Small Addition to Previous Post
What I forgot to mention is that in World War II, the system of price and wage controls only really worked because there was also rationing, not of everything of course, but of many essentials. Given the inflationary problems I expect to plague us after recovery–I’m so optimistic!–my suggested solution of a system of price and wage controls needs to be supplemented by rationing, as in WWII.
Wednesday, December 17, 2008
On the Agenda? Wage-Price Controls
On the Agenda? Wagae-Price Controls
The most important thing the Fed is doing is not targeting the federal funds rate at zero (or zero to .25%–whatever this range can possibly mean). That’s because the federal funds rate has been virtually zero for about a month, even though the target was 1%. (See a recent comment I made explaining what the federal funds rate is, if this is unclear.) Instead, what is really significant is that the Fed intends to buy, according to the Times, "large quantities" of "mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." Now, this is spectacularly new.
When you add to this "new monetary policy," or whatever you call it, the $600 billion to $1 trillion stimulus planned by Obama, (alas) over 2 years, and not one, the chances are that the economy will stop dropping either by the fall of 2009, being optimistic, or hopefully by the summer of 2010. This reversal will happen sooner if a huge part of the Obama stimulus goes to aid states and cities. By a huge part, I mean at least $300 billion. The effect of this spending will be almost immediate, and I suspect will also be considered as worthy and credible–on schools, libraries, and the like–whereas all the variations of the infrastructure stimuli I read of may take a considerable period of time to get off the ground, worthy though they may be.
But Alan Blinder, a Princeton Professor of Economics, and formerly, Vice-Chairman of the Federal Reserve, and a liberal, is worried about the inflationary potential of what is being done, or proposed, not what will happen in 2009, but what will happen after a recovery picks up steam, if we can be optimistic, in, say, 2010. Blinder is right to be concerned, since the Fed, it looks like, is going to be printing money by the trillions.
In a recent comment, I wrote that at some point the Fed will reverse itself, when the inflation begins, and that the longer-run period ahead of us will contain high interest rates to contain this inflation and therefore cause the economy to be sluggish. This means the normal state of the economy will have higher rates of unemployment than what we are accustomed to, even during relatively good times.
However, there is an improbable answer to this, a "solution" to inflation used in the early 1970's, one which seemingly is forever discredited, opposed by almost all in the political spectrum, with vows made at the time that this so-called solution never be used again. I am of course referring to the system of wage and price controls thrust on us by Nixon in August, 1971 (the 15th if I remember correctly) and which went through a number of phases until 1974.
Nixon wanted to keep low for political purposes what I believe could be considered a relatively minor amount of inflation. What happened is that the Fed chief, Arthur F. Burns, Nixon’s appointee, caved in to Nixon, and kept the 1969-70 recession relatively short–see my earlier comment on Federal Reserve heads. By keeping the recession short, by lowering interest rates–at that point traditional monetary policy worked, unlike now--the inflation of the 1960's, partly caused by the Vietnam War, was only partially reduced. The politics of this is that Nixon didn’t want to go into the 1972 election with a large amount of unemployment (he didn’t know, in 1971, his opponent would be a patsy–George McGovern), but he also worried that inflation might also do him in, so he began a wage-price freeze which phased into a system of wage-price controls.
But in 2010 or 2011, if the choice is: (a) high unemployment to keep prices down, given the trillions being printed, and the trillion of stimuli, along with the expected deterioration of the dollar, leading to higher costs for everything being imported, or (b) a system of price controls, for, say, a 5 year period, to borrow a number from our former (?) arch-enemies (a system that also may require controls on wages), I have hopes the phony-baloney Nixon program of 1971-1974 should not nix this solution, in 2010-2015.
And there is, of course, a successful precedent–World War II. Wage-price controls worked then, and worked well, and were not unpopular, since their need was readily understood. With some prepping–public discussion and leadership--the need for something like this could possibly be accepted. And if accepted, succeed. If not, the alternative seems to me far more dismal–high rates of unemployment, kept high by high rates of interest, designed to keep the rate of inflation caused by the unprecedented bail-out to reasonably low levels.
Blinder is right to be concerned. As we get closer to the period he is concerned about–yet a few years away, unless the various stimuli work far better than anyone anticipates–let’s hope leaders of his caliber talk about a solution of the type I am suggesting.
The most important thing the Fed is doing is not targeting the federal funds rate at zero (or zero to .25%–whatever this range can possibly mean). That’s because the federal funds rate has been virtually zero for about a month, even though the target was 1%. (See a recent comment I made explaining what the federal funds rate is, if this is unclear.) Instead, what is really significant is that the Fed intends to buy, according to the Times, "large quantities" of "mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." Now, this is spectacularly new.
When you add to this "new monetary policy," or whatever you call it, the $600 billion to $1 trillion stimulus planned by Obama, (alas) over 2 years, and not one, the chances are that the economy will stop dropping either by the fall of 2009, being optimistic, or hopefully by the summer of 2010. This reversal will happen sooner if a huge part of the Obama stimulus goes to aid states and cities. By a huge part, I mean at least $300 billion. The effect of this spending will be almost immediate, and I suspect will also be considered as worthy and credible–on schools, libraries, and the like–whereas all the variations of the infrastructure stimuli I read of may take a considerable period of time to get off the ground, worthy though they may be.
But Alan Blinder, a Princeton Professor of Economics, and formerly, Vice-Chairman of the Federal Reserve, and a liberal, is worried about the inflationary potential of what is being done, or proposed, not what will happen in 2009, but what will happen after a recovery picks up steam, if we can be optimistic, in, say, 2010. Blinder is right to be concerned, since the Fed, it looks like, is going to be printing money by the trillions.
In a recent comment, I wrote that at some point the Fed will reverse itself, when the inflation begins, and that the longer-run period ahead of us will contain high interest rates to contain this inflation and therefore cause the economy to be sluggish. This means the normal state of the economy will have higher rates of unemployment than what we are accustomed to, even during relatively good times.
However, there is an improbable answer to this, a "solution" to inflation used in the early 1970's, one which seemingly is forever discredited, opposed by almost all in the political spectrum, with vows made at the time that this so-called solution never be used again. I am of course referring to the system of wage and price controls thrust on us by Nixon in August, 1971 (the 15th if I remember correctly) and which went through a number of phases until 1974.
Nixon wanted to keep low for political purposes what I believe could be considered a relatively minor amount of inflation. What happened is that the Fed chief, Arthur F. Burns, Nixon’s appointee, caved in to Nixon, and kept the 1969-70 recession relatively short–see my earlier comment on Federal Reserve heads. By keeping the recession short, by lowering interest rates–at that point traditional monetary policy worked, unlike now--the inflation of the 1960's, partly caused by the Vietnam War, was only partially reduced. The politics of this is that Nixon didn’t want to go into the 1972 election with a large amount of unemployment (he didn’t know, in 1971, his opponent would be a patsy–George McGovern), but he also worried that inflation might also do him in, so he began a wage-price freeze which phased into a system of wage-price controls.
But in 2010 or 2011, if the choice is: (a) high unemployment to keep prices down, given the trillions being printed, and the trillion of stimuli, along with the expected deterioration of the dollar, leading to higher costs for everything being imported, or (b) a system of price controls, for, say, a 5 year period, to borrow a number from our former (?) arch-enemies (a system that also may require controls on wages), I have hopes the phony-baloney Nixon program of 1971-1974 should not nix this solution, in 2010-2015.
