Sunday, July 25, 2010

Obama swinging but missing on economic policies

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 benefits fall. At some point the net benefits become negative. For most other types of government spending, especially the typical pork-barrel project, the first dollar spent yields negative net benefits.

The trouble with “stimulus spending” is that it isn’t working. Nor would a good theorist expect it to work under current conditions. Professor Robert Barro of Harvard University has estimated spending multipliers of “around 0.4 within the same year and about 0.6 over two years.” In other words, the net effect of government spending is to reduce economic activity in one area by $1 in order to increase it by about half a dollar in the area targeted for spending.

The 2009 stimulus package has been financed by increasing government debt, which must be serviced through future taxes. Barro estimates the effect of taxes using a multiplier of minus 1.1, which means that a $1 increase in taxes this year will reduce economic activity next year by $1.10. When adding up the effect over five years, Barro concludes, “This is a bad deal.”

2. Regulatory policy becomes very expensive in ways that go way beyond its budgeted administrative costs. Regulations, though ostensibly enacted to protect people from one another, tend to grow into such a thicket that it is hard, expensive, and too distracting for businesses to serve their customers efficiently.

The biggest costs of the recently passed health-care-reform and financial-regulation laws will be not so much in overt expenditures as in wealth never produced. As things continue to go wrong as a result of these and other regulatory actions, there will be heated political debates over the real causes. These bills have time-bomb effects: they authorize multiple agencies to fill in the details with future regulations. Many of these new regulations will be intended to correct the visible distortions created by earlier regulations.

An administration interested in reducing unemployment, and knowledgeable in good economics, would first remove the existing regulatory overgrowth that is choking innovation and wasting our entrepreneurial energy. Particularly at a time of high unemployment, we need more flexibility, more freedom to act on perceived opportunities and create the voluntary agreements to serve one another that we call “jobs.”

3. Monetary policy centers on the ostensibly independent Federal Reserve System. But the Fed exists at the pleasure of Congress, and its top officers are presidential appointees. Its work is also complicated by the many other agencies and regulations created by Congress. Most notoriously, Fannie Mae and Freddie Mac continue to distort the mortgage market and to drain taxpayers of wealth that might have been put to intelligent use.

The Fed itself acted as expected by providing emergency liquidity to help mitigate the cyclical blowback from its previous looseness. But it is afraid to let go of interest rates and allow them to reflect current market realities. Thus, at a time when we have businesses begging for credit, the Fed is discouraging savers from lending and it is paying banks a quarter percent interest to hold excess reserves at no risk.

That’s three outs for this administration, and we’ve lost this inning.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010

Sunday, July 18, 2010

Pelosi’s words, like her policies, don’t add up

Published in The Tennessean, Sunday, July 18, 2010

Pelosi’s words, like her policies, don’t add up

by Richard J. Grant

There is a market for bad economics. That market exists largely to service customers who are active in what we might call the politicized sectors of life.

A recent example of bad economics being put to use was House Speaker Nancy Pelosi’s attempt to justify the extension of unemployment insurance benefits with a stimulus-multiplier type of argument. She now-famously extemporized, "It injects demand into the economy. It creates jobs faster than almost any other initiative you can name."

There is no word yet on whether Speaker Pelosi will test her theory by putting her economic advisers on unemployment. But one begins to see the brilliance of her party's actions in ramming through or threatening legislation that serves to keep up the unemployment rate. If only we lesser souls could understand her theory: the more money we take from people who are working to give to those who are unemployed, the more jobs we create.

True believers in the government's ability to “stimulate” sustainable economic activity correspond to those who, in another era, believed in perpetual motion machines. Perhaps one day we will find a way to receive the benefits of work without any net energy expenditure. But we're not there yet, at least not for the whole system or society.

Work is inseparable from survival. Someone must work to provide for the needs, and some of the wants, of our families. Unemployment, in the sense of not producing what is needed, reduces our assurance of survival. But those who live in a familial community will be helped by their fellows through periods of sickness, injury, or other misfortune. Such charity can be organized in many ways, and we can choose to support those that appear most effective. We could even, where constitutions allow, employ government to undertake charitable activities, and put someone like Nancy Pelosi in charge.

