Economics

There’s a weird symmetry between the Right and the Left. It’s difficult to articulate, but it’s becoming clearer to me now. They’re both Keynesians, only in different domains. The Left are Keynesians about economics, the Right are Keynesians about political strategy. The trouble with either is that Keynesianism doesn’t work very well anywhere it's applied.

Lest I lose my reader straight out of the gate, allow me to explain in simpler terms the defining characteristics of what I’ll call the “Keynesian Model.” This model:

1. Deals almost exclusively in macro-level aggregates.

2. Holds that these aggregates are mostly informative.

3. Information can be successfully used for macro purposes.

For example, in economics, Keynesians want to tweak or “stimulate” the economy by raining largess on particular sectors to stimulate aggregate labor demand, say.

But the trouble with this way of looking at the world is:

I. The micro-level is where most of the action is.

II. The devil of the economy is in the details of billions of individual means-ends actions, coordinations and transactions, which makes knowledge mostly local.

III. These details are far to complex to be reduced to aggregates and manipulated to positive effect.

Now, I believe the Left has figured out I-III in the political domain, though sadly not in the economic (indeed, I seriously doubt they care about the micro mechanisms of economic growth at all, as I argue here.  Keynesian policies of the Obama Administration are merely a pretext for the end of consolidating power, economics be damned. But I digress.). The point is, the right seems to be under a similar spell, except in their approach to political strategy.

If anybody knows Tim Giethner, feel free to send him a copy of this.  In one of the flashes of Jeffersonian brilliance, I think I have it figured out why he is having a hard time staffing up Treasury.

We all agree that the economy is in dire straits right now.  Just stabilizing the problem, more or less turning it around, is going to take a herculean effort.  To accomplish this we need a group of near geniuses.  We need people with a strong grasp on the problems that we have allowed into our free market system, and how to manipulate the market to fix them.  We need people from the private sector, but those from the public sector with a strong background in the issues before us are also great.  We need men and women with a firm grasp on the principles of a free market democratic system.  So we all agree that this would describe what we need?  If you do, that is why Giethner can not find anybody to join him.

Why would a strong believer in the strength of our free market system want to step into this group?  This week Geithner lashed out at the Petroleum industry and indicated he think we need to tax the living crap out of them.  Punishing success while propping up failure is not free market anything.  How do you build a successful system based on punishing success?  How can somebody who wants to see industry flourish join a government what wants to nationalize and centralize everything?  Then look at the push to nationalize healthcare.  Look at tax plans that start by punishing even the moderately successful ( $250k does not make you Donald Trump, just good at what you do ).  Listen to the talk of taking control of banks and stepping up control of the auto industry.

There is the problem.  Administrations come and go.  While many of us hope the Administration does not succeed at some of their goals ( I won’t say fail because I don’t want Gibbs to make fun of me next ), we also know that if they do it can be undone.  Anybody with a great background and strong career knows this.  Once you go over to perform these ruinous acts, you will be branded as one of the people who committed these damaging moved long after this administration is relegated to history.  Decades building a career based on industry and economics will be flushed down the toilet.  If you join this administration, you will deserve the punishment for betraying the principles that built this nation.   That is why we can not get anybody qualified to join this team.

http://federalistblogs.wordpress.com

With the stimulus signed into law, Barack Obama got the dramatic, unprecedented jolt to the economy that he wanted -- the yearly budgetary impact of the stimulus is about 3 times what the 2001 Bush tax cuts were -- and now we'll have a chance to see if it works. Today was the day Barack Obama took ownership of the economy. A President could traditionally expect an 18 to 24 month honeymoon -- but with this dramatic action that honeymoon period shortened to 6 to 12 months. For Obama's stake -- and for liberalism's -- it had better work. 

Let's lay down some markers on what success means, and hold the Democrats accountable for meeting them. Start with their own words. Advocates of the stimulus have taken one of two tacks to describe its impact: 

• The President's contention that the stimulus will save or create 4 million new jobs
• The fact that the stimulus needed to be be at least $775 billion since this was the projected difference between the economy's actual and potential capacity. 

President Obama is on the record stating that employment will be 4 million higher than if we did nothing by the end of 2010, and that economic growth will be about 2.8% higher (over two years, the stimulus represents about 2.8% of GDP) -- if you assume every dollar of stimulus is a dollar of economic growth, as is strongly implied by the second bullet. 

What does this mean in terms of actual levels of economic activity? 

