The Obama Watch
Stimulus Malpractice and the Trillion Dollar Deficit
The President-elect’s Keynesian extravaganza won’t get the economy booming again.
In the 1980s, Reaganomics produced $200 billion deficits “as far as the eye can see,” the saying went. Actually, those deficits continued until the country elected Republican Congressional majorities in 1994. Within a few years, the continued $200 billion deficits under Clinton were turned around by Gingrich and those majorities into $200 billion surpluses, using sharp spending restraint and pro-growth tax cuts.
But the Left, as represented by the so-called Mainstream Media (what now should be called the party-controlled press), pounded away day after day for years about the supposed horrors of those Reagan deficits and the certain calamities they would produce. As a result, the party-controlled press missed entirely the economics story of the century, the world-changing Reagan boom, resulting from the most successful economics experiment in history.
Roaring inflation that increased prices by 25% during 1979 and 1980 was reduced by Reaganomics to 6.2% by 1982 and to 3.2% by 1983. The rise in unemployment starting in the 1970s peaked at over 10% in 1982, before Reaganomics reduced it to 5.3% by 1989. The Reagan defense buildup, which contributed to the deficits, led to the collapse of the Soviet Union, with Margaret Thatcher so rightly commenting, “Reagan won the Cold War without firing a shot.”
But none of this seemed to matter to the party-controlled press. All that mattered to it were the $200 billion deficits.
Now President-elect Barack Obama is reportedly preparing a budget with a deficit of $1 trillion. While the weak economy is reducing federal revenues, the enormous, unprecedented size of that deficit is primarily due to the Obama/Democrat stimulus package of $500 billion or even $800 billion, according to some reports. Expect to hear from the party-controlled press how that trillion dollar deficit is now all good and wonderful.
The Emperor Has No Clothes
The stimulus package is based on wave after wave of increased
government spending for bailouts, infrastructure, and all sorts
of government aid. Even the tax cuts that may be included are tax
credits, which are effectively the same as government grants as
far as the economic incentives produced, particularly when most
of the credits would go to people who pay little or nothing in
federal income taxes.
This “stimulus” package is not going to produce economic recovery. Economic prosperity is not based on government spending. It is produced by incentives for economically productive activity, such as saving, investment, entrepreneurship, starting or expanding businesses, job creation, and work, along with other pro-growth policies (the rule of law, property rights, freedom of contract, sound money, free trade). Those incentives are strengthened by tax rate cuts, reduced regulatory costs, and other measures that increase the reward, and hence the incentive, for productive activity.
Taking hundreds of billions out of the economy through government borrowing and then spending it does nothing to improve the economy on net. It does nothing to improve incentives for economically productive activity. That is why Obama’s trillion dollar deficit is not going to get America booming again. If the government spending is financed by taxes rather than borrowing, the effect is worse, because the taxes worsen incentives.
Obama’s massive government spending stimulus strategy takes us backward all the way to the 1930s, when President Roosevelt tried it. It failed, as shown by Amity Shlaes in her brilliant recent book about the history of the Great Depression, The Forgotten Man. As Shlaes wrote in the Wall Street Journal just last week, by 1938, six years into the New Deal, unemployment was still 20%. She adds, “Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level.”
The new rage today is government spending to hire workers to build and restore infrastructure, such as roads, bridges, highways, airports. As if workers just wouldn’t be able to find a job anywhere unless the government hired them to build something. When Roosevelt tried that in the 1930s, unemployment was over 14% for 10 years, and had reached 25% or more. Millions of workers really couldn’t find a job anywhere else. Unemployment today is 6.5%, and it has been over 6% for all of three months.
More recently, Japan adopted an aggressive infrastructure building program to counter its deep economic slump in the 1990s. It had the same experience as America under Roosevelt in the 1930s, the sad economy continued for more than 10 years.
Government spending for infrastructure can do some good on net. Improved transportation networks can add to economic growth, for example. But borrowing hundreds of billions out of the private sector to finance runaway infrastructure spending is not a viable strategy for promoting robust general economic growth. Some new jobs might be created, but at the expense of other jobs that would have been created elsewhere if the capital had been left in the private sector.
Worst Treasury Secretary in
History
America had its own recent experience with a government spending
stimulus package, apparently now all but forgotten. Roughly a
year ago, the Bush Administration cut a deal with Congressional
Democrats for a supposed stimulus package of over $100 billion
primarily based on cash grants for all taxpayers. These cash
grants involved no reductions in tax rates, and no improved
incentives. I wrote at the time that this was an abrupt departure
from supply-side economics, and was not going to work. On one of
those White House cheerleading conference calls held regularly to
promote the Bush agenda among conservative activists, I asked
some brain dead senior White House economist what they were going
to do after this failed. He said, “The economists I respect don’t
think this will fail.”
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (38) | Leave a comment
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Bob| 12.3.08 @ 8:25AM
You political hacks make me laugh. How many macro-economics courses did you take at Harvard Law? They offer none to my knowledge.
Political hacks like you put far more importance on policy than it deserves. I know you must support "Reaganomics" because you worked in that administration and thus are not a disinterested party. Supply side economics is situational in nature and unless you understand the macro-economic factors, you can't say it is the cure all for all economic problems.
