Tag: James K. Glassman

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Barack Obama Economics Financial Crisis Politics The Opinionsphere

The 7 Layers of Opposing Obama’s Response to the Financial Crisis

[digg-reddit-me]Opponents of Obama’s response to the financial crisis have taken a number of approaches their disagreement. As with all political opposition, these approaches begin with a seemingly common-sense question or objection – and use it as a lever to attack their opponents. Governor Bobby Jindal for example used a bit of each of the following approaches to go after Obama – though not quite committing to any of them fully. I’ve paired many of these approaches with the most prominent individuals who have become associated with them – and tried to respond to them. What is common among them all is a desire to tap into the inchoate rage that this crisis is engendering among all Americans – and to try to focus that rage on Barack Obama. What is lacking among these approaches is a compelling or plausible alternative.

I. Do we need to do anything at all? (James K. Glassman)

George Will memorably attacked this point as a strawman on This Week. But it’s not, even if it is unfair to attribute this view to most Republicans. James K. Glassman (hereinafter called “Dow 36,000” after the book he coauthored) wrote a much-talked about piece for Commentary making the argument that nothing need to be done. The article was cited by House Minority Leader John Boehner among others – and was perhaps the first anti-Obama argument to gain traction in the stimulus debate. Mr. Dow 36,000 made the argument that the Austrian business cycle best explained our current mess – and that our best option would be to do nothing and hope things got better, that we trust the market to provide if only we have enough faith in it’s benevolence and restrain our sinful (government) interference.

What Mr. Dow 36,000 failed to account for was that the stability of societies around the world is dependent on economic growth and the opportunity this brings. The opiate of the masses unhappy with their governments is no longer religion – it is the hope that results from economic growth, the miracle and curse of rising expectations.

Mr. Dow 36,000 believes that if our economic heart seems to have stopped beating, the answer is to have faith that our blood will continue to flow. “We don’t need stimulus – we need to calm down,” he says. But the only rational response is to shock the heart back into action, to stimulate it.

II. But do we need to spend all this money?

Yes, if not more. The basic theory of Keynesian stimulus is that when the aggregate market demand for goods and services enters into a decreasing spiral.

Less demand = Lower prices = Less supply = Less jobs = Less demand = Lower Prices = etcetera

When an economy enters this cycle, Keynes believed, the government must step in and increase demand by spending more than it receives in taxes. (If it taxed to make up for it’s increased spending, it would not be adding demand but merely redistributing it.) Projections indicate that the US gross domestic product will fall by $2.1 trillion in the next two years. Which is why some Nobel-prize winning economists were frustrated that Obama’s plan was so small that it will not be able to make up for the drop in demand.

Joe Scarborough pointed out on Meet the Press last Sunday that, as all deficit spending is stimululative, the last eight years of the Bush presidency have been Keynesian stimulus too:

Scarborough uses this point to make out Obama’s stimulus to be more of the same, except with the stimulus directed towards the bottom 95% of Americans instead of the top 2%. He’s not entirely wrong, but to continue the metaphor above – if someone’s lifestyle choices have put enormous pressure on their heart, as they snort cocaine or take speed or otherwise constantly overcharge their heart, the first step to getting them healthy is usually to get them to stop putting so much pressure on their heart. But if their heart beat is dropping rapidly, or their heart has stopped, then the first step is no longer to remove the cocaine from their system but to inject them with someone that will energize their heart. This is a stimulus. And this is the reason Obama’s economic team is increasing our deficit in the short term.

III. What about tax cuts? (Eric Cantor)

The Republicans proposed a $3.1 trillion dollar permanent tax cut as their alternative to Obama’s $780 billion dollar spending/tax cut stimulus. That they continued to criticize Obama for fiscal irresponsibility and accused him of “generational theft” while supporting this bill aptly demonstrates that this was a pure political play. But if nothing else, the sheer size of the Republican alternative stimulus suggests what the reports of the nonpartisan Congressional Research Office concluded: tax cuts work slower and have less stimulative effect than almost any kind of spending measures. This is why more than half of Obama’s bill is spending.

IV. Fine. But even if this works, the deficit will be out of control! (John McCain)

Damn right it will. Hell – after eight years of rapidly decreasing taxes coupled with the largest increase in domestic spending since the War on Poverty and two large and seemingly unending wars, the deficit was already out of control. Even before that, as Bush failed to respect the “lockbox” that Al Gore promised to protect with the extra funds raised by Social Security taxes, we were in trouble. But even if we had saved all of this money paid into the Social Security program which is owed to me and you in a few dozen years (or less) the rapidly escalating cost of health care would leave our government with a deficit of over $60 trillion dollars over the next few decades.

