Richard J Grant

Published in The Tennessean , Sunday, December 19, 2010 No matter what Fed does, interest rates set to rise by Richard J. Grant When speaking of national budget deficits, one of the magic numbers that has somehow emerged as a benchmark is 3 percent of gross domestic product (GDP). The International Monetary Fund often recommends this benchmark; and the European Union requires current and prospective members to keep their deficits below 3 percent. Although 3 percent is way too high, let us not quibble. For the last couple of years the national budget deficit in the U.S. has been running around 10 percent. If we keep overspending at this rate, our national debt will increase by the size of our GDP every seven or eight years. Given that the total public debt outstanding is now more than 90 percent of GDP, the debt itself will double sooner. We might console ourselves with the fact that the government owes one third of its debt to itself. Government agencies (such as the Social Security Tr...

Published in The Tennessean , Sunday, December 12, 2010 We should cut, not increase, top income tax rates by Richard J. Grant Just as there seems to be a universal speed limit, the speed of light, there seems also to be a limit to the proportion of economic output that can be turned into tax revenue. With apologies to Einstein, if we were to accelerate a rocket, it would seem to shorten and grow heavier as we approached the speed of light. We would have to inject increasing amounts of energy for each mile per second that we eke out. Since the middle of the 20th century, the U.S. government has applied a wide range of top marginal income-tax rates, from 92 percent down to 28 percent. But so far, the level of tax revenue as a proportion of Gross Domestic Product (GDP) has not managed to break above the 20-percent level (though it did test that level at the peak of the tech boom). This is a historical observation, sometimes called “Hauser's Law,” after Kurt Hauser of the Hoover Instit...

Published in The Tennessean , Sunday, December 5, 2010 Lame ducks should not let tax rates rise by Richard J. Grant They say that a wounded animal is a dangerous animal. This would seem to apply also to a lame duck, as exemplified in our present lame-duck liberal Congress. Despite the recent electoral repudiation of big-government liberalism, Democrats continue to grasp for any fin du régime advantage that they might pull out in their last days as the majority. They continue to push the canard that their intended January tax-rate increases will affect only “the rich.” When they say “the rich” they really mean “high income earners,” but the needs of rabble-rousing demagogues will always trump language accuracy. It is difficult to find real economists who would support tax-rate increases at a time of weak economic recovery and high unemployment. Even those economists who believe that such tax-rate increases might increase tax revenue will, nevertheless, recognize the danger of dampening ...

Published in The Tennessean , Sunday, November 28, 2010 Irish financial crisis has lessons for Americans by Richard J. Grant The current Irish financial crisis offers lessons to Americans. First, we can learn a lot about fiscal prudence and economic growth from the preceding Irish history. Through the mid-20th century the Irish, like their British neighbors, abandoned common sense in favor of the pseudo-intellectual promises of socialism (what we call “progressivism”). The role of state involvement in their lives grew and their economies stagnated. Just as the Thatcher revolution pulled Britain back from the precipice and restored, at least temporarily, the people's dignity, the Irish went one better. They cut government spending and tax rates aggressively. They removed trade restrictions and brought down their inflation rate. As a small country, with a population just under 4.5 million, they needed to offer clear advantages to business in order to stand out from the crowd. They le...

Published in The Tennessean , Sunday, November 21, 2010 European Union will bail out Irish mistake by Richard J. Grant Four years ago, the government of Ireland was running a healthy budget surplus. During the previous 20 years Ireland had transformed its economy into the envy of Europe. Until the early 1980s Ireland had been a big-government, high-tax, high-inflation, high-unemployment land of economic stagnation. Its main export was people. Government spending consumed more than 50 percent of its economy. The corporate income tax rate was 50 percent and the top personal rate was close to 60 percent. The inflation rate had been in double digits for much of the previous 10 years. Ireland had been phasing out its protectionist tariffs, but in the mid-1980s its unemployment rate reached 17 percent and its economic growth rate was still only about 2.3 percent. By 2006, Ireland's corporate tax rate was 12.5 percent, the lowest in Europe. Its top personal income tax rate had dropped alm...