And there is, of course, a successful precedent–World War II. Wage-price controls worked then, and worked well, and were not unpopular, since their need was readily understood. With some prepping–public discussion and leadership--the need for something like this could possibly be accepted. And if accepted, succeed. If not, the alternative seems to me far more dismal–high rates of unemployment, kept high by high rates of interest, designed to keep the rate of inflation caused by the unprecedented bail-out to reasonably low levels.
Blinder is right to be concerned. As we get closer to the period he is concerned about–yet a few years away, unless the various stimuli work far better than anyone anticipates–let’s hope leaders of his caliber talk about a solution of the type I am suggesting.
Tuesday, December 16, 2008
Potpourri, But Mostly Economic Tidbits
Potpourri, But Mostly Economic Tidbits
1. Smart Witnesses: A Sad Sign of the Times
The Sunday Times, in a page one article entitled "An Evangelical Article of Faith: Bad Times Draw Bigger Crowds," had this interesting paragraph:
"The Jehovah’s Witnesses, who moved much of their door-to-door evangelizing to the night
shift 10 years ago because so few people were home during the day, returned to daylight witnessing this year. "People are out of work, and they are answering the door," said a spokesman, J.R.Brown."
To me, should the Jehovah’s Witnesses lose their faith, they could get jobs as economists, as they
know how to marginally readjust their resources as costs and benefits change.
2. B’s & M’s
A friend wrote and asked me how one (Bernard Madoff, to be specific) could create a Ponzi scheme involving as much as $50 million. Oops. He made a mistake. $50 million is actually no problem, just con a few hundred rich friends and voila! But the reality, $50 billion, does seem a bit difficult, even for your most adept Ponzi-er. How did he do it?
3. Negative interest rates soon?
Yesterday, the Fed lowered its target rate to a range between zero and 1/4 of 1%. It’s the first time I’ve ever seen a range, but that is hardly the main point. Zero–that’s the point. Now this is a target, so I’ll do some Econ 101: The Federal Reserve requires banks to keep a small fraction of their deposits as reserves at the Fed–about 10%. Now sometimes, expected deposits don’t come in (to be put in reserves) and the bank is short. At the same time, another bank decided not to make a loan, so it has an excess of reserves. The first bank (short of the required reserves) borrows from the 2nd bank, which has an excess. And what is the interest rate on this loan, which is usually over-night? Well, as parrots are trained to say: supply and demand. Or in other words, it depends on how many banks are short (and by what amounts) and how many have excessive reserves.
If the Fed wants to lower rates, it buys Treasury bills that are out there in the market and the recipients of the Fed’s check deposit it into a bank. And thus increased reserves result. By the logic of S & D, the interest rate on borrowed reserves falls (banks borrowing reserves from other banks), since there are more banks with excess reserves who are willing to loan them overnight (to other banks or at least to other banks that look healthy). The Fed typically has a target and if, say the target is 2%, and the actual loaning rates are 2 1/4 %, the Fed buys more T-bills. If the rate is 1.85 %, then the Fed sells T-bills. It tries to achieve the target by either buying or selling T-bills.
The target is now zero (or 1/4 of 1 %). In the past, this rate nudged other rates, which firms and individuals could relate to, such as the prime rate, a rate banks base all their rates on, and the prime would drop ½ % when the Fed dropped its target ½ %. And many credit cards have rates pegged to the prime.
But perhaps even more important, the Fed, feeling that its open market operations are all but useless, is now considering buying long term Treasury bonds, in the hope that reduced rates in the long term markets will bring other long term rates down and that, in turn, will induce potential borrowers to borrow. And stocks reacted positively today (Tuesday) in response)--the Dow was up 4.2%--but stocks always react to news of this sort, even if nothing of substance occurs later on (and I think, in general, the stock market over-reacts whenever positive news hits the headlines). It doesn’t at all mean prosperity is around the corner, as Hoover used to say.
To me, the Fed looks increasingly desperate. Normal monetary policy is simply not working. Zero is a record, but not one we should be in the streets cheering. It’s an indication that times are getting ever more desperate. The odds are that the economy will hit double-digit unemployment during the next year (although Monday’s Times has an article that predicts only 9%) and that recovery will be slow in coming and possibly (even probably) only partial. That is, increasingly it looks like we may be saddled with a weak economy for many, many years.
4. "In the long run we are all dead."
Most persons, by now, know this was stated by John Maynard Keynes. Actually, he wrote it in "A Tract on Monetary Reform" in 1923, long before the Great Depression, during which he authored "The General Theory of Employment, Interest and Money," the classic that made Keynes the greatest economist of the 20th century (and whose approach to hard times is as pertinent today as it was in the 1930's). He was expressing his distaste at economists who would argue, during a time of stress or economic malfunctioning, that in time everything would settle back to normality.
But I bring up the long run to write about the future and the past (what some might refer to as the long run). I have two related but different situations in mind. The first relates to what investment advisers currently suggest. I met an intelligent adviser at a family party recently and he suggested diversification is the answer and one’s portfolio should stocks, primarily, and then bonds and possibly other alternatives–like real estate, CD’s, etc. He like others knows that the present is not exactly like the past, but nonetheless will use figures from the past indicating that over a long period of time stocks have outperformed bonds. The implication, also, is that as you get closer to retirement you might reduce your holdings of stocks, which are more speculative in the short run, and increase your holdings of bonds, which, typically, are not (unless there is an upsurge of inflation, as we had in the 1970's).
But what if the future is significantly different from the past? How does one know it will not be? What, in any event, does significantly mean? So let me bring in the other situation, the overall workings of the economy. Suppose that the future is what some in the 1930's thought of as "secular stagnation?" Secular, has noting to do with religion, or its lack thereof, but means "long run." (My somewhat old Random House dictionary offers, as definition 6 of secular, "going on from age to age; continuing through long ages.")
In the 1930's, deep in the Great Depression, the phrase arose and a conservative economist from Harvard, Alvin Hansen, converted to liberal Keynesianism and gave the 1938 address, as President of the American Economic Association, on just this topic–secular stagnation (and why it existed). Now we all know that after the war, this view of things melted away as there was prosperity and not stagnation. But it’s time to reconsider.
The United States is clearly in some kind of secular decline, possibly un-reversible. Our manufacturing is down enormously from what it was, as a percentage of our GDP. Our trade balance is just awful. And we only seem to survive by bubbles that inevitably burst. What is to propel us in the future? I know there are optimists who believe our science and superior level of education will enable us to lead the way in developing an appropriate green technology, but while I think this is possible, I doubt very much it will happen. I’ll believe it when we are able to pass what is absolutely necessary if we are to successfully switch to electric cars–a whopping gasoline tax of, say, $4 a gallon, with further increases to come. No way, Jose.
If we do bounce back some from the disaster we are now in but then limp along, aided by huge levels of Federal government spending, that simply continue, and are not temporary, we will in effect be in what was known 70 years ago as secular stagnation. If this is the case, then it would seem to me stocks will not be surging ever upward, but worse--interest rates will be high and partly because of this, the economy will stagnate even more. Interest rates will be high, since we are printing money by the trillions to try to jump-start the economy, and then keep it moving upward, and at some point the dollar must weaken and inflation will appear. Who of our creditors wants to hold a currency that is being massively printed into worthlessness (or perhaps less emotionally into less and less worth). To deal with the declining dollar, and the inflation it will create–all foreign goods will cost more–interest rates have to be high.
