Did Bernanke say the recession will end this year or not?

“The headline for the Wall Street Journal News Alert Tuesday morning reads "Bernanke Says Recession Should End This Year."

But the text of the message, summarizing the news from the Federal Reserve Chairman's testimony before the Senate Banking, Housing, and Urban Affairs Committee Tuesday morning adds a big "if":

"2010 'will be a year of recovery,' if actions taken by the government lead to some stabilization in financial markets."

And the actual text of his prepared remarks reveals further qualification: (Bold mine.)

If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

That's not just a big "if." That's a giant, honking, humongous, get-down-on-your-knees-and-pray-for-salvation "if." Ben Bernanke predicts that we can hope for an economic recovery next year, only if government action is effective -- and that includes, in his view, Treasury Secretary Tim Geithner's plan to bring stability to the banking system, the details of which are still unknown.

In the full context of his remarks, Bernanke doesn't sound all that optimistic. (Bold mine.)

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.

So let's retitle that WSJ News Alert: "Bernanke Warns That Without Aggressive FDR-Style Strong Government Action to Boost the Economy, We're Doomed."”

Andrew Leonard, “Ben Bernanke makes the case for strong government”, Salon.com (24 February 2009).

http://www.salon.com/tech/htww/2009/02/24/bernanke_and_economy/index.html


Andrew Leonard is a senior technology writer for Salon.com and a contributing writer for Wired Magazine.

My headline would have been “Bernanke says recovery possible next year but downside risks predominate”.

The written remarks by the Fed Chief provide an overview of recent developments and the steps that have been taken to counter the severe contraction the U.S. economy is now experiencing. The text also provides some cheerleading remarks about questions Congress has had about the transparency of decision making at the Fed. It ends with a review of the recent revisions made to the Fed’s economic outlook and its projections, pointing out that they have been revised substantially downward since the last set were released in October.

It is to be noted that there is nothing in the prepared remarks that associates the Fed with the policies of the Treasury or the Administration nor is there anything that indicates that the Fed believes these policies will necessarily be successful. Part of this is no doubt the traditional independence and “stand-offishness” of the Fed, which does not wish to be identified with the policies of any Administration. But I think it also expresses the fact that we still do not know exactly what the Administration proposes to do in the area of reforming and restructuring the financial system. Even in the area of spending, it is not clear what the Administration wants to do or how it intends to actually implement the spending that has been approved. Given all these uncertainties, Bernanke is right: Everything about the prospects before the economy depend on a great big “if”, and, if truth be told, we don’t even know what that the actions behind that “if” is.

A "Thank you" to Mark Thoma of Economist’s View for the pointer.

Roubini on how to clean up a banking system

“There are four basic approaches to cleaning up a banking system that is facing a systemic crisis: recapitalization of the banks, together with a purchase of their toxic assets by a government "bad bank"; recapitalization, together with government guarantees – after a first loss by the banks – of the toxic assets; private purchase of toxic assets with a government guarantee (the current US government plan); and outright nationalization (call it "government receivership" if you don't like the dirty N-word) of insolvent banks and their resale to the private sector after being cleaned.

Of the four options, the first three have serious flaws. In the "bad bank" model, the government may overpay for the bad assets, whose true value is uncertain. Even in the guarantee model there can be such implicit government over-payment (or an over-guarantee that is not properly priced by the fees that the government receives).

In the "bad bank" model, the government has the additional problem of managing all the bad assets that it purchased – a task for which it lacks expertise. And the very cumbersome US Treasury proposal – which combines removing toxic assets from banks' balance sheets while providing government guarantees – was so non-transparent and complicated that the markets dove as soon as it was announced.

Thus, paradoxically nationalization may be a more market-friendly solution: it wipes out common and preferred shareholders of clearly insolvent institutions, and possibly unsecured creditors if the insolvency is too large, while providing a fair upside to the tax-payer. ....

Nationalization also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers. Indeed, the problem has now grown larger, because the current approach has led weak banks to take over even weaker banks.

