10/11/2011

Debunking Liberal Economic Myths

Kevin Drum, writing in Mother Jones, proposes 5 “Myths” about some common economic issues that he claims aren’t true.  Liberal writers often suffer from a kind of confirmation bias when making such statements. This is the tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.
Let’s have a look at what Mr. Drum says, and I’ll provide my own “confirmation bias” to show that the statements are either false, or not wholly accurate:

Myth #1 The Stimulus Failed
The central theme of this assertion revolves around what FDR did during the Great Depression.
Mr. Drum asserts (correctly) that FDR tackled the depression with inflation, easy monetary policy, and government spending. Then in 1937 spending was cut and monetary policy tightened up.    Mr. Drum reports that in 1938 the austerity program was abandoned and the economy started to grow again. What he doesn't report is that  FDR raised taxes sharply in 1937 in an attempt to balance the budget. Once tax increases took effect, the economy collapsed into another recession – the second stage of the double-dip which lasted into WWII. But in 1938-9, FDR relented. In a 1938 speech Roosevelt acknowledged that some administration policies were retarding recovery. Economic policy shifted considerably around this time, and the economy boomed. Antitrust enforcement resumed. The fiercely controversial undistributed profits tax, which was retarding investment, was drastically reduced and then eliminated in 1939. The sit-down strike was declared illegal, and employers could fire sit-down strikers. Many people believe it was WWII spending that got us out of the Depression. But the full effect of the war effort really didn't start to take effect until after 1941.
Drum asserts that the "stimulus worked in 1933". But FDR’s policies then put the ‘great’ in Great Depression. Unemployment never dipped below 14%, and even FDR’s own treasury secretary, Henry Morgenthau, lamented that spending didn’t work. It wasn't until FDR finally removed heavy taxation and regulations and encouraged the private sector in 1938-9 that the economy really took off. That is what finally succeeded.
Then Mr. Drum attempts to say that the 2009 stimulus worked. But posting figures about "how many jobs were created" is disingenuous. Before the stimulus, total employment was 134.3 million. Today, it is 131.1 million. That's a net loss of 3.2 million jobs since 2009. You do the math. You can make the “well it would have been worse” case until your face turns blue. The fact is, the stimulus didn’t work, period. If we had simply left everything alone, the normal powers of economic contraction and expansion would have done the job by now. I’ll explain:
Habituated as we have become to steadily rising prices, it would shock just about everyone to know that prices in the United States fell steadily for almost 150 years -- from the late 1700s all the way to 1913! During that time we experienced some of the fastest economic growth in the history of the planet. It was in 1913 that the Federal Reserve was created.
There is one simple method that works whether you’re selling a house, an idea, or your own skills: Lower your asking price. To get out of a recession, wages and prices need to fall in order to bottom out and get things going again. Unfortunately, Keynesians only know how to prevent that from happening, and the FED and politicians are deathly afraid of deflation, which is a normal part of the recovery process.
It is the artificial propping up of the economy with easy money, effective zero interest rates, and quantitative easing by the FED that has kept the current recovery in paralysis for so very long. In case you haven't guessed, this is living proof that Keynesian economics is an abject failure.
Keynesian stimulus theory ignores the second half of the story: Deficit spending must still be financed, and financing carries budgetary consequences and economic costs. Proponents generally acknowledge the long-term budgetary costs, but ignore the offsetting near-term consequences that render Keynesian stimulus useless.
When the Fed stops the printing presses and allows the economy to hit bottom by itself, it will begin to rebound by itself. In the meantime, all the stimulus spending and jobs bills in the world will be utterly useless, as we have seen. Posting figures about "jobs created" is disingenuous.
Myth #2: The deficit is our biggest problem right now
Here Mr. Drum claims that if our national debt were really at dire and unsustainable levels, nervous investors would be driving up interest rates on federal borrowing. He completely ignores the fact that in an effort to keep interest rates artificially low, the Federal Reserve has printed over Three Trillion Dollars in just the last three years! It has also deliberately been keeping short term rates effectively at ZERO. “Nervous investors” has nothing to do with Federal Reserve policy and it’s results. It was spending that got us into this fix. Drum is asking for more spending! Then he posts this silly chart that is supposed to illustrate "The Bush Effect" on the deficit. The chart only has two years of real data - everything after that is meaningless projections. Standard & Poor’s downgraded the credit rating of the United States for the first time in history. They did it for several reasons, and our unsustainable short and long term deficits is one of them. They deliberately cited deficits as one of the major reasons for the downgrade, and they said there could be further downgrades.
The Facts:
