Reason Magazine Article Examining the Pro-Government Expenditure Bent of Many Macroeconomic Models

Veronique de Rugy, from the June 2011 issue of Reason Magazine (http://reason.com/) writes an article titled “Ugly Modeling…Will spending cuts ruin or improve America’s economy?” which can be found at the following web address:
http://reason.com/archives/2011/05/10/ugly-modeling.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University (http://mercatus.org/veronique-de-rugy?id=17018).

The author touches on issue relating to Keynesian theory and assumed economic multipliers for government expenditures…

“Also, the Zandi and Phillips models are based on the Keynesian view that government spending produces recovery. According to that theory, $1 in government spending produces substantially more than $1 in growth, a phenomenon known as the “multiplier effect.” The Goldman Sachs study assumes a multiplier greater than three—i.e., more than $3 in additional GDP for each dollar of government spending. But a review of the empirical literature reveals that in most cases a dollar in government spending produces less than a dollar in economic growth. And these findings often don’t even take into account the impact of paying for that government dollar via increased taxes.”

“The Harvard economists Robert Barro and Charles Redlick estimate that the multiplier for stimulus spending is between 0.4 and 0.7. In another study, the Stanford economists John Taylor and John Cogan concluded that the stimulus package couldn’t have had a multiplier much greater than zero. Even the multipliers used by Christina Romer, the former chairwoman of the White House Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Joseph Biden, in their January 2009 paper “The Job Impact of the American Recovery and Reinvestment Plan,” ranged from 1.05 to 1.55 for the output effect of government purchases. More recently, the Dartmouth economists James Feyrer and Bruce Sacerdote, who supported the stimulus, acknowledged that it didn’t boost the economy nearly as much as the administration models claimed it would.”

The author’s final thoughts and prescriptions for the economy are as follows…

“Now what? Many economists and many members of the business community argue that recent policy changes have hampered investment, making a bad situation worse. The prospect of endless future deficits and accumulating debt raises the threats of increased taxes and of government borrowing crowding out capital markets, diverting resources that could be used more productively. As a result, U.S. companies are less likely to build new plants, conduct research, and hire people.”

“We have tried spending a lot of money to jump-start the economy, and it has failed. Now we need to cut spending and lift the uncertainty paralyzing economic activity. That approach will not just be more fiscally responsible. It will also empower individuals and entrepreneurs. And they are the only ones who can bring on a real recovery.”

In economics there is much debate and division into camps of thought regarding which schools of economic thought and theory best represent the functioning and processes involved in macro-economies.  It is difficult to change one’s mind about a school of economic theory that we have invested time, blood, sweat, tears, and even our careers in.  Yet, the Keynesian models are failing to accurately represent the stimulative impact of government expenditures upon the U.S. economy.  To keep following these failed theories will lead to long term economic damage for the U.S. and World economy.

“A Decade of Debt” by Reinhart and Rogoff: Trends toward “Financial Repression” of Economic Activity

On March 28, 2011 macroeconomists Carmen Reinhart (bio) and Kenneth Rogoff (bio) recently made available a paper titled “A Decade of Debt” addressing the track record of the impact of major increases in public indebtedness upon various countries economic performance in recent history.  The paper is published as a discussion paper on VoxEU.org (http://globalcrisisdebate.info/), which is “a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites.”

“A Decade of Debt” provides a sobering and objective analysis of a) how public and private indebtedness has affected world economies in recent history (i.e., Japan, Iceland), and b) the impacts that current public indebtedness in the United States and elsewhere can be expected to have in the next decade.  Following is the web reference to obtain a free pdf of the paper (http://globalcrisisdebate.info/index.php?q=node/6295) as well as the paper’s abstract…..

Abstract of “A Decade of Debt” by Reinhart & Rogoff

This paper presents evidence that public debts in the advanced economies have surged in recent years to levels not recorded since the end of World War II, surpassing the heights reached during the First World War and the Great Depression. At the same time, private debt levels, particularly those of financial institutions and households, are in uncharted territory and are (in varying degrees) a contingent liability of the public sector in many countries. Historically, high leverage episodes have been associated with slower economic growth and a higher incidence of default or, more generally, restructuring of public and private debts. A more subtle form of debt restructuring in the guise of “financial repression” (which had its heyday during the tightly regulated Bretton Woods system) also importantly facilitated sharper and more rapid debt reduction than would have otherwise been the case from the late 1940s to the 1970s. It is conjectured here that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang (combined with the widespread “official aversion” to explicit restructuring) are leading to a revival of financial repression–including more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.

