by hilzoy
In a sane world, John McCain would just have knocked himself out of the race for the Presidency, or any other office that requires at least a vague knowledge of economics. In this world, only a few bloggers seem to have noticed:
""As a Republican, I stand before you embarrassed. Embarrassed that we let that spending get out of control," the presidential candidate told voters on the eve of the state's GOP primary.
"The economy is not good. The stock market continues down. And the indicators are not good. I'm not too astonished. ... We let spending get totally out of control, and it continues today, and I'm sorry to tell you this," McCain said at a town-hall style meeting at the Carolina Hospital East Campus in Florence.The Republican presidential candidate has voiced apprehension over proposals for temporary tax cuts and more spending as suggested by many Democrats and Republicans alike, saying they result in additional strains on resources. McCain has proposed cuts in corporate taxes instead from 35 percent to 25 percent, extension of Bush tax cuts, and elimination of the Alternative Minimum Tax.
"People talk about a stimulus package. Fine, if that's what we want to come up with. But stop the spending first," he said."
Um: how to say this? Our economy is not good because we are going into a recession. Recessions do not happen because of excessive government spending. Spending stimulates the economy; that's why it, along with cutting taxes, are the two standard things governments try to do to help get the economy out of a recession. Saying that the economy is going into a recession because of excessive spending is like blaming someone's anorexia on her having too much food. It's just plain nuts.
Excessive spending obviously causes problems. It can contribute to inflation. If it isn't compensated for with tax increases, it will increase the deficit, contributing to long-run problems*. But it simply does not cause recessions, any more than turning up the heat in my house causes me to get frostbite.
Similarly, it's crazy to say that we can have a stimulus package, but only if we stop spending first. Spending is stimulus. It's not the only kind of stimulus, but it's a kind. Cutting spending would work directly against a different kind of stimulus package, like one built around tax cuts. To continue my previous example: saying that we can have a stimulus package, but only if we cut spending first, would be like saying to someone dying of frostbite: sure, you can turn on the heat, but only if you open all the doors and windows, take off all your clothes, and pack yourself in ice first.
Would you want someone who gave you that kind of advice to be your high-altitude mountaineering guide? I don't think so. Similarly, I don't want John McCain to be my President.
This astonishing display of ignorance comes on the heels of McCain's earlier claim that "Every time in history we have raised taxes it has cut revenues." I'll just outsource this one to Jonathan Chait, who eviscerates it. Better yet, I'll steal Chait's chart:
Can you spot the downturn in revenues that accompanied the 1993 tax increase? Neither can I. But hey: why should McCain let actual historical facts get in his way?
***
*Deficits can, in particular, contribute to long-run decreases in growth. Over time, they can therefore contribute to recessions. But McCain did not say that the excessive deficits we racked up under Reagan, Bush I, and Bush II contributed to the recession. He seems to have meant that our (present) out of control spending caused the recession we now seem to be entering, which is just bizarre.
For what it's worth, my best take on his remarks is that he has grasped the idea that deficits are bad, but not the idea that the best thing the government can do to avert a recession is to stimulate the economy, and that this involves cutting taxes, boosting spending, or both. If he also believes that raising taxes makes revenues drop, that might explain why he thinks that cutting taxes would be OK from the point of view of the deficit, whereas boosting spending would not.
In no case, however, is what he said consistent with his having any clue at all about economics.
It is kind of bizarre that everyone is talking about a "fiscal stimulus" package as if that hasn't been going on for the last 6 years. Deficit spending = fiscal stimulus, as I understand it.
Posted by: ral | January 20, 2008 at 12:32 AM
Hilzoy: Wow, jaw dropping.
It's going to be interesting to watch Republicans navigate this politically with a bad economy, when the idea of kicking up spending is a near universal recommendation.
By the way, I'm a little curious about this received idea that tax cuts are stimulatory. Look, when the government taxes you, it usually doesn't retire the revenues in the reserve. It goes out on spends them on, say, someone's salary! So a tax is just a transfer of income from one person to another: it is economically neutral.
Of course, to a smaller extent, taxes can interfere with allocative efficiency and incentives if they are bad taxes. But if they are smart taxes (the kind that solve collective action problems: what government was built for), they actually improve incentives and allocative efficiency.
