New School Politics

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Today, President Bush signed the $168 billion stimulus package that has received much coverage in its bipartisan pursuit to address the economic slowdown with more spending. From the AFP:

Treasury officials say tax rebate checks of up to 600 dollars for individual taxpayers and 1,200 for couples, plus 300 dollars for dependent children, could boost consumer spending which has been pressured by sinking home prices and tight credit.
The White House said the package will provide tax rebates to 128 million American households and that the first checks should arrive in mailboxes in May.

Of course the signing is not much of a surprise, but I would also like to use this post to make a valuable addition to the Coalition Against Stimulus. John Stossel, who conveys free market ideas to a wide audience like no other member of the media, joins the club with an article, “Stimulating Nonsense,” released today.

He envokes Russ Roberts, as several have, who had perhaps the most the most memorable line of the anti-stimulus campaign:

It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.

In other words this bill will (a) not augment gross product in any way and (b) all it does is redistribute money from one place to another–rich to lower/middle class; savings to consumption. If anything, from what we know about the effect of redistribution on economic incentives as well as the importance of savings to economic growth, “stimulus” will do anything but stimulate overall.

Popularity: 39% [?]

Speaking at the Janesville General Motors Assembly Plant, Barack Obama finally laid a concrete and comprehensive plan for economic development during an Obama presidency.  The location of the speech is somewhat symbolic given the announcement by GM yesterday of huge losses and issues with the unions.  The Page has full coverage of his plan, but we’ll outline it below.  Commentary and opinions on the plan will be posted shortly.

We are not standing on the brink of recession due to forces beyond our control. The fallout from the housing crisis that’s cost jobs and wiped out savings was not an inevitable part of the business cycle. It was a failure of leadership and imagination in Washington – the culmination of decades of decisions that were made or put off without regard to the realities of a global economy and the growing inequality it’s produced….

I don’t know about a time-out, but I do know this – when I am President, I will not sign another trade agreement unless it has protections for our environment and protections for American workers. And I’ll pass the Patriot Employer Act that I’ve been fighting for ever since I ran for the Senate – we will end the tax breaks for companies who ship our jobs overseas, and we will give those breaks to companies who create good jobs with decent wages right here in America….

My energy plan will invest $150 billion over ten years to establish a green energy sector that will create up to 5 million new jobs over the next two decades – jobs that pay well and can’t be outsourced….

In the end, this economic agenda won’t just require new money. It will require a new spirit of cooperation and innovation on behalf of the American people. We will have to learn more, and study more, and work harder. We’ll be called upon to take part in shared sacrifice and shared prosperity. And we’ll have to remind ourselves that we rise and fall as one nation; that a country in which only a few prosper is antithetical to our ideals and our democracy; and that those of us who have benefited greatly from the blessings of this country have a solemn obligation to open the doors of opportunity, not just for our children, but to all of America’s children.

Those who claim that Mr. Obama has been all style and all substance should finally have something to chew on today, whether they like his plan or not.  We’ll soon see how the public reacts.  February’s primaries are supposed to be skewed heavily in Obama’s favor, and results like yesterday’s in upcoming primaries could help seal the nomination for a candidate who was once thought of as a long shot.

Popularity: 41% [?]

President Bush’s new stimulus planned, now approved by Congress, will send checks of at least $300 to over 100 million American in an effort to jumpstart the lagging economy.  For the plan to work it is necessary that citizens receiving these rebates go out and consume right away.  However such a plan is only a minor fix and will end up exacerbating the original problem that caused this recession: debt. 

The major event leading to the downward economic spiral we find ourselves in today was the subprime mortgage crisis, which essentially meant that many new lower income bracket homeowners could not pay their mortgages, leading the banks to have to foreclose.  Furthermore, Americans, as a whole, owe more money than they are taking in because of widespread ignorance about how to properly use a credit card and budget.  Our government is even having major issues with budget management as our outstanding national debt is approximately $9 trillion, with over $2 trillion of that being owed to foreign governments.  In fact, we borrowed the $168 billion for this stimulus package from China.   

At a time when the American people and government have so much debt to pay off, how does a plan help in which the government has to borrow billions of more dollars, and encourages the people to go further into debt by buying a new television, computer or DVD player?  Temporarily there will be a surge in profits and sales, but as soon as monthly payments for product with low down payments and high interest rates are due we will see how the economy does then.  My prediction is not too good. 

Popularity: 48% [?]

From Walter Williams:

Professor Don Boudreaux, chairman of George Mason University’s Economics Department, wrote “If Trade Surpluses Are So Great, the 1930s Should Have Been a Booming Decade.” According to data he found at the National Bureau of Economic Research’s “Macrohistory Database“, it turns out that the U.S. ran a trade surplus in nine of the 10 years of the Great Depression, with 1936 being the lone exception.

