'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.

Ecological Knowledge vs. Economic Knowledge

You may remember the name of Dr. John Holdren from an earlier post on this blog. Former summer fellow John Macek had written a letter to the editor in response to Holdren's claim that anyone who doesn't tow the line on global warming is "dangerous."

Now NYT columnist John Tierney is reporting that Obama has named Holdren as his science advisor. Tierney has more on Holdren's troubling past here.

It looks like John has more work to do.

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.

“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"

Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"

Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

Wish List cont.

History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much,

Our aim should not be more government, it should be smarter government.

2.) I wish that G.W. Bush had actually acted over the last eight years like he believed that statement of his.

(HT: Bloomberg.com)

The myth of declining wages

Steven Chapman takes on Senator Obama's favorite mis-measure of the American economy: wages.

[Obama] makes a habit of claiming that "wages are shrinking," working families have lost ground, and the country desperately needs his "Rescue Plan for the Middle Class." His economic program rests on the unshakable conviction that everyone except the wealthy is doing worse and worse all the time. If elected, he will find sympathetic ears among Democrats in Congress, where never is heard an encouraging word.

In the midst of alarming headlines, it's easy to persuade people that things are worse than they used to be. The only problem is that aside from the transitory effects of the current turmoil, they aren't.

So like most politicians, Obama predicates his economic plan on a diet of fear that overlooks the ubiquitous economic progress of the last 25 years. He should know better. After all he's the candidate of hope.

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

None of this alters the fact that some people have done worse. Domestic and global competition, which raise living standards, also spell trouble for many companies and workers. A 50-year-old who loses a $30-an-hour job on the Chevy assembly line may never find anything comparable. But the steady, broad rise in living standards makes it clear that—at least until recent months—our economy consistently spawns more good jobs than it destroys.