Monday, March 30, 2009

Dump the Political Clowns

What's wrong with being smart?

Republicans used to like smart people, back when they offered effective leaders. Even Ronald Reagan gave insightful radio addresses while governor of California, and he wasn't afraid to work with strong intellects.

But the previous administration had such a severe anti-intellectual bent that presidential advisor Karen Hughes  "rarely read books and distrusted people who had," bemoans the Economist. Speechwriter David Frum noted that 'conspicuous intelligence seemed actively unwelcome in the Bush White House.'

We may be glad that president is gone, but have we left him behind?

We're still holding up GOP candidates who drop their g's and tout their down-home qualities. I don't mind a politician of the people, whether a boy from a log cabin or a peanut-farmer, and 'rural' doesn't mean 'dumb.'

So why do we support the yokels in dunce hats? Do we really want only one party in America to offer intelligent candidates?

Glenn Beck, a rising star for FOX News, recently asked aloud if disaster relief agency FEMA was setting up concentration camps, calling it a rumor he was unable to debunk. That's the oldest, lamest journalistic trick of all, applicable to any stupid statement you wish to make. I, for instance, am unable to dispel rumors that Glenn Beck is French.

He's full of nutty comments. Take the recent one that 'the U.S. is on the road to socialism,' and compare that to your feeling about Wall Street bailouts.  Would you describe a president who hands money to investment banks as 'socialist'?

Comedian Dennis Miller noted when Ann Coulter says such things, she's acting like a dunk tank clown 'trying to sell more baseballs.' The goal isn't to inform or instruct, but just to incite.

We have enough clowns. Give us thinkers, too. Please.

In April, each Monday's post will be about society and technology. We'll return to economic issues in May, with Who Pays the Taxes?

Monday, March 23, 2009

The Paradox of Thrift

This is the last post for awhile on why we need spending, so let's look at the clearest possible case: a village of three people who trade only with each other.

If some hold back on their spending, they all suffer. Why?

Suppose they each buy $5 of goods from the others, spending and earning $10. Peter bakes bread, Paul grows grapes, and Mary cooks casseroles, and everyone buys - and sells - two items each month.

This works fine until Peter begins to worry about the future and wants to save. He decides he can do without Paul's grapes for now, so he buys nothing more than the $5 casserole from Mary.

Paul now has just $5 to spend, since only Mary bought his grapes. Paul must cut back on his own spending as a result, and once he buys one loaf of bread from Peter - and nothing from Mary, since he has no more money - all trade is finished.

How much money does Peter now have to save?

Nothing. Zero. Zip. No one has more money in this situation, yet everyone has less to enjoy. How can that be?

This is what economist John Maynard Keynes called "the paradox of thrift." When people move too drastically to save, they can all end up saving less than if they were less thrifty. The problem results from a sluggish economy when everyone pulls back at once from their spending.

What can be done to get this village economy moving again?

Someone has to have confidence that things are improving, enough to promise purchases from both other merchants. Then the whole chain can begin moving again at full capacity. 

Saving isn't inherently evil. But if people leap too quickly to increase their saving habits, they can end up with less on the table and in the bank.

Monday, March 16, 2009

Who Laughs at the Laffer Curve?

You've found me: the one and only person in America who believes in the Laffer curve.

Ever since Reagan championed the idea that the government can earn more from lower taxes, liberals have shunned the concept.

Oddly, conservatives have, too, though they love part of the idea. You can read some near-religious praise for part of the Laffer curve at, a site whose crazy fervor used to tickle me until they kicked me off for suggesting there's a role for good government.

One poster says, 'its logic continues to elude the class-warfare lobby' and another insists, 'Laffer curve should be pasted on the ceiling above every child's bed.'

But they don't really want a Laffer curve. They want a Laffer bulge, a curve with no left side.

Look closely at that left side: at that point, government receipts fall with further tax cuts. That fits both our historical data and plain logic. If you cut taxes to 0%, we'll clearly have no government revenue.

So where are we on the curve?

For us to expect more revenue by cutting taxes to 10%, from 40%, we'd have to expect that people would work four times as many hours. That's simply not possible, and the tax change does not imply any leap in productivity to fill the gap.

Could people work twice as many hours to compensate for a cut to 20%? Since the average employed American works between 46 and 50 hours per week, doubling their time would be exceptionally hard. Remember, that's an average. Yes, some people already work 100 hours a week, but they can't double their time to 200.

