The Public Policy
Of Rachmaninoff and Economics
Music to one’s ears? When establishment figures concede that government spending isn’t the solution to our economic woes.
Last Friday night was the coldest night in Washington, D.C. in ten years, according to the man on the radio. Blessedly, my wife and I spent the evening transported by the National Symphony Orchestra’s performance of Rachmaninoff’s Piano Concerto No. 3 in D minor, Opus 30, in the lush surroundings of the Kennedy Center’s Concert Hall.
The pianist was a young Norwegian, Lief Ove Andsnes, who drew a standing ovation and took three encore bows. EMI Classics will release his new CD this spring.
Damn! I would sooner give up my house than part with our symphony tickets. Music is truly a balm for the soul, especially in such difficult times as these. The daily papers and news broadcasts are unrelievedly depressing. Our financial and political elites really do not know the length, breadth, or depth of the current economic crisis that their kind has visited upon the county. Nor do they understand how to remedy the situation. They are making it up as they go along.
How else do you explain Bank of America taking on a turkey like Merrill Lynch, then declaring tremendous losses for the last quarter of 2008?
The stockholders are understandably peeved that they did not know about the sorry state of affairs before the takeover. Management tries to justify itself as taking a bullet for the nation, but it is hard to square that with the fiduciary interest owed to stockholders. Of course, the Bank is receiving more federal bailout dollars to cover heavy losses in its new subsidiary.
I have no problem with elites, per se, as long as they get the job done. But our current crop appears to be a pretty feckless bunch. Please understand that I am not making a partisan criticism here. Whether it is Wall Street or Washington, the character and intellectual deformities afflict Republicans and Democrats alike.
One must take small pleasures where one can find them. The previous weekend I had to spend all of the Lord’s Day, January 11, flying across the country on a business trip. A small but delightful compensation for such an inconvenience is the ability to read every single page of the Sunday New York Times, cover to cover, given the plentiful time spent aloft and in airports.
I was rewarded with a perceptive article by N. Gregory Mankiw, a Harvard economics professor and a former advisor to President Bush: “Is Government Spending Too Easy an Answer?” — in the New York Times of all places!
The good Professor musters the courage to question the Keynesian demand-side assumptions of the incoming Obama administration, promoted in college classrooms for decades through the classic textbook, Economics, written by Paul Samuelson and first published in 1948. In fact, says Professor Mankiw, Lawrence H. Summers, a very sharp fellow and the new head of the National Economic Council, is Mr. Samuelson’s nephew.
Mankiw notes that the new administration, not to mention most of Congress, believes the centerpiece of any economic recovery must be “a huge increase in government spending.” That said, “there are ample reasons to doubt whether this is what the economy needs.”
One reason for doubt is a study by Valerie A. Ramey, an economist at the University of California, San Diego, which reviewed U.S. history and concluded that each dollar of government spending increases GDP by only 1.4 dollars. “When G.D.P. expands, less than a third of the increase takes the form of private consumption and investment,” argues Mankiw.
Later in his article, Professor Mankiw cites another study, by Christina D. Romer and David H. Romer, formerly economists at University of California, Berkeley. Readers may recall that Christina Romer is in line to become President Obama’s chairwoman of the Council of Economic Advisers, a very fortunate development as will become clear in a moment.
The Romers’ research revealed that a dollar of tax cuts raises GDP by roughly $3!
“According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases,” says Mankiw.
Mankiw speculates, reasonably, that Christina Romer’s participation in the Obama economic team may explain the recent increase in tax cuts as part of the new administration’s stimulus package.
About the Author
G. Tracy Mehan, III served at the U.S. Environmental Protection Agency in the administrations of both Presidents Bush. He is a consultant in Arlington, Virginia, and an adjunct professor at George Mason University School of Law.
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Jason | 1.19.09 @ 6:52AM
Obama won't be able to resist the temptation to spread the wealth around. It's in his DNA.
http://www.rightklik.net/
Mark Oxley| 1.19.09 @ 7:44AM
I trust Obama will not be the orthodox, and uphold hopelessly the other end of theoretical liberal/conservative divide similar to the likes of Newt Gingrich. What's wrong with government spreading a bit the wealth? After all, spreading it in the right direction got us to the moon!! Ain't this something?
Michael L. Hauschild| 1.19.09 @ 8:44AM
What's wrong with government spreading a bit the wealth?
God help us.
Ryan| 1.19.09 @ 9:04AM
The more I see, the more I come to realize that we need a complete simplification of the tax code. Heck, it may not have to be a flat tax, just something more along the lines of what occurred in 1986, if not broader. What it would do:
1. Companies needing fewer accountants to deal with tax issues. Sorry if I step on toes, but accountants - particularly ones who deal with taxes, add NO value to products and services. The less that companies have to spend in figuring out the complexities of the tax system - or fighting for their own loopholes - the less their products cost (or the more they can pay for people who actually add value).
2. The less of a need for more DC bureaucrats. The less money into government pockets, the more in ours AND the less power the government has over us.
3. The less need for companies to hide funds in tax shelters and offshore, where corporate accounts can stay in US banks and do more good there rather than sit somewhere where they don't do the US economy any good. There's a LOT of money in this situation, and imagine how less of an issue we may have if some of the corporate tax shelters were held here in the US.