Merging zombie banks is like drunks trying to help each other stand up. JPMorgan's takeover of Bear Stearns and WaMu; Bank of America's takeover of Countrywide and Merrill Lynch; and Wells Fargo's takeover of Wachovia underscore the problem. With nationalization, the government can break up these financial monstrosities and sell them to private investors as smaller good banks.

Whereas Sweden adopted this approach successfully during its banking crisis in the early 1990's, the current US and British approach may end up producing Japanese-style zombie banks – never properly restructured and perpetuating a credit freeze.”

Nouriel Roubini, "Time to Nationalize Insolvent Banks", Project Syndicate (February 2009).

http://www.project-syndicate.org/commentary/roubini11/English

http://www.project-syndicate.org/contributor/1095

Professor Nouriel Roubini (1959-) teaches economics at the Stern School of Business, New York University and is Chairman of RGE Monitor, an economic consulting firm. He has wide experience in academia, the Federal Reserve, Council of Economic Advisors and Treasury, and international financial institutions. Roubini is also known as “Dr. Doom”, for his early and pessimistic warnings of an economic crisis that would engulf the U.S. and the world.

Had we from the beginning worked systematically to identify those banks that were insolvent from those that were weak from those that were satisfactory, and immediately closed down the insolvent ones and worked to save the weak ones, we would have had some hope of saving the situation. But we didn’t. Instead we followed several strategies to “try and save” the situation and avoid the losses entailed in shutting down failed banks while propping up weak ones. Money was thrown at the banks and efforts were made to put a floor under the price of toxic assets. As we did so, the bad banks ate good banks and toxic assets were spread further across the financial system. We created zombie banks that are now a bigger threat to the health of the economy than the insolvent banks of the past ever were.

We may now have no choice but to shut down them down by having the government take them over in some sense of the word. In the case of little banks, this is not a problem, as the FDIC has (unfortunately) lots of experience closing down small banks. But large banks are not really banks, or rather are much more than banks. Financial holding companies such as Citigroup are huge entities, really financial conglomerates with a myriad of different kinds of financial services under a umbrella of different sub-companies with a complex web of debts owed and debts due, all of which we need to be sorted out. The only ones that will come out ahead in any nationalization of the banks (I can see Professors Folsom and Davids cheering now -- just kidding) will be the lawyers. The rest of us will simply suffer, suffer, suffer in ways we cannot even anticipate because nationalizing big bank holding companies is far more complex and far more fraught with the possibility of the pain spreading far and wide than people realize.

Professor Roubini’s home page is http://pages.stern.nyu.edu/~nroubini/.

Thanks to Larry Willmore for the Tdj.

The "paradox of thrift" and fiscal stimulus

“The "paradox of thrift," a celebrated chestnut first described by John Maynard Keynes in the 1930s, has been the source of much confusion about how saving affects the health of the economy. Intuition suggests, correctly, that if any one family saves an extra $100 this year, its bank balance at year's end will be higher by that amount. According to the paradox of thrift, however, if everyone tries to save more at once, total savings will actually fall. ....

At moments like these [economic recession], government is the only actor with both the motivation and the ability to jump-start the economy.

Passage of a robust stimulus bill has rightly been the Obama administration's highest priority since taking office last month. As Keynes explained during the Great Depression, increased public spending would help end the downturn even if it were for useless activities like digging holes and filling them back up. It would obviously be better if the extra spending went for something useful. And as it happens, decades of infrastructure neglect, combined with huge state and local government budget shortfalls, provide more than enough valuable projects to put everyone back to work.

Bizarrely, however, some Congressional critics have denounced the administration's stimulus proposals as "mere spending programs." Of course they're spending programs! More spending is exactly what we need. The imperative is to get this legislation passed and get the spending started right away. ....

The "paradox of thrift" applies only during economic downturns .... Most of the time ... the economy operates near full employment. Before long, it will again. Under those circumstances, if every family saved a little more, extra money would flow into the capital market, causing interest rates to fall and investment spending to rise.”

