Great Klein Post on the "Free Market" Bush Administration
I am still in the Dark Ages (an anti-Church misnomer) when it comes to reading blogs. My wife once tried to set up a Bloglines thingie for the sites I like, but it didn’t take. So that means I only read a limited number of blogs during a normal session. Consequently, I only read Peter Klein’s blog posts when they get linked from another site. Perhaps it’s just selection bias, but man Klein always knocks it out of the park… Check out Klein on journalists (HT2 Steve Horwitz):
Bush and Paulson and Greenspan and their clique are “free marketeers” in the same way (to borrow from A. J. Jacobs) that Olive Garden is an Italian restaurant. They adopt the language, and some of the form, of market advocacy without any of the content. The Bush Administration was already, before the “financial crisis,” the most economically interventionist since LBJ; it now ranks with Hoover and FDR as the most aggressively anti-market in US history. Greenspan and Bernanke expanded the money supply like none before; Bush and Cheney borrowed and spent trillions to finance overseas adventures; the Federal Register added pages at a record-setting pace; now the banking and automobile industries have become GSEs. Lassiez-faire, indeed!…
And yet, there was Juan Williams on yesterday’s Diane Rehm show explaining, matter-of-factly, how Bush and Paulson had allowed their “free-market ideology” and “resistance to regulation” to “commitment to the idea that the market works itself” to lead the nation into ruin. Williams may be a good news reporter, but he has the political-economy understanding of a fifth-grader. Does it ever occur to these “watchdogs” to investigate what government officials actually do, rather than simply repeat what they say?
Fight the power, Pete!
Brad DeLong: Budgets Deficits Are Awful Unless They’re Obama’s
Readers know that lately I’ve come to doubt the evenhandedness of Brad DeLong. (This makes it difficult for him to “grasp reality with both hands,” the professed goal of his blog.) My suspicions were further aroused when I saw him make this statement at TPMCafe (HT2 Arnold Kling):
What is going to be the new leading sector? What is going to allow us to maintain full employment without running huge long-term budget deficits that will, eventually, sap our rate of economic growth somewhat?
Now that raised some red flags for me. Catch the two qualifiers that DeLong uses, to make sure the reader doesn’t get the wrong idea and think that federal budget deficits have a downside: he says “eventually” and then even has to throw in “somewhat”!! And there’s no doubt either about the nature of the beast here. He’s explicitly talking about “HUGE LONG-TERM budget deficits” (my emphasis of course).
To check my suspicions, I decided to do a Google search of “bush deficit” at DeLong’s blog. Go ahead and click on some of the results. When the huge deficits were George Bush’s actual, or John McCain’s hypothetical, then DeLong was quite severe in his criticism. This post from from just last August is the best example I found:
It says more about me than I should probably admit, but back in 2000 I found the prospect of paying off the national debt to be very exciting.
To me, the pledge to do that, which Bill Clinton made towards the end of his presidency and George W. Bush made as his years in the White House were just beginning, was absolutely thrilling. Because of the lower annual interest payments that would result, no other change then being seriously talked about had the potential to alter the long-term federal budget outlook as positively and permanently.
That’s why I found the mid-session review of the budget released yesterday to be so depressing. It was the official notice that the pledge, and all the good things that would come from it, would not be fullfilled. It was also time to admit that the budget politics, economics, and limits of the past decade would continue…and continue…and continue.That’s just not a happy occasion for anyone but those of us who blog, write, and talk about the budget. Business will be booming.
None of this was a surpise, of course. The prospects for paying down the national debt firmly ended back in the first year of the Bush administration. And the close to $490 billion deficit that OMB projected for 2009 has long been assumed or leaked.
Nevertheless, the release of the midsession review on July 28, 2008 should be noted as the official date when the dream of a very different budget debate and fiscal policy opportunities died.
I’ll have more about the following shortly. But other observations:
…
From a budget, deficit, debt, interest rate, and fiscal policy perspective, the Bush administration is leaving the country so much worse off than it found it that it will likely hamstring the next president and Congress in ways that aren’t yet fully understood.
