This Was Intentional

In an episode of the popular 90s sitcom “Seinfeld”, Elaine suffered an injury to the neck. Kramer insists on helping her. Jerry joked, “His formal training is in pediatrics.” Not surprisingly, Kramer’s treatment ended up doing more harm to Elaine.

Bruce Bartlett has had a hand in developing the economic policy of the nation over the past three decades. In 1977, Bartlett went to work for Congressman Jack Kemp as a staff economist. He helped to draft the Kemp-Roth tax bill that eventually became the basis for Ronald Reagan’s 1981 tax cut. In 1983 he became executive director of the Joint Economic Committee of Congress. In 1987 he became a senior policy analyst in the White House Office of Policy Development. During the administration of George H.W. Bush he was deputy assistant secretary for economic policy at the Treasury Department.

Just as Kramer had no formal education in chiropractic medicine, Bruce Bartlett has had no formal education in economics. He majored in history. His master’s thesis was on the attack at Pearl Harbor. He obtained his knowledge of economics from listening to politicians and reading bumper stickers. And not surprisingly, his policy recommendations have done more harm than good.

In chapter 6 of his latest book, The New American Economy, Bartlett describes the “starve-the-beast” political strategy. It was believed that “tax cuts would channel concerns about budget deficits into political pressure to cut spending”. This idea had a lot of support, not just from political hack pop-economists like Bartlett but by none other than Milton Friedman himself who is quoted by Bartlett, “I have concluded that the only effective way to restrain government spending is by limiting government’s explicit tax revenue.”

In my opinion it’s a cop-out. Rather than roll up your sleeves and fight against overspending, they devised this method. It stems from weakness and cowardice.

This strategy was embraced by many over the years including Greenspan, Rick Santorum, Stephen Moore of the Club for Growth, President George W. Bush,William A. Niskanen, a member of Reagan's Council of Economic Advisers, and Richard Cheney. Barlett writes, “Instead of being viewed as the height of fiscal irresponsibility, cutting taxes without any corresponding effort to cut spending was now seen as the epitome of conservative fiscal policy.”

And it didn’t work.

Despite thirty years of outrageous budget deficits and a growing and growing and growing national debt, no significant spending cuts were ever implemented. Even when Republicans controlled the House, the Senate, and the White House, spending rose including the outrageous Medicare prescription drug benefit. Few made any effort to control spending.

We are faced with a national debt approaching 100% of GDP, and that national debt is dwarfed by continually rising unfunded Social Security and Medicare obligations. We are in a fiscal hole so deep that it will take generations to get out of. And it was all intentional. 

Kudlow Completely Clueless

http://tinyurl.com/7gamjj4

In a recent column Larry Kudlow seemed totally clueless about Alan Krueger's assertion that "problems built up over decades" are the direct cause of our situation today. “For nearly 25 years — during those bad old decades — the economy increased 3.3 percent annually. Unemployment dropped from 11 percent to 6 percent to 5 percent to below 4 percent,” Kudlow wrote.  Kudlow seems to think that just because economic growth was good during that period then all was well and that no adverse effects could have been accumulating.

While we did have economic growth and low unemployment, debt was building up.  In those 25 years we have accumulated so much debt that we can’t even count it.  We have gone from the world’s largest creditor nation to the world’s largest debtor nation with over $15 trillion in outstanding bonds and tens of trillions in unfunded Social Security and Medicare obligations.

And a diminished workforce is going to be saddled with those obligations.  Not only does the retirement of the baby boomers leave us with fewer workers per retiree, but those remaining workers are less educated, less skilled and less productive.  More degrees are awarded in the arts than for STEM areas.

But it hasn't been "problems" that caused this, but instead bad policy.  The most obvious cause is the buildup of debt, and, yes, Reagan is partially to blame. He taught us that the government can have low taxes and high spending meanwhile borrowing the difference with no consequences. Common sense tells us that this won't work in the long run, but people like Kudlow came along and told us not to worry about it. But it's not all Reagan's fault.

The government's financial position is but one factor. The savings rate has plummeted over the past 30 years as consumers hoped for Social Security, pensions and a windfall from selling appreciated homes and investments would provide much of their retirement income. A stock market crash and dismal recovery followed by a housing market crash and no recovery have left consumers up to their yin-yangs in mortgage debt, credit card debt and student loan debt. American consumers had been the engine of the world economy for so long borrowing to finance the appearance of prosperity.

