Perhaps the Murdochs and the WSJ editors are distracted by their News of the World difficulties. Or maybe there was a lapse in building security at the Journal's headquarters. Whatever the cause, it appears that a sane person somehow got into the place, and wrote most of today's (September 8, 2011) lead editorial.
This editorial raises in an intellectually valid fashion, the question of why the Obama stimulus failed to work. "Failed to work" is itself, of course, a controversial concept. According to Paul Krugman and many other observers, the stimulus did work, to the extent that it could, but fell short of hopes because it wasn't large enough. The Democrats generally argue the unverifiable case that the stimulus did work, preventing more jobs from disappearing. On the other hand, the results have certainly been disappointing. They have not been what President Obama clearly expected, and have fallen far short of what the public needed. In that sense, at least, I think most people could agree that the stimulus failed.
I think that a serious debate about Keynesian economics in the face of this experience is very worthwhile. The WSJ editorial is based on two somewhat anecdotal academic studies from George Mason University (a largely right wing think tank), which it takes to suggest that the stimulus money did not create nearly as many jobs as projected, and that some of the money went to highly unproductive uses. In my terms, if we take the study findings as believable and generalizable, it suggests that this was one government spending program that accomplished less than projected, and that at least some of it was actually wasteful. What a shock!
I think that a more serious question should be considered: namely, whether Keynes's idea about the psychological impact of government spending is still workable today. The fundamental idea behind Keynes's spending proposal was psychological. A depression, he noted, created the public perception of an endless downward spiral of demand. The desire for production disappears, and credit dries up. Only the government can invest. If it does so, it can lift the public depression, creating demand and hope. As animal spirits revive, so does private investment and consumption. Rising tax revenues then pay for the credit that the government used.
But Keynes was writing in a day when information was far more limited than today, and more controlled as well. The elites who guided economies in his time were close mouthed and relatively homogeneous in outlook. Those conditions no longer prevail. As we have seen during Obama's Presidency, the psychological impact of the stimulus package was immediately undercut by Republican and conservative opposition, which got more publicity and attention than the stimulus itself. While there clearly was some effect as jobs got saved and new spending materialized, I bet that a study of public attitudes would show that the psychological effect on which Keynes was relying proved far weaker than anticipated.
It may also be the case that intervening factors overwhelmed Obama's efforts. The economy did in fact appear to be recovering through late 2010, albeit more slowly than hoped. At that point, however, two major changes in the environment took control of events. One was the success of Republican propaganda and opposition to Obama, leading to the Tea Party and Republican control of the House in 2011. The other was the eruption of the sovereign debt problem in the EU.
With the Republican opposition granted veto power, Obama's poor skills at deadly political combat ensured a crippling standoff, bringing public policy solutions to a halt. It was no longer possible to pursue policies that would repair deficiencies in the stimulus program. In fact, a highly regressive and economically disastrous set of policy proposals came to the fore. In many states, constrained by constitutional requirements for balanced budgets, there were sharp immediate cutbacks on employment, which the federal government could no longer offset, and also sharp reductions in public employee compensation. On the federal level, Obama repeatedly made concessions to the Republicans that implemented or set in motion to implement important aspects of their regressive proposals. Instead of stimulus and continued economic recovery, these political changes produced severe cutbacks on government spending and the disemployment of hundreds of thousands of public employees.
Because Europe is an important trading partner of the US, its economic difficulties weigh on US prospects as well. When the euro came into existence in 1992, the politicians understood that in the longer run it would be necessary to strengthen the central government if the euro were to survive. But the politics of the moment being what they were, a stronger central union was not then feasible. All EU countries could borrow on terms that were suitable only for the wealthiest, and so Greece, Italy, Portugal, Spain, and Ireland did exactly that, with the collusion of northern European and American banks. The crisis of 2007 gradually made it clear, however, that many of these loans were worthless, or far less valuable than expected. Europe's creditors, like America's, had lost a huge percentage of their wealth. They were much poorer than they thought. In the US, the creditors turned to the federal government, which bailed them out. In Europe, however, there is no such benevolent savior. The central government is weak, and the constituent elements like the Dutch and the Germans are not too willing to bail out the fraudulent and spendthrift southerners; nor is it clear that they can actually do so. In short, Europe's loss of wealth is similar to that of the US, and they are both experiencing an economic slowdown to account for it.
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
7/21/11
On Partisan Vitriol and What It Means In The Current Environment
Keith's attack on Martin Feldstein's June 8 article in the Wall Street Journal is remarkable, although to me less for its substance than its tone. Stripped of the invective, Keith's commentary is a cogent but fairly routine defense of President Obama's economic policies since arriving in office. Feldstein's article, for its part of course, is little more than the opposite number: a routine critique of those same policies. Both are predictably partisan.
I'm not going to try to support Dr. Feldstein here, since his article in my opinion does indeed drift onto shaky ground in places. But what I do want to do is ask a question about Keith's commentary: since the debate has become largely ritualistic, why such bitter heat? Why, first of all, must we disparage Feldstein as a "partisan hack"? And if such he is, what partisan writers today can really escape this obloquy? If Keith's point is simply that Feldstein's article is essentially a recitation of current-day conservative dogma regarding the state of the economy, I would not disagree. By that standard, however, to take one prominent example, most of what Paul Krugman has written during the past three years could be dismissed as "partisan hackery" too, written from the liberal side of the fence. His articles, well-crafted though they generally are, boil down to mono-maniacal repetitions of standard neo-Keynesian economic doctrines. While it's becoming increasingly hard to learn anything new from them, I would avoid the temptation of labeling Dr. Krugman's work as hackery. He's actually pretty good, even if a bit trapped by his ideology.