This means that over the next generation, it is likely that bonds will outperform stocks, although there is a matter of timing to be dealt with. That is, after the dollar starts weakening, and bond rates rise, then, and only then, will one’s investment in bonds outstrip one’s investment in stocks, if I am correct. The decline of the dollar may actually have begun (or begun again). After seeking safety in the dollar, the dollar strengthened this summer against the Euro, but it has been weakening recently, against the Euro, and has weakened enormously against the Japanese yen. Is it not possible then that over the next two or three decades bonds might be a better investment than stocks? If the future is like the past, of course not. But if it isn’t?
What all this also suggests is that "full employment" is going to be higher than what it has been. At one point, earlier in the post-war period, full employment was perhaps defined as 3 %, rarely achieved, or 4%, last achieved in the late 1990's. During the mid-nineties, Greenspan refused to raise rates, when the existing theoretical apparatus suggested that full employment was about 6 % (or a tad more), meaning that levels of unemployment below this 6 % would lead to increases in the rate of inflation. But Greenspan rightfully decided this statistical measure, based on the past, was inappropriate. He didn’t raise rates to prevent inflation, because he thought there was no inflation to worry about. (We leave off the question of whether he should have raised rates to slow down the dot-com bubble or at least raised margin requirements to 100% or repeat periodically his fear of "irrational exuberance.")
But given what the Fed will have to do to stop inflation, it is possible that full employment will be higher than it was thought to be in the nineties. That is, the Fed will believe it has to keep rates at a level that will lead to 7 or 8 % unemployment or we will have increasing inflation. This means, to me, we will be living in world of secular stagnation, in spades.
Let’s modify Keynes: "In the long run, almost all of us will be deadly poor."
5. TIAA Real Estate Fund and Empty Stores
Although only persons who have holdings in TIAA-CREF, the enormous college retirement fund, have a financial interest in its real estate fund, there is, I think, an intellectual interest in what is happening. Plus there is discussion of real estate in general.
Ignore that I had over 90% of my retirement funds in the TIAA Real Estate Fund, violating the conventionally held view, by maybe 99.5% of economists and financial advisers, and ignore that I did very well and even partially convinced a very smart economist that because of its lack of volatility, my arguments for holding this fund might, in the last analysis, be sound. [For about the first three months of the year, the fund was up about 1%; then, for the next three months it declined so that it was only up by about one half of one percent–that’s when I got out. Now it is down 9 ½ % for the year, far less than the CREF stock funds, but obviously not doing well.
The TIAA Real Estate Fund is unique. You give them money and when they have enough, they invest it by buying commercial buildings, or shopping malls or storage facilities, etc., without a mortgage. (I’m oversimplifying: they keep some funds as a cash reserve and a small percentage in gated communities and a few buildings had mortgages.) Unlike REITs (real estate investment trusts), which you buy into by buying stocks that others sell, the Real Estate Fund was not sold in a market.
I once looked over its day-to-day listings since it was formed in the late nineties. Usually, it had gains of .06 in a fund worth, say 200, so that your holdings increased to 200.06. On very, very big days, it increased by .75. Or perhaps it lost .5. This happened maybe two or three times a year.
Well things have changed! On Friday, in one day, it dropped 5.0, from 287.91 to 282.91, almost 2%. It could be compared to the Dow dropping 23% in one day, in 1987. Though I find this amazing, I was asked by someone I got to put more money into the Real Estate Fund a few years ago and then told him to get out, when I did, "since the real estate fund was the last to go down, will the Real Estate Fund be the first to revive or the last?"
Here was my answer: "I think the real estate fund (of TIAA) is a lagging indicator. That is, it started down after the economy started down because it was only over time that its leases fell due and its customers, those in reasonably good health, could either ask for lower rents or move to smaller and cheaper quarters. By the same token, I think it will go up after the economy starts going up, if it ever does."
An acquaintance of mine has a very pessimistic of things and believes we are not far from seeing stores being boarded up and tent cities. I’m not sure. But another friend tells me that there are a lot of stores on Broadway near 96th Street that are empty. On my own corner, there is a site that used to be a restaurant, and one that was usually close to being full, that closed about two years ago and remains un-rented. What I think happened is that the landlord asked for a huge increase in rent that the restaurant couldn’t pay (maybe double the rent) and then after fixing up the place some, put the site up for rent. And it simply hasn’t rented. Whether the landlord is going to get more realistic I have no way of knowing.
I think this slump is going to take an enormous toll on owners of business property just as it has on people who own residential property.
We’ll know, for sure, we’re in a real depression when there are increasing numbers of homeless sleeping in doorways and others are selling in the streets the 21st century equivalent of apples (or maybe apples are what will still be sold).
1. Smart Witnesses: A Sad Sign of the Times
The Sunday Times, in a page one article entitled "An Evangelical Article of Faith: Bad Times Draw Bigger Crowds," had this interesting paragraph:
"The Jehovah’s Witnesses, who moved much of their door-to-door evangelizing to the night
shift 10 years ago because so few people were home during the day, returned to daylight witnessing this year. "People are out of work, and they are answering the door," said a spokesman, J.R.Brown."
To me, should the Jehovah’s Witnesses lose their faith, they could get jobs as economists, as they
know how to marginally readjust their resources as costs and benefits change.
2. B’s & M’s
A friend wrote and asked me how one (Bernard Madoff, to be specific) could create a Ponzi scheme involving as much as $50 million. Oops. He made a mistake. $50 million is actually no problem, just con a few hundred rich friends and voila! But the reality, $50 billion, does seem a bit difficult, even for your most adept Ponzi-er. How did he do it?
3. Negative interest rates soon?
Yesterday, the Fed lowered its target rate to a range between zero and 1/4 of 1%. It’s the first time I’ve ever seen a range, but that is hardly the main point. Zero–that’s the point. Now this is a target, so I’ll do some Econ 101: The Federal Reserve requires banks to keep a small fraction of their deposits as reserves at the Fed–about 10%. Now sometimes, expected deposits don’t come in (to be put in reserves) and the bank is short. At the same time, another bank decided not to make a loan, so it has an excess of reserves. The first bank (short of the required reserves) borrows from the 2nd bank, which has an excess. And what is the interest rate on this loan, which is usually over-night? Well, as parrots are trained to say: supply and demand. Or in other words, it depends on how many banks are short (and by what amounts) and how many have excessive reserves.
If the Fed wants to lower rates, it buys Treasury bills that are out there in the market and the recipients of the Fed’s check deposit it into a bank. And thus increased reserves result. By the logic of S & D, the interest rate on borrowed reserves falls (banks borrowing reserves from other banks), since there are more banks with excess reserves who are willing to loan them overnight (to other banks or at least to other banks that look healthy). The Fed typically has a target and if, say the target is 2%, and the actual loaning rates are 2 1/4 %, the Fed buys more T-bills. If the rate is 1.85 %, then the Fed sells T-bills. It tries to achieve the target by either buying or selling T-bills.