The real problem is that no one is doing anything about it.  Paul Ryan had the most radical proposal, but even that his plan barely scratches the surface of what needs to be done.  People like Kudlow say that all we need is a tax cut and reduced regulations and everything will go back to the way it was before.  We need to live within our means, educate the next generation and invest in productivity enhancing R&D with our eyes on a return on investment, not by the next election cycle, but in the distant future.

Back in 2007 I predicted that it would take years to get out of this. Now I predict that it's going to take decades. Many of us will never live to see an economically healthy America.  And it is very possible that this is it.  It is very possible that our debt will result in permanent lower standards of living for Americans today and in the future.

Thirty years of irresponsible behavior isn’t corrected overnight or even by the next election cycle, and it isn’t painless.  It is going to hurt.  Some people are already feeling it.  Many government workers have lost their jobs, taken pay cuts or had their salary increases reduced or eliminated.  People in the private sector have it even worse.  Many seniors are reducing their lifestyles because the interest from their investments is next to nothing.  And the pain will get worse.  Putting it off will only make it worse.  Social Security will either have to be reduced or delayed.  Medicare will require higher premiums.  Many pension funds will not be able to pay.  Businesses that promised post-retirement benefits will not be able to fulfill the obligations.

Kudlow's attempts to blame Obama for our plight are ignorant. He should listen intently to those that argue that bad policy over decades cause this (i.e. real economists) and try to understand it.

Demand Side Economics

In the late 1970s Jack Kemp and others started an idea that Ronald Reagan made famous. They called it "Supply-Side Economics", and the general idea is that reducing costs to businesses (i.e. the supply side of the demand/supply equation) would stimulate the economy and result in economic growth. Tax rates were reduced, the economy grew, and Supply-Side Economics was credited for the growth. Since then it was believed that government policies aimed at stimulating the economy in this manner would result in more and more economic growth.

Some who identify themselves as Supply-Side Economists claim that the demand side of the equation doesn't even matter. There will always be demand, they say. Arthur Laffer, one of the most famous of the Supply-Side Economists, says that demand is not a problem. He includes this in a recent book "The End of Prosperity".

Convenient for people like Laffer, another phenomenon that is less often discussed that took place during the same period is the demand side of the equation (i.e. consumer demand). Consumer demand was seemingly insatiable for much of the past three decades. Consumers consumed. They used their savings. They borrowed. When they couldn't borrow anymore, interest rates were lowered, and new ways of borrowing more money were invented. Credit cards were offered to college students and others with little or no credit and even to people with bad credit, and limits were increased. People were permitted to borrow from retirement accounts. Home equity loans were nearly synonymous with ATMs.

This consumer spending by Americans was the root of much of the economic growth over the past several decades not just in the United States but in many other countries as well. In the 80s Japan's economy took off with much of the growth a result of sales to American consumers. In the 90s the Asian Tiger economies took off and in the aughts China's economy grew at double-digit pace every year.

By 2008 American consumers were tapped out. Housing prices had declined so home equity loans could no longer provide a source of funds for consumers. Consumers were also up to their necks in auto loans and credit card balances. When consumer spending declined, businesses stopped selling, and when businesses stopped selling they stopped making profits.

When you talk about economics, a lot of people automatically think of supply and demand. And they'd be right. There is the supply side, and there is the demand side. Both sides are equally important in the equation. 

Bowyer: God Designed Free Market Capitalism

Some often like to start at a conclusion, and then look for facts that support the pre-drawn conclusion. Sometimes they rewrite history to shape the facts so that they support their premise. It’s often said that the Kennedy tax cuts triggered the economic boom of the 1960s. A few clicks of a mouse will tell you that the economy had been booming for years prior to that tax cut. In analyzing the Great Depression these people pick their pet peeve and declare it either as a cause of the Great Depression or a contributor to the elongation.

Christianity experiences something similar. The Bible is such a large and complex book that things can be taken out of context and exaggerated and twisted and spun to the extent that the Bible has been used to support selfishness, hatred, and even war. A good preacher will take a passage from the Bible, a proverb or an entire chapter from an epistle, and teach the message that said scripture intends to teach. A bad preacher will start with his own thought, and then search for scripture references that support what the preacher wants to teach that day.

Hack faux economist Jerry Bowyer commits both errors at the same time. He has been writing some blog entries arguing that the free market model of economics is an economic model designed by God to contribute to the prosperity of mankind. He started off arguing that Adam Smith intended that his “invisible hand” was the actual invisible hand of God himself. In his recent column http://tinyurl.com/4xfajob Bowyer leaves no doubt of his belief that his model of free market economics was designed by God so that mankind could enjoy the fruitfulness of creation.