And why do we have to disparage readers of the Wall Street Journal as suffering from "grotesque ignorance and gullibility", or describe the American economy as an "economic stinkpile" somehow entirely the fault of the miscreant George Bush - still the villain two and a half years after leaving office?
What I want to focus on here is not so much the economic issues under discussion as the political issue of the tone to which the debate has descended, and the causes of this devolution. I've read enough articles and blog posts from both liberals and conservatives that I'm confident in my judgment that the degree of vitriol is roughly equivalent on both sides at the present time. And while rightwing bile may be comparable in its intensity, it's of a different nature and would require a longer article to characterize. Since my purpose here it to respond briefly to my friend and brother-in-law, I'm going to focus on why I think it is that our liberals are in such a lather.
Much of it in my judgment stems from the unrealistically high hopes they had when President Obama assumed office at the beginning of 2009. Having spent much of eight years demonizing George Bush and his congressional supporters as the source of all economic and political failure, Democrats were handed what appeared to be a great opportunity when the financial system, along with the general economy, imploded with these rightwing types seemingly in charge of everything. As normal in the aftermath of such a fiasco, incumbents were swept out of power everywhere and the opposition swept in. Democrats indisputably had a mandate.
Barak Obama, in addition to being the first Afro-American president in the nation's history, was an intelligent and highly articulate champion of enlightened big government, for generations the central totem of liberal politics in America. Liberals expected great things. Backing Obama up would be the Democratic legislators who now had taken control of both houses of the U.S. Congress. Together the new president and his allies would re-populate the administrative and regulatory agencies of our government, so thoroughly ravaged during the Bush years. They would follow the infallible Keynesian playbook and pull the right levers to "get the economy moving" again. They would leave behind the amateurism, or alternatively the malicious greed, of the free-market enthusiasts who had been allowed to do so much damage under Bush.
Of course, certain veteran Democrats suspected the political trap they were setting for themselves and tried to warn that so much work would take time. However, nearly all appeared to be highly optimistic and to believe that the nation was now on the road to a stable prosperity, one to be fairly distributed and administered by wise government stewards. Righteous soldiers were marching into battle.
Unfortunately little that followed worked out in line with the script. The new governing alliance quickly attempted much of what they had promised, administering a massive fiscal stimulus to the economy, buttressed by the most accommodative monetary policy in our history. Such an overwhelming assault could hardly have failed, at least temporarily, to arrest the economic implosion that had been underway. Yet few of the underlying problems seemed to have been resolved, or even addressed in a sustainable way. The unemployment rate, the key touchstone of Keynesian economics, defied hopeful forecasts and stayed unnervingly high. The rate of economic growth, typically robust after so deep a recession, was anemic. A relapse into recession seemed not outside the realm of possibility. Furthermore, the cost of the stimulus package had been enormous and had been funded in the debt markets. Thus, the federal budget deficit, a chronic worry for much of the past generation in the U.S., soared to record levels with no workable option in sight for controlling it. Federal debt was compounding even as economic growth sputtered.
Motivated by the glamorous mythology long recalled of Franklin Roosevelt's first Hundred Days in office, exultant Democrats crammed even more work through Congress while they still had a monopoly on power. They passed massive legislative packages purporting to reform both the healthcare and banking systems. No one, of course, could make credible arguments against either of these efforts in the beginning. The American financial system had just come close to destroying itself and threatening he stability of the general economy. Healthcare in America, while already more expensive than anywhere else in the world, was grotesquely unfair to unemployed and underemployed Americans who had limited access to it. Something had to be done in both areas. Yet the bills ultimately signed into law by the President were dog's breakfasts that virtually no one in or out of government seemed fully to understand. The risk of unintended consequences was enormous, and yet there was limited confidence that the targeted problems were in fact being addressed.
Finding themselves with what looked like possibly a worsening mess on their hands after two years in power, the Democrats struggled for explanations. Everything they came up with boiled down essentially to variants on two arguments:
1) The depravity of Bush and his allies was far worse than anyone had imagined in the beginning. The problems created by incompetent, malicious or stupid (take your choice) Republicans were far too deep to be easily remedied. The damage was now going to take years, maybe even a full generation, to repair.
2) Democrats had refrained from fully wiping the Republicans off the political map when they had the opportunity. Now as a result, the surviving remnant was sabotaging everything Democrats, in their wisdom, were trying to do.
Most Democrats seemed to believe one or the other of these arguments. Many talked as though they somehow believed both. However, the party's experienced political hands fully understood that such excuses were not going to play well with the voting public. They, of course, did not, and the Democrats lost control of the House of Representative in the mid-term elections. If conditions don't improve, it's not out of the question that Obama, not long ago the heroic knight marching on Washington, might end his political career as a one-term president.
Having ridden such a rollercoaster over the past couple of years, it's not hard to see why liberal Democrats have become testy. For many of them, the only acceptable criticisms of President Obama are that he wasn't extreme enough in the solutions he tried to impose, or that he's been too polite in dealing with his opposition. Any suggestion that the ideology of modern liberalism is somehow at fault, and that it might no longer be up to the task of providing a governing framework in the United States, is anathema. Most Democrats don't want to contemplate it and are ready to fight anyone suggesting it.
I intend to follow this article up soon with another one describing how I see Conservatives as having arrived at parallel cul-de-sac in their thinking. This will attempt to explain why, like their liberal antagonists, Republicans are also acting so irresponsibly thin-skinned.
Then, if I get around to it, I hope to write a third article probing what I see as the deeper problems that none of our politicians are coming to grips with. These are the underlying issues currently escaping the shallow reaches of both conservative and liberal orthodoxies.