The target is now zero (or 1/4 of 1 %). In the past, this rate nudged other rates, which firms and individuals could relate to, such as the prime rate, a rate banks base all their rates on, and the prime would drop ½ % when the Fed dropped its target ½ %. And many credit cards have rates pegged to the prime.
But perhaps even more important, the Fed, feeling that its open market operations are all but useless, is now considering buying long term Treasury bonds, in the hope that reduced rates in the long term markets will bring other long term rates down and that, in turn, will induce potential borrowers to borrow. And stocks reacted positively today (Tuesday) in response)--the Dow was up 4.2%--but stocks always react to news of this sort, even if nothing of substance occurs later on (and I think, in general, the stock market over-reacts whenever positive news hits the headlines). It doesn’t at all mean prosperity is around the corner, as Hoover used to say.
To me, the Fed looks increasingly desperate. Normal monetary policy is simply not working. Zero is a record, but not one we should be in the streets cheering. It’s an indication that times are getting ever more desperate. The odds are that the economy will hit double-digit unemployment during the next year (although Monday’s Times has an article that predicts only 9%) and that recovery will be slow in coming and possibly (even probably) only partial. That is, increasingly it looks like we may be saddled with a weak economy for many, many years.
4. "In the long run we are all dead."
Most persons, by now, know this was stated by John Maynard Keynes. Actually, he wrote it in "A Tract on Monetary Reform" in 1923, long before the Great Depression, during which he authored "The General Theory of Employment, Interest and Money," the classic that made Keynes the greatest economist of the 20th century (and whose approach to hard times is as pertinent today as it was in the 1930's). He was expressing his distaste at economists who would argue, during a time of stress or economic malfunctioning, that in time everything would settle back to normality.
But I bring up the long run to write about the future and the past (what some might refer to as the long run). I have two related but different situations in mind. The first relates to what investment advisers currently suggest. I met an intelligent adviser at a family party recently and he suggested diversification is the answer and one’s portfolio should stocks, primarily, and then bonds and possibly other alternatives–like real estate, CD’s, etc. He like others knows that the present is not exactly like the past, but nonetheless will use figures from the past indicating that over a long period of time stocks have outperformed bonds. The implication, also, is that as you get closer to retirement you might reduce your holdings of stocks, which are more speculative in the short run, and increase your holdings of bonds, which, typically, are not (unless there is an upsurge of inflation, as we had in the 1970's).
But what if the future is significantly different from the past? How does one know it will not be? What, in any event, does significantly mean? So let me bring in the other situation, the overall workings of the economy. Suppose that the future is what some in the 1930's thought of as "secular stagnation?" Secular, has noting to do with religion, or its lack thereof, but means "long run." (My somewhat old Random House dictionary offers, as definition 6 of secular, "going on from age to age; continuing through long ages.")
In the 1930's, deep in the Great Depression, the phrase arose and a conservative economist from Harvard, Alvin Hansen, converted to liberal Keynesianism and gave the 1938 address, as President of the American Economic Association, on just this topic–secular stagnation (and why it existed). Now we all know that after the war, this view of things melted away as there was prosperity and not stagnation. But it’s time to reconsider.
The United States is clearly in some kind of secular decline, possibly un-reversible. Our manufacturing is down enormously from what it was, as a percentage of our GDP. Our trade balance is just awful. And we only seem to survive by bubbles that inevitably burst. What is to propel us in the future? I know there are optimists who believe our science and superior level of education will enable us to lead the way in developing an appropriate green technology, but while I think this is possible, I doubt very much it will happen. I’ll believe it when we are able to pass what is absolutely necessary if we are to successfully switch to electric cars–a whopping gasoline tax of, say, $4 a gallon, with further increases to come. No way, Jose.
If we do bounce back some from the disaster we are now in but then limp along, aided by huge levels of Federal government spending, that simply continue, and are not temporary, we will in effect be in what was known 70 years ago as secular stagnation. If this is the case, then it would seem to me stocks will not be surging ever upward, but worse--interest rates will be high and partly because of this, the economy will stagnate even more. Interest rates will be high, since we are printing money by the trillions to try to jump-start the economy, and then keep it moving upward, and at some point the dollar must weaken and inflation will appear. Who of our creditors wants to hold a currency that is being massively printed into worthlessness (or perhaps less emotionally into less and less worth). To deal with the declining dollar, and the inflation it will create–all foreign goods will cost more–interest rates have to be high.
This means that over the next generation, it is likely that bonds will outperform stocks, although there is a matter of timing to be dealt with. That is, after the dollar starts weakening, and bond rates rise, then, and only then, will one’s investment in bonds outstrip one’s investment in stocks, if I am correct. The decline of the dollar may actually have begun (or begun again). After seeking safety in the dollar, the dollar strengthened this summer against the Euro, but it has been weakening recently, against the Euro, and has weakened enormously against the Japanese yen. Is it not possible then that over the next two or three decades bonds might be a better investment than stocks? If the future is like the past, of course not. But if it isn’t?
What all this also suggests is that "full employment" is going to be higher than what it has been. At one point, earlier in the post-war period, full employment was perhaps defined as 3 %, rarely achieved, or 4%, last achieved in the late 1990's. During the mid-nineties, Greenspan refused to raise rates, when the existing theoretical apparatus suggested that full employment was about 6 % (or a tad more), meaning that levels of unemployment below this 6 % would lead to increases in the rate of inflation. But Greenspan rightfully decided this statistical measure, based on the past, was inappropriate. He didn’t raise rates to prevent inflation, because he thought there was no inflation to worry about. (We leave off the question of whether he should have raised rates to slow down the dot-com bubble or at least raised margin requirements to 100% or repeat periodically his fear of "irrational exuberance.")
But given what the Fed will have to do to stop inflation, it is possible that full employment will be higher than it was thought to be in the nineties. That is, the Fed will believe it has to keep rates at a level that will lead to 7 or 8 % unemployment or we will have increasing inflation. This means, to me, we will be living in world of secular stagnation, in spades.
Let’s modify Keynes: "In the long run, almost all of us will be deadly poor."
5. TIAA Real Estate Fund and Empty Stores
Although only persons who have holdings in TIAA-CREF, the enormous college retirement fund, have a financial interest in its real estate fund, there is, I think, an intellectual interest in what is happening. Plus there is discussion of real estate in general.
Ignore that I had over 90% of my retirement funds in the TIAA Real Estate Fund, violating the conventionally held view, by maybe 99.5% of economists and financial advisers, and ignore that I did very well and even partially convinced a very smart economist that because of its lack of volatility, my arguments for holding this fund might, in the last analysis, be sound. [For about the first three months of the year, the fund was up about 1%; then, for the next three months it declined so that it was only up by about one half of one percent–that’s when I got out. Now it is down 9 ½ % for the year, far less than the CREF stock funds, but obviously not doing well.
The TIAA Real Estate Fund is unique. You give them money and when they have enough, they invest it by buying commercial buildings, or shopping malls or storage facilities, etc., without a mortgage. (I’m oversimplifying: they keep some funds as a cash reserve and a small percentage in gated communities and a few buildings had mortgages.) Unlike REITs (real estate investment trusts), which you buy into by buying stocks that others sell, the Real Estate Fund was not sold in a market.
I once looked over its day-to-day listings since it was formed in the late nineties. Usually, it had gains of .06 in a fund worth, say 200, so that your holdings increased to 200.06. On very, very big days, it increased by .75. Or perhaps it lost .5. This happened maybe two or three times a year.