Robert H. Frank, "Economic View: Go Ahead and Save. Let the Government Spend.", New York Times (15 February 2009).

http://www.nytimes.com/2009/02/15/business/economy/15view.html

[DOW: Cornell economist Robert H. Frank is currently a visiting professor at New York University's Stern School of Business.

Yes, the “paradox of thrift” exists, and with households attempting to save more than in the past government expenditures can counter the deflationary effects of this increased saving by injecting spending into the economy. But so would an increase in private investment expenditures, maybe not completely, but with some impact. Yet nothing was done in the recent stimulus package to encourage
investment.

Further, the assumption by Frank is that the stimulus package will have its intended multiplier effects. The contention of critics of the package is that it will not work and will only increase the national debt.

Time will tell whether the boosters or the critics of the stimulus package are right.

Once again, thanks to Larry Willmore for the Tdj.

China's exchange rate policy

“Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, "believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles."

Like many economists, I cringe whenever I hear the term "fair trade." It is not that I am against fairness — who is? — but the word "fair" is so amorphous in this context as to defy definition. Most often, the slogan "fair trade" is little more than a rallying cry for protectionism. ....

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy. ....

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money. ....

As the United States embarks on a path of unusually large budget deficits, the nation's chief financial officer should pause and think carefully before turning up the heat on one of its biggest creditors.”

N. Gregory Mankiw, "Economic View: It's No Time for Protectionism", New York Times (8 February 2009).

http://www.nytimes.com/2009/02/08/business/economy/08view.html


LW: Very clear thinking from Harvard economist Greg Maniw, professor of economics at Harvard and author of a best-selling economic principles text. Mankiw is a Republican, but his message is basic economics, not partisan at all. There is much more in the full column, which is worth reading.

DOW: I agree with Larry. Given our present policy approach, we have become dependent on China to finance our budget deficit. If we go down this road we have to be careful about what we say about their policies. It would be unwise to complain about the undervalued yuan if it is a key source of the financing for our outsized budget deficits.

But we should ask why we put ourselves in this position. It is not just that we are dependent. That is bad enough. But now we are dependent on an undependable rival facing its own internal economic problems over which it has no real control. Obama is not just gambling that his policies will turn around the U.S. economy; he is also gambling that the Chinese will be willing and able to fund much of the deficit his policies create.

I for one do not think this is wise.

Thanks to Larry Willmore for this Tdj.

Politics and the dismal science

“Economists are failing to express anything resembling consensus on the most basic questions of economic policy. ....

I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist, explain that raising tariffs – though perhaps unwise for other reasons – "can make the world better off". .... What are his readers to make of this? Are all the economists who say otherwise just wrong? ....

Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to "magic". ....

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. ....

Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.”

Clive Crook, "Politics is damaging the credibility of economics", Financial Times (9 February 2009).

http://www.ft.com/cms/s/0/437694de-f602-11dd-a9ed-0000779fd2ac.html

Clive Crook confesses that he is not an impartial observer: "As a lapsed member of the guild – I had a spell as an economist in the British civil service – I have a lingering sentimental attachment."


Clive Crook is a senior editor of The Atlantic Monthly, a columnist for National Journal and a commentator for the Financial Times. He was formerly on the staff of The Economist. A graduate of Oxford and the London School of Economics, he has served as a consultant to the World Bank and worked as an official in the British Treasury.

I think it is worse than Crook says. Here Crook says that two eminent economists are confusing the public and policy makers about economic policy because they insist on jousting in public about the rough edges of what is a professional consensus -- protectionism is bad in trade and a fiscal stimulus is helpful in an economic downturn. The implication is that if either of these economists had the responsibility of designing policy they would follow the professional consensus and forget about the minor exceptions to the consensus that are so close to the hearts of editors of economic journals seeking to publish something new between the covers of their little read periodicals.

More important is the failure of that consensus, modified or not by the luminaries of the profession, to provide any real guidance as to what to do in the present circumstances. I wonder if anyone has noticed that nothing policy makers have done in the name of macroeconomic theory has actually helped one iota.