Of course, don't expect from me any practical solutions to the issues. Sitting here as a mere citizen, I have the luxury of not offering any, as does Keith. Hopefully, clarifying some issues may offer a bit of help. That's why we write. Eventually it's the politicians who have to do the work. That's why we elect them.
I'm not going to try to support Dr. Feldstein here, since his article in my opinion does indeed drift onto shaky ground in places. But what I do want to do is ask a question about Keith's commentary: since the debate has become largely ritualistic, why such bitter heat? Why, first of all, must we disparage Feldstein as a "partisan hack"? And if such he is, what partisan writers today can really escape this obloquy? If Keith's point is simply that Feldstein's article is essentially a recitation of current-day conservative dogma regarding the state of the economy, I would not disagree. By that standard, however, to take one prominent example, most of what Paul Krugman has written during the past three years could be dismissed as "partisan hackery" too, written from the liberal side of the fence. His articles, well-crafted though they generally are, boil down to mono-maniacal repetitions of standard neo-Keynesian economic doctrines. While it's becoming increasingly hard to learn anything new from them, I would avoid the temptation of labeling Dr. Krugman's work as hackery. He's actually pretty good, even if a bit trapped by his ideology.
And why do we have to disparage readers of the Wall Street Journal as suffering from "grotesque ignorance and gullibility", or describe the American economy as an "economic stinkpile" somehow entirely the fault of the miscreant George Bush - still the villain two and a half years after leaving office?
What I want to focus on here is not so much the economic issues under discussion as the political issue of the tone to which the debate has descended, and the causes of this devolution. I've read enough articles and blog posts from both liberals and conservatives that I'm confident in my judgment that the degree of vitriol is roughly equivalent on both sides at the present time. And while rightwing bile may be comparable in its intensity, it's of a different nature and would require a longer article to characterize. Since my purpose here it to respond briefly to my friend and brother-in-law, I'm going to focus on why I think it is that our liberals are in such a lather.
Much of it in my judgment stems from the unrealistically high hopes they had when President Obama assumed office at the beginning of 2009. Having spent much of eight years demonizing George Bush and his congressional supporters as the source of all economic and political failure, Democrats were handed what appeared to be a great opportunity when the financial system, along with the general economy, imploded with these rightwing types seemingly in charge of everything. As normal in the aftermath of such a fiasco, incumbents were swept out of power everywhere and the opposition swept in. Democrats indisputably had a mandate.
Barak Obama, in addition to being the first Afro-American president in the nation's history, was an intelligent and highly articulate champion of enlightened big government, for generations the central totem of liberal politics in America. Liberals expected great things. Backing Obama up would be the Democratic legislators who now had taken control of both houses of the U.S. Congress. Together the new president and his allies would re-populate the administrative and regulatory agencies of our government, so thoroughly ravaged during the Bush years. They would follow the infallible Keynesian playbook and pull the right levers to "get the economy moving" again. They would leave behind the amateurism, or alternatively the malicious greed, of the free-market enthusiasts who had been allowed to do so much damage under Bush.
Of course, certain veteran Democrats suspected the political trap they were setting for themselves and tried to warn that so much work would take time. However, nearly all appeared to be highly optimistic and to believe that the nation was now on the road to a stable prosperity, one to be fairly distributed and administered by wise government stewards. Righteous soldiers were marching into battle.
Unfortunately little that followed worked out in line with the script. The new governing alliance quickly attempted much of what they had promised, administering a massive fiscal stimulus to the economy, buttressed by the most accommodative monetary policy in our history. Such an overwhelming assault could hardly have failed, at least temporarily, to arrest the economic implosion that had been underway. Yet few of the underlying problems seemed to have been resolved, or even addressed in a sustainable way. The unemployment rate, the key touchstone of Keynesian economics, defied hopeful forecasts and stayed unnervingly high. The rate of economic growth, typically robust after so deep a recession, was anemic. A relapse into recession seemed not outside the realm of possibility. Furthermore, the cost of the stimulus package had been enormous and had been funded in the debt markets. Thus, the federal budget deficit, a chronic worry for much of the past generation in the U.S., soared to record levels with no workable option in sight for controlling it. Federal debt was compounding even as economic growth sputtered.
Motivated by the glamorous mythology long recalled of Franklin Roosevelt's first Hundred Days in office, exultant Democrats crammed even more work through Congress while they still had a monopoly on power. They passed massive legislative packages purporting to reform both the healthcare and banking systems. No one, of course, could make credible arguments against either of these efforts in the beginning. The American financial system had just come close to destroying itself and threatening he stability of the general economy. Healthcare in America, while already more expensive than anywhere else in the world, was grotesquely unfair to unemployed and underemployed Americans who had limited access to it. Something had to be done in both areas. Yet the bills ultimately signed into law by the President were dog's breakfasts that virtually no one in or out of government seemed fully to understand. The risk of unintended consequences was enormous, and yet there was limited confidence that the targeted problems were in fact being addressed.
Finding themselves with what looked like possibly a worsening mess on their hands after two years in power, the Democrats struggled for explanations. Everything they came up with boiled down essentially to variants on two arguments:
1) The depravity of Bush and his allies was far worse than anyone had imagined in the beginning. The problems created by incompetent, malicious or stupid (take your choice) Republicans were far too deep to be easily remedied. The damage was now going to take years, maybe even a full generation, to repair.
2) Democrats had refrained from fully wiping the Republicans off the political map when they had the opportunity. Now as a result, the surviving remnant was sabotaging everything Democrats, in their wisdom, were trying to do.
