A teacher is a person who never says anything once.
Howard Nemerov
Anna Schwartz: RIP
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| Courtesy of econlib.org |
"The United States has experienced three major price inflations since 1914, and each has been preceded and accompanied by a corresponding increase in the rate of growth of the money supply: 1914–1920, 1939–1948, and 1967–1980. An acceleration of money growth in excess of real output growth has invariably produced inflation—in these episodes and in many earlier examples in the United States and elsewhere in the world."
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| Courtesy of Patton / Forbes NOTE: because of tepid consumer spending, much remains at Fed Reserve banks, not the economy but if consumer borrowing picks up... |
The 96-year-old economist earned her Master's degree from Columbia University at the age of 19 and started her professional career in the middle of the Depression. She began her lifelong stint with the National Bureau of Economic Research in 1941 to to her death this past Thursday. (She picked up her doctorate at Columbia in 1964.)
Anna Schwartz was perhaps best known, by non-economists like me, for her monetarist collaboration work with Nobel Laureate economist Milton Friedman and was an outstanding historian of economics, with deep knowledge of business cycles and monetary policies. I have not read most of her work, but I'm familiar with a couple of popular pieces I would bring to the reader's attention: the first is when she rebukes neo-Keynesian Paul Krugman's "damning with faint praise" tribute to Friedman.
The second is a WSJ interview (aptly titled "Bernanke is Fighting the Last War") in the aftermath of the passage of TARP and Treasury Secretary Paulson's policy shift from shoring up toxic assets to shoring up the banks, which she considered moral hazard (thumbs UP!) She argues that the issue wasn't a liquidity issue (i.e., whether there was money to spend) but analysis paralysis in lending: were they lending to a zombie bank? For example, how much were those mortgage-backed securities from bubble real estate markets (e.g., Nevada, California, and Florida) really worth? All Paulson was doing was deferring the day of reckoning for weak banks.
Schwartz was not happy with the preceding Federal Reserve chairman Greenspan's self-serving rationalization (i.e., worries about collateral damage on other, non-bubble areas of the economy) for prolonged loose monetary policy fueling the multiple asset bubbles. And she especially did not like Greenspan successor Bernanke's reference to Milton's and her work on Depression economics (Bernanke considers himself a student of the Depression), vowing that he would never forget those lessons on his watch at the Fed. She felt if Bernanke had really understood their work, he would have realized the Depression and 2008 economic tsunami crises were apples and oranges and that he was using the wrong policy tools.
Unfortunately, I think that Schwartz is right.
My thoughts and prayers with Anna Schwartz's surviving family members and friends.
Obama's "Just Fine" Economy: A Reality Check
It's interesting how otherwise intelligent progressives, like Barack Obama, always jump to conspiracy theories. I've always thought that one of the distinguishing characteristics of an intelligent person is the ability to learn from his mistakes (and/or the mistakes of others) and reexamine his assumptions.
For example, like most Americans, I was supportive of the liberation of Iraq. There were a number of reasons. First, I never thought that Bush, after criticizing the Clinton Administration over nation building, would take on an open-ended commitment on his own, given a weak economy as the country was struggling to emerge from a massive stock market bust, the financial scandals, and 9/11. Second, I trusted the President to be forthright about the intelligence on Iraq, although the evidence he showed seemed thin. I did consider it suspicious that Hussein would throw out UN inspectors just so he could destroy old poison gas stockpiles in secret, knowing it wouldn't help him get economic sanctions lifted. But I figured that he had secret evidence I didn't know about. Third, as the nation's only Ivy League MBA President and a former businessman (and being an MBA myself), Bush seemed to have the knowledge and skills to manage the war and any subsequent occupation; certainly he knew about potential strife among the Shiites, Sunnis and Kurds.
In short, I was wrong about Bush. I also never thought that he would squander the hard-fought balanced budgets that the GOP House forced on Clinton, keeping him in an fiscal straitjacket. I did not think that Bush would initiate a war that he couldn't pay for. I never thought that Bush would push for an unpaid for expansion of a Great Society program (Medicare drug benefit). I never in a million years considered the possibility that Bush would nominate dubiously qualified Texas cronies as Attorney General and SCOTUS. I was disappointed that the first MBA President did little to simplify taxes and lower them on the business side or streamline over $1T in regulatory costs, choking economic growth. I also saw less of the bipartisanship leadership Bush had shown in the state of Texas in Washington DC. And I thought what happened during the economic tsunami was a betrayal of the fundamental principles of free markets. What was he thinking of? Trying to channel his inner Paul Krugman?