It is even worse than this. On the monetary side, we have gone through many iterations of the TARP in a concerted attempt to give away $700 billion and, despite the Treasury saying the world as we know it would end if Congress didn’t immediately approve every penny, only half the money has been used and more importantly not one thing in the banking sector has actually improved. Trillions of dollars in additional obligations have been assumed by the Fed and the Treasury and hundreds of billions of dollars have been injected into the system and still banks act as if they are broke and cannot lend. Rumors of the nationalization of banks, closures of banks, creation of new banks, packages of loan guarantees, purchases of stock in financial companies, new kinds of insurance for financial institutions, support for/closing down zombie banks, and now the suggestion of an “aggregator” bank to warehouse toxic assets while they await purchase by gamblers have all be put forward in just a few months. All these suggestions in the name of macroeconomic theory.

On the fiscal side, the stimulus package now being discussed in Congress bears little resemblance to any sensible “timely, targeted, and temporary” program, to use the words of the President’s key economic advisor, that theory suggests should underlie policy at this time. Although Congress appeals to macroeconomic theory for justification of what it is doing, in fact what it is doing has nothing to do with macroeconomics. Yet macroeconomists claim to support the package in the name of theory.

If discussions of macroeconomic policy both confuse policy making and are irrelevant to the actual policy making process, fights among macroeconomists are the least of its troubles. Simply stated, it has utterly lost its justification for even being part of the policy making process.

Thanks to Larry Willmore for the Tdj.

Development, population growth and poverty

“President Obama has ended the ban on federal funds imposed by the Bush Administration on groups that promote or perform abortions abroad and on the United Nations Population Fund. He must take this opportunity to put pressure on the UNFPA to concentrate on the health of women and babies--and to stop wasting money assaulting the poor with wrongheaded population-control schemes.

"Continued rapid population growth poses a bigger threat to poverty reduction in most countries than HIV/AIDS," the UNFPA said in an hysterical statement on World Population Day, last July. This is plain wrong: it is not human numbers that cause poverty, but bad economic policies, laws and institutions.

The densely-populated Netherlands and Japan are prosperous but poor in resources, while much of impoverished Africa is thinly populated but rich in resources. The United States rose to affluence with one of the world's highest long-term population growth rates, while now-prosperous Ireland had negative long-term rates. Clearly, neither human numbers nor natural resources are keys to the modern story of global wealth and poverty.

It is clear that neither human numbers nor natural resources are keys to the modern story of global wealth and poverty.

The UNFPA talks of "women's empowerment and gender equality" and "universal access to reproductive health" but, despite this politically-correct discourse, it remains committed to its original purpose of reducing population growth: reproductive healthcare is "the most practicable option for slowing population growth," it says, equating this with poverty, food insecurity and environmental degradation.

These fallacies hark back to the 18th century economist Thomas Robert Malthus. Like many other pressure groups and NGOS, the UNFPA continues to commit elementary analytical errors: ignoring evidence staring us in the face.

The 20th century saw human numbers quadruple to more than six billion but food production widely outstripped population growth, average life expectancy doubled to well over 60 years, while global GDP per capita more than quintupled.

In the 1960s, alarmists such as Paul Ehrlich predicted imminent mass famine around the world. Indeed, in the last couple of years global food prices briefly shot up--maize, wheat and rice all doubled or tripled in a short time--but fell back again. In fact, the long-term trend in real grain prices over the past century has been heading steadily downward, at an average of seven to 10 percent per decade (depending on the product).To be sure, a horrifying number of people today still live in squalor, scourged by disease and hunger--but the correct name for this is poverty, not "overpopulation." In countries where people cannot securely own property, cannot sell their produce freely and get scant protection in law, government is poverty's handmaiden.”

Nicholas Eberstadt, “Curbing the Myth of Overpopulation to Fight Poverty”, China Post (Taiwan) (7 February 2009).

http://www.aei.org/publications/pubID.29350,filter.all/pub_detail.asp


Nicholas Eberstadt, one of the country’s foremost demographers, is the Henry Wendt Scholar in Political Economy at the American Enterprise Institute.