Given the volitional nature of an employment relationship, employment is not truly insurable. We corrupt both our language and our thought when we speak of unemployment “insurance.” If we are going to offer unemployment benefits, and thereby politicize employment, then we need to be honest about what we are really doing. We are shifting both charitable resources and responsibility from civil society to the coercive mechanisms of government. The relationship is changed, but if it is honestly understood and agreed upon, then it has some legitimacy.

This legitimacy is not unlimited, and it is tested by any attempt to extend any government service, including unemployment benefits. The moral environment is further polluted when bad economic theories are promoted in the political market for votes.

A better understanding of reality should help us survive in the “real world.” Systematic improvement in the physical sciences and economic science should help to improve our judgment. But politicization of social functions can corrupt not only those functions but also the sciences that inform them.

The 1930s economic theories of John Maynard Keynes have been warmly embraced by politicians who wish to justify the expansion of government spending and budget deficits in the hopes of promoting economic growth. This political usefulness better explains the longevity of Keynesian theories than does any internal merit.

The physical sciences are just as vulnerable to distortion as a result of political usefulness. Climate science has been brought down by serpentine political agendas and the intoxicating taste of government funding. When politically advantageous, we can replace Albert Einstein with Henny Penny.

Just as Keynesian economics helped to break down the protective stigma against debt, it has been used to promote the illusion that we can get something for nothing through political action. We should not blame Keynes for this but rather those among his followers who allowed political incentives and dreams to stunt the growth of economic science.

We can have an honest debate about the size and direction of government spending “multipliers,” but Nancy Pelosi's words, like her policies, don't add up.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010

Sunday, July 11, 2010

Economic recovery would have come naturally

Published in The Tennessean, Sunday, July 11, 2010

Economic recovery would have come naturally

by Richard J. Grant

The Obama administration's cheerleaders are having difficulty getting the crowd fired up about “Recovery Summer.” With unemployment stubbornly holding above 9 percent, and economic growth much lower than would normally be expected, expectations are depressed.

The trouble with Recovery Summer is that it should have come last summer. Economies are always in “recovery” in the sense that people are always adapting their business plans to changes in their expectations as market realities change. In macro terms, we can say that the economy began to recover in 2006 when real estate prices began noticeably to fall. In accepting such prices, home sellers were adapting to the reality of market demand.

We tend to see the falling wages, employment levels, and sales revenue that we experience during a recession as the problem. They hurt. But the pain is a symptom of the economic discoordination that existed before the collapse. The falling prices and changing business patterns serve to reveal the problem and to correct it.

All the Obama administration had to do was to let the recovery unfold naturally. But that did not fit their agenda any more than it fit that of their predecessors. Politicians always come under pressure to “do something,” or at least to be seen to be doing something.

Thus the new administration kicked off with gusto by playing the resource shell game they call “stimulus.” The idea was to pump up “demand” for goods and services in the hopes that we could make everything go back the way it was before the collapse. In other words, they tried to restore the pre-collapse situation (the height of the problem), rather than accept the changes that would have been the cure.

When the stimulus packages were rushed through Congress, they were described as urgent and essential. But, interestingly, much of the spending was withheld for later projects. Rather than spending all the cash in 2009, as stimulus true-believers were urging, much of that spending seems to be coming out a year later. Given that 2010 just happens to be an election-year, a cynic might stoop to describe the Recovery Summer as the “Summer of Pork.”

Politicians like “stimulus” spending because it can be used to channel resources in the direction of supporters and, more generally, it can give a temporary (albeit unsustainable) feeling of prosperity. With good timing, it can be decisive at election time.

The problem facing the Obama administration and the Democratic majority is that they tried to get away with too much, too soon. Rather than remember the advice given to medical doctors, “First, do no harm,” Democrats rammed through a massive, and largely incomprehensible, health-care reform bill. As businesses calculate the compliance costs, the effect is far from stimulating.

