannot bring themselves to be completely in
favor of open markets.
reason: You are a big believer in multilateral
trade agreements over bilateral trade agreements. What’s wrong
with bilateral trade agreements?
Bhagwati: Free trade agreements and
protectionism are two sides of the same coin. When I have free
trade just with you, I’m freeing trade with you but I handicap
those who are not members of our free trade area. They have to
keep paying the duties to get into our markets. So that becomes a
de facto way of increasing protection against outsiders.
Multilateral free trade would be a closer thing to pure free
trade.
But there are two additional worries about bilateral trade
agreements: One, we don’t just have two or three free trade
agreements. Today there are close to 500, and every week there’s
another new one being constructed. As a result, you’re getting
all kinds of special tariffs, rules of origin, and other things
multiplying in the system, something which I’ve called the
spaghetti bowl. Exporters rightly get upset by the large numbers
of tariffs they face depending on where you’re coming from.
Two, how do you enforce these agreements in a globalized world?
It’s very chaotic. Parts are coming from everywhere. For a
country to have to then decide which product is my partner
country’s product rather than an outside country’s product
becomes completely arbitrary. A car produced in Canada with
Japanese steel and German chemicals, where 80 or 90 percent of
the parts may come from elsewhere—is that a Canadian car or is it
really something else? Does it qualify for the zero tariff under
the North American Free Trade Agreement or not?
reason: Was NAFTA a mistake?
Bhagwati: I think in retrospect, yes. It’s not a
slam dunk argument because it did bring in Mexico. Otherwise,
they were talking about CAFTA which included just Canada and the
U.S. But when you brought in Mexico, it made it a much bigger
thing.
President Clinton was carrying on the multilateral negotiations
in tandem with NAFTA. But NAFTA created worries on the part of
the unions here, because this is a poor country and they were
worried that Mexican competition would really hurt their wages.
So even though the multilateral talks would’ve gone through
without any difficulty, President Clinton ended up having to
fight very hard for NAFTA, which survived by a very narrow
majority. In order to win NAFTA, he had to give in on things like
labor standards and so on. That’s when all these social things
became part of trade deals. From there, it never looked back.
So in retrospect, I would say, because of the concessions they
had to make, Clinton started us down a road which really has been
counterproductive.
There is another thing to worry about. When you look at a trade
agreement like NAFTA, it’s about that thick (holds his hands
about two feet apart). When I debate people like Lori
Wallach of Public Citizen, she arrives with a lot of books, and
among them is this NAFTA treaty she carries for effect. I hope
she gets a hernia from doing this often enough, because it looks
pretty heavy to me. I wouldn’t be carrying it around. Anyway, she
shows this book and asks, “Is this free trade?” And mad as she
is, she’s right to raise that issue. You should be able to say
maybe in 10 pages that in these sectors we are going to
liberalize and so on. But nine-tenths of what’s in these
agreements are things which have nothing to do with trade. Labor
standards, environmental standards, intellectual property rights.
If I were Jane Fonda, in order to sell more workout tapes, I
could put into the agreement a clause that the president of
Mexico has to do his exercise to my tapes. And it would go in,
because ours is a lobbying culture and nobody really would know
that it’s there. Because who opens these things except the
lobbyists?
So many developing countries are now waking up to the fact that
they’re being sold a bill of goods in the form of trade
agreements.
reason: Do you think a global externality
problem like global warming poses a fundamental threat to free
trade?
Bhagwati: I think it depends on the way you do
it. First, you’ve got to decide whether there is a problem of an
externality. I have doubts about these scientists who claim to
have a consensus on global warming because, you know, Freeman
Dyson, a great scientific figure, says these guys are really
low-level scientists and I’m told by many that they, in fact,
are. And if they reach a consensus, I don’t care. I mean, that’s
the consensus of incompetents.
But so long as only the scientists were talking about global
warming, nobody paid the slightest attention. Remember, not a
single senator voted for the Kyoto resolution back in the ’90s.
Even Al Gore and Clinton had to walk away from Kyoto. But then
the polar bears were threatened, the glaciers began to melt, and
then that great French film about the penguins which touched all
our hearts came out. So these were three whammies. Even if you
live in Peoria you will understand, wrongly maybe, that global
warming is a problem. I tell all my students: If they think of
something like that for free trade, please let me know.
What countries like India and China are saying is that if the CO2
was accumulating and it’s going to create a disaster, then that
took a lot of time to establish. So they want the West to bear
primary responsibility for the damage it has caused in the past.
If America applies some kind of a carbon tax and it says that if
India and China don’t impose a similar tax, it’s going to use
what is called border tax adjustment, then that is protectionism.
And there’s no reason why Indians and Chinese have to accept
this. Just as America was not willing to accept it when it didn’t
sign onto Kyoto and Europe started threatening a countervailing
duty on American exports. But everybody reacted to that talk and
said this is a cockeyed thing to do. Peter Mandelson, who was the
EU Commissioner, said it was very unwise because the United
States will retaliate.
It’s ironic that we are now using exactly that kind of threat on
India and China. But America’s fuel tax is so much lower than
that of most other countries, except the Middle East. So India
and China are going to hit us because we had a low gas tax for a
long time. And all hell would break loose. India and China are
big guys. They can get legal [World Trade Organization]
retaliation against the U.S. Or India could take away contracts
from Boeing and give them to Air France. It can have nuclear
reactors go to France rather than to G.E. Caterpillar would be
shut out.