I just keep hearing people saying that cutting taxes is stimulatory, and I don't get it.
Posted by: Ara | January 20, 2008 at 12:48 AM
Ara: I think a lot depends on whether or not the tax cuts are paid for with spending cuts. If not, then the government will still be paying the same salaries; it will just leave more money with individuals, who will then (presumably) spend it, thereby stimulating the economy.
I mean, thinking of taxation as involving the transfer of money from one person to another makes most sense, I think, if you imagine that the government cannot transfer just the same money without taxes, by borrowing. But it can.
Of course, that's only true until the interest payments come due, as they will.
Posted by: hilzoy | January 20, 2008 at 12:52 AM
hilzoy: Of course, that's only true until the interest payments come due, as they will.
Ah, but in the long term, we're all dead. Coincidentally, this is also the George W. Bush view of history's verdict.
Posted by: ral | January 20, 2008 at 12:58 AM
I'm kind of surprised that you would expect any different from any of the Republican candidates. As far as I can tell, there's only two things that make up the total of Republican orthodoxy on economics:
- Tax cuts are always good, no matter what
- Spending by Democrats is always bad, spending by Republicans is ... hey, look over there!
The problem we have now is that the decrease in asset value will swamp any stimulus package that can be put together, and that decrease is enough to strongly affect consumer consumption, which is about 70% of the economy. The normal responses, like cutting the Fed rate or taxes, won't work at this point. It's like pushing on a wet noodle, the demand isn't there to pull more capital into the system. Following the supply side voodoo has put us in a bad spot, and I don't see anything that can help at this point. My worry is that they adopt a policy of intentionally inflating the dollar to reduce the public and private debt load - that's really playing with fire.
Posted by: HankP | January 20, 2008 at 01:14 AM
"I'm kind of surprised that you would expect any different from any of the Republican candidates."
What phrase, exactly, gave you the idea that Hilzoy did?
I don't see one, but I certainly could be overlooking it: could you point it out to me, please? Thanks.
Posted by: Gary Farber | January 20, 2008 at 01:58 AM
HankP: I don't expect better. I just don't think it's a good idea to tone my outrage down. We should not accept flat-out economic illiteracy in Presidential candidates, and we should not stop saying that it's outrageous, however common it becomes.
That's my view, at any rate.
Posted by: hilzoy | January 20, 2008 at 02:14 AM
Whether or not McCain is ignorant himself, he certainly talks as if he thinks the ELECTORATE is ignorant. For all I know, he's right about that.
My inner optimist says that the electorate's ignorance can be cured with information. But the information has to be presented the right way: in personal, homely terms. Maybe somebody can pore through FDR's fireside chats for a refresher course on how to do it right.
My inner pessimist says that any attempt to actually inform the electorate about national economics will be branded "class warfare" by the media. (Republicans are merely the opposition; the media are the enemy.) The only way to counter that meme is to adopt it: damn straight we're waging class warfare, Democrats should say; which class do YOU side with?
My inner cynic, finally, says that if McCain gets elected Democrats should push really hard for HUGE tax cuts -- for the "middle class", i.e. for anybody making under $200K a year. Make a President McCain veto THAT before he gets to sign any spending cuts. We'll have a veto-proof majority in both Houses, come 2010.
-- TP
Posted by: Tony P. | January 20, 2008 at 02:58 AM
Yes, hilzoy, I understand that what sensible people mean when they say that tax cuts are stimulatory is just short for tax cuts without spending cuts (deficit spending).
My point was just that when Republicans speak of lower taxes being good for the economy, they don't mean *deficit spending*. And they're not talking about short-term stimulation. They mean something else. But what they mean is a little mysterious to me.
Posted by: Ara | January 20, 2008 at 03:27 AM
Gary - Well, the entire post consists of (correctly) calling McCain on his economic innumeracy, and says that in a sane world he would have knocked himself out of contention for the Presidency. Since I've been hearing the same tripe since 1980, and even in the current election from other Republicans, I guess I don't see what's unusual or even remarkable about it at this point.