First, we have to establish some baselines. Last week, Nate Silver posted an insightful chart forecasting the unemployment rate based on postwar recessions. If job growth continues along the average trajectory of the postwar period, unemployment will peak at about 8.1% this summer and begin declining. Most economists would say this is getting off relatively easy. However, if the trajectory continues along the lines predicted by recessions in the modern period marked by the Fed chairmanship of Alan Greenspan, unemployment will top out at 9.6% in June 2010 before beginning a steeper decline. 

This is if we "do nothing."

Obama's projected four million jobs saved translates to a projected 2.8% off the unemployment rate by the end of 2010. My reading of the post-1987 chart suggests that unemployment if we do nothing would be at 9.1% in January 2011 and 6.3% post-stimulus. This is the worst case scenario. Looking at the postwar curve, 6.8% unemployment pre-stimulus would be converted into an astonishing 4.0% post-stimulus. This is highly unlikely, but it's the best case scenario. 

Split the difference between these scenarios and you get an unemployment rate of 5.15% at the end of 2010. Either way, we should expect an unemployment rate no worse than 6.3% at the appointed date if Obama's economic theory proves correct. 

The economic growth targets are a bit more nebulous, but the implicit promise is that the economy will get no worse than it is when the stimulus first kicks in. So we should expect zero economic growth at a minimum over the next two years if what we are promised actually occurs -- and likely more, since even 1-2% percent declines in economic activity are rarely sustained over four quarters or more (Obama has seven economic quarters to make it happen). 

3 trillion! -- Senate, Fed, Treasury attack crisis

http://finance.yahoo.com/news/3-trillion-Senate-Fed-apf-14318088.html

Judging for the reaction of equity markets today in the US and overnight in China , I'm beginning to think this indiscriminate financial carpet bombing IS the crisis.

Here is a good read making the free market case in opposition to the Obama economic plan. The article written by John Tamny of H.C. Wainwright Economics provides an important lesson in economics and the damage caused by ineffective and damaging government intervention.   Government moving wealth around, the essence of the Obama tax plan disguised as tax credits will stifle demand and not serve as a vehicle of economic growth.  Tamny points out that since no change in wealth will result from the Obama tax policy (unlike what would be the result of an across the board real tax rate reduction) it merely is a punitive measure aimed at the producers and achievers in favor of the non-producers and non-achievers in the economy. John Tamny's supporting argument as to why he believes that the Obama plan will result in slowing economic recovery is based in part upon the crowding out theory. Since government debt is now at historic levels both in real dollars and in percentage of the GDP less money can be made available for the sort of entrepreneurial activity which drives economic growth. The Obama plan at every turn takes decision making away from the private sector and replaces it with government redistribution and allocation of hard earned dollars.  The American people still have the ingenuity, creativity, and innovative spirit needed to lead the world economy if only the government will not stand in the way and not interfere with the free market's invisible hand.However, this time unlike in other recession and recovery cycles, the US government is now part owner of some of the biggest names in the financial sector and the auto sector due to billions of dollars in debt buyouts meaning, Uncle Sam sits on the boards of these companies that were bailed out. That debt belongs to all of us yet we have little to no say in demanding that those companies now partly owned by the taxpayers shape up.  Tamny points out the truth proven time after time that left alone, companies or industries are reorganized and that the bailouts are "... delaying the process whereby people and capital are managed productively. "

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hat tip to http://www.997wtn.com/custpage.cfm?frm=9347&sec_id=9377 Ralph Bristol's Nashville's Morning News, WTN 99.7

Ralph interviews John Tamny on Friday mornings.

John Tamny is editor of http://www.realclearmarkets.com (RealClearMarkets), a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading (www.trtadvisors.com). He can be reached at jtamny@realclearmarkets.com.

http://www.realclearmarkets.com/articles/2009/01/obamas_economic_solutions_are.html

Obama's Economic Solutions Are Contractionary  By John Tamny

Here is an interesting discussion of the existence (or non-existence) of intellectual property rights.

Libertarians fighting over whether or not you can own "intellectual property."

What do you think?

One of the curious features of 2008 was how little impact the recession seemed to have on everyday life for most of us. Indeed, aside from a few early bears, the hot debate seemed to be whether or not there would be a recession at all. As late as September, traders on Intrade were betting against a recession in 2008. Despite all this, the NBER recently established that the US economy went into recession in December of 2007.

While the recession was drifting by like an iceberg in the background, the financial system was freezing up. The violent tremors occured in June 2007 when two Bear Stearns' hedge funds laden with mortgage debt became publicly insolvent. Bear itself went under in February of 2008 and by July the dominoes really started to fall in the financial sector.

