Sunday, August 29, 2010

Stimulus packages failed to ignite the economy

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 continues to hold interest rates down, thereby depriving the market of honest information about savings and the demand for loans. Just out of uncertainty and fear, people are saving more and borrowing less; so interest rates would be low anyway. But the Fed has pushed rates lower still and is thereby discouraging saving and encouraging borrowing. This is the opposite of what people need; and it thwarts recovery.

The low interest rate policy interferes with businesses’ decisions about capital and production structures. When interest rates are held artificially low, businesses are led to use capital as if it is less scarce than it really is. This is what made the Fed a major culprit in causing the financial crisis. Now it is using even more drastic measures in a futile attempt to make the symptoms go away.

The wide discretionary powers exercised by the Fed are just one more illustration of the broader constitutional failure that has allowed government powers to grow and disrupt the economic order. It is not just a failure of particular economic theories, but a failure to enforce the limits on governmental power that were embedded in the US Constitution from the beginning. These limits reflect values of a much deeper nature than mere administrative rules.

Perhaps it is too much to hope that a growing awareness of this failure will lead to a restoration of an appropriate constitutional attitude. It is the attitude that the fundamental laws, as preserved in the founding documents, place real limits on what can be done under their authority.

A steadfast respect for constitutional restrictions would have saved us from the mushrooming welfare state and the pretensions of state capitalism. We would have been spared the fights over the recent health-care bill, the financial regulation bill, and the cap-and-trade fiasco. We would also have been spared the spectacle of congressmen voting for bills, the effects of which they could not possibly understand.

Constitutional respect would also have prevented the political class from acquiring a taste for, and a dependency on, big helpings of tax revenue. We would not now be facing an imminent increase in tax rates on income, dividends, capital gains, and estates. Such an increase would not be called for at the best of times and is foolish at a time of economic sluggishness and high unemployment. It is particularly foolish in combination with increased regulations and deficit spending.

A renewed constitutional attitude would not remove all economic uncertainty from our lives, but it would restrain the government from creating new uncertainties, as it is now. An overly ambitious government with excessive discretionary powers can, and does now, cause businesses to delay decisions and to delay hiring. The wealth that is lost is lost forever. We can never get that time back.

The longer we go without strict enforcement of the Constitution, the greater the danger that we will lose the habit altogether. The value-laden rules that have worked so well for us will give way to the new precedents that we allow to slide in on the crest of the next crisis.

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. E-mail:

Copyright © Richard J Grant 2007-2010

Sunday, August 22, 2010

Government thinks we’re helpless, makes us so

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 expected to pay for them ourselves. After all, they don’t pay for themselves. Without a subsidy, the payback period for solar panels would be longer than the life of the panels. Even with a subsidy, the net energy production of solar panels is negative over their life-cycle. But many companies exist on these subsidies.

Greenish technology makes us feel so good that now we are happy to have the government subsidize its application to cars. Why wait for it to become economically and ergonomically viable when we can feel good about ourselves now and let the government find someone to pay for it?

Employers are apparently quite scary. They come up with ideas that make other people productive, and this gives them an advantage in the marketplace. Not to worry: the government has long since passed labor laws and imposed mandates to ensure that employees remain expensive. The current reluctance of employers to hire has nothing to do with this, we are told, and can be counteracted with subsidies financed by the government’s superior ability to borrow.

Selective tax breaks encourage employers to provide medical insurance and payment plans. With all the state mandates, licensing restrictions, and potential regulatory liabilities, this tends to confuse the market and to bid up the costs of medical coverage. But don’t worry; eventually the government will centrally plan the medical system – and we know how well that works.

Through Medicare, the government is already protecting us from some of our medical-planning responsibilities and the hard work of innovation and finding private solutions to real problems. With the assurance that the government will take care of us, we will learn to tolerate the minor inconvenience of collectivized rationing and waiting lists. We can also find comfort in the hope that our grandchildren will be better prepared to handle the trillions of dollars of unfunded liabilities we leave them.

For the economy’s sake, the government urges us to spend money. To the extent that we obey, we are less able to provide financially for our retirement. But the government doesn’t expect us to be that prudent anyway.