During those 10 years, we had a significant trade surplus, with exports totaling $26.05 billion and imports totaling only $21.13 billion. So what do trade surpluses during a depression and trade deficits during an economic boom prove, considering we’ve had trade deficits for most of our history? Professor Boudreaux says they prove absolutely nothing. Economies are far too complex to draw simplistic causal connections between trade deficits and surpluses and economic welfare and growth.

I think Boudreaux, who writes at Cafe Hayek, is right on the money. It is no surprise that the depression years were the years in which America experienced its most “favorable” balance of trade. After all, if you look at the US trade deficit compared to GDP over time the US trade deficit has tended to grow in times of prosperity (mid/late ’80s, mid/late ’90s, early/mid ’00s) and shrink in times of slowdown (early ’70s, early ’80s, early ’90s).

Nevertheless it’s all too often that we hear politicians demogauging about trade imbalances, especially that with China, whose devalued currency is responsible for delivering even cheaper goods to the market. Policy-wise reducing the trade deficit would require some sort of trade barriers (i.e. tariffs), devaluing our currency (which we are indirectly doing by making money easier), or compelling other nations (like China) to stop devaluing their currencies. Either way, the policy means higher prices and less purchasing power for the American consumer. Moreover, it does not make the US any more productive, and as a matter of fact it makes us less productive by discouraging foreign investment.

But amidst the Fed’s devaluing of our currency and our economic downturn, I would expect the anti-trade polls to be happy because our trade gap has been narrowing in the meantime (at least in the past year since our financial woes began).

Moreover, recently released numbers show that the trade deficit closed in December and in 2007 overall as bad economic news continues to pour in.

Ultimately, as Boudreaux said, the trade deficit doesn’t really matter because as Adam Smith first articulated specialization and comparative advantage and other intricacies govern trade balance. However, based on theory and data, I must take my conclusion one step further to say that a trade deficit is usually indicative of economic strength and growth, rather than an economic problem. I say this because in any economic system you can only consume as much as you produce (Say’s Law) and concurrently a nation can only import if it has the purchasing power to compensate. The more a nation produces the more it can buy, hence the more it imports. Moreover, the greater share of global product it produces, the greater share of global goods and services it will import. This is why American slowdowns have resulted in less imports and a tighter trade gap. And most importantly, upon realizing this, it is imperative that our country does not submit to economic sensationalism, and does not spite itself by instituting protectionist policies which only hamstring American living standards.

Popularity: 23% [?]

Tonight, the Senate passed a slightly moderated version of the compromise stimulus bill settled on by the White House and the House of Representatives 81-16. The bill was immediately rushed back to the House, where Speaker Pelosi got it passed rapidly. Senate Democrats’ version of a stimulus bill fell flat earlier after being fillibustered by Republicans and coming one vote short of qualifying for an up-or-down vote on the floor.

The Senate passed the House’s $150 billion bill, and tacked on an additional $18 billion in spending for those not paying income taxes but earning at least $3,000, as well as Social Security recipients and wounded veterans. Harry Reid alas’ decided to accept the original bill–which primarily features rebates for those earning less than $150,000/year and business tax credits–after vowing to stand for his bill whose price tag stood around $204 billion. The failed Democrat’s bill included bolstered unemployment insurance, heating subsidies for the poor, and incentives for investment in renewable energies, coal, and home building (because higher prices and more demand for energy, not to mention more home construction, are exactly what our economy needs right now).

All of the 16 who voted against the bill in the Senate were Republicans. They included such spending hawks as Tom Coburn (OK), Jim DeMint (SC), and Bob Corker (TN), the last of whom opined that Congress had just done the equivolent of throw $150 billion “into a mud puddle.” Wise words from the junior Senator from Tennessee. Unfortunately, John McCain apparently was never graced with Corker’s bout of wisdom, as the presumptive GOP nominee returned to the Hill on Thursday to vote for the muddled spending. Of course this is disappointing to see from the AZ Senator who has lauded himself as a great deficit hawk and budget cutter. On top of that, I have never–in any speech or debate–heard him explain what he believed on stimulus, nor even enumerate what his opinion was up until this point.

Hillary Clinton (in addition to Barack Obama) flew back just for the first vote. On the trail, Clinton has offered her own stimulus plan which has baffled me for its economic irrationality for some time now. It includes a provision to freeze rates on adjustable rate mortgages (of which there are currently 11 million in America) for the next five years. Here is a solid article from two prominent economists demonstrating the would-be consequences of such price fixing.

