Libertarian Party blog: ‘The skeptics’

Posted at LP.org by Andrew Davis:

Not everybody is pumped about Obama’s $825 billion stimulus plans, especially the part that includes billions of taxpayer dollars being spent by the government in the hopes of jump-starting the economy.  Here’s what we’ve said about it:

But don’t just take our word for it: There is a growing number of economists speaking out against the logic behind Obama’s stimulus package.  Harvard economics professor Greg Mankiw (who’ve we’ve mentioned on here a few times before) has been recording these economists’ statements against the stimulus plan.  This is some of what Mankiw has compiled:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Perhaps their [Romer and Bernstein’s] estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive. For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.

  • Kevin Hassett, American Enterprise Institute director of economic-policy studies

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

Hard to do. It’s not easy to spend large amounts of new money quickly. Harder still to do it in a way that creates good value for society and doesn’t bring out the worst in our politicians. (I can hear Jon Stewart on the Daily Show: "Where’s Ted Stevens when we need him?")

Bad timing. Right now, most forecasts call for continued shrinkage in the first half of 2009, modest growth in the second half, when the stimulus starts to come online, and faster growth in 2010, when spending hits high gear. This is, of course, the classic argument against countercyclical fiscal policy: it’s hard to get the timing right.

Small multiplier. Let us say that for every dollar of extra government spending, GDP goes up m dollars, where "m" is the multiplier. Undergraduate textbooks, including your favorite, sometimes suggest m is large. The evidence is fuzzy, to be sure, but to me it suggests a multiplier around one, maybe smaller. Even stimulus cheerleader Paul Krugman only claims 1.1. If that’s the case, the impact of government spending (say 700b over two years) is barely enough to reverse the decline in GDP we expect to see over the next two quarters.

Long-term budget issues. I don’t spend much time in Washington, but I thought the mainstream view among government economists was that our retirement and health-care programs were likely to bust the budget over the next 2-3 decades. Recent directors of the CBO under both Republican and Democratic Congresses have made this point, and I hope I wasn’t the only one listening. The US is not Argentina, but it still seems a little incongruous to advocate massive increases in spending when the long-term problem is paying for spending already on the
books.

It’s the financial system, stupid. Japan in the 1990s is a Rorshach test for macroeconomists, so I can’t claim everyone sees this as I do. But my take (borrowed from Anil Kashyap) is that Japan demonstrated that the real issue in financial crises is the financial system. If we don’t fix it, no amount of fiscal stimulus will make much difference. That’s one of the reasons I’m optimistic about the US right now: unlike Japan, we faced our problems, ugly as they were, and have acted decisively to correct them.

The bottom line is this: we are being asked to believe that a big, trillion or even multi-trillion fiscal stimulus can boost the current macroeconomy.  If you look at history, there isn’t good reason to believe that.  Any single example, such as the Nazis, can be knocked down for lack of relevance or lack of correspondence to current conditions.  Fair enough.  But the burden of proof isn’t on the skeptics.  It’s up to the advocates of the trillion dollar expenditure to come up with the convincing examples of a fiscal-led recovery.  Right now we’re mostly at "It wasn’t really tried."  And then a mental retreat back into the notion that surely good public sector project opportunities are out there.

So what you have is the possibility of faith — or lack thereof — that our government will spend this money well.

GOP House Leader John Boehner has also put a list together, which you can read here.

Unfortunately, economics is not a highly-pressed study in our schools, at both the high school and collegiate levels.  While students may be forced into workshops and classes about diversity training, far too few students leave college with a good understanding of even the most basic economic principles.  As such, it’s easy for politicians to put together great-sounding proposals that make little economic sense, as we believe the case to be with Obama’s stimulus package.

It’s nice to think that government can easily spend its way out of a recession.  Government (both Republicans and Democrats) has no problem dropping a couple of billion here and there, and this will be made much easier with the moral imperative of economic recovery.  And, it seems so simple: Government spends money and the GDP increases! How come we don’t do this all the time?

Answer: because it doesn’t work.  As Cowen pointed out in the quotation above, there is little (if any) historical evidence suggesting that this type of Keynesian spending actually works.  It didn’t work for Argentina, Zimbabwe and most notably, Japan.  It didn’t work for Hoover.  It didn’t work for Roosevelt.  It didn’t work for Ford either. What suddenly has changed to think that it may work for Obama?

We’ve said it over and over again: Obama’s stimulus plan is a sham that will cost taxpayers near a trillion dollars with no tangible economic benefit.