Based on what we now know for sure about next year’s budget, none of the presidential candidates’ promises should be taken seriously. Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president’s options will be severely limited.
Hmm that tone seems a heck of a lot different from the more recent statement quoted in the very beginning of my post. And to repeat, you can’t get DeLong out of this by saying, “C’mon, right now we’re in a massive recession that requires deficit pump priming.” First of all, we were in a recession back in August, though the NBER didn’t know it. Second, to repeat myself, DeLong was referring to LONG-TERM budget deficits and what they would EVENTUALLY do. So even if you think he means all of the new pro-deficit talk in terms of a depression economy, then you’re still left with the implication that massive budget deficits won’t get us out of the slump even in the long-term.
In conclusion, I think Occam’s Razor says that the best explanation is that deficits are awful when they are the fault of George Bush. When the incoming Barack Obama pledges them, and Paul Krugman says any fiscal stimulus number should be doubled to get it right, then DeLong can only bring himself to say that HUGE LONG-TERM deficits would EVENTUALLY slow down economic growth SOMEWHAT.
CARB Takes Criticism Well
Here is my Townhall column explaining how the California Air Resources Board (CARB) ignored scathing peer reviews of its economic analysis, and voted unanimously to go forward with the statewide cap-and-trade program (and other goodies) contained in AB 32, aka “The Global Warming Solutions Act of 2006.” (So now we can stop worrying about global warming.) Excerpt:
The fallacy in CARB’s reasoning is easy to spot. Right now there is nothing preventing businesses from lowering their emissions, and consumers right now are able to adopt the “efficiency” measures that would allegedly save them so much money. And yet, CARB would have us believe that the private sector is so incredibly shortsighted (or just hates the planet that much), that the California politicians have no choice but to force their constituents to become richer.
Outside experts—some of whom were explicitly invited by CARB itself to provide comments—have agreed with my harsh assessment….[For example, consider] the remarks of Harvard’s Director of Environmental Economics Program, Robert Stavins. Now let’s be clear, this guy is no Rush Limbaugh ditto-head. He has been a lead author for the Intergovernmental Panel on Climate Change (IPCC), and was Chairman of the EPA’s Economic Environmental Advisory Committee—a post to which he was initially appointed during the Clinton years. So this professor is no “denier.” Yet here’s what he had to say about CARB’s rosy predictions:
I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the State government or the public for the purpose of assessing the likely costs of CARB’s plans. I say this with some sadness, because I was hopeful that CARB would produce sensible policy proposals analyzed with sound scientific and economic analysis.
Although readers know my views about cap-and-trade programs, that’s not why I wrote about this episode. It is truly shocking how crazy CARB’s economic analysis was. If you want to take the IPCC science and make a case for a carbon tax or cap-and-trade, you can certainly do so; William Nordhaus makes a strong case [pdf], for example.
But that’s not what CARB did; instead they claimed that setting an aggressive emissions target would boost the California economy. I’m just speculating, but I bet higher-ups told the economists something like, “With the recession and huge budget deficit, there’s no way this is going through if we report that it will kill jobs and tax revenue. So you come up with a way that AB 32 boosts the economy.”
Why Aren’t the Fed Injections Leading to Massive Price Inflation?
As longtime Free Advice readers know, my favorite graph lately has been of the monetary base, which consists of currency plus bank reserves on deposit with the Fed. (Note that a broader definition of money, M1, includes total demand deposits, i.e. checking accounts, whereas the monetary base doesn’t.) In contrast to the broader measures of money, the Fed can directly control the monetary base through open market operations (and other ways if need be), and that’s why most economists look at the behavior of the monetary base to see whether the Fed is tightening or loosening.