So I suggest a different way. If in our own U.S. system you’re
going to get your companies to clean up under the Superfund Act,
that’s a tort principle which we accept. Then we ought to be
willing to pay in some form to other poor countries for the past
damages. The West has completely ignored this suggestion so far.
It has provided maybe a few million dollars in assistance to
Third World countries for this purpose. But if the West seriously
starts contributing to this fund, Third World countries could get
anywhere from $150 million to $1 billion to mitigate global
warming.
reason: This is a political non-starter, you
know.
Bhagwati: Yes. But the president actually has
made some remarks about border tax adjustments not being such a
good idea. He’s got to do more than that. He’s got to say this is
a crazy thing to do. He’s still very cool—he needs to lose his
temper once in a while. Because it’s too important. The U.S. is
one of the biggest trading nations in the world. We want the rule
of law. We don’t want retaliation, which would be massive. India
and China are not Zaire or Zimbabwe. They’re not little countries
you can push around. We don’t want to unleash that kind of trade
war, because it would be very hard to control, I’m afraid.
Where’s That Inflation?
From September 2008 to September 2009, the Federal Reserve pumped
an unprecedented $2 trillion into the financial system by buying
Treasury bonds and assets from banks. According to most
mainstream economists, such action should create a general
increase in prices.
Inflation is the result of more dollars chasing the same number
of (or fewer) goods. As the Nobel laureate Milton Friedman put
it, in one of his main contributions to “monetarist” economics,
inflation is always and everywhere a monetary phenomenon—that is,
it’s caused by an expansion in the supply of money or credit. So
why haven’t we seen inflation in 2009? Are we looking in the
wrong places, or is it time to update monetarist theory?
The monetary base, which consists of currency in circulation plus
bank reserves on deposit with the Federal Reserve, has exploded,
as Figure 1 shows. Figure 2, by contrast, shows inflation as
gauged by the consumer price index (CPI)—the cost of goods
purchased by the average U.S. household—and by a measure called
the median CPI. Standard CPI is the traditional measure for
inflation, but a few extreme outliers (such as the price of fuel)
can throw off the average; thus the median is a more robust
statistic to estimate the central tendency in the data.
So while the standard CPI shows deflation over the past year,
that stems from a few anomalous sectors, such as energy, where
prices have dipped significantly since 2008. The median CPI, on
the other hand, shows an inflation rate that does not look very
unusual.
The standard explanation for the lack of inflation is that banks
are sitting on all that new cash. As soon as the economy shows
signs of recovery, goes the theory, banks will make more loans,
and the broader monetary aggregates will shoot up rapidly. But
that expectation ignores an important factor: Beginning in
October 2008, for the first time in history, the Federal Reserve
started paying interest on reserves held by banks. So even when
the economy starts heating up, banks will have an incentive to
hold money rather than lend it.
What’s more, should inflation rear its head anytime soon, the Fed
could suck the newly created money out of the banking system by
selling assets, such as some of the higher-quality
mortgage-backed securities it bought from banks at the depth of
the financial crisis. That would decrease the amount of money in
the system and choke back inflation.
On top of that, the Georgetown University economist Donald
Marron has argued, if investors really thought we were on the
verge of inflation, we would see the 10-year Treasury or 30-year
mortgage rates go through the roof. But that hasn’t happened.
Marron’s view reflects what might be called the monetarist
consensus. It is embraced by economists across the political
spectrum, including Obama’s economic adviser Larry Summers and
the current and former Fed chairmen. It is a position that relies
on the wisdom of politically independent (and hopefully
monetarist) central bankers to manage both the economy and the
threat of inflation.
Besides placing undue faith in the Fed’s ability to time
perfectly any necessary anti-inflationary measures, the consensus
suggests that the nation’s central bank now has the heretofore
undiscovered ability to increase the money supply without
creating inflation. If true, this would be an important new
development, since inflation has long been rightly vilified for
destroying entrepreneurship and long-term economic growth. But if
false, this conceit could prove dangerous indeed. And it’s
probably false.
On his blog Free Advice in September, the Pacific
Research Institute economist Robert Murphy argued that inflation
is already here but economists are missing the signs. “From
[December 2008] until August 2009, the unadjusted CPI level has
increased 2.7%, which translates to an annualized increase of
just over 4%,” Murphy wrote. He acknowledged that “ten-year
yields [on Treasury bonds] are…low” but added that the price of
gold has increased enormously. “Why do we assume that TIPS
[Treasury Inflation-Protected Securities] traders are genius
forecasters, but gold traders are morons?” he asked.
In an email message, Murphy adds: “I believe we are currently
witnessing a bubble in Treasury debt. I consider the current
yields on 10-year U.S. government bonds to be absurdly low, just
like the price of housing was absurdly high in early 2006. After
this bubble bursts, investors will slap themselves on the
forehead and say, ‘What were we thinking? Why did we rush into
Treasurys even as the government told us it was planning to
double the federal debt burden in a decade?’ ”
The St. Lawrence University economist Steven Horwitz agrees both
that inflation is already happening and that it is widely
misunderstood. Monetarists, he says, were “too focused on
aggregates like ‘the’ price level, which led economists to ignore
the way inflation could distort individual prices at the
microeconomic level, causing resource misallocation in the
process.” Virtually all economists now agree, for example, that
the Fed’s low interest rates inflated housing prices earlier in
the decade. Yet as the prices of houses went up, few economists
worried about inflation because the CPI looked relatively stable,
due in part to a decrease in energy prices. When housing started
to crash in 2007, many economists thought the Fed should inject
still more funds into the system to stave off further declines.