Well things have changed! On Friday, in one day, it dropped 5.0, from 287.91 to 282.91, almost 2%. It could be compared to the Dow dropping 23% in one day, in 1987. Though I find this amazing, I was asked by someone I got to put more money into the Real Estate Fund a few years ago and then told him to get out, when I did, "since the real estate fund was the last to go down, will the Real Estate Fund be the first to revive or the last?"
Here was my answer: "I think the real estate fund (of TIAA) is a lagging indicator. That is, it started down after the economy started down because it was only over time that its leases fell due and its customers, those in reasonably good health, could either ask for lower rents or move to smaller and cheaper quarters. By the same token, I think it will go up after the economy starts going up, if it ever does."
An acquaintance of mine has a very pessimistic of things and believes we are not far from seeing stores being boarded up and tent cities. I’m not sure. But another friend tells me that there are a lot of stores on Broadway near 96th Street that are empty. On my own corner, there is a site that used to be a restaurant, and one that was usually close to being full, that closed about two years ago and remains un-rented. What I think happened is that the landlord asked for a huge increase in rent that the restaurant couldn’t pay (maybe double the rent) and then after fixing up the place some, put the site up for rent. And it simply hasn’t rented. Whether the landlord is going to get more realistic I have no way of knowing.
I think this slump is going to take an enormous toll on owners of business property just as it has on people who own residential property.
We’ll know, for sure, we’re in a real depression when there are increasing numbers of homeless sleeping in doorways and others are selling in the streets the 21st century equivalent of apples (or maybe apples are what will still be sold).
Tuesday, December 9, 2008
1929 and Now
1929 and Now
Paul Krugman (blog entry, from Sweden, squeezed in before he receives the award)
December 4, 2008, 9:07 am Worries about next year
I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month. IT WAS MUCH MORE
2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are "shovel-ready" are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
**************
ME
I think, in general, more informed people are becoming more "deformed," not to mention scared to death, over the economy. One reason, though I haven’t seen it argued anywhere, may be as follows:
The current situation is much worse than what existed in 1930. Yes, the stock market had bubbled in the late 1920's, and had burst, and yes, there were enormous imbalances in the economy that needed to be addressed. But there were no derivatives to speak of, no credit default swaps, no slicing and dicing. Compared to the situation we are now in, solving the Great Depression was a snap.
However, what was lacking was the will. And by the time there was "will" (or at least a much greater amount of it), the deterioration of the economy was so great it was hard to bring back our prosperity, except by the massive expenditures devoted to World War II. Than you, Tojo.
Today, there is much more "will," (assuming the Republicans, or most of them, don’t become extreme obstructionists, making the recovery impossibly difficult), but the problems are incredibly harder.
In other words, we could have had a recovery starting in 1930 or, surely, by 1931, and a strong if not booming economy by 1932. Instead, we had a disaster by 1932. Today, it is an open question as to whether we can avoid a disaster since we are only in 1930, so to speak, and we simply don’t know (1) whether the financial chaos can be cleaned up enough so that we can begin to resume normal economic growth and (2) how effective the stimulus can be in the short run. Note Krugman’s citing the Goldman Sachs report, indicating that only a few tens of billions of projects are "shovel-ready." And much of what is really interesting about Obama’s list of projects–in essence his efforts in trying to green America–surely are not shovel-ready.
Therefore, while it seems not likely to me that we will have as bad an economic mess as we had in the thirties, it also seems to me that we will be struggling with our unique economic problem for a number of years to come.
Also, the setting is different. Once the United States got its act together (and it took World War II to make this happen), it was then clear sailing. No one could match our productivity and not only because our competitors–Japan and Western Europe–were knocked out by the war, and we were not, but because, in general, we had a huge technological lead. In 2008, that lead has vanished or is vanishing. One need only look at the trade picture. We have had, by any measure, record-setting trade deficits and will end 2008 with a trade deficit near $700 billion.
Now, it’s possible the trade situation may be significantly improved. I think Krugman leans to this view and may indeed be implicitly arguing this in his Nobel acceptance speech which I believe took place earlier yesterday. But I doubt that the picture is going to improve much unless we utilize our science and technology knowledge and come up with new exportable products. There is some hope: according to the Times, (Sunday), Obama seeks to have his stimulus package expand programs "to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions." But, unfortunately, time is of the essence, as people used to say.
But even if Obama gets what he wants, and what he wants is what we need, the road ahead is steep and it will be difficult to climb. Or put another way, even without the existing financial nightmare–say it never existed–we were increasingly losing our competitive advantages and certainly losing much of our manufacturing. And while the loss to Japan, starting in 1980 (or thereabouts), had its limits since Japan is ultimately not that large, the actual losses of our manufacturing to China have been stupendous, and the potential future losses are almost without limits, given China’s size and the fact that it has hundreds of millions willing to work at a fraction of what America’s average worker is paid.
The ultimate result is likely to be one that few in America can emotionally accept: an average living standard that does not grow and, worse, one that will probably decline. This could possibly be acceptable if we were a people that thought differently about the meaning of life, persons who could prefer a little more leisure to more goods. But we are not.
I think if living standards remain stagnant, and to some extent that has been the situation for most families for a few decades, the upper 5% (or maybe 20%) being exceptions, the political consequences are terrifying. As I have elsewhere mentioned, the Father Coughlins and Huey Longs flourished in the 30's and why wouldn’t deep economic despair make us ripe for future Coughlins or Longs.
Replies to this conjecture which emphasize our Democratic traditions are not convincing to me because our history, even our recent history, is not reassuring. Democracy has eroded under Bush–executive power has increased at the expense of the legislature; there was the firing of Democratic prosecutors; Abu Ghraib was sanctioned; the Iraq war was started, one we had no moral right to start, utilizing outright lies–the Saddam Hussein-Osama bin Laden connection, as well as all but claiming we had incontrovertible evidence that weapons of mass destruction existed in Iraq, when they did not.
But there is a longer history--and I'm just going back to WWII--of immoral behavior, such as overthrowing the Guatemalan government in 1954 and the Iranian government in 1953 and aiding the overthrow of Allende, in Chile, in 1973. Or covering up the mass slaughter of unarmed civilians at My Lai, in 1968. And decades earlier, we rounded up the Japanese and put them in camps. (Or read, with judiciousness, The Shock Doctrine, by Naomi Klein.)
While Sarah Palin’s unpopularity helped defeat John McCain, she still had something like 35% approval, when, with her credentials, not to speak of her creationist ideology, she deserved no support whatever. To me, this means that in a relatively calm atmosphere, 35% of our adult population are fanatics How far will authoritarian and dictatorial attitudes go when the economy fails to meet the expectations of vast numbers and the failure feels like it is never-ending? I suspect pretty far. And I write this believing we have come a long way, in racial attitudes (obviously, Mr. President-elect) and sexual attitudes, including both a modern and equal role for women (not completely, of course) and a greater acceptance of homosexuality, the California vote notwithstanding.
But under deep and lasting economic stress, why shouldn’t we be fearful of political desperados taking over? After all, Schicklgruber achieved power in a reasonably civilized society. So I’m "deformed" not only over the economy but over the political implications of a deformed economy.