Most Democrats seemed to believe one or the other of these arguments. Many talked as though they somehow believed both. However, the party's experienced political hands fully understood that such excuses were not going to play well with the voting public. They, of course, did not, and the Democrats lost control of the House of Representative in the mid-term elections. If conditions don't improve, it's not out of the question that Obama, not long ago the heroic knight marching on Washington, might end his political career as a one-term president.
Having ridden such a rollercoaster over the past couple of years, it's not hard to see why liberal Democrats have become testy. For many of them, the only acceptable criticisms of President Obama are that he wasn't extreme enough in the solutions he tried to impose, or that he's been too polite in dealing with his opposition. Any suggestion that the ideology of modern liberalism is somehow at fault, and that it might no longer be up to the task of providing a governing framework in the United States, is anathema. Most Democrats don't want to contemplate it and are ready to fight anyone suggesting it.
I intend to follow this article up soon with another one describing how I see Conservatives as having arrived at parallel cul-de-sac in their thinking. This will attempt to explain why, like their liberal antagonists, Republicans are also acting so irresponsibly thin-skinned.
Then, if I get around to it, I hope to write a third article probing what I see as the deeper problems that none of our politicians are coming to grips with. These are the underlying issues currently escaping the shallow reaches of both conservative and liberal orthodoxies.
Of course, don't expect from me any practical solutions to the issues. Sitting here as a mere citizen, I have the luxury of not offering any, as does Keith. Hopefully, clarifying some issues may offer a bit of help. That's why we write. Eventually it's the politicians who have to do the work. That's why we elect them.
5/27/11
Inflation or Deflation: Can Economists Tell Up From Down?
Much economic commentary today is gloomy. Even those investors and economists who sound bullish for the moment, are often somewhere between non-committal and bearish about the longer term when pressed for anything more than a sound bite. Enthusiasm for the immediate future is understandable. The economy appears to have stabilized following its near-death experience two years ago, and the stock market has enjoyed one of the sharpest rises in its history from the low point struck during the crisis. Most consumer prices, at least according the popular indices, are relatively stable. Yet almost no one believes that things are right with the economy, or considers an era of sustainable growth and trustworthy investment values to be just around the corner. It's hard to pick up an article in the popular press that doesn't make reference to bubbles of one sort or another, as though optimism and reckless illusion were indistinguishable.
So what's wrong? Our most dogmatic commentators are entirely clear about this, of course. The problem is that their ideas offer seemingly incompatible 180-degree perspectives. Goldbugs, often allied with the political right, warn breathlessly about uncontrolled deficits leading to avalanches of worthless money and hyperinflation. In their articles they like to show pictures of harried middle-class Germans pushing wheelbarrows full of paper currency out to buy groceries in 1923. Old-style political lefties, on the other hand, talk with equal fervor about a new Great Depression on our immediate horizon if we don't stop fretting about deficits and start driving the economy full-tilt with bigger government programs and projects. On their websites, they favor pictures from a decade later of people in baggy clothes, no currency at all in their pockets, waiting grimly in lines for bowls of free soup.
There are, of course, more moderate voices suggesting nuanced versions of these same negative views. So-called "inflation hawks," like Dallas Fed Chairman Richard Fisher, often mention inflation risk to support calls for tighter monetary policy. Across the ideological fence, liberal economist and Nobel Laureate Paul Krugman routinely invokes Depression fears to justify ever-higher levels of fiscal stimulus.
People looking for reasons to be optimistic sometimes draw comfort from all this, like atheists who find hope in the dogmas of Jihadists and Christian fundamentalists. The implied assumption is that these people must all be wrong, since they can’t all be right.
Religion aside, however, maybe the time has arrived indeed to consider the counterintuitive possibility that all these diverse economic naysayers are onto something. Perhaps a few of them, including some of the more lathered Jeremiahs, see accurately into our current predicament, even when none of them has solutions to offer beyond revolution or gold bars and fortified bunkers.
Over at least the intermediate term, inflation risk is real. In the United States, chronic budget deficits continue to compound, while our politicians devote enormous energy to grandstanding about inconsequential reductions in federal spending or adjustments to the tax code. There is no politically viable solution even under consideration at the present time that brings deficits under meaningful control in the foreseeable future. New economic theories have arisen that conveniently purport to explain why we shouldn't worry about this. Yet the fact remains that the only reason we've gotten away with our financial high-wire act as long as we have is that the U.S. Dollar has so far retained its reserve currency status. Foreign governments continue to take down and rollover our bonds at low interest rates, regardless of the deficits. This kind of monetary power on the part of the United States is an historical anachronism and cannot be relied upon much longer. At the first real sign that the bond markets are becoming restive, rates will rise. Given the huge base upon which new interest would then start accruing, compounding interest costs would soon offset, and eventually overwhelm, hard-fought cuts in discretionary spending. At that point, we would find ourselves in an intolerable bind.
Our Federal Reserve is, of course, vigilant and fully aware of this potential scenario. Concern about it has to be one of the reasons it has dusted off the once old-and-obscure monetary tool that carries the appropriately obscure name "quantitative easing," even though economic stimulus has been the public rationale for its application. Once considered an extreme measure for dire circumstances, QE was employed during the height of the 2008 financial crisis and then, before much had settled, again last year. Rumors abound that QE3 may currently be in the works, and QE is looking increasingly as though it's been elevated to a standard weapon in the Fed's arsenal. We can be 100% confident that QE would be employed with an intensity not yet imagined in the event of a serious international run on the U.S. Dollar. At that point, new money would be pouring into our system and doing nothing whatsoever to stimulate the flow of new goods and services. That is one prescription for inflation, to put it in the blandest possible terms.
So if inflation risk is thus real, what can be done to circumvent it? Well, obviously in the minds of certain partisans, deficits have to be forced under control with tax increases, plus draconian cuts in entitlements and all other spending.
