Posted on 08/19/2003 9:52:27 AM PDT by Festa
If I am to believe the media, President George W. Bush’s policies have engineered a complete economic meltdown and put us in the worst fiscal condition since the great depression. When I hear this I typically ignore it. As an economics major, I know how to read through nonsense.
Recently, however, it has come to my attention that many economists themselves have entered into this silliness. Recently, the think tank EPI circled a petition opposing the Bush tax cut that was signed by over 500 economists, including several Nobel laureates. What struck me as odd was not that some of these economists opposed the tax cuts, but the reasons they offered. The petition argues against the tax cuts as follows, “Passing these tax cuts will worsen the long term budget outlook, adding to the nations national debt...To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to stimulate demand.” This statement, taken together, is highly misleading
In order to understand why, an overview of what the consensus view is among economists on what to do during a recession. Modern macroeconomics began during the Great Depression. At this time, politicians including Herbert Hoover believed the best response was to balance the nation’s books. The government cut spending, raised taxes, and trimmed the nation’s money supply. What followed was a national disaster. By 1932, one out of every four Americans was out of a job and another 25% were underemployed. Franklin Roosevelt repeated this mistake in 1935 to the same dismal result.
The economist John Maynard Keynes knew this was going to happen. According to his theories, the government needs to run a deficit during a recession. If the government trims spending, the recession becomes worse. Think about it this way: during a recession do you want the government to stop purchasing fighter jets and constructing roads or do these things actually stimulate private enterprise? Within a few years this became common consensus. The belief was so widespread that between 1953 and 2000 the federal government rarely had a balanced budget.
Furthermore, many economists found ways of making this recessionary policy automatic and set up the process precisely so that deficits arise. Because the government relies on income taxes for most of its revenue, when the economy is in trouble people pay less in income taxes because they are working less. This acts as an automatic tax cut. Likewise, government spending automatically increases because as people become unemployed they begin to receive more unemployment checks. These pundits have it exactly backwards; it is bad if the deficit shrank.
Now what I have outlined here is the standard Keynesian analysis of depressions. During a recession you want deficits to increase, you want tax cuts and you want government spending to increase. President Bush’s original tax cut was not simulative. Most of the cuts were not going to take effect until 2006, 2008, and 2010. Therefore if stimulus is to occur, they had to happen now, not later. That is why President Bush proposed to make his tax cuts take place immediately.
Many people question why President Bush phased in his tax cuts rather than just send another rebate check out. The economist Nicholas Souleses recently published a study that highlights the advantages of permanent rate cuts over temporary rebate checks. His analysis compares the rebate checks President Ford issued in 1975 with the Reagan tax cuts issued in 1981. The conclusion is unambiguous: rate cuts stimulate much more because they are permanent and reliable for the consumer. Most people when they get a one-time rebate check pay bills and do not spend it.
“But Festa, isn’t there a way to oppose to Bush Tax Cuts.” Surely, but contrary to the signers, the reason to oppose it is quite conservative. After Keynes laid out his theories, many economists wondered whether or not it was actually a good idea to run a deficit in the long term. After long research they concluded that in the long term deficits crowd out investment due to increases in the interest rate. This decreases potential GDP and has an adverse affect on the economy. Furthermore, monetary policy is neutral in that all it does in the long term is raise inflation. Yet the signers want stimulus and stimulus will increase the deficit, which they do not want to increase. The best stimulus available is immediate rate cuts and increases in government spending. Temporary rebates do not work and “temporary spending” has already been employed. But this increases the deficit. What do they want, stimulus or a balanced budget?
Most economists argue that in recessions modest deficits are ok. This is exactly what is happening. Right now the 455 billion dollar deficit is around 4% of GDP which is enough to cause a panic.
The real reason to criticize the Bush Administration is for the structural deficits that will plague the U.S. thanks to the increasing costs of Medicare and social security. If nothing changes these programs will account for the entire 44 trillion dollar debt the U.S. will accumulate over the next 75 years. Bush is not doing enough in these areas and is also letting wasteful spending get out of control, which only hurts investment. Yet the signers barely even touch on this. The Bush Tax cut will not destroy Medicare, social security, and the budget. On the contrary, the real worries are wasteful spending and the flawed structures of our two biggest government programs. The media pundits, politicians, and economists ignore this and give citizens nothing but partisan bashing and hot air.