Overpopulation is not now and never has been a problem before mankind. Levels of living have risen in the past as human numbers have increased, not the reverse, and as the level of living has risen fertility has declined. Under its medium-variant projection of world population growth, average world fertility is expected to decline steady from now to mid-century, and to fall below the replacement rate of an average of 2.1 children per woman by 2040. In the more economically developed areas of the world fertility is now significantly below replacement and some of these countries are already experiencing population decline.

Nor is running out of resources or a shortage of food at the global level a problem, although it is at the regional and country levels for reasons having to do with poor economic mananagement. Food, metals and petroleum prices on international markets, which had risen significantly during the global upturn of the middle of the decade, have fallen back since the summer and are likely to resume their longer-term downward trend. This long-term trend is not consistent with the hypothesis that population is pressing on the world’s available resources.

Finally, Eberstadt is right to emphasize that development depends on policies, not resources or population densities. The world does suffer from terrible poverty, far too much poverty, with almost three billion people subsisting on two dollars a day or less. Successful development to reduce that poverty requires a strong respect for the efficiency of markets and a supportive environment created by public institutions rooted in the rule of law, respect for private property, a stable financial system and an emphasis of education. An open orientation to the world economy also contributes markedly to the process of development, especially small countries.

If international agencies are to contribute to the acceleration of development in the world’s poorest countries, they should respect the lessons learned from the past and emphasize those policies that truly promote long-term development rather than a futile and unnecessary attempts to bring down population growth in the short-term.

Thanks to Professor Bom for the pointer to the Tdj.

Should the IMF allocate more SDRs to fight the global downturn?

“This one seems a no-brainer to me. The easiest and quickest way to create global liquidity and enable credit-starved emerging and developing countries to increase their spending is for the IMF to engineer a vast new SDR [Special Drawing Rights] allocation. It can be done at the stroke of a pen, and it does not require the IMF to negotiate a program for every country that needs a loan.

Let's remember some basic facts. The U.S. fiscal stimulus will be a lot less effective if it is not accompanied by similar fiscal action elsewhere. Developing nations are severely limited in what they can do in this respect because they have little room for domestic borrowing. Serious fiscal stimulus requires that they have resort to external resources, of which there is a severe shortage at the moment (both because of the flight to quality and the borrowing that is going on in the developed world). The existing swap lines and the IMF's new short-term lending facility have had few takers, in part because no country wants to signal that they are (or may be) in trouble and running out of resources. A generalized SDR allocation--in return for a commitment to spend a share of these resources in pursuit of a globally coordinated fiscal stimulus — would give countries the cover needed to do what is good for them and for the rest of the world without suffering a reputational penalty.

The main objection to the creation of SDRs has always been that this would be inflationary. In the current environment, this is a plus rather than a minus. Inflationary, you say? Pile it on! That is exactly what the doctor ordered.

So if you want to reduce protectionist pressures in the U.S. and elsewhere while helping the developing countries get over a crisis that is not their doing, SDRs can be a large part of the solution. So I repeat my question: why don't we hear more about this?”

Dani Rodrik, “Why don't we hear a lot more about SDRs”, Dani Rodrik's Weblog (3 February 2009).

http://rodrik.typepad.com/dani_rodriks_weblog/2009/02/why-dont-we-hear-a-lot-more-about-sdrs.html


The writer is professor of international political economy at Harvard's Kennedy School of Government.

Special Drawing Rights of the IMF are a faux world money used as a unit of account by international agencies and as a limited reserve asset by countries. It is neither a currency nor a claim on the IMF. However, in settlements among countries it is a potential claim on the freely usable currencies of IMF members under certain defined and restricted circumstances. Its value is defined by a basket of currencies consisting of the euro, Japanese yen, British pound sterling, and the U.S. dollar. A SDR today is valued at about $1.50.

Allocations of SDRs by the IMF provide its member-states with a costless asset on which interest is neither earned nor paid provided its holdings remain as initially allocated. If a country’s holdings rise, it earns interest; if its holdings fall, the country pays interest. Countries may voluntarily exchange SDRs or countries with strong external positions may be designated by the IMF to purchase SDRs from countries with weak external positions. In this way, international liquidity is increased.

