A sign of immaturity – most often found in children and certain politicians – is being in denial or even unaware of the consequences of one’s actions. The global political class has always suffered from an excess of immaturity, but every generation or so, political immaturity explodes like a star in its death throes and vaporizes everything in its vicinity.
Current examples are all too numerous. Much of the present global financial crisis was caused by the issuance of too much debt by both governments and by private players. A mature thinker would understand that part of the solution must be a reduction in debt, and only an immature mind would advocate the creation of mountains of new and almost never-ending debt – yet this is precisely what the majority of the political class in the United States and many other countries is doing in issuing many trillions of dollars of new government debt.
Stanford University economics professor and former Treasury Undersecretary John B. Taylor has shown how the proposed additional U.S. government debt could cause 100 percent inflation over the next few years, which means most people will see their real standard of living fall as prices double. Long-term interest rates on U.S. government debt have jumped a colossal 81 percent (annualized) in just the last five months and seem slated to go higher as markets see the increased risk of future inflation.
To ameliorate some of the inflation, immature political minds (and even a few immature economists) argue for a massive tax increase to pay for all of the new debt. Mr. Taylor estimates the tax increase would have to be about 60 percent, which, of course, would kill incentives to work, save and invest and would result in a stagnant economy, or worse, massive unemployment.
For centuries in the United States, and even before under English common law, bond holders were secure in the knowledge that in a business failure they would be first in line to collect from the sale of the assets. Suddenly, the immature actors in the Obama administration have overturned well-established bankruptcy law and put a politically favored union ahead of the bond holders in the case of Chrysler and General Motors Corp.
The predictable result is that firms with strong unions already find they have to pay higher interest rates because lenders demand a substantial political risk premium. As a result, unionized firms will be even less competitive and, thus, there will be even fewer union jobs (unless the taxpayers are forced to subsidize the higher union costs).
Another sign of political immaturity in Washington, Paris and London is the attack on low-tax jurisdictions with the demand that they enforce the tax laws of high-tax countries. Just this past week, the Organization for Economic Cooperation and Development in Paris – an organization originally founded to promote economic growth – said it would help coordinate the attack of the high taxers on the low taxers.
One result of this attack is that suddenly fewer and fewer banks will open accounts for Americans living or working in other countries. The banks find the new rules too costly to administer, and thus the safer and less costly course of action for them is to refuse to provide accounts for Americans. The reason given for the attack is to collect the purported $100 billion that Americans are evading in taxes.
The Internal Revenue Service commissioner was recently forced to admit that the $100 billion number was totally fabricated without any evidence. More mature minds (than those now found in much of the Congress, the Treasury and the IRS) would understand that trying to go after a fictitious $100 billion, while putting several trillion of needed foreign investment into the United States at risk, is a fool’s game.
Without bank accounts, overseas Americans will not be able to write a check on a U.S. bank to pay U.S. bills or taxes, or to get a U.S.-issued credit card, or to transfer funds to American bank accounts, or to establish a credit rating in the United States, etc. To date, the IRS has refused to do a cost-benefit test on its proposed regulations, despite requests – probably because a legitimate cost-benefit analysis would show that millions of Americans would be harmed – and potentially hundreds of billions of dollars lost – in a futile attempt to catch a few tax evaders.
The good news is that there is still time to reverse the worst aspects of the destructive policies described above – to avoid ever-increasing inflation and interest rates. The bad news is those politicians responsible both for the current mess and these proposed harmful “cures” will probably continue to act like immature teenagers with too much access to money and power.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
Immaturity In Economic Power – Richard Rahn, Washington Times
June 8th, 2009
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From Naked Capitalism: A story that needs to be told by people who know something about it.
So an article today in the New York Times, “The Economy Is Still at the Brink” by Sandy Lewis and William Cohan, is a badly needed contirbution:
President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible…
Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.
Yves here. Put more simply, confidence is a necessary but not sufficient condition for recovery. Indeed, many readers have argued that boosterism will backfire when the policy measures come up short. This is, as we have said repeatedly, an effort to restore status quo ante rather than deal with serious, deeply rooted problems. Back to the article:
We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game. (Disclosure: One of us, Mr. Lewis, was convicted on federal charges of stock manipulation in 1989, pardoned by President Bill Clinton in 2001 and had his lifetime trading ban overturned by the Securities and Exchange Commission in 2006; documents relating to the case can be found at sblewis.net.)
The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. At another fund-raising event, for Senator Harry Reid, President Obama said: “We didn’t ask for the challenges that we face. But we are determined to answer the call to meet those challenges, to cast aside the old arguments and overcome the stubborn divisions and move forward as one people and one nation …. It will take time but I promise you, I promise you, I’ll always tell you the truth about the challenges we face.”
Keeping that statement in mind — as well as an abiding faith in the importance of properly functioning capital markets — we have come up with a set of questions meant to challenge a popular president, with vast majorities in Congress, to find the flaws in the system, to figure out what’s being done to fix them and to get to the truth about the difficulties we face as we set out to restore the proper functioning of our markets and our standing in the world.
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Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.
Yves here. Finally, someone besides folks like Willem Buiter, who is well respected but not widely read, is saying the obvious. Back to the story:
Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.
As a start, the best-compensated executives at the top of these big banks, hedge funds and private-equity firms should be treated like general partners of yore. If a firm takes prudent risks that pay off, this top layer of management should be well compensated. But if the risks these people take are imprudent and the losses grave, they should expect to lose their jobs. Instead of getting guaranteed salaries or huge bonuses, they should have the bulk of their net worth completely at risk for a long stretch of time — 10 years come to mind — for the decisions they make while in charge. This would go a long way toward re-aligning the interests of these firms with those of their shareholders and clients and the American people, who have been saddled with their risks and mistakes.
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Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?
Confidence will return only when jobs can be found and mortgage payments are made. Even if Mr. Obama’s claim is true that his $780 billion stimulus package “saved or created” some 150,000 jobs, we seem a long way away from the point where those struggling to get by will feel like spending again. What happens when people buy a car once every 10 years instead of once every two or three, especially now that we taxpayers own such a big percentage of the American auto industry?
The story continues here.
June 8th, 2009