The growth in the economy in the late 80's and 90's was due more to the technology bubble than it was to Reaganomics. Capital flows to those structures that provide the greatest returns. In the 90's, it would have been difficult not to get budget surpluses even if you followed Keynes.
Supply side economics has resulted in the decline (in relative terms) of the middle class the the growth in disparity between the rich and middle. The concept of "trickle-down" has become relatively ineffective today as productivity increases and offshore manufacturing limits job creation in the U.S. During the Bush administration, capital gains and tax rates were relatively low and capital flowed not to manufacturing that created jobs, but to financial constructs like mortgage backed securities. Perhaps, if cap gains were actually higher, the housing bubble would not have been as large and the recession we are facing would not be so severe.
Thus, the notion that you can take a policy that existed 30 years ago and apply it today without recognizing the fundamental changes in the economy is idiotic.
I would suggest to you that you drop the ideological dogma that you are selling because you want to hype your resume, and start looking at pragmatic solutions that are neither supply side or Keynesian in nature. There are some supply side concepts that will work, especially in industries that must create jobs locally. And there are some Keynesian concepts that will work especially in selected areas like infrastructure. Rather than blindly utilize either theory, we need to set up test cases, do a thorough analysis of the results, and move towards things that work notwithstanding the ideology behind it. With the dramatic capabilities of data analysis and simulation afforded to us with technology, we can, for the first time in history, actually use an experimentalist approach to economics.
Alan Brooks| 12.3.08 @ 8:31AM
Gingrich worked wonders in 1995-6, very quickly. The deficit shrank some $50 billion, average, a year. Yet I've become very suspicious of figures-- figures lie and liars figure.
But who said anything about a boom? That takes several years.
Todd Showalter| 12.3.08 @ 8:45AM
You are a loser Bob, do you have nothing better to do with your time than to make your ridiculous comments which have no basis in reality. You think you are really intelligent but all you have to say are liberal cliches that do not square to reality. Take your comments to the Daily Kos where you belong.
Indiana_Alex| 12.3.08 @ 8:55AM
Bob,
The application of classical economic principles has led to increases in living standards where every it has been tried. Except when the benefits of increased productivity are squandered by government spending. Facts are hard. Nonsense is nonsense.
Bob| 12.3.08 @ 8:59AM
Todd, I'm glad you had something to add to the conversation. Drinking the KoolAid will not lead to either learning or success. Your type of anti-intellectual comment is just what is expected of so-con lemmings.
By the way, those on the left are also opposed to pragmatic approaches and would be just as angry at the comment. In point of fact, if you actually understood my comments, you'd see that they are quite conservative. We must get away from "conservative cliches" and move towards pragmatic solutions away from any labels. Pragmatism used to be a hallmark of Republicans, but the so-cons have driven that away.
Todd Showalter| 12.3.08 @ 9:24AM
What exactly do you do Bob? You seem to have a great deal of time on your hands as you seem to feel the need to comment on about every article on this site. From your many, many comments, I know that you are a Obama Kool-Aid drinker. I know about your so-called "Third Way" pragmatic approach and bold government experiments, the left has been using that language since FDR and it is nothing new. I perfectly understand your comments and there is nothing remotely conservative about them. What exactly is your economic expertise Bob that you seem to think you possess that exceeds that of the author of this excellent article?
Alan Brooks| 12.3.08 @ 9:43AM
Bob,
not all of us so-cons are angry rightwingers.
You know how so many cons are nostalgic about the economy of the '80s? well I miss 1995-7 when IT-driven prosperity and tax cuts were slowly but surely rising all boats. I want a time machine to take me back to then.
Hush this cry of progress 'til a thousand years have past!
Bob| 12.3.08 @ 9:43AM
"What exactly do you do Bob?"
Besides having an advanced degree, studying economics in both school and business, and spending over 30 years in the real world developing new businesses and consumer studies, I guess I have nothing to offer. I'm retired now so I have the time between taking care of my investments, a bit of writing, and doing some leisure activity. So yes, I have far more real world experience and training than the author of this ideological, biased article. I think you need to look up the true definition of "conservative". Hint: it does not mean "ideological".
As you know, the left has never been pragmatic -- always denouncing supply side even though there are proper applications for that theory. There is a difference between using the term for political purposes and actually using it for its real meaning.
And by the way, the ideology propounded by the author of this article is mis-used bunk. The "results" he states are much more a matter of timing than policy. I could just as well say that low taxes and low cap gains doesn't work as evidenced by the current recession and high deficits and the left would clap loudly. I could also make the case that Clinton was just as responsible for the budget surpluses as was the Congress. Both sides are wrong. Markets are stronger than the policies of administrations or Congresses. Bush was not as bad as people say and Clinton was not as good. Reagan's impact on the economy was more cyclical than ideological as most economists know.
I am hoping that Obama's group is more pragmatic than ideological. Summers is a pretty pragmatic guy and Volker is no-nonsense. Neither of them are highly political -- and I like that. You want economists that will disagree with people.
Bob| 12.3.08 @ 9:47AM
Alan, I'm here to create waves. Please stop being rational -- it ruins my whole anger-against-anger approach....