They failed to see that the Fed had distorted relative prices in
the first place.
As the George Mason University economist Peter Boettke explains,
“A problem with the current monetarists is that while they
learned from Friedman the idea that we should fight inflation, in
practice they learned from his writings on the Great Depression
that central banks should fear deflation.” As a result,
economists who are theoretically inflation-hating Friedmanites
now want to meet every downturn by fighting deflation.
Because of this tendency, bursting government-created bubbles
leads to the creation of new ones. The real lesson may be that
inflation is not only a monetary phenomenon but also a political
one. Which makes it that much more difficult to predict, much
less control.
Contributing Editor Veronique de
Rugy (vderugy@gmu.edu) is a senior research fellow at the
Mercatus Center at George Mason University.
Bernanke’s Philosopher
When Ben Bernanke took charge of the Federal Reserve in 2006, the
media made a few passing references that suggested he secretly
subscribed to libertarianism. “I worked with him for years before
I even knew he was a libertarian-leaning Republican,” the former
Fed vice chairman Alan Blinder told CNN. The Wall
Street Journal reported that Bernanke, “though a libertarian
Republican …displays few partisan leanings.”
Last summer President Barack Obama re-nominated Bernanke to
another four-year term atop the central bank, a reward for
allegedly saving the world from a second Great Depression.
Bernanke will arrive at his Senate confirmation hearings this
January with an unbeatable recommendation. “As an expert on the
causes of the Great Depression,” Obama raved in August, “I’m sure
Ben never imagined that he would be part of a team responsible
for preventing another. But because of his background, his
temperament, his courage and his creativity, that’s exactly what
he has helped to achieve.”
“Mission Accomplished,” the banner might have read.
Missing from Obama’s speech was any mention of Bernanke’s
economic philosophy. These days, the media have taken to calling
him a Keynesian—a believer in fiscal stimulus and the mixed
economy. “We are all Keynesians again,” the liberal
Washington Monthly headlined a January 2009 feature on
the Fed chief.
In reality, Bernanke is following a monetarist
depression-prevention model laid out by Nobel laureate and
libertarian patron saint Milton Friedman. The Fed chairman has
invoked the late economist in support of lowering interest rates
to zero and bailing out banks. Trillions of dollars have been
staked on the insights of “monetarism,” the economic theory of
central banking and inflation-management associated with Friedman
and Anna Schwartz. Though Schwartz now distances herself from
Bernanke, opposing his reappointment on the grounds that he’s
gone too far, the irony remains that a series of Fed policies
many libertarians find repugnant are being championed by a man
claiming to take his chief inspiration from the most influential
libertarian economist of the 20th century.
A Monetary History of Ben Bernanke
The story begins in 1963, when Friedman and co-author Anna
Schwartz published A Monetary History of the United
States, an opening salvo in what Friedman called a
“counterrevolution” against Keynesian theory. Their chapter on
the Great Depression was spun off into a stand-alone book,
The Great Contraction: 1929–1933, an epic revisionist
history that changed America’s understanding of the causes of the
Depression. Friedman and Schwartz contended that the Federal
Reserve—not capitalism or Wall Street—was to blame for the dismal
’30s.
“The fact of the matter is that it was the [Fed’s] decision to
tighten credit policy in 1928 that produced the Great
Contraction,” the 93-year-old Schwartz says by phone from her
office at the National Bureau of Economic Research in New York
City. The Fed hiked interest rates in 1928 to curb what it saw as
rampant speculation on Wall Street—a conflagration of leverage,
margin buying, and outright Ponzi scheming fueled in the first
instance by cheap credit from the Federal Reserve. (Goldman
Sachs’ various pyramid schemes from that era, after they
collapsed in 1929, generated losses of $475 billion in today’s
dollars.)
Friedman and Schwartz rejected the widely held theory that
speculation had been a major problem, or that there had even been
a credit bubble in the 1920s. Bad loans and reckless banking
practices were a “minor factor,” at most, in the Great
Depression, they said. In this narrative, a Federal Reserve
paranoid about speculation had needlessly constricted the money
supply, imploding an otherwise sound economy.
After the Great Crash of 1929, the Federal Reserve drastically
cut interest rates from a brief high of 6 percent to 1.5 percent
by mid-1931. But during the first few years of the crisis, the
Fed occasionally felt forced to abruptly raise rates again in
complicated maneuvers to stem outflows of gold into Europe.
Friedman and Schwartz blamed these sporadic interest rate hikes
for smothering incipient recoveries, opening a vortex of
deflation, and transforming a recession into the Great
Depression.
“What the Fed had to do was increase the money supply,” Schwartz
tells me. “By taking that action, it would have revived the
economy. That’s the lesson of the Great Depression.” In The
Great Contraction, she and Friedman argued that the Fed
squandered its ample latitude to combat deflation. “The monetary
authorities,” they wrote, “could have prevented the decline in
the stock of money—indeed, could have produced almost any desired
increase in the money stock.”
When it comes to his academic specialty, Bernanke is a disciple
of Friedman and Schwartz. In 2002, at Friedman’s 90th birthday
party at the University of Chicago, Bernanke was effusive. “Among
economic scholars,” he began, “Friedman has no peers.” He
developed the “leading and most persuasive” explanation of the
Depression, whose impact on economics and the popular mind
“cannot be overstated.”
