Tuesday, February 19, 2008

They say that Keynesianism is Dead, but...

I try to keep my politics out of my blog. Most of you know I'm a lobbyist, so my proximity to the meat-grinding process that is policymaking discredits me with half the population--including my father, who takes great joy in sending me jokes and insults aimed at politicians. This same proximity, however, affords me a bird's eye view of why political decisions are made and the unshakeable grip that campaign donations have on policy.

That said, policymakers and politicians are playing by the only set of rules available right now. It's a broken system, yes; but we're all complicit. Many lawmakers take office, earnestly vowing to resist special interest politics. I may be naive, but I believe a good many of them mean it. Yet, these promises are usually broken by the time the next election takes place.

Why? Because we don't support politicians who resist. It takes money to get elected, and until we truly start to limit corporate contributions and PAC giving, set aside a public election fund and mandate its use, and in the interim, give more on a personal level, there is no other path to reelection. And with respect to personal giving, I mean on a scale that counts.

Naturally, this is not universally applicable. Some people simply have no disposable income to spend on political contributions. I'm talking to the rest of you. If you think spending $100 dollars on dinner or drinks a few times a month is more important than donating a thousand dollars every year to a candidate who is trying to buck the system, then you are the problem. If you abhor special interest politics, put your money where your mouth is and donate to candidates bucking the system, even when they are not your own representative.

But I digress. I didn't make a rare appearance tonight on my own dying blog for a rant against campaigns and elections, but I did come to rant about money. Or, more precisely, monetary policy.

I've been sick, so this is the first opportunity I've had to comment on the $165 billion economic stimulus package the President signed into law last week. The package will be sending checks to taxpayers this summer, with most of us getting $300, $600 or $1,200.

Most of you know I'm mildly liberal. Left liberal on social issues, moderate on fiscal issues. Taking someone's fiscal temperature, however, is usually only possible when done in relative terms. Like even the most die-hard conservatives, I don't believe all spending is bad spending, as long as the spending matches my priorities. I don't consider money spent to shore up our education, welfare, health-care, public safety, transportation, or other socially important programs to be government "waste." So most people wouldn't call me fiscally conservative at all. Some people might dare to call me a "tax and spend liberal." Which is probably closer to the truth.

The difference between me and most traditional fiscal conservatives, however, is that my spending priorities include many American domestic spending programs while conservatives simply favor spending that eventually benefits their own bottom lines. Spend on defense, spend on corporate welfare, spend on tax breaks, spend on policies and programs that bolster the hefty business interests that are coincidentally bulking up their own investment portfolios. I have news for those of you "true fiscal conservatives" who think tax breaks are "conservative." Guess what, it's the same as spending when the deficit is 70 percent of the nation's GDP. (Nope, not the worst it's ever been, but don't say it's not bad.)

But here's some news for you fiscal thinkers, and it's not exactly new. Fiscal policy in general isn't the steadying hand that rights the ship. In the long term, economic health can only be accomplished through fiscal responsibility. In the short term, the kind of fiscal tinkering that includes economic stimulus package is usually worthless.

I keep hearing this 1 percent figure. Well, guess what? 1 percent of this nation's budget is over 150 billion dollars. For you conservatives: shouldn't that be too expensive for you? And for you liberals: remember when you (rightfully) campaigned against the proposed 1 percent budget cut? What do you think this is? This latest economic stimulus package is nothing more than a tax cut in disguise. And proponents hold that reducing marginal tax rates and creating economic incentives, tax cuts (or economic stimuli) will facilitate the flow of resources into production, push products into the market, and boost economic growth, overall. Maybe. But more likely, maybe not.

What galls me is that any liberal would vote for this package. Don't you fools know how to recognize supply side economics? And these supply-siders are still trying to fool us with that tired old argument, which holds that tax cuts, in whatever form, will eventually pay for themselves by boosting the economy and increasing total revenue. I understand the allure of this theory. In truth, it's no better than a pyramid scheme aimed at creating the intangible notion of instant wealth. On paper, the trick looks like it will work and there may be a few anecdotal cases for success. On a long term and broader scale, however, it's nothing but a costly illusion.

I'm no economist, that's for sure. (If I was, I guess I wouldn't consider 5 bucks a day on coffee a "sound financial investment.") But I've followed policy for a long time, and I believe there are three main ways to influence the economy. All three exist on macroeconomic levels, and two are long-term plans. The first is to maintain steady and faithful fiscal responsible. The second is to invest in government programs that provide options for education and growth in the long term. Only the third path can carry short-term effects, and this involves careful adjustments to monetary policy (management of interest rates, mainly), not fiscal policy (economic stimulus, tax cuts).

But the supply-siders are back. Not only are they worsening the deficit now, they'll do more long-term damage than good, both by lowering the amount of revenue available to support current infrastructure needs and the critical domestic spending necessary to run this country.
Keynesianism has been largely discredited. Not many people believe that interest rates and spending should be tweaked in an attempt to "fine-tune" the economy. And I agree. In order to stave off this coming recession, I believe interest rates would need to fall to near zero. And although that would help a lot of people, I can't help but think of the long-term. Private debt is extremely high and we can't continue to sustain this.

In fact, when I do think of monetary policy, I find myself reminded of sailing. My own, that is. My sailing buddies will point out that I'm oversimplifying, but to me, sailing requires both big, smooth moments (tacking and gibing) as well as constant small movements to make sure you're capturing enough wind to carry you forward. I'm a novice sailor, so when the wind is dying down, especially, I tend to overcompensate. As a result, I leave an "S" curve wake trailing behind that suggests the uneven hand of a novice at the tiller.

