LETTERS: Spending is not the answer
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One of the pressing concerns of our day is the current financial crises. Many want to know what went wrong and how to make it right. Unfortunately, many are misguided and ill-informed of both: See Mr. Petrzelka’s letter “Hasenmiller wrong on multiple points.” Mr. Hasenmiller was right on one point: Tax cuts for the rich stimulate the economy.
To refute Mr. Hasenmiller, Mr. Petrzelka appeals to a flowery economic term called ‘marginal propensity to save,’ given to us by John Maynard Keynes. One would think Keynes was rejected not by conservatives but by 1970s stagflation. Yet he is alive and well if you look around the economic talk dominating the media and the selection of recent Nobel Laureate, Paul Krugman.
So Mr. Petrzelka’s age-old economic logic is: Poor people are stellar at spending. Rich people have a bad habit of saving money. What is the logical point made here? It is that spending drives the economy; spending is what makes economic progress possible. But is this really logical? Only one question need be asked: How can something be bought that is not first saved?
Once this question is asked and determined to be illogical you will deduce how tax cuts for the rich stimulate the economy.
With more of their money properly returned, “rich people,” i.e., business owners, entrepreneurs, and all of the people who provide society what it wants, have more to invest back into their rich endeavors. This may be acquiring more tools of production, which spurs higher wages for workers, lower prices, and the hiring of more employees. They can also lend money to others so they, too, can begin a business and provide more goods and services.
Savings are the only way to economic progress. Mr. Petrzelka and our monetary masters, the Treasury Secretary and Fed Chairman, believe the way out of our economic debacle is to spend more. If spending solved our economic problems, we would never have any. It is as illogical as someone with massive credit card debt trying to pay his debt with more and more credit cards. Such a conclusion is absurd!
Instead, let me offer Mr. Petrzelka an economic term in return. It is one of substance that explains how the economic crisis began and lends insight into how it can end. It is Austrian business cycle theory.
Theodore Wolff
Alumnus
To refute Mr. Hasenmiller, Mr. Petrzelka appeals to a flowery economic term called ‘marginal propensity to save,’ given to us by John Maynard Keynes. One would think Keynes was rejected not by conservatives but by 1970s stagflation. Yet he is alive and well if you look around the economic talk dominating the media and the selection of recent Nobel Laureate, Paul Krugman.
So Mr. Petrzelka’s age-old economic logic is: Poor people are stellar at spending. Rich people have a bad habit of saving money. What is the logical point made here? It is that spending drives the economy; spending is what makes economic progress possible. But is this really logical? Only one question need be asked: How can something be bought that is not first saved?
Once this question is asked and determined to be illogical you will deduce how tax cuts for the rich stimulate the economy.
With more of their money properly returned, “rich people,” i.e., business owners, entrepreneurs, and all of the people who provide society what it wants, have more to invest back into their rich endeavors. This may be acquiring more tools of production, which spurs higher wages for workers, lower prices, and the hiring of more employees. They can also lend money to others so they, too, can begin a business and provide more goods and services.
Savings are the only way to economic progress. Mr. Petrzelka and our monetary masters, the Treasury Secretary and Fed Chairman, believe the way out of our economic debacle is to spend more. If spending solved our economic problems, we would never have any. It is as illogical as someone with massive credit card debt trying to pay his debt with more and more credit cards. Such a conclusion is absurd!
Instead, let me offer Mr. Petrzelka an economic term in return. It is one of substance that explains how the economic crisis began and lends insight into how it can end. It is Austrian business cycle theory.
Theodore Wolff
Alumnus
Comments
You would think that conservatives would have some hard numbers by now to show that these policies work. Unfortunately, the numbers show the opposite.
Here is one site with some numbers aggregated...
eRiposte Economy - Democrats v. Republicans on the U.S. econ...
The thing is, it doesn't matter which one of the several sites I reference because you can always cry bias. I'll admit that figures don't lie but liars can figure. What's important is that you can't find a site to show the opposite with historic numbers. If it were easily verifiable that Republican policies lead to better economic performance, we would expect to see statistics to support that.
