To torture the analogy for just a moment more, we are in an economic skid and we’re depending on the powers that be in Washington to steer us out of it. They don’t see the problem.
John Mauldin’s “Outside the Box” has an unusually good article by Horace Brock called The End Game Draws Nigh - The Future Evolution of the Debt-to-GDP Ratio.
Brock makes a compelling case that deficits the government creates are less important than the growth policies that that same government promotes. In other words, it’s possible to grow an economy out of the debt hole if the proper policies are followed.
Unfortunately, while the Obama policies are creating deficits that are larger than any seen before, the policies regarding economic growth are nowhere to be seen.
…the President's cheerful rhetoric suggests little concern with the growth of the numerator [the rate of debt]. To be sure, his administration's OMB budget projections blithely assume that very high growth rates will magically return after the next three years, and nothing solves fiscal problems as well as rapid growth. Yet everyone acknowledges that these projections are smoke-and-mirrors, constituting a leadership default of the first magnitude.
Yet could all of this be deliberate? Could the administration's choice to tax and spend ad infinitum have been politically strategic in nature? After all, haven't both President Obama and his chief of staff Rahm Emanuel openly admitted that "the new budget is a means to altering the very architecture of American life, with government playing a much larger role than before"? The likelihood that their new architecture would drive the growth of numerator of the Debt-to-GDP ratio ever-higher and the growth of the denominator [the growth of the economy] lower was never mentioned.
Do financial commentators even understand this risk? While the press has expressed appropriate "concern" about the sea of red ink to come, there is little sense of the true End Game at stake: Which of our Figure 3 scenarios will occur, and what will it imply?
The answer may well determine whether we face a future of peace and prosperity, or of war and privation. As a personal aside, this author has never been more concerned than he is now about the economic state of the nation.
Brock is no enemy of the right kind of spending … the kind that results in higher productivity over the long term. Brock’s essay includes lots of tables and graphs that demonstate his point that the key to avoiding the “Zimbabwe” kind of economic black hole it to promote the right kind of economic growth.
It’s embarrassing to be lectured on economic growth by the Chinese who were, until fairly recently doctrinaire Communists.
Given this rare opportunity—and moral obligation—to tilt the economy towards long overdue investment spending, how can the Obama stimulus package have fallen so short of the mark? It is frankly embarrassing to witness Chinese policy advisors like Professor Yu Qiao of Tsinghua University scolding the US about something as basic as this:
Most of Mr. Obama's stimulus spending is devoted to social programmes rather than growth promotion, which may exacerbate America's over-consumption problem and delay sustainable recovery.
Financial Times, Editorial page, April 1, 2009
Qiao's point parallels a principal point we are making in this essay. Why are we not reading this from Christina Romer or Larry Summers in Washington? Have the Best and the Brightest once again lost their moral integrity as they did during the Vietnam War era? Can they seriously believe that more transfer payments to Democratic Party special interest groups is what the nation needs in this hour of its distress? The author considers the composition of the proposed $3 trillion of discretionary stimulus over the next five years a moral travesty.
Case Study of Energy: As a case study in how poor the administration's policies are in this regard, consider its energy policies. Is anyone in the new administration reading about the disastrous 9% annual decrease in the output of "old" oil (yes, "peak oil" turned out to be true), in conjunction with a collapse of previously scheduled investments in exploration and development, and in refining capacity? Are they blind to the supply-crisis that is unfolding, one that calls not only for "renewable energy," but also for a major expansion of traditional oil and gas production?
By now, has it not become crystal clear that the increased production of traditional fuels should come from within the US, given the devolution of both the political leadership and the infrastructure of those thugocracies upon whom the US increasingly depends for 40% of its consumption? Is no thought being given to the rising probability of $500 oil prices—or perhaps outright rationing—when global energy demand recovers? [Recall how jointly price-inelastic demand and supply curves cause huge changes in price both upward and downward, as we demonstrated mathematically five years ago.]
Elementary arithmetic is all that is needed to ascertain that the administration's BTU gains from increased renewable energy production and conservation from increased "weather-stripping" will not yield even 10% of the BTU shortfall that the nation will confront. The reality, therefore, is that the country needs a vast expenditure of funds on novel and traditional sources of energy, as well as on our deteriorating energy infrastructure. Expenditures of this kind would create several million jobs of precisely the kind that are needed during the next decade. And they would leave the next generation with an improved infrastructure, in addition to lessening our extraordinary dependence on imports from rogue states.
But what do we get from the Obama team? A present value tax hike of up to $400 billion on "big oil" in one form or another, along with weather-stripping tax credits and expenditures on renewable energy alone. And who is the newly appointed spokesman for national energy policy? A highly credentialed academic who strikes virtually everyone as indecisive and ineffectual. Does even one reader of this essay know his name? [Steven Chu] Of course, his Nobel Prize supposedly substitutes for his lack of political skills. By extension, are we about to witness the "quant" financial theorist Myron Scholes appointed as Treasury Secretary after Tim Geithner steps down? After all, Scholes too, is a Nobel laureate, even if his notorious "pricing models" helped to bring down Long Term Capital Management and then the world economy a decade later. The Lord save us from "The best and the brightest!"
Regarding taxes:
Both the president and his chief of staff Rahm Emanuel have been completely candid about their redistributionist agenda—an agenda that has even alarmed European liberals. Were they at all concerned with innovation, productivity, and growth, the administration would not publicly espouse taxation policies that punish success and reward failure. In particular, they would not have declared war on small business, since small businesses typically generate the bulk of new jobs and innovations that determine the rate of economic growth.
To be sure, disparities in the current tax code do permit Warren Buffet to incur a much lower tax rate than his receptionist, as he quipped. Such inequities must be remedied. But the fact remains that the top decile and quartile of income earners in the US pay a larger share of government tax revenues than in any other G-7 nation. If so, why does the president assume it is "fair" to hike the tax rates on top income earners, and only on this group? From an employment standpoint, the new tax rates may well send talented young Americans to live elsewhere. Starting in 2011, a New York City wage earner will pay a marginal tax rate (federal, state, and local) of over 60% on "high" incomes of $200,000. This rate is higher than comparable rates in Germany and France where taxes paid secure decent schooling and medical care, which they do not in the US. Yet even so, France has witnessed a veritable diaspora of young talent to London, the US, and Switzerland during the past two decades.
Brock reveals at the end that he initially supported Obama, but he’s having second thoughts.
Is "politics" the problem? We do not think so, at least to the extent that growth-maximizing policies are win-win policies that any good politician should be able to sell. No, the problem is rather one of the mind-set of a generation that has never before needed to confront the problems lying ahead, and that is tone deaf to philosophical issues, as opposed to "policy wonk" issues.
Today's True Challenge — Governance: In this vein, … the root problems of today are not macroeconomic as much as they are political philosophical: How can democracy save itself from itself?
The political philosophy of Team Obama is nowhere more brightly defined than in his and Michelle’s commencement speeches in which they encourage graduates to enter “public service” jobs. Jobs that are in no way going to increase productivity, supply the world of tomorrow with goods and services that make us richer and more prosperous. They are the kind of jobs that nurses perform as a patient is dying, making the world economy more comfortable as the end draws nigh.
The hope for the US and the world is that others will join Brock in his revelation …
The abject moral failure of the new team to identify much less to propose a solution to the End Game is extremely disturbing to the present author. Despite his initial support of President Obama, he increasingly wonders whether we have the right team in place. And he is alarmed that time to rebuild credibility is running out.
1 comment:
The politicians put us in the skid and are driving us head on into the concrete abutment called "Depression".
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