Hilzoy - You are correct, it is crazy. Unfortunately, I've come to the conclusion that until the entire Republican economic mythology fails, and fails seriously, their full-on propaganda campaign and the willingness of the public to believe what they want to believe prevent any realistic opposition to their plans. Look, the two leading Democrats are calling for tax cuts - while we're running a deficit and the debt has increased to http://www.treasurydirect.gov/NP/BPDLogin?application=np>over $9 trillion. There will not be any change in this 30 year delusion until things get really, really bad. The lure of "something for nothing" is just too strong. Sorry if that makes me cynical, but that's what experience does to you.
Posted by: HankP | January 20, 2008 at 03:31 AM
"Since I've been hearing the same tripe since 1980, and even in the current election from other Republicans, I guess I don't see what's unusual or even remarkable about it at this point."
Conceivably the fact that hours ago he won the South Carolina primary might be relevant?
Posted by: Gary Farber | January 20, 2008 at 03:41 AM
HankP, many things that aren't new nonetheless bear remarking. It is, for instance, still important to remind people that not smoking tobacco, or stopping if they've started, really reduces their risk of a bunch of cancers. Likewise with traffic safety, and so on. Even though it's not news that Republican leaders are still committed to sheer economic folly, it's important - it's not something we should take for granted or excuse as more of the same, because it wasn't okay in the first place either. When something is bad but persistent it's easy to forget that it's not inevitable, necessary, or anything like that. I see Hilzoy as here reminding us of this.
Posted by: Bruce Baugh | January 20, 2008 at 03:42 AM
Hey, I'm not picking on Hilzoy, I agree with her. My point is that there's nothing special about McCain in this, and it's a far broader problem than just this one candidate. In other words, if Romney, or Huckabee, or any of the other Republican clowns gets nominated, it won't change the fact that the underlying problem is with the entire philosophy, not this specific candidate. It also means that whoever gets the nomination will have the full support of the "business press" behind them. Sorry if I put anyone's nose out of joint over this, I just think that while it's good to point out McCain's inane statements, it's also important to remember that the problem, and therefore the solution, goes well beyond this one candidate. I don't think the voting public sees it as a big enough problem to actually make their vote depend on it yet. I do think that will change in the coming year, which is why I'm much more sanguine about Democratic prospects in the fall than some others (yes, even if Clinton is the Democratic candidate).
Posted by: HankP | January 20, 2008 at 04:05 AM
Even a total failure of voodoo economics is not likely to be accepted as a failure of the principle but of the execution. I think it is the same as with "really existing" communism and its unconvincible supporters. The fact of failure is an argument for doing it again but with even mor excesses (compare also the Vietnam ideologues that claim that the US was simply too restrained in its violence and that with a bit more "tough love" it would have been a triumph). A failure of voodoo economics will be blamed on A) the Democrats/liberals/detractors for constantly undermining it and B) on GOPsters fallen into disgrace for not being radical enough (a fate likely to hit the Bushes after leaving office).
Posted by: Hartmut | January 20, 2008 at 05:13 AM
HankP -
My worry is that they adopt a policy of intentionally inflating the dollar to reduce the public and private debt load - that's really playing with fire.
Agreed, but what are the alternatives? You'd have to get to a surplus somehow. Let's see: raise taxes (or charge for services), cut spending, sell off assets, improve productivity and tax away the surplus, keep borrowing, nationalize (for example) the oil companies and take the profits, renounce the debt. I've probably forgotten something.
All of those alternative solutions involve heavy political costs, and I see no evidence that any current politician has any interest in incurring heavy political costs, no matter how beneficial it might be for the long-term interests of the country as a whole. Historically the politically easiest way has generally been to inflate and thus reduce the real value of the debt. The cure for this problem is the same as the cure for Iraq - don't go off on unsustainable adventures in the first place. Too late for that now.
Posted by: cw | January 20, 2008 at 01:02 PM
Hartmut - When supply siders have the same chance of being elected as communists, I'd say that particular threat is over.
cw - My guess is that they try to prop up technically insolvent businesses with "special" side deals and promises - that's been the rumor about why Bank of America bought Countrywide, that the Treasury made some secret and unspecified promises to BofA if they helped out. Anything to hang on until there's a D in the white House.
