Fiscal Stimulus: Government Spending versus Tax Cuts

Greg Mankiw wrote a good article summarizing the current state of the debate between these two stimulus strategies.

Wartime Planning...Easy (Part II)

In Part I, I asked what economic planners should plan for. But answering this question requires the reader to understand the role of an economic planner. To paint as clear of a picture as possible, I will constrain our considerations to what we observe in the real world. In any case I can imagine throughout history, the role of economic planner was held by those who retained political power in their country.

The nature of politics is such that the ruling class, or the political party holding power at a given moment, will likely pursue policies or directives that perpetuate their control. They want to retain power. Assigning the responsibility of economic planning to the political class in control has lead, in the past, to economic planning designed to increase that control. I am unaware of any ruling regimes that have used economic planning to decrease their political power. Indeed, given the desire to maintain rule or control, failing to use the powerful tool of economic planning to further that desire would be irrational. It is generally safe to assume that people are rational in the weak sense that they generally do not do things that directly contradict what they see as in their self-interest.

Thus, let us return to the question of what economic planners should plan for with the following information in mind. First, economic planners are those who hold political power. Second, these individuals do not want to relinquish political power. So, what do you think economic planners (in the real world) should plan for?

Wartime Planning...Easy.

While reading Bruce Caldwell's introduction to Hayek's 'The Road to Serfdom, I began meditating on economic planning. A plan is simple enough as a stand alone concept. It is a set of strategies employed to achieve a desired end (my definition). An economic plan, then, is a set of strategies employed to achieve an economics related end. For example, suppose the United States decided to gear the entire US manufacturing base towards Diet Sprite production. Let's ignore the fact that this would destroy the economy and just say that Diet Sprite production would be pretty easy.

But this is too simplistic. Consider wartime planning. During WWII, a massive portion of the US industrial base was retooled to meet the needs of our military forces whether it be arms manufacturing, rubber production, or any other functions related to war. In other words, fighting a war and planning an economy designed to aid and sustain the US war fighting capabilities allows economic planners to limit their considerations to just those involved in regulating on our enemies.

Here is a question (assume that planning is the way to go): during times of peace, what should economic planners plan for? What end should they try to achieve?

The Overton Window

A student brought up the new Glenn Beck fiction book, The Overton Window.  The actual Overton window in political theory refers to the phenomenon that at any given time, there is a range of political ideas that the majority of the country finds palatable.  Ideas outside this range are typically career killers and thus politicians who wish to continue as politicians are actually incentivized to think inside the box...or window, in this case. 

Another professor brought up a classic example.  Steve Largent ran for Governor of Oklahoma several years back.  Oklahoma is notorious for its massive administrative layers and bureaucracy in the public education system.  For instance, Broken Arrow, which boasts the largest high school in the state, has one superintendent.  Berryhill High School, a school that is two or three classifications (classified according to size) lower than Broken Arrow also has one superintendent.  In many cases, there are towns with fewer than 500 people with their own public school superintendent.  Largent's proposal was to get rid of some of this bureaucracy by consolidating the administrations of many smaller schools. 

Largent's idea must have been outside the Overton window considering his subsequent loss of the election and disappearance  from politics in Oklahoma altogether.  I wonder if his idea would still be outside that window in today's economic/political climate.

Backlash

While shopping in a bookstore, a friend who works there asked me if I had heard of 'The Road to Serfdom'. Indeed. I started to explain the ideological struggle between Hayek and Keynes and outline the Austrian, Chicago, and Keynesian schools of thought. I got about as far as saying the author of 'The Road to Serfdom' is Hayek. Summarizing these paradigms in 30 seconds usually leads to some sloppy, if not outright incorrect, characterizations.

At any rate, my friend told me that people were calling the store frequently and asking for Hayek's book. I went to the economics section and, indeed, there were no copies left whereas there were multiple ones a few weeks back. I couldn't help but think that the turn towards Hayek is the result of the silliness of our European friends as they wring their hands at the inefficacy of goverent profligacy to sustain a prosperous state.

I am watching the PBS production, Commanding Heights. I cannot help but be taken in by Hayek's charm. I'm glad the international community recognized the value of his contribution while he was alive to enjoy it.

If The Germans Can...

The Germans just cut their government spending in an attempt to decrease their budget deficit.

More than one person, reflecting on Greece, has asked me how a country can go into bankruptcy or why a country cannot just keep going the way it's going. Why all of the sudden decide that a country is in danger of economic collapse.

