The Fed and Policy Uncertainty
How and when should the Fed unwind the enormous monetary expansion it undertook in response to the financial crisis and recession? The WSJ reports [$]:
As the Federal Reserve’s next meeting approaches in early November, an internal debate is brewing about how and when to signal the possibility of interest-rate increases.
The Fed has said since March that it will keep rates very low for an “extended period.” Long before it raises rates, however, it will need to change that public signal to financial markets.
Because the recovery is so young and is expected to be so weak, many central bank officials are comfortable, for now, keeping rates very low. But they are beginning to strategize about how to walk away from the “extended period” language.
My suggestion is that the Fed announce a path of gradual increases in the federal funds rate, say beginning next year and lasting for two years, until the rate is at some “normal level.”
This approach is different than what the Fed is likely to undertake; it will probably want to maximize “discretion,” the ability to adjust on the fly as conditions unfold.
My approach maximizes predictability and reassurance: it commits the Fed to shrinking the money supply and heading off future inflation. This reassures markets and takes substantial uncertainty out of the picture.
The problem with my approach is the pre-commitment: everyone knows the Fed could abandon a pre-announced path.
But such an announcement might still give markets useful guidance, and the Fed would know that any deviation would itself upset markets, and this might encourage adherence to the pre-commitment.
C/P Libertarianism, from A to Z
Filed under: Finance, Banking & Monetary Policy; General
Paul Krugman vs. The Daily Show
In a recent New York Times column (“The Uneducated American”), Paul Krugman writes that, “for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars.” As a result, Krugman continues, U.S. education has been “neglected” and “has inevitably suffered.”
Readers who put their trust in Krugman might thus conclude that per pupil spending has stagnated or declined. In reality, as the chart below reveals, it has more than doubled since 1970, after adjusting for inflation.
Paul Krugman may not be an “uneducated American,” but he’s certainly a badly misinformed one.
Much more troubling is the fact that Krugman and the Times are spreading this misinformation on a grand scale. And that got me thinking about Jon Stewart. When Time magazine recently asked Americans to name their most trusted newscaster, the comic and Daily Show host won in a landslide. Many pundits have taken this as a sign of the Apocalypse, worrying that so many Americans are getting their facts from a presumptively unreliable source. But is the Daily Show really less reliable than Paul Krugman and the New York Times?
To find out how they stack up on this particular question, I Googled the Daily Show’s website for any discussion of education spending. The most relevant hit was an exchange in the show’s on-line forum. In it, a commenter claims that spending per pupil has risen by a factor of 10 since 1945, after adjusting for inflation. That’s not too far off the mark. The actual multiple is just under 8. So folks who get their facts from the Daily Show’s website will be better informed on this subject than those who trust the Nobel Prize winning New York Times economist.
Not only is Krugman wrong to claim that public schools have been financially “neglected,” he is wrong to imagine that higher public school spending spurs economic growth – which is the central point of his column. Better academic achievement does help the economy – but, as the chart above illustrates and many scholarly studies have demonstrated, higher public school spending does not improve achievement. And by raising taxes without improving achievement, it may actually slow economic growth.
Media elites have been wringing their hands over the collapse in public demand for their products, over the two thirds of Americans who now doubt their credibility, and over the fact that more people now get their information from the Daily Show’s website than the New York Times’s.
Perhaps the media might attract more readers and rebuild trust if they were to stop publishing material less reliable than the blog discussions on a comedy show’s website. Just a thought.
What They Aren’t Telling You About the CBO Score
The CBO report that said the health care bill won’t raise deficits makes it clear that the Baucus bill’s reduction in future budget deficits comes not from controlling government spending or reducing health care costs, but because of a rapid escalation in tax revenues.
The bill imposes a 40 percent excise tax on health-insurance plans that offer benefits in excess of $8,000 for an individual plan and $21,000 for a family plan. Insurers would almost certainly pass this tax on to consumers via higher premiums. As inflation pushes insurance premiums higher in coming years, more and more middle-class families would find themselves caught up in the tax.
