Archive for July, 2010

German economy stimulated by market-oriented fiscal policies

July 31, 2010

“German unemployment fell in July for the 13th consecutive month, putting Europe’s largest economy on the brink of a milestone: regaining all the jobs lost during the recession far faster than many economists expected.” Brian Blackstone, ‘Germany Regains Jobs Lost in Recession’, The Wall Street Journal, July 30, 2010

Once again, hydraulic Keynesian economists like Lawrence Summers, Christina Romer, Paul Krugman and Joe Stiglitz have been confounded by facts.  First, their successful demand that the United States federal government should engage in massive fiscal stimulus programs has predictably failed to create jobs during an anemic economic recovery.  Now, Germany, utilizing a much more conservative, market-oriented fiscal policy, is showing the U.S. economy a clean pair of heels with respect both to economic growth and job recovery.

The German government correctly targeted the labor market with respect to its limited fiscal stimulus.  Recognizing that German wages tend to be sticky in the downward direction, government subsidies were directed to that weakness, with subsidies designed to keep workers on payroll at reduced hours.   Under the plan, companies reduce workers hours but keep them on the payroll, with government kicking in for some of their lost wages and social security contributions.  In consequence, instead of government subsidising individuals who are not working, government is paying individuals to retain their jobs, and encouraging companies to hire more such workers.

The results are predictable, from any non-hydraulic Keynesian perspective.  In July 2010, unemployment fell to 3.2 million, putting it near to the pre-recession trough of 3.19 million in Octber 2008.  The rate of unemployment fell to 7.6 percent, its lowest for two years, and well below its peak of 8.3 percent in July 2009.  By comparison, the Keynesian induced unemployment in the United States peaked at 10.1 percent in July 2009 and remains at 9.5 percent in July 2010. 

 What should President Obama do to move  into Angela Merkel’s shoes?  Well, an obvious answer is to fire Summers,  Romer, and Geithner,  ignore  the rantings of Krugman,  Stiglitz and Bernanke, and hire professional economists who understand the nature of market process.

Because the German subsidy program has been successful, it  can now be phased out.  At its peak, in May 2009, 1.5 million workers were in the program.  That has now been cut to half a million as companies move workers back to full time shifts. The German unions, exposed to the job-enhancing impact of subsidized wages, have begun to make wage concessions of their own in order to preserve jobs.

Nothing succeeds like success; and nothing fails like failure.  Wake up, President Obama and smell the coffee. Clean out those job-destroying hydraulic Keynesian ‘economists’  from the White House and  the Department of the Treasury, and shut your ears to Ben Bernanke’s hydraulic Keynesian message .

July 29, 1981: Morning in America

July 30, 2010

“On this day in 1981, Congress passed President Reagan’s plan to cut tax rates by 25 percent over three years.  The proposal had been a central pillar of Reagan’s presidential campaign a year earlier, and six months into his first term – in the face of a recession unequalled until today – he was determined to get it done.” John Heubusch, ‘Remembering Morning in America’, The Washington Times, July 29, 2010

On July 29, 1981, a Republican-controlled Senate approved Reagan’s proposed tax cuts by a vote of 89-11.  With Americans completely jamming the Capitol switchboard with calls voicing their support for this initiative, a Democrat-controlled House of Representatives decisively overruled Speaker Tip O’Neill in  approving the president’s proposal by a vote of 238-195, with 48  Democrats crossing the aisle to vote in favor of the bill.  This truly was  the monumental rocket thrust that propelled the Reagan two-term presidency into the economic stratosphere nothwithstanding the fact that Paul Volcker’s Federal Reserve had imposed a monetary refrigerator on the United States economy.

It behoves us in these dramatically different political circumstances,  to review the economic impact of that glorious tax-cut.  Over the eight years of the Reagan presidency, 20 million new jobs were created in the United States, inflation declined from 13.5 percent to 4.1 percent, unemployment fell from 7.6 percent to 5.5 percent, and the net worth of middle- income families grew annually by 27 percent.  The economy itself grew in real terms  by a staggering  40 percent.  

