Economic Crisis – Page 19 – artdiamondblog.com

Gallup Finds Highest Doubts of Government in Decades

(p. A23) If you want to know why Americans are so fearful of a government takeover of the health-care system, take a look at the results of a new Gallup poll on government waste released Sept. 15. One question posed was: “Of every tax dollar that goes to Washington, D.C., how many cents of each dollar would you say is wasted?” Gallup found that the mean response was 50 cents. With Uncle Sam spending just shy of $4 trillion this year, that means the public believes that $2 trillion is wasted.

In a separate poll released on Monday, Gallup found that nearly twice as many Americans believe that there is “too much government regulation of business and industry” as believe there is “too little” (45% to 24%).
Perhaps most significantly, in both of these polls Gallup found that skepticism about government’s effectiveness is the highest it’s been in decades. “Perceptions of federal waste were significantly lower 30 years ago than today,” say the Gallup researchers. Even when Ronald Reagan was elected president in 1980 with the help of the antigovernment revolt of that era, Americans believed only 40 cents of every dollar was wasted, according to Gallup.
. . .
Over the last decade, the federal government has become bloated and inefficient. Voters are on to the scam. Mr. Obama keeps calling federal spending an “investment,” but Americans apparently feel this is the worst investment they’ve ever made. They’ve come to regard Washington as a $2 trillion Bridge to Nowhere. They are right.

For the full commentary, see:
STEPHEN MOORE. “Our $2 Trillion Bridge to Nowhere; Americans believe Washington squanders half of every tax dollar.” The Wall Street Journal (Weds., SEPTEMBER 23, 2009): A23.
(Note: ellipsis added.)

Tax Cuts Better Than Stimulus Spending for Raising GDP

(p. A23) The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure “multipliers” are greater than one–so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.
. . .
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

For the full commentary, see:
ROBERT J. BARRO AND CHARLES J. REDLICK. “Stimulus Spending Doesn’t Work; Our new research shows no evidence of a Keynesian ‘multiplier’ effect. There is evidence that tax cuts boost growth.” The Wall Street Journal (Thurs., OCTOBER 1, 2009): A23.
(Note: ellipsis added.)

A longer and much more detailed account of Barro and Redlick’s recent research on this topic can be found in:
Barro, Robert J., and Charles J. Redlick. “Macroeconomic Effects from Government Purchases and Taxes.” NBER Working Paper # w15369, Sept. 2009.

Dutch Were Too Busy Trading to Build a Church

“Print of New Amsterdam by Joost Hartgers, 1626.” Source of caption and image: online version of the WSJ article quoted and cited below.

(p. A15) The financial collapse of 2008 and the Great Recession have had, not surprisingly, a major adverse impact on the economy of the country’s financial center, New York City. There have been over 40,000 job losses in the financial community alone and both city and state budgets are deeply dependent on tax revenues from this one industry. There has been much talk that New York might take years to recover–if, indeed, it ever can.

But if one looks at the history of New York there is reason for much optimism. The city’s whole raison d’être since its earliest days explains why.
The Puritans in New England, the Quakers in Pennsylvania, and the Catholics in Maryland first and foremost came to what would be the United States to find the freedom to worship God as they saw fit. The Dutch–who invented many aspects of modern capitalism and became immensely rich in the process–came to Manhattan to make money. And they didn’t much care who else came to do the same. Indeed, they were so busy trading beaver pelts they didn’t even get around to building a church for 17 years.
Twenty years after the Dutch arrived, the settlement at the end of Manhattan had only about a thousand inhabitants. But it was already so cosmopolitan that a French priest heard no fewer than 18 languages being spoken on its streets.
. . .
Deep within the heart of this vast metropolis–like the child within the adult–there is still to be found that little hustly-bustly, live-and-let-live, let’s-make-a-deal Dutch village. And the creation of wealth is still the city’s dearest love.

For the full commentary, see:
JOHN STEELE GORDON. “Opinion; Don’t Bet Against New York; The financial crisis has been devastating, but the city has reinvented itself many times before..” The Wall Street Journal (Sat., Sept. 19, 2009): A15.
(Note: ellipsis added.)

Economic Understanding of the Great Depression is Still “Fragmentary”

In the last few decades the accepted opinion among most economists was that the profession understood what caused the Great Depression sufficiently so that we could be confident that we know how to avoid another Great Depression in the future.
Now the accepted opinion is becoming less accepted. I quote below the last sentence of Harold Cole’s review of a 2007 book that surveys current views of the Great Depression by distinguished economists:

(p. 418) I came away from the book struck by the fragmentary state of the science with respect to the Great Depression and the challenges that we still face in terms of developing a truly satisfactory quantitative theory of what happened.

Source:
Cole, Harold. “Review of Parker’s “the Economics of the Great Depression”.” Journal of Economic Literature 46, no. 2 (June 2008): 415-18.

The book under review is:
Parker, Randall E. The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Era. Cheltenham, U.K. and Northampton, Mass.: Elgar, 2007.

“Stimulus” Did Not Stimulate

Source of graph: online version of the WSJ article quoted and cited below.

(p. A23) The nearby chart reviews income and consumption through July, the latest month this data is available for the U.S. economy as a whole.

Consider first the part of the chart pertaining to the spring of this year and observe that disposable personal income (DPI)–the total amount of income people have left to spend after they pay taxes and receive transfers from the government–jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures. Because the boost to income is temporary, at best only a very small fraction was consumed.
This is exactly what one would expect from “permanent income” or “life-cycle” theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.
. . .
Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic–not the fiscal stimulus program–deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

For the full commentary, see:

JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND. “The Stimulus Didn’t Work; The data show government transfers and rebates have not increased consumption at all.” The Wall Street Journal (Thurs., SEPTEMBER 17, 2009): A23.
(Note: ellipsis added.)