At this point in the debate we blunder haplessly onto the home turf of Professor Krugman and others who tirelessly and accurately point to the problem here. With unemployment still high, and economic growth anemic this far into a supposed economic recovery, austerity measures robust enough to make a difference would surely throw us back into recession. And another recession this soon after the last one, however our economists might choose to label it, would constitute a depression and probably intractable deflation.
That doesn't leave much middle ground, of course, but this is the nature of our problem. It seems depressingly obvious. Investors and savers trying to protect their money confront a dilemma, since investment portfolios prudently designed for one environment can be full of reckless exposures in the other.
Unfortunately it's politics more than economics that will determine which road we may actually be on. Voters contemplating the loss of their jobs, or the erosion of their savings and pensions, can be entirely unpredictable.
So what's wrong? Our most dogmatic commentators are entirely clear about this, of course. The problem is that their ideas offer seemingly incompatible 180-degree perspectives. Goldbugs, often allied with the political right, warn breathlessly about uncontrolled deficits leading to avalanches of worthless money and hyperinflation. In their articles they like to show pictures of harried middle-class Germans pushing wheelbarrows full of paper currency out to buy groceries in 1923. Old-style political lefties, on the other hand, talk with equal fervor about a new Great Depression on our immediate horizon if we don't stop fretting about deficits and start driving the economy full-tilt with bigger government programs and projects. On their websites, they favor pictures from a decade later of people in baggy clothes, no currency at all in their pockets, waiting grimly in lines for bowls of free soup.
There are, of course, more moderate voices suggesting nuanced versions of these same negative views. So-called "inflation hawks," like Dallas Fed Chairman Richard Fisher, often mention inflation risk to support calls for tighter monetary policy. Across the ideological fence, liberal economist and Nobel Laureate Paul Krugman routinely invokes Depression fears to justify ever-higher levels of fiscal stimulus.
People looking for reasons to be optimistic sometimes draw comfort from all this, like atheists who find hope in the dogmas of Jihadists and Christian fundamentalists. The implied assumption is that these people must all be wrong, since they can’t all be right.
Religion aside, however, maybe the time has arrived indeed to consider the counterintuitive possibility that all these diverse economic naysayers are onto something. Perhaps a few of them, including some of the more lathered Jeremiahs, see accurately into our current predicament, even when none of them has solutions to offer beyond revolution or gold bars and fortified bunkers.
Over at least the intermediate term, inflation risk is real. In the United States, chronic budget deficits continue to compound, while our politicians devote enormous energy to grandstanding about inconsequential reductions in federal spending or adjustments to the tax code. There is no politically viable solution even under consideration at the present time that brings deficits under meaningful control in the foreseeable future. New economic theories have arisen that conveniently purport to explain why we shouldn't worry about this. Yet the fact remains that the only reason we've gotten away with our financial high-wire act as long as we have is that the U.S. Dollar has so far retained its reserve currency status. Foreign governments continue to take down and rollover our bonds at low interest rates, regardless of the deficits. This kind of monetary power on the part of the United States is an historical anachronism and cannot be relied upon much longer. At the first real sign that the bond markets are becoming restive, rates will rise. Given the huge base upon which new interest would then start accruing, compounding interest costs would soon offset, and eventually overwhelm, hard-fought cuts in discretionary spending. At that point, we would find ourselves in an intolerable bind.
Our Federal Reserve is, of course, vigilant and fully aware of this potential scenario. Concern about it has to be one of the reasons it has dusted off the once old-and-obscure monetary tool that carries the appropriately obscure name "quantitative easing," even though economic stimulus has been the public rationale for its application. Once considered an extreme measure for dire circumstances, QE was employed during the height of the 2008 financial crisis and then, before much had settled, again last year. Rumors abound that QE3 may currently be in the works, and QE is looking increasingly as though it's been elevated to a standard weapon in the Fed's arsenal. We can be 100% confident that QE would be employed with an intensity not yet imagined in the event of a serious international run on the U.S. Dollar. At that point, new money would be pouring into our system and doing nothing whatsoever to stimulate the flow of new goods and services. That is one prescription for inflation, to put it in the blandest possible terms.
So if inflation risk is thus real, what can be done to circumvent it? Well, obviously in the minds of certain partisans, deficits have to be forced under control with tax increases, plus draconian cuts in entitlements and all other spending.
At this point in the debate we blunder haplessly onto the home turf of Professor Krugman and others who tirelessly and accurately point to the problem here. With unemployment still high, and economic growth anemic this far into a supposed economic recovery, austerity measures robust enough to make a difference would surely throw us back into recession. And another recession this soon after the last one, however our economists might choose to label it, would constitute a depression and probably intractable deflation.
That doesn't leave much middle ground, of course, but this is the nature of our problem. It seems depressingly obvious. Investors and savers trying to protect their money confront a dilemma, since investment portfolios prudently designed for one environment can be full of reckless exposures in the other.
Unfortunately it's politics more than economics that will determine which road we may actually be on. Voters contemplating the loss of their jobs, or the erosion of their savings and pensions, can be entirely unpredictable.
5/17/11
Comparison Between Rome and the U.S. - A Response
We need to be cautious with historical analogies because, obviously, no two historical periods ever track one another that closely, and the implications we draw from comparisons between them can easily drift astray. Furthermore, the less we know about any particular period, the greater the temptation there is for historians to connect whatever dots are available to them in a manner that suits their preferences. The resulting picture may ultimately tell us more about the ideas of the author than about the era itself. My suspicion is that Keith may be indulging in a bit of that here with his comparison between the late Roman Empire and our contemporary America. Nonetheless, historical parallels can be useful to ponder, and I think he is onto something substantive in his commentary that warrants further examination.