In fact, overall, the tax increases in the bill are more than double the amount of deficit reduction. This isn’t a health care efficiency bill or a cost containment bill. It is a tax and spend bill, pure and simple.
Lies Our Professors Tell Us
On Sunday, the Washington Post ran an op-ed by the chancellor and vice chancellor of the University of California, Berkeley, in which the writers proposed that the federal government start pumping money into a select few public universities. Why? On the constantly repeated but never substantiated assertion that state and local governments have been cutting those schools off.
As I point out in the following, unpublished letter to the editor, that is what we in the business call “a lie:”
It’s unfortunate that officials of a taxpayer-funded university felt the need to deceive in order to get more taxpayer dough, but that’s what UC Berkeley’s Robert Birgeneau and Frank Yeary did. Writing about the supposedly dire financial straits of public higher education (“Rescuing Our Public Universities,” September 27), Birgeneau and Yeary lamented decades of “material and progressive disinvestment by states in higher education.” But there’s been no such disinvestment, at least over the last quarter-century. According to inflation-adjusted data from the State Higher Education Executive Officers, in 1983 state and local expenditures per public-college pupil totaled $6,478. In 2008 they hit $7,059. At the same time, public-college enrollment ballooned from under 8 million students to over 10 million. That translates into anything but a “disinvestment” in the public ivory tower, no matter what its penthouse residents may say.
Since letters to the editor typically have to be pretty short I left out readily available data for California, data which would, of course, be most relevant to the destitute scholars of Berkeley. Since I have more space here, let’s take a look: In 1983, again using inflation-adjusted SHEEO numbers, state and local governments in the Golden State provided $5,963 per full-time-equivalent student. In 2008, they furnished $7,177, a 20 percent increase. And this while enrollment grew from about 1.2 million students to 1.7 million! Of course, spending didn’t go up in a straight line — it went up and down with the business cycle — but in no way was there anything you could call appreciable ”disinvestment.”
Unfortunately, higher education is awash in lies like these. Therefore, our debunking will not stop here! On Tuesday, October 6, at a Cato Institute/Pope Center for Higher Education Policy debate, we’ll deal with another of the ivory tower’s great truth-defying proclamations: that colleges and universities raise their prices at astronomical rates not because abundant, largely taxpayer-funded student aid makes doing so easy, but because they have to!
It’s a doozy of a declaration that should set off a doozy of a debate! To register to attend what should be a terrific event, or just to watch online, follow this link.
I hope to see you there, and remember: Don’t believe everything your professors tell you, especially when it impacts their wallets!
Would Summers Be Any Worse than Bernanke?
As I have argued elsewhere, Bernanke’s record as both a Fed governor and Chair suggest we be better off with a new Fed Chair come January 2010, when Bernanke’s term as Chair expires. Outside of those who believe the bailouts have saved capitalism, two very reasonable arguments are put forth for keeping Bernanke at the helm: 1) in a time of crisis, the markets need certainty and dislike change; and 2) the alternatives, such as Larry Summers, would be worse. Both these points have real merit, however I believe in both cases the pros of change outweigh the cons of staying the course with Bernanke. I will save the “certainty” debate for another time, for now, let’s ask ourselves: Would Summers really be any worse than Bernanke?
Before I make the case for Summers, I do want to make clear, President Obama, and the country, would best be served by a “Carter picks Volcker” type moment. Go outside the Administration, go beyond the usual circle of easy-money, new Keynesians. The Fed lacks creditability in two (at least two) important areas: bailouts and inflation. And one doesn’t even need to go outside of the Federal Reserve System to find candidates. Topping my list would be Jeff Lacker (Richmond Fed), Gary Stern (Minn Fed) and Charles Plosser (Philly Fed). Any of these three know the workings of the Fed, have the respect of the Fed staff, and have taken strong positions on both “too big to fail” and easy money. In the case of Gary Stern, it would seem especially appropriate, as his early warnings (see his 2004 book on bank bailouts) were largely ignored and dismissed. If we want to reward and promote those who got it right, these guys are at the top of the list.
