Our past experience with changes in the capital gains tax should be a warning about the potential unintended effects of a Buffett rule. Here's the article at American.com explaining why.
Everybody is for "fiscal responsibility" -- but that term has at least four different meanings, not one of which is simple to defend.
To see the four possibilities, check out my latest article at American.com:
"What Does 'Fiscal Responsibility' Mean?"
How is Uncle Sam's credit these days?
According to the free market, U.S. Treasury securities are one of the safest investments on the entire planet—in other words, it's about as good as it gets. Uncle Sam is able to sell U.S. Treasury securities in return for U.S. dollars at near-zero interest rates.
But that begs an important question: SO WHAT?? A world-class credit ranking doesn't necessarily mean the U.S. government should borrow money.
No, it doesn't. Just because we can do it doesn't mean we should do it without a good reason. And this is where we can get some valuable guidance from our past. George Washington, Thomas Jefferson, Ronald Reagan, and our Constitution have told us and showed us when to borrow against our credit.
Hint: it's all about the defense budget and national security. For the details, see my latest article at American.com, the online magazine of the American Enterprise Institute:
Peace—and Prosperity—Through Strength
Okay, so those aren't big surprises to anyone who has visited this blog in past seven years. But I expect they will surprise many readers at American.com, the online magazine of the American Enterprise Institute. Here's a link to my latest article there:
Why Growth Matters More than Debt
In the article, I used our familiar pie chart; I also thought of a more public-friendly name for the "debt burden"--specifically, I called it the "Interest Bite." [You may recall that I've tried its inverse, "Times Interest Taxed," at this blog before--but that most certainly does not compress down into a convenient acronym.]
On the one hand, getting nostalgic about Reagan is easy for Republican presidential candidates (with the unfortunate exception of Ron Paul, who has publicly advocated condemnation of Reagan). On the other hand, actually understanding what Reagan did, and how he did it, seems to be significantly more difficult for quite a few Republicans, and for an even larger portion of Democrats.
It's time we started thinking just a little harder about Reagan's tenure; there might be a clue or two that could help us out today.
My latest article about this topic is now available at the American Enterprise Institute.
Ben Bernanke is doing a good job, so far, in carrying out Alexander Hamilton’s sage advice: keep politicians at a safe distance from monetary policy. He’s doing that by the simple act of ignoring a letter he received. I hope he continues using that approach.
However, I have been having a little fun imagining a parallel universe—one in which Bernanke patiently responds to the politicians, in an honest attempt to explain what the Fed is trying to do.
Imagine we are now in Parallel Universe Number Two. Here is Bernanke’s response.
Thank you very much for your letter. Past Chairmen would have ignored it under the guiding principle of keeping politics at arm’s length from monetary policy. However, I’ve decided break tradition by responding—particularly if my response helps to clear up any misconceptions.
I’d like to explain, as simply as I can, what the Fed is trying to do, in hopes that you will see that we are not on the path of creating Weimar USA; in reality we are trying to help achieve the goal of getting the economy moving again. “Jobs, jobs, jobs” is how everyone likes to put it these days. Please understand that, just as Congress sometimes has difficulty acting in unison, so does the Fed... occasionally. We all know these are difficult times; but we all have responsibilities to act, even if it cannot always be with unanimity.
Please bear with me. My explanation requires four steps and one simple algebraic equation; no calculus, I promise. I sincerely hope you will follow along as I take it one step at a time.
[As an aside, I have read Atlas Shrugged as I presume you have; but one aspect of the plot has always bugged me greatly. It has to do with the part about those little gold coins in John Galt’s intermountain utopia. I’ll get to that later, after covering the four-step explanation I feel I owe you.]
First is the equation that helps us envision how the real economy and the money supply interact with each other. It’s the simple “equation of exchange” we see in economics books. Here it is, below:
Next is a simple, color-coded explanation of each element. I’m sure you’ll all recognize the “P” (price level) component, because when a country makes the horrible mistake of hyperinflating its currency, “P” takes off like a rocket. But there are three other things in the equation of exchange: the money supply, the money velocity, and the quantity of real goods and services exchanged, as shown below:
Most people consider “T” to be the most important element—the total amount of production and exchange in the real economy. It is affected by virtually everything we do in monetary, fiscal, and regulatory policy.
The next logical step: how the Fed can try to help whenever fiscal, regulatory, and past monetary policies have failed to get the real economy (T) moving and growing again at a robust pace. (Whether the Fed should try is a different question; currently the Fed's mandate is to do something about both "P" and "T"; you can change that, of course, but that's the way it is now.)
The explanations use the scenario of an undesirable slowdown in real economic activity—today’s situation, including the effect of dormant excess reserves. In the alternate scenario of undesirable inflation, the Fed would reverse its action by “unprinting” money (i.e., by raising its target rate and selling assets as necessary), to keep the price level in line with what we all hope is robust activity in the real economy.