The rise and fall of empires has always been a favorite topic among historians, and probably no empire has received more attention over the years than that of the Romans. It’s “fall”, if such it was, has been attributed to everything from imperial overreach to impurities in the Roman water supply. Keith offers us a different perspective, suggesting that a key reason the Roman system broke down was widening class disparities, and with them, increasing gaps in wealth and opportunity between rich and poor. He then makes the leap to contemporary America and suggests that similar inequalities here could lead to an analogous outcome if something isn’t done to intervene.
What interests me about this thesis is that it goes beyond the conventional “fairness” issue, which tends to be a battle of axioms and is therefore difficult to debate analytically. The thrust of Keith’s argument is that extreme disparities of wealth, in addition to being unfair, wreck the very economic infrastructure upon which is based the wellbeing of all classes in a society, including the rich. As I understand the point, the underlying problem is the erosion of the middle classes, whose economic creativity and labor constitute the core source of a society’s wealth. In the ancient Roman world, this “robust class”, as Keith labels it, consisted of “knights, entrepreneurs, civic leaders, and well-paid retired soldiers”, among others. They are thus distinguished, one presumes, from the landed aristocracy, who enjoyed the lion’s share of that ancient world’s wealth and political power in return for essentially passive management of inherited resources. Maybe we could refer to this latter group as the "reaper class", in the sense that they reaped an economic harvest largely sewn by others.
Applying the analogy forward, our “robust class” would consist of those people whose work is essential to our economy. At the very least this group would include entrepreneurs, small business owners, engineers, technology innovators, and those workers producing goods and services demanded by free markets. Our productive class is in fact much broader than this and, I would think, must include some senior executives, some lawyers and accountants, corporate middle managers, teachers, workers providing essential government services, and all others whose often invisible contributions undergird the robust functioning of our society. As Keith argues, any social dynamic that diminishes or demoralizes this class of people while rewarding an oligarchy or "reaper class", threatens our economic bone and muscle.
This far into his argument I concur entirely. Where I suspect I part company with him, however, is in the implied next stage of the argument, largely unspoken in this brief commentary. For if we must "repudiate oligarchy" and eliminate "grotesque disparities of wealth", we need tools to get the job done. And the tools Keith probably has in mind would be (1) higher and more progressive tax rates and (2) activist government programs aimed at re-distributing wealth downward. While at a theoretical level there is nothing wrong with considering these options, there is a great deal wrong I suspect with how they would probably pan out in practice. I can currently see very little to persuade me that, in America today, gains to be had from aggressive redistributionist policies would not be lost in a morass of perverse unintended consequences.
First of all, we need to try to understand who this "oligarchy" is that's so in need of being squeezed harder. It's interesting that President Obama, in pumping for more sharply progressive taxation, has pointed out that rich people themselves are saying they should pay more taxes. Presumably, here he's referring to people like Bill Gates, Warren Buffet, George Soros, and others in their class who, generally liberal-leaning in their political views, have indeed said exactly that. If it's possible to identify an elite super-rich oligarchy in America today, surely these are among the guys we're talking about.
Going beyond this small group of celebrity plutocrats and trying to uncover the broader universe of our modern-day oligarchs, there would be no more fertile ground to search than the hedge fund universe. Hedge funds are by definition investment vehicles for the very rich in America, since it's only by restricting their investor base to supposedly sophisticated high-net-worth individuals, or institutions, that they are exempt from the regulations applying to ordinary mutual funds. It's a revealing fact that hedge funds, being an important source of political contributions, have in general spread their money around between Republicans and Democrats and in fact, until perhaps very recently, have actually favored Democrats in the balance. Anyone who has spent time talking to hedge fund principals knows Democrats, and even liberal Democrats, to be well-represented among their numbers. Many of them support more progressive taxation and the ideals of interventionist government. George Soros, because of his liberal activism, is probably the most visible of this breed, but he is by no means alone.
None of this squares very well with Keith's picture of America's super-wealthy elite banding together like reactionary Roman aristocrats in a tooth-and-nail fight against economic democracy.
So what then is the real source of political resistance to the liberal economic agenda in America? A clue to the answer can probably once again be found in the words of President Obama. During the last Presidential campaign he put forward $250,000 in annual income as somehow a dividing line between "ordinary Americans" and the "super-rich". This line is, of course, orders-of-magnitude south of Warren Buffet's socio-economic turf. Still, Mr. Obama put the spotlight on this second group as being the ones who should bear the entire burden of increased taxation. The group was thus implicitly stigmatized as a pampered elite who could easily afford to pay more, and who should be made to do so anyway as a matter of economic justice. This distinction made for good campaigning, since $250,000 is far above what most Americans make in a year, and the majority would have no obvious reason to feel threatened by the suggested new tax burden.
The problem comes in thinking about exactly who would get caught up in this net thrown down by our soon-to-be President. It's not hard to imagine many people who might indeed deserve to pay more taxes, and who could be made to so without negative consequences to the economy. People living on large amounts of inherited money come to mind, as perhaps do investment bankers, some corporate executives, celebrities, lottery-winners, big-time tort lawyers, and anyone like Gates or Buffet who has made so much money, even when fairly gained, that he really doesn't know what to do with it all.
However, also represented in this targeted class is another group of people whose interests are closely aligned with our society as a whole, and for whom increased taxation would likely force a curtailment of vital economic activity. These would be owners of successful small and medium-sized businesses. Such enterprises in the aggregate make up a substantial portion of our economy, and represent a disproportionate share of our economic growth and new job creation. Their success usually means that they are contributing useful and innovative products to the economy, as well as vital employment opportunities. For expanding companies, profit means a source of low-risk equity capital for financing growth, more than a source of luxury-living for their owners. Diverting such income, through taxation, from productive investment and into government programs, even well-conceived ones, would in general lead to a net loss in economic vitality.