We've seen thirty years of tax cuts for the rich and Reaganomic "trickle-down" policies, but wealth has not been "trickling down;" rather, it is FLOWING up. Real wages have been decreasing (that is, wages are increasing at a rate lower than inflation), and the economic inequity gap is growing exponentially. It's time for an end to the idiotic mantra of "tax cuts for the rich" as the solution to every economic question. Slow market? Tax cuts for the rich will get it going again! Economic upturn and surpluses? Tax cuts for the rich to give that extra money to the people who deserve it! Things are normal? Tax cuts for the rich will make it BETTER!
Enough bullshit.
The Keynesian theory—government inflation of the money supply, massive borrowing and spending by the government, and massive government regulation—is flawed, and causes the artificial economic bubbles to inflate which, inevitably, burst and deflate. Keynesians then try to keep the deflating bubble inflated through more borrowing, spending, inflation, and regulation, which only makes more moral hazards, makes everything worse, and delays the inevitable correction, prolonging the suffering.
Keynesian theory is based on the idea that spending and consuming are the engines of a good economy. This is wrong, as Mr. Wolff points out.
It is savings and production that are the marks of a sound economy. You can’t spend and borrow and not save; you can’t consume more than you produce. Unfortunately, we as a nation borrow and spend and consume while having little to no savings and production to subsidize this behavior; it’s unsustainable. At the same time, our tax system punishes and discourages production, savings, and investment: the very cures to our sickness.
It’s government intervention of the Keynesian stripe that not only caused the crash of 1929, but also prolonged the suffering and caused the Great Depression. Economists of the Austrian School predicted the crash of 1929, and are currently predicting much worse things on the horizon.
Mr. Wolff is right: Americans need a good dose of the Austrian School. Interference by the federal government in the free market is the sickness, not the cure.
numbers?
Ok Brian, I'll agree with you that borrowing massive amounts of money from other countries and spending it like crazy without any repayment plan is thoroughly idiotic. But I think you're forgetting just who did this... Bush and the Republicans, also known as the party of fiscal responsibility and conservatism. Place blame where it's due.
Also, how did regulation get lumped in with all this? Proper regulation of the banking industry could have prevented the current financial disaster. Frankly, I just don't understand how people can possibly think that big businesses have their best interests in mind, and that letting them do whatever they want will result in anything other than disaster.
Eric, it would be helpful if you specified what type of numbers you’re looking for, but in the meantime, I’ll give you this research paper by two UCLA economists, in which they conclude that the policies of FDR (the poster boy of Democratic economics) prolonged the Great Depression by about 7 years:
FDR's policies prolonged Depression by 7 years, UCLA economi...
www.econ.yale.edu/...
And if you’re really so concerned about statistics and objectivity, you should know better than to use that data table you provided as an argument that fiscal conservatism doesn’t work. For a real picture, you’d have to look at the situations that each president faced during each of their terms, along with their policies and their ability to follow through with their promises.
Personally, I’m not a big cheerleader for “trickle down” economics because I think we should focus the most on cutting taxes for ALL income classes and reducing government spending by quite a bit to go along with it. That second part is a much harder goal to achieve politically. To my knowledge, no recent president has succeeded in reducing overall government spending – not even Reagan, and certainly not Bush. I do think that tax cuts for the rich benefit the economy, but it’s questionable to me whether you’ll see any real economic bump from it if you keep spending the nation into oblivion.
From an economic standpoint, Bill Clinton, with his welfare reform, free trade deals, and emphasis on balancing the budget, was much more fiscally conservative than George W. Bush, and I think the economy benefited from that. Even if you leave out the increase in military spending, Bush has increased government spending by more than any other president.
So you should specify whether you’re railing against fiscal conservatism in general or the GOP’s abysmal failure to follow through with its promises, because if it’s the current state of the GOP that you have a problem with, then we have something in common.
Nick,
First of all, I appreciate your comments. They are fair and reasonable.
There is a difference between my numbers and the numbers you are citing. My numbers are actually the metrics that we can (probably) agree matter (GDP, etc...). Your articles are analyzing history and drawing conclusions. The science behind those conclusions may very well be sound, but it is still an interpretation and not raw numbers.
