New School Politics

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George Will’s latest column in Newsweek consisted of a series of questions he would like to see Senator Obama answer during this campaign. It is worth reading the whole thing, but here are a few of my favorites:

• ExxonMobil’s 2007 profit of $40.6 billion annoys you. Do you know that its profit, relative to its revenue, was smaller than Microsoft’s and many other corporations’? And that reducing ExxonMobil’s profits will injure people who participate in mutual funds, index funds and pension funds that own 52 percent of the company?

• You say John McCain is content to “watch [Americans'] home prices decline.” So, government should prop up housing prices generally? How? Why? Were prices ideal before the bubble popped? How does a senator knowideal prices? Have you explained to young couples straining to buy their first house that declining prices are a misfortune?

• Michelle, who was born in 1964, says that most Americans’ lives have “gotten progressively worse since I was a little girl.” Since 1960, real per capita income has increased 143 percent, life expectancy has increased by seven years, infant mortality has declined 74 percent, deaths from heart disease have been halved, childhood leukemia has stopped being a death sentence, depression has become a treatable disease, air and water pollution have been drastically reduced, the number of women earning a bachelor’s degree has more than doubled, the rate of homeownership has increased 10.2 percent, the size of the average American home has doubled, the percentage of homes with air conditioning has risen from 12 to 77, the portion of Americans who own shares of stock has quintupled … Has your wife perhaps missed some pertinent developments in this country that she calls “just downright mean”?

• You favor raising the capital gains tax rate to “20 percent or 25 percent.” You say this will not “distort” economic decision making. Your tax returns on your 2007 income of $4.2 million show that you and Michelle own few stocks. Are you sure you understand how investors make decisions?

• You denounce President Bush for arrogance toward other nations. Yet you vow to use a metaphorical “hammer” to force revisions of trade agreements unless certain weaker nations adjust their labor, environmental and other domestic policies to suit you. Can you define cognitive dissonance?

Most of these questions capture economic illiteracy that is commonplace in politics. It especially suggests the arrogance of a politician who think that he can make economic decisions better than individuals can in the free marketplace. The second question really gets to the heart of it–could you even imagine him trying to answer?

Popularity: 7% [?]

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: 18% [?]

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: 43% [?]

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% [?]

The award goes to Steven Landsburg:

Mike Huckabee is not my favorite candidate, though I relish the irony of an evolution-denier whose basic appeal is to voters’ most apelike instincts.

Here’s the entire article, which actually concentrates on Mike Huckabee’s notably outside-the-box tax plan, better known as the “FairTax,” which basically replaces all federal taxes in favor of a national sales tax. Landsburg, a professor at the U. of Rochester, comes to the defense of shifting taxation toward consumption in light of a Huckabee’s plan being lambasted by pundits (most notably, Bruce Bartlett) and media (AP story) lately. BU professor, Laurence Kotlikoff, also comes to the FairTax’s defense.

Like Landsburg, I applaude Huckabee for his support of the FairTax. Not only do I think that it shows the Governer is willing to think for himself–which I don’t suspect he often does–but I also believe that the plan, which was first proposed ten years ago, could be economically beneficial. I am inclined towards a national sales tax essentially because:

1. It shifts the tax burden from overall income (personal and corporate) to consumption, which enhances the incentive to save and invest. This is especially important to the US economy whose savings rate is particularly low, and whose current credit crunch can be strongly connected with insufficient accumulation of real wealth.

2. It eliminates the IRS, which costs taxpayers about $20 billion. Even more expensive, however, is the $200 billion plus that Americans spend on filing their federal taxes each year, which would also be eliminated.

3.  It eliminates the complication of the 60,000+ page tax code, which is riddled by all sorts of loopholes. The incentives the code creates encourages the diversion of resources from productive activity to evasive activity. Some, including to the GAO, estimate these costs to be anywhere from two to five per cent of GDP.

My reservations on the FairTax include:

1. The potential menu costs of a massive alteration of taxes and costs (costs would likely rise in the short term because while the sales tax would kick in immediately it would take longer for prices to come back to normal levels as the embedded costs from income and corporate taxes go away).

2. Proposals for a national sales tax include a monthly rebate from the government to lower income earners to compensate for their new tax burden. However, this would require massive bureaucracy to execute the measure. The question is, how much would it cost and how would it compare to that of the current tax code.

3. Tax evasion would probably be easier under a sales tax given taxed monetary exchanges are much smaller and plentiful than under an income tax. Once again, this is more of a question than a statement–more inquiry is necessary, but logic leads me to initially believe it.

Popularity: 17% [?]

It is no secret that Mitt Romney won the Michigan and Nevada primaries because of his strong economic background. While it is true that Romney faced little competition in Nevada and that he was a “native son” in Michigan, his business and executive experience is what put him over the top in the two primary states where the number one issue is the economy.

From the Detroit News-
The optimistic economic message former Massachusetts Gov. Mitt Romney brought to his native state was a big reason he finished on top of Tuesday’s Republican primary here. A solid majority of both Republican and Democratic primary voters said their motivating issue was the economy, according to the National Election Pool exit poll.