Alan Brooks| 12.3.08 @ 9:49AM
...of course a time machine means progress, doesn't it :)
The reason why I switched from lib to so-con is no matter how much an economy grows people need their appetites reined in. Remember that economic progress can't mend broken families.
Alan Brooks| 12.3.08 @ 9:53AM
Bob,
you're right. And a reasonable man never did anything.
BTW I submitted the last post just 2 minutes after yours-- didn't anticipate you'd mind the rationalism.
Michael Roush| 12.3.08 @ 9:58AM
Deregulation, limited (if any) government oversight, tax cuts and liquidity. This has been the Republican economic agenda and look where we are boys and girls. Want to know the dream of conservative ideologues? Pick up a history book and read about laissez-faire economics as manifest in America around the turn of the century. Massive wealth resided in the hands of a few, there was practically no middle class and the poor worked ten to twelve hours a day six or seven days a week for survival wages. No government regulation, no income tax, no labor unions and a Supreme Court that maintained sanctity of contracts which, in turn, maintained the status quo.
The only positive thing about our current situation is that the wheels came off of the economy while the people responsible are still in office. The laziness and incompetence of our president are on full display for the world to see. Paulson, Wall Street and the auto industry have all become Keynesians (or socialist if you fancy yourself to be a conservative) and most of us are hoping Obama's economic team can get us out of this mess.
Daphne Kenward| 12.3.08 @ 10:19AM
Stimulus Package and Malpractice and trillions of Dollars deficite. Most people seem to think that will bailout the economy, no, no ,no. It's designed to create a nation in constant debt, with high inflation, low growth, and poverty, people chasing fewer and fewer dollars, high cost of living. And to survive men and women will have no choice but to join the Army or the Airforce because there will be nothing else to do. Die fighting losing your lives in far flung places around the world, over what ever the Government invent as a terror zone, true or false. America will trun into the new Africa controled by the IMF and the world Bank, and the rest of the Governmental policies comes directly from Europe, which ever puppet that is called President will do as he is told to do.
Alan Brooks| 12.3.08 @ 10:42AM
Yes, Daph!
The ghost of Jack Ruby will be sent from the serial number 666 computer in the Rural Antichrist Trust (RAT) located in a haystack on a farm outside Brussels Belgium-- to force every Palestinian boy to eat nothing but matzoh balls and gefilte fish until he becomes sick and susceptible to Hebraic indoctrination.
Todd Showalter| 12.3.08 @ 11:02AM
Bob,
Let me apologize for my first post, for some reason I was annoyed to see your comment this morning. I prefer to argue based on facts and not personal attacks. I don't doubt you have been successful in your life but I think the argument you made in your first post has several fallacies. Lets look at this statement for example "The growth in the economy in the late 80's and 90's was due more to the technology bubble than it was to Reaganomics." Obviously, people on the left do not want to give Reagan's policies any credit for turning around the dismal situation in this country after the disastrous Presidencies of Nixon and Carter with their attempts to micromanage our nations economy. Nixon might have been a Republican but was nowhere near being a Conservative with his price fixing policies that were a disaster. You seem to believe it was all a big coincidence that the market improved dramatically under Reagan all due to a technology bubble and that his dramatic tax cuts had nothing to do with it. Can you explain to me how it was exactly that technology changed so rapidly from the late 70's to the 80's? Maybe it had something to do with the fact that there was much more capital available for investing in new technologies thanks to Reagan's tax cuts and allowing the market to run without micromanagement from incompetent bureaucrats. What technology bubble are you referring to? The Internet bubble that burst in 2000? I believe the Economy as a whole benefited greatly from much improved technology, the bubble of Internet stocks of the late 90's does not reflect the economy as a whole so your argument holds little water.
I am also not sure where you stand regarding the main point of the article that massive new government spending and "stimulus" will fail to bring economic growth and will just leave us with far larger deficits that will leave a huge burden on the next generation. Your contention that higher cap gains taxes could have prevented the housing bubble is laughable without a shred of evidence to support it, funny considering how much you preach we need to look at everything analytically. The Fed's policy of easy money starting in 2003 along with Fannie Mae greatly increasing the market for subprime loans by buying up every possible loan with no regard for risk is what has caused the bubble and not lower cap gains taxes. I think the evidence is quite clear about this.
I believe FDR already tried the "experimental approach" to economics but I guess you think now with computers and spreadsheets, Obama and his cohorts will get it right this time. This will never work because as Reagan stated famously and accurately, Government is the problem and not the solution. All these bailouts and sitmulus programs just take us further in the hole and will suffocate the markets ability to respond rationally to the problems we face. Maybe you agree with that genius Thomas Friedman ( I am sure you are a big fan of his) and we should be like China for a day so the liberals can force a "green revolution" down our throats.
Vern Crisler | 12.3.08 @ 11:21AM
The latest rumor is that Al-Qaeda is going to call a temporary halt to its bombings so that it can go to Washington and ask for a federal bailout.
Tom Wasney| 12.3.08 @ 11:54AM
I LAUGH in anyone`s face when they dare say corporate tax rates are "relatively" low when in fact the USA has some of the highest corporate tax rates in the western world.