Does that mean I would have supported Gore or Kerry? Not a chance. As bad as Bush was, the opportunity costs of choosing a tax-spend-and-regulate social liberal were immeasurably greater, and the election of Obama has sadly proven the point.
Barack Obama is a different story. Stubbornness can be a positive quality; at the right time and place, it can reflect political courage. But it can also reflect a state of denial. Clinton realized this after the 1994 elections put the House under control of the GOP for the first time in decades: he declared the era of Big Government was over. Obama, on the other hand, decided to ram the Senate health care bill through the House AFTER polls had turned way negative against the corrupt bill and after Scott Brown used the issue to become the first Massachusetts GOP US Senator in just over 3 decades. Dozens of House Democrats voted against it. Obama gave over 3 dozen speeches on health care and his conclusion was NOT that there was a problem with the bill but that he just hadn't found the right words to sell it. Somehow the opposition was all due to the corrupting influence of "the special interests" or Fox News on the gullible.... It's not as though Obama didn't know that Clinton lost the House after pursuing a tax hike and health care reform.
Remember what former Arkansas Democratic Congressman Marion Berry said in reference to the upcoming 2010 mid-terms?
"The president himself, when that was brought up in one group, said, 'Well, the big difference here and in '94 was you've got me.'"Winston Churchill once adroitly observed, "Show me a young Conservative and I'll show you someone with no heart. Show me an old Liberal and I'll show you someone with no brains."
No, Obama: you can't claim the saying only applies to Joe Biden because you are middle-aged... On the other hand: half a heart, half a brain.... Hmmmm.
Let us remember what President-Elect Barack Obama said:
Obama blamed the Bush administration's laissez-faire economic philosophy for recent mis-steps including Madoff's stunning exposure as a corrupt financier ."There's not a lot of adult supervision out there," said Obama at a press conference in Chicago today. "We have been asleep at the switch," said Obama. "Not just some of the regulatory agencies but some of the Congressional committees have not been as aggressive as they should and we've had a White House that started with the premise that deregulation was always good."OH, PLEASE SHOW ME THE LAISSEZ-FAIRE POLICIES OF THE BUSH ADMINISTRATION.! No laissez-faire politician would have nearly doubled the national debt to $10.6T, bailed out AIG, the GSE's and the auto companies, forced the banks to accept loans from the government, expanded unpaid-for Medicare benefits, increased federal spending on education by over 50%, and added (not subtracted) regulatory costs by tens of billions of dollars to an annual tab of over $1T.
Even laissez-faire advocates agree with some minimal level of regulation (e.g., court system guaranteeing certain economic and other individual unalienable/enumerated rights and public safety). The issue that we have is regulations typically impose expensive constraints on business activities. Businesses must be able to, at minimum, cover their costs, including taxes, regulatory compliance costs, etc. Those of us who are laissez faire first want to ensure that regulation is necessary; if necessary, we want to determine at what point regulation is sufficient. At that point, additional regulations simply exacerbate costs. It's like healthy eating: we eat to the point our appetites are satiated; additional unnecessary calories are simply converted to fat. Obama's deregulation allegation is like accusing conservatives of arguing that dieting is always good. Dieting is a problem if a person is underweight or at a healthy weight. But we are a long way from a lean federal government.
Obama's speech was the usual partisan crap, a clear departure from reality. Just because McCain failed to answer Obama's baseless charges of McCain's "deregulation-run-amok" policies during the campaign, let us remember McCain's real record on enacted, supported or sponsored legislation:
- campaign finance regulations
- patient bill of rights
- the climate stewardship act
- for Medicare prescription drug price setting
- against capping CAFE standards
- against drilling in ANWR
- supported Sarbanes/Oxley
There was no massive deregulation under the Bush Administration; in fact, the Senate Democrats throughout the Bush Administration could filibuster any such initiative. The best Bush could achieve was slowing down the increase in regulation!
Obama is left with no excuse unless he's going to make the crackpot claim that there was some "vast right-wing conspiracy" of GOP regulators. What about the Nasdaq meltdown under the Clinton Administration? Was that a failure of a right-wing conspiracy, too? What about the state regulators of bankers in New York state? What about the oversight responsibility of the Congress (controlled by the Dems from 2007 through 2010)? What about all the other parties involved in the real estate bubble, e.g., credit rating agencies, accountants, the Fed, appraisers, insurers, etc.?
Fortunately, there are far more reasonable explanations (for anyone whom has ever worked in a big bureaucracy like the government) than Obama's unsupported partisan allegations, e.g., bureaucratic inertia, incompetent or otherwise ineffective regulators, etc. Ockham's razor!