No one could know for sure that such would be the case on July 29, 1981, when  those brave souls in the Senate and in the House  followed the tax-cutting leadership of  a determined President.  In the mid-term 1982 elections, the President’s approval rating would hover below 40 percent and the Republicans would lose 26 seats.  By 1984, however, with economic recovery assured, Reagan’s approval would  rise to a high of 70 percent  and his re-election would be a landslide.

“Our struggle for nationhood, our unrelenting fight for freedom, our very existence;  these have all rested on the assurance that you must be free to shape your life as you are best able to, that no one can stop you from reaching higher, or take from you the creativity that has made America the envy of mankind.” Ronald Reagan, ‘Primetime Address to the Nation‘, July 27, 1981

As John Heubusch correctly notes, in 1984 Reagan’s re-election theme: Morning in America, was more than just a slogan – it was how Americans truly felt.

 

Governor Mervyn King: wisdom and integrity at the Bank of England

July 30, 2010

Mervyn Allister King was born in March 1948. He studied economics at King’s College, Cambridge, where he earned a First Class Honours Degree in Economics, and at Harvard University, as a Kennedy Scholar.  So one might well expect that he would have emerged in full-blown hydraulic Keynesian economic cloth.  Such may possibly have been the case during his early career teaching at Cambridge and Birmingham universities, as well as during his spells as visiting professor at both Harvard University and MIT (where he shared an office with a young  Ben Bernanke). 

By October 1984, however, when he joined the London School of Economics as a full professor, Mervyn King  surely had become much more market conscious, indeed founding the Financial Markets Group.  Recognizing that money matters to a much greater degree  than any hydraulic Keynesian would ever allow, King became a non-executive director of the Bank of England in 1990, and joined the Bank as chief economist and executive director one year later. 

 He was appointed Deputy Governor in 1997 and became an ex-officio member of the Bank’s interest-rate setting Monetary Policy Committee from the latter’s inception in June 1997, when the Bank was cut loose from Treasury control.  In June 2003, King succeeded Sir Edward George as Governor of the Bank of England.

Mervyn King has always been an anti-inflation hawk. Before becoming Governor, he regularly voted for tighter monetary policy than any of his colleagues.  That pattern continued through his Governorship.  Most notably, he opposed the interest cut by the MPC in August 2005 and was in the MPC minority  voting  in favor of higher rates in June 2007. This willingness to place himself in a minority on interest rate policy is exceptional among central bankers.  In both cases, Mervyn King was on the side of the Angels.

Morever, King is more than willing to put his money where his mouth is. As an anti-inflation hawk, committed to holding  inflation in Britain low and stable at the target rate of 2 percent, in 2008 he declined a pay increase of 125,000 pounds sterling, that would have elevated his salary to 400,000 pounds sterling per annum.

Mervyn King’s wisdom has surfaced most spectacularly since the financial crisis began to impact the British economy.  He is best known for (correctly) refusing Bank of England  funding to the Northern Rock  Bank when it ran into financial difficulties, and for refusing similar funding to other retail banks that misbehaved with their depositors monies. He cannot be held responsible for the bank nationalisations that followed under the intemperate and unwise governance of Prime Minister Gordon Brown’s doomed Labour Government.  But his upholding of the doctrine of lender of last resort against extreme political pressure will go down in central banking history as a position of wisdom and high integrity.

Fully aware of the economic lunacy of excessive deficit financing as a tool for countering economic contraction, Mervyn King risked his career on March 24, 2009 by explicitly and publicly warning the British government against a second fiscal stimulus. More recently, he has warned publicly against excessive complacency about  economic recovery, noting that it  is likely to be plagued by stagflation as a direct consequence of past fiscal imprudence.

He has asked repeatedly, and justifiably,  for the complete segmentation of British banks into separate retail and investment corporate entities as a means of avoiding the ‘too-big to fail’ syndrome.  Just this week, he has castigated the British retail banks for their policies both  of  excessively remunerating their employees, and of paying out excessive dividends to their stockholders, all  at the expense of refusing to extend justifiable wealth-creating loans to cash-starved small enterprises.

