New School Politics

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From the NYT, regarding his proposals on taxes and spending:

The problem is that the campaign has been far, far more detailed about its tax cuts, which would worsen the deficit, than its spending cuts, which would reduce it. Mr. McCain has proposed the elimination of the alternative minimum tax (at a cost of $60 billion a year), new child tax deductions ($65 billion), a corporate tax cut ($100 billion) and faster write-offs for corporate investments in new equipment ($50 billion to $75 billion).

On the spending side, the senator talks broadly about cracking down on pork barrel projects and holding agencies accountable for their budgets. These steps, Mr. Holtz-Eakin told me, could eventually bring $150 billion a year in savings. He added that given Mr. McCain’s history of fighting against wasteful spending, he deserved the benefit of the doubt.

It would be easier to give him that benefit, though, if he weren’t so vague. For decades presidential candidates have been promising to cut waste, fraud and abuse, and no one has yet made a noticeable dent in the federal budget.

As Mr. McCain’s plan currently stands, The Economist magazine concluded that it “will not come anywhere close to paying for the tax cuts.” Most telling, I spoke over the past week with several other economists who admire Mr. McCain and have advised him over the years. None would defend his current fiscal package (or be quoted).

Neadless to say, there is a hole at least $150 billion wide in McCain’s economic agenda. At least, however, McCain isn’t using the old “the tax cuts will pay for themself” defense–didn’t work so well in the past eight years.

For a myriad of reasons though, I have relative confidence that McCain will attempt to control spending proportionately to the Bush and would-be McCain tax cuts. However, it will take much more than crusading against pork barreling, which accounts for about $30 billion of the budget if my memory serves me.

What it will take is addressing much, much bigger programs including the great third rails–Social Security and Medicare, whose costs are rising at an alarming rate (already SS is the biggest government program in the history of mankind). On his website he at all specific about how he will address these issues or control spending other than eliminating earmarks and freezing non-military discretionary spending.

Much of McCain’s credibility centers around the idea that he speaks his mind and does what he believes regardless of the political convenience. In this case, he is not living up to that. We have seen McCain’s specifics on tax cuts, but that’s the easy stuff. What really matter’s is how–and if–he will cut spending, but it is also not a very popular topic.

If McCain really believes what he says about spending and the size of government, he will begin thinking hard about how he will squeeze the budget. After all, if you don’t propose any cuts in spending, you shouldn’t expect the deficit to narrow any time soon.

Popularity: 17% [?]

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: 34% [?]

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: 35% [?]

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: 53% [?]

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: 42% [?]

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: 54% [?]

From Steve Forbes:

Our Founders drafted the Constitution with fewer than 5,000 words; with later amendments it is about 8,000 words. The federal tax code is more than 9 million words. So the document that created the government is less than 0.1% as long as the tax code that funds it. Such is the state of Washington today.

Well, needless to say the contrast is stark. For all the politicians who do, I think it is an absolute crock for any of them (except for the Ron Pauls of the world, perhaps) to implicate their nostalgia for the Founders considering they support a federal government that spends one fifth of the economy (and state and local governments that spend another one sixth). And this includes the Republicans who trick themselves into thinking they are the party of small government.

The truth is they’ve got nothing on Thomas Jefferson, who cut the already small federal government by a quarter. The third president outlined his belief in a “wise and frugal Government, which shall restrain men from injuring one another.” Today, the Democratic party, which holds an annual dinner in Jefferson’s name, wants the government to control the whole healthcare industry.

While Americans have no problem glorifying their forefathers, it is clear that they have no idea what they actually stood for, and what the constitution stands for. And until and unless they do, American freedom will continue to be marginalized.

Popularity: 39% [?]

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: 75% [?]

Unfortunately, most politicians don’t have much of an economic pedigree, but some at least think more like economists than others. My inclination is that Obama fits the bill among Democrats, although all the talk of “taking on the drug companies,” “predatory lending,” the illusions to protectionism, etc. is enough to conclude that the Democrats are not really to be trusted on big economic issues in general.

Many of the Republicans leave a lot to be desired also, but some do make sense from time to time. The South Carolina debate on Thursday night demonstrates this.

I think among Republicans, Ron Paul and John McCain tend to distinguish themselves. Ron Paul, I believe, has consistently established himself as the most economically-minded of candidates although he is out of the mainstream. Perhaps I am partial to him because he is reads von Mises, Rothbard, and Hayek, however any politician who actually takes the time to read treatises on economics by such thinkers deserves credit.

He also deserves credit for putting the immigration issue into an economic context which none of the other candidates seem think of–ever. Here was his response to an immigration question:

I think this whole thing should be thought of more in economic terms. Maybe I think about economics too much. But there is something said in economics that, if you subsidize something, you get more of it.

And this is what we do. We encourage it by giving free medical care, and free education, and the promise of amnesty. And no wonder more will come.

We have a weakening economy and now immigrants, especially the illegals, are seen as a threat because they come and they undermine our tax system. And some of our hospitals are being closed and some of our people won’t work because of the welfare state.

You can’t solve this problem if you don’t deal with the terms of welfarism. And, besides, you know, some of our border guards are over in Iraq. I think they would be better off on our borders, you know, protecting our borders, not in Iraq.

Immigration is one of the issues on which I disagree to a certain extent with Rep. Paul–I think that immigration laws should be very lax–but he is right with regard to the welfare aspect of it, which must be curtailed. Most of all, he deserves pops for observing that immigration is fundamentally an economic phenomenon, and to analyze any economic phenomenon you must look at incentives.

