Free Markets, Free People

Economics

The “Economics” of Obama’s First 100 Days, Part 2

In addition to Bruce’s post below, chartng the rise in debt since Pres. Obama took office, I think it’s important to look at whether we can find historical parallels, and try to identify how closely such parallels may apply to the current economic situation in the US.  Fortunately, a historic parallel–and a very close on at that–comes easily to hand.

Does this look familiar?  If not, it probably will...

Does this look familiar? If not, it probably will...

The chart on the right is a comparison of how Japan’s increase in debt since 1989 compares with the performance of the Nikkei stock index.

As the authors of the chart point out:

[I]f large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7). Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.

They say that insanity can be defined of repeating past actions with the expectation of a different outcome.  If so, how do we characterize the current government activity in response to the economic situation?

Happily–if that is the appropriate word–we may be able to put to rest fears of hyperinflation.

The bottom line, however, is that it is totally incorrect to assume that the massive expansion in reserves created by the Fed is inflationary. Economic activity cannot move forward unless credit expansion follows reserves expansion. That is not happening. Too much and poorly financed debt has rendered monetary policy ineffective.

So, we’ve got that going for us.

The “Economics” of Obama’s First 100 Days

I put economics is [""] for a reason. And that has to do with the fact that there was little about the first 100 days which had much to do with economics and certainly wasn’t economical. Feast your eyes on this. Yes, it’s from the GOP, but “numbers is numbers”, folks, and check out the quote attached to the chart:

chart-first100

Heritage also weighs in with a few trenchant observations:

In his first 100 days, President Obama will have quadrupled the budget deficit he inherited while pledging to cut it in half, which would still leave a deficit double the size it was in January 2009.

Make sure you get that – quadrupled the budget deficit within 100 days. Promised to cut budget deficit in half. Even if he does that, it will still be twice the size of the budget deficit in Jan 2009 when he made the promise. Yup, smoke and mirrors.

The President came into office promising a “net spending cut” then signed the stimulus bill, which will dump $9,400 in new debt on the average American household. Under CBO’s estimate, if some programs become permanent, this would skyrocket to $26,600 per American household.

And we are reminded that there is nothing more permanent than a temporary government program (REA anyone?).

Just to give this all a little more perspective:

In his first 100 days, President Obama proposed a budget that would dump a staggering $9.3 trillion in new debt—$68,000 per household—into the laps of American children. This is more debt than has been accumulated by all previous Presidents in American history combined.

And yeah, for the lefties that includes the “selected but not elected” George W. Bush among all the president’s combined. Or said another way, 44 is spending more than the previous 42 combined (and no I didn’t screw up, Grover Cleveland was president twice at two different times).

So while you see the informationally deprived “celebrating” the “accomplishments” of his first 100 days, don’t forget that those yet to be born aren’t going to be quite as enamored with Obama as the present spendthrifts who think he’s doing such a great job economically.

~McQ

Cap & Trade: Even More Expensive Than Thought

Sometimes math is actually pretty easy. For example, when someone, say some MIT professors, writes a report claiming that a tax on certain businesses will raise a specific amount of revenue for the government ($366 Billion to be exact), and that revenue is divided by an estimated number of American households (117 Million), there isn’t any doubt about how much money per household that tax represents ($366 b./117 m. = $3,128.21). Unless, that is, there are politics involved. Then the math becomes Bistromathic, which allows one of the progenitors of the original numbers to declare “you’re doing it wrong!” and almost everyone will believe him. Unfortunately for them, real math operates on real facts, and thus reality is destined to intrude upon their fantasy.

That, in a nutshell, is basically how the argument over costs of the Obama Administration’s cap and trade policy has unfolded. MIT’s John Reilly co-authored the original study, Republicans used the numbers to derive a cost per taxpayer, Reilly balked, and the media/leftosphere went into paroxysms of outrage about how the GOP were all a bunch of liars. But that was just the main course. For dessert, there will be crow (my emphasis):

During a lengthy email exchange last week with THE WEEKLY STANDARD, MIT professor John Reilly admitted that his original estimate of cap and trade’s cost was inaccurate. The annual cost would be “$800 per household”, he wrote. “I made a boneheaded mistake in an excel spread sheet. I have sent a new letter to Republicans correcting my error (and to others).”

While $800 is significantly more than Reilly’s original estimate of $215 (not to mention more than Obama’s middle-class tax cut), it turns out that Reilly is still low-balling the cost of cap and trade by using some fuzzy logic. In reality, cap and trade could cost the average household more than $3,900 per year.