Which is why Obama has been talking about dealing with America’s long-term fiscal problems since he was on the campaign trail – and especially since he was elected. In the weeks before his election, Washington was taken with his idea of a “Grand Bargain.”

But none of this will matter if the economy doesn’t begin growing again. If the first step to recovery is deficit spending to get the economy going again – continuing the above metaphor, using paddles, injections, whatever to get our economic heart functioning again – the next step is to clean up our act and take a fiscally responsible approach to governing and entitlement spending – in other to stop the irresponsible behaviors that helped create the crisis. If our economy is still stagnant, we will need to dismantle a good portion of our federal and state governments. But if the stimulus works, and the economy begins to grow again, adjustments can be made. Another point that Obama and his Director of the Office of Management and Budget Peter Orzag have made clear is that the first step to solving America’s long-term fiscal problems is tackling the problem of our rapidly escalating health care costs – which thanks to their rapid growth make up an ungodly percentage of our unmet future commitments. This is why Obama sees health care reform as one of the first steps that needs to be taken – to stop the rapidly escalating costs of health care.

V. Do we really need to help all these losers? (Rick Santelli)

Yes, we do. Obama has described his economic team as a bunch of mechanics who are trying to fix the machine that is our economy. When a mechanic sees that a spring or a lever or a cog isn’t functioning properly – and this piece is preventing the machine from working – the mechanic knows the problem will not be fixed by lecturing the piece or letting it fail for not properly doing it’s job. The correct thing to do is to replace it or glue it or do whatever is necessary to make the piece function as it must. Yes, the bankers whose job it was to properly calculate risk and make money instead spectacularly failed to understand the risks they were taking and lost money; and yes, the liars and idiots who took our mortgages they couldn’t afford should be punished too. But while one bank failing is just, a failure of our banking system could paralyze the economy. And while an idiot who took out a loan he couldn’t afford should get his house foreclosed upon, too many foreclosures will take down a neighborhood. Both of these are part of systemic problems which has resulted in downward spirals.

Obama, in taking this approach, seems to be combining some elements of Hayek’s warnings about the limits of the discipline of economics and the failure of the best-laid plans with Keynes’s fierce urgency of now – a kind of trial-and-error, scientific approach to financial crisis management as opposed to a more ideological, morality-driven approach associated with partisans of the left and right.

VI. Obama’s plan sucks. It isn’t working yet!

The stimulus money hasn’t begun to be spent. And the banking and mortgage fixes have yet to be fully implemented – so  of course it’s not working yet. Obama recently explained that the ups and downs of the stock market are a flawed indicator – just as the ups and downs of campaign polling is often flawed. Obama bet his campaign on a strategy of ignoring the day to day and conceding the daily media wars and never trying to boost his daily poll numbers. Instead, he focused on the fundamentals. And he won. His economic team’s approach to the financial crisis is similar. The falling stock market is merely a symptom of the crisis. It is a waste of time to treat a symptom when the root cause is not being addressed – but if one is able to treat the root cause, the symptom will be cured as well.

Obama has elected to do what needs to be done to fix the economy as a whole – and this means helping people whose decisions were poor, people who were greedy, people who were stupid, and yes, losers too. No matter how distasteful, the situation bankers and mortgagees must be helped in order to fix the economy.

To reiterate, the Obama plan has several steps:

  1. Fixing the mortgage and banking mess.
  2. Arresting the downward economic spiral touched off by these messes with government spending to stimulate demand.
  3. Put our government on a fiscally sane path by tackling the enormous gap between our spending promises and revenue generation in the area of entitlements – and at the same time, reigning in deficit spending as soon as this crisis has passed. (These steps are necessary to prevent those who we currently owe from panicking.)

VII. I hope he fails! Socialist! Communist! Marxist! Terrorist! Black Hitler! The Antichrist! Nobama! (Rush Limbaugh)

In fairness to Rush, he’s only publicly expressed a few of these sentiments. I’m not sure that he’s called Obama a black Hitler yet – but I’m sure he’s joked about it. This approach presumes that Obama has a quasi-secret agenda he is trying to impose on America – and that this agenda is so awful, it would be better to suffer another Great Depression or worse than to capitulate. Rush has described Obama as acting in bad faith, as being deranged, as having a mental illness (which Rush diagnoses as liberalism), and as all manner of awful and un-conservative things. Rush is a true propagandist and ideologue – and he has become the rallying point for movement conservatives.

