City Journal Spring 2014

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Spring 2014
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Guy Sorman
No More Quick Fixes « Back to Story

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Mr. Sorman,

Just wondering what you think of this: Smoot-Hawley & the Economic Contraction of the Great Depression

http://constitutionalley.us/article-links/smoot-hawley-the-economic-contraction-of-the-great-depression/
Why do I picture a quack doctor (gov't) putting a band-aide (rules) on a broken, infected arm (the current economic system)?
The western governments may learn good lessons from the Chinese economic policies, but they are too arrogant to do that. In China, gambling and many such investments that just create financial bubbles are made illegal by the government. More Chinese investors are interested in easy, quick returns and highly speculative investments, than their western counterparts, but the Chinese government has put in place regulations that discourage such investments. Instead the Chinese government is creating incentives for luring investment in manufacturing especially in the rural areas where investors can take advantage of cheap labour due to lower cost of living. The market forces have played its predictive role. On the one hand, Chinese investors and some other investors from other Asian countries are attracted to the west where they are able to freely engage in speculative investments that led to the collapse of the financial industry in the west. On the other hand, western investors investors are attracted to the Chinese market to invest in manufacturing. Investment in manufacturing creates much more jobs and real economic growth and less financial bubble, speculative investment in the financial sector, on the other hand, create less jobs and more financial bubble. As a rule bubbles often expand quickly and burst quickly and that was what happened when the financial bubble burst in 2008. We should be expecting a repeat collapse unless the west is able to swallow its pride and take a lesson or two from the Chinese and learn to regulate the market. Any pretence that the market will regulate itself is merely an excuse for the strong to freely rub and exploit the weak. With proper regulation in place, investors are more confident to invest because they are able to make easy planning and forecast. Investors in the speculative financial market, on the other hand, depend more on the absence of regulation to be able to speculate. You can't have it both ways.
RULES?! Obama don't need no stinkin' rules! He just makes it up as he goes: whatever is good for BO, is good for America. That's the Obama Doctrine!
The political system is more than oligarchic, it is a ruling class duopoly. Perhaps taking an axe to its total share of the economy would tame it.

BUT. Let's talk about the share, and also lets provide explicitly in some way for what we expect to happen with entitlement and national security commitments, spending, and taxes raised to pay for such.

Some rules (say on reapportionment or non-partisan primaries) mostly change how the game is played. THIS proposal were the cap low enough compared to present commitments would mandate the outcome, a step I doubt many want to take blind.
This is not correct. What we need is to look at the business income statement. When we do, we will see that before income tax regulation has destroyed the profitability of business.
Want to grow the economy...
1. Make the Bush tax cuts permanent.
2. Reduce federal spending by 10% per year until the budget is in primary balance...
3. Reinstate Glass Stengel and get rid of Frank Dodd.
4. Get banks out of the investment business.
5. Reduce regulations on business.
6. Lower the corporate tax rate to make the US competitive for investment.
7. Increase domestic energy production to lower energy costs.
8. Throw out Obama Care and deregulate the health care and insurance industries.
That will lower costs.
The solutions are simple. Our politicians are bought off and paid for by special interests that do not have the best interest of the country in mind.
I pretty much agree with this article with the exception that I think recovery can happen fairly quickly by congress making the necessary corrections. They basically should start to undo all of what Obama did. Enact functional, safe, fair and sensible regulation. Lower corporate taxes and cut foolish spending.

Voters in both parties need to vote out liars.
In the long-run, the long-term unemployed are dead.

You are arrogant to think that you can come up with "set" rules that will make the long-term better, while at the same time ignoring the intermediate-term dislocations
Sorry - didn't see Stephen Cohen's post before i posted mine. Obviously, i agree with him! :)
Here's the problem with Keynesianism: We're only 'Half-Keynseian'. In my lifetime, there have been 5 balanced Federal Budgets. In my reading of Keynes, he in NO WAY advocated for deficit spending over a very long term, in any and all circumstances. Essentially, he argued for balancing budgets over a much longer period - say 10 years. If we actually ran the large surpluses when 'times were good' that we should have, we wouldn't be in trouble today. The problem is that Politicians know that they can easily buy votes - and they do it every day.
Wrong.
There are approximately 20 million business in America that employee less then 50 people. Offer them a 3 year haitus from federal regulations in return for hiring 1 more employee and keeping them for 3 years.
That would put about 15 million people back to work and buy time to examine which rules and regulations are needed.
A constitutional ammendment has to be enforceable and easily measured. For that reason, I favor forbidding any spending increase if last year the Federal Government had a deficit. There would be an across the board sequestration to the appropriated amounts so that the total spending could not rise. It would end the "goodies today, pay tomorrow" methods that bias government towards ever increasing spending. It would also end the "I'm giving you something for free" sales pitch politicians repeatedly sell to voters. Everybody would know increased spending would imediately mean increased taxes. Spending would become a lot less popular.
Well, there is and it's called a REAL Energy Policy. America has the largest proven energy reserves in the world and yet we're only utilizing 4% of them.
These are high paying energy producing jobs that should make us the largest energy provider in the world.
Fundamental problem is the arrogance of gov't wonderlings who believe they can out-think and manipulate the market into prosperity. As has been proven again and again, they can't and the more they try the more havoc they create.

