The WSJ has two great op/eds in today's paper on what i believe are the 2 key pillars of the new foundation I am proposing for US economy: supply side reforms and sound money. The first op/ed is Stephen Moore on Obamanomics vs Reaganomics. The second is Allan Reynolds on how easy money is ruining economy. See both copied at bottom of the blog commentary.
Stephen Moore;s piece is wonderful, but he misses one crucially important point about Reaganomics in his article having to do with the vital role sound money played in the Reagan recovery. Moore doesn’t explicitly talk about sound money.
And this is a massive and fatal mistake that modern Republicans have made. I think this is the case because Reagan inherited sound money from the new Fed governor appointed by Carter named Paul Volcker who happened to be a card carrying Democrat. Conservatives don’t like to admit Democrats may have done something right after all!!!
The GOP talks about Reaganomics as a combo of deregulation and free markets and small government. Unfortunately, they miss the most important ingredient of all: i.e. sound money. Reagan was lucky in a profound way that Carter appointed Paul Volcker as Fed chairman in 1979.
Volcker implemented a new sound money framework at the Fed, which in my opinion is THE key policy that underpinned the great Moderation (low inflation / high growth) in the 80s and 90’s that fueled low unemployment and secular bull markets in both stocks and bonds lasting 20+ years. I understand some of Reagans key econ advisers thought Volcker was purposely trying to kill the US economy in order to stick it to GOP and Reagan.
The Reaganomics lesson learned by the GOP is that de-regulation and tax cuts are the key to prosperity and that deficits don’t matter. THE PROBLEM IS … de-regulation is deadly in an easy money environment ... and deficits DO matter because they lead to easy money!!!
Further, if government massively distorts markets with subsidies, which is the case now and was the case in lead up to 2008 crisis, then markets can't work properly. Every major sector of US economy is massively distorted with subsidies. GOP pols love subsidies because they can win them political points with special interest groups while leaving the private sector ostensibly “in charge.” The problem is that subsidies distort the market and sow systemic risk into markets. When systemic risks play out, the nasty results are blamed on the evil MARKET and / or private greed and error.
Markets CAN’T work when they are distorted with a combination of easy money and subsidies. If you add de-regulation and massive new structural fiscal deficits on top of easy money and subsidies, the result will be tragic as we saw in 2007-8.
The GOP had no answer for the 2007-8 crisis except to say that all of the interventions proposed by the Dems were wrong.
McCain had not the faintest clue what caused 2007 crisis or how to fix it.
The Dem answers were and are wrong and bound to leave fundamental disease of the market unsolved at best and at worst cause even worse problems going forward – i.e. an even bigger bust down the road.
But until the GOP understands the insidious nature of easy money, deficits and subsidies – we are stuck with neither side having a clue. WHICH IS WHY I CALL THIS BLOG MISTER CENTER.
The right and left are both addicted to easy money and subsidies and central bank financing for special interest goodies, simply grouped into two main categories, welfare for Dems and warfare for GOP.
Middle of the road compromise in this context means very ugly outcomes and ever bigger government and easier money.
Thus, we are bound to remain stuck in political grid lock as neither side has compelling vision, thus locking us into a low growth, high employment, low productivity world that begs even more government interventions in self reinforcing cycle of negative unintended consequences and a painful trip on the Road to Serfdom.
What we need to grow our way out of the debt mountain we are under as a country and as a world economy …. is first and foremost sound money, WHICH MEANS we need a new monetary anchor for the Fed replacing the fatally flawed inflation targeting framework). Contrary to what Paul Krugman asserts, the government cannot improve the wealth of society by causing inflation via the money printing press. Why do we believe such promises of free lunch craziness????
Entrepreneurs build wealth, the government redistributes wealth and destroys it with well intended policies. Why do "we" believe in free lunch promises from political or policy or academic elites?
What we need is less government, which includes entitlement reform (read CUTS), and the removal of major subsidy programs (e.g. housing, farm, healthcare, post office, education, banking. YOU NAME SECTOR AND I ASSURE YOU THAT WE HAVE A MASSIVE SUBSIDY PROGRAM FOR IT.)
We need to begin to reverse the ineluctable growth of the warfare / homeland security / welfare state.
and last but not least (in fact most important of all) we need to simplify the IRS tax code and broaden the tax base by eliminating write offs and lowering marginal rates for everyone!!! get rid of all taxes on capital gains, get rid of double income taxation on companies, eliminate crazy death taxes and if we still want to tax companies implement a simple gross sales tax with NO deductions.
Obamanonics vs. Reaganomics
One program for recovery worked, and the other hasn't.
By STEPHEN MOORE
If you really want to light the fuse of a liberal Democrat, compare Barack Obama's economic performance after 30 months in office with that of Ronald Reagan. It's not at all flattering for Mr. Obama.
The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.
By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.
My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.
The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.
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Ronald Reagan talks taxes, 1981.
The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down.