The $800 paid annually per household is merely the “cost to the economy [that] involves all those actions people have to take to reduce their use of fossil fuels or find ways to use them without releasing [Green House Gases],” Reilly wrote. “So that might involve spending money on insulating your home, or buying a more expensive hybrid vehicle to drive, or electric utilities substituting gas (or wind, nuclear, or solar) instead of coal in power generation, or industry investing in more efficient motors or production processes, etc. with all of these things ending up reflected in the costs of good and services in the economy.”

In other words, Reilly estimates that “the amount of tax collected” through companies would equal $3,128 per household–and “Those costs do get passed to consumers and income earners in one way or another”–but those costs have “nothing to do with the real cost” to the economy. Reilly assumes that the $3,128 will be “returned” to each household. Without that assumption, Reilly wrote, “the cost would then be the Republican estimate [$3,128] plus the cost I estimate [$800].”

In Reilly’s view, the $3,128 taken through taxes will be “returned” to each household whether or not the government cuts a $3,128 rebate check to each household.

In short, Reilly’s claim of “you’re doing it wrong!” amounts to parsing of direct vs. indirect costs. Yes, the cap and trade taxes will be passed onto the consumers in some way, but those aren’t the “real costs” to the economy. Only those direct expenditures made necessary by the policy (the “but for” costs) are “real costs.” As long as the federal government provides a benefit to the taxpayers with the cap and trade taxes, then those higher utility bills are a wash:

In Reilly’s view, the $3,128 taken through taxes will be “returned” to each household whether or not the government cuts a $3,128 rebate check to each household.

He wrote in an email:

It is not really a matter of returning it or not, no matter what happens this revenue gets recycled into the economy some way. In that regard, whether the money is specifically returned to households with a check that says “your share of GHG auction revenue”, used to cut someone’s taxes, used to pay for some government services that provide benefit to the public, or simply used to offset the deficit (therefore meaning lower Government debt and lower taxes sometime in the future when that debt comes due) is largely irrelevant in the calculation of the “average” household. Each of those ways of using the revenue has different implications for specific households but the “average” affect is still the same. [...] The only way that money does not get recycled to the “average” household is if it is spent on something that provides no useful service for anyone–that it is true government waste.

He added later: “I am simply saying that once [the tax funds are] collected they are not worthless, they have value.”

Essentially, Reilly is making the pernicious claim that a dollar in the taxpayer’s hand is the same as one in the government treasury. But we all know that’s not true, including (I’ll bet) Mr. Reilly.

No matter how efficient the government is, it will never be able to take $X from me and return exactly $X of benefit. Indeed, at least some portion of that $X will be needed just to support the system of taking the money and providing the benefit. Already the taxpayer is at a loss.

Moreover, there is an implicit assumption in Reilly’s explanation that, in exchange for this de facto tax, the government benefits provided would be returned in proportion to their costs. But that would defy all historical precedence when it comes to the federal government which, once the money is received, tends to dole it back out to suit its own purposes. As Merv aptly states:

I really doubt the government will return any cost of cap and trade dollar for dollar. If they did it would be just an expensive money swap. To the extent the government does return any money you can bet that it will be based on conduct they want from people and not unconditionally. They will be imposing their choices on American families and their lifestyles.

To be fair, Reilly tacitly acknowledges this fact when he explains what use of his numbers would be acceptable to him:

“If the Republicans were to focus on that revenue, and their message was to rally the public to make sure all this money was returned in a check to each household rather than spent on other public services then I would have no problem with their use of our number.”

The fact is, cap and trade is going to cost taxpayers significantly more than the measly $13/week tax cut that the Democrats and the left are so excited about. While the $3,900 cost cited by John McCormack above is an accurate accounting of what Reilly’s study portends, even that is probably an unrealistically low estimate. Consider how the same policy has affected Europe:

Europe’s experiment with cap and trade has turned into a bureaucratic mess that has failed to live up to its initial expectations. A report by the GAO reveals that the supply of carbon permits has exceeded the demand causing allowance prices to fall substantially. This policy failure has caused the European economy to suffer and expectations to reduce CO2 emissions have been lowered.

Additionally, Europe’s cap and trade experiment has led to decreased employment opportunities and higher energy prices across the continent. In France manufacturers have packed up and left for Morocco. In the Netherlands factories are forced to close early to meet emissions standards. In Germany energy prices have risen 5% each year sparking widespread outrage. All across Europe evidence shows that cap and trade has hurt the economy. If the United States implements a European style cap and trade system, estimates show that it could wipe out between 1.2-1.8 million American jobs by 2020.