Published in The Tennessean , Sunday, November 14, 2010 Burdensome regulations slow economic recovery Richard J. Grant It is unfortunate that the Federal Reserve Act gives the Federal Reserve System three different goals to promote: maximum employment, stable prices, and moderate long-term interest rates. Riding three horses at the same time can be dangerous. Fed Chairman Ben Bernanke simplifies matters somewhat by referring to the Fed's “dual mandate” to promote “a high level of employment and low, stable inflation.” But he is not shy about manipulating interest rates in his attempt to achieve the other two goals. With price inflation low and unemployment high, the Fed has attempted to raise employment by pushing down real interest rates. This is why the base money supply has increased so drastically since mid-2008 and why prices did not fall more than they did at that time. Chairman Bernanke still believes that the inflation rate is too low and that more inflation can help increa...

Published in The Tennessean , Sunday, November 7, 2010 The Fed continues to create money out of nothing by Richard J. Grant Federal Reserve Board Chairman Ben Bernanke reminds us that the Fed responded to “the worst financial crisis since the 1930s” by purchasing more than $1 trillion worth of Treasury securities and U.S.-backed mortgage-related securities. This action took several hundred billion dollars worth of risky mortgage-backed securities off the balance sheets of private financial institutions and put them on the Fed's balance sheet. How did the Fed pay for all these securities? It used its unique statutory powers to create money out of nothing. In the last few months of 2008, the Fed doubled the base money supply to $1.8 trillion, and by the beginning of 2010 had increased it above $2 trillion. Under normal circumstances, this would almost certainly have resulted in high double-digit price inflation. With all this new cash available, banks would have had plenty of excess ...

Published in The Tennessean , Sunday, October 31, 2010 Health-care bill and others have given birth to new regulations by Richard J. Grant When the Speaker of the U.S. House of Representatives, Nancy Pelosi, famously let slip, “But we have to pass the bill so you can find out what is in it,” she was referring to the health care reform bill of March 2010. She wasn't kidding. The bill had become increasingly unpopular with the American people, so she found it necessary to logroll a coalition by adding big scoops of political sweeteners to buy the support of individual senators and congressmen. The bill was passed with great urgency but little understanding. It was like a cluster bomb, full of unpleasant surprises. The final bill was so long and complicated that, now seven months later, even its supporters are expressing surprise as insurance companies raise health-care premiums and eliminate particular categories of coverage. These consequences might have been unintended, but they we...

Published in The Tennessean , Sunday, October 24, 2010 Tension between government, voters is nothing new by Richard J. Grant Just when our epoch seemed to be lost in vacuous notions of “hope and change,” we have suddenly noticed that some things are permanent. The laws of nature, which include the laws of human action, seem to persist no matter how well or poorly we understand them. And recent political events have arisen that remind us of our cultural and political inheritance and of the chain of responsibility that has been passed to us by previous generations. It is for us to build upon and to preserve for our descendents. The malaise in our nation is more than economic. What we today call the tea party movement is, like the Boston Tea Party of 1773, an act of open defiance by a people against what they see to be their government’s disrespect for, and encroachment upon, their rightful liberties. That original tea party gave rise to events that provided the constitutionally limited d...

Published in The Tennessean , Sunday, October 17, 2010 Reaganomics led to an economic turnaround By Richard J. Grant When judging the results of successive U.S. governments, it is common to focus on the simple matter of who the president was. But this neglects the importance of Congress in all legislative matters. We cannot understand the actions or the results of an administration without examining both its intentions and the context in which it served. That context includes not only the composition of the contemporary Congress, but also the cumulative legacy of previous governments as well as the economic and strategic conditions in the contemporary world. Strategies and ideologies manifest differently in different contexts. It is common, for example, to note the increases in the federal budget deficit during the years of the Reagan administration. Shallow analysts look at this one statistic and dismiss “Reaganomics” as a failure. They fail to note that the national debt had been tre...

Published in The Tennessean , Sunday, October 10, 2010 Paying for government is burdensome to taxpayers by Richard J. Grant To direct our attention to the cost of government, the Framers of the U.S. Constitution included in Article I, Section 9 that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” In compliance with this requirement, government agencies provide regular reports and projections of federal revenue and expenditures. The recent content of these reports, such as budget deficits reaching $1.4 trillion, which is about 40 percent of the budget, suggests that our government should try harder to comply with the other parts of the Constitution. There are also costs of government that go beyond narrow fiscal matters. The expanding federal regulatory structure has costs that few perceive. The best recent study of the federal regulatory burden is “The Impact of Regulatory Costs on Small Firms,” which was prod...