A few of the key points from the paper:

1) “The combination of high and climbing public debts (a rising share of which is held by major central banks) and the protracted process of private deleveraging makes it likely that the ten years from 2008 to 2017 will be aptly described as a decade of debt.”

2) “Historically, high leverage episodes have been associated with slower economic growth.”

3) Surges in private debt lead to private defaults (which most often become manifest in the form of banking crises). Banking crises are associated with mounting public debt, which ultimately lead to a higher incidence of sovereign default or, more generally, restructuring of public and private debts. Specifically, banking crises and surges in public debt help to “predict” sovereign debt crises.

4) “It is conjectured here that the pressing needs of governments to reduce debt rollover risks and curb rising interest expenditures in light of the substantial debt overhang, combined with an aversion to more explicit restructuring, may lead to a revival of financial repression. This includes more directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, and tighter regulation on cross-border capital movements.”

There is much to think about and digest in regards to Reinhart and Rogoff’s work. In future posts I will review parts of their paper.  This paper can provide some sober-minded, fact based objectivity for serious citizens to think about concerning the debt issues now being wrestled with by the United States.

Mises Daily Blog: Macro Confusion: Inflation, Commodities and the Fed

On the Von Mises Institute Daily index is an article by Kel Kelly dated May 12, 2011 on general macroeconomic misunderstanding of the root causes of our current economic situation.  The article can be found at the following web reference:

http://mises.org/daily/5273/Macro-Confusion-Inflation-Commodities-and-the-Fed

Following are a few key sections that are particularly relevant to today’s concerns about commodity price inflation and the role or economic impacts of monetary actions by the U.S. Federal Reserve bank.

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Will the Fed Raise Rates?

The discussion began with CNBC’s in-house economist Steve Liesman discussing whether the Fed should raise rates in response to reports of soaring wholesale inflation numbers. He explains that the Fed “has so far concluded that it would be the wrong medicine right now for the problem.”

That alone brings us the first concern: It is difficult to imagine that the Fed has actively decided not to raise rates, when the fact is that — as things stand — it could not raise rates even if it wanted to (and it might want to). It can raise treasury rates by ceasing to buy treasuries, but it can’t raise the federal-funds rate.

The Fed raises the federal-funds rate via open-market operations that withdraw money from the federal-funds market, making money more expensive. But given the massive amount of excess reserves that the banks hold at the Fed, it is virtually impossible for the Fed to withdraw all the reserves it has created without causing massive economic damage. Therefore, it is the excess money on the market that is keeping rates near zero. Thus, the banks — not the Fed — are in charge of interest rates.

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Regarding the root cause of commodity price inflation, Kelly writes…

But the demand for commodities and the prices of other goods have not been falling. Why? Because what is driving up commodity prices — while the prices of all other goods are rising at the same time — is simply an increase in the quantity of money. Market participants are bidding up the price of commodities, along with consumer goods and stock and bond prices (and, formerly, real-estate prices) with the additional money they are receiving from the central bank.

Rising asset prices are the manifestation of inflation. The prices of financial instruments and commodities are rising more rapidly than consumer prices because they are traded on exchanges, where banks, insurance companies, hedge funds, and the like insert funds newly borrowed at cheap rates from the world’s central banks. Further, foreign central banks themselves redirect reserves earned from the US trade deficit into the financial markets. Therefore, new money flows disproportionately into the asset markets relative to the real economy.

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Regarding Fed policies and the impact on commodity prices….

The Fed officials are saying that if they raise interest rates and/or reduce money supply growth, the economy will slow. They are therefore saying that the economy is being driven — or at least pushed along — by low rates and by money and credit “being available” (as they would say). Therefore, the growing economy, in their view, causes a “demand” for commodities. They don’t say that it is a monetary demand — just a general “demand.”But they also acknowledge that if this demand were reduced with “monetary policy tools,” demand for commodities would fall. Thus, they are simultaneously saying that their policies are not driving commodities prices higher, but that if they undo their policies, commodities prices will fall. The fact is that it is their money pumping that is driving both GDP growth and commodities prices — but not the real economy.

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All this is food for thought in regards to the impact of Fed policies based on Keynesian economic theory on commodity price inflation – as we have seen both ups and downs in recent weeks and months.

