Thursday, July 09, 2009

A Second Stimulus

I have yet to hear a discussion from our leaders about how a fiscal (spending) stimulus will work now when similar policies failed during the great depression under Roosevelt and Hoover. The first $787 stimulus was passed despite numerous warnings from some of the worlds best and most prominent economists, including Cole & Ohanion, Prescott, Barro, Becker, Rizzo, Mankiw, Sargent, and almost 200 more. When the Michael Jordans and Tiger Woods of the field are stating that the stimulus package flies in the face of over 60 years of macroeconomic research, the supporters of the policy, or the media, or someone needs to be discussing this as a debatable idea.

Current evidence indicates that the first stimulus has not worked as it appears to have had no influence on unemployment - see graph below or link here.

Source here via Greg Mankiw

So now, supporters of a second stimulus have to explain, after the New Deal stimulus spending failed in the 30's, and the first $787 stimulus failed , why do we expect a 2nd stimulus will work? I aknowledge that there is a lag time for stimulus spending, but that only strengthens the argument AGAINST a second stimulus. If we have not had enough time for this to work, then we don't know if we truly need a second stimulus or not. If we need more spending now on infrastructure to create more jobs as Pennsylvania Governor Rendell says ( from , then why didn't we spend more of the $787 billion on things that would create jobs the first time. Why not reallocate what we have already committed in the $787 billion to these ends?
Instead of ‘returning to the failed policies that got us where we are today’ perhaps we should consider other policies that have shown success in the past. I’m referring to lowering marginal tax rates and reducing the corporate tax rate.

The basic argument for cuts in marginal taxes is that lower tax rates provide an incentive for increased economic activity. In addition, lower taxes reduce the incentive for the wealthiest Americans to engage in activities to avoid paying taxes . Why pay high management fees, and risk lower returns if a reduction in taxes will lead to higher after tax returns than what you will get in a tax shelter?

Is there any evidence for these supply side effects? Do we actually see increases in economic activity and increases in revenue in the face of cuts in marginal tax rates?

In his book 'Vision of the Annointed,' Thomas Sowell provides data from the US Budget Historical tables ( I checked these ) indicating that with the Regan tax cuts, we saw revenue increases.

This is corroborated by Lawrence Lindsey ( 1987) who found that for those earning > $200K per year, we saw the following increases in collections:

1982 – 3%
1983 – 9%
1984 – 23%

( see Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206 , also noted in: Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997 )

And for the recent Bush tax cuts: ( see this from the Wall Street Journal )

"Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003." ( see historical tables link above )

Also, straight from the historical tables provided by the office of management and budget you will see that from 2004-2007 there was a 25% surge in tax revenues, ( in face of tax cuts) which was the largest 3 yr surge since 1966.

Further evidence is given by President Obama's chief of the council of economic advisers, Christina Romer. She finds that a dollar of tax cuts raises the G.D.P. by about $3. According to this research the benefit from tax cuts is more than twice what other researchers say we get from spending increases.

Dr. Rand Paul on the Glenn Beck Show


Wednesday, July 08, 2009

Sarah Palin Inarticulate?

Is Sarah Palin inarticulate? On what basis of comparison? Would this be an issue if she were to actually run for president?

Maybe not. Despite both President Obama's confusion about basic economics, gaffs, and inarticulate mishaps, he was quite successful in his campaign.
For example see here, here, and here. This is not to bash or disrespect the POTUS, but to illustrate how unfair or biased this criticism of Sarah Palin has been.

As far as Palin- what happened to all of the interviews like this( On Larry Kudlow)- where are the gaffs? This is inarticulate? ( this is prior to Governor Palin joining the ticket- so no tricks)

If all you saw of the campaign were the above videos of President Obama and the above video of Governor Palin, who would you judge as being 'inarticulate'? This is exactly the flavor of the campaign coverage provided by the national media, and illustrates exactly why so many Americans have such a poor perception of who is or isn't 'articulate.'

To continue with this criticism of Sarah Palin, while dodging the issues like taxes, spending,the stimulus, regulation, inflation, and natural resources is intellectually dishonest on the part of all of her critics, political opponents, and anyone in the media that continues to play this game.

