Free Markets, Free People
It’s not often one finds a dose of sanity in the New York Times. When one does, it should be celebrated, rather than ignored. In this case, the sanity comes from David Stockman, former budget director for President Reagan. His bottom line is no different than what I’ve been predicting since 2009. It’s just as gloomy:
[T]he Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.
He calls it a state-wreck, which is exactly what it is. An arrogant government that thinks it can fix everything, help everyone, and create money out of nothing has corrupted the markets & political culture, and mortgaged our future.
Even now, the Fed, after two previous rounds of "monetary stimulus"—code words for creating en ever larger supply of "money"—is dumping $44 billion cash into the market every month. And where it going? Creating millions of new jobs? No. It’s just going to Wall Street, where the equity markets have hit an all-time high.
The wheels have been wobbling for the last five years. Sometime in the not-too-distant future, they’ll simply…come off, and then we shall see what we see.
Read the whole article. Save it. Print it out. Keep it. That way, you’ll be be able to show your children how the richest, most powerful nation in the history of the earth committed suicide.
Let’s see how today went, shall we? We got our debt ceiling deal, but the Dow dropped 266 points, and the S&P 500 fell 33 points, so it’s now negative for the year. The yield on the 10-year T-note dropped to 2.61%. Gold, meanwhile, hit a fresh record high of $1,644.50/oz. So, I guess this year’s Recovery Summer is over.
None of this, by the way, has anything to do with the debt limit battle in DC. No one on Wall Street really thought a deal wouldn’t be struck. At the end of the day, everybody was pretty confident that the debt ceiling would be raised, and a default avoided.
Stock prices are volatile, of course, so one day’s movement doesn’t mean much, but we have lost about 800 points on the Dow since 22 July, so the trend isn’t good. What’s worse is the steady decline on treasury yields and the climbing price of gold. When you couple that with the 0.4% 1Q GDP increase, and the danger of downward revisions to the lackluster 2Q GDP over the next two months, the evolving picture doesn’t look pretty. We’ve also has a few weeks of unremittingly bad economic releases, showing the economy might be heading back towards recession, and unemployment getting closer to 10% than 8%.
So then what’s the problem? I mean, we’ve had our big stimulus, and our TARP and our Quantitative Easing I and II, and we’re still not only barely budging into positive GDP territory, but now all the signs are showing the economy slowing. What’s happening? Why isn’t any of this working?
I think the answer can be found in what I wrote in my previous post about debt levels, and how over the last several years…
…a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases.
What seems to happen is that, as you begin to approach a debt-to-GDP ratio of 100%, economic growth slows. As you add debt, there’s a non-linear decrease in economic growth. and each additional increment of debt slows growth more than the last. As I also pointed out, this has some pretty scary implications for Keynesian policies, because as you add debt, you’re no longer stimulating growth, you’re hindering it ever more strongly.
That puts policy makers in a pretty bad spot. For instance, right now, real short-term interest rates are effectively zero, so the interest rate tool is no longer of any use to the Fed. You can’t lower rates below 0%. With that tool gone, the only thing left to try and stimulate the economy is to add more debt. Conversely, cutting spending will result in more government workers and contractors being moved over to the unemployment line, and the economy still slows. It’s a trap, where all the standard policy moves result in a slowing economy.
Back in the 80’s my fellow Econ and Business undergrads would debate about all the debt Reagan was adding, and trying to figure out when all that debt would begin crowding out private investment and slowing economic growth. As it turned out, it took far longer than any of us believed it would, but I think we finally have the answer.
The really scary this is that, if we decided that we had to bite the bullet, and impose some austerity, it really wouldn’t help much. We could cut discretionary spending by half, and all it would do is gain us a few years of breathing space before the coming explosion in Social Security and Medicare entitlements—about $60-76 trillion worth of them—eat up any short-term savings and debt reduction we might acquire. After all, discretionary spending—including defense—is only about 39% of the current budget anyway.
What part does economic growth play in all this? Well, it’s clear that 2% per year isn’t going to help much.
It is a generally accepted truism that the trend rate of growth in a mature economy is 3%. There are a lot of reasons given for this; slower population growth in developed countries, large sunk costs in plant and capital, blah, blah, blah. But why should any of that matter? Just because population growth is slow, it doesn’t necessarily follow that the growth of wealth or human ingenuity is hampered.
Here is a reason for that slow growth that’s almost never given. You see, one of the things that mature economies all seem to have in common is large government expenditures, extensive entitlements, massive regulatory oversight, and increasing debt. All of that is financed by taxation to remove money from the productive portion of the economy. So, one of the primary reasons we have slower economic growth is because we trade it for public goods.
Now, we may love these public goods. And they are certainly nice to have if you can afford them. But the evidence is increasingly that we cannot. if we could, we wouldn’t be racking up a level of peacetime debt that’s nearly 90% of GDP. Not only do we give up a lot of economic growth to sustain these public goods, but, apparently, we eventually give up all of it…at which point, we have to give up the public goods as well.
If we really want to climb out of this hole, then what we really need to do is to radically rethink what government should be, what it should be allowed to do, and how it’s funded. It’s not enough any more to cut budgets, while leaving the regulatory, entitlement, taxation, and spending structure intact. A truly radical solution would be to limit government spending and revenues to no more than 10% of GDP in peacetime. Replace the income tax with a 10% VAT. Eliminate the departments of Education, Commerce, Labor, Transportation and Agriculture. Repeal most Federal criminal laws. Privatize social security. Enforce free markets, rather than the crony capitalism we have now.