So the 95% of you who received a “tax cut” from Obama had better start saving that extra money up. You’re going to need every penny to service the debt required to pay for your costs of cap and trade.

NYT: Spectacularly Wrong … Yet Again

Will someone please buy these people a subscription to Google or something? In trying to compare TANF and TARP spending, Nancy Folbre makes a rather glaringly error:

Robert Rector and Katharine Bradley of the Heritage Foundation, a conservative research organization, estimate that federal welfare spending amounted to $491 billion in fiscal 2008. (They don’t explain what specific programs they included in this estimate, and I’ll try to unpack it in a future post.) Even their extremely high estimate remains far below estimates of the total of $2.5 trillion spent on financial bailouts this year. The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.

David Boaz begs to differ:

Excuse me?

Since she linked to one of our papers on corporate welfare, we assume she’s visited our site. How, then, could she get such an impression? Cato scholars have been deploring bailouts since last September. (Actually, since the Chrysler bailout of 1979, but we’ll skip forward to the recent avalanche of Bush-Obama bailouts.) Just recently, for instance, in — ahem — the New York Times, senior fellow William Poole implored, “Stop the Bailouts.” I wonder if our commentaries started with my blog post “Bailout Nation?” last September 8? Or maybe with Thomas Humphrey and Richard Timberlake’s “The Imperial Fed,” deploring the Federal Reserve’s help for Bear Stearns, on April 14 of last year?

Boaz goes onto reproduce a video compilation of Cato scholars denouncing bailouts on “more than 90 radio and television programs.” He also produces an impressive list of papers, articles and media appearances which seriously challenge Folbre’s notion of “remarkably quiet.”

Folbre doubles down here:

You’re right. The Cato Institute website has not been silent. It just didn’t meet my expectations of adequate noise.

Yeah. Too bad her post didn’t meet reality’s expectations for factual.

A Recipe For Economic Disaster

A level of economic government intrusion is now being contemplated like none we’ve ever seen before.  If you didn’t understand the one of the main purposes of the tea parties, perhaps this will help.

But what Obama rarely says about ending the “cycle of bubble and bust” is this: he’s prepared to intervene to make sure that kind of red-hot growth doesn’t occur.

And he’s willing to do it with added government regulation if needed to prevent any one sector of the economy from getting out of balance – the way the dot-com boom did in the 1990s and the real-estate market did earlier this decade.

According to Austan Goolsbee, a key Obama economic adviser, the president plans to focus on stopping bubbles along with preventing busts. And in an interview with POLITICO, Goolsbee said the administration will be on the lookout for new bubbles, like the tech stocks or housing prices.

If new threats are spotted, he said Obama would use “regulatory oversight to prevent guys who want to make a quick buck from doing real harm to the economy. . .That is what it means to get out of the bubble and bust cycle.”

In other words, government would decide what is or isn’t a “bubble” and move to stop what it determines is a bubble. As CATO points out, one man’s expansion might be another’s “bubble”. Are you comfortable with government calling that shot?

And government would also arbitrarily decide who was or wasn’t entitled to profit from that market – it would be the final determiner of who was or wasn’t making a “quick buck” from the growth.

Any idea what that would do to any market in which the government stepped in to slow down?

Yeah, nothing could go wrong that that idea, could it?

Bottom line: you have a governing elite picking winners and losers.

Thankfully, it isn’t quite as easy as you might imagine to do what Goolsbee and Obama would like to do.

…[T]here’s not much an administration can do in practical terms to burst a developing bubble. The best way to cool things down is raising interest rates, which is the purview of the Federal Reserve. Another option would be for regulators to order banks to curtail lending to buyers of certain kinds of assets.

The lesson here, of course isn’t necessary the plan itself, but the fact that those in a position of power are contemplating this seriously. Those aren’t the plans of a moderate, and certainly not those of a capitalist. They’re the plans of a group who apparently believes that complex economies can indeed be controlled and manipulated successfully from above.

Amazing hubris. Even more amazing arrogance. Most importantly, incredibly dangerous economic thinking.

~McQ

They’ll Be Workin’ On The Railroad

Well here we go – the government apparently plans on getting further into a business in which it has no track record of success. Yes friends, if “Amtrak” doesn’t remind you of why this isn’t a good idea, how about doubling down on it?