The Road to Serfdom And The Car That Will Take Us There

See The Environmental Motor Company Making Detroit a subsidiary of the Sierra Club ( Wall Street Journal)

Saturday, July 04, 2009

Freedom Rallies: What are they about?

Freedom rallies, also known as tea parties by some, have been proliferate these past few months. What are they all about?

One of the first criticisms that comes to mind is 'where were all of these protesters under Bush'? No one was happy about the expansion of medicare and entitlement spending under Bush, and who can deny that the 1st round of lump sum tax cuts were poorly structured- although the the later cut in marginal taxes did work well- nor were very many of the tea party protesters likely very happy about the tariffs that came and went under Bush. Bush was not successful in reforming social security, and he should have vetoed the job and opportunity crushing minimum wage increases- if only to take a symbolic stance against poorly designed policies. For many of the protesters, I assume that president Bush left a lot to be desired. We too often forget the outrage over Bush starting the bailouts.

Unfortunately, I think many of them came to accept this brand of 'compassionate conservatism' or 'bipartisanship' to be a reality under the two party system. Electing John McCain would have meant more of these bipartisan ('maverick' as he called it) policies - like McCain- Feingold, cap and trade, and taxing our healthcare benefits. Sarah Palin was popular only because she was truly a Washington outsider, and seemed to bring balance to the ticket as someone willing to stand up to business as usual in DC. Unfortunately (or maybe fortunately) for her, McCain lost.

I think these parties represent a referendum on all parties, they are sending the message to everyone that many Americans are tired of bailouts, and hearing that the financial crisis is the result of deregulation under Bush ( even though they have not cited a single act of deregulation by congress since Gramm-Leach-Bliley in the 90's) or that it is a crisis of capitalism (basically our own fault).The participants are outraged to be punished for it with higher taxes, bigger government, inflation, and unprecedented deficits.

I think many of the participants are tired of having their intelligence insulted in this manner. They are looking for leadership- from whatever party- that is willing to look at the facts, and provide a solution as the result of carefully weighing and considering all of the evidence. They are sick of the big government ideology and bipartisanship that has brought us to where we are today.

I think the last straw may have been with the passage of the $787 billion stimulus package. We were told that it was necessary, as we faced the greatest financial crisis since the great depression. It may have been more accepted if those favoring this massive increase in spending could have offered some reasoning as to why this would work today, even though similar policies failed us during the great depression under Roosevelt and Hoover. This was passed despite numerous warnings from some of the worlds best and most prominent economists, including Cole & Ohanion, Prescott, Barro, Becker, Rizzo, Mankiw, Sargent, and almost 200 more. When the Michael Jordans and Tiger Woods of the field are stating that the stimulus package flies in the face of over 60 years of macroeconomic research, the supporters of the policy, or the media,or someone needs to be discussing this as a debatable idea. It is the burden of the supporters and the media to explain why this will work, and while all of the other evidence is flawed. I don't recall any of the supporters of the legislation having a discussion like this- I don't remember seeing or hearing mention of any of these economists' research being discussed or debated on the news in relation to the stimulus. In short, I think the protesters probably feel like they have been lied to to a great extent about the stimulus and current budget deficits, or greatly insulted by the arrogance of its supporters. Not only are they likely upset with the republicans and democrats that have supported these policies, but they are also growing more and more impatient with a national media that has failed to ask tough questions.

To add insult to injury, evidence indicates that the projections of how much better off we would be under passage of the stimulus have turned out to be wrong. Unemployment has surpassed what it was projected to have been without passing a $787 billion stimulus package.

Source here.

The excuse seems to be 'we didn't know how bad it really was.' This excuse might be acceptable, were it not for the big I told you so coming from the hundreds of economists listed above. And the original projections did account for the lag we would expect from fiscal policy, so the excuse of 'giving it more time' isn't really much more acceptable.

Given what we have experienced through the bailouts and the stimulus package, many of the participants in the freedom rallies are even more skeptical of the policies to come such as national healthcare and cap and trade.

Those participating in the freedom rallies across the country this past independence day weekend have a lot grievances on their plate, and a lot of questions they want answered. Will they get answers, or will they be arrogantly dismissed as fringe radicals, closed minded, anti-progressive sore losers? Will they be answered by an offer to have a serious discussion? Will they be offered evidence, or cowboy style ideological shots from the hip?