Posted by: HankP | January 20, 2008 at 01:27 PM
Another legacy of the great Ronald Reagan, folks.We apparently have a whole party full of educated adults who believe that:
1.tax cuts increase government revenue
2.tax hikes decrease government revenue
3. government spending causes recessions
Soon they'll be saying that tax increases cause inflation- but let me not give them any ideas...
Posted by: stonetools | January 20, 2008 at 10:03 PM
I hate to interrupt this amen chorus, but hilzoy's economics aren't as unarguable as she seems to think.
A deficit will boost aggreggate demand and a surplus reduce it, all other things being equal. But all other things aren't equal. The Federal Reserve has the ablity to raise or lower interest rates, and if it is following its own policies concerning an acceptable rate of inflation, a higher deficit will just induce it to raise interest rates. This will mean a fall in private investment without any corresponding stimulus.
Since it takes longer for fiscal policy makers to react to changes in the cycle than monetary policy makers, the general view of macro types is that counter-cyclical policy (reducing inflation in times of boom, boosting output in downturns) should be left to central banks, and not governments.
Moreover, over the longer haul, McCain is right. To spend a dollar, we need to take more than a dollar in private wealth, whether the spending is paid for by taxes or borrowing. So higher spending means lower growth. Obviously, that doesn't mean the government should spend nothing at all, but it does imply that keeping the government as small as possible is good for the economy.
Posted by: Pithlord | January 20, 2008 at 11:55 PM
So a tax is just a transfer of income from one person to another: it is economically neutral.
What Pithlord said re government efficiency. Anyone who has waited in line at DMV knows this. Remember, bureaucracy is the conversion of human energy into solid waste. :)
Posted by: bc | January 21, 2008 at 12:50 AM
Hm. I seem to think that this is a quality of all large organization of humans. I haven't noted that many differences between private and public in that respect; they just direct their inefficiencies in different ways.
Posted by: gwangung | January 21, 2008 at 12:56 AM
Respectfully, Hilzoy, although there are criticisms to be made of McCain's you comment is so muddled that it is difficult to understand what you think McCain's error was. Here are two paragraphs of McCain (italics), followed by the first two paragraphs of your reaction:
Both you and McCain are in part mixing apples (what causes a recession?) with oranges (what to do about a recession if and when one occurs?). So let's try to separate them out for ease of discussion:
McCain's argument -- that deficit spending caused or contributed to an economic decline -- is debatable. Yours, however, is just wrong. Recessions do happen because of excessive government spending. Indeed, in a subsequent paragraph, you tick off of all the problems that excessive government spending can cause, any one of which can lead to a recession. So, although McCain may (or may not) be wrong in this particular case, your counterargument fails to meet him on the merits -- in part because it has no merit.
McCain and you both agree that reduction in money kept by the government -- whether via a tax cut or a spending cut (we'll call both "spending" for convenience) -- can stimulate the economy. That's basic Keynes circa 1930, and, as a blunt, unnuanced statement of economic theory, 1930s Keynes has survived through today. The problem is that the nuance has generally swallowed the rule. Not all government "spending" is equal; e.g., the "great works" programs of the 1930s have been largely discredited. More modern Keynesian thinking is to get more money into the hands of consumers who spend, usually through a tax cut. For instance, Reich (a liberal and well-respect economic voice) advocates a payroll tax cut (http://robertreich.blogspot.com/2008/01/we-need-stimulus-now-but-what-kind.html). Unemployment insurance, allowing businesses to take additional depreciation credits on their taxes, and breaks on taxation of investment have been mentioned by Bernanke. Bernanke, however, stresses that any stimulus must be deficit neutral, in that it is temporary (i.e., either goes away or is paid for via spending cuts.)
Note a couple of things, here: First, the distinction that you suggest between "spending" and "tax cuts" is obscuring. Even a good "liberal" stimulus package will primarily rely on tax cuts. Second, McCain is not too far from the mark in insisting that spending be brought under control. You are not going to find an economist who would advocate a stimulus package that is not "paid for" in some sense. Reich, for instance, is envisioning a temporary cut in payroll taxes. Bernanke's statements similarly stress the need to get spending in line with tax revenue.