Keynes and Keynesianism are different. Followers of Keynes formulated the IS/LM model to explain keynesianism, ignored prices, and thus the long run.
Friedman has more or less renounced montarism.
Indexing the tax brackets to inflation has nothing to do with federal bank policy. Friedman still holds to this arguement contrary to your claim and inflation has gone down significantly...hence the fed's almost constant worry about inflation.
No the CPI has been cooked. Why has M3 doubled in the last 8 years?
The myth that the trade deficit is a HUGE problem it is not. I simply provided a justification for why it is here. But I cannot add more until I know your position on free trade. If your decrying the trade deficit leads you to the typical buchanan response of "close the borders" then you will wreak havoc far more havoc by closing the borders and getting rid of the trade deficit than keeping it
NO it has not been cooked, but it is not meant to pick up M3 money stock. That does not mean it is not a significant problem however. Here, check this out http://skybluemonthly.freeservers.com/sbm/sbm00f.htm
These guys all but predicted the market crash. It was good talking to you. I hope this is helpful
What about Japan and Germany? Both of those countries had ever-increasing deficits throughout the 1990s (Japan's was at 8% GDP in 2002), with corresponding decreases in their interest rates. What is the explanation for that phenomena?
Frankly, you provided no refutation of the FACT that the Trade Deficit IS a huge problem. You merely made an observation that it has kept interest rates low while sidestepping the issue that an increasing portion of our taxes goes to support the nations who finance our National Debt.
But I cannot add more until I know your position on free trade. If your decrying the trade deficit leads you to the typical buchanan response of "close the borders" then you will wreak havoc far more havoc by closing the borders and getting rid of the trade deficit than keeping it
Ah, there it is! That same old extremist misrepresentation of the position of others.
Please illuminate us, O self-described "economics major", do you have any conception whatsoever of the difference between "targetted tariffs" and a "revenue tariff"??? Or is your education truly that shallow?
And you completely do not understand my first assertion. Anyway, I was merely asking for your thoughts on free trade which you apparently do not want to give
Of course its cooked. Socialist Insecurity and TIPS are indexed to the CPI, they have every incentive to fake the numbers with "hedonistic" adjustments. Or are you arguing the price of medical care, automobiles, college, housing,energy,etc. are going up at the rate of the CPI? Bull.
but it is not meant to pick up M3 money stock.
They can create it but they can't control where it goes. We'll have a better idea what's really going on after the GSEs implode.
Thanks for the link.
I am not sure if this link is going to work but it is titled "Preventing Deflation: Lessons from Japan's experience"
Short answer though: inept monetary policy
I am not familar with Germany, perhaps you have something on it?
I have never argued against the fact tht SS, etc are "good" and even "sincere" programs. In fact, I thought I made it quite clear towards the end of my article that a) There are massive problems in SS and Medicare specifically (ie they are going to cost too much) and b) of course the federal government can inflate numbers, I have never argued to the contrary.
You are going to have to elaborate on your comment about college (private) housing, etc. Normal goods have their prices determined by supply and demand unless otherwise interfered upon by the federal government which is the case with energy. Intervention leads to disaster.
I think you'll find most things that matter are increasing in price much faster than the CPI.
Here is what my macroeconomcs teacher said about this "conspiracy".....and he is about the farthest thing from a liberal one gets:
M3 may well have grown at a higher rate than M1 or M2. Remember that inflation is not defined as the growth rate of M1, M2 or M3. Inflation is defined as the growth rate of the price level. I doubt that the CPI inflation rate is cooked since the implicit GDP price deflator tells a very similar story as the CPI inflation rate most of the time. Also if the government were cooking the data on inflation it would be evident in foreign exchange markets through a very sharp dollar slide. The dollar is too healthy to be consistent with a 9% rate of inflation - unless all countries are cooking their inflation numbers - come on now!
The fact is that most economists don't care much about the M3 definition of money. The Fed really targets M1 and M2, monetary economists don't care much about it, and movements in M3 it are not closely related to movements in the monetary base. M3 is too broad a measure of the money supply to be used in building a model to explain the inflation rate.
I have long argued that the recession really isnt the sickness in the economy but the cure. The sickness is unwarrented speculation and investment. When the chicken comes home to roost, you have a recession.
Our system is set up to cushion these recessions with automatic stabilizers. Furthermore, some people argue that an extra "cushion" can be used to further soften the blow. But by focusing on the short term you ignore the long term. Rarely do I hear Keynesian's asking: what caused this mess in the first place? How do I ensure that it doesn't happen again? What do I need to do.
