Government – Page 128 – artdiamondblog.com

FDR’s Treasury Secretary Morgenthau Concluded that Big Spending Stimulus “Does Not Work”

Henry Morgenthau, Jr.

Source of portrait: http://en.wikipedia.org/wiki/Henry_Morgenthau,_Jr.

Henry Morgenthau, Jr. was FDR’s Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed.

(p. 2) We have tried spending money. We are spending more money than we have ever spent before and it does not work. And I have just none interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!

Source:
Folsom, Burton W., Jr. In New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. 4th ed. New York: Threshold Editions, 2008.
(Note: ellipses in Folsum’s version of the quotation.)

Folsum says that this statement was from testimony before the House Ways and Means Committee in May 1939; and can be found in Morgenthau’s Diary entry for May 9, 1939 at the Roosevelt Presidential Library.

Source of book image: http://www.flickr.com/photos/roscoe/3121498653/

Japan’s Stimulus Package Stimulated Debt, but Not Recovery

Source of graphs: online version of the NYT article quoted and cited below.

(p. A10) In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

In the United States, it has also led to calls in Congress, particularly by Republicans, not to repeat the errors of Japan’s failed economic stimulus. They argue that it makes more sense to cut taxes, and let people decide how to spend their own money, than for the government to decide how to invest public funds. Japan put more emphasis on increased spending than tax cuts during its slump, but ultimately did reduce consumption taxes to encourage consumer spending as well.

For the full story, see:
MARTIN FACKLER. “Japan’s Big-Works Stimulus Is Lesson.” The New York Times (Fri., February 5, 2009): A1 & A10.

“The soaring Marine Bridge in Hamada, Japan, built as a public works project, was almost devoid of traffic on a recent morning.” Source of caption and photo: online version of the NYT article quoted and cited above.

Only 24% of Obama’s Campaign Money Came from Small Donors

(p. A16) An analysis of President-elect Barack Obama’s campaign fund-raising punctures one of the most enduring pieces of conventional wisdom from his presidential run: that small donors powered his record-breaking money machine.
. . .
The institute found that while nearly half of Mr. Obama’s donations came in individual contributions of $200 or less, in reality, only 26 percent of the money he collected through Aug. 31 during the primary and 24 percent of his money through Oct. 15 came from contributors whose total donations added up to $200 or less. The data is the most recent available.

For the whole story, see:
MICHAEL LUO. “FUND-RAISING; The Myth of the Small Donor.” The New York Times (Tues., November 25, 2008): A16.
(Note: ellipsis added.)

“This is a Crisis of Excessive Debt”

Source of book image: http://ecx.images-amazon.com/images/I/41gD4n5UkHL._SL500_.jpg

Niall Ferguson has a recent book on money that has received a great deal of attention (but that I have not yet seen). Here are some of his views, as expressed at the 2009 World Economic Forum, in Davos, Switzerland:

(p. B4) “Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”
Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.
“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”
While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

For the full story, see:
NELSON D. SCHWARTZ. “Global Worries Over U.S. Stimulus Spending.” The New York Times (Fri., January 29, 2009): B1 & B4.

The latest Ferguson book, is:
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: Penguin Press, 2008.

Japan’s Huge Stimulus Spending Led to Economic Stagnation

(p. A2) Rep. Paul Ryan of Wisconsin, a young and economically astute Republican leader, has numerous problems with the economic-stimulus package working its way through Congress, but essentially they boil down to this: He fears the U.S. is repeating the mistakes Japan made trying to get out of its own economic ditch in the 1990s.
The Ryan critique is important in part because it’s popping up with increasing frequency among congressional Republicans.
. . .
Here’s the critique in a nutshell: Japan in the early 1990s, like the U.S. today, saw a real-estate bubble burst, spawning a banking and credit crisis that drove the whole economy down, hard. The Japanese then tried stimulating the economy with giant doses of government spending, which didn’t pep things up — but did bring on deficits that required tax increases later, dragging out Japan’s problems for years.

For the full commentary, see:
GERALD F. SEIB. “CAPITAL JOURNAL; Avoiding Japan’s Stimulus Miscues.” Wall Street Journal (Tues., FEBRUARY 2, 2009): A2.
(Note: ellipsis added.)

The Ad Hoc Growth of the Regulatory Snarl

Source of graphic: online version of the NYT article quoted and cited below.

(p. 9) Who’s to blame for the implosion of financial markets? The finger-pointing has gone in every direction, and it’s easy to see why: the regulatory structure points in every direction.

The apparatus that oversees the nation’s financial system is an ad hoc creation: every time there is a fiscal panic, new agencies are formed and existing ones receive new responsibilities.

For the full comment, see:
HANNAH FAIRFIELD. “Metrics; A Snarl of Regulation.” The New York Times, SundayBusiness Section (Sun., October 4, 2008): 9.