His critiques now have power as the anticipatory fear of what Obama might do overwhelms the sense of what Obama is doing – and if Obama fails, Rush will be hailed as a visionary and a leader. But if Obama continues to display the conservative temperament and pragmatism that won him the election, then he will be as little remembered as Father Coughlin with his anti-Roosevelt screeds.

Rush – like proponents of failed ideologies everyone – continues to maintain that the conservative movement did not fail, but rather that it never truly had the power to achieve it’s agenda.

Continue reading “The 7 Layers of Opposing Obama’s Response to the Financial Crisis”
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Barack Obama Economics Financial Crisis Political Philosophy

A Scientific Approach To The Economic Crisis

[digg-reddit-me]There are relatively few serious political figures who argue that our economy does not need fiscal stimulus at this time – few political figures are comfortable advocating inaction while serious disruption occurs. But there are a significant minority who do take this position – including, it seems likely, some number of Republicans who though publicly are not advocating this extreme course, position themselves to oppose what Obama is doing in whatever ways are feasible.

The majority of Republicans in power seem to advocate stimulus by enormous tax cuts while railing against deficit spending (although the proposed tax cuts cost more than the proposed spending). This piece does not address their concerns – although independent, non-partisan Congressional Research Service did – explaining why the economic consensus was that tax cuts stimulated less and less quickly than spending – and I will address them again later today. A significant number of other Republicans simply have a bad feeling about the stimulus and are looking for which approach best suits them to oppose it.

For those who do oppose any form of stimulus, James K. Glassman’s article in Commentary has proven to be a rallying cry. But it has also provided ammunition to many others who seeking to oppose Obama by any available means. Cited by House Minority Leader John Boehner and many others, this article has found a large audience despite Glassman’s previous infamous prediction (as an author of Dow 36,000) that the stock market was undervaluing companies in 1999 at the height of the tech boom. I addressed some of the questionable historical claims Glassman made to build his case in an earlier post, but now I’m going to address his broader, more basic argument.

Glassman makes two points which leads him to label fiscal stimulus a folly repeated throughout recent economic history:

  • Economics is a limited profession and we can never quite understand the market enough to affect it the way we intend to; which is why, “Government simply cannot know enough to direct an economy successfully.”
  • “Meanwhile, left alone, what Hayek called ‘spontaneous order’ will find its way forward;” meaning the market is self-correcting as long as the government does not interfere.

The inherent contradiction is obvious. If we do not understand the market enough to affect it deliberately, how can we predict how it will act. If economics is such a limited profession that it cannot provide us with enough information to affect the economy in any predictable way, how can we trust an economist’s presumption to do nothing? The market – as Glassman describes it – is a kind of god who we must have faith in. Letting our economy slide deeper into recession while taking no is the economic equivalent of a “leap of faith.” Given this understanding, economist are little more than priests of the free market – who cannot predict or effect their god’s will – but whose job is to assure us that this god will bless us eventually with plenty in its own good time, but only if we trust it and restrain sinful (government) interference.

But Glassman then says something extraordinary given the two above statements and the inaction he is advocating now:

[I]n the 1930’s, “something in the normal regenerative process was missing.”

He doesn’t offer an answer to this – but the economist he derides throughout, John Maynard Keynes, does.  My meager understanding of Keynes suggests he believed the economy, like an engine, would need to be primed from time to time to prevent it from stalling – and he saw the best means of doing this as stimulus spending. The spending boom of the Second World War, for example, can be seen from a Keynesian perspective, as finally getting the world economic engine started again.

Obama however seems to have incorporated Hayek’s admonition that he “cannot acquire the full knowledge which would make mastery of the [economic] events possible” with a cautious Keynesianism. For those who believe that grand challenges such as possible financial collapse demand a grand ideological vision, Obama’s approach will disappoint. But the kernel of wisdom in Hayek (as well as many other truly conservative thinkers) is that grand visions are as likely to fail as minor tinkering projects – except when they fail, they will cause far more damage than the tinkering. 

Obama’s approach to the crisis is in this mold; some call his bill too cautious and too small; some call his stimulus bill an ideologically mixed up mash with a little of everything; some are frustrated his bailout approach focuses more on process than results. But all of this makes sense if Obama is approaching this crisis as a tinkerer. 

Hayek believed that the economy was a mysterious thing and that, to quote another philosopher/economic thinker, we shouldn’t “disturb complicated systems that have been around for a very long time [as w]e don’t understand their logic.” This other thinker, Nassim Nicholas Taleb, believes that if we must act, we should “tinker” to use his word. As “[w]e have the ability to identify our mistakes eventually better than average,” we can avoid the worst outcomes, and potentially latch onto the best innovations:

Look at the three big inventions of our time: lasers, computers and the internet. They were all produced by tinkering and none of them ended up doing what their inventors intended them to do…We choose the iPod over the Walkman. Medicine improved exponentially when the tinkering barber surgeons took over from the high theorists. They just went with what worked, irrespective of why it worked.