Anyway, the graph below illustrates the old “pushing on a string” notion of impotent money-pumping. In the past year the Fed has pumped in a ridiculous amount of bank reserves–meaning that the Fed goes out into the market and buys assets such as government debt or even mortgages from institutions, and then out of thin air increases the electronic entries for their deposit balances with the Fed itself. But as you can see, the increase in reserves is basically just sitting in the (electronic) vaults on the Fed’s ledger. Even though banks have the legal ability to make new loans to customers (which would increase M1, M2, MZM, etc. by more than the base itself increased), they aren’t doing so. In other words, the total amount of checkbook balances (as well as other very liquid forms of money included in the definition of M1) has gone up sharply, but not nearly as much as the base has increased (an increase itself driven by the spike in one of its constituents, reserves).
Here’s another way to view it. “Excess reserves” means those reserves that banks hold on deposit with the Fed, that they don’t need to back up their outstanding demand deposits. So when excess reserves rise, that means banks have the legal ability to make more loans but are choosing not to. Now I’m just eyeballing it here, but if you look closely you can see an uptick in recent months…
But back to the serious issue at hand: What happens when the panic in the financial sector subsides, and banks feel comfortable lending again? Well, loosely speaking, it means that the amount of money in the hands of the public (as opposed to reserves that commercial banks have on deposit with the Fed) can increase the same percentage as reserves have increased. So even if Bernanke cut the spigot off Monday, and didn’t let reserves increase any more, that would still mean there was enough slack in the system for demand deposits to increase some 1,400%. (Reserves have gone up yr/yr a bit more than that, while demand deposit year/year growth has been around 38% or so.)
Now obviously Bernanke is not going to sit back and let prices go up by a factor of 14. But how does he suck reserves out of the system? Why, he has to sell off the trillions in new assets that the Fed has recently acquired. And of course, this is precisely all of the “troubled” assets that nobody wanted to hold in the first place, and that had caused the major players to seize up.
And even if Bernanke decides to hang on to all of the mortgage derivatives–you know, the ones that are going to make us taxpayers so much profit in the coming years–and he just dumps U.S. Treasurys, guess what that does? It lowers the price of Treasury debt, meaning interest rates rise. Fortunately, the incoming Obama Administration has plans to sharply pay down the federal debt, so at least skyrocketing interest rates won’t be so painful. Oh wait.
I hope my advice to acquire physical gold and silver makes more sense now. And I hope you also see why I find all this talk about the market forecasting 30-year average inflation rates of 2 percent (or whatever) to be absurd.
The Policeman Is Not Your Friend
I realize I get cynical a lot here, but check out this story from Galveston. (HT2LRC) I’m not even going to comment.
It was a little before 8 at night when the breaker went out at Emily Milburn’s home in Galveston. She was busy preparing her children for school the next day, so she asked her 12-year-old daughter, Dymond, to pop outside and turn the switch back on.
As Dymond headed toward the breaker, a blue van drove up and three men jumped out rushing toward her. One of them grabbed her saying, “You’re a prostitute. You’re coming with me.”
Dymond grabbed onto a tree and started screaming, “Daddy, Daddy, Daddy.” One of the men covered her mouth. Two of the men beat her about the face and throat.
As it turned out, the three men were plain-clothed Galveston police officers who had been called to the area regarding three white prostitutes soliciting a white man and a black drug dealer.
All this is according to a lawsuit filed in Galveston federal court by Milburn against the officers. The lawsuit alleges that the officers thought Dymond, an African-American, was a hooker due to the “tight shorts” she was wearing, despite not fitting the racial description of any of the female suspects. The police went to the wrong house, two blocks away from the area of the reported illegal activity, Milburn’s attorney, Anthony Griffin, tells Hair Balls.
After the incident, Dymond was hospitalized and suffered black eyes as well as throat and ear drum injuries.
Three weeks later, according to the lawsuit, police went to Dymond’s school, where she was an honor student, and arrested her for assaulting a public servant. Griffin says the allegations stem from when Dymond fought back against the three men who were trying to take her from her home. The case went to trial, but the judge declared it a mistrial on the first day, says Griffin. The new trial is set for February.