Frankly, your aghast, "what an idiot" remark regarding McCain is followed by several paragraphs of prose that, though well-written, is incoherent on the merits.
(Now, as I said, there are legitimate criticisms to be made of McCain's proposal. You're just not making them.)
(As a support of McCain and this proposal, I'll decline making them as well)
Posted by: von | January 21, 2008 at 09:38 AM
von: I tried to separate the two points. On the first: I agree that over time, deficit spending can lower growth, and if it lowers growth, it can make the difference between a slowdown and an outright recession. But that didn't seem to be McCain's point.
On the second, I agree that the point is to get money into the hands of people who can spend it quickly and via some means that is temporary, not a permanent drag on revenues. I disagree that this rules out spending: there are forms of spending that are quicker than tax cuts, especially cuts in income and business taxes, which will not have any effect until April.
I'd also point out that as I understand economics, the point that any stimulus has to be paid for means that we should enact it with the proviso that when the economy is back on its feet, it expires, and we commit to recouping the revenues we spent/lost on it, when the economy is doing better and we can do so without sending it into a recession again.
This, however, is not what McCain said: he said that we should cut spending first, not that we should stimulate first, but be sure to pay for it later. So don't see how the point that stimulus packages need to be paid for helps him at all.
Posted by: hilzoy | January 21, 2008 at 11:19 AM
von: I tried to separate the two points. On the first: I agree that over time, deficit spending can lower growth, and if it lowers growth, it can make the difference between a slowdown and an outright recession. But that didn't seem to be McCain's point.
But that was precisely McCain's point. He said: "The economy is not good. The stock market continues down. And the indicators are not good. I'm not too astonished. ... We let spending get totally out of control, and it continues today, and I'm sorry to tell you this[.]" He is very clearly drawing a causal link from spending ==> downturn. If he wasn't, his "I'm not too astonished" comment makes no sense whatsoever.
Also, excessive government spending, whether paid for via taxation or debt, can cause a recession. See Germany, Weimar and any number of South American and African countries. You're continuing to dance around this issue, and suggest that excessive spending can never really be "the big" problem -- but you're dancing away from a position that is well-established even among liberal economists. (They may dispute causes and frequency, of course.)
I disagree that this rules out spending: there are forms of spending that are quicker than tax cuts, especially cuts in income and business taxes, which will not have any effect until April.
Take a look at Reich's proposal. You're making assumptions that won't bear investigation into the facts.
This, however, is not what McCain said: he said that we should cut spending first, not that we should stimulate first, but be sure to pay for it later. So don't see how the point that stimulus packages need to be paid for helps him at all.
Here you have more of a point, which is why I wrote that McCain was also mixing apples and oranges. There's a sound argument that the long-term health of the country requires some form of spending restraint on entitlements (Medicare, SS, etc.). McCain is championing that restraint as part of his policy package. And there are sound arguments that earmarks are wasteful of taxpayer money while doing close to nothing to strengthen the economy. I read McCain as getting at these two policy points -- e.g., let's get a stimulus package together, but let's do it without the "bridge to nowhere". But I do see an alternate reading that makes McCain sound a little silly -- which is the reading you (and many of the commentators) have adopted.
Posted by: von | January 21, 2008 at 01:06 PM
von: See Germany, Weimar and any number of South American and African countries.
Von, isn't runaway inflation usually associated with those economic disasters? We don't seem to have reached that point yet.
I am no economist, but what I meant above (admittedly a bit obscure) is that we may well have "stripped the gears" (to use Krugman's turn of phrase) to the point that actions by either the Fed or the Congress are unlikely to have much beneficial effect.
For "more witches" read "more tax cuts."
It would have been better to have been paying down the debt over the last few years but alas, it's too late for that. Thank you, Alan Greenspan.
Posted by: ral | January 21, 2008 at 01:42 PM
Pithlord, I'm a little slow today, could you please unpack your comment a bit for the non-economists among me? In particular, I blush to admit that I don't know why A deficit will boost aggreggate demand and a surplus reduce it, all other things being equal., and are you saying that when there's a deficit, the Fed raises interest rates, thus depressing investment and slowing the economy? Why are the rules set up to do that? It sounds counterproductive.