At the end of his encomium, Bernanke made a soon-to-be-famous
apology on behalf of the Federal Reserve, where he was then
president of the powerful New York branch: “I would like to say
to Milton and Anna…regarding the Great Depression. You’re right,
we did it. We’re very sorry. But thanks to you, we won’t do it
again.” (The speech was published as the afterword to the latest
edition of The Great Contraction.)
Schwartz was present at the birthday party. “I’m sure he was
sincere when he said that,” she says. And Bernanke stayed true to
his word. In 2006 he replaced Alan Greenspan as chairman of the
Federal Reserve. Greenspan, a self-described “libertarian
Republican” who had once been part of Ayn Rand’s inner circle,
had engineered an era of low-inflation growth that won Friedman’s
endorsement. “There is no other period of comparable length in
which the Federal Reserve System has performed so well,” Friedman
declared in The Wall Street Journal on January 31, 2006.
Monetarism and Freedom
When the economy collapsed two years into Bernanke’s watch
because of a massive credit bubble, he slashed interest rates to
zero and ordered the money-printing presses to full steam. He
also embarked on a course of “quantitative easing,” where a
central bank convolutedly buys its own government’s bonds with
printed money so as to sink interest rates even further.
This approach was not new. Friedman had prescribed quantitative
easing, combined with “easy money” and inflation, as a cure for
Japan’s 1990s economic slump, which he described as an “eerie, if
less dramatic, replay of the Great Contraction.” As he did with
the Depression-era Fed, Friedman emphasized that “there is no
limit to the extent to which the Bank of Japan can increase the
money supply if it wishes to do so.” In 1998, a year after
Friedman penned his advice in The Wall Street Journal,
Japan introduced monetary stimulus: a cocktail of zero interest
rates and quantitative easing. But deflation continued. Today
Japan’s exports are down an unthinkable 36 percent from just last
year, and prices are plummeting at an all-time record pace.
Stateside, in the shadow of the Fed’s multi-trillion-dollar
balance sheet, it has been all too easy to categorize Bernanke
simply as a Keynesian supporter of public works projects,
socialistic safety nets, and profligate, government-led
consumption. While it’s true that the Obama ad-ministration is
pursuing Keynesian fiscal stimulus, the Federal Reserve under
Bernanke has consciously acted on the Friedman/Schwartz insight
that loosening central bank credit is a fundamental tool in
forestalling deflation and depression. Understanding that
monetarism can mean both the management of low inflation in good
times, and the creation of inflation in bad times, has proven too
difficult for most of the media.
The New York Times, for instance, has identified
Bernanke as “a student if not necessarily a devotee of the
British economist John Maynard Keynes.” Actually, Bernanke spent
most of his academic career elaborating on Friedman’s
Keynes-refuting interpretation of the Great Depression. Athough
his research sometimes strayed into nonmonetary subjects, it was
always, as he said at Friedman’s birthday party, “an
embellishment of the Friedman-Schwartz story…and in no way
contradict[ed] the basic logic of their analysis.” In 2003, at a
conference honoring Friedman’s Free to Choose, Bernanke
said, “Friedman’s monetary framework has been so influential
that, in its broad outlines at least, it has nearly become
identical with modern monetary theory and practice.” So great was
Friedman’s influence that Bernanke compared it with Shakespeare’s
contributions to English literature.
Even Bernanke’s nickname “Helicopter Ben” derives directly from
Milton Friedman. It came about during a 2002 speech entitled
“Deflation: Making Sure ‘It’ Doesn’t Happen Here,” in which he
quoted Friedman on the importance of conjoining fiscal and
monetary policies. The ideal fiscal stimulus, Bernanke said, was
a shower of tax cuts “equivalent to Milton Friedman’s famous
‘helicopter drop’ of money.” Friedman had originally used the
phrase to counter Keynes’ idea of the “liquidity trap,” in which
setting interest rates at zero leads to bank hoarding and leaves
the Federal Reserve no room to maneuver. Friedman suggested that
countries could escape the liquidity trap by handing out money to
consumers, and he explained his argument in a tale about a
helicopter unloading cash on a town. Likewise, Bernanke’s Federal
Reserve has created special “vehicles” to disburse consumer
credit from on high.
In February, Bloomberg News added to the philosophical confusion
by reporting that “Federal Reserve Chairman Ben S. Bernanke is
siding with John Maynard Keynes against Milton Friedman by
flooding the financial system with money.” Of course, Bernanke
has said precisely the opposite. He’s flooding the financial
system with money during a deflationary crisis, he says, because
that’s what Friedman would have him do.
On February 10, Bernanke further underscored his allegiance to
Friedman in an overlooked Capitol Hill question-and-answer
session with Rep. Ron Paul (R-Texas). Their exchange is worth
quoting at length.
“Chairman,” Paul began, “you have written a lot about the
Depression. There was a famous quote you made once to Milton
Friedman, apologizing for the Federal Reserve bringing on the
Depression. But you assured him it wouldn’t happen again.…But the
key to this discussion has to be: Was it too much credit in the
’20s that created the conditions that demanded a
recession/depression, or was it lack of credit in the Depression
that caused the prolongation?…Here we’re working frantically to
keep prices up. What’s wrong with allowing the market to dictate
this…and prices to go down quickly so we can all go back to work
again?”