A number of years ago, at an annual meeting of  the American Economic Association, I attended a lunchtime address by Mervyn King when he was Deputy Governor of the Bank.  King chanced to mention that a central bank had an obligation to protect high levels of employment as well as price stability. Just a week earlier, Alan Greenspan had spoken about the absolute priority thst should be given to price stability by the Federal Reserve.  Smart Alec, that I may have been, I  challenged Mervyn King on this discrepancy, asking whether this implied that the value of sterling predictably would decline against the U.S. dollar as a consequence of this difference in central bank philosophies.  King nervously checked out the room to determine that the Press was absent.  He then deferred in his reply to Alan Greenspan, stating that he could not compare himself with the Maestro on such matters.

Well, both Mervyn King and I were wrong on that occasion. Alan Greenspan turned out to be a Wizard of Oz, not a Maestro,  whereas Mervyn King was much more of an anti-inflation hawk than either he or I believed. So I am more than happy to extend my apology to Mervyn King for this grievous error of judgment.

I only wish that the Federal Reserve might have been  blessed with a Chairman with the wisdom and integrity of  Governor Mervyn King  over the period 2003-2010. The world-wide  financial crisis and economic contraction of 2008-2010 surely would have been far less pronounced than has been the case.

John Kerry leads a wealthy-taxpayers revolt

July 28, 2010

John Kerry, a failed candidate for the 2004 presidency, and currently Senior Senator for the Commonwealth of Massachusetts, evidently is strongly opposed to increasing the tax burden on the truly well-off.  Indeed, he is allegedly so strongly opposed as to engage in tax avoidance on a very significant scale.  John Kerry has been caught out in flagrante delicto  attempting to line his own deep pockets (or perhaps I should say the deep pockets of his second wife)  at the expense of his Massachusetts constituents.

Senator John Kerry has made something of a career out of  expounding terminological inexactitudes and out of marrying wealthy women. Fresh out of time-served in Vietnam,  and confronting what must now appear to him as acute poverty, Kerry opted for a short-cut to celebrity as spokesman for Vietnam Veterans Against the War, offering what he now acknowledges to have been ‘exaggerated’ stories of American war crimes on that battlefield.  In need of financial support for a budding political career, he fortuitously married Julia Thorne, a multi-millionairess who took extremely good care of  all his rapidly increasing expenses. 

When that marriage eventually fell apart – as is the tendency in such marriages – John Kerry was nursing high-cost presidential ambitions.  By great good fortune, Kerry struck gold a second time, marrying Teresa Heinz, the widow of  H. John Heinz III, heir to the ketchup fortune.  Teresa, at that time, was well on her way to billionaire status, and fully capable of funding almost any level of political ambition.  She was apparently sufficiently suspicious of the objectives of her younger new husband as to make him sign a prenuptial agreement.  But she has proved to be unfailingly generous in her support of his life-style, which includes a private jet, and eight multi-million dollar  vacation homes.  Oh, yes, and which now includes a new $7 million yacht, a 76-foot sloop named Isabel.

Isabel, it seems has been a naughty lady, in the tax-lecherous hands of the Senior Senator for Massachusetts. It appears that her maintenance costs are somewhat higher than John Kerry (or perhaps Teresa) had bargained for. Specifically, the Peoples’ Republic of Massachusetts, always on the look-out for revenue sources, targets such nautical mistresses with specific charges. So John and Teresa Kerry  have taken extreme care with respect to her official residence. 

Isabel is currently domiciled in yacht  tax-free Newport, Rhode Island, not in Massachusetts, quite contrary to the official residence of her owners.  Well, actually, Isabel is not officially owned by John or by Teresa, but by a limited liability corporation based in Pittsburgh, the home town of Teresa and her late first husband.  John Kerry, under media pressure, now admits that Teresa is the majority stockholder in the corporation. Understandably, perhaps, Teresa is not going to allow  her John too much freedom with his new mistress.

This domestic arrangement has significant tax advantages for the Kerry threesome.  With Isabel located in Newport, Rhode Island, she would  escape a one-time sales tax of $437,000 and some $70,000 in annual excise taxes chargeable in the event that she had been housed in Massachusetts. This is quite a consideration even for an extremely wealthy wife, when deciding whether or not to finance a sleek mistress for her husband. 

Unfortunately for the tax averse triple, however, Massachusetts knows how to take care of its own family business. The Isabels of this world, it turns out,  are liable to Massachusetts taxes if Massachusetts domiciles bring such vessels to her shores within six months of taking ownership. Unfortunately for the tax avoiders, John Kerry just could not leave his new mistress be.  Isabel has been photographed  in Nantucket over the Fourth of July weekend and on Martha’s Vineyard more recently.