Now, the fallout in the real economy is starting to come fast and furious. This is scary stuff and still we've only seen the tip of the iceberg.

1. Nortel is bankrupt.

Nortel Networks Corp., the phone equipment maker that was once Canada’s largest company by market value, filed for bankruptcy protection after losses mounted and financing dried up amid a deepening recession.

The century-old company, North America’s biggest maker of phone gear and worth about $250 billion at its peak in 2000, fell victim to reduced spending by customers such as Verizon Communications Inc. and competition from Cisco Systems Inc. The company made the filing a day before a $107 million interest payment was due...

2. Retail sales has collapsed.

Retail sales are a key portion of consumer spending and real retail sales have fallen off a cliff.

And retailers are going bankrupt:

• Gottschalks - 1904-2009 - R.I.P.
• Goody's - 1953-2009 - R.I.P.

3. Shipping has is slowing to a crawl across the globe.

"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster."

Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

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A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.

"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

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It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.

The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.

Financial Armageddon links to a Wall Street Journal article on the state of the U.S. freight industry: Freight Haulers Slam on the Brakes.

In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.

"We're settling in for nuclear winter in the first half of 2009," says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.

He's not alone. Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more. As a result, companies in industries ranging from trucking to railroads to ocean shipping are scaling back sharply. 

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At a Kenworth plant in Renton, Wash., more than 400 employees will lose their jobs when the company, a subsidiary of Paccar Inc., suspends making heavy-duty highway trucks at the plant next year, according to Don Hursey of the machinists union, who says he has been briefed on the plans. Just a few years ago, the plant produced 50 big rigs a day, he says. A Kenworth spokesman declines to specify how many workers will lose their jobs.

"This is the tip of the iceberg," Mr. Hursey says. "It's going to be a disaster next year for the entire industry. I'm scared to death."

Jon is right. The addition of some $300 billion in temporary tax cuts to the massive $775 billion Obama stimulus is a risk politically and Bushonomics (e.g. tax-cut-and-spend) on steroids policywise.

What's the main reason Republicans are dispirited right now? Because the Republican Party no longer represented less spending and limited government. What do we propose to do to fix it? Why... double down on this strategy by throwing in with the biggest spending bill in U.S. history if does enough tax cutting! As Jon infers, if the GOP accepts massive stimulus spending of any kind, it will sever the GOP from its base for years, and keep Republicans from rallying around a unifying limited government message in 2010. Instead of a peaceful 1994-style revolution, this will likely trigger a bloody Goldwater-style takeover of the GOP from the outside which may take 2 or 3 presidential cycles to fully play out. Ugly, but it may turn out, necessary.

There is broad consensus in the country right now that we need to "do something" about the economy. The economy will probably recover on its own by early 2010, but we must nonetheless "do something." Republicans should accept this fact and move on.

But there are different ways to "do something." A stimulus primarily composed of permanent tax cuts is a perfectly legitimate and defensive version of "doing something" both from a policy and public opinion perspective -- one that we can go to the country with and not appear like Hooverites or know-nothings. For one thing, past (successful) stimuli have been composed primarily of tax relief. Obama's own economist says the economic multiplier effect from tax relief is greater than than the general consensus of the multiplier from spending (allowing the GOP to paint larding up the bill with spending as primarily ideologically -- not economically -- driven). The American people are not economists, and likely have no inherent preference between tax cuts and spending increases so long as the plan is of a certain magnitude. So, let's educate them.

Right now, I yearn for the legislative acumen -- and in this case, the spine -- of Bob Dole, who rallied even John Chafee -- Lincoln's father -- to oppose the 1993 Clinton stimulus. With the GOP officially reaching rock bottom today, the Republican leadership in Congress has to recognize that number one political priority is not to give voters warm and fuzzies by angling into photo ops with Obama. Yes, he's popular, but his popularity can only redound to the benefit of one party, and that's not Republicans. For a cautionary tale on what happens when a party tries this strategy, see the 2002 midterm elections.

The GOP's number one priority politically is to set into motion a series of events that will make Obama look more ineffective, partisan, and unpopular than he is today. Playing hard-to-get on the stimulus is one way to do it. And we need to set the stage for a unified and effective Republican opposition that will actually fight from top to bottom. Even if Democrats did some truly stupid things these last two years, it was always impossible to rally grassroots Republicans in opposition because the party had zero credibility. Closing that credibility gap -- not beating Obama in popularity contest right now -- must be job one in order to rebuild the GOP. Newt Gingrich and Bob Dole (!) did it, and Boehner and McConnell must do the same. Not neutering our principles in search of short-term headlines would be a good start. 