According to CNN’s exit polling data from Nevada, Romney beat his rivals on the economy by overwhelming margins. For the Democrats in Michigan, the story was the same. The economy was the most important issue by nearly fifty percent with Iraq a distant second. While it may be too early to tell who is taking a lead in either primary elections, it is clear what issue is becoming-the economy.

About a week ago Goldman Sachs predict that the US economy will find itself in a recession in 2008; which means a decline in economic growth for more than two consecutive sessions (two quarters). Many market analysts believe that recession began prior to the new year with the series of poor fiscal news last December.

One of the least known but best indicators of economic health is the Baltic Dry Freight Index. The index measures the price of shipping dry bulk goods (iron ore, wheat, coal, soybeans, etc…) by sea in cargo ships. A decline in this index means there are less consumers for those goods; currently the biggest consumers of those products are China, India, and the United States. The declining rates indicate a slow down in the global economy, a slow down that the dry bulk market will see before the retail and consumer reports here in the United States. The bulk market also suffers from a problem that much of the economy does. It had built new vessels anticipating continued demand, but the demand from China and India has decreased which means that there is no need for the hundreds of new ships on order. This parallels what has been happening in many other markets, there is a massive surplus of new homes across the US and Europe and thus housing prices have slumped; the same has happened with the automotive market and in other consumer areas such as electronics. On the flip side, supply for natural resources has not caught up to demand so natural gas, oil, grain, corn, copper, and even milk prices have soured anywhere from 4-50% over the past year alone. Consumers are being faced with high mortgage rates, a dollar worth less, and greater expense at their grocery store and the gas station. The dollar will simply not get you as far in 2008 as it did in 2007.

So how does this effect the election? The two states where Mitt Romney and Hillary Clinton did best (Michigan and Nevada) are the two states with the highest foreclosure rates and highest unemployment rates of any in the country. The pain that the citizens in these two states are currently feeling will unfortunately be felt throughout the country by November of this year.

Jim Cramer made an interesting point the other day; since statisticians first began measuring personal per capita income the incumbent party or candidate ALWAYS looses the election when per capita income decreased. By November 2008 average per capita income will have decreased due to economic decline in the first several quarters of this year.

This would imply that the Democrats will win this election no matter what; but the question that arises is what happens when a business man is thrown into the equation. Indeed, Mitt Romney did win an election in the most liberal state in the country and was able to do so while the state faced a massive fiscal crisis. If economic news continues to become more dire over the next several months (and it almost certainly will) then Mitt Romney will have a big advantage over his rival John McCain. Indeed, even Rudy Giuliani could benefit from the change in voters’ number one issue. In Florida he is now focusing on his fiscal record as Mayor and how he turned around NYC’s languishing economy during the 1990s. Even Mike Huckabee’s populist message may begin to resonate more strongly as the economy takes a turn for the worse. The one who this does hurt is John McCain who has almost no economic credentials and even opposed the Bush tax cuts which are considered a staple of accepted conservative economic policy. In addition, McCain also finds himself on the wrong side of the issue that Republicans have claimed to be their second most important issue-illegal immigration.

In the Democratic primary this should also favor Hillary Clinton as she appears to have an upper hand over Senator Obama among voters who consider the economy to be the biggest issue. Many voters become nostalgic when they recall the great economy under Clinton.

I am always skeptical of those who heavily blame or give credit to Governors and Presidents for the quality of the economy that existed when they governed. Outside of having (some) control over the governments budget, there is little they can do to effect monetary policy (controlled by the Fed) and there is nothing they can do to tackle cyclical events in the economy. Despite their lack of control, the Commander and Chief can set tone and direction. FDR and then Reagan changed the direction of the nation’s fiscal vision most drastically during the 20th century. Romney and Clinton most certainly have the same vision for a strong future American economy but their means to try and achieve that end will be drastically different.

The pundits have not been able to use past data to predict this election because well quite frankly 2008 is different than any previous election. I still believe the Democrats will have a major advantage come this November, but even if that is the case I see little reason why a voter should choose a Senator to fix the economy over a business man and turnaround artist.

Popularity: 30% [?]

The WSJ writes:

Since the Bush tax cuts of 2003, the budget deficit has fallen by $217 billion mostly because of a continuing torrid pace of revenue growth. …For the Bush tax cuts to have been a give-away to the rich, people paying the higher marginal tax rates would have to be carrying a smaller share of the income tax load. But the IRS data indicate that they are not paying less. Instead, they are paying more — lots more. More surprisingly, the richest 1%, 5% and 10% of the taxpayers are shouldering a larger percentage of the income tax burden at the federal level than the tax estimators said they would had the Bush tax cuts never materialized. …The amount of tax paid by those earning more than $1 million a year increased to $236 billion in 2005, up from $132 billion in 2003, the year of the tax cut. This was a 78% increase in taxes paid by millionaire households.

…[L]ower tax rates on capital gains and dividends also caused a huge jump in reported income. The National Bureau of Economic Research found an “unprecedented surge in regular dividend payments after the 2003″ Bush tax cut. Likewise, the lowering of the capital gains tax was followed by a 150% increase in the amount of capital gains unlocked by the 15% tax rate. Lower tax rates expanded the tax base.

