Category: Economic Crisis

Ending Capital-Gains Tax Would Encourage Funding for Entrepreneurial Ventures

(p. A15) In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?
One explanation is that these economists think this recession is an extraordinary one.
. . .
But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors’ fear. Thus, the problem is how to increase investors’ willingness to take risk. It’s unclear how the proposed stimulus package would help inspire investors to do so.
. . .
So how do we stimulate the economy without increasing the already large current-account deficit? It’s not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years

.

For the full commentary, see:
ALBERTO ALESINA and LUIGI ZINGALES. “Let’s Stimulate Private Risk Taking.” Wall Street Journal (Weds., JANUARY 21, 2009): A15.
(Note: ellipses added.)

Stimulus Bill is “Big, Messy, Largely Off-Point and Philosophically Chaotic”

(p. A11) The final bill was privately agreed by most and publicly conceded by many to be a big, messy, largely off-point and philosophically chaotic piece of legislation. The Congressional Budget Office says only 25% of the money will even go out in the first year. This newspaper, in its analysis, argues that only 12 cents of every dollar is for something that could plausibly be called stimulus.

What was needed? Not pork, not payoffs, not eccentric base-pleasing, group-greasing forays into birth control as stimulus, . . .
. . .
I think there is an illness called Goldmansachs Head. . . . When you have Goldmansachs Head, the party’s never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he’s feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn’t know what time it is.
. . .
But you don’t have to be on Wall Street to have GSH. Congress has it too. That’s what the stimulus bill was about–not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn’t mean you’re a pro, it doesn’t mean you’re a tough, no-nonsense pol. It means you’re a slob.
That’s how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis.

For the full commentary, see:
PEGGY NOONAN. “OPINION; DECLARATIONS; Look at the Time.” Wall Street Journal (Sat., JANUARY 30, 2009): A11.
(Note: ellipses added.)

A Toast to Schumpeter on His Birthday (February 8, 1883)

ForbesKeynesSchumpeterCover1983-05-23edited.jpg

Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .

In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists’ passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.

The reference for the original Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:
http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).

Entrepreneurs, Investors, and Consumers Will Delay Decisions If Government Policies Are Uncertain

(p. A15) . . . , the new administration needs to be clearer on its long-run goals and policies. Mr. Obama deserves time to lay out his longer-term agenda, but he must reassure those who would put capital at risk that we are not headed toward a European-style social welfare state. Will he push for financial reform with better intelligence, the centerpiece being that any firm that is or could quickly become too big to fail must be subject to real-time capital adequacy and risk disclosure and monitoring? Or will he just push for more punitive regulation?

Mr. Obama has pledged to go through the budget and shut down ineffective programs, but how much shorter is his list than mine or yours? Is he capable of a “Nixon goes to China” on Social Security, as President Bill Clinton once hoped to do? Or will he push for tax reform and simplification with a broader base and lower rates?
One thing is certain: Investors, workers and employers need to have a sense of where tax, spending and regulatory policy are headed, or they will postpone decisions and further weaken the economy.

For the full commentary, see:
MICHAEL BOSKIN. “OPINION; Investors Want Clarity Before They Take Risks.” The Wall Street Journal (Fri., JANUARY 23, 2009): A15.
(Note: ellipsis added.)

Car Bailout Destroys Dynamism of Process of Creative Destruction

(p. A29) Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.
This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.
Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. . . .
. . .
But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

For the full commentary, see:
DAVID BROOKS. “Bailout to Nowhere.” The New York Times (Fri., November 18, 2008): A29.
(Note: ellipses added.)

“Atlas Shrugged is a Celebration of the Entrepreneur”

RandAynStamp.jpg

“The art for a 1999 postage stamp.” Source of image: online version of the WSJ article quoted and cited below.

(p. W11) Many of us who know Rand’s work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that “Atlas Shrugged” parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated “Atlas” as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
. . .
Ultimately, “Atlas Shrugged” is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand’s political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear — leaving everyone the poorer.

For the full commentary, see:
STEPHEN MOORE. “DE GUSTIBUS; ‘Atlas Shrugged’: From Fiction to Fact in 52 Years.” Wall Street Journal (Fri., JANUARY 9, 2009): W11.
(Note: ellipses added.)

Multiplier: Is it 1.5 as Team Obama Hopes; or Zero, as Barro Estimates?

(p. A17) Now we have the extreme demand-side view that the so-called “multiplier” effect of government spending on economic output is greater than one — Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.