I think the easiest answer to this question is to look at an analogous scenario using any large corporation. If I go to a lending institution and ask for money to upgrade my property, plants, and equipment, an analysis of my ability to repay the borrowed funds is undertaken. If my balance sheets and other financial statements indicate high revenue with low costs, no other outstanding debt, and good management, then I will most likely receive the funds with a low interest rate.

If I continue going to financial institutions asking for more funds, without retiring my previous debts, I will likely have to pay an increasingly high interest rate. At some point, a lending company may decide that my company can not repay outstanding debt, let alone any new debt. At this point I will be unable to finance continued operations of my company and be unable to pay off existing debt because I was using new loans to pay off old ones.

My best bet to obtain new loans is to demonstrate that I have cut costs (goverment spending) and expect my future profits (economic growth) to improve dramatically, enough to where, in time, I will catch up on all the old debt and be able to pay off the new as well.

Germany is doing this now, before intrnational lenders are calling for their heads. It's too late for Greece, according to most headlines. But, perhaps Ireland, Italy, Portugal, California, New York, and Illinois can still learn a lesson from our German friends.

Thought Provoking Fun

Imagine two cavemen with their families.  Suppose they roam the earth without running into any other members of their kind until one day they happen across one another.  Do the two cavemen decide to live with one another?  If they do, why?  In my experience, libertarians and communitarians answer this question differently.  If you are unfamiliar with typical libertarian and communitarian answers, then you may end up giving an answer that belongs to the opposite end of the political spectrum.  That is, you may consider yourself libertarian or communitarian but support the opposite side with your fundamental beliefs regarding human nature.

Does Liberal Education Policy Cause Childhood Obesity

The quality of public school breakfasts and lunches is oft bemoaned in the media.  As a recipient of such meals, I can attest to their questionable nutritional value (although they were all very tasty).  The typical narrative is that poor public school food choices contribute to childhood obesity.  The logic here is sound.  Taking in more calories than you expend leads to weight gain. 

However, there is a relationship between liberal education policy and childhood obesity that requires examining.  First, schools are required to provide meals to children and are then asked to do so at the lowest cost possible.  Easy to prepare and cheap food that still tastes good is often the least healthy, most caloric-dense food available with high levels of fat and preservatives.  Second, liberal policy mandates that students whose parents' income falls below a certain level be allowed to consume this food either very cheaply or for free. 

What does this amount to?  Poverty-stricken (often minority) students are given free or cheap food that is blamed for causing childhood diabetes and related ailments.  A class-action lawsuit against liberals should be inevitable since one could interpret their educational policies as an attempt to destroy the lives of poor minority children.

Is there an alternative?  Yes.  Take the value of the school-provided breakfast and lunch and give a non-transferable gift card redeemable only at a local grocer to qualifying families.  It is not too late for the left to halt their war on the poor.

Growth and Equity

Daniel Henninger's article in today's WSJ was primarily about the Republican party capitalizing on billing themselves as the We're Not Europe Party.  Whether this strategy is optimal, Henninger brings up a good point.  Faust is a character who sells his soul to the devil in exchange for a comfortable, successful life.

As mentioned in a previous blog, Greg Mankiw outlines the tradeoff between economic efficiency and economic equity.  If you want more equity, you must sacrifice efficiency.  Put simply, fairness comes at the expense of growth.  Members of the European Union have long favored equity over efficiency, and the bill must now be paid (paraphrasing Henninger, here).


A great paragraph from Henninger's article:

Barack Obama would never say it is his intention to make the U.S. go stagnant by suppressing wealth creation in return for a Faustian deal on social equity.  But his health system required an astonishing array of new taxes on growth industries.  He is raising taxes on incomes, dividends, capital gains and interest.  His energy reform requires massive taxes.  His government revels in "keeping a boot on the neck" of a struggling private firm.  Wall Street's business is being criminalized.

  I suppose one way to look at what we want our future outlook to be here in the U.S. is to ask a question.  Do we want the future rhetoric regarding U.S. economic output to sound like today's rhetoric about Europe?  Or, do we want it to sound like the rhetoric surrounding Asian growth?

I favor the latter.

While Saddened by the hardship and turmoil the Greek debt crisis has spawned, I cannot allow such compelling material for teaching go unnoticed.  So, I am compiling a set of articles from various sources to create a packet for my Econ of Social Issues classes next semester.