You remember Amtrak:

In FY 2007, Amtrak earned approximately $2.15 billion in total revenue and incurred about $3.18 billion in expenses. Amtrak relies on an annual federal appropriation, which in FY 2007 totaled $1.294 billion, including $521 million in operating funds, $495 million in capital and $277 million for debt service. While Amtrak relies on federal appropriations to support its operating and capital needs, the federal government’s investment in Amtrak was less than 2 percent of the entire federal transportation budget for FY 2007.

Only 2%? Well, we’ll take care of that:

The president’s plan identifies 10 potential high-speed intercity corridors for federal funding, including California, the Pacific Northwest, the Midwest, the Southeast, the Gulf Coast, Pennsylvania, Florida, New York and New England.

It also highlights potential improvements in the heavily traveled Northeast Corridor running from Washington to Boston, Massachusetts.

Of course Amtrak runs service in all of those places.

The president cited the success of high-speed rail in European countries such as France and Spain as a positive example for the United States.

And, of course, Spain and France are physically so much like the US it is frighting:

US -  9,161,923 sq km

Spain – 499,542 sq km

France – 545,630 sq km

For comparison:

Texas – 691,030 sq km

Travel by train has been a part of the culture of both France and Spain for literally centuries. Not so in the US. This is not an “if you build it they will come” moment.

“My high-speed rail proposal will lead to innovations that change the way we travel in America. We must start developing clean, energy-efficient transportation that will define our regions for centuries to come,” Obama said at an event near the White House.

You can read the plan here. It can pretty much can be summed up by Obama’s statement. Not a single bit of analysis about whether there is a demand, whether or not it will be profitable, and, frankly whether it’s economically viable at all.  It’s all about social concerns, not how much it costs.

This is government betting your money that it can change your habits. It isn’t a business plan that’s been produced, it’s a social engineering plan.

Is this the role you’ve imagined for government? As most who understand economics would tell you, if there is a market and it is a profitable market, some entrepreneur or entrepreneurs will enter that market. But you can be assured that won’t enter a market unless there is a profit to be made – which should tell you all you need to know about this boondoggle.

And whether or not you ever board a single one of these trains in your lifetime, you will pay for it.

~McQ

Taxes – They Have To Go Up Say Economists

For those of you who believe that you can spend yourself out of debt and enjoy the same level of taxation, a little dose of economic cold water is in order, appropriately on the day after tax day.

Many economists, including some who voted for Obama, do not believe that he can indefinitely avoid imposing tax increases much further down the income scale — on the middle class.

“You just simply can’t tax the rich enough to make this all up,” said Martin A. Sullivan, a former economic aide in the Reagan administration who said he backed Obama last fall.

“Especially just for getting the budget to a sustainable level, there needs to be a broad-based tax increase,” said Sullivan, now a contributing editor at Tax Analysts publications. “If you want to do healthcare on top of that, almost certainly, it just makes [a middle-class tax increase] all the more certain.”

And toss a little “cap-and-trade” on top of that, and whoa Nellie, the sky is the limit when it comes to the taxation necessary to support all of that.

How about those that believe that taxes should be used for “income equality” (also known as “tax the rich”)?

But even economists sympathetic to tackling income inequality say it will be difficult to avoid other tax hikes.

“There’s no way we’re going to be able to pay for government 10, 20 years from now without coming up with a new revenue source,” said Leonard Burman, director of the Tax Policy Center, during a forum on Obama’s tax proposals earlier this month.

Burman said a value-added tax is “inevitable.” Burman, deputy assistant Treasury secretary during the Clinton administration, said Obama should consider using revenue from the broad-based VAT to fund his healthcare plan. That would give middle-class and lower-income people incentive to keep taxes and health costs low, he said.

Translation for those who didn’t pick up on Burman’s last point – the “incentive” provided by the VAT (or Value Added Tax) is it will discourage “middle and lower income people” from using the medical system thereby keeping “health costs low”. If you want the real short version – rationing by price, the price being the cost of a visit plus the tax. Naturally, as a percentage of income, that would hit the middle and lower income levels much harder than the higher income levels.

And that 95% tax cut for Americans?

The president’s overall tax proposals, including perpetuating most of Bush’s tax cuts rather than allowing them to expire, will lead to $3 trillion in lost tax revenue over the next decade, according to an estimate by the Joint Committee on Taxes, which provides independent projections to congressional tax writers.

So $3 trillion in lost tax revenue, but an increase in the debt and debt service requirements:

More revenue will be needed to service the growing national debt. Because annual deficits are expected to remain above $500 billion for the next decade, Sullivan expects debt payments to more than double, from about 1.2 percent of GDP to more than 3 percent.