Our solution?

Cut taxes, permanently.  Reduce spending, drastically.  And, over all, keep government from micromanaging the economy.

Editor’s Note: Many readers of this blog may be out of a college, and therefore not registered for a semester of Econ 101; however, it is never too late to begin brushing up on your economics.  The Age of the Internet has made this terrifically easy, as that many economics professors now run their own blogs.  Mankiw, for example, has an excellent blog on economics that is easy to understand, frequently updated and usually has great insight into current political topics of an economic persuasian.  Here is a list I’ve found of other great economics blogs for your reading pleasure.

[end of LP.org blog entry by Davis]

Posted to IPR by Paulie

16 thoughts on “Libertarian Party blog: ‘The skeptics’

  1. VirtualGalt

    Does the LP have a short term policy proposal? People want “something” done… and yes I sort of agree with the statement that doing stuff only pushes off the final day of reckoning making it worse.

    I’m not saying I have an answer, or even that there is one.

  2. paulie cannoli Post author

    Does the LP have a short term policy proposal? People want “something” done… and yes I sort of agree with the statement that doing stuff only pushes off the final day of reckoning making it worse.

    I fully agree with the statement that doing stuff only pushes off the final day of reckoning making it worse. Yes, people want something done, much in the same way that my brain cells want something done when I go through withdrawals.

  3. VirtualGalt

    So we just oppose the Obama plan, and leave it at that? Shouldn’t we have an alternate scenario? i.e., we say do nothing, the likely short term impact is ______, and longer term is _____?

  4. paulie cannoli Post author

    Alternate scenario: the faster we allow unhealthy aspects of the economy to collapse, the sooner they can start to recover and the less they take down with them.

    The more we bail them out to forestall the inevitable, the worse we are setting ourselves up.

  5. steamer

    All of these arguments may be in for the biggest surprise…If the foreign investors quit buying into our system we have no other choice but for the government to print unbacked dollars and that is not going to be pretty.

    \From the International Herald Tribune the other day 1/8/2009

    What is clear is that the effect of the global downturn on China’s finances has been drastic. As recently as 2007, tax revenue soared 32 percent, as factories across China ran flat out. But by November, government revenue had actually dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn Monday that 2009 would be “a difficult fiscal year.”

    A senior central bank official mentioned last month that China’s $1.9 trillion in foreign exchange reserves had actually begun to shrink. The reserves – mainly bonds issued by the U.S. Treasury and by Fannie Mae and Freddie Mac, the mortgage finance companies – had been rising quickly ever since the Asian financial crisis in 1998.

    The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars and a weaker euro means that euro-denominated assets in those reserves are worth less in dollars, decreasing the total value of the reserves.

    But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appears to reflect much broader shifts.

    China manages its reserves with considerable secrecy, but economists believe about 70 percent is in dollar-denominated assets and most of the rest in euros. The country has bankrolled its huge reserves by effectively requiring its entire banking sector, which is state-controlled, to hand nearly one-fifth of its deposits over to the central bank. The central bank, in turn, has used the money to buy foreign bonds.

  6. paulie cannoli Post author

    If the foreign investors quit buying into our system we have no other choice but for the government to print unbacked dollars and that is not going to be pretty.

    No other choice? There’s no way to back the currency with gold and silver or better yet privatize it completely?

  7. Momintn

    There is no inevitable. In order to avoid a recession, consumers must have purchasing power and prices must stabilize so that companies can figure out how to profit. The volatility of the markets and the bubbles traders have created have reaked havoc on our economy. Too much depends on Wall St and when their greed trumped wisdom the government had to step in to save our economy. New regulations and managers committed to transparency and security are what we need to avoid this again.
    If you think there is a generally accepted economic theory then you might want to preview this list:
    http://cepa.newschool.edu/het/thought.htm
    Finance theory (at the bottom) even with its short history and rejection by many, seems to point to some interesting explanations for what we still hear from the trading pundits even as we watch the random swings of the markets.
    http://cepa.newschool.edu/het/schools/finance.htm
    The efficient markets hypothesis “rests on “information” and “beliefs”, and thus does not, at least in principle, rule out the possibility of speculative bubbles based on rumor, wrong information and the “madness of crowds”. “

  8. paulie cannoli Post author

    Government can’t create something out of nothing. The recession is already happening. The more the government bails out failed industries and speculators, the more they will continue to misallocate resources, and the more other people will join in and spend money foolishly while demanding bailouts. Sooner or later – probably sooner – the FRN will collapse. Who’s going to bail that out?