I ALSO LAUGH in anyone`s face when they claim Obama "trickle up" economics and that creating make-work programs does anything. Any rarional economist DOES NOT count said jobs as reducing unemployment.
I ALSO LAUGH at anyone who says Clinton ran surpluses. The Total National Debt went UP every year under Clinton.
Michael Roush| 12.3.08 @ 12:18PM
Tom.
There were budget surpluses under Clinton. The National Debt increased at a much lower rate. Under the spend and charge Republicans, both have gone off the charts. Now that we need fiscal stimulus, it would have been nice if the current administration hadn't rack up enormous debts while the times were good and we could have responsibly afforded to pay taxes for the governments goods and services that Democrats and Republicans alike demanded.
Bob| 12.3.08 @ 12:47PM
Todd, thanks for your rational response....
I agree with Reagan that government needs to stay out of the way. That was exactly my point that markets had more impact on the economy than government policy. The economy ebbs and flows. Kennedy/Johnson faced a similar situation in the 60's and made some fairly large tax cuts. It would be hard for me to believe that anyone trained in economics would not have reduced taxes significantly in that situation.
And yes, I do believe coincidence plays an important role in assigning both kudos and blame to administrations. The market is a very powerful source and I've yet to see an econometric analysis that assigns a higher coefficient to policy than to market forces. My opinions come from mathematical analysis, not from "feelings" or "beliefs".
Actually, the technology gains we saw in the late 80's and 90's had a tremendous effect on the economy. You won't see that in technology stocks, per se, but in the productivity gains we started to see in the 90's. The technology bubble -- it was more than just internet stocks -- did collapse the market and caused capital to be taken out of the market -- it was significant.
Regarding the housing market, while the Fed under Greenspan certainly had a role, it was the behavior of the housing market that was the underlying cause of the problem, and not just sub-prime loans. In fact, few of the loans made by Fannie and Freddie were sub-prime. Housing prices were only seen to go up, and not down. Therefore, you could create mortgage backed securities with little risk of failure. The models that created the pricing and capital requirements then provided the highest leverage available. Leverage is always related to calculated risk. And of course, capital moves towards leveraged opportunities. The companies providing most of the sub-prime loans were specialty companies like Household and Beneficial who started collateralizing their mortgages in the late 80's and early 90's. Countrywide entered the fray a bit later.
Regarding the main part of the article, massive spending, per se, will not solve the problem. However, targeted spending will help. The issue is what kind of return will we get for that spending over what period of time. For example, we know from studies that unemployment benefits will be fully spent and hit the economy sooner than any other stimulus. Infrastructure spending is longer term, and if chosen properly, will pay benefits if they enable newer and faster movement of goods, energy, or services. The key here is carefully choosing the proper stimulus. Therefore, an experimentalist approach is necessary to whittle down (the funnel approach) the best use of funds. I am totally against a non-targeted, willy nilly, approach.
The "green" revolution is interesting. There was a study done in Europe that said the best use of funds for this type of spending was limited funds used for research, i.e., finding cheaper solutions for solar, wind, geo-thermal, etc. There are certain technologies that should be reduced like ethanol subsidies. I tend to agree with this study that we shouldn't through money at current, non-economical solutions, but spend more on research (at a fraction of the cost) to become a leader. This is somewhat like the approach we used for space. We then look at cost curves and inflection points and determine timing and implementation. That said, it is fairly clear we need to improve our electrical energy transmission grid no matter which technology we pursue. Wind, solar, nuclear, etc., all produce electricity and at least, an efficient grid backbone makes some sense. I'm all for nuclear and, believe it or not, wind is financially competitive. We need next generation solar before we start implementing that in a big way -- perhaps some of the thin-film stuff we're seeing right now.
I was especially close to the mortgage industry having worked for a sub-prime company in the 90's and a "large insurance company" that did financial guarantees at the turn of this century.
We are not as far apart as you think. I am just more pragmatic and less ideological in my approach.
Roger McKinney| 12.3.08 @ 1:00PM
Bob: “…start looking at pragmatic solutions that are neither supply side or Keynesian in nature. There are some supply side concepts that will work, especially in industries that must create jobs locally. And there are some Keynesian concepts that will work especially in selected areas like infrastructure.”
Bob, there seems to be a popular delusion that schools of economics are ideologies without basis in fact and that a separate “pragmatic” approach exists. The truth is that economic schools are attempts at understanding reality. There are different schools because economic reality is so complex and different schools emphasize different facts and ignore others.
Using a cafeteria approach, a serving of Keynes and a cup of supply side, will get you nothing but a pail of garbage. So what does Austrian economics say? The government should do nothing. Anything the state does will only make matters worse. Keynesian stimuli are worse than bleeding a patient with cold. Supply side tax cuts help only when there is a budget surplus, otherwise you borrow from Peter to pay Paul and accomplish nothing.
Free markets are stable. Instability comes from state intervention. Like our bodies, free markets are naturally healthy. If we get sick, we try to find the source of the illness and remove it. The body will heal itself. If the market appears to stumble, then we should look for the state intervention that caused the market to stumble and remove it. In the current crisis, cataloguing ill-conceived state intervention would require an encyclopedia.