“I think we’ll be okay,” says Griffin. “I don’t think a jury will find a 12-year-old girl guilty who’s just sitting outside her house. Any 12-year-old attacked by three men and told that she’s a prostitute is going to scream and yell for Daddy and hit back and do whatever she can. She’s scared to death.”
…
Update: This is from the officers’ lawyer, William Helfand:Both the daughter and the father were arrested for assaulting a peace officer. “The father basically attacked police officers as they were trying to take the daughter into custody after she ran off.”
Also, “The city has investigated the matter and found that the conduct of the police officers was appropriate under the circumstances,” Helfand says. “It’s unfortunate that sometimes police officers have to use force against people who are using force against them. And the evidence will show that both these folks violated the law and forcefully resisted arrest.”
Bryan Caplan Gets Pre-Emptively Attacked by Hawks
Over at EconLog, Bryan Caplan made a surprisingly courageous post about disarmament. Now granted, Caplan’s argument wasn’t airtight, but give the guy a break; you’re not going to get world peace with a few paragraphs. Anyway, the majority of commentators lecture Bryan about human nature, A is A, therefore we need nukes, etc., but this one really pushed me over the edge (and note that I changed “Ghandi” to “Gandhi” throughout):
Would Gandhi, going up against any power other than Britain, have succeeded as well as he did — or would he have been executed for treason?
Now the author, “liberty,” is a guylady I like; heshe posts a lot at The Austrian Economists blog. But I think this type of quick dismissal of Gandhi is goofy:
C’mon guys, let’s “think like economists” here and reason on the margin. You’re saying, e.g., that Gandhi would have been slaughtered by Hitler. Yes he would have. So what that means is the way to beat Hitler is to try to kill him with a suitcase bomb placed under his table! Violence is clearly a more successful strategy.
(And yes, I understand you will say, “Huh? I’m talking about the Allies coming in with tanks and bombers.” But Gandhi didn’t have tanks and bombers at his disposal. I get exasperated when people somehow flip the example of Gandhi to show that nonviolence doesn’t really get you anywhere in the real world.)
Now let me be clear: I am not claiming I just made the case for pacifism in the above retort. I’m just pointing out the sloppy arguments often made in the “obvious” case against nonviolence.
Robert Wenzel Gives Me Props on Paulson
Robert Wenzel and I have formed a mutual fan club, which means I don’t have to toot my own horn on my Paulson call. The entirety of Wenzel’s post (and note my convention here, that I don’t italicize my own words to avoid confusion):
Bob Murphy Is Going to Flip
On Wednesday, Bob Murphy wrote at his blog:
Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP
Now I didn’t specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it’s a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn’t need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, “Yeah, of course I want to spend another $350 billion. But I meant I wouldn’t be spending it on troubled asset relief.”
Guess what?
Paulson, in his statement on the automotive bailout, flips again and says he needs the remaining $350 billion of TARP funds for “financial market stability”:
As a result of this decision [to bailout the auto industry], Treasury effectively has allocated the first $350 billion from the TARP…In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect’s transition team in the near future.
I think Murph has Paulson figured out.
Thanks RW, I do think I’ve got Paulson figured out. But I must confess that Wenzel’s own blogging habits are still mysterious to me. For example, he doesn’t include a picture of me or of Paulson, even though this blog post clearly focuses on the two of us. And yet, in another recent post, Wenzel includes a photo of a person who’s not even the focus of his analysis. What gives?
Great (and Depressing) TV Show About the New Deal
Bryan Caplan and David Henderson have been raving about this half-hour Canadian show on the New Deal, and boy they were right. Like David, I intended to just watch a few minutes, and finally around 20 minutes into it I decided to stop agonizing, and just resolve to watch the whole thing.
What’s really amazing is that even the pro-FDR guys only rebut the anti-FDR guys by saying things like “Roosevelt wasn’t trying to fix unemployment, he was trying to revamp American capitalism, so he succeeded in that respect” and of course “He made Americans feel good.” (Not exact quotes but close.)
I think I’m going to write a book about this.
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