Failed ideas of economists

Here's John Tammy, a senior economist with H.C. Wainwright Economics, writing of Joseph Stiglitz, and the Failed Ideas of Economists

In a recent article for Vanity Fair, Stiglitz engaged in falsehoods and contradictions in order to blame capitalism for our present troubles. It would perhaps be better for him and other elite economists to simply look in the mirror.

Indeed, while Alan Greenspan’s light trashing of free markets has surely earned him a place in economic purgatory, the blame being passed his way for the housing boom and bust is not rooted in reality. Many even on the Right blame low nominal rates of interest on Greenspan’s watch for the latter, but then history shows housing has traditionally done best when interest rates are rising.

More realistically, weak currencies are the biggest drivers of nominal home-price gains, and for evidence we need only study Richard Nixon’s second presidential term and Jimmy Carter’s lone term to find that much like this decade, housing was frothy under both. Stiglitz argues that Greenspan had a role here for turning on “the money spigot” with “full force” earlier in the decade, but then money supply is vastly overrated as an indicator of a currency’s direction. For evidence, we need only compare the ‘70s and ‘80s when money creation by the Fed was the same, but achieved opposite results. If Stiglitz is looking for someone to blame here, he would do better to finger a Bush Treasury that embraced a weak dollar with great vigor.

Stiglitz says Greenspan should have been more vigilant about curbing “predatory” lending to low-income households and “liar loans”, but when we consider how the Right talked up “America’s Ownership Society” in concert with politicians from the Left eager for Fannie and Freddie to expand their mandate into the subprime space, it seems folly to assume that Greenspan could have blunted this bipartisan bout with political correctness. Stiglitz decries the innovation that made these loans possible, but then loans are always risky, and they’re only problematic when the very regulators and politicians whose actions he espouses seek to privatize the gains from same, while socializing the losses.

While he served President Clinton, Stiglitz claimed he did not support the repeal of Glass-Steagall, and that repeal changed the culture of banking, thus making way for the various failures in our midst. What he ignores is that with the exception of Citigroup, the majority of financial failures involved investment banks lacking a commercial-bank affiliation. Indeed, imagine what might have happened if regulations had kept commercial banks from serving as White Knights in this whole financial mess (see J.P. Morgan & Bank of America), and more broadly, what a shame that regulations kept other cash rich companies such as Wal-Mart from buying greatly weakened financial institutions in order to enter the banking space themselves.

Stiglitz regularly seeks to elevate regulation as the path to financial health, but then contradicts himself in decrying a 2004 SEC decision in which investment banks were allowed to increase their debt-to-capital ratios “from 12:1 to 30:1, or higher”. The question Stiglitz fails to ask is whether regulation was in fact the problem. Indeed, the ’04 SEC decree essentially allowed risk-oriented banks to hide behind the very regulations that Stiglitz would like more of. Did it ever occur to him that absent a muscular SEC, self-interested investors with their money on the line might have regulated the investment banks themselves; allowing firms with a history of investment success higher debt-to-capital ratios, while curbing the activities of those thought to be unworthy?

On the tax front, Stiglitz claims that the 2001 and 2003 Bush tax cuts “played a pivotal role in shaping the background conditions of the current crisis.” According to him, “they did very little to stimulate the economy.” About the 2001 “reductions”, he would have a point in that stimulus and tax breaks for select industries are by definition an economic retardant. But there again lies a contradiction in that while he correctly decries the imposition of Henry Paulson’s awful TARP, his reasoning has to do with Paulson’s failure to do anything “about the source of the problem, namely all those foreclosures.” Put simply, Stiglitz didn’t like the welfare that characterized Bush's Stimulus I, but somehow welfare for irresponsible homebuyers is a good thing.

Regarding the ’03 cuts, if economic growth is the certain result of productive work effort bolstered by investment, and it is, how is it that lower penalties on both would harm ours or any economy? More important, Stiglitz contradicts himself again in noting the massive amount of “foreign” oil that reached our shores in subsequent years. Indeed, imports of any kind are merely a reward for productive economic activity. If the ’03 cuts had hurt the economy, this would have revealed itself through less, not more in the way of imports. Stiglitz would also do well to remember that we’re not “independent” when it comes to all manner of goods, but far from economically enervating, this lack of self-sufficiency is a positive for Americans mostly doing that which they do best. Put simply, self-sufficiency of the economic variety is merely a kind term for poverty.

Obama-nomics failed in Japan

President-elect Barack Obama's plan to stimulate the economy by increasing government spending was tried in Japan and led to Japan's "lost decade," in which the economy grew hardly at all. The Wall Street Journal editorial page recounts the details in their column titled Barack Obama-san

As January 20 nears, Barack Obama's ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the "stimulus" at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian "pump-priming" in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we'd recount the history of the last major country that tried to spend its way to "stimulus" -- Japan during its "lost decade" of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa's Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan's debt-to-GDP ratio was 68.6%.

.....

Now we're told that a similar spending program -- a new New Deal -- will revive the U.S. economy. How do you say "good luck" in Japanese?

Bankruptcy Before Bailouts

United States Senator Jim DeMint, Republican from South Carolina, was interviewed by National Review Online regarding a possible federal bailout of the Big Three automobile industry.

GM had its best sales year ever in 2007. It sold over 9 million cars around the world — the same number as Toyota. But Toyota made $20 billion, and GM lost $40 billion. Their viability is not going to change if the cost structure is such that they cannot succeed. Until they restructure, we’d just be throwing good money after bad to prop them up for a few months.