Austrian Economist Friedrich A. Hayek – one whose ideas we should look to

Friedrich August Hayek (1899-1992 )

The Concise Encyclopedia of Economics at the online Library of Liberty and Economics (http://www.econlib.org/index.html) provides a thumbnail sketch of economist Friedrich A. Hayek (see http://www.econlib.org/library/Enc/bios/Hayek.html).  Following are some key excerpts from their article, with my own emphasis on issues relevant to today’s economic issues of government involvement in trying to manipulate and manage economies, of inflation, and of the roles and economic impacts of the U.S. Federal Reserve system ….

“Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory. Hayek saw a connection among all three. The major problem for any economy, he argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions. But the market does not work perfectly. What causes the market, asked Hayek, to fail to coordinate people’s plans, so that at times large numbers of people are unemployed?“

“One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market. But capital investments are not homogeneous. Long-term investments are more sensitive to interest rates than short-term ones, just as long-term bonds are more interest-sensitive than treasury bills. Therefore, he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.“

Regarding the causes of inflation, and how central banks were at least partly responsible for inflationary pressures by their Keynesian-like  economic policies and actions, note the following….

“Hayek believed that Keynesian policies to combat unemployment would inevitably cause inflation, and that to keep unemployment low, the central bank would have to increase the money supply faster and faster, causing inflation to get higher and higher. Hayek’s thought, which he expressed as early as 1958, is now accepted by mainstream economists (see the Phillips Curve).”

Hayek penned the book The Road to Serfdom (http://en.wikipedia.org/wiki/The_Road_to_Serfdom) in which be gave a withering critique of socialist-oriented government control of economies. Quoting from Wikipedia…..

“….(Hayek) warned of the danger of tyranny that inevitably results from government control of economic decision-making through central planning, and in which he argues that the abandonment of individualism, liberalism, and freedom inevitably leads to socialist or fascist oppression and tyranny and the serfdom of the individual. Significantly, Hayek challenged the general view among British academics that fascism was a capitalist reaction against socialism, instead arguing that fascism and socialism had common roots in central economic planning and the power of the state over the individual.”

The ideas and philosophies of Hayek would be identified today by many as either classical liberalism (http://en.wikipedia.org/wiki/Classical_liberalism) or libertarianism (http://en.wikipedia.org/wiki/Libertarianism), although many political and economic conservatives would be in strong agreement with much of what Hayek espoused.

The Growing U.S. Federal Debt (in Pictures)

Following are some images from the data base of the St. Louis Federal Reserve Bank that help to describe the U.S. economy and other key economic variables.  This info is extremely relevant given the information from the statements of Ben Bernanke and the U.S. fed. The info can be found at the following web address:

http://research.stlouisfed.org/fred2/

A. The U.S. Federal Surplus / Deficit (1895-2010)

Note the explosive growth in U.S. government deficits since 2008, with U.S. recessions represented in shaded areas.  Deficits reached 1.4 trillion in 2009 and 1.3 trillion in 2010.  The previous record deficit had been 460 million in 2008.  Any thinking person will recognize that a continuation of these deficits will lead to financial catastrophy for the U.S. if allowed to continue.

B. The U.S. Federal Government Debt (1895-2010)

The ceiling for the amount of U.S. federal government debt is the issue that will be voted upon within weeks in the U.S. congress.  U.S. government debt has moved from approximately 10 trillion to 14 trillion since early 2008, at the time when the U.S. was in a recession and the Obama administration came into office.  Will the current U.S. congress allow the U.S. government to borrow over approximately 14.2 – 14.3 trillion U.S. dollars or not?   But then, what is the size of the U.S. economy? Are we able to service such large amounts of debt? See the information below….

C. U.S. Gross Domestic Product (1895-2010)

How has or can the U.S. government service 14 trillion in national debt when the national GDP is also 14 trillion dollars (and we are being merciful and measuring GDP in nominal rather than real inflation adjusted dollars)?  Well, we could either a) reduced spending and promote economic growth through responsible government leadership, or b) attempt to avoid fiscal responsibility and “monetize the debt” by devaluing the U.S. dollars it is denominated in (i.e., see the current quantitative easing policies of the Ben Bernanke fed).

The conservative Heritage Foundation provides a much more comprehensive overview of the budgetary challenges facing the U.S. at the following web address:

http://www.heritage.org/budgetchartbook/

Here in the U.S. we are at a point of decision regarding whether we will responsibly deal with our fiscal problems.  Lets take responsibility for the issue and address it for the sake of our and our kids future.