Zach may be right that Ron Paul sounds about as confusing to the average voter as Sean Paul sounds to–well–me, but at least he speaks in a more rational and candid manner–something which I would rarely accuse the other candidates of doing.

John McCain also made some sense in the debate with regard for the potential recession (especially with regard to the loss of manufacturing jobs in Michigan, which has the next primary):

Well, the first thing we need to do is stop the out-of- control spending. Out-of-control spending is what caused the interest rates to rise. It causes people to be less able to afford to own their own homes.

We need to stop the spending. And that way we can get our budget under control and we can have a — basically a strong, fundamental fiscal underpinnings.

The second thing that we need to do, of course, is stop spending $400 billion a year overseas to oil-producing countries that come right out of our economy immediately. Some of that money goes, unfortunately, to fund terrorist organizations.

We’ve got to — and we can use Detroit for this, where there’s tremendous technology in the state of Michigan, and tremendous abilities to develop technologies to reduce this dependency on foreign oil, and eventually eliminate it, and stop this outflow of some $400 billion a year. Education and training is obviously important, but stop the spending. As president, I know how to do it. I’ll wield that veto pen, and I won’t let another pork-barrel earmark spending bill cross my desk without vetoing it. And I’ll make the authors of it famous.

It was generally a good statement because its theme was that spending more than you have is bad for the economy. Hence, hes giving an economic–not a political (i.e. “deficit” sounds bad, so lets stop it)–reason to tighten fiscal policy, and eliminate the deficit. He also deserves high marks for alluding to the price system and how more spending means less savings and higher interest rates.

His comment on foreign oil was not so good, however. His claim about the $400 billion spent on foreign oil does not compute. Even if we stopped spending that money on foreign oil altogether, we would still have an unfulfilled $400 billion dollar demand for energy. Where would we get it? Its not like “alternative” energies can provide us with nearly the same energy for the same cost.

Additionally, if we stop spending on Middle Eastern oil it wont really hurt those producer–at least, not nearly as much as it will hurt us economically. The oil market is a global market, and if we remove our demand from the marketplace, the price will immediately go down, but that will cause demand from elsewhere to rise and the price to rise, although not quite as high as original levels. The US on the other hand will be spending its energy dollars elsewhere, which will make non-MidEastern energy more expensive and, again, shift spending from the rest of the world back to Middle Eastern oil to off-set the imbalance.

Among the other candidates, there wasn’t much to write home about. Thompson and Giuliani, who have both proposed similar tax cuts, which they insisted would also raise revenue. This is not necessarily true as it is difficult to tell where we are on the Laffer Curve and how much it applies. Additionally, their saying that spending need not be cut reminds me of the Bush deficits.

Mitt Romney kind of surprises me. I see him posturing for public opinion on economic issues more than I hear him making sense–for instance, he was making an obvious appeal to MI voters on the recession question when he talked about how he “created jobs” as Governor. I expect more from such a successful executive and investor.

I have little evidence that Mike Huckabee speaks economics.

Lastly, the Wall Street Journal recently conducted a survey of economists regarding everything from the future of the economy to the presidential race.

when asked their personal preference, the economists favored Republicans. Sen. McCain led the field with 39% of the forecasters’ votes, compared with 11% for Mr. Giuliani and 7% for former Massachusetts Gov. Mitt Romney. Among Democrats, Sen. Obama edged Sen. Clinton, 14% to 11%, while former North Carolina Sen. John Edwards took 4%.

“People are looking for change,” said Susan Sterne of Economic Analysis.

Some 56% of the economists disapproved of President Bush’s stewardship of the economy, while 44% approved. That is especially startling considering 59% of the economists said the stock market performs better under Republican presidents, compared with 28% who said it favored Democrats. Most economists who disapproved of Mr. Bush cited an increase in government spending. Many praised the president’s tax cuts.

The economists polled, as I understand, were generally mainstream ones which is probably one reason why they tended towards mainstream candidates, especially moderate conservatives. McCain led the field by a lot, which suggests that he does sound good on economic issues as I suggested. Ron Paul apparently doesn’t register, which isn’t a surprise because he is so radical, but is disappointing nevertheless.

Popularity: 46% [?]

Its nice to see a battle over spending for once in Washington. Surprisingly enough its the Bush White House who is trying to check Congress’ urge to spend. Block grants are the main area over which this disagreement is occurring:

…differences over how much federal aid should be provided to cities and states is only one part of the $22-billion chasm that divides congressional Democratic leaders and the White House.

Despite the fact that $22 billion is a large amount of purchasing power, in the context of our whole economy it does not make a dent in government spending. Additionally, cutting federal aid expenditures will do little to the Federal budget on the whole. If a real initiative to reduce the size of government existed it would aim at reforming entitlement spending which account for about 2/3 of total spending.

Moreover Social Security and Medicare especially are growing at a rate that make them grotesque liabilities in the near future.

[According to] Congressional Budget Office that Social Security and Medicare outlays will rise from 8.5 percent of annual economic output to 10.5 percent in 2015 and 15 percent in 2030.

These costs, in turn, would force the United States to keep borrowing, pushing the ratio of publicly held federal debt from its current level of 37 percent of the economy to about 100 percent in 2030, a level reached in the past only during World War II.

A wise first step would be to curb the growth of entitlements by tying it closer to an inflation index instead of a GDP index. Second would be to cut entitlements in general. Lastly it would be most wise, although most unlikely, to move towards ending these absurdly large bureaucracies.

Nevertheless, courage and reason are in short supply among politicians and I surmise that very few would sacrifice their political lives to initiate such wise reforms.

Popularity: 100% [?]