Archive for September, 2010

Myths of the Fall

I often disagree with Robert Reich, but nonetheless find his arguments quite interesting. From what I gather, his forthcoming book (After Shock) is going to situate the financial collapse and the troubled recovery in a longer record of declining wages (a product of the decline of manufacturing) and growing inequality (a product of these declines and changes in tax policy). I have not read the book, but I have heard Mr. Reich speculate that the decline in the savings rate and the growing levels of indebtedness resulted from the disjunction between expectations of improving levels of consumption and the stagnation of real wages for much of the population. There is likely much to this argument, although the fully developed argument would have to take a host of additional factors into account.

Having heard Mr. Reich on NPR the other evening, I dropped by his blog to see if I could find a written version of his argument. No such luck. However, I came upon his critique of the Republican Pledge in an posting entitled “Republican Economics as Social Darwinism.” Let me quote:

John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929.

But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget.

And we all know what happened after 1929, at least until FDR reversed course.

I remain somewhat stunned that the standard issue story of the Great Depression and the Hoover administration continue to find an audience.  It is not as if the data is hard to find. One can go to the OMB’s Historical Tables (Table 1.1 ) and discover the following:

  • 1929: the federal government ran a surplus of $732 million
  • 1930: the federal government ran a surplus of $738 million
  • 1931: the federal government ran a deficit of $462 million
  • 1932: the federal government ran a deficit of $2.7 billion. In dollar terms, this was larger than the deficit in FDR’s first year in office ($2.6 billion)


Reich’s claim: The Hoover administration’s response to depression was “shrink government, cut the federal deficit, reduce the national debt, and balance the budget.”


The OMB’s data: As a percentage of GDP (Table 1.2), the deficit incurred during Hoover’s last year in office was 4 percent of GDP. During the decade of the 1930s,  the federal government would run higher deficits in 1933 (4.5 percent of GDP), 1934 (5.9 percent of GDP), and 1936 (5.5 percent of GDP). But its deficits would be the same as Hoover’s last year in 1935, and smaller in 1937 (2.5 percent GDP), 1938 (.1 percent GDP) and 1939 (3.2 percent GDP).

To compare Hoover’s 1932 spending record to more recent years, a deficit of 4 percent of GDP was greater than the US government incurrent from any time from 1993 through 2008. It ballooned to 9.9 percent of GDP (2009) and is estimated to hit 10.6 percent this year (2010).

The Republican Pledge suggests that we can move to a balanced budget via reductions in discretionary spending and an extension of tax cuts, with no serious discussion of entitlements (another myth worth rejecting).

I wonder if we can have serious discussions of large economic policy questions when we work with inaccurate caricatures of the past. The Left tells a story of Hoover and Mellon, champions of laissez faire, heartlessly shrinking the government in the wake of the depression and Roosevelt riding in on a white horse to save the nation’s economy.  The Right tells a story—equally inaccurate—of Great Society social engineers inflating the size of government until Ronald Reagan rode into town, explained that government was the problem, not the solution, and reduced the size and role of government, unleashing the marvels of the market and the private sector.

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According to the Las Vegas Review-Journal, Democratic Senate Majority Leader Harry Reid, under a tough re-election challenge from Republican Sharron Angle, is running ads slamming Angle for opposing health insurance mandates. Angle was one of two state senators to vote against mandated coverage of colonoscopies and correctly argued that these mandates drive up costs for everyone. Angle is right on the economics, but this is a hard one to explain to voters. Let’s hope a courageous adherence to principle wins the day, but I’m not holding my breath.

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From George Will’s recent column on gender politics: “At Bryn Mawr, 4 percent of 2010 graduates majored in chemistry, 2 percent in computer science. At Smith, half of 1 percent were physics majors; 1.4 percent majored in computer science. In 2009 at Barnard, one third of 1 percent majored in physics and astronomy.”

But does he cherry pick the data?  What is the percentage of physics majors at Bryn Mawr (it is apparently about 3%)?  Chemistry majors at Smith?  Chemistry and computer science at Barnard?  Should these numbers be surprising for liberal arts schools?  And what do they actually tell us (and do they tell us what Will thinks they tell us)?

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The Financial Times has an interesting piece and photo essay on Kennesaw, Georgia, where gun ownership is legally required. 

Naturally, I disagree with any law forcing individuals to purchase something from the private sector – whether it is health insurance or a gun.  However, as laws go, this is pretty harmless since it is not enforced and there are numerous exceptions.  What I do like about it is that it represents a certain spiritedness that is lacking in so many other places.  As the author points out, “This is not just about gun rights, but about independence; it is about a desire to keep the government in check.” 

Of course, that spiritedness is improperly channeled here – as, unfortunately, is often the case with so many conservative Americans.  The answer to the state overreaching in one place isn’t to extend it in another.  But this is the sort of sentiment, that if properly channeled, can help forestall further erosion of our liberties – and if we are real lucky, perhaps even some restoration.  Of course, this assumes that people actually desire to be free, something that wiser minds than my own have questioned.    

(BTW, given that the Confederate cause shows up more than once in this piece on Kennesaw, it is worth noting the following: As a Yankee, a libertarian, and someone absolutely opposed to slavery and racism, I don’t share the respect for the Confederacy so often seen in the American South by even those who profess some love of liberty.  While I understand that the Confederate flag, for some, represents opposition to the federal government, I really wish that modern day “rebels” would seek out a more positive symbol of their resistance [some suggestions are posted here, including one wisely adopted by the Tea Party Movement].  For libertarians, there is so much to dislike about the CSA and so many better models of resistance.  As David Beito and Charles Nuckolls rightly conclude: “If the Confederate multiculturalists believe in liberty, as many of them assert, they will stop waving the Confederate Battle Flag, abandon the cause of a nation state that championed an unforgivable violation of inalienable rights, and embrace the rich American heritage of individualism.”).