Lastly, we have the equation to which I believe those who advocate the gold standard are mistakenly committed. Note the conspicuous absence of “T” and “V.”
It says that any increase whatsoever in the money supply is the very definition of inflation. (Never mind that we cannot actually measure the money supply, as the Volcker Fed discovered, after which the Fed began targeting the interest rate instead of the money supply.) The simplified equation says, to understand inflation, there’s no need to think about idle money sitting in excess reserves, and no need to think monetary policy can do anything about any sluggishness in the real economy. No, all we need is a known quantity of money, like the gold coins in John Galt’s intermountain utopia; monetary policy is as simple as that. [My view, and that of many others: it's an oversimplification.]
And that brings me back to the irritating flaw in the Atlas Shrugged plot—one that the economist in me couldn’t help but notice. Presumably, John Galt’s economy would attract many other high-integrity producer-consumers, and the utopian economy would grow due to increases in population, physical capital, human capital, and productivity. But with a known quantity of little gold coins (M) in a growing economy (T), the prices (P) would be forced to fall (deflation)—which in turn would require smaller and smaller gold coins as the economy flourished. Either that, or the economy would surely taper off, stagnating at a constant level of activity in a short period of time. How small could a gold coin get before the economy leveled off and everyone started demanding some new, better way to grow the money supply so that the real economy could start growing again? How much deflationary pain would it take for the citizenry to start demanding the innovation of fiat money, and the controlled, purposeful printing of same, in Galt’s intermountain utopia? Certainly the need for fiat money would cause an entrepreneur to invent it, at least by the time the gold coins got tiny enough to start leaking out of everyone’s pockets from between the stitches, if not long before, wouldn’t it? If not, Galt’s economy would be doomed--definitely NOT what Ayn Rand had in mind.
As I said, it’s an angle only an economist could conjure up.
In any case, sirs, I hope this response will help to reassure you that the Fed understands the problem, and is trying to do what it can to alleviate it, even though it is not always possible to act unanimously.
Chairman of the Federal Reserve Bank
United States of America, Parallel Universe Number Two
Effective fiscal and regulatory reforms would have the potential of eliminating the need for dramatic actioin in monetary policy.
Ben Bernanke and the Fed
have been "printing money."
That’s supposed to be counterfeiting, according to politician Ron Paul. It’s supposedly treasonous, according to politician Rick Perry (...yes, he actually said that; see this link). But I disagree; I think it’s a laudable, praiseworthy effort in monetary policy by non-politician Ben Bernanke to protect main street from the hardships of stagnation and deflation – in the absence of any help in the way of growth-friendly fiscal leadership from our politicians.
If you have any friends who think printing money is always inflationary, this post is for them. They are only hearing half of the real story from our politicians, and I bet they’d like to hear the other half.
Here are several several facts grouped under the two headings “common knowledge” and “well-kept secrets.”
• The Fed can print money rapidly.
• Inflation is too much money chasing too few goods and services. [Keyword: “chasing.”]
• Unanticipated inflation is bad; it hurts lenders by forcing them to accept money of lower value as payback for previous loans.
• Printing money is the Fed’s tool to fight deflation.
• The Fed can also “unprint” money rapidly.
• Unprinting money is the Fed’s tool to fight inflation.
• Deflation can be triggered or fueled by insufficient money to support the potential production of goods and services.
• When newly-printed money is just sitting there not “chasing” anything, it doesn’t cause inflation or cure deflation.
• Deflation is bad; it hurts borrowers, frequently forcing them to default on their loans – which in turn hurts lenders as well.
How the Fed prints and unprints money
The Fed “prints money” by purchasing U.S. Treasury securities from the public (i.e., from banks) – but instead of printing paper money to buy them, it simply bumps up the balances in the banks’ checking accounts at the Fed. Conversely, it “unprints” money by doing the reverse. The money isn’t “printed” or “unprinted”; the Fed simply changes numbers on a spreadsheet. That’s why “unprinting” money is just as fast and easy as “printing” money.
Wouldn’t it be a big step forward if our politicians started revealing some of the well-kept secrets above? For example, wouldn’t it be nice to hear one of them admit that the Fed’s job is not only to protect bankers from inflation, but also to protect main streeters from deflation? It would lead to a less-dogmatic, more substantive debate about what the Federal Reserve is doing. Hint: The Fed isn’t counterfeiting, it isn’t playing politics, it isn’t committing treason, and (for anyone who defines inflation in terms of the general price level, as opposed to the price of gold) it isn’t inflating the currency.
And if our politicians can’t find the courage to open up the debate like that, our journalists should call them on it instead of continuing to let them get away with it.
My priorities have changed, suddenly and unexpectedly. (You may have inferred that already from the recent lack of activity at this blog.) Posting here needs to drop down on my priority list for a while.