Further, I don't doubt that Democrat presidents have screwed things up from time to time. I can find times when Republicans have made mistakes as well. I also understand that individual presidents have special circumstances. My point was based on averages. On average, the Democrats have seen a 5% gain in GDP while the Republicans have seen a 1% gain (I've seen stats for past 50 years or past 100 but the story is the same). Even if you take time lag into account, the numbers are very similar. That is a profound difference. It is hard for a rational man to look at those numbers and put his money on the Republicans. To me it's interesting that even rich people benefit from a 5% gain in GDP. It shows that maybe helping the poor isn't really so bad after all. If my post tax income is higher, I don't care if it's because I paid less tax or because the economy is better.
I agree that we should be able to cut taxes for all tax brackets. Where we likely differ is in where we think the cuts should be. I don't think the Pentagon needs 50% of the budget, for example. However, as part of my obsession with numbers, I have noticed that countries with social programs have better numbers than we do (life expectancy, infant mortality, education, etc...). I believe that it is OK for the government to run social programs when they are likely to help those numbers, though admittedly that is prediction and not always raw numbers. Unfortunately those things are paid for with taxes.
In summary, I guess I'm railing against the GOP's failures. However, with my data going back 100 years, it is unlikely that fiscal conservatism will perform much better.
Nick,
First of all, I appreciate your comments. They are fair and reasonable.
There is a difference between my numbers and the numbers you are citing. My numbers are actually the metrics that we can (probably) agree matter (GDP, etc...). Your articles are analyzing history and drawing conclusions. The science behind those conclusions may very well be sound, but it is still an interpretation and not raw numbers.
Further, I don't doubt that Democrat presidents have screwed things up from time to time. I can find times when Republicans have made mistakes as well. I also understand that individual presidents have special circumstances. My point was based on averages. On average, the Democrats have seen a 5% gain in GDP while the Republicans have seen a 1% gain (I've seen stats for past 50 years or past 100 but the story is the same). Even if you take time lag into account, the numbers are very similar. That is a profound difference. It is hard for a rational man to look at those numbers and put his money on the Republicans. To me it's interesting that even rich people benefit from a 5% gain in GDP. It shows that maybe helping the poor isn't really so bad after all. If my post tax income is higher, I don't care if it's because I paid less tax or because the economy is better.
I agree that we should be able to cut taxes for all tax brackets. Where we likely differ is in where we think the cuts should be. I don't think the Pentagon needs 50% of the budget, for example. However, as part of my obsession with numbers, I have noticed that countries with social programs have better numbers than we do (life expectancy, infant mortality, education, etc...). I believe that it is OK for the government to run social programs when they are likely to help those numbers, though admittedly that is prediction and not always raw numbers. Unfortunately those things are paid for with taxes.
In summary, I guess I'm railing against the GOP's failures. However, with my data going back 100 years, it is unlikely that fiscal conservatism will perform much better.
You are absolutely right about the Bush brand of conservatism: it isn’t conservative or fiscally responsible at all.
As far as regulating banks, consider the unintended moral hazards created by something like the FDIC:
The whole purpose of a bank is to provide a place for depositors to keep their money safe. Now imagine a world without the FDIC. It is now in your best interest to shop around and find a bank that is fiscally responsible and has sound business practices so that you know your money will be safe. It’s also in the best interest of banks to be fiscally responsible and have sound business practices in order to attract depositors. Here, there is risk and fear that enforces sound business practices and discipline.
But when you put the FDIC into the equation, suddenly there is no sense of risk or fear. People don’t care what bank they do business with because they know there’s a government safety net to insure their money. And banks no longer care what kinds of risky business practices they can and cannot engage in because they know the depositors’ money is insured by the government. And that’s exactly what banks do—engage in risky behavior that, in a world without the FDIC, they would not have normally done.
It is these government safety nets (though put in place with good intentions in mind) that makes the illusion that there is no risk. This is usually what happens with regulations: unintended consequences that equal a net loss for everyone over the long term. You’re right in that businesses don’t always have our best interests in mind. But if you do not erect safety nets, and do not subsidize and entrench irresponsibility with government bailouts, businesses will be put in check by the fear and risk of a truly free market.