Ultimately, John Kerry is doing the right thing and is coughing up what he owes.  On Tuesday July 27, 2010, he advised the Massachusett’s Department of Revenue that he would ‘promptly’ pay taxes as if the vessel were docked in his home state.

Whether such renewed enthusiasm for tax- paying would have surfaced in the absence of the ongoing Massachusetts gubernatorial race, in which an independent candidate, Timothy Cahill, alerted reporters to possible tax evasion by Senator John Kerry,  is difficult to determine. If perchance, Teresa Heinz overlooked the Massachusetts tax trap, she just might want to re-examine her prenuptial agreement, to make sure that that  is truly watertight. Her family fortune may depend on such  vigilance.

Failures walk the plank: but only in the private sector

July 27, 2010

The Board of Directors of BP is acting to remove Tony Hayward as Chief Executive Officer of the giant oil company in the wake of the Gulf of Mexico disaster and to name an American, Robert Dudley, as his successor. The change of leadership will take effect on October 1, 2010. Whether this move is good or bad for BP, or for recovery in the Gulf, as yet is unforeseeable.  The suspicion is that Dudley was not targeted for this position at all prior to the oil spill, not least because he is an abrasive individual who literally had to flee for his life from Russia when he alienated  Vladimir Putin while engaged on a  TNK- BP  joint venture in that country. He has (prudently) remained in voluntary exile from Russia since his escape.   His political advantage at this time is that he is an American.  And that indicates the extent of the slide to state capitalism in the United States. At least he has experience of how to flee successfully (and remain in exile) should his abrasiveness alienate Barack Obama while engaged in the BP-United States oil containment venture.

As The Wall Street Journal (July 26, 2010) points out, the important lesson to be drawn from this and other similar events is who tends to be discarded and who tends to survive disasters of this nature. The BP CEO, Hayward, has walked the plank.  Secretary of the Interior, Ken Salazar, still remains in office. In his place, a low-level operative, Elizabeth Birnbaum, Director of the Minerals Management Service was thrown overboard.

Such outcomes are typical under United States state capitalism.  When General Motors finally collapsed in June 2009  GM CEO, Rick Wagoner walked the plank.  Larry Summers and Timothy Geithner, who had been overseeing the company, remain in office as does the President of the UAW, Ron Gettelfinger.  When major financial corporations lost their way during the financial crisis of September 2008, many famous CEOs walked the plank: Richard Fuld, Angelo Mozilo, Jimmy Cayne, Chuck Prince, Robert Rubin, Stan O’Neal, Robert Willumstad all went overboard. Those truly responsible for the crisis, Ben Bernanke at the Fed, Hank Poulson and Timothy Geithner at Treasury, and Chris Dodd and Barney Frank in Congress,  all retained their positions (though Poulson departed in January 2009 and Dodd is quitting politics to avoid being  investigated regarding a sweetheart mortgage deal with Countryside Financial.

Readers will note that the private sector quickly removes those who fail, whereas the public sector does not.  That is why laissez-faire capitalism thrives while  state capitalism stagnates.  If one feels at all sorry for the sharks starving in  political waters, I suspect that Barney Frank would make an especially appetising snack.  The plank is waiting for you, Barney, and your time has more than come!

“Our point is that it is certainly fair for Mr. Hayward to take the fall, and the timing is right given that the leak now seems on its way to being contained.  We only wish there was a similar culture of accountability in government, especially in Congress.”  ‘Hayward Over the Side’. The Wall Street Journal, July 26, 2010

Time to call it quits, Charlie Rangel

July 26, 2010

Representative Charles Bernard Rangel  was born in Harlem, New York City in 1930. Following a troubled childhood, he enlisted in the United States Army in 1948 and served honorably in the Korean War, earning a Purple Heart for his wounds and a Bronze Star with Valor for his actions in the face of death.  He was also awarded the Presidential Unit Citation and three battle stars.  He rose to the rank of staff sergeant and returned to Harlem in 1952  as something of a war hero and as a truly commendable role model for his local community.