Bob: “Rather than blindly utilize either theory, we need to set up test cases, do a thorough analysis of the results, and move towards things that work notwithstanding the ideology behind it. With the dramatic capabilities of data analysis and simulation afforded to us with technology, we can, for the first time in history, actually use an experimentalist approach to economics.”
Economics is not physics; the coefficients of equations in economics don’t stand still as they do in physics. They change with time, different models and circumstances. And the data is far more complex with far more variables than physicists have to deal with. Historical data is so vast that it can be used to support any idea, no matter how stupid.
What makes you think economists haven’t been using computers to analyze data and perform simulations? They’ve been doing that for over 40 years. As a result, mainstream macro economics is more of a mess today than ever before. And they have tried experimental approaches for decades. The problem is that to be practical the experiments have to be so stylized and limited that the results can’t be scaled up to the macro level. They’re not bad for micro problem, though.
So how do you do economics? You come up with sound theory first and use it to interpret data. That’s how I was taught to do statistics. Starting with the data and trying to derive theory from it is called “data mining”, which leads to some of the most ridiculous theories ever invented. After you have sound theory, you derive policy from that theory. The only school of economics that does that is called Austrian economics. Before Keynes it was called simply economics.
Tom Wasney| 12.3.08 @ 1:18PM
Michael Roush,
A simple perusal of the U.S.Treasury`s own web site will clearly show you that in no year did did the national debt go down, nor did Clinton leave President Bush with a budget surplus that Bush subsequently turned into a deficit.
The only year where Clinton came close was in FY2000 with a deficit of $17.9 billion.
Bob| 12.3.08 @ 1:35PM
Roger, actually I don't disagree with much that you have said. However, markets are never really "free", and therein lies the rub. There is governmental intervention in almost all markets. We do that to prevent crime, to stop consumers from being disadvantaged, to make capital flow, and to stratify governmental priorities. I would like a bit more regulation in some sectors, but, as you, would like a lot less in others.
The problem with using a "theory first" approach, is that it is not efficient as a method. Theories actually develop through the interaction with data points. Statistics is not a good analogy since it is so rule and method oriented that theories are actually limited in nature. Economic theory is, indeed complex. What I prefer to do, with the computing ability available today, is to apply both current theories, and some new theories, to the issue involved and look at the models that develop from ALL of them. You really did not have the computing horsepower to do that even 5 years ago except on the largest supercomputers because each requires multiple simulations and sensitivity analyses.
You were taught an older method because it was far easier for the masses to understand. Macro-economics is a mess not because of experimentalist approaches, but because politicians and journalists have taken an ideological, rather than a data oriented approach. That's what I like so much about Summers work, it is neither supply side or demand side, but attempts to put multiple frameworks on the market. In this world of 30-second sound bytes, we oversimplify too much. This tends to happen more on the Republican side of the ledger given the trend towards anti-intellectuallism.
Again, the "theory first" approach is dangerous because it is ideological in nature and restricts "out of the box" solutions. In all markets, you have both demand and supply factors that can be affected. This balance changes with markets and conditions. Again, we can do pragmatic solutions if we get rid of the temptation of sticking to one specific ideology.
By the way, if you deduced a ridiculous theory through "data mining", the progenitor of that model didn't know what he/she was doing. Idiots have a strong tendency to produce idiotic results.
Anita Rohrborne| 12.3.08 @ 1:58PM
RE: Paulson failures
Always remember what appears to be failure
is actually success. Think about it. Look what
Paulson's failures have led to: more government
control and ownership of private industry.
The Fabians should be screeching with joy!
Todd Showalter| 12.3.08 @ 2:05PM
Bob,
If you agree with Reagan that government needs to stay out of the way, how can you possibly support the increasingly big government programs and stimulus that Obama's administration promises to bring?
I think what is happening with the automakers right now will be very instructive on how his administration views markets. I think we both know that GM's current business model is a complete failure and should not be subsidized in any way until there are major concessions made in the current unworkable union contracts that are destroying the Company. A non-ideological approach will realize this but I think you know the Democrat party is beholden to union interest and will attempt to bailout the UAW while leaving GM in its uncompetitive situation relying on government money to survive. Barney Frank doesn't care about this and Obama's allegiance to unions is well known whether it is pragmatic or ideological. This is related to the "green" revolution in that liberals will demand as part of the bailout that GM will have to build more electric and hybrid cars whatever the economics of the situation are. Take a look at the Chevy Volt which is suppose to cost $40,000 and will have a range of something like 40 miles on a charge, can something like that possibly make money? No, clearly it is a politically motivated vehicle and not based on economics. My point is liberals love nothing better than to have big business at their mercy so they can tell them how they should run their business Soviet style and nothing good can ever come of that.
For the most part I agree with you in your paragraph about the "green" revolution though I
am skeptical about wind power being financially competitive due to its unreliability, particularly in the summer. Nuclear power is by far the best source of non-carbon energy if we had common sense approach that limited the ability of the environmarxist to use the legal system to stop needed nuclear power plants from being built. Ethanol is a fiasco that needs to be eliminated immediately and causes more harm to the environment than good not to mention the waste of money and increased food costs.