Having disclaimed competence, I should probably comment no further, but what the heck, toujours audace. This can't be quite right:
In the long term...higher spending means lower growth...keeping the government as small as possible is good for the economy.
Is there no such thing as investment? The development of the Western frontier with leveraged government funds (Louisiana purchase, conquest, railroad allotments, Homesteading Act, etc.) created new wealth; on a smaller scale, so did rural electrification, public education, the space program, etc.
Or did you just mean that we should keep overhead down, in which case I agree but neither McCain nor anybody else has a magic wand for that. Gore's Reinventing Government program reputedly cut administrative costs pretty effectively, is there really much left to do in that regard?
Posted by: trilobite | January 21, 2008 at 01:47 PM
To spend a dollar, we need to take more than a dollar in private wealth, whether the spending is paid for by taxes or borrowing. So higher spending means lower growth.
With the caveat that I am not an economist, I'd like to say that this seems, by far, overly simplistic to me.
It depends on what the dollar is spent on. The concept to consider is "investment".
What Pithlord said re government efficiency. Anyone who has waited in line at DMV knows this.
It's a byword that government is always inefficient, and private industry is always efficient. For better or worse, I think it's also something of an urban myth.
If you want to traffic in anecdota, I will happily take an appointment at the RMV, my local zoning board, the town dump, or even my local social security office over a phone call with a software support organization, or an attempt to get a warranty repair done on a car or an appliance. My auto and health insurance companies are pretty good, but they seem to be kind of an exception.
Private industry is very, very efficient at taking my money from me. Once the check clears, their level of efficiency goes down markedly.
To be dead honest, I find government agencies to be as efficient and generally more responsive than private agencies that are similar in scale, other than at the point of sale. That's my reality. As always, YMMV.
Having spent time over the last few years in jury pools, the registry of deeds, town meeting, the RMV, and a variety of other retail-level government offices, I can also say without hesitation that my tax dollars are not being spent on frills.
IMO, government gets a bad rap.
the "great works" programs of the 1930s have been largely discredited.
I guess I missed class that day.
I have no idea if a program like the one we embarked on in the '30s is the best remedy for now. It probably is not. That said, I think they were, and are, considered to have been quite helpful at the time.
Thanks -
Posted by: russell | January 21, 2008 at 06:00 PM
"If you want to traffic in anecdota, I will happily take an appointment at the RMV, my local zoning board, the town dump, or even my local social security office over a phone call with a software support organization, or an attempt to get a warranty repair done on a car or an appliance."
You aren't really comparing apples to apples here. You should either compare appointment to appointment (and I'll tell you now that in California it can be hell to get an appointment to stick with a building inspector) or 'I want it now phone call' to 'I want it now phone call'.
Posted by: Sebastian Holsclaw | January 21, 2008 at 06:11 PM
You aren't really comparing apples to apples here.
Fair enough, the specific examples I've given are dissimilar.
Suffice it to say that, at the local to state level, my experience with government agencies has been pretty good, in the context of meetings, "help me now" phone calls, or any of a variety of other services.
At the federal level, I've found a slightly higher frustration level, but still workable. The folks in my Congressional rep's local office are outstanding.
Other than in the context of their actually selling me product, my experience with private companies has been, truthfully, much more spotty. And trust me when I say that I'm talking about very successful companies, folks who are nowhere close to being swept from the field by the magic of the market due to their bad manners. They're making lots and lots and lots of money.
There is "efficiency", in the sense of squeezing every last ounce of some kind of value out of a resource, regardless of the inconvenience or difficulty that creates. Then there is "effectiveness", in the sense of actually making the useful thing happen.
I have no doubt that government is usually not the most efficient possible provider of a given good or service. They are, however, quite often the most effective one, especially when that good or service is not one that necessarily yields a high financial return. There are lots of things like that.
"Government is wasteful, private sector is efficient" is a cliche. It depends on what you are measuring, and what you're trying to achieve. I find that, where government touches my life, they generally do a good job, without a lot of undue waste or hassle. Nothing flashy, nothing over the top, but the useful, necessary thing gets done.
Maybe I'm just a lucky guy.
Thanks -
Posted by: russell | January 21, 2008 at 08:42 PM
It's Monday evening.