In response, Bernanke repeated the lesson of The Great
Contraction: “Milton Friedman’s view was that the cause of
the Great Depression was the failure of the Federal Reserve to
avoid excessively tight monetary policy in the early ’30s. That
was Friedman and Schwartz’s famous book. With that lesson in
mind, the Federal Reserve has reacted very aggressively to cut
interest rates in this current crisis. Moreover, we’ve tried to
avoid the collapse of the banking system.”
For her part, Schwartz is critical of Bernanke’s application of
her and Friedman’s theories. “You don’t have to lower the
interest rates to the extent that he has in order to increase the
money supply,” she says. “The essential action should be
increasing the money supply. That’s the lesson of the Great
Depression.” She adds, “There’s nothing contradictory in The
Great Contraction with reference to what the Fed should be
doing currently.”
Schwartz is alarmed by the enthusiasm with which Bernanke has put
“monetary expansion” into practice. She berates the Fed for going
too far and predicts that it will have to raise interest rates
“in the near future” to arrest inflation. Asked if she sees
hyperinflation on the horizon, she exclaims, “Oh, yes!”
In a New York Times op-ed last July, Schwartz criticized
Bernanke as a “man without a plan,” warning that his “easy
monetary policy is a sin.” She concluded, “He does not deserve
reappointment.”
Schwartz also seems to have undergone a late-life conversion to
at least some part of Keynesian theory. Asked for her current
solution to the crisis, she repeats the ultimate Keynesian maxim:
The government should pick up slackening demand in the private
sector.
“People are saving, not spending. In order to revive this
economy,” she says, hesitating before continuing, “the government
will have to resume spending. By spending, the government will
require that the current inventory will be depleted and have to
be replenished. And that will bring on additional production and
jobs.”
Bernanke’s Money Mischief
Ron Paul, like Schwartz and Friedman, is a libertarian, but he
embraces the “Austrian” school of economic theory that rejects
the very concept of the Federal Reserve. He is critical of what
he sees as the Fed’s ongoing monetarism. “In essence,” Paul says
in a phone interview, “Bernanke is following Friedman’s advice.
He’s a Friedmanite when it comes to massively inflating. Bernanke
was able to justify [his policies] by using Friedman.”
Does Friedman’s enthusiasm for inflating the monetary supply in
crises flout libertarianism? “Absolutely,” Paul answers. “The
monetarists said that you could overcome a natural market
correction of a collapsing system by inflation—print money
faster! Which contradicts Friedman’s whole thesis. He wanted a
steady, managed increase in the supply of money of about 3
percent.” Here Paul is alluding to Money Mischief,
Friedman’s 1991 book in which he called on the Fed to grow the
money supply at 3 percent annually, presumably forever. “Yet at
the same time, Friedman said the Depression could have been
prevented by massively inflating.” Paul has kind words for
Friedman, whom he praises as a staunch defender of economic
liberty, but his final summation is damning: “Friedman’s very,
very libertarian—except on monetary issues.”
With Bernanke at the helm, the Federal Reserve has unleashed
monetary expansion, the very definition of inflation—and
Friedman’s blueprint for averting economic depression. According
to Bernanke, Obama, and scores of economists, it’s working.
“Prospects for a return to growth in the near term appear good,”
Bernanke predicted in August.
But with lenders foreclosing on 358,000 homes that month, the
commercial real estate market only beginning to collapse, a 20
percent annual fall in railroad freight, and unemployment
projected to crack double digits any minute now, the much-vaunted
recovery is no given. And if it isn’t working, we might still
relapse into recession, or worse.
The total cost of the Fed’s monetarist-inspired program is
mysterious. Paul, whose bill to audit the Fed is now co-sponsored
by more than half of the House of Representatives, declares: “We
don’t know for sure how much the Fed has spent—I’ve heard it
could be $6 trillion. But we have no knowledge of what the Fed’s
doing. All these dealings are very secret.” A Reuters estimate in
late September pegged the Fed’s balance sheet around $2.1
trillion, with $111 billion doled out to banks every day through
the Fed’s overnight discount window. Bloomberg News has sued the
Federal Reserve for full disclosure, and we may soon find out the
exact number. Manhattan Chief U.S. District Judge Loretta Preska
has ordered the Federal Reserve to open its books, though the
bank has filed an appeal.
Friedman and Schwartz, those champions of low inflation, have
helped inspire the greatest monetary expansion in Federal Reserve
history, a program of limitless market interventions and tireless
money printing whose end game is likely to be a return to the bad
old days of inflation that they fought for so long. For two
libertarian champions of free markets and limited government,
this unintended legacy has the ring of a world-historic irony.
Penn
Bullock (penneth@gmail.com) is a freelance writer for Village
Voice Media. He lives in Florida.
That Stimulus is So Freaking Awesome it Has Created or Saved Jobs in Congressional Districts That Don't Even Exist!
Here's a
stimulus success story: In Arizona's 9th Congressional
District, 30
jobs have been
saved or created with just $761,420 in
federal stimulus spending. At least that's what the website
set up by the Obama
Administration to track the $787
billion stimulus says.
There's one
problem, though: There is no 9th Congressional District in
Arizona; the state has only eight Congressional Districts.
There's no 86th Congressional District in Arizona either, but
the government's recovery.gov Web site says $34
million in
stimulus money has been spent there.