Besides, not only are most regulations unwise policies, the federal government isn’t authorized by the Constitution to create them anyway.
Brian, How much do you know about your bank? How much can you know? Can you ever know enough to be sure that they won't engage in something like predatory lending? Millions of people trusted firms like Washington Mutual and AIG, everyone said that their investments were top notch and totally safe, how could they have known what was really going on behind the scenes?
In a perfect world, banks would always operate with legitimate and sound business practices, In order to avoid the kind of financial ruin we've seen recently. But you're forgetting that banks are run by people, and some people are willing to put personal gain ahead of their company's and the people's wellbeing.
The FDIC was created to maintain investor confidence, and prevent the kind of mass run on banks that caused the Great Depression. If it wasn't for the FDIC, we would all likely be standing in a bread line right now. Are you willing to lose your home for the sake of the free market?
As for your last claim, let me just say this: What is any law but regulation?
Also note that without regulations, there would be no requirement for a bank not to fabricate financial statements.
Less than 2.5% of bank deposits were actually lost during the bank runs. Nowadays, we as a nation probably lose more value to inflation each year than the value of all the deposits lost during the crash.
Sure, I agree, some regulations are good and desirable. But these regulations can be done at the state level.
The powers of Congress are carefully described in Article I, Section 8 of the Constitution, which doesn’t list any power to create the FDIC or even a national bank.
Nowadays we might find that things are so interconnected that the damage could spread much quicker than it did back then.
I generally do prefer that the states handle things that are appropriate but I can understand benefits of having banking regulated federally. For one thing, since banks are very interconnected these days, it could probably fall under interstate commerce. I don't have firm opinions on this specific topic, but I'm just saying some regulation is reasonable.
Eric Marsh, the chart you cite that claims Democrat presidents were better for the economy than Republican presidents for the back half of the 20th century is fallacious nonsense. The fatal flaw in this argument is that it mistakes correlation for causation.
The US economy did spectacularly well after WWII because the industrial bases of our economic rivals had been destroyed. We had a near monopoly on most industrial markets. This continued through the 1970s when the developed nations caught up. It doesn't matter what president was elected in this time frame, as you falsely claim. Any president from any party would have held an enormous economic advantage as a legacy of the world war.
Likewise, the 1990s were a boom time because of the twin inventions of the PC and Internet, fathering whole industries. These inventions had nothing to do with the party of the president. So, about 35 of the 50 years of the back half of the 20th century were economically good because of factors of which the presidents had no control nor input. You claim, in the classic manner of liberal fabulists, that these boom times were due to the Democrat presidents who served. It's pure nonsense.
It absolutely is correlation and not causation. It is still evidence against any claim that Republicans have done anything good for the country. When you are in charge and the economy always seems to stink, it's hard to argue that you are the party who will fix the economy.
Eric Marsh,
If you want to properly rebut my argument, you need to argue that it is causation rather than mere correlation. Correlation does not mean causation is something a sophomore should have learned. You still persist in the error that the only variable that affects the economy is the president. That is self-evidently false to everyone. As arguments against your bogus notion, Republicans Eisenhower and Reagan presided over healthy, booming economies while Carter the Democrat did not. Likewise, both Bushes presided over healthy economies.
I don't think you know what a bad economy looks like. If you think the economy under Bush was bad, then you have been living a very sheltered life. Go ask some of the foreign students what a bad economy looks like.
So it's sheer coincidence that every time a Republican is in office the economy goes to crap?
I've given the examples of Reagan and Eisenhower, Republican presidents who presided over healthy economies. You are ignoring them to shout your wrongheaded assertion again and again, apparently in the belief that if you repeat a wrong thing often enough, it will become true. And there is the sad example of Jimmy Carter and his stagflation. Carter's sick economy proves your thesis wrong and simple-minded.
It's also worth noting that you avoid addressing my point about external factors being more responsible for the strength of the economy than the party of the president. Why the avoidance? Could it be that your simple-minded partisan argument is rather obviously wrong?
Actually, Gregg, pointing out specific instances (Reagan, Eisenhower, Carter) ignores the general trend, so it doesn't do much against his point. You're right about being too hasty to draw conclusions from the party in the White House, though. I can only hope you remember that the next time Hasenmiller starts screaming crazy doomsaying predictions about Obama running the economy into the ground - but something tells me you won't.