Quick fixes are not that hard: drill-here, drill-now, build the Keystone pipeline, repeal and replace OweBamaCare, get the EPA under control. Ditch the anti-business, anti-energy job-destroyer in the White House. Recovery will begin 30 seconds after he gives his concession speech.

"Explosion of inflation!" Total balderdash!
Your false claim invalidates the credibility of everything you say.
With Europe's shrinking and aging population it is almost impossible for them to "Grow" out of their problems. Centralization and Federalization will simple bring even the countries with decent economies to ruin. Jump starting capitalism would definitely help, but the entitlements have to be reduced are the crash will be spectacularly bad.
The following is a narrative taken from a 2008 Sunday morning televised "Meet The Press." From Sunday's 07 Sept. 2008, 11:48:04 EST, Televised "Meet the Press" the then Senator Obama was asked about his stance on the American Flag. General Bill Ginn, USAF (ret.), asked Obama to explain WHY he doesn't follow protocol when the National Anthem is played. The General stated to Obama that according to the United States Code, Title 36, Chapter 10, Sec. 171... During rendition of the national anthem, when the flag is displayed, all present (except those in uniform) are expected to stand at attention, facing the flag, with the right hand over the heart. Or, at the very least, "Stand and Face It". 'Senator' Obama replied: "As I've said about the flag pin, I don't want to be perceived as taking sides....." "There are a lot of people in the world to whom the American flag is a symbol of oppression...." "The anthem itself conveys a war-like message. You know, the bombs bursting in air, and all that sort of thing." Obama continued, "The National Anthem should be 'swapped' for something less parochial and less bellicose. I like the song 'I'd Like To Teach the World To Sing.' If that were our anthem, then I might salute it. In my opinion, we should consider reinventing our National Anthem as well as 'redesign' our Flag to better offer our enemies hope and love. It's my intention, if elected, to disarm America to the level of acceptance to our Middle East brethren. If we, as a Nation of warring people, conduct ourselves like the nations of Islam, where peace prevails - - - perhaps a state or period of mutual accord could exist between our governments ......""When I become President, I will seek a pact of agreement to end hostilities between those who have been at war or in a state of enmity, and a freedom from disquieting oppressive thoughts. We as a Nation, have placed upon the nations of Islam, an unfair injustice, which is why my wife disrespects the flag, and she and I have attended several flag burning ceremonies in the past." "Of course now, I have found myself about to become the President of the United States and I have put my hatred aside. I will use my power to bring CHANGE to this Nation, and offer the people a new path. My wife and I look forward to becoming our Country's First black Family. Indeed, CHANGE is about to overwhelm the United States of America."
It is true that monetary policy should be rule-based rather than discretionary. However, the correct rule is stable nominal GDP growth, not stable money growth. This is because the V in the quantity theory (velocity) is very volatile. The monetary authority needs to do more than target inputs (QE), it must also target outputs (nominal growth). To the extent that monetary policy is incompetent (see: BoJ, FRB, ECB), "government" will intervene with a list of growth-destroying nostrums and fiscal waste. Government should just do its job and not attempt to influence growth; that is the job of the monetary authority. [See: Scott Sumner}
Stephen Cohen I like your suggestion of an automatic stabiliser consisting of higher unemployment relief when employment rises. In fact I still like it though I persuaded the then next Prime Minister of Australia to propose just that in 1974 or 1975 but it came to nothing when he was in office. However a subsequent Australian government of the centre-right gave the lie to B. Samuel Davis's view that Keynesian theory is no good because it doesn't work in practice. The 1996 to 2007 Howard government's Treasurer Peter Costello presided over surpluses in nearly all his budgets and their actual outcomes and briefly eliminated federal government debt so that the Labor government in office when Lehmann Bros went under was in a position to provide immediate stimuus so that, at least plausibly as claimed by the government, Australia hasn't had a recession since 1991.
The fundamental problem with the over emphasis on rules for the is that those who devise or think they have discerned an appropriate set of rules simply don't know enough, about the past and present but, most obviously the future. They don't know what the next revolutionary tachncial innovation will be or managemement fad or doctrine. Above all they don't know what will be the motivating "Animal Spirits" which Shiller and Akerlof write about very intelligently in the book of that name. The right rules are indeed important and there being rules in which there is some trust likewise. Even when it comes to the important animator of animal spirits, the spirit of fairness, the existence of rules is important because, as with the rule of law, it tends to remove the trust-destroying arbitrary power of the bureaucrat.
Economics does not lie but politicians do. Sorman may not realize the current regime's objective is tyranny and slavery for America and the rest of the world.
If an economic theory doesn't work in the real world then it is useless. If Keynesian theory suggests that government run a surplus in boom times and a deficit in depressions, and in practice, despite being aware of the foregoing, government never runs a surplus then the theory is useless.

