Link: http://www.realclearpolitics.com/articles/2010/02/03/the_perils_of_prosperity_the_story_behind_the_economic_crisis_100149.html

This summary of the causes of the recession by respected economist Robert Samuelson is generally close to the mark. It leaves out some key points (CRA, homeownership promotion, mark-to-market), but is right on the principle macroeconomic factors.

The second to last paragraph has some merit:

But it’s neither possible – nor desirable – to regulate away all risk. Every “bubble” is not a potential Depression. Popped bubbles and losses must occur to deter speculation and compel investors and borrowers to evaluate risk. The overregulation of finance may discourage useful innovation and clog the channels for capital on which an expanding economy depends. Finally, a single-minded focus on the blunders of Wall Street may also distract us from other possible sources of future crises, including excessive government debt and borrowing.

Two big inefficiency problems are occurring with the way the government is handling the crisis right now. First, the return to excessively low interest rates (which Samuelson points out were part of the reason we got here) and an unprecedented amount of deficit spending will result in productive inefficiency–an excessive amount of investment over saving. The difference is made up in an increase in the money supply fed by government debt (and, for the first time, by existing mortgage securities). This will end up in higher inflation (when money velocity returns), unused capital investment, and broken balance sheets (both for households and for government).

Second, since much of the spending is by government, it also results in allocative inefficiency–investment and consumption of goods and services at prices divorced from actual value. Whenever you hear some Keynesian (like Brad DeLong) saying “spend money on anything", you will understand what I am talking about. Intuitively it makes no sense to pay people to bury cash in the ground and dig it up again. Yet almost the entire stimulus bill was money looking for a grift. The boom caused a lot of government-induced malinvestment, principally in financial services and homebuilding industries. The bust is a natural reaction to correct these, to move the capital and labor invested in these industries elsewhere. If this is interrupted by government pushing the resources into yet other unproductive work (e.g., green jobs), the bust will have made us all poorer for nothing and will continue until we let the natural adjustments occur.

To progressives I say: … LET’S MAKE A DEAL!

I’ll keep my morals out of your bedroom if you keep your morals out of my wallet.

Let the progress begin.

While it is a little late, I may as well go on record writing that I oppose(d) the reappointment of Ben Bernanke as Chairman of the Federal Reserve. He’s a very capable individual, but:

1. He is implementing the same policy that created the severe economic crisis that gave us a badly structured economy and a resulting recession, i.e. easy money and artificially low interest rates. In fact, he has pursued the lowest interest rates in the Fed’s history.
2. He has sought to acquire much more power and discretion for the Federal Reserve. Not only has he returned to a dual policy of price stability and macroeconomic stability (full employment), the latter being wisely and effectively discarded in the last thirty years by Volcker and Greenspan, but he has made these goals justification for buying consumer mortgages and equities without Congressional approval.

In fact, his very competence is part of the problem. He has found brilliant and inventive ways to pursue these goals, all of which (intentionally or not) expand the power of the Fed at the expense of elected officials, the financial industry, and common liberty.

Anyhow, Bernanke was confirmed to a second four-year term by the U.S. Senate yesterday by a vote of70-30. 18 Republicans, 11 Democrats, and 1 independent voted no.

I was not actually surprised that many Republicans supported his re-confirmation. But I was curious how this vote compared with the TARP vote of October 2008. It would seem that similar reasoning for legislators to oppose TARP would be used to oppose Bernanke: letting the market adjust to economic reality, belief that government interference makes the problem worse, assuaging symptoms accommodates the problem, so forth.

So, comparing Republicans on the two votes (the TARP vote breakdown is here) for those who served in both Congresses, we have:

1. For TARP, for Bernanke (18): Alexander (TN), Bennett (UT), Bond (MO), Burr (NC), Chambliss (GA), Coburn (OK), Collins (ME), Corker (TN), Graham (SC), Gregg (NH), Hatch (UT), Isakson (GA), Kyl (AZ), Lugar (IN), McConnell (KY), Murkowski (AK), Snowe (ME), Voinovich (OH)
2. For TARP, against Bernanke (7): Cornyn (TX), Ensign (NV), Grassley (IA), Hutchison (TX), McCain (AZ), Specter (PA), Thune (SD)
3. Against TARP, for Bernanke (3): Barrasso (WY), Cochran (MS), Enzi (WY)
4. Against both (10): Brownback (KS), Bunning (KY), Crapo (ID), DeMint (SC), Inhofe (OK), Roberts (KS), Sessions (AL), Shelby (AL), Vitter (LA), Wicker (MS)

Note that three Republicans voted who did not serve in the last Congress and thus did not vote on TARP: Johanns (NE), LeMieux (FL), and Risch (ID); Johanns voted for Bernanke, the other two against. That makes 41 Republicans because I included Specter (PA), turncoat.

Group (1)–the timid. This includes a lot of typical establishment, free-market-is-better-I-guess kind of Republicans who think the bailout was necessary “to avoid a Depression” (whatever) and the Fed should be doing all it can to “get the economy moving again". It is disappointing to see some stalwart economic conservatives here, like Burr, Kyl, and especially Coburn. These people lean free-market, but they lack the conviction.