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More on Inequality

Fellow blogger Jason Sorens recently asked whether we should care about inequality – and argued in the negative while stressing that we should care more about poverty and market power imbalances.

But even if we do care about inequality, it still begs the questions of what causes inequality and how to deal with it.  Enter economist Daron Acemoglu (and his frequent co-author James Robinson).  Noting that the average citizen in the United States is a lot more prosperous than the average citizens of various developing countries, he proceeds to explain how the differences can largely be explained by the very different institutional arrangements in these places.  As Acemoglu argues, “Inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.”  Therefore, the surest way to deal with global inequality (and poverty) is to reform the governments of these places.  

Not exactly a new argument – and much easier said than done.   But Acemoglu’s argument is an important corrective to the rather enabling (and popular) stories of geographic, meteorological, and ecological determinism told by people like Jared Diamond.  Government is a critical variable in economic development and even though (as Smith reminds us) there is a lot of ruin in a nation, poorly conceived (or worse, well-planned parasitic) institutional design/policies can have huge ramifications for the long-run wealth of a country.  Just ask the people of Santa Cruz County, Arizona and Nogales, Mexico!    

That all being said, I think institutionalists – especially economists – are too quick to dismiss cultural variables when discussing economic outcomes.  We don’t have to retreat to Weber’s old “Protestant Ethic” argument (or Montesquieu’s nastier argument about the laziness of those who live in warm climates) to remember that institutions – even if really, really important in their independent effects – don’t emerge out of the ether but may reflect the cultures in which they emerge or that culture has an important mediating effect on the impact of institutions themselves.  Moreover, one could argue that the extent of personal virtue of those who inhabit higher office or the relative barbarism/gentility of society also have the potential to make or ruin a nation. 

Nonetheless, we should take heed of Acemoglu’s counsel, and I look forward to more of his work and that of his co-author Robinson..

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The Only Issues

I mentioned in a previous post that we as a nation face two problems that are far and away the most pressing and menacing, and that almost every other problem—even all the rest combined—barely amount to a hill of beans in comparison. Those problems are: (1) our public debt, at the federal, state, and local levels; and (2) geopolitical instability and aggression. I think we need to address those two problems before we worry about anything else. And we must address them like grown-ups, who understand there is an external world with realities that we must face, not as intellectual children who believe that wishes, words, hopes, or dreams can make all of reality’s hard edges and all the world’s bad men go away.

Laurence Kotlikoff, professor of economics at Boston University, now tells us that the first problem is even worse than I feared. According to his recent arresting essay in Bloomberg, “The U.S. is bankrupt.” Using CBO data, Kotlikoff calculates the net present value of the United States debt to be $202,000,000,000,000. That is two hundred and two trillion dollars.

That is approximately $673,333.33 for every man, woman, and child in the United States.

That is approximately $2.7 million for every family of four.

And that is not considering the debt that each individual, or each family, has incurred on its own. So if you have a mortgage on your house, car, or boat, or if you have student loans or credit card bills, you have to put that on top of the debt the government has created for you.

Kotlikoff says the only ways out of our almost unimaginably bad fiscal nightmare—which is, in reality, he says, worse than that of Greece—are (a) immediate and permanent doubling of taxation at all levels; (b) radical, drastic, and immediate slashing of federal obligations (on the order of defaulting on Social Security, Medicare, and Medicaid completely); or (c) massive priting of money to “pay” the bills, leading to corresponding massive inflation. He predicts a combination of all three.

A fourth option he neglects to mention is (d), an aggressive policy of imperialism, whereby we conquer lands and territories, claim their assets, and use those assets to pay off our debt.

You don’t think (d) is possible . . . do you? Well, whether you do or not, it’s going to be some combination of those four. There are no other options.

We have been living in a fiscal fairy tale for a long time. The unprecedented wealth to which America’s political and economic institutions have given rise have also enabled us to develop and nurture a juvenile worldview of unreality, where wealth, production, goods, services, peace, and leisure are all naturally occurring features of the world—instead of fragile historical anomalies that must be carefully and diligently and continually maintained. Our wealth has allowed us to adopt adolescent economic theories that are the intellectual equivalents of “milk comes from the grocery store” and “money comes from the bank.”

At some point, adults are going to have to begin acting once again like adults, and do the equivalent of cutting up the credit cards. It is nice and fun and oh-so-freeing to live as if we had no responsibilities, as if someone somewhere else were taking care of things, as if we could act like children our whole lives. But we can’t. After decades of pretending we could, the real world is now crashing back down us with a vengeance.

Some are beginning to realize the gruesome reality we face. Koltikoff, for one, is sounding the tocsin; he is not the only one. But if his numbers are right—if they are even close to being right—it might well be too late.

Time to buy gold?

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For those looking to start the weekend early, a video of Stephen Colbert’s opening statement (before his congressional testimony).

On the one hand, one might see this as troublesome. After all, Congress has not been able to come to a resolution on the Bush tax cuts; it has not yet passed a single spending bill for the upcoming fiscal year.  There is no evidence that any of this will interfere with the desire to return home and begin doing the people’s work seeking reelection.

On the other hand, as long as members of Congress are watching Mr. Colbert, they can’t cause any serious trouble. As a fan of the Colbert show, I highly recommend this link.

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