Liberals don’t get economics because it’s not as simple as they are. “If people are poor” say liberals, “then lets take money from the rich and give it to them.” It has a ‘let em eat cake’ sort of simplicity and elegance, so they put no more thought into it than that. But when they follow through on their plan, it hurts the character of the poor by making them dependent, and it hurts the rich because they could otherwise do productive things with the money that liberals are wasting making the poor dependent. It’s an old story really.
For liberals this is really standard fare. But that isn’t to say that there aren’t some economic issues which are so counter-intuitive that they defy popular instinct for conservatives as well. Tax rates go down and revenues go up; conservatives typically understand that where liberals don't. But I’d like to call attention to a few others which seem to be a bad idea in principle (and in fact probably are in most cases) but in reality they will only help us given our present situation.
The first is inflation. We are conditioned to hate inflation, and rightly so in the broadest sense. But “some” inflation right now would actually firm up our global position and make a complete collapse of our system less likely not more.
A ‘collapse’ of the American system can only come from a crisis event. The scenario envisioned by most is a run on Treasuries which causes the Fed to support the bonds, and that subsequently causes a run on the dollar. But if we let some level of managed inflation occur, then the thing that will rise most precipitously if food. Nowhere in the world does food represent a lower portion of the average wage than in America. It’s really our last area of total global dominance.
So as food prices rise across the globe, it will destabilize the emerging market long before it begins to affect stability in the US. That will mean that if a liquidity crisis were to occur in the capital markets for whatever reason, people will be more likely to run toward the US dollar instead of away from it. In other words, allowing a degree of ‘managed’ inflation will reinforce the US market in comparison, and make a total collapse less likely.
The second is the ‘bail out’ for the states. Several states have problems which can’t be solved by normal cuts in spending and management of tax rates. I feel like I’ve discussed why ad-infinitum, but if Rip Van winkle is reading this, it’s their pension liabilities which are doing it, and it’s the bluest highly unionized states that are in trouble.
The first conservative reaction to the fiscal distress is shouts of ‘let em default’. Austerity and personal responsibility are watchwords of the conservative movement and are important to the 'Tea Party' as well. Even the House of Representatives is considering a resolution against any 'bailout' for the states, and if it’s adopted, it will all but guarantee that someone somewhere will be entering the legal limbo of state bankruptcy.
But to give more evidence to the axiom that the first instinct isn’t necessarily the best, that ‘let em default’ emotion is precisely the same one held by most liberals. Default, under the present law, means the bond holder only. And according to liberals, it's they alone who should be asked to take the hit. “We have a contract" they say "and that must be honored come hell or high water.”
But if if they are, then not only will services have to be slashed dramatically, laying off union staffers in the process, but taxes will need to be raised enough to kill whatever economic growth we’re expecting. And forcing the default on the bondholders exclusively will also make it impossible for the states to borrow money in the future at anything like a reasonable rate. Some aggregation of capital is necessary in government, so a greater portion of future taxes will have to go to debt service than is currently the case. If this happens, then very little government is about to become VERY expensive.
There are steps being taken to change the law – and the real solution will be a negotiated settlement of all parties involved. But it’s ironic how the conservative instinct for fiscal austerity will only aggravate the problem. The thing that conservatives will typically strive for – a growing economy and rising market with stable prices – would be best achieved with some level of federal assurance for the financial markets. It can even probably be managed without any real dollar cost to the taxpayer. But both liberals and conservative are in open revolt over the prospect.
6 comments:
If the blue states are willing to sign over a painfully big chunk of their sovereignty (starting with a bankruptcy judge presiding over their financial commitments, and maybe extending to limits on Federal representation in Congress), then hey, bail away.
Inflation sucks and we are relying to those crappy politicians to act instead of expecting that from them.
The first is inflation. We are conditioned to hate inflation, and rightly so in the broadest sense. But “some” inflation right now would actually firm up our global position and make a complete collapse of our system less likely not more.
Looking back in history (from my perspective), I don't see much in the way of any great nation / empire inflating its way back to prosperity.
I can however, find examples where a stable currency was chosen. The results was often short term pain in the form of a steep recession / depression, but long term growth overall. Examples: England after the Napoleonic wars, USA after the Civil War, 1921 depression where Harding / Coolidge cut spending and reversed the post WWI inflationary period. Reagan / Volker in the early 1980's ending the double digit inflationary period, even though it triggered a steep recession.
USA, post Civil War: The government committed itself to defending the value of the dollar (it took over a decade because the dollar had been effectively destroyed during the war). In this case, making the fiat money (United States Note) issued during the war as good as gold. It took decades, but the fiat money eventually traded for the same value as the gold backed dollar. The result over the long term was capital flowing into the USA and a massive expansion of the economy as industrial output soared. There were financial panics (1873, 1893), but they served a purpose as well: Over expansion of credit and mal-investment (i.e. over-building of railroads and housing) were severely and quickly punished. Bad debt was written off and the economy picked up again. I think this is preferable to a long, drawn out crisis a-la Japan where you have endless stimulus without ever getting the bad investments off the books. Or in my opinion, destroying the long term growth by eroding the value of the currency and hence, punishing those who save / invest on the long term.
If the USA committed to defending the dollar (even going as far as to re-issue gold and silver certificates as a vote of confidence), would not investment pour into the USA? The world over, there is a loss of faith in the fiat money system. Would not the USA benefit in a huge way if we were the safe harbor. Versus the "least bad" choice among the major economies of the world?
As a principled position I agree that stable prices are more important over the long term. Over the short term however, I stand behind what I said.
The problem is that it's the path of least resistance for those deciding policy, so we don't get it only in the short term, but in the long term as well.
To add to this thread and your T. Sowell Thred: An interview with Sowell has been posted at http://rightwingnews.com/2011/01/interviewing-thomas-sowell-on-basic-economics/
We're getting very close to the point where we could have states default on their debts for the first time. What should happen then?
They should go bankrupt. I'm looking forward to it.
There are three possibilities -- bankruptcy or bailouts or ruinous taxations. Of the three, bankruptcy is the one that makes the most sense because it's the one that conveys the most accurate knowledge -- which is that they've run out of money and couldn't cover all the promises they made. That fact should be revealed to all for future reference. The other thing about bankruptcy is that it's the only thing I know of that can get rid of these ruinous public sector union contracts with these extravagant pensions. Those pensions are so popular because the politicians can promise the pension now and get votes now without losing the votes of taxpayers now, because they don't set aside enough money to cover the pensions. Then they simply kick the can down the road and leave it to somebody else to figure out what to do when the money runs out.
You say:
They should go bankrupt. I'm looking forward to it.
I'm sorry but I don't know what that means. I don’t mean to nit-pick, but if you think it means the same thing that it would mean when you say it about yourself or about an insolvent company, it really doesn't.
Right now the muni-bond market is assuming that there will be some level of federal involvement of the dissolution of state liabilities. They're assuming that because they know that the alternative is chaos. If you let the California bondholders lose 100% (or even take a steep haircut), it would be exactly the same as driving a Ferrari off a cliff. It makes no sense.
The Ferrari maybe dented, have ugly paint, and be belching smoke with three flat tires – it may not even be running at all and be going off the cliff only after rolling downhill and thanks to the help of gravity. But it's still a Ferrari. It has value. And the bond holders know that the Feds will see that and react accordingly no matter what the talking heads say.
So don't go throwing any parties yet - for all the emotional satisfaction there is to be had at seeing morally bankrupt people get what they deserve, we're all going to be getting a bill for this.
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