Then here's where we are on the Laffer curve: we're close to the optimum level for receipts. We can't cut the top tax rate to 20% and expect people to double their work week, nor should we hike it to 60% while hoping it doesn't reduce hours. Neither is reasonable.

We can argue over whether we should shift 5% one way or another, but we're no longer at the punitive 80% top tax rate that existed when Reagan took office. The level now is close to where it needs to be.

So let's put away the Laffer bulge and call a spade a spade: lowering taxes now is liking taking medicine for last year's cold.

Monday, March 9, 2009

Shouldn't We Be Saving?

Let's start with a great graphic:

This is a hugely informative piece for comparing consumer spending during past economic crises. The 'Peak' line intersects with '1' in the middle, so anything to the left is before the worst of the recession, and anything toward the bottom reflects less spending. That sagging red line shows our current decline.

Now it's clear: recessions deepen until spending picks up.

That makes sense. What employer wants to hire more workers without more customers?

Once answer to that question could be 'the government,' when suggesting that federal money be used to build more bridges, upgrade the electrical grid, and improve schools. All those will indeed create jobs and ease the recession.

But if we want more jobs in the private sector, we need consumer demand, and as long as it keeps falling, we're going to lose more jobs. 

Don't take those jobs lightly. One reader responded to the above graphic by saying, 

'So what if it gets worse? Standard of living is all relative, anyway. You don’t mind not having as long as your neighbor can’t have it, either. Find other things to enjoy in life besides more stuff.'

But we're not just talking about the amount of 'stuff' you have. We're following people's ability to earn a living. Before we start telling others how they ought to handle their money and values, let's reverse the loss of millions of jobs.

Maybe you think people shouldn't be buying junk, but while they refuse to buy anywhere, America will continue to lack jobs.

So do you have to run out and spend? No, do what you see fit: no one knows your needs better than you do. But don't feel guilty for spending when you do, and above all, join me for a cheer when that red line starts to rise.

Saturday, March 7, 2009

The Guilt-Free Stimulus

Do we really build debt when we move to increase spending?

In my column in today's Washington Post,  'Stimulating our Inner Consumer,'  I propose that we can use human nature to encourage consumer demand, easing the loss of jobs until longer-term stimulus projects take root.

If people find it easy to spend with a $2000 prepaid American Gift Card, we're likely to see such a boost, as convenience is hard to resist. People are likely to eat more when seated by a bowl full of chips, and many diners wave away bread to remove that very temptation.

But some people still wonder how much new spending a gift card would encourage. What if consumers ended up buying the same groceries as usual and saving more of their paychecks?

The answer is: that's fine. Doing so costs nothing, and it doesn't build real debt.

If you save the equivalent $2000 then repay it through taxes years from now, there's no cost to you or the government.

Even interest on the debt goes to you and back. When the government borrows money, it issues Treasury bills mainly to Americans; only one in six is held abroad. That means it borrows from you before loaning that same money back. If you save all the money, the result is exactly the same as if you got a $2000 IOU and then returned it a few years later.

In such a case, issuing the Gift Card truly does cost nothing (save administrative costs, which have tended to be low for past rebate checks), as it does nothing.

Fortunately, such absolute saving is unlikely, and we can expect real results. If you hand $2000 to the man on the street, he'll have a strong incentive to spend at least a portion more than usual. The 'marginal propensity to consume' varies with income - a gift card may have less influence on Bill Gates than on me - but it's always more than zero.

We really can encourage more consumer demand, just as surely as people will eat from a bowl of chips.

Tuesday, March 3, 2009

Ronald Reagan's Favorite Joke

Reagan used to quip that 'the most terrifying words in the English language are: I'm from the government and I'm here to help.'

The funny thing is that government can indeed help people to help themselves, and that's a lesson worth remembering in tough economic times.

Look at the recent proposal in Fairfax County, VA, to trim the budget through elimination of Adult Daycare Centers. Their daytime services help not just the elderly, but their grown children who are then free to go to work.

Without such services, alternatives are bleak. Private elder care can cost upwards of $10,000 a month, and it's rarely covered by insurance. It's far cheaper for most people to quit their jobs to care for needy parents than to try to pay for assistance at market rates.

Those centers offer more than care for the elderly and more than positions for the people providing the care. They give other people the chance to pursue their own jobs, and we can hardly ask for a wiser form of government spending.

I'm not advocating a hand-out. I'm not suggesting that the government should provide everything we need.

But it should sure give people the chance to provide for themselves. If we cut back on people's opportunities, they'll end up in even greater need.

Funny how that works.

Next Monday's post will be on Who Laughs at the Laffer Curve?