In late July 2010, Charlie Rangel, now 80 years of age, has served in the House of Representatives for 39 years, representing New York’s 18th, 19th, 16th, and currently its 15th congressional district.  He is currently ranked 4th by seniority among United States Representatives. It is high time for Charlie Rangel to call  it quits and to retire home to the bosom of his family.  For he is no longer a commendable role model for his Harlem community. Unfortunately, for Charlie Rangel, increasing age and increasing power allegedly have brought with them lowered ethics and increasing personal corruption.

Beginning in 2008, Rangel has faced a series of allegations of ethics violations and failures to follow the tax laws.  In February 2010, the House Ethics Committee concluded that Rangel had violated House gift rules by accepting payment from corporations for reimbursement for travel to conferences in the Caribbean, and required him to repay those expenses.  The Ethics Committee since then has worked on three more serious investigations, which involve allegations of living improperly in multiple ‘rent-stabilized’ apartments in New York City, while claiming his Washington, DC home as his primary residence, of improperly using his office in raising money for a public policy institute in his name at the City College of New York, and of failing to disclose rental income from an apartment in the Dominican Republic. 

In March 2010, Rangel stepped aside ‘temporarily’ as Chairman of the House Ways and Means Committee.  In July 2010, the House Ethics Committee charged Rangel with multiple ethics violations . He will face a formal hearing regarding these charges.  Already, Rangel has expended more than $1 million in legal fees from his campaign coffers.

The Chairmanship of Ways and Means is the pinnacle of many a House member’s political career. Yet that position appears to be a minefield for many who achieve that lifetime’s goal. Wilbur Mills and Danny Rostenkoswki  both  engaged in career-ending scandals while holding that high office.   Charlie Rangel can expect no better an outcome.

Better by far for Charlie Rangel to retire before being forced into a humiliating resignation, or even being voted out of political office by his Harlem constituents. What is ironic about all these forced departures is that they occur typically for truly petty crimes and misdemeanors. It is as if the very smallness of democratic politics eats away at the diminished  souls of those who devote their lives to that profession.  

My advice to the youth of Harlem is this:

Steer well away from politics, and earn an honest living in the private market-place; and hang on for dear life to your precious souls.

Beware of opening any door to a new tax base

July 25, 2010

“The interest of the government is to tax heavily: that of the community is, to be as little taxed as the necessary expenses of good government permit.” J.S. Mill, Considerations on Representative Government.1861

“The very principle of constitutional government requires it to be assumed that political power will be abused to promote the particular purposes of the holder; not because it always is so, but because such is the natural tendency of things, to guard against which is the especial use of free institutions.” J.S. Mill, Considerations on Representative Government.1861

“In constraining any system of government, and fixing the several checks and controls of the constitution, every man ought to be supposed a knave, and to have no better end, in all his actions, than private interest.” David Hume, ‘Of  the Independency of Parliament’, Essays, Moral, Political and Literary.1752

“It is better to keep the wolf out of the fold, than to trust to drawing his teeth and claws after he shall have entered.”  Thomas Jefferson,  ‘Notes on Virginia’. 1782

“No doubt the raising of a very exorbitant tax, as the raising as much in peace as in war, or the half or even the fifth of the wealth of the nation, would, as well as any gross abuse of power, justify resistance in the people.” Adam Smith, Lectures on Jurisprudence. circa 1750.

From the perspective of public choice, it is sensible to view government as a malignant Leviathan with respect to its taxation powers. The fewer and the narrower the tax bases, the more easily can the individual escape the tax burden by behavior modifications.  The more numerous and the wider the tax bases, the less easily can the individual escape the clutches of this Monster. When all such avenues are closed, outward migration or resistance are all that are left to those who love freedom and abhor coercion.

For those who are concerned about current conversations in the United States about tax-base widening, or about progressivity enhancements within existing tax bases, I recommend the following prescient book:

Geoffrey Brennan and James M. Buchanan, The Power to Tax. Cambridge University Press, 1980.

The United States Senate attempts to interfere with foreign democracies

July 23, 2010

The Federal Government of the United States, like Imperial Rome  some 2000 years ago, now believes that it can interfere in the domestic policy decisions of independent nations. The most recent episode of this conceit is the attempt by the United States Senate to require the attendance of Scottish and United Kingdom  democratically-elected politicians at its upcoming inquiry into the premature release, on medical grounds, of a convicted Lockerbie terrorist.  Quite appropriately, the relevant politicians are declining this invitation.