New allocations of SDRs would add to the liquidity of global markets and, presumably, help in the immediate situation. But new allocations of SDRs are very difficult to approve. The first general allocation for SDR 9.3 billion was distributed in 1970-72 and a second for SDR 21.4 was distributed in 1979-81. In 1997 a special one-time allocation has been approved by the IMF Board of Governors and many IMF members but it awaits approval of the United States.

This points to major problems with this proposal. In the first place, allocations of SDRs require the approval of Fund members with 85 per cent of its total voting power. Given the weight of the U.S. in IMF decision-making, and the financial implications of new SDRs for the Federal budget, this effectively gives the U.S. Congress a veto on any issuance of SDRs. Second, when allocated, SDRs are distributed in accordance with IMF quotas, which means that the emerging and developing countries -- those most in need of additional liquidity -- would receive only small allocations. Moreover, allocations would go to those countries, such as the Sudan and Zimbabwe, currently under U.S. sanctions. Finally, while helpful in the short-term, additional global liquidity in the long-run could further aggravate the already extensive external imbalances that describe the world economy by postponing needed adjustment in those countries with wide trade deficits.

I for one am doubtful that any new SDR allocations will be approved at this time.

Easterly and Sachs agree about budget deficits? Impossible!

“[One] school of thought ... asks WWJD? What would Jeff do? Jeffrey Sachs has spent more than two decades calling for the U.S. government to spend huge sums on anything that moves, from Bolivia to Poland to Russia to global health to Africa to global warming. But on Wednesday, January 28, 2009, as Davos opened, Sachs suddenly announced that he is now a U.S. deficit hawk.

"Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package."

He sounds like one of those IMF fiscal austerity priests issuing a stern reprimand to some benighted land—like those that prior to Wednesday he derided at every opportunity. But on today's deficit dangers at home, I had to agree with Jeff Sachs for the first time in over a decade.”

William Easterly, "Leaders Go Left, but Economists Get Back to Basics", Forbes.com (30 January 2009).

http://www.forbes.com/2009/01/29/davos-economic-basics-opinions-contributors_0130_william_easterly.html

[LW: Easterly is quoting Jeffrey Sachs, "The stimulus is a fiscal straitjacket", Financial Times (28 January 2009). Years ago, when I was a graduate student, my macroeconomics professor carefully explained the conventional wisdom that budgets ought to be balanced - not every year, but over the business cycle. In other words, government should operate with surpluses in good times, and deficits when the economy is depressed. Republican presidents in the US, beginning with Ronald Reagan, ignored this rule. All were spendthrifts – not fiscally conservative at all. In just 8 years, G.W. Bush managed to increase the US national debt from $5.7 trillion to more than $10 trillion. With current interest rates close to zero, servicing this debt costs taxpayers almost nothing. What worries economists like Jeffrey Sachs and Bill Easterly is the future: the cost of servicing this debt when the economy improves and interest rates increase. This is the sad legacy of fiscal imprudence – it is difficult to apply fiscal stimulus when it is most needed.]

William Easterly is professor of economics, New York University, visiting fellow at The Brookings Institution, author of The White Man’s Burden, a book about development policy, and a former World Bank economist.

Jeffrey Sachs is Professor of Economics and Director of the Earth Institute at Columbia University and a consultant to the Secretary-General of the United Nations on development questions.


Larry is right to call out Republican Presidents on their fiscal imprudence. This is a legacy the blights the record of the Republican Party to this day.

But let us not let the Democrats off so lightly. Deficits under President Carter were large by previous standards and the shrinking deficits and rising surpluses under President Clinton can be traced to a significant decline in defense expenditures associated with the end of the Cold War. Absent the decline in defense, Bill Clinton would have ran a deficit in every year of his presidency. Moreover, deficits do not “belong” to Presidents. They are just as much a creation of Congress as the President. Finally, I would mention that most of the increase in the debt under Bush 43 was incurred the last few months of his Presidency, as the current financial crisis worsened. Again, Congress must be held partly responsible for this development.