What does that mean for that “permanent” tax cut for the 95%?

The usual:

Obama’s budget proposed that his signature Making Work Pay tax credit be made permanent, but it was not included in either the House or Senate budget blueprints, partly because doing so would have increased the size of the deficit on paper.

Lies, damn lies and “permanent” tax cuts.

All the promises are BS, folks – and that’s not because I want them to be, its simply how the law of economics works. We will end up paying for all of this fiscal profligacy somewhere in the very near future. And anyone that says differently or promises otherwise is blowing smoke up your skirt.

~McQ

Tea Parties Are About Future Taxes, Not Present Ones (update)

Much of the left,  Steve Benen serving as a perfect example, are missing an essential point about the tea parties planned around the country. They aren’t about the level of taxation now. Instead, those attending them understand that with the massive spending undertaken by the federal government and the massive amounts of currency pumped into the system by the Federal Reserve, taxes aren’t going to remain anywhere near where they are now, no matter what politicians promise.

Benen uses a recent Gallup poll which says people are mostly happy with the tax rates they now have in an attempt to portray the protesters as being out of touch and out of step with the mainstream:

The latest survey from Gallup shows these assumptions don’t seem to apply right now: “A new Gallup Poll finds 48% of Americans saying the amount of federal income taxes they pay is ‘about right,’ with 46% saying ‘too high’ — one of the most positive assessments Gallup has measured since 1956. Typically, a majority of Americans say their taxes are too high, and relatively few say their taxes are too low.”

The same poll found that 61% of Americans believe the income taxes they paid this year are “fair.”

This certainly isn’t the kind of public opinion landscape Republicans were hoping for. In order for conservative talking points on the economy to be effective, Americans have to believe the current tax rates are never “about right” and anything but “fair.” Broad satisfaction with taxes leaves Republicans with very little else to say.

I beg to differ (and it isn’t just “Republicans” involved in these protests). What it says is the Bush era taxes, the ones which resulted from a tax cut, are considered “fair”. That would mean, then, than any increase in taxes would be considered something other than “fair”. And anyone with enough intelligence to make toast should realize that the spending orgy we’ve seen in the last few months is something that will have to be “paid for” either through taxation or inflation (or both).

So when Benen says the following, he whiffs completely:

Indeed, the semi-official slogan of the Tea Baggers’ events tomorrow is “T.E.A.: Taxed Enough Already.” It was hard enough to make this argument shortly after the president signed the largest middle-class tax cut in history; it’s even harder in light of poll results like these.

“Taxed Enough Already” mirrors the poll. But unlike Bennen, who attempts to pawn off the “95% of Americans will receive tax cuts” nonsense as the reason for the satisfaction, the people showing up seem to understand the economics of the situation better than he does. Someone is going to have to pay for all this fiscal profligacy, and the protesters know exactly who those people are.

Thus the protests.

UPDATE: Benen still doesn’t get it. Referencing this post, he says:

I see. So, at some point in the future (we don’t know when), some politicians (we don’t know who) might find it necessary to raise taxes. Whose taxes would be raised? It’s too soon to say. How much would taxes go up? No one knows.

It helps, if you’re going to write about this stuff, if you keep up with what’s been going on. As we pointed out in another post on the Obama budget, you don’t even have to guess “how much” or whether or not it might be “necessary”, the budget answers those questions:

Tax Increases:

Against a baseline that assumes current law tax policy is extended, S. Con. Res. 13 raises taxes by $361 billion and allows for $1.3 trillion in additional tax increases. In addition their budget paves the way for additional tax increases from a proposed cap-and-trade tax in reconciliation.

And (making the point as to how the 1.3 trillion is raised):

Deficit Neutral Reserve Funds:

The Democrat budget includes 15 “reserve funds,” which essentially “phantom spending” policy statements that allow the majority to say that they would like to fund a certain initiative. The deficit neutral requirement associated with the reserve funds typically require that taxes be raised in order to pay for the new policy initiative. If all reserve funds were to be fully enacted, total spending would increase by $1.3 trillion, financed by tax increases or spending decreases.

Maybe Benen finds that acceptable, but obviously those protesting don’t.

He concludes with:

With this in mind, I can only conclude that the Tea Parties are the most forward-thinking political events in the history of the country.

Another whiff – all you have to do is read the budget proposal that was passed by Congress, Mr. Benen. It outlines the size and scope of those future taxes fairly specifically.

You have read it haven’t you?