President Obama recently has released several  supposed terrorists, held without any trial for several years, from the Guantanamo Bay prison. How would the United States respond if the British coalition government demanded the President’s attendance for a House of Commons cross-examination regarding ignored possible habeas corpus  rights of these prisoners? 

What is sauce for the goose, is sauce for the gander, Senator John Kerry.  How dare you pursue narrow electoral politics by meddling in the policies of independent nations! 

“Let us not assassinate this lad further, Senator.  You’ve done enough.  Have you no sense of decency, sir?  At long last, have you left no sense of decency?’

Joseph N. Welch, The Army-McCarthy Hearings, June 9, 1954

Ben Bernanke drowns in a Keynesian quick-sand

July 23, 2010

“At the current moment, large deficits, as unattractive as they are, are important for restoring economic activity and stability.  I would be reluctant to withdraw spending too precipitously.  I would much prefer to see consolidation or cuts over the medium term as opposed to immediately.”  Ben Bernanke, Statement to Senate Banking, Housing and Urban Affairs Committee, July 21, 2010

Like so many of his out-dated hydraulic Keynesian peers, Ben Bernanke is out of ideas as well as out of Federal Reserve Board remedies in attempting to treat an economic disease that he stubbornly fails to understand.  By continuing to adhere to an economic model that was decisively falsified some 30 years ago, the Fed Chairman encourages economic interventions that are decidely harmful to economic recovery.

The evidence for this judgment was directly in front of the Fed Chairman in documents provided by the Fed itself,  as he responded to Senate questioning. But, like the Senators, Bernanke was blind and could not see.  Let me review that evidence with eyes that see and a brain that understands.

Mortgage delinquency rates for prime and near prime mortgages with adjustable rates: January 2009 – 12 per cent; May 2010 – 15 percent.

Mortgage delinquency rates for subprime mortgages with adjustable rates: January 2009 – 32 per cent; April 2010 – 42 percent.

Delinquency rates on commercial real estate loans by commercial banks: January 2009 – 10 percent; March 2010 – 18 percent.

Private housing starts, millions of units, annual rates: January 2009 – 0.5; June 2010 – 0.5

Mortgage interest rates, adjustable rates: January 2009 – 5 percent; July 2010 – 3.8 percent.

Changes in prices of single-family houses, FHFA index: January 2009 – (-) 8 per cent; June 2010 (-) 2 percent.

Changes in total bank loans, annual percentage rates: January 2009 – (-) 15 per cent;  June 2010 – (-) 8 percent.

Civilian unemployment rate: January 2009 – 8.5 percent; June 2010 – 9.7 percent.

Personal saving rates: January 2009 – 5 per cent; May 2010 – 4 per cent.

Federal saving rates:  January 2009 – (-) 6 percent; March 2010 – (-) 9 percent.

Federal government debt as percentage of GDP held by the public: January 2009 –  45 per cent; December 2010 – 67 percent.

Federal expenditures as percentage of GDP: September 2008 -23 percent; September 2009 – 25 percent

Federal receipts as percentage of GDP: September 2008 – 16 percent; September 2009 – 14.5 percent.

What does all this tell us about the impact of the federal government’s attempts to stimulate the national economy?

1. The stimulus monies pumped into the mortgage market and the Fed’s massive effort to lower adjustable mortgage rates have failed to revive either the private or the commercial real estate markets. In my judgment, these interventions have slowed down recovery and have depressed the level of housing starts by retarding  market- clearing in these markets. In a free market, house prices would have quickly dropped to market-clearing levels as the foreclosure process accelerated.

2.  The massive increase in high-powered money into the banking system has failed to stimulate bank lending. The reason for this is the bailing out of insolvent banks by the federal government and the rigging of stress tests. High-powered money is being used largely to prop up banks that remain insolvent and to provide government cover for banks that have allowed themselves to become illiquid.

3.  Civilian unemployment rates have increased, not declined, as a consequence of Stimulus I and Stimulus II, primarily because of the pessimistic expectations induced by the enormous debt overhang that has been created (and the future tax implications of that debt overhang). Stimulus III, by further increasing the debt while subsidizing lengthy job searches by the long-term unemployed, is likely further to retard recovery in the jobs market.