I am fascinated by the spectacle of unionized government employees, a huge and primary source of the crisis, protesting in the streets against wage freezes and pension cuts. Instead they want the government to increase tax rates, a wealth destroying activity. So, those who make a living from state revenue are are in the streets arguing for policies that reduce state revenue, yet they hope to maintain the same level of income and pay raises?

That basic economic principles are not exactly mainstream knowledge is the only reason I do not view these protesters in the harshest of lights.

If anyone knows of some great articles I should include in the packet, please let me know.

It Never Gets Old

Winning, that is. On a recent lake trip with some of my lifelong friends we made a stop at a miniature golf course. Wagers were made, talent displayed, and improbable shots were in abundance. Despite having doctors, lawyers, entrepreneurs, and...beginner economists in the mix (all seemingly people one would take seriously) there was quite a bit of jubilation and childlike cheer expressed at the successes and failures on the course.

And, when all was said and done, I found that winning at mini-golf is...satisfying. My apologies to the members of the group who were dominated by Michael Garrison.

Shocking?

In Monday's WSJ, Mary Anastasia O'Grady summarized the shortages of coffee resulting from a Chavez led takeover of that sector a few years ago.

A telling part of O'Grady article comes when she labels the shortages of coffee resulting from price controls, regulation, and capital controls as predictable.

Are there truly heads of state that think instituting price controls on a product will ensure affordability and adequate supply to meet demand? I believe they do know this. The economics behind price controls is well-established. Even someone displaying a total lack of interest in basic economic principles as Chavez does must have an advisor paying attention to the potential adverse effects of policy.

O'Grady concludes that Chavez knows that his great socialist experiment (yet another) has failed. But he intends to go down with a miserable flair. I agree.

Motivational Recessions?

My levels of motivation follow a cyclical pattern. Some weeks I cannot wait to get out of bed and begin my day. These weeks are precious and represent the best version myself. When in this mindset I can absorb information and churn out ideas at a frenetic pace. Other weeks, I get out of bed when I have to and do enough work to prevent feeling guilty.

During these slow times I wish for the fast pace times of high motivation but it doesn't seem to translate into action. I've found a useful tool to make these slow times productive. I look at this period as a time of retrenchment, where I look over my vast list of ideas formulated during the 'fast times' and pick the best ones. I then write out strategies and objectives to advance those ideas. Some ideas are put on the backburners, or put out of their misery. But, I know that a period of high motivation is around the corner, and I don't sweat the loss of ideas, they will be replaced.

Unseen Victims of Democrat Policy

A WSJ article today, written by Anne Jolis, presented Paul Kagame, the warlord of Rwanda, who led an army outnumbered two to one and ousted a genocidal leader who had slaughtered 800,000 of his own citizens. During an interview with Jolis, Kagame made is attitude about foreign aid quite clear: they don't want it.

Instead of asking for aid, Kagame boasted of his nation's attainment of self-sufficiency in feeding itself and of their slashing of foreighn aid by half over the past 15 years. Kagame told Jolis that Rwanda's greatest needs were for other countries to stop subsidizing their own agriculture and to get rid of import tariffs.

Domestic agricultural subsidies in the United States lower the price of domestically grown produce while import tariffs make the price of foreign produce imports higher. This combination of policies helps domestic agricultural producers but hurts the citizens of developing countries.

Developing nations have limited options for exporting goods. Often, they lack the technological sophistication to export anything other than what they can grow on their own soil. Their labor is cheap and their land worth little, thus the price of their exported goods should be very low compared to rhe same good produced in a technologically advanced society where labor is expensive and land comes at a premium.

In economics, when one country can produce something at a lower cost (opportunity cost, actually, but thats another lesson) than another country, we say that country has a comparative advantage in producing that product. The US can produce technologically advanced goods at a lower cost than most other countries, but it is relatively expensive for us to produce such things as corn and wheat compared to how cheaply other countries can produce the same good. That is, Rwanda has the comparative advantage over the US in producing cheap agricultural products.

Devoting resources and taxpayer wealth to subsidizing the production of goods we don't have a comparative advantage in is wasteful, inefficient, and damaging to developing economies.

The US should lower it's agricultural subsidies and abolish import tariffs.

First Things First

A recurring criticism of U.S. Foreign policy I often hear from rhe political left is that we often engage in lop-sided transactions, using our political, military, and economic clout to coerce developing and/or weaker nations into accepting unfavorable terms.

There are several problems with this critique, but one suprcedes the others. Why would one criticize a country's leaders for advancing their nation's interest at the expense of others? That is their job.