Free-Market German Aristocrat Receives Ovation for Opposing Bailout

(p. A7) BERLIN — Could the heir apparent to Chancellor Angela Merkel be a wealthy, handsome 37-year-old baron who loves rock ‘n’ roll?

The baron, Karl-Theodor zu Guttenberg, vaulted to prominence this year when he took over the often dull job of economics minister in the midst of the financial crisis. His independent stand on a thorny economic matter earned him the respect of voters.
. . .

It was his independent streak that earned him the respect of voters, rather than just their curiosity. Mr. Guttenberg broke ranks with Mrs. Merkel over how to handle the troubled German automaker Opel. Mrs. Merkel supported a consortium led by Magna International, a Canadian auto parts maker, and Sberbank, a Russian bank. Mr. Guttenberg favored bankruptcy, and even offered to resign just months into his tenure.
He lost the battle, but gained credibility with voters — an important commodity with a disenchanted electorate that has largely ignored the coming vote. At the big kickoff campaign rally in Düsseldorf for Mrs. Merkel’s conservative Christian Democratic Union, Mr. Guttenberg was the only politician to receive a spontaneous ovation from the crowd of 9,000.

For the full story, see:
NICHOLAS KULISH and JUDY DEMPSEY. “Aristocrat’s Rise Shakes German Doldrums.” The New York Times (Weds., September 22, 2009): A7.
(Note: ellipsis added.)

In Economic Policy, as in Medicine: “First, Do No Harm”

(p. A13) Consider someone rushed into an emergency room in severe cardiac distress. After starting acute life-support measures, doctors still apply the rule stated by Galen of Pergamum more than 1,800 years ago: primum non nocere, or “First, do no harm.” Treatment interventions are selected carefully from a battery of technologies and potent drugs while recognizing that any one of them, or a combination, could hurt the patient if misapplied or given in the wrong dosage. Economic interventions require no less care.
. . .
Our economic doctors should permit America’s uniquely effective immune system to take over as companies and financial institutions deleverage their balance sheets. With people and with capitalism, the tincture of time is often the best medicine.

For the full commentary, see:
MICHAEL MILKEN and JONATHAN SIMONS. “Illness as Economic Metaphor; The first rule, as always, is do no harm..” The Wall Street Journal (Sat., June 20, 2009): A13.
(Note: italics in original; ellipsis added.)

Clunker-Like Subsidies May Mainly Affect Timing of Purchases

(p. A6) The next program to test the effect of government funds comes this fall. Consumers who buy high-efficiency appliances such as refrigerators, washing machines and dishwasher can receive rebates of up to $200 on certain products; no trade-ins would be required. The $300 million program was included in the $787 billion stimulus law.

As with the clunkers program, it’s unclear whether the rebate program will offer anything more than a short-term economic boost.
“The people who will most like likely respond to this are the people who need appliances, and they were probably going to buy appliances anyway,” said Erik Hurst, an economist at the University of Chicago’s Booth School of Business. “If all you’ve done is move that from tomorrow to today, then the economy is going to lag even more tomorrow.”

For the full story, see:
SUDEEP REDDY. “Dealers Get More Time to File for Clunker Rebates.” The Wall Street Journal (Weds., AUGUST 25, 2009): A6.

Economists “Mistook Beauty, Clad in Impressive-Looking Mathematics, for Truth”

Source of caricatures: online version of the NYT article quoted and cited below.

Nobel Prize winner Paul Krugman is no friend of the free market, and more importantly, his manner of dealing with opponents is a long way from gracious civility.
But he is not always completely wrong:

(p. 36) Few economists saw our current crisis coming, . . .
. . .
(p. 37) As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.

For the full commentary, see:
PAUL KRUGMAN. “How Did Economists Get It So Wrong?.” The New York Times, Magazine Section (Sun., September 2, 2009): 36-43.
(Note: ellipses added.)

The economist on the left is probably intended to resemble Keynes, but he also bears some resemblance to Hayek. Source of caricatures: online version of the NYT article quoted and cited above.

Let Venture Capitalists Invest Their Own Money in Entrepreneurs

(p. A17) Venture-capital funds deal solely with privately purchased equity securities in start-up companies, which are not traded in public markets. They have as their limited partners only people who meet the S.E.C.’s definition of a “qualified client” (meaning they possess a substantial amount of money to invest). These investors, who typically allocate a small percentage of their portfolios to venture capital, are familiar with risk, but it is long-term risk, stretching out 7 to 10 years. They put their faith not in publicly traded securities but in entrepreneurs, emerging technologies and new markets.

Because their business is contained within the ecosystem of limited partners, venture-capital funds and the companies in which they invest absorb all the risk: there can be no domino effect in the world financial system.
. . .
It would be a shame to impose any new limits now, when venture capital is the asset class that can best help build and nurture the companies that bring about growth and job creation. The figures are compelling. In 2008, venture-backed companies that went public in previous years accounted for 12.1 million jobs and $2.9 trillion in revenues for the United States Treasury.
The names of companies financed by venture capital are legendary: Cisco, Google, Facebook, Apple, Federal Express, Staples, Yahoo, Amazon, Genentech and on and on. The privately purchased equity securities that helped start these companies supported new technological and scientific ideas, all of which led to new jobs.

For the full commentary, see:
ALAN PATRICOF and ERIC DINALLO. “Stopping Start-Ups.” The New York Times (Mon., August 31, 2009): A17.
(Note: ellipsis added.)