Through the Social Security system, a welfare scheme ostensibly funded by dedicated payroll taxes, we can rest assured that the government will take care of us in our old age. We need not worry about how much more our savings might have grown had we been allowed to invest them in real, productive businesses instead of funneling them into current consumption. Thanks to the government deciding for us, we need never worry about what we might have achieved had we been left with all the fruits of our labor and the responsibility of managing them.

To help us find our assigned place in society, and to relieve us of the burden of education, the federal government is increasing its funding of schools and universities. Now we spend as much, or more, per student without the variety or results of private education.

Helplessness comes with practice, and practice makes perfect.

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. E-mail:

Copyright © Richard J Grant 2007-2010

Sunday, August 15, 2010

Less government control helps China’s economy

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 too low to support their desired level of GDP growth, the result is “stimulus” spending, exploding budget deficits, artificially low interest rates, and subsidies for companies and projects that waste resources. Needing a quick fix before an election, politicians and their advisors imagine that they can micromanage the macroeconomy.

Since the collapse of the post-war, fixed exchange rate monetary system in the early 1970s, the International Monetary Fund has tried to justify its existence by acting as the compiler of international economic statistics and dispenser of advice. Recently the IMF suggested that the People’s Republic of China should maintain “the fiscal stimulus through 2010 while, on the margin, reorienting further toward fiscal measures that will spur consumption.”

China’s GDP growth rate has tended to be in the high single digits and was 11.1 percent in the second quarter of 2010. That’s not recession, but apparently the IMF imagines that growth should be faster or that it might slow without government taking on more spending.

The IMF wants Chinese private consumption to increase in order to achieve “a more balanced economy” but never specifies exactly what a “more balanced” economy is. If the standard is the same as that exhibited by the Obama administration, then no level of consumption is high enough. If we don’t spend, then the government will try to spend for us – or despite us. Even the big-spending Bush (II) administration wanted Chinese residents to spend more, but at least President Bush revealed his true motive of promoting US exports.

Those who marvel at high Chinese growth rates should consider the link between that and the high level of savings and investment. China prospers as its economy is freed relatively from government control and interference. China is still underdeveloped, but its growth rate has soared as ownership and decision-making have been decentralized.

Chinese communists could not ignore the lesson provided by Hong Kong as it grew from post-war poverty to the top tier of prosperity in just a few decades. As a British colony with not much of an economy after the Japanese occupation ended, Hong Kong escaped the attention of the socialist planners that were unleashed on the United Kingdom itself.

Sir John Cowperthwaite, who was the Financial Secretary of Hong Kong from 1961 to 1971, resisted requests from Whitehall bureaucrats for economic data. When later asked what his best reform was, he replied, “I abolished the collection of statistics.” Cowperthwaite knew the danger of handing such statistics to social engineers.

Hong Kong had virtually no restrictions on trade, minimal regulation, and a flat personal income-tax rate of 15%. Cowperthwaite’s policy of “positive non-intervention” consisted of ensuring that government did very few things, but did them well. The people were free to produce, trade, and prosper – which they did. By the end of British rule, Hong Kong had a per capita income that was slightly higher than Britain’s.

Hong Kong might never again have another John Cowperthwaite, and it will decline accordingly. The United States could do worse than copy Cowperthwaite’s example, and it has.

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. E-mail:

Copyright © Richard J Grant 2007-2010

Sunday, August 08, 2010

Higher taxes mean less production

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 increase in property taxes will reduce the market value of your house below what it would have been. The total effect does depend on the value to you of the services that are provided from the tax revenues, and we would hope that the net effect is positive, but the tax effect leans against this. All else equal, the higher the property tax compared to other municipalities, the less a potential buyer is willing to pay for a property.

When we buy shares in a corporation, we expect to receive some combination of dividends and capital gains. If we suddenly learn that dividends and capital gains are subject to taxation, the price that we are willing to pay per share will be less than it would have been without the tax. The corporations “themselves” also pay taxes, including a significant corporate income tax. All these taxes reduce the values of corporations and businesses in general. We can only hope that the services the tax revenues pay for will bring a net benefit.