In 2003, Megan McArdle coined Jane's Law: "The devotees of the party in power are smug and arrogant. The devotees of the party out of power are insane."  Some friends on the Left appear to be exploring both.

Speculating on the Right's distaste for the various fiscal stimulus proposals and bailout billions, Steve Benen, Ed Kilgore, Josh Marshall, and Matt Yglesias all argue that the only explanations for involve the Right being stupid or evil.  Yglesias summarized...

• The Moral Explanation: Ed Kilgore explains that some on the right thing America is too fate and happy. This is a bit like David Frum’s nineties vintage Donner Party conservatism.

• The Benefactor Explanation: Matt Stoller says the right is more interested in entrenching inequality than worrying about the economy.

• The Illiterate Explanation: Maybe they’re just dumb.

• The Strategic Explanation: TPM Reader JF observes that a long depression serves the GOP’s political interests.

Washington Monthly's Benen also speculates on a Machurian Explanation, which assumes "it's possible that GOP officials secretly hate the United States and are actively trying to destroy us from within. That last one seems unlikely, but I'm just presenting the possibilities."   Classy.  Let's try not to think about how outraged the Left has been for the last 7 years over Andrew Sullivan suggesting that some people could "mount what amounts to a fifth column." 

Inexplicably, none of them appear to even consider the arguments that skeptics actually make: that (a) fiscal stimulus is a poor tool for addressing recessions, (b) fiscal stimulus and bailouts are distortionary, and (c) we can't keep doubling down every time the previous policy bets go bad.

The case against massive government intervention isn't tough.  The Left should be particularly aware of that after having spent the past few years attacking Republicans for doubling down on various well-intentioned but unhelpful interventions.  And the case against fiscal stimulus isn't exactly unknown...

• "Can we pump up the economy with additional tax cuts or temporary public spending? Not safely..."
  
• "What about fiscal policy? Some liberals have recently [argued] that the economic slump is a reason to put aside promises to protect the Social Security surplus. But those liberals are making a big mistake."
  
• "[A]lmost all economists now agree with [Milton Friedman's] position that monetary policy, not fiscal policy, is the tool of choice for fighting recessions."

In fact, the case against fiscal stimulus shouldn't be unfamilar to the Left, either.  Each of those quotes is from liberal economist Paul Krugman.  In fairness, there are also good economic arguments for fiscal stimulus - even massive fiscal stimulus - as "in the face of deep and persistent slumps" and when "the economy is near a liquidity trap" (both of which are possible).   Like an alcoholic taking another drink to ease the pain, though, those arguments amount to doubling down to get relief from the symptoms.

And then you have positively weird comments, like this from Matt Stoller...

Deflation transfers wealth from debtors to creditors, which is another way of saying from people who are cash poor (the poor, the middle class, entrepreneurs, risk-takers) to people who have cash (the risk-averse rich).  Unfortunately, the risk-averse rich don't spend very much of their wealth relative to everyone else, which is why they are risk-averse. ... And here you see the political problem; people that have money would prefer that they remain on top, and will oppose attempts to restart spending from a broad base.  These people are known as 'conservatives', and they have their Beltway facing servants writing screeds about how the New Deal failed in the 1930s.  Economics is very dry and technical, but it is inherently political.  

Stoller seems to confuse wealthy people with people who keep their money in a coffee can.  In the real world, wealthy people keep their wealth in investments....and lose massive amounts of it when the economy tanks.  And while deflation might make any given dollar more valuable, that's not at all the same thing as making wealthy people wealthier.  Anyway, the implication of all this is that massive inflation is an important progressive policy.  Think of all the wealth you could transfer to the poor!  Viva la 70's!  I encourage the Left to start making this argument.

Which brings us back to this: the Left has always some very conspiratorial, paranoid notions about the Right (and the same can be said of the Right about the Left, of course).  But they will have fewer and fewer tangible Republican policies to oppose as they consolidate control of government, so expect this to grow worse.  They're going to have to continually work harder to justify vilifying their opponents. 

Ultimately, this dynamic will not be healthy for the Left.   Tylen Cowen is right...

It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies.  Have I mentioned that having their party in power was very bad for Republican economists too? 

Being out of power helps to sharpen a movement and party; getting back into power dumbs them right back down.