But let’s reasonably suppose that Obama wants someone close, someone he personally knows and will stick with tradition by picking a member of his own administration. Without going into any detail, picking Romer would offer little substantial difference with keeping Bernanke. The case for Summers is essentially that here is one instance where his enormous ego would be an asset. One easily gets the sense that when Summers sits next to President Obama, Summers is thinking to himself just how lucky the President is to be sitting next to Larry Summers. One can call Summers lots of things, starstruck is not one of them. Given what we now need most in a Fed Chair is true independence, from especially the Administration but also from Congress, Summers is the only qualified economist close to the President who displays even the slightest streak of independent thinking. Bernanke, in contrast, has endlessly pandered to the Administration and to Congressional Democrats. Summers has been willing on occasion to actually defend the sanctity of contract (remember the debates over the AIG bonuses), a rarity on the Left, and more than Bernanke was willing to say.
So forced to choose between Bernanke and Summers, the need for an independent Fed Chair willing to take on the Administration and Congress, when appropriate, makes Summers a far better choice. That said, here’s to encouraging Obama go outside his comfort zone and pick someone who has the will to remove excess liquidity from the system before the next bubble gets going.
What’s A Dollar Worth?
It’s not just Americans worried about the flood of dollars from the Fed. The Chinese and now the Malaysians also are wondering if they should keep dealing in greenbacks.
Reports the Wall Street Journal:
Malaysia’s prime minister said China and his country are considering conducting their trade in Chinese yuan and Malaysian ringgit, joining a growing number of nations thinking of phasing out the dollar.
“We can consider whether we can use local currencies to facilitate trade financing between our two countries,” Malaysian Prime Minister Najib Abdul Razak told reporters at a briefing Wednesday after meeting with China’s premier, Wen Jiabao.
“What worries us is that the [U.S.] deficit is being financed by printing more money,” Mr. Najib said. “That is what is happening. The Treasury in the United States is printing more notes.”
The dollar won’t easily be displaced as the world’s principal reserve currency. But Washington appears to be doing everything possible to hasten that day.
Perhaps Americans should consider keeping their wealth in yuan or even ringgits. At least they might retain their value even as the Fed and Treasury attempt to inflate and spend the U.S. economy into oblivion.
Filed under: Finance, Banking & Monetary Policy; International Economics and Development; Tax and Budget Policy
Excellent WSJ Column on Health Care Nonsense
By George Newman. A sampling:
“The cost of health care rises two to three times as fast as inflation.”
That’s like comparing the price of hamburger 30 years ago with the price of filet mignon today and calling the difference inflation.
Misinformation from Heritage
The Heritage Foundation has a chart up on its blog, showing defense spending as a percentage of gross domestic product and declaring that “Obama plan cuts defense spending to pre-9/11 levels.”
This is a standard rhetorical device for defense hawks (see the Wall Street Journal editorial page, Mitt Romney and lots of others) so it’s worth pointing out that it’s misleading. The unfortunate truth is that Obama is increasing non-war defense spending this year and seems likely to increase it at least by inflation in the near future.
It’s true that defense spending will probably decline as a percentage of GDP, assuming the economy recovers. But that’s because GDP grows. Ours is more than six times bigger than it was in 1950. Meanwhile, we spend more on defense in real, inflation adjusted terms, than we did then, at the height of the Cold War. The denoninator has grown faster than the numerator.
By saying that defense spending needs to grow with GDP to be “level,” you are arguing for an annual increase in defense spending without saying so directly. That’s the point, of course.
To be straight with readers, charts that show defense spending as a percentage of GDP should either show GDP growth over time or include a line that shows defense spending in real terms. Otherwise they fail to demonstrate that the decline in defense spending as a percentage of GDP is a consequence of growing GDP, not lower spending.
Here’s a chart from the Congressional Budget Office’s report, “The Long Term Implications of the Current Defense Plans,” that does this.
The assumption in analysis like Heritage’s is that defense spending should be a function of economic growth, not enemies and strategies for defending against them. It’s easy to point out that this is strategically and fiscally foolish. And it’s worth noting, as I have on many occasions, that we face a benign threat environment and can cut defense spending massively as a result.