This is a textbook manifestation of the Laffer Curve and it is surely an effect of tax cuts such as those under Presidents Reagan and W. Bush. However, the Laffer curve remains a weak justification for cutting taxes. Of first importance is that growth in revenue is only a direct result of economic growth caused by tax cuts. Remember that the only reason revenue can increase at the same time that taxes decrease is that the economy is growing more rapidly at the margins than taxes are being reduced. If taxes are cut enough–below the optimal rate–revenue is theorized to fall (all things remaining equal) however it could not compensate for the fact that tax cuts would still cause the overall national income to grow (not to mention that since all things do not remain equal in the real world, revenue would eventually grow because of augmented economic growth).

But even if all things did remain equal, I would still choose to tax far below the optimal rate because under such conditions we are essentially dealing with the question of how to allocate funds in the economy. Thusly it is a question of incentives–how to distribute money, how to spend money most efficiently, how to minimize wasteful costs, and how to properly establish time-preferences are all issues encompassed therewithin. My answer to all those questions, especially the overriding one, is that by allowing people to keep what they earn we encourage hard work, inventiveness, thriftiness, and investment, all of which are vital to economic health.

The underlying dilemma in using the Laffer effect as a justification for tax cuts is that the curve is actually a double edged sword. If you argue for cutting taxes when they are above the optimal rate you must also argue for raising taxes if they are below it. Tax reform should not be used as a means to bolstering the Congressional purse but rather as a means of reducing its relative scope and creating incentives to generate economic progress.

Popularity: 36% [?]

Although best known for his leadership on 9/11, Rudy Giuliani’s best attribute is probably how well he ran New York City where he lowered taxes, reversed the budget deficit, cracked down on crime, etc. Now he is trying to position himself as the small government candidate among the Republican Party’s contenders for the presidential nomination.

On issues from taxation to healthcare he is pushing for free market reforms in order to ensure the nation’s prosperity while he accuses the Democrats of advocating a “nanny state”. From the AP: 

Republican presidential hopeful Rudy Giuliani on Monday accused Democrats of favoring a controlling “nanny government” as he continued his bashing of the rival party.

…

Giuliani argued that he favors less government and lower taxes.

“That’s what makes America great, not this nanny government that Democrats want to give us, where government controls your entire life,” he said.

…

On Tuesday, Giuliani intends to outline his health care plan. Giuliani’s goal is to give individuals more control over health care decisions and to encourage state officials to come up with innovative solutions.

Key to his plan is a $15,000 tax deduction for families to buy private health insurance, instead of getting insurance through employers. Any leftover funds could be rolled over year-to-year for medical expenses, under Giuliani’s plan.

Even on social issues, which tend to be very polarizing in American politics, Giuliani offers a unique, constitutional alternative:

Giuliani argues that the best way to reduce tension about social issues is to allow states, rather than the federal government, to take the lead in responding to them. That would allow socially conservative and liberal states to each set rules that reflect the prevailing values inside their borders. Rather than perpetual combat in Washington, he insists, the nation could reach a new equilibrium as different states gravitated to different solutions.

In an interview last week, Giuliani said the key to resolving cultural arguments “where our society on a national level ends up being very divided” is to apply the “principle of federalism.” Questions on topics such as gun control, gay rights or aspects of abortion, he continued, “are issues that I think the founding fathers would say should be consigned to state and local governments, experimenting, deciding, having different views, and the federal government having a more limited role.”

The fact their top primary candidate is arguing for free market and federalist reforms in Washington should give comfort to Republicans who have witnessed the GOP descend from the modern party of small government, pioneered by Reagan and Goldwater, to become the other party of big government in the past 12 years. So much is put on the fact that Giuliani isn’t pro-life, nor pro marriage amendment, nor religious that no one has even bothered to look at his positions which would have a far greater impact.

Although I am supporting Ron Paul–who is the truest advocate of limited domestic government–I concede that I would support Rudy Giuliani out of the top four GOP contenders (Giuliani, Thompson, McCain, and Romney). And furthermore I urge those Republicans who long to stop the advance of the nanny state to support Giuliani in the face of the most popular alternatives.

Popularity: 59% [?]

Ryan briefed our readership on the situation with Ed and Elaine Brown several weeks ago.  The national media has slowly picked up on the story, with the LA Times publishing a short article on July 20th.  The saga rolls on, after power cuts, and various other attempts to get the “criminals” to turn themselves into the authorities. 

“We’re fighting for you, your country,” adds Elaine, 66, a calm woman with short, wavy dark hair. “This isn’t just taxes.”

“There’s no more America,” Ed says. “It’s already gone.”

“I’ll die fighting, rather than live in slavery,” Elaine says. “I’ll tell you that.”

The Browns continue on a tirade throughout the LA Times article, and it’s a terrific read.  Many Libertarians see the Browns as a signal of hope in a tax-filled country, but most pundits doubt it’ll have any lasting implications for America’s taxpayers. 

Popularity: 38% [?]