Despite the Federal Reserve cutting its federal funds rate substantially in recent months (from 5.25% all the way to 3% already), European central banks have been resolved in keeping their rates generally steady to combat inflation and avoid reinflating any credit bubble. Just today the Bank of England cut its rate by .25% but indicated that is unlikely to trim it any more, while the European Central Bank has yet to ease rates at all (announcing tonight that it would continue to keep them steady). Jean-Claue Trichet, the President of the ECB, made the case that the fundamentals of the European economy are strong and that inflation, which is currently above 3% and will probably remain above 2% for some time, is a more daunting worry.

More importantly, he noted that M3 growth remained fervent, as did borrowing by non-financial businesses, reaching highs in December 2007. The scary thing is that Europe is not having the same credit problems as we do, as Trichet noted, yet we are the ones debasing interest rates to the potential end of reinflating existing financial imbalances. The current mess we are witnessing is little more than the consequence of the Fed doing the exact same thing that it is doing now, when it lowered the federal funds rate all the way to 1% in 2003 in order to respond to the same type of economic slowdown. Even worse, the downturn in ‘01/’02 was less related to credit woes, so this time by loosening credit we are putting fire to even more flamable substances. Nevertheless, Trichet was wise to note that there is only so much we know–only so much data available to paint a realistic picture of the economy–and that “further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.”

The ECB President’s speech also brings me back to the topic of fiscal stimulus, as he used some of his time to rebuke the idea of government spending to boost the economy saying:

With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability.

It looks like American officials from Bush to Bernake could take use some advice from the Frenchman, who is right on the money when it comes to warning about intervention to encourage more economic spending. Add him to the coalition against fiscal stimulus.

Also of interest is NYU Prof of Econ, Will Easterly’s critique of Bill Gates’ concept of “creative capitalism,” which the Microsoft founder spoke in favor of in his speech at the World Economic forum in Davos. In response to Gates, who argued that self-interest and the profit motive do nothing for the poor and that foreign aid and a sense of social responsibility are necessary to improve the plight of the world’s poor, Easterly makes the case that charity does little to lift poor peoples out of perpetual poverty. His rebuttal is in line with his book, The White Man’s Burden, as he argues that indeed self-interest and unfettered capitalism makes the whole world better off in the long run because it is most productive and creates the best incentives for third-world nations to build an economic system through a sense of individualism and self-reliance.

Finally, on a happier note, the writer’s strike appears to be over. A deal has been reached between corporate media and the writer’s guild, according to ex-Disney CEO Michael Eisner.

Popularity: 67% [?]

With economic prospects not looking so hot and the compromise bill for fiscal stimulus in limbo in the Senate, more spending appears to be the consensus among the public regarding how to cure the ailing economy. Right now we stand to see around $150 billion in mainly expended to “prime the pump” at some point this year.

But while stimulus may be the conventional wisdom, a variety of legitimate voices still exist against the Keynsian rehash. Here is a list compiled by Greg Mankiw of such voices:

• Andrew Samwick
• Steven Landsburg
• Robert Samuelson
• Russell Roberts
• James Hamilton
• James Cramer
• Arnold Kling
• Donald Boudreaux
• Alan Reynolds
• Bruce Bartlett
• George Will
• Alex Tabarrok
• Bill Thomas and Alex Brill
• Michael Kinsley
• Steve Entin
• Dan Mitchell
• Walter Williams
• Thomas Sowell
• Ricardo Hausmann
• Bob McTeer
• Willem Buiter

It is worth noting that I too am against any notion of “fiscal stimulus.” Some of my favorites, which on the whole best represent my opinion, include Economists Steven Landsburg, Russ Roberts, Don Bourdeaux, Arnold Kling, Alex Tabarrok, Walter Williams, Thomas Sowell and political commentator George Will.

The underlying theme of their criticism is that there is nothing magical about the stimulus and it does little more than redistribute existing wealth within the economy. The main effect it has is to encourage consumer spending (as opposed to savings) in order to boost short term demand. Unfortunately this is the complete opposite of what our economy needs right now. What the economy is experiencing is essentially a readjustment of how it spends its money. Years of extremely low interest rates an loose credit caused mal-intestment and overspending–especially in real estate–up until the current point in time in which investors began to realize that real savings was not enough to support the expensive borrowing that was going on.

In other words, the root of the economic problems we are facing today are the consequence of overspending. And the proposed rememdy–even more spending–can only further inflate these problems and postpone even greater economic woes.

Popularity: 56% [?]

From one of my favorite thinkers, Yaron Brook:

Today, what we have is not a system grounded in American individualism, but a collectivist system that aims to relieve the individual of the “burden” of paying for his own health care by coercively imposing its costs on his neighbors. For every dollar’s worth of hospital care a patient consumes, that patient pays only about 3 cents out-of-pocket; the rest is paid by third-party coverage. And for the health care system as a whole, patients pay only about 14%.