“God created the world with a plan that free individuals pursuing peaceful commerce would be of benefit to all,” writes Bowyer.

I’m going to get right to the point: there is no evidence whether in economic research or in the Bible that God or some supreme being designed the Universe so that free market capitalism would be a perfect economic system. If Jerry wants to argue that Adam Smith believed that free market economics was designed by God, then he’s free to do so. In fact, it makes not one bit of difference whether Adam Smith thought that free market economics was inspired by God or whether he wore women’s underwear.

But let’s take a look at Jerry’s argument. Jerry writes, “God made a world which is fit for us, and He made us fit for the world.” Indeed He did. I agree with that. But a critical problem arises because a key feature in the mix has been corrupted. When man disobeyed God, man changed, and his relationship with God changed. Man obtained a sinful nature. The Apostle Paul writes, “There is no one righteous, not even one; there is no one who understands; there is no one who seeks God. All have turned away, they have together become worthless; there is no one who does good, not even one.” A key ingredient in God’s utopian economic plan changed significantly.

God’s original plan was to have Adam in the garden tending to the garden and eating the fruits of the trees (except one). But God’s original economic plan changed abruptly. After man’s rebellion (or as Jerry calls it, a “misunderstanding”), God said “Cursed is the ground because of you. Through painful toil you will eat food from it all the days of your life. It will produce thorns and thistles for you and you will eat the plants of the field. By the sweat of your brow you will eat your food until you return to the ground…”

“Painful toil” “all the days of [our] lives” and then we die does not sound how one would describe God’s best economic system God bequeathed upon us to fruitfully enjoy. From a Biblical standpoint, it’s clear that our current economic system is not God’s original plan for us.

With respect to an economic argument, there is no evidence that Adam Smith’s free market economic system was designed by God. There’s no evidence that it wasn’t. But would an economic system designed by God have so many faults and limitations and need so much help from mankind?

Free market economics has unreasonable assumptions like perfect market information, no participant with market power to set prices and no barriers to entry or exit among others. Second, government involvement is necessary for the system to work most efficiently. Institutional infrastructure to enforce contracts, externalities, public goods, police, national defense… Would an all-powerful omnipotent God design an economic system that had so many flaws, unreasonable assumptions and needed so much help from government?

What Jerry is doing here is putting forth a tired argument, and it’s not new. Many politicians purport that God is on their side. The entire Republican Party often tries to claim that God is on their side. It’s a tired argument because it discourages analysis of the actual issues. Jerry declares that free market economics is the economic system designed by God. Who can argue with that? If God is for it, who can be against it? The damage that this argument does is that it discourages careful analysis of free market economics.

Free Market Economics may not be ordained by God, but it’s the best system of economics we’ve got. And careful analysis of the market, its failures, its successes and careful analysis of the effects of government policies are essential in determining the best way to refine the model. Jerry’s argument undermines that. 

A Slave to Figures

They say that if you remain silent then people will think that you’re in idiot, but that if you open your mouth then you remove all doubt. Larry Kudlow has removed all doubt a long time ago. In a recent column http://tinyurl.com/3cax6um Kudlow gives us a glimpse into the depth of his ignorance. This might be failing to see the forest through the trees.

Sometimes economists make the argument that damage caused by natural disasters stimulates economic activity thereby contributing to economic growth. Some argue that the money spent on expenditures to repair said damage would have otherwise been spent on other expenditures thereby resulting in a wash. What both sides of this argument are missing is the very heart of our economy.

What do we want from our economy? Answer: stuff. Why do you get up and go to work? Do you get up and go to work so that the numbers on your bank statement get bigger? No. You do it so that you can have more stuff. You can have a car or a nicer car or a house or buy an x-box or a diamond ring for your sweetheart or take a vacation. The reason we want our GDP figure to be bigger is because a bigger GDP figure represents more stuff we can have. A number on a government report doesn’t do any good for anybody except for a politician who is trying to get re-elected based on the performance of the economy.

So for that reason people think that a bigger GDP figure means a better economy and therefore more prosperity. One thing the GDP figure does not measure is the loss. The expenditures to rebuild the damaged road are included in the GDP figure, but the damage is not included in the GDP figure. Kudlow’s failure to realize that this damage is not included in the GDP figure is his most grievous error.

Kudlow makes the mistake of being a slave to figures. One might consider it failing to see the forest through the trees.