Group (2)–the jaded. These might be senators who have changed their mind on macro-management issues, now that they have seen it play out in cahoots with a Democratic government.

Group (3)–the confused. This group thinks the bailout was wrong but that things the Fed was doing which is hand-in-hand was okay. Why are Baraaso and Enzi voting for Bernanke? Is there some connection to Wyoming?

Group (4)–the wise. These senators read my blog.

Taking these votes together seems to show a dichotomy in economic policy. It is not (strictly) free-market vs. government, and is not so much populism vs. establishment. It is more a belief (or doubt) that the macroeconomy can run (or correct) itself. It is something along the lines of Keynesian vs. Austrian in macroeconomics. One doesn’t need to be distrustful of individuals or businesses to believe that they may freely act together to perhaps inadvertently bring down the system (i.e., one can be free-market and Keynesian). But it is a mistaken belief.

I have long thought that there are two main fault lines in economic policy: regulation vs. laissez-faire and redistribution vs. desert. These two votes show a macroeconomic fault line which kind of fits into the regulation vs. laissez-faire, but not quite: some of the senators in group (1) have impeccable anti-regulatory credentials. Indeed, many of them probably believe that it is (in some way) pro-free-market to vote for TARP and to vote for Bernanke. But I think it reflects a mistaken belief that natural forces in the economy, being voluntary choices of individuals, are something to be resisted. If you subscribe to the “Too Big to Fail” mentality and do not recognize the moral hazards involved in resisting it, you would have also voted for the biggest bailout in economic history and for a man whose response is to return to the course that got us there.

One of the provisions in the Middle Class Task Force proposals is not only bad policy, but another example of horrid constituency politics. This is the provision on “Limiting a student’s federal loan payments to 10 percent of his or her income". Here is how it is explained:

The Obama-Biden Administration will expand make [sic] student loans more affordable by limiting a borrower’s payments to 10 percent of his or her income above a basic living allowance. It will also keep the total cost of loan repayment manageable by forgiving all remaining debt after 10 years of payments for those in public service work and 20 years for all others. The monthly payment for a single borrower earning $30,000 who owes $20,000 in loans would be $115 a month, compared to $228 a month under the standard 10-year repayment plan. These steps – which build on the Income-Based Repayment plan implemented last summer – will help with the staggering burden of student loan debt and allow a generation of young adults to enter public service and other careers with historically low pay. [Emphasis added]

Like his $50 billion payoff to the unions in the health care conference bill negotiations, this is naked discrimination, this time against the private sector. In this formulation, you can escape with having the government forgive most of your student loans if you enter “public service work”. This discrimination is defended because such jobs have “historically low pay". But far from being low-paying, Jeff Jacoby noted in today’s Boston Globe that public employees already make 76% more than private sector workers, in addition to having pension benefits those who work more than seven hours a day only dream about.

If there’s anybody who doesn’t need coddling, it’s “public service employees". Yet they are a big Democratic constituency, so middle-class private-sector tax dollars go to [upper-]middle-class public servants. It is also a big payoff to academia, another Democratic constituency, as higher education tuition will skyrocket as everyone in their 20s will stay in school as long as possible, knowing that their schooling costs will never be more than 10% of any future income (and that only above some minimum threshold) and never last more than 10 to 20 years.

In tonight’s State of the Union address, President Barack Obama will doubtless try to patch up his agenda after the domestic policy failures of the past year: an unpopular, ineffective, and unprecedentedly expensive stimulus program; a stalled cap-and-trade energy bill based on dubious science and heavy-handed regulation; and a health-care bill that is on life support after angry conservative and independents just elected a steadfast opponent in a heavily Democratic state.

A large part of the speech will be devoted to a set of big new policy initiatives produced by the “Middle Class Task Force", a group, headed by Vice President Biden, of his Cabinet secretaries and economic advisors. These were outlined at a Press briefing on Monday. The White House also produced a more detailed account of the proposals in the attached fact sheet.

Among these proposals are three new tax credits. I have noted before this President’s love affair with refundable tax credits, and how conservatives and Republicans are often hoodwinked by such tax cut socialism.

You’re probably asking yourself: Don’t these guys realize that giving handouts to the middle class entails raising taxes on (or adding debt to) the middle class? They know. But they play this con game of ‘Take from the Middle Class, Give to the Middle Class’ for four important self-serving reasons: (1) They want power over the money, consider it theirs to begin with, and can stop giving it back at any time; (2) They build political constituencies of people who receive the paybacks; and (3) They can discriminate who they give the money back to.

At some point, people will realize that, with so many tax credit carve-outs, they are simply being given back the taxes they pay, but with strings attached. You work, you pay taxes, the government gives these taxes back to you in tax credits. Seems harmless enough. The difference is that the government treats it as their money, not yours. Notice in the fact sheet and press release the numerous times they say “administration” and “help"; you should be thankful they are giving you a tax credit of your own money!

Don’t be surprised if they came out with a Tax Credit for Taxpayers. Do you pay enough in taxes? Here’s a tax credit for you. Not a reduction in taxes, but a tax credit. Don’t laugh. That’s what last year’s Making Work Pay Tax Credit was all about. We tax you higher so we can give you money. So be thankful.