Recognizing (my) government subsidies

The list of government subsidies that I benefit from is pretty lengthly.  Here are just a few of the DIRECT government subsidies that I can think of…

1) Tax deduction for interest paid on my house loan

2) Government payments on the small amount of farmland that my wife and I own

3) Crop insurance subsidies for a proportion of our crop revenue coverage as a crop share land owner

4) Income tax deductions for each of my children

5) State matching support for my government employee retirement account

6) Tax deductions for my church / religious charitable giving

On the surface, all else being equal, my family and myself have benefited financially from each of these elements of tax support.  But in a macro economic, wholistic systems sense, this level of government support is unsustainable (with millions of U.S. citizens all involved in receiving similar tax subsidies).   In my desire to protect my own government subsidies, am I unwilling to recognize the that the broader U.S. economy and the economic livelihood of my children for decades to come is put at risk by this much government support? Am I myself a “tragedy of the commons” in regards to my lack of recognition of how my portion of the government “pie” is a significant part of the cumulative budget problem here in the U.S.?

My contention is that we in the U.S.  (me first) have to recognize that without the elimination or at least more effective targeting of these government subsidies (or changing them to a true safety net for the most needy instead of an entitlement program for all), the economic future of the country is at risk.  I want my children to have an opportunity to make an honest living in the future.  The subsidies for my house, my farmland, my crop insurance, my charitable giving, and yes, even my child tax credits likely need to go.  IF I had a lower tax rate with equitable application across the U.S. tax payer base, I may end up better off financially.  These subsidies from the government have made us weak, timid and fearful —- scared to independently take responsibility for our own finances apart from government support.

Time for this economic/social conservative to reengage…

With other activities in life and work I had shifted attention away from this blog.  Now it is time to reengage.  With the 2012 elections coming up, over wrought environmental policies damaging the U.S. economy, a long term budget crisis facing the country, and assorted other maladies, it is time for all freedom loving economic and social conservatives to have a voice.  On we go….

US Economic “Growth, Deficits, and the Future” (J.D. Foster – Heritage Foundation)

Following is an article by J. D. Foster, Ph.D., who is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation (http://www.heritage.org/).

 J.D. Foster, Ph.D., The Heritage Foundation

Foster’s article addresses the anticipated impact of further government spending (i.e., fiscal stimulus) upon the U.S. economy, in the short run and beyond.  Foster provides a counter-argument to the recommendations and justifications of Economist Paul Krugman for further government spending.  The crux of the article is that the most healthy approach to helping the U.S. economy to recover from the current recession is not by increased fiscal stimulus, but rather by reducing taxes at all levels of the economy to encourage growth in private, nongovernment business.

Following are some noteworthy selections from the complete article (here).  (Bold, italicized,  and underlined text are provided by myself to draw attention to key thoughts in Foster’s article.)  

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“Growth, Deficits, and the Future”

by J.D. Foster, Ph.D., The Heritage Foundation
WebMemo #2150, December 3, 2008

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Paul Krugman, in his article in The New York Times on December 1, “Deficits and the Future,” discusses deficit spending reflecting both the weakening state of the economy and his response to the changed political climate in Washington, D.C.  Krugman tells a good story, but in calling for even more spending he misses the punch line badly. Tax rate reduction, not another dose of deficit spending, is the key to a stronger economy.

Globally, and certainly in the United States, an intense debate is underway as to the proper magnitude of fiscal stimulus programs to “jumpstart,” “jolt,” or otherwise stimulate national economies as the global economy slides into a deep contraction. For some, a big boost to government spending is the natural solution, especially since they can identify so many “unmet needs” awaiting federal largesse. Neither desperation nor opportunism justifies ineffective and misguided action. These troubled times demand policies that work.

Fiscal Stimulus That Works

The global economic downturn looks to be quite deep. Even optimists do not foresee the recession that began in the United States at the end of 2007 to end until the second half of 2009. Naturally, the focus is on a government response, as though all solutions come from Washington. And, naturally, the response from Washington is to do what Washington excels at: spending money.

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Suppose for a moment that the fiscal stimulus is effective in pumping up aggregate demand. The budget deficits under current policy for 2009 through 2011 are already around $1 trillion for each year, not counting the budget effects of the various financial bailouts. Put those figures in perspective: In dollar terms, the largest federal budget deficit ever was recorded in 2004 at $413 billion. As a percent of the economy, the largest was 6 percent in 1983. Even before any new policies, the deficit in 2009 is already an astonishing 8 percent of gross domestic product or more. If deficit spending stimulates the economy, then a $1 trillion deficit should suffice to launch a rapid expansion. If $1 trillion is not enough to end the recession, then another $500 billion in deficit spending surely will not do any better.