Rather than keep tax rates the same (or lower), previous tax-rate cuts will be allowed to expire at the end of this year. Although candidate Obama had promised that no one earning less than $250,000 per year would experience a tax increase, Democratic dithering in the face of record budget deficits will apparently ensure that this promise is broken.

The new financial reform bill, now in the lap of the Senate, is just as complex and stultifying as the health-care bill. This reform, as are most such reforms, is being sold to the public as a series of promises about the wonderful protections that it will bestow upon us. Like most campaign-style sales jobs, it confuses intentions with content. Far from protecting us from systemic risk, it will shift resources into regulatory compliance rather than customer service. It will inhibit innovation and diversity, and will disproportionately raise the costs of smaller financial institutions.

The tilting of labor law further toward the promotion of organized labor unions is another special-interest move that will increase costs and harm the majority of workers.

Recovery Summer’s pork won't stand up to all these job killers. How about “Recovery November”?

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010

Sunday, July 04, 2010

Nowadays problem is taxation without comprehension

Published in The Tennessean, Sunday, July 4, 2010

Nowadays problem is taxation without comprehension

by Richard J. Grant

Shortly after she had made the transition from prime minister to baroness, I attended a lecture by Margaret Thatcher. In a noticeably extended portion of her speech she waxed admiringly about the achievements of Thomas Jefferson. Though this was a meeting of the Empire Club, with most of the audience being Her Majesty's subjects, it was more than a punchline when she added, “But after all, he was an Englishman.”

Jefferson was indeed an Englishman, as were his colleagues. Were it otherwise, it is hard to imagine what sort of society would have emerged in North America. Just as it matters where we come from, it matters even more from where our institutions come.

The American rebellion against the Crown was not unprecedented in British history: the Glorious Revolution, for example, had occurred less than a century before. Observers closer to the times, such as Joseph Jekyll and Edmund Burke, would each characterize such revolutions as preservers of the existing social realities, not as upheavals. Contemporary use of the word “revolution” often implied coming full circle rather than a discontinuity. Jekyll is reputed to have characterized the Glorious Revolution as “a revolution not made, but prevented.”

Preceding both revolutions, the kings’ actions alienated significant portions of their subject populations. In the Americas, the colonial experience had undoubtedly selected against those individuals unequipped to survive on the frontiers of civilization and against those settlements established on unviable economic institutions. The colonials were British, but the experience and successes of freedom created a tension in the centripetal political bands that seemed less to connect them to, than to bend them to the will of, the mother country. Thus the list of grievances that Jefferson included in the Declaration of Independence.

Words would not settle the matter. It would be settled by strength of will and force. But the inflammatory touch of the French philosophe in the Declaration – which characterized Jefferson, not colonial society – beckoned to a future military ally.

Despite the disruptions and burdens of war, military victory allowed the continuity of a society that had evolved naturally and had long since existed in fact. Burke would not approve American separation from the Empire any more than future American federalists could countenance the secession of one of their own states. But the U.S. Constitution that later emerged was clearly informed by the British Constitution and allowed Americans to enjoy what Burke would call “the chartered rights of Englishmen.”

This was in stark contrast to the unhinged rationalism of the Jacobin movement in France that attempted to sweep away all vestiges of the past – God, King, aristocracy, and even the calendar – and to restart society as if from a state of nature, much as their modern-day descendents try to hit the “reset button.” The reign of terror that followed, to be replaced only by a great leader who thrived on war till the end, should not have been a surprise.

We have grown and changed since then, but the essential needs and nature of man have not. Institutions that comprehend this will serve to preserve us while allowing us to innovate at the margins. Revolt must give way to getting on with life. But how is it progress when, after 234 years, we have merely exchanged “taxation without representation” for “taxation without comprehension”?

Is it surprising that an older Thomas Jefferson wrote the following in a letter shortly before he became President? “Let the General Government be reduced to foreign concerns only, and let our affairs be disentangled from those of all other nations, except as to commerce, which the merchants will manage the better, the more they are left free to manage for themselves, and our General Government may be reduced to a very simple organization, and a very inexpensive one; a few plain duties to be performed by a few servants.”

After all, he was an American.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010