  9. Prospective Advertiser

    There are many ways to privatise currency. In most places where people have experienced a dramatic economic collapse, all sorts of things became valid current money. After WW2, cigarettes and chocolate bars were money in parts of Europe. At the most recent collapse circa 2001-2002 in Argentina, warehouse receipts for wheat were circulated as money.

    Of course, free market money can be anonymous, or even anonymous digital bearer instruments for value. It is possible to entirely eliminate account based systems. The double spend problem has been solved in several clever ways.

    Governments and socialists really hate this idea, because it reduces their ability to control. It also makes it very hard for them to print money without creating something of value, or at least taking possession of something of value. And that’s a problem because, well, governments and socialists don’t create anything of value.

    The worst part of it for socialists is that you have to finance foreign wars with printed money. And if they can’t print lots of money and force the military to accept it, then use the guns of the military to force shopkeepers to accept it, then they cannot have a good foreign war. And everyone knows that war is the health of the state and the joy of every statist.

  10. MG

    Various form of private currency are legal and growing in the US.

    AP recently had a profile, ‘Going Green: Communities Make Their Own Currencies’ on one part of the trend.

  11. Joe Striner

    Businessweek, not your typical Liertarian rag, has called these companies who are supposed to die but are bailed out instead, Zombie companies. We need to get rid pf or restructure those (GM, etc) as soon as possible.

    The only way to recovery is to allow these firms to die.

    If the government wants to do its job – the only thin g that it should do is to make sure that the biggest impact is on people who actually benefitted from this bubble – and not the innocent bystander.

  12. Thomas L. Knapp

    Want “something done?” No problem.

    1: You know how the US government “shuts down” everything except “essential services” when there’s a budget impasse? Do that without one. If it isn’t “essential,” then why the hell are they doing it in the first place?

    2. I seem to recall that both John McCain and Hillary Clinton suggested a holiday on the federal gasoline tax last year. They weren’t thinking big enough: Make 2009 a “jubilee year” for federal income taxes. No withholding, no collections, no filing of 2009 returns in April of 2010.

  13. Robert Capozzi

    Tom, rather than income taxes, some as wide ranging as James Galbreath and Neil Boortz are calling for a SS tax holiday. I’d start there, too, as it’s more inclusive.

    And, yes, skinnying government down to the “essentials” seems indicated. Of course, when they say “essentials,” they mean “essential that someone be on-the-job on a daily basis.” While I’d love to abolish, say, the Department of Commerce, their (dysfunctional) work is more institutional than, say, the Coast Guard.

  14. Michael H. Wilson

    Robert I had heard about the SS tax idea also. Got anymore info on it? From what I gather it would put dollar in the pockets of everyone, but especially the lower income workers would benefit and those dollar may actually get spent locally. Anyone heard any more?

    The LP should be on top of this idea.

    MHW

  15. Prospective Advertiser

    MG says, “Various form of private currency are legal and growing in the US.”

    Sadly, no. Both the Liberty Dollar confiscation in September 2007 and the e-gold confiscation in April 2007 have effectively destroyed the free market money industry in the USA. Most companies, such as GoldAge, that have tried to provide exchange services in the USA have also been maliciously prosecuted.

    It is simply false to say that there are lots of legal alternative currencies. The government still hasn’t charged anyone in the Liberty Dollar case with a crime, because the government is run by evil scum. Nevertheless, the judge in that case keeps postponing any hearing on whether the confiscated gold, silver, platinum, and copper may be returned to its owners, because the government is run by evil scum.

  16. Frances Stark

    Dear Libertarian enthuiast,

    I’d like to invite you to listen to the Bob Zadek Show on Talk 910 KNEW (http://www.910knew.com/main.html) every Sunday at noon (3pm EST). Bob’s show is new to the Bay Area and he stands out as the only Libertarian talk show host in the region.

    This Sunday (12/1) Bob Zadek plans to talk to Health Care Futurist Joe Flower about the state of health care in America.

    Here’s a link to Joe’s website for more info. http://www.imaginewhatif.com/

    Bob will offer the audience a comprehensive overview of the Libertarian solution to healthcare in America while debating Joe Flower on the need for government controlled healthcare in this day and age.

    Please let me know if you are interested in covering the topic for your blog.

    Feel free to contact me with any questions you may have.

    All the best,

    Frances Stark
    Producer
    The Bob Zadek Show
    Talk 910 KNEW
    http://www.910knew.com

Leave a Reply

Your email address will not be published. Required fields are marked *