No Downsides to Deficit Spending?

… The (often wrong) conventional wisdom is that Congress will pass a fiscal stimulus plan of a half trillion dollars or more early in 2009, including some mixture of extended unemployment insurance benefits, food stamp spending, relief to the states, highway spending, and whatever other ingredients can be tossed into the fiscal goulash.

Krugman argues that there can be none of the traditional crowding out of private investment when government increases its borrowing (driving the deficit up from a trillion dollars). There may be none of the traditional downsides, but there are none of the promised upsides, either. The simple fact is that when government borrows a dollar, either the dollar was borrowed at home (reducing domestic consumption or investment) or it was borrowed from abroad, thereby increasing the trade deficit. Either way, the increase in aggregate demand from government spending is matched by a reduction in aggregate demand from the private sector.

Investing for the Future

The economy is weak and weakening, so prudent, effective fiscal stimulus is certainly called for. But that does not mean increased spending. At a minimum, it means making the tax relief enacted in 2001 and 2003 permanent–especially the reductions in individual income tax rates, the reduction in the dividends tax rate, and the reduction in the capital gains tax rate. Threatening rate increases is no way to stimulate an economy, as Krugman notes in his editorial. …

Keeping current tax policy is not stimulus; it is the elimination of a threat. True stimulus means cutting individual and corporate tax rates to encourage entrepreneurs to start new businesses and existing businesses to invest more. The economy is certainly weak today, but business startups and investment are about the future. Current economic troubles will pass and the economy will regain its strength. Lower tax rates will encourage businesses to prepare better now for future growth and in so doing will bring about a future of stronger economic growth. An effective fiscal stimulus means cutting tax rates–not because of the resulting higher deficits but because tax rate cuts improve the incentives for workers, investors, and producers to do more, thus stimulating the economy.

The Grand Teton Mountains, Wyoming, USA (www.ohranger.com)

 

Critical View of Keynesian Economics (Peter Boettke – The Austrian Economists Blog)

Following is an article on “The Legacy of Lord Keynes” by Peter Boettke of George Mason University, one of the authors of  “The Austrian Economists” Blog (here) .  Here is a link to the full article:

http://austrianeconomists.typepad.com/weblog/2008/11/the-legacy-of-lord-keynes.html

 The Austrian Economists (economics.gmu.edu)

In this article, Boettke is critical of the fruits of Keynesian economic policies as practice in various countries since 1940.  His view is consistent with the “Austrian School” of economics which in general is very supportive of free market economic policies with limited government interference.  Correspondingly, this school of economic thougth typically takes a very dim view of the effectiveness government fiscal intervention upon economic growth.  

As you can deduce, Austrian economists are typically NOT in favor of the types of government fiscal intervention being practiced in these days.  For more on this train of economic thought I would encourage you to visit such websites as the Ludwig von Mises Institute (http://mises.org/), the CATO Institute (http://www.cato.org/), The Heritage Foundation (http://www.heritage.org/), The Foundation for Economic Education (http://www.fee.org/) and other free market economics-oriented websites.

My own personal leaning is in this “free market”, limited interventionist direction.  That said, I surely respect such capable economists as Greg Mankiw and Larry Summers.  Lets hope that capable and sound economic advice is provided to the incoming administration in regards to policies that will truly promote long term economic growth in the U.S., with as much limitation as possible in the debt leverage of the U.S. government upon the U.S. economy.

Following are a few pertinent exerpts from Peter Boettke’s article taking a critically constructive view of Keynesian economic practices.

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The Legacy of Lord Keynes

By Peter Boettke, George Mason University, pboettke@gmu.edu

….

“The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations.  We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy.  This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy.  All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.”

“Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one)  Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.”

“Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940.  We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.”

“Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism.  Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through.  I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt.  Somehow I doubt that will take place in our current intellectual and policy context.”

 

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“Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reasons we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036.  Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place.  Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.”

The Canadian Rockies (here)

“Far-Reaching Reforms Can Wait” According to Robert J. Samuelson

In a December 1st article, Newsweek business and economics writer Robert J. Samuelson (background info) addressess the issue of whether or not the Administration of President-elect Barack Obama should aggressvely pursue various major reforms immediately in early 2009, or wait until the U.S. economy recovers. 