In fact, during boom times I don't recall ever hearing Keynesian economic theorists calling for running a surplus - all we hear is that even more money needs to be spent.

I also recall during the recession Bush II's ran into during his first term (yes, that's right - Bush II did not "inherit a surplus") there were calls by Democrats for a 'stimulus' which was eventually either not passed, or what was passed but was miniscule in comparison to what the Democrats were demanding. The economy recovered anyway.

The point is that Keynesian theory doesn't seem to work in the real world, since it doesn't take into account how governments act. That's of course even accepting that government should enact stimulus spending during a recession. I don't see any evidence that this makes one bit of difference. Certainly the trillion dollar Obama stimulus did little, if anything, even though much of that money has been spent not just in the first year but every year thereafter. (if that's true why isn't it more widely known?).

I'm no economist, and this might not be the place for it, but whatever Obama did in his first two years didn't work. I still recall how quickly we came out of recession in 2000, to the extent that most people even forget there was a recession. I've also noticed is that Democrats never seem to learn from mistakes, which is why we continue to hear calls for MORE useless spending.

I agree, free markets are the best way to go. And sticking by the rules is also best so that economies flourish.

But much of the present economic crisis was caused by the free market being manipulated and the rules being ignored or flaunted. That is why government intervention is sometimes necessary, to keep it free and honest as possible. I am sure the Milton Friedman was, before he died, disgusted with what was going on.

If the economy was as free as Sorman wants then we would certainly be living in a more ruff and tumble world than we are.

Arguments exceptionnaly useful and objective, to be supported not only in direction of market democracies, already in crisis, but precisely towards big emerging economies, like China and Brazil, which are frequently tempted to undertake any kind of economic tricks - like expanding consummers credit and sectoral policies in the industrial branch - just to avoid a crisis they are in fact stimulating, by changing the rules every time.
Those countries, like my own, Brazil, have to learn that the main kind of volatility arises not from "Wall Street speculators", but from erratic economic policies.
Rules as opposed to arbitrary actions by either the Fed or the administration would certainly be an improvement. However the trashing of Keynesian economic theory is unfair to Keynes whose proposals have NEVER been followed in full. Keynes suggested that in order to flatten the economic cycle governments should run a surplus in boom periods and a deficit in depressions. Politicians have jumped on the second half of his thesis and ignored the first half. Naturally the results have been disasterous.

We should embrace Keynesian theory in practice by establishing rules that would automatically follow his logic. To a certain extent this has been done by the institution of unemployment insurance which obviously pays out more in deprressed times and takes in more when the economy is healthy. This effect could be enhanced by offering an expanded unemployment payment linked to the unemployment rate. This would pay out money to the unemployed, regardless of normal entitlement rules when unemployment exceeded a set rate, say 6%, and would be eliminated at lowere unemployment rates.

This would be a true Keynesian solution and being rule based, it would remove the temptation for politicians to do things that we now know have exacerbated problems in the past

Another possibility is to change the compensation package of the President and the elected members of Congress to incentive compensation.

If their pay included a sizable bonus for exceeding long term trend GDP growth, there would be a monetary incentive to avoid doing the things that negatively impact the economy.
If only there was some way to raise interest rates on our hard-earned savings that we older people depended on to survive freely into old age. No one seems to care about this coming devastation to our life style that is forcing us ever closer into bankruptcy and government dependence.
The snag is that rules do not protect the power of the people who won the election. At least, not visibly and immediately.

Discretionary decisions can be, and typically will be, tilted to favor key congressional districts, states, and cities. That's what voting is for, in the view of today's majority.
John B Taylor is the guy whose weak theories caused this crisis. As chief economist of the Council of Economic Advisors he recommended acceptanceof the first tax increase that unraveled the Reaganrevolution. That in turn lead to the defeat of HW Bush which lead to the second tax increase under Clinton- the death knell.