Published in The Tennessean , Sunday, October 3, 2010 Democrats’ election strategy is to evade responsibility by Richard J. Grant House Majority Leader Steny Hoyer, D-Md., has found a way to blame President George W. Bush for future tax increases. He says that because President Bush’s tax-rate cuts were not permanent, but were set to expire at the end of 2010, it is actually President Bush who is responsible for the coming tax increases. The trouble with Hoyer’s attempt at logic is that President Bush has been retired for almost two years and the Democrats have all the power they need to prevent the tax rates from rising at the end of the year. They have that power now. They are supposedly in charge right now. But with an election looming – and their ideology clashing with economic reality and voter sentiment – the responsibility is too much for them to handle. So they evade it. Like the Ancient Mariner who shot the albatross, Democrats have used their majorities during the current ses...

Published in The Tennessean , Sunday, September 26, 2010 Majority of voters in 2008 made a hiring mistake by Richard J. Grant The head of a very large corporation, who is described as a “die-hard Obama fan,” was recently quoted as saying that “the president could have used some executive experience on his all-academic economics team.” Noting that there is no former business executive in the Obama cabinet or among the top economic advisers, he opined, “I think it was a hiring mistake for the administration.” Who else made a hiring mistake? Was this business leader not also a voter and, possibly, a campaign supporter and contributor? Are the skills needed to run a major corporation not transferable to one’s judgment at the ballot box? Was it terribly difficult to notice that one of the leading presidential candidates was a man in his 40s who had not yet outgrown his schoolboy Marxism? This top business executive has subsequently discovered that his political actions have imperiled the we...

Published in The Tennessean , Sunday, September 19, 2010 Attempts at control merely show how little we know by Richard J. Grant In their attempts to understand economic matters, people commonly make two big errors. One is to think of various types of relationships as if they were discrete and durable objects. An example is employment relationships. In this case, we not only speak of “saving” or “creating” jobs, we even think of them as being ends in themselves rather than remembering that any particular job exists to help create those things that we really want. The other big error is to presume to have knowledge that we cannot possibly have. When there is a disruption in the supply of any good, such as gasoline, the price tends to rise. Such price rises can trigger outrage in people who see the increases as “price gouging.” The question for which these people have no defensible answer is, “What is the correct price?” They do not know the answer now, just as they did not know it before...

Published in The Tennessean , Sunday, September 12, 2010 Obama continues to gamble with the economy By Richard J. Grant The Obama administration continues to throw “stimulus” mud on the wall with the hope that some of it will eventually stick. The next splat to hit the wall will be $50 billion of spending on infrastructure projects that were, apparently, not of a sufficiently high priority to be included in the previous flurries of stimulus spending. Any attempt to explain this new spending proposal in terms of the “national interest” will result in bewilderment. It makes sense only from the perspective of the people who are pushing it and stand to gain from it. That would be the politicians and staffers whose futures depend on swaying voters’ minds before the November elections. It would also be those businesses and workers who expect to be the first recipients of the anticipated government spending. In politics, it is often said that “perception is reality.” It is also said that in c...

Published in The Tennessean , Sunday, September 5, 2010 Effects of national debt felt in all aspects of life by Richard J. Grant On a recent speaking tour, Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, told audiences, “The most significant threat to our national security is our debt.” His point was that a sound economy would be essential to provide the resources needed to maintain a strong defense. This, he believes, is threatened by the increasing interest burden of our national debt. Admiral Mullen is rightly concerned. New government debt is rarely incurred to finance important, long-term capital investments. Most often it covers only transfers and current consumption. As a percentage of the budget, defense spending has fallen from over 50 percent in 1960, to just over 20 percent in recent times. Now, more than half the budget is taken up by Social Security, Medicare, other health-related spending, and the various income security programs. Interest payments have hov...

Published in The Tennessean , Sunday, August 29, 2010 Stimulus packages failed to ignite the economy by Richard J. Grant Perhaps the worst effect of the recent recession and financial crisis is the political response and the establishment of new precedents for government intervention. Although the crisis was itself a political creation, this is not yet widely understood. And as long as the most important lessons remain unlearned, we are in danger of prolonged stagnation and future repetitions. More optimistically, and perhaps naively, we might believe that the severity of the crisis and the almost unambiguous failure of the Keynesian-style “stimulus” packages would make most people skeptical of the value of government interventions. Clearly, the government’s response has failed to remove the symptoms of recession. The various stimulus tricks did little more than to give the economic equivalent of a sugar buzz. Now, we see signs of the economy slumping again. The Federal Reserve continu...