Needless to say, an experienced sailor knows how to finesse the tiller. So, then, can the Fed. But in terms of short-term tinkering, modest interest rate adjustments is as far as we should go. Economic stimuli are almost always a bad idea. Often, by the time the new law goes into effect, the damage is done (perhaps that's why these rebate checks will be coming this summer, even though the income they're attached to is 2008's). Not only do stimulus packages need to be rapidly enacted to have any considerable impact, they also have to be huge ($156 billion huge?). Spending like that usually invites much larger problems. Again, the difference between tax cuts and spending is irrelevant, at least in theory. Instead of deficit spending economic stimulus package, we are better off encouraging responsible budgeting practices and allowing the Fed to adjust interest rates. And as I mentioned, we should be careful, even with that.

Not to be Dave Barry, and tidily bring it all back to my opening paragraph -- think about who supported this package. Republicans. And Democrats. Supply-siders and hardcore Keynesianists. Why? Because they're afraid to lose an election. It almost invites me to extend this debate into an argument for longer terms for members of the House of Representatives, but I think that's enough wonky stuf for one evening, even if I do want to scare away any remaining readers with boring policy talk!

5 Comments:

Blogger Lonnie Bruner said...

I think the effectiveness of this stimulus package will be successful if it affects the mass psychology of people. With a lot of things related to macroeconomics, if people don't believe it will work, it likely will not. It matters less what econometrics produce on paper than our beliefs translating into more spending.

Also, on the debt front, remember, Japan's current accout deficits are FAR larger than ours relative to GDP. All that debt has made them very rich.

Also, wasn't there some consumer spending report released recently that showed a significant increase? All this hand wringing about the recession may be for naught ...

ps: Love the sailing analogy. Excellent.

8:52 AM  
Blogger red storm said...

This comment has been removed by the author.

3:17 PM  
Blogger red storm said...

I'm not trying to be pejorative, but do you really think it's worth the enormous price tag? Analysts have debated deficit to GDP ratios for years and have been disagreeing about the severity for just as long. In fact, I tend to agree with you that deficit spending is not necessarily the end of the world (of course, I don't support tax breaks that put us into debt). I think the weakened dollar could have one benefit, which would be a growth in exports (that would make you happy, yes?) and a reduction in imports.

The bigger problem with deficit spending, as I see it, is the fact that Congress is then statutoraily obligated to set discretionary spending caps. In a nutshell, this means if we want to increase funding for the arts, or for sick kids, or for education, we have to offset that spending elsewhere. The problem is, we never offset education spending by cutting defense spending or corporate subsidies; rather, we cut other domestic priorities and necessary infrastructure programs.

I'll pick on my own industry for a moment to provide an example. For years, the FAA has been running on antiquated equipment -- seriously, we've got a ground-based system that has been in place since the 1950's. Since then, air travel has increased exponentially and airplanes now have advanced cockpits that are designed for satellite-based navigation, but instead, they're stuck using the outdated and inferior system now in place. Investment in the system has been promised for years, but has so far been grossly insufficient for the important modernizations needed. So instead of meeting the growth in air travel with increased airport and air traffic system capacity, the government proposes to artifically limit demand by charging consumers and airlines more to travel at busy times or through busy airports. Rather than meet demand, they stifle it. Rather than allow free market, they squash the economy. How stupid is that? Even more stupid, when you consider that U.S. commercial aviation drives $1.2 trillion in U.S. economic activity and 11.4 million U.S. jobs.

Okay, let's face it, a few caps on that travel isn't going to negate the positive effects air travel has on the economy in the short term, but they do measurable harm, especially in the long term. If it's a problem now, what happens in 20 years, when air travel is expected to double, again?

This is obviously a parochial topic for me, but I'm only using it as an example. This is the effect that a deficit spending scenario has on but ONE government agency. People who don't worry about deficit spending assume that its possible to fully fund the govenment under this scenario -- if you're willing to keep adding zeros to the figure. But in reality, it doesn't work that way. There are budget caps and subsequent funding shortfalls, often in really important programs. Think about what funding shortfalls mean to the NIH, or to CDC, to the department of education, the department of energy?

To me, deficit spending is more complicated than a formula that measures the benefits of wealth and healthy trading against the deficiencies of debt because it constrains government spending elsewhere.

Now, you may correctly argue that this should be a separate argument, and stimulus money should not be counted against funding available for the programs that keep the government running, but in reality it's not like that. The department of transportation, department of education...funding for those agencies is not sexy. Economic stimulus packages are sexy -- because they promise free money to taxpayers. Unfortunately, I just don't buy it that the benefits will ever be worth the damage.

And by the way, we haven't even factored in the effects of saving versus investment and spending, which is always mentioned with respect to economic stimulus. It's not terribly relevant to my argument so I'll leave that alone for now.

We agree on a number of things, most notably the overstatement of the coming slump. You're absolutely right about this. There are alarmists out there who are throwing around words like depression, which I think is grossly irresponsible. Clearly, there have been signs of hope lately, but I do think the coming recession may be worse than the 91-92 downturn.

In any case, you should know by now that everything I ever needed to know about economics I learned from Paul Krugman, although Krugman has been known to call Keynesianists "vulgar," so maybe I'm not so one-dimensional after all!

3:19 PM  
Blogger Lonnie Bruner said...

You need to watch the stand up economist!

5:47 PM  
Blogger red storm said...

I'm no longer a vulgar keynesianist. I am now a vulgar Baumanist. That's great!

5:54 PM  

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