In fact, Recovery.gov
lists hundreds of millions spent and hundreds of
jobs created in Congressional districts that don't exist.
ABC's reporter Jonathan Karl drily notes that Recovery.gov was
created to foster greater accountability and transparency in
stimulus spending.
Hat tip: Amanda
Carpenter of the Wash Times.
Dave Bing's Last-Second Shot
On November 3, voters in Detroit trudged to the polls and
re-elected 65-year-old Mayor Dave Bing, giving him five new city
council members to accomplish a mission impossible: bring
Michigan's biggest city back from near death. There's no clear
prescription that will work, and Detroit's recalcitrant
public-employee unions will resist the fiscal therapy that will
necessarily be a part of any recovery.
Last year, Mayor Kwame Kilpatrick headed off to prison for using
city funds to cover up an affair with a staffer. After a few
months of an interim mayor, Bing stepped in to finish
Kilpatrick's remaining time in office neither out of political
ambition (he's announced he won't seek two terms) nor to get rich
(he is donating his salary to the police department). The former
Detroit Piston basketball legend who later made a fortune as an
auto supplier genuinely wants to use his business acumen to save
the city. But Detroit is much closer to the brink than many
people acknowledge.
Detroit has been in trouble for decades. It has the highest taxes
in Michigan, the highest murder rate in the country, and a
dreadful public school system. Only 25 percent of high school
students graduate each year. Its tens of thousands of abandoned
homes offer safe haven to drug dealers and criminals. All of this
has produced an exodus of businesses—there is no longer a single
major department store in the city—and residents. Detroit's
population is less than half of its peak of two million in the
1960s.
With the collapse of the auto industry over the past year and a
half, things have gotten a lot worse. Unemployment is now
touching Depression levels of around 30 percent—three times the
national rate. Businesses that depend on the auto industry are
shutting down and more residents are hitting the exits. This is
accelerating the erosion of the city's tax base, producing a
fiscal crisis that seems impossible to escape. The city's
accumulated deficit is currently somewhere between $300 million
and $400 million. No one knows for sure because the city has yet
to submit its 2008 audit; its annual budget is about $3 billion.
Joe Harris, a former chief financial officer of Detroit, notes
that when Bing took office this summer, the city had enough cash
on hand to make payroll, pay vendors and meet other day-to-day
needs for about 11 days. To make ends meet, Bing is planning to
issue "tax anticipation" notes to lenders to raise $94 million
against expected tax revenues. This money, along with the
biannual property taxes that the city collected in August, might
keep Detroit running through the end of the fiscal year next
June.
But that won't address the underlying fiscal imbalances. For that
problem, Bing wants to squeeze $5 million in savings every month
by asking the city's roughly 13,000 workers to take a 10 percent
pay cut, a 10 percent benefit cut, and a 10 percent staff cut. He
also wants to privatize or outsource many city services and
consolidate various departments. "Our people [city workers] need
to understand that entitlement is gone," Bing told the
Detroit News in August. "There are people who think we
are job providers. We're service providers."
Bing is going to have a very hard time making the city's
entrenched unions play ball. John Reihl, president of the
American Federation of State, Council and Municipal Employees
(AFSCME) Local 207, regards Bing's talk of cuts as a personal
insult. "It is just a way to mess with the unions," he told the
Detroit News in July. "It's not our role to give anymore
concessions."
So far Bing has shown little indication that he'll stand up to
the unions. For the third time on Friday, Bing backed off on his
threat to lay off more workers if unions don't accept a wage cut.
Yet a recent study by the Mackinac Center for Public Policy found
that if state and local government employee benefit packages in
Michigan were limited to what is typical for Midwestern private
sector workers—including those in unions—taxpayers would save as
much as $5.7 billion annually.
The fiscal mess puts Bing in a Catch-22. He can't cut the city's
taxes because the short-term hit to cash flow would leave the
city unable to pay its bills. But without tax reform the city
can't lure businesses back.
Detroit may simply not be viable in its current form. Political
and economic leaders need to rethink the notion that the city can
regain its former status as a major American metropolis capable
of luring large companies with tax breaks—which was Kilpatrick's
failed strategy.
Detroit now more closely resembles a frontier town that needs not
flashy stadiums and art institutes but basic services: police,
firemen, and good schools. Bing needs to confront the hard
reality that the city needs to pare back its liabilities,
identify infrastructure it can no longer afford to maintain, and
(though this is anathema to Detroit's political class) perhaps
auction off portions of its 140 square miles to neighboring
counties, shrinking to a size that its diminished population base
can support.
Short term, Detroit's best hope may be to go bankrupt. However,
given Michigan law, which has never been tested because no city
has ever filed for bankruptcy, it's unclear if even bankruptcy
will fully release Detroit from the clutches of its unions and
allow it to start over. The only thing certain is that fate is
not kind to a city that allows unions to run amok.
Shikha Dalmia is a senior analyst at Reason Foundation and
lives in metro Detroit. This article
originally appeared in The Wall Street Journal.
Because When You Support Reason, Someone Who Hates You Throws Up a Little in His Mouth
For today's lunchtime webathon pitch
I hand the mic over to an antagonist, the beloved lefty blogger
TBogg at
Firedoglake.com:
Which it is, but only in states that still have the death
penalty.
That "dusky" was an especially nice touch, especially since it
came right next to a
particularly swarthy-looking pic of Senor Fonz himself (who,
not that it matters, is
against the death penalty, as am I).