Dow futures are predicting an opening 520 points down tomorrow morning. This is on top of the approximate 2000 points the Dow has lost since its all-time high late in 2007.
Bourses all over the world are crashing into bear market territory. India, China, and Brazil markets (the fastest growing economies) are cratering from parabolic spikes achieved last year.
I make no predictions about markets.
We are in a gigantic credit contraction, which began with the subprime mortgage crisis (private sector companies), and has spread now to credit card debt and auto loans(extended by private sector companies).
The lending companies disregarded all rational lending policies. Outright fraud, lying, misrepresentation, you name it, are just now coming to light.
These loans were packaged together and sold by private sector companies worldwide to every financial institution (private sector companies, mostly) in every country. There was no transparency, purposely.
All of the parties fought regulation and transparency every step of the way. That would be socialism.
The bond rating agencies (private companies) completely forfeited their integrity by rubber-stamping all of this funky paper, just as they did in the Enron debacle, which is spit in the ocean of the current debacle.
The geniuses on Wall Street (private sector companies) bundled this paper together to maximize non-transparency and unaccountability. They used mathematical models to predict the paper's behavior under various economic scenarios.
Those models were discarded late in 2007.
The geniuses are scared crapless. They've already unloaded the paper. We bought it.
Their proxies, for the most part, are parading across TV business shows denying the catastrophic nature of what is happening as they have done every step of the way, since the housing industry began to slow. They lie, on behalf of the managements and shareholders of private sector companies.
The private sector companies which insure the paper are very close to bankruptcy.
They also insure municipal bonds.
The bond insurers' demise, if allowed to happen, will be catastrophic.
The liquidity of this paper is non-existent. There is no pricing. There are no bids. Already, several money market funds have "broken the buck" and have stopped or limited redemptions, an almost unheard of event, much like a bank closing.
The money market fund is a cornerstone of American savings.
And yet, all we hear and all we are going to hear from John McCain and the other Republican candidates is how the government is somehow to blame for the "brilliant" financial innovation that has been bestowed on the American economy by the private sector, from the loan officer down the street all the way up to our current Treasury Secretary, late of Goldman Sachs.
Go ahead, add a cut in Federal government spending to the whirlpool of credit contraction that is kicking the crap out of Main Street.
Real smart.
The narrative presentation in 2000 by Republican propagandists (Larry Kudlow (simply a liar) is one of hundreds) seeded throughout the media was that the economic slowdown at the end of the Clinton Presidency was the "Clinton recession".
The stock market began its swoon in the Spring of 2000 a few days AFTER George Bush announced his tax cut policy during the campaign.
The Federal government was in surplus. Spending, domestic and defense, was growing less than inflation.
The narrative taking shape this time (same liars, Kudlow at the head of the line of the usual suspects) is that the current stock market decline is happening because Hillary's and/or Obama's election will destroy the country.
It won't be called the "Bush recession". The liars will make sure of that.
We'll need further tax cuts, won't we? We'll need spending cuts, won't we?
Ad nauseum.
Sorry to go all "Bill" this evening. But even a stopped "Bill" can hit the jackpot sometimes.
The Federal Government (monetary and fiscal policy and a Resolution Trust much like the S&L bailout of the early 1990's) is going to bail out the private sector one more time.
To not do so will be a catastrophe. I'd check all of your investments with a magnifying glass before you start whining about moral hazard. That goes for me, too.
I hope things turn out O.K.
Until the next time the private sector fails.
So that everyone can live to complain about the government another day.
P.S. What Russell said.
Ps. Kudlow (merely an umbrella name for the entire phalanx of endlessly optimisitc, lying idiots) believes Fannie Mae, Freddie Mac, Citigroup, etc. should be allowed to fail.
Go ahead, Larry, let it happen. I would read Cormac McCarthy's "The Road" before you do so, so you can learn where your next meal will come from.
Andrew Mellon lives.
Posted by: John Thullen | January 21, 2008 at 09:06 PM
Incidentally, if the market opens down big tomorrow and then closes up for the day, you'll know the government has just saved lots of everyone's bacon.
Try not to act relieved.
Then I will say "never mind" about my previous comment.