Steve| 1.19.09 @ 9:37AM
Prof. Mankiw is a good man and a knowledgeable economist. Obama is a political hack who knows less about economics than my dog. Will Obama screw things up even worse than Bush/Paulson have? Yes. Will Mankiw's voice be heard in the new administration? Not a prayer.
Fasten your seatbelts and foam the runways
BAILOUT to POVERTY| 1.19.09 @ 9:48AM
Anybody who thought this BAILOUT made any sense, sorry you lose again.
Economics using common sense, if a business is not making a profit, it's making a loss.
If it was a profitable business, it can survive a down turn by re-ajustments, such as cut backs, laying staff off till things picks up again.
But if operating at a loss is not changing after ajustments, you go under bust, failing that and there is bits of the company that can be sold off to regain liquidity, than that is an option.
Any Government that is buying up companies that are dead in the water is because they have an hidden agenda. Because companies like that would be taken over by other businesses. If people in the private sector don't want it it's because there is something wrong with it.
In simple terms, its like a man risking his life to save a man that he already knows is dead.
The reason this is going on in America, and in Europe is because the Government buys up all the Banks, and eventually they own them all, but why would they want to own them all, because each country Central Bank will be turned over to one controling Bank. The move is towards the one WORLD BANK, ONE WORLD GOVERNMENT.
It's a part of the NEW WORLD ORDER. It's been in the making for 60 years, all the governments world wide knows about it, but the people is not to know till each government has full control of all these Banks.
The wars with the MIDDLE EAST has nothing to do with what they tell you it's about, but because the people in the MIDDLE EAST want nothing to do with it. They have a different Banking system according to Muslim law. WE the people need to re -educate ourselves as a matter of urgency.
Hank Merdle| 1.19.09 @ 11:02AM
If government will not take charge of the economy so badly screwed up by greedy investment bankers - the likes of Bonnie and Clyde will roam streets of America again, hunting for food as such folks will be unable to make ends meet.
John Scots| 1.19.09 @ 11:10AM
Government will own 70% of RBS! People want to make money, buy RBS stock! The government is the safest instittute in the country which makes RBS the safest stock to buy in these rocky economic conditions!
Michael L. Hauschild| 1.19.09 @ 3:42PM
It is an amazing scenario the devolving of the American democratic process. The basic tenant of majority rule with its implied premise of “only if it does not infringe on the rights of the minority” has passed the stage of campaign sloganeering and has now become the economic reality with “class warfare” guiding the tax structure. We have passed from the relatively complicated sliding proportionality of “tax brackets” to a hard line in the sand of with those that actually “earn” on one side and those that only get “compensated” on the other. This threshold (I don’t think it is what RR envisioned as trickle down) is being exacerbated by the bipartisan celebration of creating more and increasingly invasive government, government that wastes a staggering of amount by simply “handling” our assets.
A practical solution exists, (see Ryan above) the flat tax. Such a scheme is not above criticism, and certainly would suffer many of the abuses and encumbrances of the beltway manipulators, the art of encumbrance is, after all, what they do best. But implementing the flat tax would accomplish much, not in the least would be placing many back in the “Hey, wait a second that’s my money your squandering” tax bracket. Furthermore it would “streamline” the tax code to one sentence, drop the size of the government bureaucracy allowing many to actually enter the workforce and “become productive.”
It has been alluded to on these pages that we need to get involved by entering the system, incrementally moving through the stages of government for the “plumb” of national office. I disagree, that process is the problem. By the time you get to that level you are so acclimatized that your original intent is convoluted and compromised. We need new blood, throw the clowns out and now is the time.
The last election was a true microcosm of the conservative / Republican / Libertarian dilemma. Economics – Romney with his forty million came in third to Huckabbe and McCain, Huckabee died on the alter of social issue martyrdom a distant second, and our ultimate choice, McCain, lost big time due to his proclivity to engage in “gang warfare.” In order to give our government back to the electorate we need someone from “outside” with simple, straightforward, policies of “inclusion” like the Flat Tax, not the self-destructive “line item” platform that characterizes and divides our party.
Marc Jeric| 1.19.09 @ 7:10PM
During the last campaign we heard bad words from all sides about wasteful spending on porkbarrell projects and earmarks. Now we have this "economic stimulus " of 850 billion dollars; it consists of some "tax cuts" for those who pay no income taxes (most of whom already receive "income tac credit" payments which are really welfare payments) while the rest will go to "infrastructure" projects. Well, these latter are just exactly porkbarrell and earmark projects - except for the name. Is everybody fooled by this trick of language?
James Lullaq| 1.20.09 @ 5:59AM
Marc,
All project government or private enterprise - in the end become porkbarrell to benefit a closed circle of oldboys. Facts of life, unfortunately.
I would not hesitate to try the government porkbarrell at this moment, as I simply can not accept the sheer size of the porkbarrell investment bankers generated for themselves recently. Why don'n we all get rich a bit on a porkbarrell instead of allowing selected few investment bankers to line their pockets - only for the sake of conservative/naive principles?
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