The other consideration to keep in mind here is the risk-return tradeoff that business people have continuously on their radar screens. Small businesses in general, and expanding ones in particular, are by their nature exposed to a high risk of failure and loss. Entrepreneurs willingly undertake such risk only because the prospect for outsized gains makes it attractive. If the risk remains while the gains, should they be achieved, are immediately subject to punitive taxation, businesses have little incentive to incur the risk of expansion at all. If such disincentives became pervasive, our economy would slide into chronic malaise that no amount of fiscal "stimulus" could do much about.
It is, of course, then government spending itself that represents the other prong of the liberal agenda. Proposals for such spending are often sold politically on the basis of either correcting social injustice or stimulating the economy. Such promises are often plausible on the surface but a little vague upon closer examination. In practice, too often federal money gets channeled into standing bureaucracies that grow relentlessly, whether or not they continue serving their missions. They also become conduits for federal money enriching networks of private contractors wedded to them politically and economically.
Liberals are, of course, not alone in facilitating this kind of wasteful application of government resources. Among the most entrenched federal bureaucracies is surely the United States Defense Department, long the darling of conservative Republicans. Decades ago President Eisenhower, himself a former general, coined the derisive term "Military Industrial Complex" to convey the omnivorous nature of this particular public-private partnership, and its lack of real accountability. This syndrome is typical of how government bureaucracies can learn to function once they gain access to the institutionalized flow of money from taxpayers and government bond sales.
Getting back to Keith's commentary, I think he's made a provocative analogy between ancient Rome and the contemporary United States. Just as Roman citizens enjoyed a relatively stable and prosperous way of life for many years, so do many of us today. And the fact that the Roman system eventually devolved into discord and relative poverty for most should be read as a cautionary tale.
Furthermore, I believe that Keith has identified an interesting correlation in the decline of Rome and the disintegration of its middle classes. Any healthy economic system depends on a "robust class" of hardworking pragmatists who innovate, solve economic problems, and keep the flow of goods and services moving to the maximum number of people. If this class becomes diminished or demoralized, the entire system is at risk because takers and consumers and start to overwhelm the producers.
In the United States, our commercial classes are essential to the healthy functioning of our society. Too often our politicians take this group for granted and, even when giving lip service to its importance, seem ready to burden it with ever increasing levels of taxation, regulation and litigation exposure. The beneficiaries of these policies often are not so much disadvantaged citizens as government bureaucracies, crony capitalists, and tort lawyers.
The closest thing we have to true "oligarchs", our hedge fund millionaires and billionaires, remain happy and don't seem to care that much one way or the other.
The rise and fall of empires has always been a favorite topic among historians, and probably no empire has received more attention over the years than that of the Romans. It’s “fall”, if such it was, has been attributed to everything from imperial overreach to impurities in the Roman water supply. Keith offers us a different perspective, suggesting that a key reason the Roman system broke down was widening class disparities, and with them, increasing gaps in wealth and opportunity between rich and poor. He then makes the leap to contemporary America and suggests that similar inequalities here could lead to an analogous outcome if something isn’t done to intervene.
What interests me about this thesis is that it goes beyond the conventional “fairness” issue, which tends to be a battle of axioms and is therefore difficult to debate analytically. The thrust of Keith’s argument is that extreme disparities of wealth, in addition to being unfair, wreck the very economic infrastructure upon which is based the wellbeing of all classes in a society, including the rich. As I understand the point, the underlying problem is the erosion of the middle classes, whose economic creativity and labor constitute the core source of a society’s wealth. In the ancient Roman world, this “robust class”, as Keith labels it, consisted of “knights, entrepreneurs, civic leaders, and well-paid retired soldiers”, among others. They are thus distinguished, one presumes, from the landed aristocracy, who enjoyed the lion’s share of that ancient world’s wealth and political power in return for essentially passive management of inherited resources. Maybe we could refer to this latter group as the "reaper class", in the sense that they reaped an economic harvest largely sewn by others.
Applying the analogy forward, our “robust class” would consist of those people whose work is essential to our economy. At the very least this group would include entrepreneurs, small business owners, engineers, technology innovators, and those workers producing goods and services demanded by free markets. Our productive class is in fact much broader than this and, I would think, must include some senior executives, some lawyers and accountants, corporate middle managers, teachers, workers providing essential government services, and all others whose often invisible contributions undergird the robust functioning of our society. As Keith argues, any social dynamic that diminishes or demoralizes this class of people while rewarding an oligarchy or "reaper class", threatens our economic bone and muscle.
This far into his argument I concur entirely. Where I suspect I part company with him, however, is in the implied next stage of the argument, largely unspoken in this brief commentary. For if we must "repudiate oligarchy" and eliminate "grotesque disparities of wealth", we need tools to get the job done. And the tools Keith probably has in mind would be (1) higher and more progressive tax rates and (2) activist government programs aimed at re-distributing wealth downward. While at a theoretical level there is nothing wrong with considering these options, there is a great deal wrong I suspect with how they would probably pan out in practice. I can currently see very little to persuade me that, in America today, gains to be had from aggressive redistributionist policies would not be lost in a morass of perverse unintended consequences.