The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
. . .
What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved — but economists have not come up with explanations, such as incomplete information, for multipliers above one.
. . .
There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

For the full commentary, see:
ROBERT J. BARRO. “Government Spending Is No Free Lunch.” Wall Street Journal (Thurs, JANUARY 22, 2009): A17.
(Note: ellipses added.)

Bernanke Praised FDR’s “Willingness to Be Aggressive and to Experiment”

Bernanke apparently endorsed FDR’s policy volatility. To the contrary, Amity Shlaes has persuasively argued that the policy volatility increased uncertainty, and discouraged entrepreneurial ventures, thereby lengthening and deepening the Great Depression.
Bernanke taking FDR as a mentor, is deeply disturbing. (And I regret an earlier entry in which I placed trust in Bernanke’s judgment.)

(p. A2) While Ben Bernanke was teaching economics at Princeton University in late 1999, he admonished officials in Japan for doing too little to get their country out of its economic funk. Their model, he said, should be Franklin D. Roosevelt.

“Roosevelt’s specific actions were, I think, less important than his willingness to be aggressive and to experiment — in short, to do whatever was necessary to get the country moving again,” Mr. Bernanke said in a paper on Japan’s paralysis.

Nearly a decade later, Mr. Bernanke, now the Federal Reserve chairman, is trying to follow his own advice.
. . .
Mr. Bernanke’s choices could damage several objectives that the Fed holds sacrosanct. Low interest rates and an exploding balance sheet could some day cause inflation. With so much slack in the economy and commodities prices tumbling, that looks like a far-fetched risk today. But the Fed’s novel new lending programs could be difficult to unwind quickly if the economy turns around unexpectedly, potentially leaving the financial system with more stimulus than it needs — along with inflation.
Mr. Reinhart notes that Mr. Bernanke’s approach also could open the Fed to political intrusion, something central bankers have fought for decades to avoid.
The recent debate about an auto-industry bailout was one example of the risk. Earlier this month, Sen. Christopher Dodd wrote to Mr. Bernanke asking if the central bank could help Detroit. Mr. Bernanke politely responded that he wanted to stay out of industrial policy. But after Senate action failed, the Connecticut Democrat raised the prospect of Fed involvement again at a news conference Friday.
“When the Federal Reserve is involved in more markets, more instruments and is seen to have an unlimited balance sheet and flexibility to use that balance sheet, it will be subject to political pressure,” Mr. Reinhart said.
. . .
Then there’s the biggest risk of all: the economy might not turn around. History was kind to Mr. Roosevelt because the economy got moving again on his watch, though of course it didn’t really turn around until the U.S. became enmeshed in a world war. Mr. Bernanke will be a hero if the economy rebounds. But if it doesn’t, the judgment is certain to be much tougher.

For the full commentary, see:

JON HILSENRATH. “THE OUTLOOK; Bernanke’s Fed, Echoing FDR, Pursues Ideas and Action.” Wall Street Journal (Mon., DECEMBER 15, 2008): A2.
(Note: ellipses added.)

Amity Shlaes’ wonderful book, is:
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

Capitalism’s Defenseless Fortress

FortressDefended.JPGPhotograph by Art Diamond.

(p. 143) . . . capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.

The bourgeois fortress thus becomes politically defenseless. Defenseless fortresses invite aggression especially if there is rich booty in them. Aggressors will work themselves up into a state of rationalizing hostility—aggressors always do.

Source:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

FortressDefenseless.JPGPhotograph by Art Diamond.

Confidence in Market Is Undermined by Economist-Backed Interventions

(p. A17) This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.

Practically every day the government launches a massively expensive new initiative to solve the problems that the last day’s initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public’s perception of the government’s competence and trustworthiness.

The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at minimum cost to taxpayers.

For the full commentary, see:
OLIVER HART and LUIGI ZINGALES. “Economists Have Abandoned Principle.” Wall Street Journal (Weds., DECEMBER 3, 2008): A17.

“I Want Some TARP” Satirical Video Clip

TARP.jpg Screen capture from the link cited below.

Today (Weds., 1/21/09) on CNBC, I caught a snippet of a replay of Bill Zucker’s musical video parody of the government’s TARP (Troubled Assets Relief Program) bailout. It was funny, and mainly on-target.

You can view it on YouTube, at:
http://www.youtube.com/watch?v=yGfQk9XXm24&feature=pyv&ad=3038287303