Both Easterly and Sachs are right to point out that the trend toward fiscal imprudence has continued under President Obama. The fact is that the world’s central banks have brought so much in the way of Treasury debt that it is most unlikely they will be willing to buy any more in the future, certainly not a present low interest rates. China, the major purchaser of past Treasuries, is now entering a deep slowdown and its economy is extremely fragile anyway. The Chinese banking system is also very, very weak. Even if they, with other foreign countries, are able and willing to fund the U.S. deficit they will insist on much higher interest rates, which will make the deficits extremely expensive to finance in the future.

One would think that policy makers would understand that however difficult our present problems and however bleak the current outlook, it is always easy to make things worse.

The present stimulus package may well do that.

Thanks to Larry Willmore for the Tdj.

Do increasing incomes bring declining values?

“The 18th Century English cleric and theologian John Wesley was troubled by a paradox that emerged as his teaching spread. He, like other Protestant thinkers stretching back to Calvin, taught that one could honor God through hard work and thrift. The subsequent burst of industry and frugality generated by Wesley’s message improved the lot of many of his working-class followers and helped advance capitalism in England. But, “wherever riches have increased, the essence of religion has decreased in the same proportion,” Wesley observed, and subsequently pride and greed are growing more common, he complained.

The emergence of what Max Weber described as the Protestant ethic represented an important point in the evolution of capitalism because it combined a reverence for hard work with an emphasis on thrift and forthrightness in one’s dealings with others. Where those virtues were most ardently practiced markets advanced and societies prospered. And, as Wesley foresaw, what slowly followed was a rise in materialism and a reverence of wealth for its own sake.

Today, we seem to be living out Wesley’s most feared version of the pursuit of affluence unencumbered by virtue. Scam artists perpetrate giant Ponzi schemes against their friends and associates. Executives arrange compensation packages that pay themselves handily for failure. Ordinary people by the hundreds of thousands seek a shortcut to riches by lying on mortgage applications. Heartless phony bailout schemes take the last dollar of people already in distress.

To survive all of this it seems capitalism needs a new dose of restraint. But absent a vast religious revival in the West, which seems unlikely, where will a renewal of the virtues of the work ethic come from? That question becomes ever more difficult to consider because as religious practice fades and our institutions reject traditional values, so too does the memory of the role that these elements played in the rise of capitalism.
…
The meltdown of the financial markets in the last few months has left us grappling with how we can keep markets free and principled at the same time. The only debate so far is between those who want more government regulation -- who want to impose from the outside via the regulator’s eye the restraint that our institutions once tried to instill in us -- and those who think that more government will only undermine our prosperity. Neither side seems to be winning the public debate because most Americans are probably equally as appalled by the shortcomings of the markets as they are by the prospect of more government control of them.

People instinctively know something is missing, just not what. A religious revival in America seems unlikely. Is it equally as unlikely that our institutions, most especially our schools, would once again promote the virtues that made capitalism thrive and Western societies prosper -- not just hard work, but thrift and integrity, or what we once called the Protestant ethic?”

Steven Malanga, “Can Free Markets Survive In a Secularized World?”, RealClearMarkets Blog (28 January 2009).

http://www.realclearmarkets.com/articles/2009/01/can_free_markets_survive_in_a.html


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute.

As Adam Smith stressed, market economies require a virtuous people to generate prosperity, with a concern for balancing both commercial values of prudence, justice, industry and frugality and nobler virtues of benevolence, generosity, compassion, kindness, friendship and concern for others.

But does prosperity produce an increasingly less principled people? And can, as Washington asked, morality be maintained without religion?

The challenge before us today is to recognize that Washington was right when he said our political prosperity rests on morality as “a necessary spring of popular government”. Equally, like Adam Smith, we must recognize that the restoration of our economy from the failures of declining standards and rampant greed requires more than mere economics and must be founded on a strong foundation in religious principle. But how to maintain “the essence of religion”, as Wesley put it, and its essential contribution to our prosperity, when our “riches have increased”, may prove the greatest challenge of all.