 Robert Samuelson’s weekly column explores political, economic and social issues. He began his journalism career in 1969 and has held positions at The Washington Post, The National Journal, and Newsweek. Samuelson has won numerous awards, including The Gerald Loeb Award for Best Commentary in 1993, 1986 and 1983 (Source for picture and description, Investor’s Business Daily Editorials- here)

Samuelson’s opinion on the preferable public policy / economic policy course for the Obama Administration to take is consistent with the title of the December 1st article, i.e., “Far-Reaching Reforms Can Wait“  The full article can be found at the following web address: http://www.realclearpolitics.com/articles/2008/12/obamas_hard_choice.html

Following are some key exerpts from the article, with underlines and bold text on areas that I personally think are most important to consider ….

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Far-Reaching Reforms Can Wait

By Robert Samuelson, Newsweek, 12/1/2008

WASHINGTON — As he assembles his economic team, Barack Obama faces a central strategic decision that only he can make. Starting with his “economic stimulus” plan, will he focus mainly on reviving the economy and relieving the financial crisis? Or will he use the economic crisis as a vehicle to advance a more ambitious social and economic agenda? The two approaches are at odds. The first aims at building political consensus and economic confidence; the second would intensify political conflict and economic uncertainty.

The decision ought to be easy. Every new president is assaulted by his own supporters, who want him to put their particular agendas atop his “to do” list. That’s already happening, as Obama allies clamor for speedy action to provide universal health insurance, combat global warming and support trade unions. But Obama — and the nation — would be better served if he concentrated for his first year on stabilizing the economy while patiently laying the groundwork for more far-reaching proposals.

The hallmark of this economic crisis has been its capacity to surprise: the desperate plight of the Big Three U.S. automakers is the latest reminder. We can expect more surprises, because the U.S. and global economies continue to weaken at a worrying pace. Consumer confidence has plunged. In October, U.S. factory orders for durable goods (machinery, autos, appliances) dropped 6.2 percent. Abroad, signs are no better. Worldwide manufacturing production is declining at an 8 percent rate. Germany is in recession; China’s growth has slowed sharply.

Against this backdrop, the parallel pursuit of crisis management and sweeping domestic reform is at best distracting. In practice, it may be politically poisonous. Superficially, the two objectives can be made to seem compatible. Obama can plug “green” investments as a way to restore job growth; he can tout a more efficient health-care system as a way to control health costs. But these rhetorical debating points obscure as much as they reveal.

Any program to refashion the energy and health-care sectors — to take these obvious candidates — would be complicated and contentious. Some producers and consumers would win; others would lose. Proposals would create massive uncertainties for businesses and raise the probability of higher costs. To succeed in curbing greenhouse gas emissions, for example, any “cap and trade” program must involve higher energy prices.

The notion that “green” investments would be large, permanent net creators of jobs is mostly a mirage. Somehow these investments must be paid for. If that happens through higher prices, higher taxes or cuts in other government programs, then “green” jobs will mainly substitute for other types of jobs. As for curbing health-care costs, that’s desirable. The trouble is that the first effect of Obama’s health-care program would probably be the opposite. Expanding insurance coverage would initially raise health spending, as greater demand for medical care met a (relatively) fixed supply of doctors, hospitals and clinics.

Obama won the election, and in normal times, his campaign agenda ought to be front and center. But these are not normal times, and what’s most important now — as he repeatedly emphasizes — is to prevent the recession from feeding on itself. This is a clear danger. Consumer spending (70 percent of the economy) has declined for five consecutive months. Eroding tax revenues may result in state budget deficits between $200 billion and $250 billion through mid-2011, estimates the Center on Budget and Policy Priorities, a liberal advocacy group. Required to balance their budgets, states face increased taxes or large spending cuts.

The compelling case for a big “economic stimulus” package is that it would cushion these and other spending declines. The odds are that any package will include the following: some direct payments to states; a renewed extension of unemployment benefits; tax cuts — reflecting Obama’s campaign pledge — of $500 for most single workers and $1,000 for most two-earner families; spending for infrastructure (roads, bridges, schools and, perhaps, windmills). Obama wants Congress to pass a stimulus package soon after his inauguration. Assuming he gets his wish, it’s then that he must make his crucial choice.

The temptation will be to press ahead with a “bold” legislative agenda — to ape the New Deal. This would be a mistake. The psychology of bruising legislative battles will not bolster confidence. The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We — and he — are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. But Obama’s first job is to avert an economic freefall.

Copyright 2008, Washington Post Writers Group

 The Andes of South America (amonty.wordpress.com)