I realize it's been a while since this was brought up, but I must correct Nick's blatant abuse of that study about New Deal policies. The article kinda sucks, but if you read it closely (or find a clearer article) you'll see that the research did NOT implicate the New Deal in general, NOR did it implicate redistributive policies in general. It focused on ONE specific policy: a strange one that allowed corporations to get monopolies if they dramatically overinflated wages. So, I think we can agree that that particular policy was, in hindsight, idiotic and we shouldn't try that again. But you cannot use that article to criticize the New Deal as a whole or modern liberal economics; neither is based around granting monopolies to high-wage corporations.
Actually, Rundle, when Eric Marsh makes an absolute statement that the economy is always sour under Republicans and sweet under Democrats, pointing out exceptions does indeed prove that assertion false. There have been six Republican presidents since WWII of which we have had a good economy under four of them. That proves this assertion to be more of the typical liberal propaganda.
Let me go through this again: Most presidents have little control over the economy. It's bigger than the presidency. There are a lot of things presidents can do to make things worse, but there are not many things they can do to make things better other than to get out of the way of the market. The only president who has really done anything to change the economy was Reagan, when he spent a painful year at the beginning of his presidency killing inflation through monetary policy.
I don't have to wait for Hasenmiller to predict Obama running the economy into the ground when I can do it myself right now: Raising taxes in a recession is a recipe for catastrophe. Such a policy illustrates Obama's painful economic illiteracy. Furthermore, Obama's plan to redistribute the wealth is simply a war on capitalism, the system which made this country rich. Economically, it's as if Obama is advocating giving up modern medicine in favor of applying leeches to people to cure illness.
His snide comment may have said that, but not his actual argument... see the post of his that starts with "Nick, First of all, I appreciate your comments. They are fair and reasonable..." Again, though, I agree that most presidents aren't really responsible for the course of the economy during their terms.
That said, your exception is garbage. W kowtowed to the private sector at every turn; deregulation was a hallmark of his presidency. And it led directly to the current depression. Market fundamentalism is a fundamentally flawed ideology. It doesn't do any actual good for the economy, aside from allowing for temporary booms that quickly collapse. That is what an underregulated economy does.
Naturally, you choose to ignore the one president who undeniably exerted the greatest influence over our economy: FDR. His policies (in general; obviously not the oddball mentioned earlier) lifted us out of the Great Depression. Let's take a look at the tax rates of this era, shall we? During WWI, the top income tax rate was 77%. After the war, it was dropped down to 25%. That should have led to a great expansion if you are correct - but you are not. It led to an unstable expansion that inevitably collapsed into the Great Depression. (Note: I absolutely do not mean to imply that the Great Depression was caused by low taxes on the rich. But lowering taxes on the rich doesn't prevent recession as you claim) Throughout the Depression, tax rates on the rich were RAISED, significantly - they had reached 75% again by 1939, the end of it. Far from being catastrophic, it was these hikes that allowed FDR to fund the policies that ended the Depression. You may scorn Keynesian policy all you like, but history is firmly against you. History has proven you very wrong.
"There have been six Republican presidents since WWII of which we have had a good economy under four of them."
Steve says this but he won't post a graph of GDP or unemployment or any numerical evidence.
"That said, your exception is garbage. W kowtowed to the private sector at every turn; deregulation was a hallmark of his presidency. And it led directly to the current depression. Market fundamentalism is a fundamentally flawed ideology. It doesn't do any actual good for the economy, aside from allowing for temporary booms that quickly collapse. That is what an underregulated economy does."
Will, how did Bush deregulate the economy?
You're kidding, right?
God, where do I even start with something like this? Well. Here are some very concrete examples: Zibb.com - Strictly Business
That article focuses solely on events leading up to the current financial crisis, which really only scratches the surface, but it really demonstrates the Bush administrations attitude toward regulation in general. Some key quotes from that:
"Bush administration objected to a proposal to have an independent regulator of Fannie Mae and Freddie Mac be an independent unit of Treasury, much like financial regulators housed in the agency that oversee banks and thrifts. The Bush administration also objected to a proposal to have the Department of Housing and Urban Development have oversight over the companies' business activities."