Paul Krugman (blog entry, from Sweden, squeezed in before he receives the award)
December 4, 2008, 9:07 am Worries about next year
I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month. IT WAS MUCH MORE
2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are "shovel-ready" are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
**************
ME
I think, in general, more informed people are becoming more "deformed," not to mention scared to death, over the economy. One reason, though I haven’t seen it argued anywhere, may be as follows:
The current situation is much worse than what existed in 1930. Yes, the stock market had bubbled in the late 1920's, and had burst, and yes, there were enormous imbalances in the economy that needed to be addressed. But there were no derivatives to speak of, no credit default swaps, no slicing and dicing. Compared to the situation we are now in, solving the Great Depression was a snap.
However, what was lacking was the will. And by the time there was "will" (or at least a much greater amount of it), the deterioration of the economy was so great it was hard to bring back our prosperity, except by the massive expenditures devoted to World War II. Than you, Tojo.
Today, there is much more "will," (assuming the Republicans, or most of them, don’t become extreme obstructionists, making the recovery impossibly difficult), but the problems are incredibly harder.
In other words, we could have had a recovery starting in 1930 or, surely, by 1931, and a strong if not booming economy by 1932. Instead, we had a disaster by 1932. Today, it is an open question as to whether we can avoid a disaster since we are only in 1930, so to speak, and we simply don’t know (1) whether the financial chaos can be cleaned up enough so that we can begin to resume normal economic growth and (2) how effective the stimulus can be in the short run. Note Krugman’s citing the Goldman Sachs report, indicating that only a few tens of billions of projects are "shovel-ready." And much of what is really interesting about Obama’s list of projects–in essence his efforts in trying to green America–surely are not shovel-ready.
Therefore, while it seems not likely to me that we will have as bad an economic mess as we had in the thirties, it also seems to me that we will be struggling with our unique economic problem for a number of years to come.
Also, the setting is different. Once the United States got its act together (and it took World War II to make this happen), it was then clear sailing. No one could match our productivity and not only because our competitors–Japan and Western Europe–were knocked out by the war, and we were not, but because, in general, we had a huge technological lead. In 2008, that lead has vanished or is vanishing. One need only look at the trade picture. We have had, by any measure, record-setting trade deficits and will end 2008 with a trade deficit near $700 billion.
Now, it’s possible the trade situation may be significantly improved. I think Krugman leans to this view and may indeed be implicitly arguing this in his Nobel acceptance speech which I believe took place earlier yesterday. But I doubt that the picture is going to improve much unless we utilize our science and technology knowledge and come up with new exportable products. There is some hope: according to the Times, (Sunday), Obama seeks to have his stimulus package expand programs "to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions." But, unfortunately, time is of the essence, as people used to say.
But even if Obama gets what he wants, and what he wants is what we need, the road ahead is steep and it will be difficult to climb. Or put another way, even without the existing financial nightmare–say it never existed–we were increasingly losing our competitive advantages and certainly losing much of our manufacturing. And while the loss to Japan, starting in 1980 (or thereabouts), had its limits since Japan is ultimately not that large, the actual losses of our manufacturing to China have been stupendous, and the potential future losses are almost without limits, given China’s size and the fact that it has hundreds of millions willing to work at a fraction of what America’s average worker is paid.
The ultimate result is likely to be one that few in America can emotionally accept: an average living standard that does not grow and, worse, one that will probably decline. This could possibly be acceptable if we were a people that thought differently about the meaning of life, persons who could prefer a little more leisure to more goods. But we are not.
I think if living standards remain stagnant, and to some extent that has been the situation for most families for a few decades, the upper 5% (or maybe 20%) being exceptions, the political consequences are terrifying. As I have elsewhere mentioned, the Father Coughlins and Huey Longs flourished in the 30's and why wouldn’t deep economic despair make us ripe for future Coughlins or Longs.
Replies to this conjecture which emphasize our Democratic traditions are not convincing to me because our history, even our recent history, is not reassuring. Democracy has eroded under Bush–executive power has increased at the expense of the legislature; there was the firing of Democratic prosecutors; Abu Ghraib was sanctioned; the Iraq war was started, one we had no moral right to start, utilizing outright lies–the Saddam Hussein-Osama bin Laden connection, as well as all but claiming we had incontrovertible evidence that weapons of mass destruction existed in Iraq, when they did not.
But there is a longer history--and I'm just going back to WWII--of immoral behavior, such as overthrowing the Guatemalan government in 1954 and the Iranian government in 1953 and aiding the overthrow of Allende, in Chile, in 1973. Or covering up the mass slaughter of unarmed civilians at My Lai, in 1968. And decades earlier, we rounded up the Japanese and put them in camps. (Or read, with judiciousness, The Shock Doctrine, by Naomi Klein.)
While Sarah Palin’s unpopularity helped defeat John McCain, she still had something like 35% approval, when, with her credentials, not to speak of her creationist ideology, she deserved no support whatever. To me, this means that in a relatively calm atmosphere, 35% of our adult population are fanatics How far will authoritarian and dictatorial attitudes go when the economy fails to meet the expectations of vast numbers and the failure feels like it is never-ending? I suspect pretty far. And I write this believing we have come a long way, in racial attitudes (obviously, Mr. President-elect) and sexual attitudes, including both a modern and equal role for women (not completely, of course) and a greater acceptance of homosexuality, the California vote notwithstanding.
But under deep and lasting economic stress, why shouldn’t we be fearful of political desperados taking over? After all, Schicklgruber achieved power in a reasonably civilized society. So I’m "deformed" not only over the economy but over the political implications of a deformed economy.
Monday, December 8, 2008
"Oh, if it were only 6.7%"
"Oh, if it were only 6.7%"
On Friday, the government announced that the unemployment rate rose from 6.5% to 6.7%. Also, employers cut 533,000 jobs. Have you noticed something strange?
Well, it’s not strange. It’s just that the unemployment rate, correctly calculated though it is, is not a very good measure of the job situation. What should be added are those too discouraged to look for jobs any longer. [And add to these, those who recently became ex-workers, who because of short term trauma, cannot yet start looking for jobs, knowing how hard it is to find one, and also knowing that what they are skilled in is no longer needed. This implies working at a low-paid unskilled job, if you can find it, at perhaps half the pay you were recently earning. ]
Add in also, on a calculated basis, those working part time who want to work full time, but can’t find full time jobs. By calculated, I mean that if there are 4 persons working 10 hours a week who want to work a 40 hour week, 3 persons should be thought of as unemployed. Without doing the 4 equals 3 calculation, the total number of part time workers who wanted to work full time rose by an additional 621,00. Another angle: the total number of people out of the labor force (not working, not looking) dropped by 637,000.
Actually, there is a 3rd addition that could be made, but isn’t–those working "full time," but for whom the length of the work week (and their salaries) have been reduced, as the employer says don’t come in this Friday. All recessionary periods are periods in which the "average" work week is decreasing. Who works overtime any more, pulling up the average, except bill collectors?
Anyway, the first two of these additions–the so-called discouraged workers (it should be called the DNW, discouraged non-workers) and the part time workers who want to work full time–are, indeed, calculated. For November, this calculation hit a record 12.5 percent (the government began calculating this in 1994) and it states in Saturday’s Times where I am taking this from–almost all economists know this calculation is made, though most, I think, do not follow this statistic religiously–that it rose 1.5% since September.