Published in The Tennessean , Sunday, August 22, 2010 Government thinks we’re helpless, makes us so By Richard J. Grant Are we helpless? Apparently our government officials believe we are. They seem less and less able to imagine that we could ever do anything for ourselves. It becomes a problem when they act on that belief, regularly rushing to our aid even when we don’t need it. There are few things that politicians won’t do to curry our favor and to make them seem indispensible to our lives. After years of repetition and progressive encroachment, it seems normal and to be expected. We increasingly prove them correct. It no longer seems natural to buy a house without a government-sponsored agency to guarantee our mortgage. We now also expect some kind of home-buyer’s credit as an incentive. And if we still can’t make the payments, the government will find a way to help us shift that burden. “Energy efficiency” and “green energy” sources are of such importance that we cannot be expecte...

Published in The Tennessean , Sunday, August 15, 2010 Less government control helps China’s economy by Richard J. Grant “That which gets measured, gets managed,” is a common aphorism taught to managers. It certainly does help in many cases to be able to gauge one’s progress toward a goal and to compare that to what is done. Perceiving a link between one’s actions and the results is a positive guide and motivator. A dark corollary to this aphorism might be stated, “That which gets measured, gets managed even when you don’t want it to be.” This often happens in corporations and administrative bureaucracies but is particularly glaring in the use of macroeconomic data. Data, such as Gross Domestic Product (GDP) and unemployment rates, are arbitrary in their construction and never better than estimates of amorphous concepts. But their real problem arises when they are politicized and married with the dubious theories of wannabe economic planners. When politicians imagine that consumption is...

Published in The Tennessean , Sunday, August 8, 2010 Higher taxes mean less production by Richard J. Grant When we want to discourage an activity, we might do so by raising the cost associated with doing it. Depending on the activity and the circumstances, that cost increase could take the form of a higher price, a tax increase, a fine, or a disparaging public-relations campaign. This is the idea behind “sin taxes,” such as those often placed on tobacco and alcohol. The same deterrent is directed toward activities deemed to produce excessive pollution. Governments use taxes primarily to raise revenue for their operations, not to discourage the activity that is taxed. But the discouragement comes with the imposition. The higher the tax rate, particularly the marginal tax rate, the greater is the disincentive to produce one more dollar of taxable income or profit. Just as taxation reduces the value of undertaking the activities that are taxed, it also reduces the values of assets. An inc...

Published in The Tennessean , Sunday, August 1, 2010 Numbers, facts don’t add up for economic adviser by Richard J. Grant There are many economist jokes out there, most of which end in, “you still wouldn’t reach a conclusion.” These jokes are funny because most laymen don’t know what economics is. Nevertheless, there is room for healthy disagreement within any science. Sometimes we suspect disagreement within the same person. Since becoming the Chair of the Council of Economic Advisers, Christina Romer has been ridiculed for seeming to forget her past as an economist in order to embrace the agenda of the Obama administration. This has come up again recently with the publication in the American Economic Review of an article co-written with her husband, David, who, like her, is a professor at UC Berkeley. The article is an impressive exercise in economic history in which the authors estimate that a “tax increase of one percent of GDP lowers real GDP by almost three percent.” They focused...

Published in The Tennessean , Sunday, July 25, 2010 Obama swinging but missing on economic policies by Richard J. Grant On the economy, there are three areas where the Obama administration and its congressional supporters are failing: fiscal policy, regulatory policy, and monetary policy. They are nothing if not consistent. 1. On the fiscal front, the policy focuses on a hoped-for “stimulus” through increased government spending. The idea is to increase “aggregate demand” by encouraging people to reduce saving and spend more now. Rather than let people do the natural thing at a time of uncertainty and save, the administration wishes to increase their taxes so it can spend the money for them. It matters what the national government buys for us. Starting from zero, the first dollars spent should go to the highest priorities, such as national security and the essential infrastructures of governance. The desirability of such spending is clear, but as spending increases, the marginal benefi...