Patients “Stuck on Waiting Lists” in Canadian Universal Healthcare

Source of image: online version of the WSJ article quoted and cited below.

(p. A17) In Ontario, Lindsay McCreith was suffering from headaches and seizures yet faced a four and a half month wait for an MRI scan in January of 2006. Deciding that the wait was untenable, Mr. McCreith did what a lot of Canadians do: He went south, and paid for an MRI scan across the border in Buffalo. The MRI revealed a malignant brain tumor.
Ontario’s government system still refused to provide timely treatment, offering instead a months-long wait for surgery. In the end, Mr. McCreith returned to Buffalo and paid for surgery that may have saved his life. He’s challenging Ontario’s government-run monopoly health-insurance system, claiming it violates the right to life and security of the person guaranteed by the Canadian Charter of Rights and Freedoms.
Shona Holmes, another Ontario court challenger, endured a similarly harrowing struggle. In March of 2005, Ms. Holmes began losing her vision and experienced headaches, anxiety attacks, extreme fatigue and weight gain. Despite an MRI scan showing a brain tumor, Ms. Holmes was told she would have to wait months to see a specialist. In June, her vision deteriorating rapidly, Ms. Holmes went to the Mayo Clinic in Arizona, where she found that immediate surgery was required to prevent permanent vision loss and potentially death. Again, the government system in Ontario required more appointments and more tests along with more wait times. Ms. Holmes returned to the Mayo Clinic and paid for her surgery.
On the other side of the country in Alberta, Bill Murray waited in pain for more than a year to see a specialist for his arthritic hip. The specialist recommended a “Birmingham” hip resurfacing surgery (a state-of-the-art procedure that gives better results than basic hip replacement) as the best medical option. But government bureaucrats determined that Mr. Murray, who was 57, was “too old” to enjoy the benefits of this procedure and said no. In the end, he was also denied the opportunity to pay for the procedure himself in Alberta. He’s heading to court claiming a violation of Charter rights as well.
. . .
Canada’s system comes at the cost of pain and suffering for patients who find themselves stuck on waiting lists with nowhere to go. Americans can only hope that Barack Obama heeds the lessons that can be learned from Canadian hardships.

For the full commentary, see:
NADEEM ESMAIL. “‘Too Old’ for Hip Surgery.” Wall Street Journal (Mon., February 9, 2009): A17.
(Note: ellipsis added.)

Stimulus Statement to President Obama that I Signed

Source of image of stimulus statement: http://www.cato.org/fiscalreality

My name appeared on the list of economists supporting an open statement addressed to President Obama questioning the wisdom of the huge government spending package recently passed by Congress. The statement was published in full-page ads paid for by the Cato Institute that ran on p. A11 of the Weds., Jan. 28, 2009 New York Times and on p. A14 of the Mon., Feb. 9, 2009 Wall Street Journal.

You can download a PDF of the statement, along with the initial list of signatories, at:
http://www.cato.org/special/stimulus09/cato_stimulus.pdf

Mankiw Warns that Economic Forecasting Would Not Be Able to Give Much Advance Warning of a Depression

(p. 1) According to the economic historian Christina D. Romer, a professor at the University of California, Berkeley, the great volatility of stock prices at the time also increased consumers’ feelings of uncertainty, inducing them to put off purchases until the uncertainty was resolved. Spending on con-(p. 6)sumer durable goods like autos dropped precipitously in 1930.
. . .
Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces.
. . .
What’s next? Perhaps the most troubling study of the 1930s economy was written in 1988 by the economists Kathryn Dominguez, Ray Fair and Matthew Shapiro; it was called “Forecasting the Depression: Harvard Versus Yale.” (Mr. Fair is an economics professor at Yale; Ms. Dominguez and Mr. Shapiro are at the University of Michigan.)
The three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

For the full story, see:
N. GREGORY MANKIW. “Economic View; But Have We Learned Enough?” The New York Times, SundayBusiness Section (Sun., October 26, 2008): 1 & 6.
(Note: ellipses added.)

Democratic 1997 Tax Break Fed Housing Bubble

Source of graph: online version of the NYT article quoted and cited below.

(p. A1) “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
— President Bill Clinton, at the 1996 Democratic National Convention
Ryan J. Wampler had never made much money selling his own homes.
Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.
And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.
But many economists say that (p. A22) the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

For the full story, see:
VIKAS BAJAJ and DAVID LEONHARDT. “1997 Tax Break on Home Sales May Have Helped Inflate Bubble.” The New York Times (Fri., December 19, 2008): A1 & A22.
(Note: ellipses added.)
(Note: the online version of the article is dated December 18, and has the somewhat different title: “The Reckoning; Tax Break May Have Helped Cause Housing Bubble.”)

“Ryan J. Wampler made nearly $700,000 on three sales of his own homes in eight years.” Source of caption and photo: online version of the NYT article quoted and cited above.

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.)