Thus, the Times on B1 (Saturday) has a story entitled "Grim Report On Jobs Not Showing Full Picture." The story goes on to say it is much worse than what it looks like.
Will Santa bring us more such presents? Or will his successor deliver the increasingly bad news in January? [More on the economy, hopefully, to follow shortly. Nothing like being retired! Unless your pension goes bust!!]
On Friday, the government announced that the unemployment rate rose from 6.5% to 6.7%. Also, employers cut 533,000 jobs. Have you noticed something strange?
Well, it’s not strange. It’s just that the unemployment rate, correctly calculated though it is, is not a very good measure of the job situation. What should be added are those too discouraged to look for jobs any longer. [And add to these, those who recently became ex-workers, who because of short term trauma, cannot yet start looking for jobs, knowing how hard it is to find one, and also knowing that what they are skilled in is no longer needed. This implies working at a low-paid unskilled job, if you can find it, at perhaps half the pay you were recently earning. ]
Add in also, on a calculated basis, those working part time who want to work full time, but can’t find full time jobs. By calculated, I mean that if there are 4 persons working 10 hours a week who want to work a 40 hour week, 3 persons should be thought of as unemployed. Without doing the 4 equals 3 calculation, the total number of part time workers who wanted to work full time rose by an additional 621,00. Another angle: the total number of people out of the labor force (not working, not looking) dropped by 637,000.
Actually, there is a 3rd addition that could be made, but isn’t–those working "full time," but for whom the length of the work week (and their salaries) have been reduced, as the employer says don’t come in this Friday. All recessionary periods are periods in which the "average" work week is decreasing. Who works overtime any more, pulling up the average, except bill collectors?
Anyway, the first two of these additions–the so-called discouraged workers (it should be called the DNW, discouraged non-workers) and the part time workers who want to work full time–are, indeed, calculated. For November, this calculation hit a record 12.5 percent (the government began calculating this in 1994) and it states in Saturday’s Times where I am taking this from–almost all economists know this calculation is made, though most, I think, do not follow this statistic religiously–that it rose 1.5% since September.
Thus, the Times on B1 (Saturday) has a story entitled "Grim Report On Jobs Not Showing Full Picture." The story goes on to say it is much worse than what it looks like.
Will Santa bring us more such presents? Or will his successor deliver the increasingly bad news in January? [More on the economy, hopefully, to follow shortly. Nothing like being retired! Unless your pension goes bust!!]
Fiscally Conservative: Clarification
Fiscally Conservative: Clarification
After I posted "Fiscally Conservative," I realized that the ending was, in a few respects,
simplistic.
There are people, who say they are fiscally conservative, or (with less sophistication) don’t use such hifalutin language, but think this. Among some, generally racists, they believe that the Federal government is simply giving welfare to blacks, who could work, but don’t. Since welfare is all but eradicated, this kind of thinking may have diminished, but long held views do not disappear "over night."
Then there are those who falsely generalize from a specific instance of what they think (perhaps properly, perhaps not) is wasteful and unneeded governmental spending. Seek and ye shall find. They sought and they found.
But perhaps these kinds of examples can be summarized under the category of those who feel that government is simply bad, or that big government is bad, so usually it is often expressed as a denigration of big government and a call for small government. This way of looking at government is perhaps culturally unique to the United States. (An extreme version of this view is libertarianism, which itself comes in different flavors, from the absolute form–no government, not even police, courts, or public streets [a view held by Ludwig von Mises and my former colleague, now deceased, Murray Rothbard]–to modified forms that generally allow big military expenditures and whatever else meets the fancy of the specific libertarian. Look at Ron Paul closely and you’ll understand. Or perhaps read carefully Ayn Rand, a writer for teen-agers and those who never rise intellectually above their teens.
But the same people who think government is bad are lined up with all the others for aid after the dikes burst or the tornado or hurricane hits. They accepted government-subsidized flood insurance at places of risk, such as Fire Island (truly an example of inappropriate fiscal policy, and one I participated in, when I had a house there, since, well, it was available). Others feel huge agricultural supports are justifiable. Still others heartily approve of Pell Grants and want even more aid given to students going or intending to go to college, especially since its expense is rising so.
I still think I was correct to say wealthier persons mouth the words–fiscally conservative–but do so because they think they, themselves, will be financially better off (and in general have not thought seriously about the pluses and minuses of government spending and taxes or maybe they have and simply don't care). But there are many others who think this way, because this is the kind of culture we live in (and all sorts of smart people from Milton Friedman on down influence them or, I would say, manipulate them).
I still very much enjoy reading the reincarnated Ben Stein, who in his earlier life was a "fiscal conservative" [until a few weeks or months ago], who is now calling for as massive a stimulus program as the President-elect says he favors. I take joy where I find it. Thank you, Ben Stein.
After I posted "Fiscally Conservative," I realized that the ending was, in a few respects,
simplistic.
There are people, who say they are fiscally conservative, or (with less sophistication) don’t use such hifalutin language, but think this. Among some, generally racists, they believe that the Federal government is simply giving welfare to blacks, who could work, but don’t. Since welfare is all but eradicated, this kind of thinking may have diminished, but long held views do not disappear "over night."
Then there are those who falsely generalize from a specific instance of what they think (perhaps properly, perhaps not) is wasteful and unneeded governmental spending. Seek and ye shall find. They sought and they found.
But perhaps these kinds of examples can be summarized under the category of those who feel that government is simply bad, or that big government is bad, so usually it is often expressed as a denigration of big government and a call for small government. This way of looking at government is perhaps culturally unique to the United States. (An extreme version of this view is libertarianism, which itself comes in different flavors, from the absolute form–no government, not even police, courts, or public streets [a view held by Ludwig von Mises and my former colleague, now deceased, Murray Rothbard]–to modified forms that generally allow big military expenditures and whatever else meets the fancy of the specific libertarian. Look at Ron Paul closely and you’ll understand. Or perhaps read carefully Ayn Rand, a writer for teen-agers and those who never rise intellectually above their teens.
But the same people who think government is bad are lined up with all the others for aid after the dikes burst or the tornado or hurricane hits. They accepted government-subsidized flood insurance at places of risk, such as Fire Island (truly an example of inappropriate fiscal policy, and one I participated in, when I had a house there, since, well, it was available). Others feel huge agricultural supports are justifiable. Still others heartily approve of Pell Grants and want even more aid given to students going or intending to go to college, especially since its expense is rising so.
I still think I was correct to say wealthier persons mouth the words–fiscally conservative–but do so because they think they, themselves, will be financially better off (and in general have not thought seriously about the pluses and minuses of government spending and taxes or maybe they have and simply don't care). But there are many others who think this way, because this is the kind of culture we live in (and all sorts of smart people from Milton Friedman on down influence them or, I would say, manipulate them).
I still very much enjoy reading the reincarnated Ben Stein, who in his earlier life was a "fiscal conservative" [until a few weeks or months ago], who is now calling for as massive a stimulus program as the President-elect says he favors. I take joy where I find it. Thank you, Ben Stein.
Sunday, December 7, 2008
"Fiscally Conservative"
"Fiscally Conservative"
At an annual family get-together, in Baltimore, a "conservative" 2nd cousin, one who typically votes Republican (including voting for Bush in 2004, but to his credit, for Gore in 2000), said to me "I’m fiscally conservative," and then added something like "on social issues I’m a moderate" or perhaps he even said "a liberal."
