Tuesday, January 20, 2009

'More Jesse James than Wyatt Earp'

The following remarks were delivered by Economics Chairman David G. Tuerck this morning at a Suffolk University Alumni Association program at Sargent Hall, Suffolk University Law School titled, “The New Sheriff in Town” to mark the inauguration of President Barack H. Obama.

Good morning and my thanks to Laura Piscopo and Eliza Parrish for putting this program together.

I understand that we are about to witness is widely seen as a transformative event in American history. That it is. But the transformation that we will get, as I see it, will not be the one being celebrated all over the world. Rather, it will be one that undermines the Constitution to the end of making social policy, that undermines national security to the end of placating the anti-war left and that ends up eroding a large swath of the private economy to the end of effecting a vaguely socialist policy agenda. There’s a new sheriff in town all right, but he’s more Jesse James than Wyatt Earp.

Obama’s predictable assaults on the Constitution and on national security are perhaps the most serious harm that we can expect from his administration. In connection with today’s panel, however, it is important that we not underestimate the harm that his policies will inflict on an already faltering economy. During the campaign, Obama promised to promote green energy, redistribute income, punish corporations, empower unions, expand government and restrict foreign trade – an agenda that, if implemented, would reduce productivity and living standards. That the public would elect a presidential candidate intent on implementing this agenda stands as a great mystery to me. Far less mysterious is the harm that these policies will inflict on the economy.

Now I suspect that many of my fellow economists who supported him have told themselves that Obama couldn’t have possibly have meant to implement the policy prescriptions that got him elected. And, indeed, but for the current financial crisis, there is the possibility that, having won the election, he would be listening to the saner voices around him and forgetting most of what he promised during the campaign.

But the financial crisis means that this is not to be. With the economy in a downward spiral, Obama knows, as do his handlers and sponsors on the left, that he has a mandate to try everything under the sun in order to put things right. Which is why we can expect him to advance a much heralded trillion-dollar recovery plan. When the attitude is that the country must do something – anything – to speed recovery, we can expect that something to be what bought votes during the campaign.

Let’s first consider the baseline projections against which we can assess the likely effects of Obama’s policies. I have surveyed a number of forecasts, ranging from relatively optimistic to highly pessimistic and reached the conclusion that the economy, as measured by real GDP, will continue to decline straight into 2010. This is bad news for two reasons: First, it means we’re in for at least a four-year stretch before employment, the housing market and equity prices recover significantly from the current collapse. Second, it means that Obama administration will be driven by political considerations to take increasingly desperate measures, many of which will make things worse rather than better, to right the economy.

To be sure, most economists now seem to favor a fiscal stimulus consisting of a combination of tax cuts and spending increases. You can accept their advice if you wish, but I think it is the result of a new kind of derangement syndrome, perhaps to be classified by psychologists someday as Obama mania or just plain Obama nuttiness.

One clue as to the temporary insanity that is now sweeping through the economics profession is the renascent popularity of Keynesianism. Otherwise sensible economists are re-branding themselves as Keynesians, as if applying that label will lend scientific authority to nostrums, which just a few months ago they would have considered laughably naïve.

You probably remember Keynes from your Principles of Economics class where you were shown how a dollar of deficit spending will deliver three, four or even ten dollars of new GDP. Keynes laid out this doctrine 73 years ago in his book The General Theory of Employment, Interest and Money. While the idea of magically expanding the size of the economy by just running deficits has an obvious appeal, the fact is that Keynes’s ideas began to undergo serious challenge in the 50s and then fell into utter disrepute in the late 60s and early 70s, with the onset of stagflation and the productivity slowdown.

In the intervening years, defenders of orthodox Keynesianism had become as rare among economists as creationists among biologists – and, for good reason: Until just a few weeks ago, new theories, developed by the last two generations of macro economists, had relegated Keynesian orthodoxy to a historical curiosity. Now, all of a sudden, Keynes is all the rage because we find ourselves in a protracted slowdown and because Obama’s policy pronouncements need some kind of intellectual justification. It’s as if Einstein, on discovery relativity, decided to return to pre-Newtonian theories of gravity in order to put the right spin on his ideas.

If we want just one example of how contemporary economics argues against Obamanomics, we need look no further than a July 2007 paper by Christina and David Romer, published as a National Bureau of Economic Research Working Paper. There, the authors find that fiscal measures of the kind being advanced by the Obama team “have been largely unsuccessful” at stimulating the economy, just as other critics have warned.

One reason why such countercyclical policies don’t work, say the Romers, is that “it is difficult for fiscal policy to respond to economic developments.” What makes this article particularly interesting is that co-author Christina Romer is slated to become Chairman of the Council of Economic Advisors in the new administration.

Another implication of Romer’s paper is that tax cuts of the kind undertaken during the Reagan and Bush administrations -- that is, tax cuts aimed at promoting economic growth -- are, unlike the cuts proposed by Obama, highly effective for expanding the economy. If Professor Romer were up to the Herculean task of disabusing her boss of his spread-the-wealth philosophy and of imparting some understanding of contemporary economics to his thinking, then perhaps we could put hope in this administration after all.

But back to Keynes. Another economist, Robert Higgs, has pointed out that World War II was the nation’s one great experiment with a Keynesian remedy – unintended though it was. And what happened during the war is just what modern economic theory, as opposed to antiquated Keynesian theory, would suggest. The expansion in government spending crowded out private investment almost dollar for dollar. Meanwhile the expansion of consumption, which the Keynesian multiplier is supposed to bring about, didn’t take place.

Franklin Roosevelt, also now being elevated to godly heights by the Obamamaniacs, in fact never took Keynes seriously. And ironically, it is Keynes himself who provided what is probably the best rationale for why his recommendations would appeal to a Roosevelt or an Obama. In his foreword to the German version of The General Theory, Keynes admitted that his ideas could “be much easier adapted to the conditions of a totalitarian state” than a free-market economy. When a reporter asked an incredulous Joe Biden whether he and Obama were advancing a Marxist agenda, she was on to something.

Earlier I said that the current crisis bodes ill for any hope that the new President’s economic policies will redound to the benefit of the nation. There is simply too much opportunity and too much pressure to accommodate his electoral base for him to do anything short of what he promised. Thus we will have four years of the various recovery-killing measures that he promised the electorate: cap-and-trade, union card check, NAFTA revision, higher minimum wages and all the rest. And there’s nothing in today’s $150 million extravaganza that can offer any comfort over these realities. This new sheriff is going to make us long for the days when the hombre from Texas was in charge.

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