Remaining high on my list, however, will be paying attention as the presidency of our Talker-In-Chief unfolds. I hope to begin seeing some substance developing in the wake of all the eloquent talk, specifically regarding his unarguable statement about the topic that is my hot-button issue:
President Obama is eloquent, no doubt about that. What's scary to me is the increasing evidence that maybe that's all there is: eloquent talk. In my mind, that nagging possibility started becoming a probability when I read what a few people close to him had to say about his eloquence, and matched that with what's been happening so far in his presidency. Here are a few excerpts from Dan Heninger's article (WSJ, 4/30/09):
Obama, of course, has known about his biggest asset for a long time:
I hope to see some follow-through on his eloquent "robust growth" statement — such as raising the effect-on-growth question for key policy proposals. I hope to see the executive branch begin defining policy specifics, instead of outsourcing them to the legislative branch; after all, the voters chose President Obama, not President Pelosi. I hope to see the ongoing campaign rhetoric come to an end, because talk is cheap. I hope to see governing begin, because policymaking is supposedly what the campaign rhetoric was all about. I hope Obama starts getting up the learning curve more quickly.
I have hoped for a lot of things from politicians... but (with the exception of the interval from 1981-1989) have almost always been disappointed. If disappointment is once again the result, then all we'll have at the helm for the next three-plus years is a Talker-In-Chief.
Not a pleasant prospect.
1. For what it's worth, I'll also be keeping my eye on a promising young guy from Wisconsin: Paul Ryan. Not only is he sharp on the key economic issues, he's demonstrating some excellent communication skills. For example, here's a clip in which he politely handles two hostile MSNBC interviewers. (I strongly suspect I'll be sending him a campaign contribution or two as time unfolds.)
2. As I said, posting will be less frequent for a while, so I decided to reprint one post from the past that pretty much summarizes my major theme for this blog. See the article immediately below: Grow or Die.
[President Obama correctly says that robust growth is the only way to fix our current situation without raising taxes. That's what he says, anyway. Below is a condensed version of what my career taught me about growth, followed by how that microeconomic truth applies to our macro economy.]
There are only two kinds of problems in business: (1) growth problems; and (2) liquidation problems. I read that a quarter century ago, and ever since then, I’ve never found a single exception to that truism. Every problem I’ve encountered in business falls under one of those two headings. And I can now add another tidbit of wisdom: Without exception, solving the growth problems is a lot more fun.
Grow or die. Expand or liquidate. Or, as Red reminded himself (after leaving Shawshank):
Early in my career, I was extremely fortunate to have joined a company that, as the leader in its industry, was growing its market share in a market that was growing rapidly. A growing share of a growing market; you know, it doesn’t get much better than that. We had growth problems galore; we were profitable, we were working hard to keep up with the growth, and we were having hectic fun.
Costs were growing rapidly—but that was good news, because revenues were growing even more rapidly — and it takes money to make money. Sure, we found ways to improve the cost structure, but that, too, was a lot more fun because of the growth problem. Bottom line: The stockholders loved the revenue-driven profit growth we delivered, year in and year out.
There’s one thing about stockholders, though: they keep demanding profit growth, whether or not revenue is growing. Stockholders have a funny thing about that. And guess how profit growth is delivered when revenue is stagnant (or worse, shrinking): cost-cutting, that’s how. In a no-growth environment, cost-cutting problems tend to become more than “productivity” programs; they tend to be liquidation problems. Cutting fat is always a good idea; cutting meat and bone is hardly ever a good idea. In a no-growth environment, though, it’s easy for management to mistake investments in the future for discretionary costs—and sometimes the "solution" to the liquidation problem only accelerates the downward spiral. Liquidation problems must be solved, but that doesn’t make them as fun as growth problems.
In any case, stockholders demand growing profits no matter what; it’s management’s job to deliver it; and, of the two ways to deliver profit growth—growing revenues or cutting costs—the only sustainable strategy in the long run is to grow revenues. Here are two charts that illustrate the difference. Profit growth through revenue growth is open-ended; profit growth through cost-cutting eventually runs into a dead end. (That’s why most successful companies place significant emphasis on developing new products and services.)
I hope those are self-explanatory. They are my condensed summary of hundreds of individual experiences on both the “growth problem” and “liquidation problem” sides of the business management coin. They are the microeconomic examples illustrating the principle of “Grow or Die.”
I have one last chart depicting how the “growth problem” scenario works for our economy as a whole. As I’ve said before, a growing economy causes federal tax revenues to grow; the green and blue lines below show that relationship. Another thing I’ve said before is that a measured, prudently managed deficit is also sustainable indefinitely. (See this article, in which I suggest how to define “fiscal responsibility”—something the doom peddlers consistently shy away from doing.)
Growth solves a lot of problems. Not only is it the seldom-mentioned third alternative to the false-dilemma of cutting spending or raising tax rates, growth is an imperative for our macroeconomy, too.
Wouldn't it be nice to hear some growth ideas from our politicians and doom peddlers for once? Wouldn't it be nice if the need for "robust growth" turned out to be more than just eloquent talk from President Obama?
Red said it best: Get busy livin’—or get busy dyin’.