I don’t know what social issues he’s moderate on--perhaps a woman’s right to choose, perhaps the environment, perhaps Social Security and medicaid (for the poor) or medicare (for older people). Perhaps others.
But it is the first part of his statement I want to address–being "fiscally moderate." This can, of course, mean a number of things, but I think the most obvious is that you don’t like a government that runs deficits. If this is what people mean when they say this, then they should be voting Democratic. After World War II, there were only two major increases in the National Debt. There was the Reagan surge, causes by the skewed tax cut (justified by the increase in GDP, and therefore in government revenues, that would result in a balanced budget by 2004). This argument was absurd on the face of it. The economy would have had to increase at a pace it absolutely could not realize, over the next three years, to achieve the balanced budget the (thoroughly and near-universally rejected) theory of supply side economics predicted. The deficits of course kept rising through the Reagan years and Bush 1's term as well.
The second surge–obviously I like this word of manipulation, at least concerning Iraq–occurred under Bush 2 and primarily happened because of his even more skewed tax cut. (By skewed, I am referring to the disproportionate share of the cut given to the upper 5% or upper 1%.) Both of these unprecedented increases in the national debt sandwiched the Clinton years, where at first the deficits were reduced, and for the last three years or so, a huge surplus was achieved. The reduced deficits were initially caused by Clinton’s tax increase, designed to appease Robert Rubin who said businesses will only invest if the deficit is reduced. The taxes, with two very minor exceptions, were levied on the well-to-do. (Republicans in both houses of Congress voted unanimously against the increase and Republican leaders wrongly predicted a disastrous recession.) After a slow start, the economy soon boomed--and the endless and huge Federal deficit turned into an unprecedented surplus--partly perhaps for the Rubin reason or maybe, independent of his argument, because the dot-com boom "happened" and brought full employment (and therefore greater government tax receipts) as well as short term capital gains from the bubble (which were taxed normally).
Perhaps being fiscally conservative means you don’t overspend, say, on armaments. In this case, both parties have much to answer for–Kennedy in 1961 and Reagan in 1981. Or perhaps it means, more simply, the federal government simply doesn’t spend very much on anything. But, but, and one more, but. Eisenhower, who courageously reduced military spending by about 30% after the Korean War ended, nonetheless felt that America, if it was to be economically viable, had to have an Interstate Highway System. So he offers one, but then to cover his conservative ass, says it was needed for NATIONAL DEFENSE, the all-purpose excuse.
And today, even conservatives, or many of them, starting with Ben Stein, who writes regularly for the Times (someone who is usually hard to take) and Harvard economists, Martin Feldstein and Gregory Mankiw, (the former was chairman of Reagan’s Council of Economic Advisers while the latter held the same position for W) are in favor of a huge fiscal stimulus, the deficit be damned.
Add to the various arguments the fact that both the stock market has done better under Democrats and average family income, adjusted for inflation, has done better under Democrats, why would conservatives go on and on and on about being fiscally conservative?
Here is my answer. They are not really interested in this issue at all. It’s a cover up. What they are interested in is that government shouldn’t hurt them economically with taxes or hurt them with regulations that are in the public interest, such as on the environment or the health of workers. But you can’t argue this so easily (and sound humane). So they use the nice-sounding "I am a fiscal conservative" for selfish personal reasons, which have nothing to do with appropriate fiscal policies. (2nd cousin, if you or your wife reads this, please don’t take it personally. You did vote for Gore and that shows you’re an exception, of sorts.)
At an annual family get-together, in Baltimore, a "conservative" 2nd cousin, one who typically votes Republican (including voting for Bush in 2004, but to his credit, for Gore in 2000), said to me "I’m fiscally conservative," and then added something like "on social issues I’m a moderate" or perhaps he even said "a liberal."
I don’t know what social issues he’s moderate on--perhaps a woman’s right to choose, perhaps the environment, perhaps Social Security and medicaid (for the poor) or medicare (for older people). Perhaps others.
But it is the first part of his statement I want to address–being "fiscally moderate." This can, of course, mean a number of things, but I think the most obvious is that you don’t like a government that runs deficits. If this is what people mean when they say this, then they should be voting Democratic. After World War II, there were only two major increases in the National Debt. There was the Reagan surge, causes by the skewed tax cut (justified by the increase in GDP, and therefore in government revenues, that would result in a balanced budget by 2004). This argument was absurd on the face of it. The economy would have had to increase at a pace it absolutely could not realize, over the next three years, to achieve the balanced budget the (thoroughly and near-universally rejected) theory of supply side economics predicted. The deficits of course kept rising through the Reagan years and Bush 1's term as well.
The second surge–obviously I like this word of manipulation, at least concerning Iraq–occurred under Bush 2 and primarily happened because of his even more skewed tax cut. (By skewed, I am referring to the disproportionate share of the cut given to the upper 5% or upper 1%.) Both of these unprecedented increases in the national debt sandwiched the Clinton years, where at first the deficits were reduced, and for the last three years or so, a huge surplus was achieved. The reduced deficits were initially caused by Clinton’s tax increase, designed to appease Robert Rubin who said businesses will only invest if the deficit is reduced. The taxes, with two very minor exceptions, were levied on the well-to-do. (Republicans in both houses of Congress voted unanimously against the increase and Republican leaders wrongly predicted a disastrous recession.) After a slow start, the economy soon boomed--and the endless and huge Federal deficit turned into an unprecedented surplus--partly perhaps for the Rubin reason or maybe, independent of his argument, because the dot-com boom "happened" and brought full employment (and therefore greater government tax receipts) as well as short term capital gains from the bubble (which were taxed normally).
Perhaps being fiscally conservative means you don’t overspend, say, on armaments. In this case, both parties have much to answer for–Kennedy in 1961 and Reagan in 1981. Or perhaps it means, more simply, the federal government simply doesn’t spend very much on anything. But, but, and one more, but. Eisenhower, who courageously reduced military spending by about 30% after the Korean War ended, nonetheless felt that America, if it was to be economically viable, had to have an Interstate Highway System. So he offers one, but then to cover his conservative ass, says it was needed for NATIONAL DEFENSE, the all-purpose excuse.
And today, even conservatives, or many of them, starting with Ben Stein, who writes regularly for the Times (someone who is usually hard to take) and Harvard economists, Martin Feldstein and Gregory Mankiw, (the former was chairman of Reagan’s Council of Economic Advisers while the latter held the same position for W) are in favor of a huge fiscal stimulus, the deficit be damned.
Add to the various arguments the fact that both the stock market has done better under Democrats and average family income, adjusted for inflation, has done better under Democrats, why would conservatives go on and on and on about being fiscally conservative?
Here is my answer. They are not really interested in this issue at all. It’s a cover up. What they are interested in is that government shouldn’t hurt them economically with taxes or hurt them with regulations that are in the public interest, such as on the environment or the health of workers. But you can’t argue this so easily (and sound humane). So they use the nice-sounding "I am a fiscal conservative" for selfish personal reasons, which have nothing to do with appropriate fiscal policies. (2nd cousin, if you or your wife reads this, please don’t take it personally. You did vote for Gore and that shows you’re an exception, of sorts.)
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