The world has limited natural resources. Once a border is drawn on a map and two groups made distinct, those groups are in direct competition with each other for those resources. With limited resources, for one group to gain, the other must lose.

Few leaders actively pursue transactions with other countries that hurt their citizens, why should we expect them to?

SEC Actions

The SEC filed charges of fraud against Goldman-Sachs yesterday, which immediately dropped GS shares fueling a 'flight to quality' in the stock market. After the dust cleared the Dow had fallen 100+ points.

The SEC is under enormous political pressure to find evidence of wrongdoing in the financial services sector. The charges filed against GS Are the first of many, I suspect, but will ultimately backfire.

While the SEC and GS battle it out, a massive destruction of wealth is getting little attention. Most unsophisticated investors rely on mutual funds as their primary investing tool. Many mutual funds are well-diversified and have interest in many stocks. As a result, their returns typically mimic the return on the Dow. When the SEC responded to political pressure and filed charges against what many see as the flagship company of our financial services sector, they induced a panicked sell-off, knocking the Dow down and wiping out enormous amounts of wealth. And this, just after the deadline to file taxe returns.

SEC Actions

The SEC filed charges of fraud against Goldman-Sachs yesterday, which immediately dropped GS shares fueling a 'flight to quality' in the stock market. After the dust cleared the Dow had fallen 100+ points.

The SEC is under enormous political pressure to find evidence of wrongdoing in the financial services sector. The charges filed against GS Are the first of many, I suspect, but will ultimately backfire.

While the SEC and GS battle it out, a massive destruction of wealth is getting little attention. Most unsophisticated investors rely on mutual funds as their primary investing tool. Many mutual funds are well-diversified and have interest in many stocks. As a result, their returns typically mimic the return on the Dow. When the SEC responded to political pressure and filed charges against what many see as the flagship company of our financial services sector, they induced a panicked sell-off, knocking the Dow down and wiping out enormous amounts of wealth. And this, just after the deadline to file taxe returns.

Unions and the Destruction of High Culture?

A recent interview on CNBC with Nina Munk, a contributing editor with Vanity Fair, outlined the budgetary problems plaguing the New York Metropolitan Opera.  This interview was fascinating.  Ms. Munk oscillated between bemoaning the loss of high culture if the opera were to close and reprimanding its management for running a horrible, horrible business.

According to the interview, the NYMO brought in around $250 million in revenue, but its costs were nearly double that amount.  Faced with bankruptcy, management is negotiating with various labor unions (hammer users, voice users, electricity conjurers, light manipulators, and others) to cut costs.  As unions are known to do, they will not budge.  

Unions, while starting out as advocates for their constituents, almost always end up mauling the hand, if not destroying it utterly, that feeds them.  If this example does not convince you of the veracity of this claim, then I would point out the following examples: Greece and California.

A recent article in the WSJ outlined the woes felt in Europe at the high levels of youth unemployment. The article asked, is the United States headed in the same direction?

Let's see. The minimum wage increased from $5.55 or so, to $7.50 or so, over the past couple of years. Higher minimum wages increase unemployment among the young. The federal government is increasing taxes on the wealthiest households, which will hit many small business owners and restrict new investment and hiring. The federal government is running up large amounts of debt, and increasing the yields required on two and ten year treasury notes, which will increase the rates at which investors can borrow funds.

Despite the current administration's stated goals to decrease unemployment, so far their actions seem designed to promote long-term high unemployment.

This past Monday, I happily joined the University of Central Oklahoma chapter of Student's In Free Enterprise for their regional championships in Dallas, Texas. Our squad acquitted themselves admirably. They were professional in appearance and manner and took home a trophy for 'Rookie of the Year.' Our SIFE team has already begun generating ideas that will help them win regionals next year and compete at the national level. I look forward to the coming year.

While several experiences in Dallas are noteworthy, one stands out. During the faculty adviser luncheon, a SIFE representative announced changes to the SIFE mission statement/areas of focus for next year's competition. A question and answer session followed, and rather quickly someone noted that the term 'free-enterprise' was stricken from the new format. The representative hemmed and hawed, stating that 'free-enterprise' was redundant with the rest of the phrasing. Quite a bit of scoffing followed her explanation and a professor raised their hand and asked "How many present would like to see the term 'free-enterprise' put back into the mission statement?" All, or almost all, present raised their hands.

SIFE's removal of 'free-enterprise,' to me, represented a little bit of political hedging. I understand. But the faculty adviser response to that removal was rather...cheering.