No one in our current political class has the slightest interest in any of those suggestions. Drastically reducing the size and scope of government is the only solution that can possibly increase economic growth substantially, and give us a shot at paying off our ever-increasing debt, but our current political class will never embrace that.
The thing is, reality doesn’t care what the political class—or anyone else for that matter—wants. It just is what it is. So, no matter what happens, we won’t have to worry about the deficit or government spending for much longer. Either we’ll fix the problem by electing a political class that’s devoted to cutting government across the board and paying down the debt. Or we won’t fix the problem, and the resulting bankruptcy and hyperinflation will allow us to monetize our debt, wipe out the life savings of every person in the country, and we will start over from scratch with a bright shiny new currency!
But the problem will get solved. The only question is how much control we’ll retain over the process, and how much government we’ll retain at the end of it.
CNN has a story about a bike store owner who has retrenched and is weathering the recession. Contained in the story is the kernel of the economics of the problem we face and how the administration still doesn’t get it.
Both then and now, D’Amour said the chief problem for small business owners is access to financing. And lawmakers want small businesses to know this complaint is reaching Washington.
President Obama urged Congress last week to move forward on a bill designed to help small businesses, including a $30 billion lending fund to loosen credit lines and $12 billion in tax breaks.
That will help but it won’t solve the problem, said Anne Mathias, director of policy research at Concept Captial.
"It’s not going to bring a rush of people into stores to buy whatever it is these different small businesses have to offer, but it will help," she said. "It’ll help kind of at the back end."
Republicans say the bill won’t have much effect and are urging the president to extend the Bush administration’s tax cuts.
Todd McCracken, the president of the National Small Business Association disagrees.
"Putting money in the pockets of both consumers and small business people so they can take advantage of the opportunities when they come along is crucial," McCracken said Sunday morning on State of the Union with Candy Crowley.
Access to financing, although important, isn’t the base problem. Consumption is – or the lack thereof. Additionally, payroll taxes will be going up for everyone in January (a little known part of allowing the Bush tax cuts to expire).
Question: if you are charged – both short term and long term – with getting the economy moving by implementing policies/laws at a national level, how would you go about it?
Well, in the short term you can provide businesses with all the financing in the world, but unless consumption steps up, it doesn’t do anything useful. Until buyers are buying, businesses won’t be hiring.
So what’s the best way to quickly boost consumption? Obviously it is to put more money in the hands of consumers. And one such way to do that is to cut payroll taxes, or, as has been suggested, have a payroll tax holiday.
That, of course, has been rejected by the Obama administration which feels it would “cost” the government to much money. They’d rather government “cost” the consumer too much money and the consumer stay home as a result one supposes.
Instead, the administration is proposing a $100 billion “research and development” credit for businesses. A couple of observations – that’s not a short term fix and not all businesses engage in R&D.
The point, of course, is the administration is more concerned about the government revenue stream than the economy and it is, as John McCain has said, just “flailing around”. It is much more concerned with the “cost” incurred by government necessary to actually have some impact on the economy than it is the “cost” it will impose on the tax payer for it’s future multi-year deficit fueled budgets.
It refuses the other side of tax cuts – spending cuts. Instead, it simply intends to shift the burden of its profligacy to you. And these tax cuts are for show only – a way of claiming to do what the GOP wants without really doing much of anything. When this tiny and piece meal approach fails to get the dead weight of the economy moving, the left will claim to have tried the right’s prescription and that tax cuts didn’t work.
Anyway, the administration plans to “pay” for this tax credit (oh, so now PAYGO is important) by increasing taxes through closing “tax loopholes” for multinational corporations and some energy companies. This, dear friends, is simply another much desired wolf from the liberal agenda in sheep’s clothing.
The National Tax Payer Union points out that those taxes being proposed as “closing loopholes” will actually make our domestic oil and gas business uncompetitive. It will, for instance, tax all the revenue Chevron earns (both here and overseas) because Chevron is an American based company but won’t do the same to BP (or Venezuela or China) because BP isn’t an American based company. Unilateral nonsense like that will put Chevron in an unenviable competitive situation.
Make sense? Especially in times of recession? Can anyone guess what a Chevron may decide to do (hello Toronto, any office space to lease up there?). And, of course, the taxes in question will be passed along to the hard pressed consumer with increased prices. That’ll spur increased consumption, won’t it?
The rest of the proposed economic package is the usual failed stuff – increased infrastructure spending. The only laudable portion of the package is the proposed extension of the middle class portion of the Bush tax cuts. But again – that doesn’t put more cash in the pockets of consumers, it simply maintains the status quo.
But the “rich” – tough noogies. You may have seen administration flunkies out pushing the canard that the tax will only effect 3% of the small businesses out there. The Wall Street Journal blows that bit of spin out of the water – first by explaining the smoke and mirrors the administration used to produce that number and then pointing out what the number really is:
According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.
So, the proposal by the administration to get the economy moving is maintain the status quo taxes on the middle class (no immediate impact), provide a limited benefit (at best a long term impact) cut to some business in the area of research and development, more infrastructure spending (long term because of the government project process), an increase in taxes on American oil and gas companies (immediate negative impact) and an increase in taxes for 48% of the small businesses in America (immediate negative impact).
If that’s not a bad tasting hash of ideas, I’m not sure what to call it. And yeah, you can bet your bottom dollar it will get the economy moving.
Excuse my sarcasm, but obviously this is “rocket science” to the administration, and they’re totally baffled by it. Someone, anyone, tell me why the GOP should support this?
In this podcast, Michael, and Dale discuss the county’s failing energy and economic policies.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
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