THE BEAR'S LAIR A repeat lesson for voters
By Martin Hutchinson
The number of economically damaging policy ideas imposed on the United States
has greatly increased in the past few months. However, from the statements of
the presidential candidates, the next few years may turn this storm of bad
ideas into a blizzard. Those with an emotional attachment to the US economy
should brace themselves for trauma.
The new salience of bad economic ideas is not particularly surprising. The US
economy is heading into an economic downturn that promises to be at least as
severe as those of 1974 and 1980-82, whose memory is already fading a
generation into the past. Additionally, the 2000-07 period was one in which US
voters made very small if any income gains, with such gains arising only
through refinancing of ever more gigantic home
mortgages. Meanwhile, the distant and dislikable titans of Wall Street
apparently scooped up all the money generated by the economy.
Now the housing bubble has burst, the average jaundiced voter naturally sees
the free market system and the George W Bush administration as responsible for
the recent not-particularly-pleasant years and the economic horror that has
followed. Claims by Republican politicians that the debacle was all the fault
of the housing finance agencies Fannie Mae and Freddie Mac, while partly true,
are wholly unconvincing.
With voters miserable and facing a disastrous economic position that they
believe was caused by free market excesses, it is not surprising that they are
looking favorably on statist nostrums. Both political candidates have
propounded bad ideas, Democratic Party candidate Senator Barack Obama more than
Republican John McCain, largely because he has more ideas in general. In
addition, there are a few bad ideas that have embedded themselves into the
system, accepted by both political candidates and the political class as a
whole.
McCain's bad economic ideas are few in number, but in terms of economic
ineptitude they're doozies. Typical of them was the proposal for a gas tax
holiday over the summer, which since supplies were tight would have driven up
consumption, transferring wealth from the US government to the Saudis. In his
urge to connect with populist-minded voters, McCain appears either not to have
consulted any economists on this bizarre scheme or to have ignored their advice
when presented.
Then there's his proposed US$300 billion bailout of subprime mortgage borrowers
who cannot make their payments. Like the Troubled Assets Relief Program of
Treasury Secretary Henry Paulson, this appears principally to be a vehicle for
relieving taxpayers of their money. By providing benefits only to those
mortgage payers who are not paying their mortgages on time, it rewards the most
over-optimistic borrowers and the most feckless lenders at the expense of those
who restricted themselves to more manageable mortgages or who maintained
careful credit standards over their mortgage lending (not that there appear to
have been many of the latter.)
Even if the $300 billion was dropped from helicopters (no thanks, Mr Bernanke,
we'll call you if we need you) it would reduce the value of mortgage loans
outstanding, probably by more than its nominal amount, by increasing the chance
that borrowers would fall into arrears in order to qualify for a bailout.
McCain's third major bad idea is the design of his "cap and trade" carbon
emissions program. Global warming may or may not be real. It seems likely that
the most effective approach to combating it would combine programs of
population control (to reduce the number of future carbon emitters) with
mitigation efforts, such as higher seawalls and heat-resistant crops. Even if
restricting carbon emissions were attractive, a carbon tax would be a more
efficient way to achieve it than a "cap and trade" system.
Finally, at the fourth layer of economic inefficiency (although to be fair, the
first three layers seem to be common to almost all politicians), McCain adds an
additional nonsense by giving away emission permits. That turns a more or less
market-oriented system for achieving something probably pointless into a
government handout system. Permits under McCain's system would be allocated by
bureaucrats, either according to some faceless and doubtless erroneous formula
or according to the amount of campaign contributions they had given. The arena
of government favoritism would thus be considerably enlarged, that of the free
market correspondingly diminished.
Turning now to Obama, some of his proposals are well designed and appear likely
to achieve their objectives without creating gross economic distortion. It is
for example likely that a capital gains tax increase from 15% to 20% will
indeed yield additional revenue over the long term, although a further increase
beyond 20% might not - wherever the Laffer optimum for capital gains taxes
lies, it is almost certainly above a 20% marginal rate. Likewise, Obama's
healthcare proposals mix increased government subsidy with considerable
reliance on free-market cost reduction measures; they appear well designed if
you like that sort of thing.
The principal problem with Obama is his deliberate failure to define himself.
The moderate Obama, with a University of Chicago economic advisor and a keen
brain attuned to the free-market system, would probably be a pretty good
president, at least in the economic sphere. However, there is also another
Obama, possessor of the most liberal voting record in the US Senate and
supporter of many of the more damaging schemes beloved by House Speaker Nancy
Pelosi and the barons of the Congressional Democrat left. Finally there is the
shadow of a third Obama, born and bred a street radical, friend of
ex-Weatherman terrorist William Ayres and supportive parishioner of the highly
anti-capitalist parson Jeremiah Wright.
It is an interesting question whether Ayres-Obama or Pelosi-Obama would be more
economically damaging - their prescriptions would clearly be very different -
but there is no doubt that by relying on moderate-Obama being fully in control
throughout, we are taking a considerable chance.
Obama's tax proposals come in several versions, reflecting his
multi-facetedness. One version would simply reverse most of the Bush tax cuts,
plus add a moderate social security surcharge for high incomes, taking the top
marginal rate of Federal tax up from 35% to 42% or so. The other, produced by
Pelosi-Obama, would sock top incomes with the full social security charge and
add a further tax increase, taking the top marginal Federal rate well up into
the mid-50s (and adding state tax on top of that.) Pelosi-Obama's tax proposal
would be highly economically damaging; moderate-Obama's would not.
On trade there is a similar dichotomy. Renegotiating the North American Free
Trade Agreement and using trade agreements to enforce labor and environmental
standards is a Pelosi-Obama approach that could potentially have the same
effect on world trade as the infamous 1930 Smoot-Hawley tariff.
