Bogeyman Economics

I'm just a buffoon, and I love a little laughter. We all need a little comic relief from time to time, so I like to make light of the economic mess we're in. However, when surly individuals with Ph.D.s and/or lots of government power start making spooky declarations and rattling their chains, I get a little nervous. After all, they could hurt somebody.


[Thanks to Zoogstercostumes.com for the image.]

Take Ben Bernanke, Timothy Geithner, and Alan Blinder, for example.

A few months ago, Dr. Bernanke looked Steve Croft straight in the eye and declared his absolute faith that the Federal Reserve can keep our economy stable and, at the same time withdraw the Fed's monetary support as soon as prices rise too much in the U.S.

I guess he thinks prices outside the country can rise as much as they want and it's not our problem. Yet credible researchers argue that U.S. monetary looseness is directly behind the current international rise in dollar-priced commodities. (See this Steve H. Hanke article for a breath of fresh common sense.) And rising food and raw material prices around the world cause misery, poverty, and death. (See this report by the World Bank.)

Then almost in the same sentence Bernanke went on to tell Steve about controlling "market expectations." Now, which is it, Sir? Does withdrawal of monetary support really stop incipient price inflation, or is price inflation merely the result of "market expectations"? Because in the latter case, you must believe that the Fed's words are more important that its actions.

But even Bernanke seems to admit that, sooner or later, the Fed will have to correct the situation; yet I don't see how the Fed can withdraw liquidity without causing a rise in interest rates and a second serious economic dip. So I suspect Bernanke and his colleagues are hoping against hope they can keep liquidity high, convince the markets that price inflation isn't going to happen, and then -- Voila, no price inflation, i.e. an economic miracle. Good luck to you, Doc. When it goes awry, either with price inflation or a second dip, don't say I didn't tell you so.

Then there's our Secretary of the Treasury, Mr. Timothy Geithner, warning us that the debt ceiling must be raised or America could default. Now, you and I know this is nonsense. (If you're not sure, read this common sense piece from Michael D. Tanner.) But no matter to the all-powerful Mr. Geithner. Recently his main purpose in life has been to scare debt-wary Republicans into believing they're driving the country into default. But, Mr. Geithner, what happens when Congress does raise the ceiling? Obviously, it condones the debt spending. But wait a minute, don't you get it, Sir? We don't want any more debt. How much of "No more!" don't you understand? You may not care if the U.S. retains its credibility, but we do.

Professor Alan Blinder, a Keynesian voodoo-economics professor at Princeton, declares that "if we crash into the debt ceiling ... it's not likely to be pretty. [WSJ commentary.] ... "At some point," says Blinder, "Mr. Geithner could wind up brooding over horrible questions like these: Do we stop issuing checks for Social Security benefits, or for soldiers' pay, or for interest payments to the Chinese government? Such agonizing choices are what make default imaginable."

Sounds like plain old scaremongering to me. This guy is the kind of academic soothsayer who furnishes politicians like Geithner with serious-sounding, credentialed ammunition. Shame on you, Professor. You're lucky you won't have to pay for the mess when U.S. debt explodes off the charts and we can't even pay the interest anymore.

Blinder goes on: "[S]uppose the federal government actually does reduce its expenditures by 40% overnight. That translates to roughly $1.5 trillion at annual rates, or about 10% of GDP. That's an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9% unemployment. Even contemplating such a possibility is evidence of a dark, self-destructive impulse."

So Professor, which is the more self-destructive party: the academics like yourself, along with the politicians and their voters, who have gotten the U.S. into the worst pickle of its history, or those who would try to save us from people like you? No, you can't scare me -- well, wait; actually, you DO scare me. But not for the reasons you think.

American jurisprudence is missing one important element: Political Accountability. American citizens should be able to hold individuals in positions of power accountable for their recommendations and actions, other than just voting them out of office. If people want the power, they should get the liability.

There should be a law that anyone in a position of power who makes policy decisions that later turn out to be wrong should be held responsible and should give up everything they own or will ever earn, in order to pay back a fraction of what is owed to all those who have been harmed.

Drunk bus drivers who cause accidents are fired and penalized, even put in jail. Politicians inebriated by the headiness of power, and academics swollen with their sense of self-importance, can cause billions of losses to defenseless citizens with no fear of reprisal. What do they get when they screw up? A comfortable pension, full retirement benefits, and a book deal.