There is plenty of blame to go around for the housing market and I certainly do not let Wall Street off the hook. I was working for an Investment Company in Jakarta last year and heard a number of presentations from Merrill Lynch and how great these CDO's were and how little risk they had due to their ingenious financial engineering. We all know now how mistaken they were and how flawed their models turned out. The root of the problem though was Fannie Mae as their actions in buying up all these mortgages allowed opportunities for these extremely flawed products to be sold at high profits until the bottom fell out. My question is why Franklin Raines is allowed to keep his money and be a free man when the damage he had done is far greater than anything Kenneth Lay had done. Maybe it has something to do with his numerous connections high up in Washington and the culpability of his partners-in-crime Barney Frank and Chris Dodd. But we all know they had good intentions with their social engineering so the disastrous results should not be held against them because they are just trying to help poor people own houses they cannot afford. This is the fruits of liberalism and it is very bitter indeed.
Bob| 12.3.08 @ 3:16PM
Todd, both liberals AND conservatives were to blame for the mortgage mess. No one gets a pass on that one from me.
Regarding big government programs, I am a pragmatist. The two biggest programs are medicare and social security. Do you really want to get rid of both of them? Not all big programs are bad and not all small programs are good.
Franklin Raines was a small (but well paid) player in the mortgage fiasco. He has received more blame than he deserves. The Wall Street guys (mostly conservatives), through their creation of derivatives forcing them through the rating agencies are the big culprits here along with Greenspan. Raines can't hold a candle to these people. Greenspan already admitted he was wrong.
todd showalter| 12.3.08 @ 4:11PM
Bob, do you know how great the unfunded liabilities we face under medicare and social security are? somewhere over $50 TRILLION I believe and will literally bankrupt the country in the coming decades if there is not serious reform. You might not care since you are retired and your benefits are secure but for a young worker like me, I am very concerned. Yes, I would get rid of them if it was possible and save the money for myself rather than trust the government to do that for me thank you very much. The New Deal was a failure whatever the revisionist attempt to make us believe. My opinion is a large majority of government programs are wasteful and infringe on our freedoms along with our money. I am sure Obama is going through the budget line by line and find those pesky programs that just don't work, that's a laugh You disagree but that is why you are a liberal and I am a conservative.
I don't buy Franklin Raines being a small player since it was under his reign the situation got way out of control and there was outright manipulation of earnings that would make accountants at the former Enron blush. He should be in jail if you hold him to the same standard Kenneth Lay and Andrew Fastow were. Manipulating revenues earnings is criminal and Greenspan, while being sadly mistaken, did nothing criminal. At least Greenspan has the decency to say he was wrong while Raines makes no excuses and has his $100 million for 6 years of criminal activity and putting our financial market at risk. Yes, he has plenty of company but his is the most blatant and criminal of all of them. The reason there are no show trials for this debacle with Waxman taking the lead is because the most guilty people are Democrats like aforementioned Barney Frank and Chris Dodd who lead the way to oppose any reform to Fannie Mae while we headed towards disaster. Care to look at a list of politicians who received large campaign funds from Fannie Mae? I believe Chris Dodd and Obama were pretty high on the list if memory serves me well.
Your assertion that Wall Street guys are mostly conservative doesn't pass muster, just compare campaign contributions in the past election. Goldman Sachs in particular was heavily weighted to Democrats. Paulson may have been appointed by Bush but he is sure no conservative and I think he has been a disgrace and either has been misleading us all along or doesn't know what the hell he is doing. I say a bit of both. Obama's new Treasurer will be no different as he has been working hand in glove with Paulson, meet the new boss same as the old boss. Of course as a liberal you will take that stance that evil conservative Wall Street is to blame for their greed and not compassionate government programs and agencies.
todd showalter| 12.3.08 @ 4:29PM
Here is some info about Mr. Franklin Raines off Wikipedia so you can see what exactly I am talking about. The fact he was allowed to keep more than 95% of his ill gotten gains is a sad state of affairs but not surprising considering his connections with those in power.
In 2006, the OFHEO announced a suit against Raines in order to recover some or all of the $90 million in payments made to Raines based on the overstated earnings [6] initially estimated to be $9 billion but have been announced as 6.3 billion.[7].
Civil charges were filed against Raines and two other former executives by the OFHEO in which the OFHEO sought $110 million in penalties and $115 million in returned bonuses from the three accused.[8] On April 18, 2008, the government announced a settlement with Raines together with J. Timothy Howard, Fannie's former chief financial officer, and Leanne G. Spencer, Fannie's former controller. The three executives agreed to pay fines totaling about $3 million, which will be paid by Fannie's insurance policies. Raines also agreed to donate the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options. The stock options however have no value. Raines also gave up an estimated $5.3 million of "other benefits" said to be related to his pension and forgone bonuses.[9]
An editorial in The Wall Street Journal called it a "paltry settlement" which allowed Raines and the other two executives to "keep the bulk of their riches." [10] In 2003 alone, Raines's compensation was over $20 million.[11]
A statement issued by Raines said of the consent order, "is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me by OFHEO."[12]
In a settlement with OFHEO and the Securities and Exchange Commission, Fannie paid a record $400 million civil fine. Fannie, which is the largest American financier and guarantor of home mortgages, also agreed to make changes in its corporate culture and accounting procedures and ways of managing risk. [13]
Bob| 12.3.08 @ 5:06PM
Todd, you are not a conservative, you are a libertarian. You need to change parties.