......

It is a dangerous and socialist idea that the government can intervene and guarantee outcomes. We can’t guarantee outcomes. And in fact, the reason we are in a financial crisis in our country is because of government involvement — such as the mismanagement of Fannie Mae. In the financial industry, for years, we forced banks to make loans to people who didn’t have good credit as part of a social-engineering strategy.

Likewise with the unions in Michigan. We’ve forced people to join unions in Michigan if they want to work for the auto industry, and thus we’ve forced them basically to fund a political party through their dues. They’re the only kind of organization that is given that kind of government protection. And so forced unionization, sanctioned by government, has essentially put the backs of these American auto companies to the wall. And now the government is going to come in and say we have to save them.

Government has been doing that on many fronts. Our policies create a crisis, and once there’s a crisis, we say we need to get the government more involved. We’re inching our way toward a European style of socialism. The auto bailout is just one more big step in the wrong direction.

Senator Corker has a plan for the Big Three

‘Corker Plan’ Outlined in Hearing with Detroit Three and UAW

“At today's hearing I suggested a number of very specific and rigorous measures that should be in place before we even discuss making a loan to any of these companies.

• “One, give existing bondholders 30 cents on the dollar to help reduce their overall debt load.

• “Two, bring wages immediately in-line with companies like Nissan and Volkswagen.

• “Three, GM owes $23 billion to the United Auto Worker’s VEBA (voluntary employees’ beneficiary association) account. The union must agree to take half of that payment in GM stock.

• “Four, the union must agree to do away with payments to workers who are still receiving almost full compensation up to four years after their jobs have ended.

“These are the same types of conditions a bankruptcy judge might require to ensure that these companies become viable and sustainable into the future, and if they will agree to these terms then we have something to talk about. The process I have suggested would allow them to avoid the problems and stigma that accompany a formal bankruptcy, while forcing them to do the things they need to do to be successful companies.”

Krauthammer and Will discuss the economy

Charles Krauthammer and George Will are the latest columnists to discuss the economic agenda of the incoming Obama administration. George Will's column is titled New New Deal Won't Help the Economy

Early in what became the Great Depression, John Maynard Keynes was asked if anything similar had ever happened. "Yes," he replied, "it was called the Dark Ages and it lasted 400 years." It did take 25 years, until November 1954, for the Dow to return to the peak it reached in September 1929. So caution is sensible concerning calls for a new New Deal.

The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.

Charles Krauthammer's column is titled The Washington Stock Market

Even more egregious will be the directives to a nationalized Detroit. Sen. Charles Schumer, the noted automotive engineer, declared "unacceptable" last week "a business model based on gas." Instead, "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai? The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

Shlaes and Krugman debate Great Depression

It looks like a debate between two economists has heated up over the effectiveness of the New Deal during the Great Depression. Paul Krugman has accused Amity Shlaes of referencing "misleading data" in her book The Forgotten Man: A New History of the Great Depression.

Amity Shlaes responds to Krugman's accusation and discussion the Great Depression and President-Elect Obama's economic policies in a column titled The Krugman Recipe for Depression: Massive government spending is no solution to unemployment

.....Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right."

Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%."

The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.

The column is worth reading in its entirety because debates such as this once between Krugman and Shlaes are certain to reappear often in the coming months, as debate over Obama's "New, New Deal" begin.

New York City needs better leadership

A recent Wall Street Journal editorial describes the problems New York City has faced over the last 50 years and explains why it has lost jobs to other locations. The editoral it titled New York Is Headed for Dark Days Unless Bloomberg Changes Course by Nicole Gelinas and it represents a warning to President Elect Obama.

Last week, Mayor Mike Bloomberg announced a grim update to New York City's $60 billion budget. To meet falling revenues he proposes spending cuts and property-tax hikes, and he may increase income taxes by 15%.

The challenges New York City faces are more significant than those facing other large cities.

To understand just how dependent upon Wall Street New York City's budget has become, consider these facts. Two years ago, a third of all the wages and income in the city came from the finance, insurance and real-estate industries, up from just a quarter a decade earlier. The securities industry alone was responsible for a quarter of wages, up from 17% from a decade earlier.

The city also depends on its top 1% of earners -- many of them tied to the financial industry -- for nearly half of its personal-income tax revenue, up from 41% from last decade. The financial sector provides more than a third of business taxes. Last year, Wall Street bonuses alone comprised 8% of the city's personal income. In 2000, the peak year for tech-bubble bonuses, they comprised 6.6%.

Wall Street's boom, moreover, papered over the precarious structure of New York City's budget. Two years ago, New York took in 41% more in tax revenues than it had in 2000, after inflation. But the city's long-term, big-ticket budget items -- pensions and health care for city workers, Medicaid and debt costs -- had increased by more than half.

The mayor calls these costs "uncontrollable" because cutting them requires long-term planning. They now comprise more than half of the budget funded by city tax revenues, and will continue to grow if left unchecked. The budget in general is 22% bigger, after adjusting for population and inflation, than it was at the height of the 1970s fiscal crisis. Most of that growth came in the past seven years.

For the United States to recover quickly from its current economic problems, the federal government must make it less expensive to invest in the United States. The Democrats' Union Card Check proposal and their desire to raise taxes are moves in the wrong direction.