Thursday, July 02, 2009

Agriculture, Obesity, and Poverty

The agriculture industry has and will continue to come under attach for contributing to obesity. These attacks are based on narrow special interests and ideology, but they will be used to justify more regulation and an attack on the personal liberties of millions of Americans. It will be done in the name of protecting the poor from themselves and the greed of agribusiness.

Back in 2007 in the New York Times Micahel Pollan makes the following comment:

"So how is it that today the people with the least amount of money to spend on food are the ones most likely to be overweight?

This perverse state of affairs is not, as you might think, the inevitable result of the free market.

Like most processed foods, the Twinkie is basically a clever arrangement of carbohydrates and fats teased out of corn, soybeans and wheat — three of the five commodity crops that the farm bill supports, to the tune of some $25 billion a year. (Rice and cotton are the others.) For the last several decades — indeed, for about as long as the American waistline has been ballooning — U.S. agricultural policy has been designed in such a way as to promote the overproduction of these five commodities, especially corn and soy."

Mr. Pollan has it all wrong on a number of accounts. I'm not here to argue about the distortions created by this or that component of any particular farm bill, but the farm bills are structured around these crops because that is what we grow, they are the staples that feed the world. We don't grow these crops because they are included in the farm bill, they are included in the farm bill because we grow these crops. Eliminate the farm bill, and yes the free market will still call for American farmers to grow the staples that feed the world.

Mr. Pollan and many of his adherents are not interested in what foods free markets ( or lets be more precise- the foods that free people) dictate. Most of these food activists would love to see a farm bill or other legislation that penalizes our efforts to feed the world with the environmentally superior technologies and science based techniques we are using today, and subsidize the production of fruits and vegetables and politically correct foods.

Also is the concern that the 'poor' are choosing to eat these unhealthy fast foods and processed foods. That may certainly be the case, but we should really be concerned with overall health, not just obesity. While the poor may be dealing with some issues of obesity, research ( from the national bureau of economic research) indicates that the relationship between socioeconomic status and health is weak. Still, if we are going to be concerned with obesity, we should be concerned with all factors contribute to obesity, not just the hand that feeds us. As indicated in a recent piece in the Rocky Mountain News, a study from the 2007 International Journal of Obesity concludes, “The obesity epidemic is often speculatively blamed on fast food, when the actual evidence shows very little, if any, association of fast food with weight gain.”

To concentrate on diet alone, and omit exercise will lead to perverse results, but it can justify a lot of government intrusion on our valued freedoms.

One approach is to inadvertandly tax small businesses and consumers with labeling requirements as done recently in Tennessee. ( See the Tennessean)

"Providing consumers with accurate, easy to understand nutritional information about the content of the food they are purchasing is a common-sense measure that could help Tennessee address its obesity epidemic" Bredesen wrote.

Governor Bredessen, common sense tells us that the gravy and fried chicken at the local diner or national franchise probably is loaded with calories and fat, labeled or not. Will this change the habits of a marginal number of people? Maybe, but at great costs with minimal benefit.

The case is similar with fat taxes. Research from the Mercatus Center at George Mason University indicates that the taxes required to have any real affect on obesity would be in the 1200 percent range, and even if taxes eliminated ( in this case soda) consumption, the impact on obesity would be very small. The study concludes that "the sensitivity of individuals to changes in relative food prices is
not sufficient to make “fat taxes” a viable tool to lower obesity."

Taking on the challenge of 'fighting obesity' in the name of helping the poor ( or reducing climate change) is likely misguided, or for some activists maybe even disingenuous. In the words of economist Thomas Sowell, many of the arguments for these policies 'invoke the name and mystique of science in order to override other people's choices."

We should be thankful that we live in a country were people of modest means have access affordable energy dense foods. We can't forget that fast food provides jobs and opportunities for advancement for millions! In producing staples like corn, soybeans, wheat, beef, pork, and chicken our farmers are utilizing modern science and technology ( like biotech) to improve nutritional quality and minimize our impact on the environment.

Many of the ideas being proposed by food activists and righteous eaters if ever implemented will truly bite the hand that feeds us.

The best approach is to maintain policies that support rather than hinder the spontaneous order of the market that allocates resources and provides incentives to produce the necessary technologies for better food, a better environment, and the economic growth that reduces poverty.