4. The temporary tax cuts that formed part of Stimulus I and Stimulus II went primarily into household saving rather than household consumption. This was a rational response by households to an increase in non-permanent income at a time of significant reductions in private wealth.

5. The debt statistics indicate the true nightmare of the Keynesian-based error in the response by the federal government to the economic contraction. The government has slowed down the recovery rate by flushing trillions of taxpayer dollars down the toilet.  History will treat this abominable behavior extremely harshly.

Economic illiteracy at the White House drags down the U.S. economy

July 21, 2010

“Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.  Our many robustness checks for the most part point to a slightly smaller decline, but one that is still typically over 2.5 percent.  In addition, we find that the output effects of tax changes are much more closely tied to the actual changes in taxes than to news about future changes, and that investment falls sharply in response to exogenous tax increases.”

Chistina D. Romer and David H. Romer, ‘The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks’, American Economic Review, June 2010

“The president badly needs to make more realistic pronouncements. …at the very least, his staff needs to avoid putting these exaggerations on the teleprompter.  It undermines confidence and raises concerns about competence.  It’s doing nobody any good – not the economy and certainly not Mr. Obama.” Michael J. Boskin, ‘Obama’s Economic Fish Stories’, The Wall Street Journal, July 21, 2010

Let me start with the issue of tax increases. President Obama has made it clear that his administration is opposed to renewing the Bush income tax cuts for households earning in excess of $250,000 per annum. He views the raising of  marginal income tax rates for high earners as a positive contribution to economic growth. If implemented, these tax increases will amount to $1.4 trillion over the coming decade.  If the above-cited AER  paper by Romer and Romer is correct, then the President is spouting economic rubbish. Yet the first-named author of that paper, Christina Romer, is one of his two key economic advisers.

Three alternative explanations are possible for this episode of lost in translation. The first explanation is that Christina Romer did not  truly co-author that paper with her husband. There are many historical examples where a more able partner bails out a less talented spouse. The second explanation is that President Obama is insufficiently smart to understand the advice that he receives from his economic advisers. The third explanation is that President Obama, for political reasons, does not want to translate the message correctly; that he is prepared to harm the economy in order to promote progressive socialism. If  either of the two latter explanations is correct, then Christina Romer has a professional  duty to all Americans publicly to admonish her president, and to return to Berkeley, California an honest woman.

My own assessment is that President Obama is an economics’  illiterate who advances arguments that appear to advance his politics, careless of whether they are related to the truth, over-ruling professional advice wherever this is expedient. Michael Boskin, in his above-cited column, offers further examples of such seriously harmful behavior.

For example, the president claims repeatedly that ‘every economist who’s looked at it says that the Recovery Act has done its job (i.e. the stimulus bill has turned the economy round). That is untrue. Many economists judge that the economic impact of the bill has been small, but positive in the short-run.  Many other  economists (myself included) judge that the bill has exerted a negative impact on the short-term recovery process, and that it will lower the trend rate of economic growth of the U.S. economy.

For example, on the anniversary of the stimulus bill, the president declared that: ‘It’s largely thanks to the Recovery Act that a second Depression is no longer a possibility.’ That is untrue. His own Council of Economic Advisers recently estimated that the impact of the stimulus bill on GDP at its trough was only 1-2 percent. A Depression is conventionally defined as a long period during which GDP or consumption declines at least 10 per cent. The decline in GDP in the current recession was 3.8 percent. So the stimulus bill could not remotely have saved the economy from a Depression.

For example, on his recent ‘Recovery Tour’ the president claimed that: ‘The stimulus bill prevented the unemployment  rate from getting up to 15 percent.’  That is untrue. Christina Romer has estimated that the stimulus bill reduced peak unemployment by one percentage point, preventing it from rising to just over 11 percent.

President Obama’s economic advisers must be aware that the president is speaking falsely, either by accident or by design, on these matters. Their silence tells us a great deal about the corrupting influence of politics upon government- employed economists. If they tell the truth and contradict their boss, they will surely be removed from the White House – as Gregory Mankiw quickly learned at the hands of President George W. Bush.  If they remain silent, they prostitute their professional knowledge, and will be despised by their peers for the remainder of their lives.


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