It's telling that when the Montagues run Washington, the same
Capulets who hated us yesterday become our new best friends
today. Whoever is out of power–and by definition, that's always
the vast majority of us–finds strange nourishment in our mix of
journalism, argumentation, and
hot gals kissing lobsters. But as the Obama era rumbles
along, ask yourself this: Who was critiquing Bailout Economics
and too-big-to-failitis not just after January 20, 2009, but from
Sept. 24, 2008 (not to mention the four decades prior)? Wasn't
The Economist. Wasn't the Wall
Street Journal editorial page. Wasn't the
GOP nominee for president.
Actually, you won't be surprised, because you already
read, watch, and interact with Reason. That's why we need
your donation right the hell now. Let's push that needle up
to 500 donors, people.
Antagonize your antagonists. Tweak the people who insult you
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I quote not
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the eternal malleability of the English language, but rather as
an illustration of the world we've lived in for 41 years, and an
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more years! 41 more years! 41 more years! When Democrats are
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live in a faux-hipster
fantasy-land and secretly heart Democrats. There's a reason
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The U.S. House of Presumptuous Meddlers
As an American, I am embarrassed that the U.S. House of
Representatives has 220 members who actually believe the
government can successfully centrally plan the medical and
insurance industries.
I'm embarrassed that my representatives think that government can
subsidize the consumption of medical care without increasing the
budget deficit or interfering with free choice.
It's a triumph of mindless wishful thinking over logic and
experience.
The 1,990-page bill is breathtaking in its bone-headed audacity.
The notion that a small group of politicians can know enough to
design something so complex and so personal is astounding. That
they were advised by "experts" means nothing since no one is
expert enough to do that. There are too many tradeoffs faced by
unique individuals with infinitely varying needs.
Government cannot do simple things efficiently. The bureaucrats
struggle to count votes correctly. They give subsidized loans to
"homeowners" who turn out to
be 4-year-olds. Yet congressmen want government to manage our
medicine and insurance.
Competition is a "discovery procedure," Nobel-prize-winning
economist F. A. Hayek taught. Through the competitive market
process, we producers and consumers constantly learn things that
force us to adjust our behavior if we are to succeed. Central
planners fail for two reasons:
First, knowledge about supply, demand, individual preferences and
resource availability is scattered—much of it never
articulated—throughout society. It is not concentrated in a
database where a group of planners can access it.
Second, this "data" is dynamic: It changes without notice.
No matter how honorable the central planners' intentions, they
will fail because they cannot know the needs and wishes of 300
million different people. And if they somehow did know their
needs, they wouldn't know them tomorrow.
Proponents of so-called reform—it's not really reform unless it
makes things better—have shamefully avoided criticism of their
proposals. Often they just dismiss their opponents as greedy
corporate apologists or paranoid right-wing loonies. That's
easier than answering questions like these:
1) How can the government subsidize the purchase of medical
services without driving up prices? Econ 101 teaches—without
controversy—that when demand goes up, if other things remain
equal, price goes up. The politicians want to have their cake and
eat it, too.
2) How can the government promise lower medical costs without
restricting choices? Medicare already does that. Once the
planners' mandatory insurance pushes prices to new heights, they
must put even tougher limits on what we may buy—or their budget
will be even deeper in the red than it already is. As economist
Thomas Sowell points out, government cannot really reduce costs. All
it can do is disguise and shift costs (through taxation) and
refuse to pay for some services (rationing).
3) How does government "create choice" by imposing uniformity on
insurers? Uniformity limits choice. Under House Speaker Nancy
Pelosi's bill and the Senate versions, government would dictate
to all insurers what their "minimum" coverage policy must
include. Truly basic high-deductible, low-cost catastrophic
policies tailored to individual needs would be forbidden.
4) How does it "create choice" by making insurance companies
compete against a privileged government-sponsored program? The
so-called government option, let's call it Fannie Med, would have
implicit government backing and therefore little market
discipline. The resulting environment of conformity and
government power is not what I mean by choice and competition.
Rep. Barney Frank is at least honest enough to say that the
public option will bring us a government monopoly.
Advocates of government control want you to believe that the
serious shortcomings of our medical and insurance system are
failures of the free market. But that's impossible because our
market is not free. Each state operates a cozy medical and
insurance cartel that restricts competition through licensing and
keeps prices higher than they would be in a genuine free market.
But the planners won't talk about that. After all, if government
is the problem in the first place, how can they justify a
government takeover?
Many people are priced out of the medical and insurance markets
for one reason: the politicians' refusal to give up power.
Allowing them to seize another 16 percent of the economy won't
solve our problems.
Freedom will.
John Stossel will soon host Stossel on the Fox
Business Network. He's the author of Give Me a Break and
of Myth, Lies, and Downright Stupidity.
COPYRIGHT 2009 BY JFS PRODUCTIONS, INC.
DISTRIBUTED BY CREATORS.COM
Reason.tv: Nathaniel Branden on "My Years With Ayn Rand"
Throughout Ayn Rand's career, no collaborator was closer to her
than Nathaniel
Branden, whom she once named her "intellectual heir." In
Rand, Branden found a fearless advocate of individualism and of
man as a heroic being. In Branden, Rand saw her vision come to
life in flesh and blood. "She gave people a sense that they
could be effective. That if they would persevere, stick by their
standards, work hard, you could achieve something you can be
proud of. Find that part in you—she would say ‘the hero in
your own soul'—and work towards that," says Branden.