Moderate-Obama's advisors say he doesn't really mean it. We'll have to see.
On housing, moderate-Obama opposed a three-month foreclosure moratorium.
Pelosi-Obama favors it and appears to be dominant here. Moderate-Obama was
right; such a moratorium, like McCain's foreclosure subsidy, would be highly
damaging to the value of outstanding mortgage debt, worsening the banking
system's balance sheet problems.
On Wall Street, Pelosi-Obama is largely dominant, denouncing greed and calling
for much tighter regulation. (Of course, the crisis also brought out a hitherto
unexpected streak of Pelosi-McCain.) Pelosi-Obama also governs Obama's
co-sponsorship of "card check" legislation, by which the unions would no longer
have to win a secret ballot to gain representation at a workplace but would
only need to strong-arm the weaker members of the workforce into signing a
representation card. While failing to address the problems of the poor, who
generally do not have unionizable jobs, that legislation would drive the US
workspace sharply back towards the French model of union dominance of key
industries, with consequent decrease in US economic efficiency and
competitiveness.
Some of Obama's other economic ideas seem to derive from Ayres-Obama. His
attempt to tie student funding to hours of community service worked derives
less from the unionized Pelosi Democrats than from a street-radical's urge to
make snotty middle-class kids experience the "real world" of the streets.
Likewise, his 2001 regret that the Supreme Court "never ventured into the
issues of redistribution of wealth" and "didn't break free from the essential
constraints that were placed by the Founding Fathers in the Constitution" was
pure Ayres-Obama. Lovers of the rule of law and well-established property
rights must hope that at least on this front Ayres-Obama will remain dormant
through an Obama administration.
Finally, there is Obama's Clean Technologies Venture Capital Fund, deploying
$50 billion of taxpayer money over five years. The nature of this venture
depends on whether Pelosi-Obama or Ayres-Obama is dominant in its creation and
design.
A Pelosi-Obama fund would promote unprofitable ventures by large unionized
companies with proven but uneconomic technologies in politically important
regions - similar to the Bush administration's ethanol boondoggle. An
Ayres-Obama fund would promote street-environmentalism, devoting its resources
to wholly unproven back-of-an-envelope ideas with no obvious profit motivation
that were promoted by urban hustler groups. Neither would be economically or
environmentally useful - a carbon tax, tilting the playing field towards
environmental technologies, would be much more likely to produce useful
enviro-tech advances.
In many ways more frightening than the bad ideas supported by one or other
candidate are those for which there is a consensus.
For example, both parties now appear to believe in larger government. The
Democrats welcome it explicitly, whereas according to Organization for Economic
Co-operation and Development (OECD) statistics US public expenditure bottomed
out in 2000 at 34.2% of gross domestic product and has now increased under
Republican government to 38.3% of GDP in 2008. Given the enthusiasm of both
parties for increasing it further, this trend is likely to continue.
As I have discussed previously, OECD data since 1960 shows that high levels of
public expenditure and rises therein have markedly depressing effects on
economic growth, being together responsible for over 50% of the differences
between countries and periods in growth rates. Little wonder therefore that US
growth over the past few years has been sluggish; it is likely to get more so.
A second idea on which there has been general consensus between presidential
candidates, although a modest rebellion in Congress, has been the TARP. The
original idea of devoting $700 billion of taxpayers' money to buying the
economy's least valuable assets, surplus securitized mortgage bonds, has now
apparently been abandoned. At least one can hope so - by diverting scarce
capital from more productive uses it would have depressed economic growth
markedly.
However, instead of breathing a sigh of relief and letting taxpayers off the
hook, Treasury Secretary Paulson has taken to using the TARP as an all-purpose
slush fund, bailing out the banks and apparently in future providing subsidies
to the automobile industry, local governments and anyone else with political
connections who needs it. The result is that Treasury borrowing in the year to
September 2009 is now estimated to be $2 trillion, around double last year's
level. Needless to say that too will damage the economy. TARP was a terrible
and poorly implemented idea; no doubt that is why it is so popular with the
political class.
However the bad economic idea for which support in the political class is most
whole-hearted is that of excessively low interest rates, far below the rate of
inflation. The financial crisis has been caused not by high interest rates but
by excessive leverage. The three-month interbank dollar LIBOR peaked at 4.82%
and overnight LIBOR (London Interbank Offered Rate) at 6.87%, neither
representing "tight money" in a currency whose inflation is still running at
more than 5%. Even those who decry over-loose monetary policy as responsible
for the 2002-06 housing bubble fail to identify its responsibility for the
stock bubble that preceded it in 1995-2000.
As for former Federal Reserve chairmen Alan Greenspan and the present incumbent
Ben Bernanke, they are wholly unrepentant of their monetary profligacy and to a
large extent remain the heroes of the political class, in spite of the
devastation they have caused.
It is this item of public education that must be stressed repeatedly by those
who seek the welfare of the US economy. Deregulation was only a minor cause of
the housing bubble and subsequent debacle; the true cause was excessive money
supply creation by the Fed, which is not a private sector free-market entity
but an agency of government.
It is these lessons, that over-easy money will bring long-term disaster and
that government has been primarily responsible for this as for so many previous
crises, which must be taught to the American people. Only when voters have
learned their lessons can we hope that politicians will no longer find
political traction for cockamamie and damaging economic nostrums.
The campaign against Greenspan and Bernanke, to get Bernanke fired and
Greenspan de-deified is not an optional meddling in ancient history. It is the
most crucial economic struggle of our time.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-07 David W Tice & Associates.)
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