The Godfather of the neo-Keynesians, Paul Samuelson, was the lead critic of the supposed follies of Reaganomics. He wrote in a 1980 Newsweek column that to slay the inflation monster would take "five to ten years of austerity," with unemployment of 8% or 9% and real output of "barely 1 or 2 percent." Reaganomics was routinely ridiculed in the media, especially in the 1982 recession. That was the year MIT economist Lester Thurow famously said, "The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come."
The economy would soon take flight for more than 80 consecutive months. Then the Reagan critics declared what they once thought couldn't work was actually a textbook Keynesian expansion fueled by budget deficits of $200 billion a year, or about 4%-5% of GDP.
Robert Reich, now at the University of California, Berkeley, explained that "The recession of 1981-82 was so severe that the bounce back has been vigorous." Paul Krugman wrote in 2004 that the Reagan boom was really nothing special because: "You see, rapid growth is normal when an economy is bouncing back from a deep slump."
Mr. Krugman was, for once, at least partly right. How could Reagan not look good after four years of Jimmy Carter's economic malpractice?
Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.
The left has now embraced a new theory to explain why the Obama spending hasn't worked. The answer is contained in the book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff. Published in 2009, the book examines centuries of recessions and depressions world-wide. The authors conclude that it takes nations much longer—six years or more—to recover from financial crises and the popping of asset bubbles than from typical recessions.
In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown.
There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions. Reagan applied tax cuts and other policies that, yes, took the deficit to unchartered peacetime highs.
But that borrowing financed a remarkable and prolonged economic expansion and a victory against the Evil Empire in the Cold War. What exactly have Mr. Obama's deficits gotten us?
Mr. Moore is a member of the Journal's editorial board.
- AUGUST 26, 2011
The Fed vs. the Recovery
How is increasing the price of imported oil and industrial commodities supposed to make U.S. industry more competitive?
By ALAN REYNOLDS
One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. "A first option for providing additional monetary accommodation is to expand the Federal Reserve's holdings of longer-term securities," he said, thereby supposedly "bringing down term premiums and lowering the costs of borrowing."
Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.
When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?
The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.
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Associated Press
Federal Reserve Chairman Ben Bernanke
The chart also shows that growth of private GDP was also much faster before QE2 than it has been since, and the increase in producer prices (i.e., U.S. business costs) was much more moderate. And that is no coincidence.
Former Obama adviser Christina Romer, writing in the New York Times in late May, said that "a weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working."
Well, foreign goods certainly did become more expensive during the second round of quantitative easing, but it is doubtful that "more Americans are working" as a result. Industrial supplies and materials accounted for 34.5% of U.S. imported goods so far this year, according to the Census Bureau, and capital equipment and parts accounted for an additional 23%. As Fed policy pushed the dollar down, higher prices for imported inputs such as oil, metals and cotton meant higher costs (producer prices) for U.S. manufacturing and transportation.
In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.
Imported goods did indeed become more expensive while the dollar was falling, rising at a 15.1% annual rate over the past three quarters according to the government's report on GDP. But exported U.S. goods also became more expensive, rising at an 11.4% rate over that same period.
The fourth column in the chart shows that net exports were a subtraction from GDP in early 2010 when the private economy was growing most briskly, thus raising the demand for imported materials and components. The rise of dollar commodity costs and producer prices in the wake of QE2 reduced the growth of real imports because it reduced the growth of real GDP.
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Many journalists credit QE2 with raising asset prices, which was certainly true of precious metals but not of housing. It is also true that stock prices generally rose over the past year, but it is implausible to link that to quantitative easing.
Operating earnings per share for the Standard & Poor's 500 companies rose to an estimated $24.86 by June 30, up from $20.40 a year earlier. Fed policy cannot possibly explain that rise in earnings because domestic output slowed and producer prices rose under QE2, while more than 46% of the sales of S&P 500 companies have come from foreign countries.
Berkeley economist Brad DeLong, writing in the Economist, suggests that, "Aggressive central banks can shift expected inflation upward and thus make households fear holding risky debt and equity less because they fear dollar devaluation more." But individual investors often react to such fears by dumping equities and speculating in gold and silver. What good does that do?
In short, the Fed's experiment with quantitative easing from November 2010 to June 2011 was accompanied by a falling dollar and inflated prices of critical industrial commodities, including oil. The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar's weakness.
Every postwar recession but one (1960) has been preceded by a spike in oil prices of the sort we experienced when the dollar fell and oil prices doubled from August 2007 to July 2008 (reaching $142.52), and to a lesser extent when the dollar fell and oil prices rose to $112.30 at the end of April 2011 from $72.91 in late August 2010. Conversely, during the 1997-98 Asian currency devaluations (and soaring dollar), the U.S. experienced a booming domestic economy as the dollar price of oil dropped to $11 by the end of 1998.
Those who are now looking backwards at how poorly the U.S. economy performed under QE2 in order to "forecast" the future appear to be neglecting the potentially beneficial effects of a firmer dollar in deflating the bubble in U.S. commodity costs. In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production. Good riddance.
Mr. Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).
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