The result of shifting the responsibility for health care costs away from the individuals who accrue them was an explosion in spending.

I get the impression that American healthcare is generally seen as a market system by the electorate and the only alternative as more government control. Of course, factually this is untrue as the government is responsible from between 45 and 50% of healthcare spending in the US, making it the single largest ensurer of Americans. On top of this, an endless array of regulations make the American system not only tapped by government, but dominated by it.

Additionally, of the insurance that is (essentially) private, third parties (i.e. employers) pay for six times as much as individuals. And the obvious reason for that the way the tax structure is convoluted to subsidize employee based insurance by not taxing it as income. According to Paul Krugman and Robin Wells, “the value of the tax subsidy for employer-based insurance is estimated at around $150 billion a year.”

I surmise the basic fallacy behind this system is the desire for a free lunch–voters want heathcare, especially if they can get it at someone else’s expense.

But the wasteful incentives this way of thinking creates not only is inefficient, but eventually passes even higher costs on to consumers. Remember that when people bear less cost for a maneuver, they have no encouragement to try and control its costs. The consequence is that spending goes nuts.

For the sake of achieving greater frugality and more efficiently rewarding good and bad providers, it would be wise to give the individual a greater place in healthcare. This would not happen by government mandate or subsidy, but rather an equalizing of the playing field between individual and employer healthcare, as well as a downsizing of government’s roll in the industry.

For that reason, the medical reforms of Ron Paul, John McCain, and Rudy Giuliani tend to be superior to that of other candidates.

Popularity: 64% [?]

The Wall Street Journal and Heritage Foundation recently released their annual study on economic freedom, which evaluates and ranks the economic freedom of 162 nations. Here is the page for the new study; here are the rankings.

Note that the study is not only cool for its rankings, but it is also an excellent resource for macroeconomic statistics and government policy of any nation in the world.

As for the countries, year in and year out, Hong Kong remains at the top of the list, often with Singapore in second. The US and the world’s other English-speaking powers are also prominent. Here is the top 10:

 1. Hong Kong

2. Singapore

3. Ireland

4. Australia

5. United States of America

6. New Zealand

7. Canada

8. Chile

9. Switzerland

10. United Kingdom

And here are the bottom ten:

10. Venezuela

9. Bangladesh

8. Belarus

7. Iran

6. Turkmenistan

5. Burma

4. Libya

3. Zimbabwe

2. Cuba

1. North Korea

And also note that countries in chaos–as if the last ten weren’t in their own chaos–were not part of the ranking (i.e. Sudan, Iraq, Congo, et al).

Popularity: 16% [?]

George Soros is convinced that the world is about to enter a serious recession.  Unfortunately, it seems as if most of the financial world is similarly convinced. The latest trend in stock markets seems to be, “Sell!  Sell!” as traders don’t know what’s going to happen in trading today in the United States, which just opened at 10AM.  The Federal Reserve, in an attempt to head off the recession, cut interest rates last night in a rare between-meetings announcement.   News from the Asian markets isn’t good, with Forbes saying that the environment is rather negative.  One Japanese trader seems to have summed up the mood.

“It’s like a funeral in here,” said Ken Masuda, senior equities dealer at Shinko Securities in Tokyo.  ”No one knows what’s going to happen tonight in New York.  It’s like we’ve gone blind, you don’t know what’s coming.

“Until we see New York, all we can do is sell.” 

We can hope that the United States can stave off recession with an economic stimulus package and without pushing the stock market lower.  Unfortunately, the stimulus package seems far off, as Democrats and Republicans cannot agree on how to reinvigorate the economy.  Sen. Charles Schumer [D-NY] predicts that the stimulus package will be passed some time in March.  If the market drops today as it has been predicted, this may be too late.  Europe, meanwhile, is convinced they won’t be affected by the US’ possible recession.  We’ll be covering the financial situation all day, and we hope that our next post comes with good news instead of bad.  In the meantime, as Eftychis suggested, stick to Forbes, The Financial Times, The Wall Street Journal, Bloomberg News, and financial aggregators like Google Finance & Yahoo Financefor up to the minute reports on the stock market’s position.  As of this writing, the NASDAQ was down approximately 117.68 points, or 5.03%, while the DJIA has seen a drop of 59.91 points [or .49%].

Popularity: 99% [?]

In a surprise move this morning, the Federal Reserve cut the federal funds rate by .75%, from 4.25% to 3.5%, which is the largest single day adjustment by the Fed in years.

The move came amidst growing US recession worries, and a severe drop in Asian and European markets on Monday and Tuesday.

Popularity: 26% [?]