Under Bush’s "tax cuts for the rich" the rich paid more in taxes in 2005 than any time in the prior 20 years. In fact, as the Wall Street Journal noted, thanks to Bush’s tax cuts for the rich, the richest one percent went from paying 25% of all income taxes in 1990 to 39% in 2005. The richest 5% went from paying 44% of all income taxes in 1990 to paying 60% of all income taxes in 2005.
More importantly, after the 2001 initial tax cuts, the annual growth rate went from 0.3% in 2001 to 2.5% in 2002. By 2004, GDP growth was the highest in 20 years.
Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II.
During the Bush years, despite the 2000 Recession, the attacks on 9-11, the stock market scandals, Hurricane Katrina, and wars in Iraq and Afghanistan, the Bush Administration was able to reduce the budget deficit from 412 billion dollars in 2004 to 162 billion dollars in 2007, a sixty percent drop. During the Bush years the average unemployment rate was 5.2 percent, the economy saw the strongest productivity growth in four decades and there was robust GDP growth.
Not only were more jobs lost after the 9-11 attacks in 2001 than in the 2008 market crash, but more jobs were created by President Bush’s pro-business policies and tax cuts than by the Obama-Pelosi "spend your way to hell" Keynesian failure. The deficit is indeed our biggest problem - both the short term and the long term deficits.
reference: [Heritage.org] "Setting the Tax Record Straight: Clinton Hikes Slowed Growth, Bush Cuts Promoted Recovery" http://goo.gl/5w41s
Myth #3: Lower taxes are the best way to grow the economy
Again, this is cherrypicking data with confirmation bias. Tax rates alone are, indeed, not the best way to grow the economy. You also need an environment that will encourage job creators, you need confidence in the regulatory environment, and most of all, you need low tax rates that are permanent -- that investors and businessmen can rely on.  And it's not just personal income tax rates - it's corporate tax rates - ours are the highest in the developed world.
A simple case from real life:  Ireland, long a poor, economically backward nation, adopted a 12.5% corporate rate in 1988 when it suffered the second lowest per capita income in the EU. The Irish rode the resulting boom over the next 20 years to the second highest per capita income in the EU. Our own Treasury Department issued a study showing that Ireland raises more corporate tax revenues as a percent of GDP with this low rate than we do with our rate nearly 3 times as high. No, lower taxes aren’t the “best way” to grow the economy – they’re only a part of the solution.
Myth #4: Regulatory Uncertainty is Clogging the Economy
Drum says, "In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses. Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway."
What a bunch of malarky!  We know that Obamacare has already started to increase healthcare costs for everyone – they went up 9.1 percent last year. And we already know that the Dodd-Frank legislation is already increasing costs for consumers – e.g., banks resorting to charging $5 monthly fees to use a debit card. And we already know that air-quality rules are costing the coal-to-electricity industry billions and many plants will simply have to be shut down. Does Mr. Drum think that his electric bill will now go down?
The Administration’s published regulatory agenda included a total of 191 planned new regulations, each of which had an estimated annual cost of $100 million or more, with some involving billions of dollars annually.  Overall, the Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion. There were only six major deregulatory actions during that time, with reported savings of just $1.5 billion. This flood of red tape will undoubtedly persist, as hundreds of new regulations stemming from the vast Dodd–Frank financial regulation law, Obamacare, and the EPA’s global warming crusade advance through the regulatory pipeline—all of which further weakens an anemic economy and job creation, while undermining Americans’ fundamental freedoms.
The cost of new regulations hit $26.5 billion in 2010 - a record. The regulatory burden increased at an unprecedented rate during FY 2010, as measured by both the number of new major rules as well as their reported costs. Even more are on the way in 2011.
Regulatory uncertainty isn't the sole factor clogging the economy but it's a big one. Attempting to brand this very big problem as a "myth" is very sad indeed.
Myth #5 Obama is debasing the Dollar
Drum claims, "The usual measure for the strength of the dollar is called "trade-weighted value." In July 2008, just before the financial crisis erupted in earnest, the greenback's value stood at 95.4. As I'm writing this in mid-September, it has gone up, then down, and is currently sitting at 96.1."  He apparently hasn't looked at the long term chart. Here it is:
tradeWeightedDollar
It is easy to see that from as early as 2002, our monetary policies have more or less continuously debased our currency. By the way, in 1985 the Trade Weighted Dollar stood at about 143, which would be completely off the chart posted above. Enough said.
Of course there is a sixth myth, contained in the title of Mr. Drum’s article: “Rich People Create Jobs”.  Of course they create jobs!
Small firms (e.g. “rich people” according to president Obama):
  • Represent 99.7 percent of all employer firms.
  • Employ just over half of all private sector employees.
  • Pay 44 percent of total U.S. private payroll.
  • Have generated 64 percent of net new jobs over the past 15 years.
  • Create more than half of the nonfarm private gross domestic product (GDP).
  • Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
  • Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
  • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.