Regarding medicare and social security, the age qualifications need to be raised as well as means tested. When it was initially designed, people didn't live as long as they do now. In addition, getting rid of these programs will flood hospital emergency rooms raising the cost of medical care. That will increase YOUR medical costs. One way or another, you will pay.
I didn't say Raines was guiltless, only that in the big scheme of things, he was a bit player. He didn't cause the problem, he did take advantage of it.
Most of the guys on Wall Street are die hard conservatives. I know, I used to work there. However, they are also business pragmatists and will give money to the candidate they expect to win notwithstanding the party.
Paulson is a glorified day trader and salesman -- that's what you do at an investment house, you make deals. He is not an economist nor is he a financial strategist. He was a poor choice for the position. Obama's new Treasury Sec is an economist and understands money flows. There is a huge difference between the two -- they are not even close. However, policy will be set by Summers and Volker, not Geithner.
Todd Showalter| 12.3.08 @ 5:59PM
I have some libertarian views but I don't subscribe to the isolationist policies favored by the libertarian party, it is not realistic or wise to ignore foreign policy issues that must be dealt with. I believe that primary purpose of government is to protect our borders and interests in the world along with the rule of law, not provide a nanny state government like found throughout Europe. I am a Reagan conservative and believe Bush's so-called compassionate conservatism has been an abject failure.
I am a realist so I don't expect to see social security or medicare to ever be eliminated but reform needs to be instituted very soon and increasing the age requirements is one way. Medicare may be the least of our problems if national healthcare is ever passed, I don't see how that will improve anything. To say Canada or Britain should be a model for us is a sick joke pardon the pun.
It might be true that Geithner is a more traditional Treasurer though I see him as just another bureaucrat who seems to buy into the Keynesian theory of spreading money around and increasing the power of the Fed to troubling levels. Hopefully Volker can be an influence to stop the easy money policies like he did under the Reagan administration but I really do not see it happening in the current environment. Summers is a decent choice but I think events will be beyond his control with the monster that has been created with these bailouts and with inept leaders like Reid and Pelosi. Deficit spending is only a problem when Republican's are President according the the mainstream media, lets have a New New Deal and happy days will be here again!
BIll| 12.3.08 @ 8:27PM
Bob:
You lost your creditability the minute you began your campaign of distain directed toward the author of the article. You are nothing but a biased political hack that will convince no one other than your liberal friends. Next time if you want to truly persuade people to your position, try a more factual non-insulting method.; otherwise, don’t waste our time with your empty distain filled context. I thought that liberals/progressives prided themselves on tolerance of other ideas. Obviously, that is only when the idea is a direct parallel to a liberal’s view of the issue - another example of a liberal hypocrite.
Obama| 12.3.08 @ 8:33PM
Todd Showalter, Bob:
How about taking your conversations offline. If you have all the answers, then run for office.
todd showalter| 12.3.08 @ 10:14PM
Obama,
Why do you care? I don't agree with Bob on alot of things but he isn't a complete moron like you are as he actually makes some reasonable points while you just talk pure liberal nonsense. Its not like we are taking away anyone's ability to make their comments and I really do not care to give my email to people I really do not know.
Adam| 12.4.08 @ 4:43AM
Count me in as one PhD economist for the corporate tax cut. It would do so much more than bailing out the bad actors, worthless 'green' subsidies, and make-work public jobs. Heavy Federal borrowing squeezes out real investors by artificially raising interest rates and dollar exchange rates.
Entrepreneurs and capitalists will muddle through despite the confusion and uncertainty caused by bad Federal policy--but it will be quite a muddle.
Best,
Adam
Roger McKinney| 12.4.08 @ 9:45AM
Bob: “There is governmental intervention in almost all markets. We do that to prevent crime, to stop consumers from being disadvantaged, to make capital flow, and to stratify governmental priorities.”
Free markets have always depended upon the rule of law for their functioning. But laws to protect property from theft and fraud are far different from laws that micromanage businesses. It shouldn’t be too difficult to tell the difference. The rule of law aids business and development. Regulations that go beyond the law cause instability, moral hazards, and crises such as we are in now.
Bob: “Theories actually develop through the interaction with data points.
Statistics is not a good analogy since it is so rule and method oriented that theories are actually limited in nature.”
I strongly disagree. Every quack theory has data to support it. It’s very easy to find the data to support any theory you want to come up with. Even Marx insisted that he derived his theory from the data. As for statistics, the rules and methods are there to insure that people don’t cheat and the handle the data properly. Are you suggesting there should be no standards for data manipulation?
Bob: “What I prefer to do, with the computing ability available today, is to apply both current theories, and some new theories, to the issue involved and look at the models that develop from ALL of them.”
And you think no one else has thought of that? Take global climate models. They’re a good proxy because economies are about as complex. Do you trust any of them? They’re all over the place in their predictions. And their forecasts are so bad they won’t submit them for proper validation. But climate models have a major advantage over economic models: they model physical forces that don’t change their minds. Economics models human behavior which changes in different ways to the same stimuli. The quants at hedge funds have the best math modelers and computers available, but those models are partially responsible for the mess we’re in. Why? Because they based their models on poor theory.