The answers are usually along the lines of
a) The business cycle
b) lower taxes and a lessoning of regulations
c a good well working legal system
d) quality education.
Defined by whom? Not by me. Money supply is obviously the driving term in the equation not the nebulous, lagging price level. Do you include equity values in the price level?
overnment were cooking the data on inflation it would be evident in foreign exchange markets through a very sharp dollar slide.
The dollars lost ~30% against the euro. Gold's up 13% this year. Oil's up 50%,natural gas is through the roof, housing has been increasing at a rate greater than the CPI for a decade.
The dollar is too healthy to be consistent with a 9% rate of inflation - unless all countries are cooking their inflation numbers - come on now!
Inflation isn't an instantaneous phenomenon. And yes, all the countries in the world are engaged in competitive currency devaluation.
The fact is that most economists don't care much about the M3 definition of money. The Fed really targets M1 and M2,
No actually, Greenspan recently admitted m1,m2,m3, and mzm were inadequate measures of money supply. Greenie is running the Fed on his Intuition. We might as well be reading chicken entrails.
Dr. Ron Paul: “We have concentrated here a lot today on prices, and you talk a lot about the price of labor, labor costs. And yet that is not the inflation according to sound money economics. The concern a sound money economist has is for the supply of money. If you increase the supply of money, you have inflation.
Just because you are able to maintain a price level, (a) certain level that because of technology or for whatever, this should not be reassurance because we still could have our malinvestment, we can still have our excessive debt and borrowing. And it might contribute even to the margin debt and these various things.
So I think we should concentrate, especially since we’re dealing with monetary policy, more on monetary policy and what we’re doing with the money. It was suggested here that maybe you’re running a policy that’s too tight. Well, that – I’d have to take exception to that, because it’s been far from tight. I think that we have had a tremendous growth in money. The last three months of last year might be historic highs for the increase of Federal Reserve credit. In the last three months the Federal Reserve credit was increasing at a rate of 74%. It is true, a lot of that has been withdrawn already. But this credit that was created at the time also influenced M3, and M3 during that period of time grew significantly, not quite as fast as the credit itself. But M3 was rising at a 17% rate.
Now, since that time, of course, a lot of the credit has been withdrawn, but I have not seen any significant decrease in M3. And I wanted to just refer to this chart that the Federal Reserve prepared on M3 for the past three years. And it sets the targets. And for three years you’ve never been once in the target range.
You know, if I set my targets and I perform like that as a physician, my patient would die. I mean, this would be big trouble in medicine. But here it doesn’t seem to bother anybody. And if you extrapolate and looked at the targets set in 1997 and carried that set of targets all the way out, you only missed M3 by $690 billion. I mean, that’s just a small amount of extra money that came into circulation. But I think it’s harmful. I know Wall Street likes it, and the economy likes it when the bubble’s getting bigger. But my concern is, what’s going to happen when this bursts? And I think it will unless you can reassure me.
But the one specific question I have is will M3 shrink? Is that a goal of yours, to shrink M3? Or is it only to withdraw some of that credit that you injected for the non-crisis of Y2K?”
Mr. Greenspan: “Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts. The problem that we have is not that money is unimportant, but how we define it.
By definition, all prices are indeed the “ratio of an exchange of a good for money.” And what we seek is what that is. The problem is we used M-1 at one point as the proxy of money, and it turned out to be a very difficult indicator of any financial state. We then went to M-2 and had the similar problem. We have never done M-3 per se because it largely reflects the extent of expansion of the banking industry. And when in effect banks expand, in and of itself, it doesn’t tell you terribly much about what the real money is.
So our problem is not that we do not believe in sound money. We do. We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employed is whether it gives us a good forward indicator of the direction of finance and the economy.
Regrettably, none of those which have been able to develop, including MZM – has not done that. That does not mean that we think that money is irrelevant. It means that we think our measures of money have been inadequate. And, as a consequence of that, we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes, until we are able to find a more stable proxy for what we believe is the underlying money in the economy.”
Dr. Paul: “So it’s hard to manage something you can’t define?”
Greenspan: “It is not possible to manage something you can’t define.”
I believe Greenspan provides an adequete answer.
He basically admitted he was a charlatan.
Look the reason people work for the Fed is the same reason people remain in academia: Because they are failures who can't cut it in the real world.
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