Instead of the paralysis and faith preached by Hayek, Taleb offers us a path forward – one of action tinged with doubt, of trial and error, of identifying mistakes quickly, of evaluatinr results honestly. His approach to economics is, at its base, science, in it’s most basic and primitive form. 

This seems to be the approach Obama is taking – pragmatic, cautious, aware of the wisdom of both Hayek and Keynes. He’s tinkering. And that’s exactly what we need.

Categories
China Economics Financial Crisis Political Philosophy

Stimulus Is What We Need

[digg-reddit-me]It is commonly stated that China’s ruling power has struck a kind of bargain with it’s people – that they will accept the one-party rule and other political restrictions – as long as the government is able to keep the standard of living rising. Orville Schell, Dean of the Graduate School of Journalism at the University of California at Berkeley and author of several books on China, gives a typical explanation:

…it would not be excessive to say that everything – economic health, social stability, political reform, environmental modernization, etc. – all depend on China’s economy maintaining at least a 6 percent to 7 percent growth rate. This is something that most market economies cannot do in perpetuity given the nature of cyclical growth cycles.

When this topic is brought up in foreign policy discussions, it is often understood as a uniquely Chinese problem – this bargain between the people and the state that they will accept an authoritarian government in return for a growing economy. But a government’s dependence  on its ability to increase opportunities for its people for its legitimacy is not a uniquely Chinese problem. The Chinese government may only be able to survive as long as it continues to provide economic growth to it’s citizens, but how different is this bargain the Chinese people have made with their government from the bargain the America people have with ours? As long as American citizens have their basic needs met and a reasonable opportunity to succeed, they will accept a polarized distribution of wealth, corruption of various sorts, and sundry other injustices. And as long as the Chinese citizens are moving towards having their basic needs met and have a reasonable opportunity to succeed, they will accept a single-party state, restrictions on freedom of speech and assembly, and other restrictions.

Any state’s constitutional structure is legitimated by whether it provides for the needs of it’s people. In another age, the state merely provided security against hostile invasions and criminals; later, it provided an identity as well; by the middle of the 20th century, a state was legitimated by the extent to which it could provide for the basic needs of it’s citizens. The Cold War was, to a large degree, a competition between the capitalist states and the Communists states to see which could provide more ably for the needs of it’s citizens. Today, the state is evolving from providing for the needs of it’s citizens to providing opportunities for it’s citizens. The basic problems of sufficient housing, food, clothes, and other necessities are able to be met with our global prosperity. ((Clearly, the problems associated with deficiences in these areas aren’t gone. But technologically, we have solved them. The problems remaining are systematic – how to satisfy the needs of those who don’t have access to the excess prosperity of the developed world.))

This evolution of our state into a market-state can best be seen by looking at the long-term trends in politics, shaping both the left and the right – as politiciains, with their ears constantly attuned to changing expectations, have sensed this evolution before most. Looking from Carter to Clinton to Obama, we can see how each has progressively embraced a different sort of liberalism – each less focused on a government providing services and more focused on government providing opporunity. Carter was a traditional big state Great Society liberal; Clinton favored free trade, ending welfare, and reining in the deficit; Obama’s liberalism accepts a number of libertarian premises and seeks as it’s goal the maximization of opportunity – as his health care reform plan, for example wouldn’t force people to join any particular program while offering a stable base for a necessary service that often causes people to remain in jobs they would not otherwise. A similar evolution can be seen in Nixon to Reagan to Bush – as Nixon favored big government programs; Reagan attacked big government; Bush focused on creating an ownership society among other reforms. Even when misguided – as for example his Social Security proposal – it was focused on offering greater opportunity.

James Glassman speaks for many doctrinaire anti-government conservatives when he suggests we allow our economy to contract – as eventually, it will reach bottom and bounce back. Stimulus – he says – is the wrong metaphor:

“We’re going to have to jump start this economy with my economic recovery plan,” [Obama] said on January 3. According to the image, one can jolt a dormant economy into action just as one can hook up polarized cables to a car battery, clamp a defibrillator to the chest, or breathe into the ear of a reluctant lover. Suddenly, the object of our attention will be back in action, aroused…

In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little.