Let's move to Obama's job plan: MORE MONEY for teachers, police, and firefighters--and, of course, infrastructure, et al. I have already visited this topic numerous times. Among other things, many cities and states are finding themselves facing huge pension costs as Baby Boomers accelerate their retirements. They need to fight the same type battles that Wisconsin, San Diego and San Jose have found themselves dealing with. The federal government can't cover its own bills, never mind engage in the moral hazard of bailing out poorly managed local and state governments. Even if we did, where are the state and local governments find the money next year and the following? And, of course, there's one of the stock favorite sayings of this blog: MONEY IS FUNGIBLE. All municipal and state governments would have to do is transfer money they would dedicate for teachers and public safety and put it elsewhere in their budgets.
Shikha Dalmia, a Reason analyst, has some relevant takeaways:
- "Every (unsubsidized) job in the private sector exists because it generates more in wealth or value than it consumes in resources — and hence grows the economic pie. That’s not the case with the public sector." That's because government doesn't market goods and services; it doesn't compete for revenue to cover its costs. It imposes its costs on the individuals and businesses by coercion, whether directly (by taxes) or indirectly (regulations, mandates, etc.)
- "It is true that private companies have added 4.3 million jobs since February 2010. However, this represents a 2.8 percent rate of job growth compared to the 8 percent average after previous recoveries — despite (or perhaps because of) $800 billion in stimulus spending."
- "Between 1970 and 2010, public school enrollment went up by 8.5 percent — while public-school employee rolls swelled a mind-boggling 96.2 percent. This cost the country $210 billion and failed to produce one iota of improvement in student achievement."
- "Since the post-2008 stimulus, the combined budget of America’s regulatory agencies has grown a healthy 16 percent, topping $54 billion. The overall economy? A paltry 5 percent. Employment at federal regulatory agencies has climbed 13 percent since Obama took office. By contrast, employment shrank by 5.6 percent in the private sector."
Professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman's ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent. "The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees. In the House, the average is around 20 percent. For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent."Why did private firms contract expenditures? The researchers suggest a few reasons:
- The private sector was planning to do a project without explicit government support (e.g., the TVA), and the government comes into the project as a partner. Government resources displace private sector resources.
- Government resources in an area with little economic slack (e.g., low unemployment) crowd out private sector investment. The private sector might not be able to take on a different project because of resource unavailability or increased project costs.
- Business uncertainty because of government activities or inactivities
the 2008 Financial Apocalypse:
Paul Krugman Agreed With Free Market Economists
Of course, it was a Republican President's policy... (Bush no doubt didn't spend nearly enough to suit Krugman's taste...) [Of course, homes in Silicon Valley were probably already averaging near a half million dollars by the time I temporarily moved there in late 1999, still in the Faux-Golden Age of Clinton (no gold behind the loose money printed by Greenspan): a spartan one-bedroom cost $1300/month to rent. It's always easier to make the call AFTER the real estate market is already in correction by that time...]
From his NYT 2008 column "Home Not-So-Sweet Home" (my edits):
President Bush in 2002 [introduced] his “Homeownership Challenge” — a set of policy initiatives that were supposed to sharply increase homeownership, especially for minority groups.But here’s a question rarely asked, at least in Washington: Why should ever-increasing homeownership be a policy goal? How many people should own homes, anyway? Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner...
And the belief that you’re nothing if you don’t own a home is reflected in U.S. policy. Because the I.R.S. lets you deduct mortgage interest from your taxable income but doesn’t let you deduct rent, the federal tax system provides an enormous subsidy to owner-occupied housing. On top of that, government-sponsored enterprises — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — provide cheap financing for home buyers.
All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.Paul, you realize, of course, that Bush doesn't deserve ALL the credit, right? It's not that the Clinton-inspired 1997 toughened CRA guidelines for banks to document closing the racial home ownership gap didn't affect credit standards, did it? Nor any of other tax giveaways in the Golden Age of Clinton, like the first $250K in capital gains from home sales if you live in a house at least 2 of 5 years? And, of course, what else was it you said in the very same column? Oh, yeah: here it is: "Austan Goolsbee, a University of Chicago economist who is one of Barack Obama’s top advisers, warned against a crackdown on subprime lending. “For be it ever so humble,” he wrote, “there really is no place like home, even if it does come with a balloon payment mortgage.”"
I can count on you to support our efforts to eliminate the home mortgage interest deduction and other home ownership tax gimmicks, right? Not to mention our attempts to privatize or eliminate the GSE's and the FHA?
HT: Mark J. Perry of Carpe Diem
Musical Interlude: My Favorite Groups
Tom Petty & Heartbreakers, "Jammin' Me"