After a decade at the center of Rand's inner circle, Branden
founded the Nathaniel Branden Institute with
the goal of promoting her philosophy. The Institute was
largely responsible for the spread of Rand's ideas during the
1960s, but came to an abrupt end when romantic conflict between
Branden and Rand tore apart their professional association.
Despite the official and unreconciled split between the two, the
79-year-old Branden has remained true to the spirit of Rand's
work during his prolific career as a psychologist of self-esteem.
To this day, their legacies remain inseparable and in 2000,
Branden authored
My Years with Ayn Rand, his second memoir of his
relationship to the author of The Fountainhead and
Atlas Shrugged.
Approximately 10 minutes. Nathaniel Branden was
interviewed by David Nott, filmed by Alex Manning, and edited by
Hawk Jensen and Alex Manning.
This video is part of the Reason.tv series Radicals For
Capitalism: Celebrating the Ideas of Ayn Rand. Go here for more
information, other videos, and related materials.
Go
here for embed code and downloadable versions.
Go here to subscribe to
Reason.tv's YouTube channel.
Reason.tv: Barbara Branden on The Passion of Ayn Rand
Arguably, no two people were closer to Ayn Rand than Barbara and
Nathaniel Branden, whom Rand once named as her "intellectual
heir." Indeed, when the Brandens married in 1953,
the author served as bridesmaid (Rand had also urged
the pair to wed).
A decade later, the Brandens would collaborate on the first
biography of Rand,
Who Is Ayn Rand? In 1986, Barbara published a
second biography,
The Passion of Ayn Rand, which eventually was made
into an award-winning Showtime movie starring Helen
Mirren.
Despite the ruinous and controversial romantic affair between
Rand and Nathaniel Branden, and her eventual ouster from Rand's
inner circle, Barbara still feels fondly for the author of
The Fountainhead and Atlas
Shrugged. As Branden, now
80, recalls in this Reason.tv interview, "I felt like she's
answering questions that I've been looking for answers for, and
nobody's been giving me any sort of answer until now."
Approximately seven minutes. Interview by Seth Goldin,
camera by Alex Manning, and editing by Hawk Jensen.
This is part of the Reason.tv series Radicals For
Capitalism: Celebrating the Ideas of Ayn Rand. Go here for more
information, other videos, and related materials.
Go
here for embed code and downloadable versions of this
video.
This video is also available on Reason.tv's YouTube channel.
Go here to subscribe.
Reason Writers Around Town: Shikha Dalmia on Detroit's Downward Spiral
Writing in The Wall Street Journal, Reason Foundation
Senior Analyst Shikha Dalmia looks at whether Detroit Mayor Dave
Bing can save the Motor City from economic collapse.
More Stimulus Shenanigans
The Boston Globe
investigates job-creation claims in the Bay State, and finds
something stinkier than week-old chowder:
While Massachusetts recipients of federal stimulus money
collectively report 12,374 jobs saved or created, a Globe
review shows that number is wildly exaggerated. Organizations
that received stimulus money miscounted jobs, filed erroneous
figures, or claimed jobs for work that has not yet started.
The Globe's finding is based on the federal government's
just-released accounts of stimulus spending at the end of
October. It lists the nearly $4 billion in stimulus awards made
to an array of Massachusetts government agencies, universities,
hospitals, private businesses, and nonprofit organizations, and
notes how many jobs each created or saved.
But in interviews with recipients, the Globe found that several
openly acknowledged creating far fewer jobs than they have been
credited for.
In other cases, federal money that recipients already receive
annually - subsidies for affordable housing, for example - was
reclassified this year as stimulus spending, and the existing
jobs already supported by those programs were credited to
stimulus spending. Some of these recipients said they did not
even know the money they were getting was classified as
stimulus funds until September, when federal officials told
them they had to file reports.
"There were no jobs created. It was just shuffling around of
the funds," said Susan Kelly, director of property management
for Boston Land Co., which reported retaining 26 jobs with $2.7
million in rental subsidies for its affordable housing
developments in Waltham. "It's hard to figure out if you did
the paperwork right. We never asked for this."
Governments that lie to you are not worthy of respect.
Link via Drudge.
Reason Contributing Editor Veronique de Rugy on other
bogus stimulus claims
here,
here, and
here.
One of the largest reported jobs figures
comes from Bridgewater State College, which is listed as using
$77,181 in stimulus money for 160 full-time work-study jobs for
students. But Bridgewater State spokesman Bryan Baldwin said
the college made a mistake and the actual number of new jobs
was "almost nothing." Bridgewater has submitted a correction,
but it is not yet reflected in the report.
Nick Gillespie on The Ed Morrissey Show at 3.30PM ET Today
Reason's Nick Gillespie will appear on Ed Morrissey's web radio
show at HotAir.com in about 45
minutes. He'll discuss Reason.tv's Radicals for Capitalism: Celebrating the
Enduring Legacy of Ayn Rand and the site's latest video, UPS
vs. FEDEX—Ultimate Whiteboard Remix, which looks at how Big Brown
is hoping to get its competitor reclassified under federal labor
rules. Check the
vid out here.
And tune in to The Ed Morrissey show
by clicking here (show starts at 3PM with guest Andrew
Malcolm of the LA Times).
Economics
All Reason Magazine articles in the "Economics" topic.