"House of Representatives passed regulation reforming the GSE's. The bill passed the House 331-90 (Republicans: 209-15; Democrats: 122-74), and would have given the new regulator broad authority over setting capital requirements and limiting portfolio size. Senate Democrats picked that bill up and offered it, but the Administration opposed that legislation. According to Mr. Oxley, the White House gave Congress and the GSE reform legislation 'a one-finger salute.'"
Etc. Again, this is a really narrow glimpse of Bush deregulation - it doesn't even begin to look at how he's gutted emissions regulations and the like - but it's most relevant to the topic at hand.
So you don't think the GSE's had enough oversight? Neither do I. The problem is, that isn't even a very good example of private industry. Fannie Mae and Freddie Mac are de facto government agencies with lifelines of taxpayer money that allow them to take risks that would sink a truly private firm (provided that the government doesn't bail that incompetent firm out, which is a big IF these days). They contributed greatly to the mess that we're in, and they probably shouldn't even exist in the first place. They are a shining example of GOVERNMENT incompetence more than anything else.
Besides, you said that Bush is a DE-regulator. That implies that he eliminated a bunch of regulation that existed beforehand. That article faults him for not imposing enough NEW regulation, and if the laws should have been there in the first place, then they're implicating Clinton as well. So if Bush really is such a massive deregulator, then what exactly did he deregulate?
God, you're a picky one. Technicalities are not actually useful here; as one NYT columnist put it, "The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated." Bush may not have presided over much ACTIVE deregulation, as you point out. Does that mean regulation has gone unchanged under his administration? Hardly. He has opposed all efforts to modernize regulations to keep them up-to-date in our rapidly evolving financial climate, as my last examples showed, and he has made every attempt to limit enforcement of what regulations are in place. Both of these have the same net effect as removing regulations; the two differ only in name.
To provide some support for my new assertion about enforcement there:
The SEC is the most relevant governmental regulatory agency to the current crisis. In 2002, in the wake of the Enron scandal, Bush sought to distance himself from Ken Lay, and appointed Donaldson as SEC chairman.( WebCPA - Bush Appoints Wall Streeter Donaldson SEC Chairman ) However, it quickly became apparent that Donaldson was not only looking tough on corporate crime but actually doing his job of regulating finance well. He had to go. In 2005, he was replaced with Christopher Cox. Here's a brief description of him from a 2005 article:
"A conservative critic of aggressive market regulation, Cox seems likely to undo Donaldson's reforms even as still-fragile financial markets struggle with the debt overhang, rising interest rates, a possible housing bubble, and the growing U.S. dependence on foreign capital. The gutting of the SEC certainly would make Wall Street insiders happy, but how can the White House be so reckless about something so critical?" - Cox's SEC: Investors Beware
Now Cox is taking flak for exactly those policies of "gutting" SEC oversight. SEC's Cox Catches Blame for Financial Crisis
If you still don't think that Bush's policies of opposing regulation at every turn and allowing the financial system to spiral out of control qualify as deregulation, fine. I'll drop the qualifier "Bush;" you're right that it's not entirely correct to pin the blame on him and it's not the important part of my argument. "Bush" is not the important part; what is important is that the past ten years have seen nothing but deregulation (and anti-regulation if you want to get pedantic). You cannot deny that. The last two years of the Clinton administration saw the passage of the Gramm-Leach-Bliley Act, a repeal of myriad banking regulations, and the Commodity Futures Modernization Act, a rider to the budget which opened up the Enron Loophole and deregulated credit default swaps, a major contributor to the current crisis.
As a matter of fact, I'd like to thank you for honing my focus. This was not meant to be an attack on Republicans specifically nor a defense of Democrats (they helped pass Gramm-Leach-Bliley and Clinton signed it). Rather, this is an attack on the ideology of market fundamentalism, on the free-marketeers who believe that the solution to everything is to reduce government regulation. They exist on both sides of the aisle and it is their naively oversimplified philosophy that has let our economy veer wildly off-course.
Now will you please address the real argument?!