That's Bogeyman Economics for you.

Blinder's Blindnesses

Alan Blinder, the well-known professor of economics at Princeton, wrote an opinion piece in the Wall Street Journal today. He claims that the fiscal hawks who fear that the stimulus hasn't worked are wrong, and that their refusal to give in on the unemployment benefits issue is misguided--what he labeled "pretty anti-Keynesian thinking."

Well yes, Professor, that's on purpose.


[Thanks to for the image of Brueghel's Blind-Leading-The-Blind]

Blinder later specifies that he is referring to Keynes's recommendations to increase federal spending, and to the idea of reducing taxes so as to increase consumers' discretionary income and hence consumption.

But Blinder himself differs from Keynes (taking permission for his inconsistency from Ralph Waldo Emerson) in that he does not endorse tax reduction. Blinder's own Keynes-bis prescription is, on the contrary, to raise taxes by allowing the Bush tax cuts to lapse (because "we can't afford them"), and to "combine more stimulus in the short run with more budgetary restraint for the long run."

This means, I assume, that the government should allow the tax cuts to lapse and use the increased tax revenue to prolong unemployment benefits (basically a redistribution of income). Then Congress should increase federal stimulus deficit spending and worry about the consequences later (believing, I guess, that wishful thinking today will restrain tomorrow's budget in spite of itself).

Thus, he declares, "Obama's Fiscal Priorities Are Right."

I see several problems with his reasoning.

Problem 1. The spender-Congress's plan, to date, is to increase federal spending through more stimulus AND to raise future spending in the long run when the new health care laws kick in and when the coming baby-boom Social Security/Medicare/Medicaid entitlements explode. This is the opposite of Blinder's long-run recommendations.

Problem 2. By increasing both taxes and unemployment benefits Blinder thinks he is simply redistributing wealth, i.e. taking from Peter to pay Paul, justified by the arguments that (i) taking from the rich is not printing money or incurring more debt; (ii) giving $1 in unemployment benefits, or giving $1 in middle-class tax cuts, or giving a $1 cut to a wealthy taxpayer is "identical" in its impact on the budget; and (iii) more consumption will cure the recession.

This is unproven on three fronts.

a. Let's say we grant that an unemployed person is likely to spend the $1, and let's even grant that a middle-class wage earner will most likely spend it. How can Blinder maintain that a wealthy person, with his armada of lawyers, will still declare the same amount of taxable income if the taxes were to increase substantially? The Laffer curve seems to suggest that wealthy taxpayers will find a way to avoid paying taxes as the tax rate climbs to a more punitive level.

b. It may be true that unemployment benefits financed by the confiscated earnings of the wealthy might force GDP income to shift out of capital investment and land in consumption. But is this a proven recession-buster? It might just have the opposite effect, especially if it's on a large scale.

c. I think Zandi's quantitative model may need a little peer review, and preferably not by a Princeton economist. Today's Wall Street Journal mentions two NBER studies that indicate:

- "... a one week increase in potential [unemployment] benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks" - 1990 study by Lawrence Katz

- "It is well known that unemployment benefits raise unemployment durations" - Raj Chetty of UC Berkeley

- Another study in March of 2010 by Michael Feroli (J. P. Morgan Chase) concludes that "lengthened availability of jobless benefits has raised the unemployment rate by 1.5% points."

3. Blinder says, "[W]e know one thing for sure: As the unemployment rate rises, the disincentives that worry conservatives become less important because there are fewer jobs to find...." Less important? That is nonsensical. He is saying that the chances of finding a job are reduced, but does this mean we have a better excuse to discourage people from accepting work?

I think the contrary. If people are under financial pressure, people will consider working in a different field than they're used to, or at somewhat lower pay, even if only temporarily. This is a GOOD thing, because the bubble economy created imbalances in the workforce that need to be rebalanced. However, if you throw them more benefits, the disincentives will operate to prevent people from hunting for, and accepting, alternative work, and skilled-labor job offers will continue to go unfilled--yes, that's right, skilled workers are hard to find, even today.

Lastly, I would respectfully ask Professor Blinder to drop the moralizing. It's namby-pamby and weak. He says, "In the 1930s, FDR taught us that heedless self-interest is both bad morals and bad economics." P-u-l-lease. He's beginning to sound like a climatologist: "Let's just do the right thing, whether we can prove it's actually beneficial or not."

Not my kind of morals, economics, or science.