Putting aside the non-consensus historical take on government action in the Great Depression (discussed here), Glassman misses the point our political leaders do not: our societal order is premised on the idea of continuous growth. A growing economy in a market state is like a beating heart – without it, we cannot survive. Perhaps a more apt metaphor is a business not making a payroll – the company can’t continue if it’s employees don’t get paid. The employees will no longer consent to subject to their employer’s authority – and the company will dissolve. When the nation-states of the early 20th century were not able to legitimate their structure by providing for the basic needs of their citizens, radicalism, revolution, and war ensued as the old order broke down and fascism and Communism took it’s place. Today, if market-states are unable to provide opportunity their citizens, they will not survive going forward. 

Our politicians and the elites sense this – which creates the manic desire to arrest this free fall and start our economy moving forward again – before it’s too late.

Categories
Economics Financial Crisis History

James Glassman’s Debatable History

James K. Glassman is the brilliant journalist and opinion-maker whose Dow 36,000 was published just before the tech boom crashed. In this book, he claimed that stocks were woefully undervalued and would rise sharply, with the Dow Jones Industrial Average reaching 36,000 by 2004 – at the latest. This prescient thinker has now written what is turning out to be an influential piece in some circles. For one, House Minority Leader John Boehner cites it on his blog. ((“Wait, he has a blog?” “Yes, he actually does.”)) I even saw some people reading print-outs of the article on my train – which is fairly unusual. It strikes me as an article written for those who already want to agree with the conclusions – and that it’s premises aren’t defended as much as stated as implicitly true.

For example, Glassman makes five historical claims which are – at best – debatable. I am not an expert on economic history – and I am sure Glassman can find an economist who will agree with each of these claims. But my understanding is that they are contrary to the general consensus.

  • From the stock market crash of 1929 to the attack on Pearl Harbor, “fiscal stimulus simply did not jump-start the economy.”

    While it’s clear that the New Deal spending did not get us out of the Great Depression, the economy had made significant progress before Roosevelt raised taxes in 1937 causing a sharp downturn. (See especially the graph of Gross Domestic Product that Paul Krugman produces. It makes clear how disingenuous Glassman is being with the above remark.)
     

  • “[C]onsidering the fact that federal spending tripled during the Great Depression, rising from 3 percent of the country’s gross domestic product to nearly 10 percent in 1939, it does not seem the likeliest explanation” that “World War II and the unprecedented infusion of government dollars” was what brought us out of the Great Depression.

    This claim  is somewhat silly. Glassman fails to account for several basic factors: (1) Stimulus would not work to push the economy into growing in theory unless it was significant enough to counter the downturn. If the economy dipped more than 7% during the Great Depression, then this surge in federal spending would not have been sufficient to counter it. (2) States and other local governments cut their budgets and raised their taxes during the Great Depression, reducing the amount of total government spending more than the federal government was willing to make up. (3) Roosevelt also raised taxes significantly in 1937, thus offsetting the stimulus measures to some degree – and throwing the country into a devastating downturn within the Great Depression. (4) The spending during World War II dwarfed that of the New Deal – it just doesn’t make sense to claim that because spending increased significantly during one period that if it increases still more, it wouldn’t have any effect.
     

  • “[E]fforts [to stimulate the economy through government spending] during the ten subsequent recessions proved…ineffective.”

    Another seemingly true but misleading statement. As the Congressional Research Service explained in their report on economic stimulus (CRS – Report R4104 – Economic Stimulus: Issues and Policies) during the past 8 recessions, legislation was only enacted before the end of the recession once. Government spending was ineffective in combating all of these recessions because it came after the economy had already recovered – and as Glassman acknowledges, the one timely stimulus plan is generally agreed to have had some effect, if not an effect as large as expected. With escalating job losses and many other dire economic indicators, action now would seem to be timely.
     

  • “It appears that the current sickness occurred because the Fed, in an effort to keep the economy stimulated after the collapse of the tech-stock bubble and in the wake of September 11, cut interest rates far too much during 2001 (from 6.5 percent at the start of the year to 1.75 percent at the end) and waited too long to raise them, making credit so easy that businesses expanded beyond all reasonable bounds, and banks, flush with cash and trying to make higher returns, shoveled money at borrowers with poor credit; risk aversion disappeared, and loans, especially to home buyers, went bad.”

    This is a theory – and not an entirely implausible one – but it seems hard for me to presume this – or to accept that this was the only cause – with so many other factors at work. It is a classic Austrian explanation for any recession. Glassman – while portraying Keynes as an enabler of ideological solutions to the business cycle – fails to acknowledge that his explanation is equally driven by ideology. And regardless – there are more than enough alternate explanations to call into question placing all of our faith in a single ideological explanation.