~McQ

Loser Spouts Off

Bob Shrum, perhaps best known for his masterful performance in shepherding John Kerry’s presidential race to…uh…it’s…conclusion, now sounds off about economic myths.

One of the most stubborn [myths] is what [John] Kennedy denounced at Yale—the notion that deficits are always evil and the balanced budget an inherent public good. This myth is now constantly exploited by do-nothing opponents of Obama’s recovery plan. On Sunday, George Stephanopoulos read a viewer’s complaint to Treasury Secretary Tim Geithner: “How do you justify printing money out of thin air?” Isn’t the inevitable consequence “hyperinflation?” Geithner calmly rebuked the cliché by pointing to the Federal Reserve’s capacity to counter inflation by raising interest rates once the economy is back on track.

Well, he’s cartainly right about that.  The Fed can always just raise interest rates.  It’s what Paul Volcker did as Fed Chairman in the late 70s and early 80s.  If by “back on track” he means that we can have an unemployment rate of 12%, as we did in 1982, and a Fed Funds rate of 14%, then, I guess he’d be right.  It certainly got rid of inflation.

After all, cutting spending now would accelerate, not reverse, the downturn, and trigger a spiral of declining federal revenues that could leave budget balancing out of reach no matter how deeply we cut.

And raising short-term interest rates by the Fed at some point in the future would…not?

This is elementary economics.

I certainly wouldn’t contradict that.

In reality, Roosevelt increased spending overall by 40 percent from 1933 to 1934, and the deficit by nearly a third. In the first five years of the New Deal, the gross domestic product rose more than 40 percent. The New Deal faltered not when FDR disdained conservative advice on deficits, but only when he briefly followed it. After Roosevelt drastically cut the deficit in his 1937 budget, the economy promptly tanked. When FDR reversed course, the economy turned around.

In reality, Roosevelt also increased tax rate; the top tax rate climbing from 63% to 79%.  No doubt his conservative critics encouraged that, too.  In other words, Roosevelt both decreased spending and increased taxes. In addition, there were new Social Security taxes in 1936 and 1937.  And a new corporate tax on undistributed earnings went into effect in 1937, too. If only we had some way to know what effect tax increases have on economic growth!

Oh, and the Fed doubled reserve requirements on banks from 1936 to 1937.

I wonder–pure speculation of course–if significant tax increases and contractions in the money supply might have, in some mysterious way, contributed to the economic downturn of 1937-1938.

Sadly, we may never know.

In 1933, FDR blew up a London economic summit that sought to set fixed currency exchange rates, a virtual return to the gold standard that would have hobbled his economic strategy.

In other words, FDR was a unilateralist cowboy who intentionally flaunted international consensus for his own political ends, and, incidentally, reversed course a year later.

There was a lot more stuff going on in 1933-1940 than simply government spending.  Not that you’d know it from reading Mr. Shrum’s amusing little article.


Stiglitz Calls Geithner Plan “Ersatz Capitalism”

A number of economists, including Paul Krugman, have panned Timothy Geithner’s plan to recapitalize banks by buying toxic assets in a complex and highly leveraged way that puts the taxpayer’s dollars at risk.

Joseph Stiglitz, a Nobel economist, has piled on. In fact, his is probably the most damning opinion I’ve seen. Stiglitz says that first of all, Geithner has analyzed the problem incorrectly. Geithner keeps telling us it is a “liquidity” problem. Stiglitz says “poppycock”:

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

What he means is their “capital”, or assets are in worthless loans. Yes that’s right – worthless. So, as he points out, paying “fair market value” for these assets won’t work, will it? They’re worthless.

So what does Geithner propose?

Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Stiglitz explains the proposed process very well, demonstrating it fairly simple and straightforward examples how the taxpayer takes the majority of the risk, and, given the nature off the “assets”, will absorb the majority of the losses.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for).

But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

That is a process driven problem. The Geithner process guarantees the outcome because that is the most likely outcome, banks not being stupid and with the government bearing the cost.

Bottom line – taxpayers are going to get hosed and hosed good.

Stiglitz provides an interesting alternative which gives you an idea of how poorly he regards Geithner’s plan:

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well.

Given only those two option, I’d say Stiglitz has a point.

Of course, the argument we’ve made since day one is we ought to let them go bust, get it over with and begin the recovery. That’s the same argument we made concerning GM and Chrysler.

Instead we’ve gotten these insane plans driven by the administration which has thrown literally trillions of good dollars after bad – and to no apparent avail.

This madness has got to stop.

~McQ