Costs can be increased also by government mandates and regulations. When a regulation is “effective,” that means that it causes us to do things differently than we would have. Even when it doesn’t change our operations significantly, the compliance documentation (paperwork) uses up resources and management attention. It is difficult to find government regulations and associated administrative processes that produce clear net benefits beyond the chain reaction of unintended consequences.

As the regulatory network grows, the net burden grows. As is the case with taxation, beyond a certain range of imposition, the returns are negative. That is why increases in tax rates now cause reductions in revenue. The tax base is discouraged. Other activities, that are “second best” but relatively more tax-efficient, become relatively more attractive to capital and entrepreneurial attention.

Increases in regulatory burdens discourage productive investment and tend to limit the capacity of the tax base. They also reduce the flexibility of everyone in business. We are all hindered in our abilities to adapt to changes in natural conditions, both economic and physical.

This helps explain why economic activity takes longer to “recover” from some downturns than from others. The response to the most recent recession is an example of government increasing the burdens on, and reducing the flexibility of, the productive sector.

As regulations and payroll taxes increase the cost of employing workers, business owners delay hiring and employ fewer workers. They might even decide to change the types of labor they employ in order to change their production and delivery processes. This also forces workers to adapt, often at great expense.

In sum, tax and regulatory increases tend to reduce the returns on stocks, bonds, businesses, and labor. That also reduces the prices and wages that people are willing to pay for these assets and services. This does not mean that we will not see those prices rise over time. It just means that the values will not be as high as they could have been.

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. E-mail:

Copyright © Richard J Grant 2007-2010

Sunday, August 01, 2010

Numbers, facts don’t add up for economic adviser

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 on changes in postwar tax revenue, not tax rates. Also, they didn’t study all cases but, to avoid complication, narrowed their focus according to their perceptions of policymakers’ motivations for the tax changes.

Romer’s critics are perhaps too quick to ridicule her for inconsistency in her support for letting most of the “Bush tax cuts” expire. In that recent article, she does not directly consider responses to recession. But she does find that tax cuts are most strongly associated with increased long-run economic growth. Also, tax increases intended “to reduce an inherited budget deficit” don’t seem to reduce growth as much as other such tax increases.

In this respect, Romer’s findings (in this academic article) are not really inconsistent with her statements as head of the CEA. In another article, made available to newspapers last week and which reads more like campaign literature, she cheers what she calls “one of the broadest tax cuts in American history, helping 95 percent of working families.” Given that her research focuses on tax revenues as a percentage of GDP, she makes no distinction between tax credits and changes in marginal tax rates. From this perspective, the tax credits more or less offset the effects of the soon-to-rise marginal tax rates by shifting resources from future investment to current consumption.

The trouble with refundable tax credits is that a large portion of them are not “tax cuts” at all: they are government spending. Given that a third of working Americans have no income-tax liability, it is impossible to reduce their income taxes further. It is dishonest to pretend to do so.

When seen in the full context of Obama administration policy, most families are net losers. The increase in the national budget deficit is bigger than the sum of the “stimulus” checks. In other words, current tax liabilities are removed from sight by running up future tax liabilities. Try explaining that to your grandchildren.
The problem exposed here is not so much inconsistency as it is a weakness in the foundation upon which most economic research is conducted. Romer’s real problem is that she gives a veneer of respectability to the administration’s policies, which are consistently bad.

She finds herself making indefensible claims about huge numbers of jobs “created or saved.” How can she say that “clean energy projects alone are responsible for nearly 200,000 new jobs” without admitting that these subsidized jobs produce less value than those same people could have produced in a market unhampered by government interference? Subsidized jobs, even “green” ones, are unsustainable.

Does Romer really believe that – constitutional questions aside – the government is really competent to be “investing” in “expanded broadband access, advanced-vehicle manufacturing and a smart-energy grid”? Where in all her research has she found any hope that any government can be entrusted with such economic planning?

As we already knew, economists can disagree. That doesn’t mean they are both wrong. But one of them is; and if we can’t tell which one, then the joke is on us – and our grandchildren.

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