;)
Posted by: John Thullen | January 21, 2008 at 09:09 PM
I find the critiques of waiting in line at DMV to be very confusing. My experience at RMV matches Russell's: its always been fast and reasonably pleasant. Beyond that though, most businesses aren't fixated on maximizing customer happiness. They may do that to some extent in order to make money, but in almost all industries, you can succeed while still pissing off your customers mightily. Quick: how many network airlines have you flown that have not pissed you off?
I don't get how the proverbial DMV experience has anything to do with government efficiency: having me wait in line for 30 minutes may really be the most financially efficient use of tax dollars. It makes more sense to keep low staff counts and tolerate occasional long queues than it does to pay for lots of staff that are usually idle in order to guarantee short queues. No one wants to pay higher taxes and most people only have to hit the DMV every few years, so it makes sense that an efficient government would charge people as fewer dollars in taxes while subjecting them to long queues at the DMV once every few years.
FWIW, I work in the airline industry, and my observations there are that people are often far more price sensitive than they expect. If you ask people upfront, almost no one is willing to say that price is by far the most important variable in their purchasing decisions. But if you actually conduct experiments, people sacrifice pretty much everything to realize stunningly puny cost savings. Airlines have been struggling to find ways to upsell consumers for years and years and their grim conclusion is that no matter what people say, they will happily fly a competitor that charges $5 less, even if it means more surly service, less comfort, less convenience, etc. Amazingly, those same customers will then complain incessantly about how crummy service is. I suspect a similar dynamic holds in most cases of government complaining...
Posted by: Turbulence | January 21, 2008 at 09:33 PM
Real smart.
Brother, you're making my head hurt.
Everybody's seen "It's a Wonderful Life", right? We are headed for Pottersville.
It's now just less than a year before W leaves office. I hope we make it.
Thanks -
Posted by: russell | January 21, 2008 at 10:02 PM
trilobite,
Sorry for the jargon. Let me try again.
"Demand" is made up of US consumers making purchases, foreigners buying US exports, the government spending money and businesses making investments. Demand can be just right, too much or too little for the productive capacity of the economy. If it is too much, you get inflation. If there is too little, you get a recession.
The Federal Reserve is supposed to keep things just right. If there is too much demand, it should raise interest rates. That makes it less attractive to consume and make investments, and more attractive to save, reducing demand. If there is too little, the Fed should lower interest rates.
If we suppose the Fed is trying to do this, then fiscal policy should not concentrate on trying to fix the business cycle. That's because if you run a big deficit to increase demand, the Fed will counteract that with higher interest rates. And since the Fed can move faster than Congress, all you will get is a mess.
I wouldn't say that every dollar in government spending is worse for growth than not spending that dollar. If you spend it on public investments that pay off, then it is worth it. But you have to remember that a tax isn't just a transfer -- to get a $1, the government not only has to take it from somebody, but they and the taxpayer create compliance and avoidance costs, and the tax changes the taxpayer's incentives. So the cost to the private economy of a dollar of public spendign is substantially more than one hundred cents. How much more is controversia.
Posted by: Pithlord | January 22, 2008 at 01:29 AM
So, are the gears stripped? Time will tell.
Posted by: ral | January 22, 2008 at 09:55 AM
You can't spend more money than you have. Deficit spending is fine for awhile, but we are doing it at an unprecedented rate and our dollar is suffering for it-- take a look at the dollar since 1913. It's worth 4 cents of what it was worth then.
When you spend in the deficit and borrow the money ($1 billion a day!) to make it all up from China, how is that supposed to help the American economy? When the government prints money, which makes all our money worth less, how is that supposed to help poor people? It doesn't, it only helps Wall Street. Prices go up for poor people, and Wall Street of course doesn't notice.
Sure, Reagan spent us into a deficit and other presidents have before as well-- but never to this extent, and never has our dollar been worth less, so much so that OPEC might stop selling oil in dollars and other countries might buy reserve currencies in Euros rather than dollars.
An "economic stimulus" (lower interest rates + more money printed) might help in the short term but will be more of the same in the long term-- our dollars worth less, our economy in worse shape, and the end of the middle class.
Posted by: Libertarian Girl | January 22, 2008 at 02:12 PM