But there is something weirder going on here that warrants mention. Arguing that wealth creation should drive defense spending is to attempt to divorce the military from its strategic rationale. That’s an implicit acknowledgement that defense spending is not for safety. High military spending in this worldview is either an end in itself or a partisan or cultural tool. That’s not much of a revelation, I guess.
Hold the Presses! Public Doesn’t Believe Obama on Deficits!
Shocking, I know. But while the public likes President Barack Obama personally, they are just a bit more skeptical when it comes to his policies. Such as deficit reduction.
A substantial majority of Americans say President Obama has not developed a strategy to deal with the budget deficit, according to the latest New York Times/CBS News poll, which also found that support for his plans to overhaul health care, rescue the auto industry and close the prison at Guantánamo Bay, Cuba, falls well below his job approval ratings.
This shows that the public is paying attention to what is going on in Washington. In fact, the president’s policy is debt inflation rather than reduction. You know — $13 trillion in bail-outs (so far; who knows what new financial disasters await!), nearly $1 trillion in “stimulus” spending, proposed budget deficits of nearly $10 trillion over the next decade, health care “reform” which will run trillions (the only argument is how many) over the same period, and more, much more.
Yes, I’d say that the president has no strategy to deal with the budget deficit, other than to increase it at every opportunity.
The GOP Is Not Serious about Cutting Down Spending
A month ago, President Obama issued a list of proposed spending cuts that I dismissed as “unserious” due to the fact that they were trivial when compared to his proposed spending and debt increases. Today, the House Republican leadership released a list of proposed spending cuts.
I’d love to say I’m impressed, but I can’t.
Both proposals indicate that neither side of the aisle grasps the severity of the country’s ugly fiscal situation, or at least has the guts to do anything concrete about it.
The GOP proposal claims savings of more than $375 billion over five years, the bulk of which ($317 billion) would come from holding non-defense discretionary spending increases to no more than inflation over the next five years.
First, it should be cut — period. Second, non-defense discretionary spending only amounts to about 17% of all the money the federal government spends in a year, so singling out this pot of money misses the bigger picture. At least, defense spending, which is almost entirely discretionary, should be included in any cap. But it has become an article of faith in the Republican Party that reining in defense spending is tantamount to putting a white flag in the Statue of Liberty’s hand.
The second biggest chunk of savings would come from directing $45 billion in repaid TARP funds to deficit reduction instead of allowing the money to be used for further bailing out. That’s a sound idea as far it goes, but I can’t help but point out that the signatories to the document, House Republican Leader John Boehner and Minority Whip Eric Cantor, voted for the original $700 billion TARP bailout. Proposing to rescind the Treasury’s power to release the remaining funds, about $300 billion I believe, should have been included.
According to the proposal, the rest of the cuts and savings comes out to around $25 billion over five years. Like the specific cuts in the president’s proposal, they’re all good cuts. But the president detailed $17 billion in cuts for one year and I generously called it “measly.” What am I to call the House Republican leadership specifying $5 billion a year in cuts?
Tough Words
In the Wall Street Journal, Mary Anastasia O’Grady got Dallas Fed president Richard Fisher to go on the record about current Fed policy. He talks tough about inflation. “Throughout history, what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen.”
What is lacking is a plan to match the tough words with tough actions. Only when a tough and resolute U.S. president, Ronald Reagan, was matched with a tough and resolute Fed Chairman, Paul Volcker, did the Fed turn into an effective inflation fighter. There is no such match up now in the face of trillion dollar deficits forecast with no end in sight.
Ms. O’Grady describes Fisher as “the lead inflation worrywart” on the Federal Open Market Committee of the Fed. But Fed officials do not act in a political vacuum, and regional Fed presidents cannot on their own stop the Fed’s printing money in the face of the deficits. That requires leadership at the top from both the Fed chairman and the U.S president.
The Administration’s plan appears to be “to print their way out of an unfunded liability.” Thus far, despite tough words from some quarters, the Fed seems ready to accommodate “the political class.”
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