First of all, we need to try to understand who this "oligarchy" is that's so in need of being squeezed harder. It's interesting that President Obama, in pumping for more sharply progressive taxation, has pointed out that rich people themselves are saying they should pay more taxes. Presumably, here he's referring to people like Bill Gates, Warren Buffet, George Soros, and others in their class who, generally liberal-leaning in their political views, have indeed said exactly that. If it's possible to identify an elite super-rich oligarchy in America today, surely these are among the guys we're talking about.
Going beyond this small group of celebrity plutocrats and trying to uncover the broader universe of our modern-day oligarchs, there would be no more fertile ground to search than the hedge fund universe. Hedge funds are by definition investment vehicles for the very rich in America, since it's only by restricting their investor base to supposedly sophisticated high-net-worth individuals, or institutions, that they are exempt from the regulations applying to ordinary mutual funds. It's a revealing fact that hedge funds, being an important source of political contributions, have in general spread their money around between Republicans and Democrats and in fact, until perhaps very recently, have actually favored Democrats in the balance. Anyone who has spent time talking to hedge fund principals knows Democrats, and even liberal Democrats, to be well-represented among their numbers. Many of them support more progressive taxation and the ideals of interventionist government. George Soros, because of his liberal activism, is probably the most visible of this breed, but he is by no means alone.
None of this squares very well with Keith's picture of America's super-wealthy elite banding together like reactionary Roman aristocrats in a tooth-and-nail fight against economic democracy.
So what then is the real source of political resistance to the liberal economic agenda in America? A clue to the answer can probably once again be found in the words of President Obama. During the last Presidential campaign he put forward $250,000 in annual income as somehow a dividing line between "ordinary Americans" and the "super-rich". This line is, of course, orders-of-magnitude south of Warren Buffet's socio-economic turf. Still, Mr. Obama put the spotlight on this second group as being the ones who should bear the entire burden of increased taxation. The group was thus implicitly stigmatized as a pampered elite who could easily afford to pay more, and who should be made to do so anyway as a matter of economic justice. This distinction made for good campaigning, since $250,000 is far above what most Americans make in a year, and the majority would have no obvious reason to feel threatened by the suggested new tax burden.
The problem comes in thinking about exactly who would get caught up in this net thrown down by our soon-to-be President. It's not hard to imagine many people who might indeed deserve to pay more taxes, and who could be made to so without negative consequences to the economy. People living on large amounts of inherited money come to mind, as perhaps do investment bankers, some corporate executives, celebrities, lottery-winners, big-time tort lawyers, and anyone like Gates or Buffet who has made so much money, even when fairly gained, that he really doesn't know what to do with it all.
However, also represented in this targeted class is another group of people whose interests are closely aligned with our society as a whole, and for whom increased taxation would likely force a curtailment of vital economic activity. These would be owners of successful small and medium-sized businesses. Such enterprises in the aggregate make up a substantial portion of our economy, and represent a disproportionate share of our economic growth and new job creation. Their success usually means that they are contributing useful and innovative products to the economy, as well as vital employment opportunities. For expanding companies, profit means a source of low-risk equity capital for financing growth, more than a source of luxury-living for their owners. Diverting such income, through taxation, from productive investment and into government programs, even well-conceived ones, would in general lead to a net loss in economic vitality.
The other consideration to keep in mind here is the risk-return tradeoff that business people have continuously on their radar screens. Small businesses in general, and expanding ones in particular, are by their nature exposed to a high risk of failure and loss. Entrepreneurs willingly undertake such risk only because the prospect for outsized gains makes it attractive. If the risk remains while the gains, should they be achieved, are immediately subject to punitive taxation, businesses have little incentive to incur the risk of expansion at all. If such disincentives became pervasive, our economy would slide into chronic malaise that no amount of fiscal "stimulus" could do much about.
It is, of course, then government spending itself that represents the other prong of the liberal agenda. Proposals for such spending are often sold politically on the basis of either correcting social injustice or stimulating the economy. Such promises are often plausible on the surface but a little vague upon closer examination. In practice, too often federal money gets channeled into standing bureaucracies that grow relentlessly, whether or not they continue serving their missions. They also become conduits for federal money enriching networks of private contractors wedded to them politically and economically.
Liberals are, of course, not alone in facilitating this kind of wasteful application of government resources. Among the most entrenched federal bureaucracies is surely the United States Defense Department, long the darling of conservative Republicans. Decades ago President Eisenhower, himself a former general, coined the derisive term "Military Industrial Complex" to convey the omnivorous nature of this particular public-private partnership, and its lack of real accountability. This syndrome is typical of how government bureaucracies can learn to function once they gain access to the institutionalized flow of money from taxpayers and government bond sales.
Getting back to Keith's commentary, I think he's made a provocative analogy between ancient Rome and the contemporary United States. Just as Roman citizens enjoyed a relatively stable and prosperous way of life for many years, so do many of us today. And the fact that the Roman system eventually devolved into discord and relative poverty for most should be read as a cautionary tale.
Furthermore, I believe that Keith has identified an interesting correlation in the decline of Rome and the disintegration of its middle classes. Any healthy economic system depends on a "robust class" of hardworking pragmatists who innovate, solve economic problems, and keep the flow of goods and services moving to the maximum number of people. If this class becomes diminished or demoralized, the entire system is at risk because takers and consumers and start to overwhelm the producers.
In the United States, our commercial classes are essential to the healthy functioning of our society. Too often our politicians take this group for granted and, even when giving lip service to its importance, seem ready to burden it with ever increasing levels of taxation, regulation and litigation exposure. The beneficiaries of these policies often are not so much disadvantaged citizens as government bureaucracies, crony capitalists, and tort lawyers.
The closest thing we have to true "oligarchs", our hedge fund millionaires and billionaires, remain happy and don't seem to care that much one way or the other.
Subscribe to:
Posts (Atom)