Bob: “Macro-economics is a mess not because of experimentalist approaches, but because politicians and journalists have taken an ideological, rather than a data oriented approach.”
I wasn’t referring to popular macro, but to macro as taught in universities. If you don’t believe me about the mess that is macro, check out some of Dr. Arnold Kling’s posts over at Library of Economics and Liberty.
Bob: “Again, the "theory first" approach is dangerous because it is ideological in nature and restricts "out of the box" solutions.”
I would challenge you to read the first chapters on economic method in Mises’s “Human Action.” Even physics and engineering don’t work without some theory first. Let me give an example of the importance of theory. Economics says that people purchase more of an item at a lower price and less at a higher price, all other factors held constant. That’s why the demand curve slopes downward. But try to find data to prove it. It’s difficult, because all other factors are never constant. As a result, you have highly correlated variables and you can’t tell which one is the cause and which the effect. The recent run up in gas prices is a good example. Prices had to climb very high for it to effect purchases, and during vacation season people actually purchased more at higher prices. If we followed the data alone, we would be led to believe that people generally buy more at higher prices.
Theory first is not ideology. It’s a method used by all sciences in order to make sense of vast amounts of data. You start with obvious truths and use sound logic to derive less obvious truths. It’s the deductive methods you learned in school.
Bob: “…we can do pragmatic solutions if we get rid of the temptation of sticking to one specific ideology.”
That’s true on the micro level, but in spite of repeated attempts it doesn’t work out at the micro level. You seem to think that economic research is stuck in the slide rule era. It’s not. There is a huge amount of money to be made in solid macro forecasting, so not only universities but all of the top banks as well as the Fed have the very best modeling and computers that money can buy. Their problem is their models are based on faulty theory. No amount of computing power will make faulty theory good.
Bob: “By the way, if you deduced a ridiculous theory through "data mining"..”
But data mining is exactly what you are recommending; only using greater computing power. So how would you know if your theory is ridiculous if you derived it from mining the data? You have nothing to test it against if you don’t have theory. I read prominent economists every day who propose stupid ideas to rescue the economy based on data mining they have done. The problem with data mining is that it becomes like a Rorschach test. People see in the data what they want to see. That’s why statisticians developed tests to analyze data objectively. Humans are natural pattern creators. Like looking at clouds and seeing animal shapes, we look at data and see what we want to be there. A good example is the mainstream media reporting on the stock market. Every good economist knows that daily movements in the stock market are random, but every news anchor thinks they know why the market moved every day.
The most common human trait is the ability to fool ourselves. Statistical techniques, deductive reasoning and logic were developed to alleviate some of that tendency, but it doesn’t stop it completely.
Roger McKinney| 12.4.08 @ 10:04AM
Bob, Your uncritical support of social security and Medicare show the problems of your pragmatism. Usually when I suggest killing either program, people respond that I’m a heartless ideology. But they assume that if the state doesn’t help poor people no one will. Then I remind them that the wealthy have helped the poor for many more millennia that has the state, and today, total charity in the US almost equals the Federal budget. I simply have more faith in my fellow man than I do in bitter bureaucrats in Washington.
But both programs are highly damaging to society. By relying on the state to provide for medical care and retirement, people save very little. The main reason Asians save so much is the lack of such state care. Not only does the average American save less, but much of the income of wealthier people that would go into investments is taxes away or is loaned to the state to make SS and Medicare payments. A lower savings rate translates into less investment, regardless of your school of econ. Less investment means lower productivity. Lower productivity causes lower wages and lower standards of living and greater dependence on the state. The only path to increased wealth for any nation is greater investment in new and expanding companies and new technology. Medicare and social security kill that process.
Businesses in the US have gotten around our low savings rate by borrowing from overseas, but that has problems of its own. As even Keynes understood, it causes trade deficits and all of the problems associated with it.
You can call this ideology if you want. Name calling is easy and for the lazy. But this line of thinking predates Adam Smith, going back at least to Richard Cantillon. It’s based on close scrutiny of hundreds of years of economic activity and sound deductive reasoning.
Bob| 12.5.08 @ 1:03PM
Roger, when you compare the savings rates of Asians versus Americans and then conclude that savings would be improved if social programs were eliminated does not take into account the cultures and economic structures of the countries involved. In fact, there may be some "white thinking" in your logic. We are a nation of immigrants who are relatively diverse in cultural backgrounds. Asian countries are far more homogeneous. Furthermore, Asian countries tend to have much more central control and planning than our bottom up society. Because our economy depends on consumption, rather than saving, we promote purchasing through capitalist means.
Thus, behaviorally, eliminating social programs will not have the same effect here as they have in Asia. In fact, Asia is moving towards structures like national health care quickly. As they move from agrarian societies to industrial societies, social programs are on the increase.
That's what is wrong with your conclusions, they don't take into account history and culture and economic basis.
So no, I don't consider your logic "sound deductive reasoning". I consider it ideologically based, unrealistic propaganda.
I do wish, however, you were right -- it would make life much simpler...
Ms. Know| 12.6.08 @ 10:01PM
The left-wing illuminati need not add to the deficit, because it will not get the economy in the right direction.