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Brown Manure, Not Green Shoots

The jobs situation is even worse than the headlines.

Add comment July 9th, 2009

The end of the recession will merely be the start of a long, painful journey, says Edmund Conway.

t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.

Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.

When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph

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Reagan Recipe on Fed, Taxes Spells Path From Funk: Amity Shlaes

July 9 (Bloomberg) — Double-digit unemployment looms. The country is in a funk. The federal budget deficit is widening to an extent not seen in decades.

This scenario isn’t new. It also describes the U.S. in 1982. Somehow, the 1980s and the 1990s turned out to be pretty good years. So it’s worthwhile to compare current policy to the one followed then.

Today, it’s hard to say where the U.S. stands when it comes to the strength of the dollar. The country is divided on the question of whether we are confronting inflation or deflation.

In the early 1980s, things were different. For a while our officials wanted a strong dollar and managed to drive the currency up so that it bought more French francs and German marks than it had in a decade. On the home front, voters in both parties had already come to see inflation as an enemy. The Federal Reserve advocated a tight-money policy and pushed interest rates up to prove it meant what it said.

Though the position on the exchange rate didn’t hold up — our own Treasury Department came to undermine it — the Fed kept up its vigilance on inflation.

Today, taxes are on their way up. Whether it will be abolishing some of the tax deductibility of health care or increasing taxes on soda, President Barack Obama and Congress are clearly signaling the direction in which they want to move. Most tax increases under discussion would make the rich, or companies, the first to pay. The justification offered for this is that the federal government needs the money and may know how to spend it better than the private sector, anyhow.

Tax Cuts

In the early 1980s, the view on taxes was the opposite: get them down. The Economic Recovery Tax Act of 1981, enacted by Ronald Reagan, pushed tax rates down for wealthy and non-wealthy alike. The capital gains tax rate dropped to 20 percent. When Reagan signed the Tax Reform Act of 1986, the top marginal rate on income taxes fell to 28 percent.

To be sure, this period did see some tax increases when other politicians in Washington pressed Reagan to scale back some of his cuts in the name of budget balancing. One of those increases came in the 1986 law, which pushed the capital gains tax back to 28 percent. But the general direction of tax policy in the 1980s was clear.

Three points are worth underscoring.

The first is that neither the Fed’s tightening nor the Reagan tax cutting was an obvious sell. Industrialists blamed then-Fed Chairman Paul Volcker personally for the recessions that came with his rate increases. Newspapers tore Reagan apart for believing in tax cuts. When unemployment jumped after the big tax decrease of 1981, the papers crowed. “Mr. Reagan adamantly resists any suggestion that the third stage of his massive tax cut be killed or delayed,” complained Tom Wicker in the New York Times in October 1982.

Contradictory Moves

The second point is that the tax philosophers of the era were putting forward a new idea. Traditional economics holds that raising interest rates and lowering tax rates contradict one another — the former tightening, the latter easing. Reagan’s gurus, and economists behind them like Robert Mundell, were saying something else: tight money and low taxes go together and can yield growth without inflation.

The evidence of the ensuing quarter-century suggests Mundell was on to something.

The 1980s, 1990s and early part of this decade were characterized by strong growth and stable prices, even when tax rates stood at levels economists might previously have deemed inflationary. The Mundell formula worked because lower tax rates left the private sector freer to allocate resources where they were most efficient. Instead of hunting for a tax loophole, citizens hunted for an invention to invest in. The extra growth — real, productive growth — ate up the extra money.

Leaning on Keynes

The third point goes to the heart of the Obama agenda so far.

For half a century, presidents have, knowingly or not, leaned on one line from John Maynard Keynes justifying a larger role for government. “Moderate planning,” Keynes said, “will be safe if those carrying it out are rightly oriented in their own minds and hearts to the moral issue.”

Scholars including Allan Meltzer have persuasively argued that such planning — whether it comes in the first, second, third or nth wave of stimulus — isn’t all that efficient. So the planning and spending are bound to disappoint. Meltzer’s work anticipated Vice President Joseph Biden’s recent acknowledgement that the administration misread how bad the U.S. economy was.

The policy formula that could get us out of trouble today is out there to read. It is worth the attention of all, not just GOP nostalgists.

(Amity Shlaes, senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

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Truth In Charity

Ignatius Press is publishing Pope Benedict’s new encyclical Charity in Truth in three formats—a deluxe hard cover print edition, as an e-book, and as an audio book (in CD and downloadable format).

It will take a month or so to publish the print edition of the book.  It will be a beautiful, hard-cover book like our editions of God is Love and Saved in Hope. But you can preorder your print copy or audio CD set right away.

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Saving Liberty

A few weeks back, at the dawn of the Obama Administration, I was at dinner with a very bright woman of middle years who called herself an independent. She found the new president very engaging, but she was alarmed by the music in the air: a government takeover of Detroit, a $700 billion government bailout of the banks, a $787 billion stimulus bill, a cap and trade bill that will add perhaps $800-$2,000 to every family’s tax bill, a massive healthcare reform now estimated to cost $1 trillion over the next decade. For the past thirty years, most of them good economic years, the federal bite into our GDP has been just under 20%. Calculating the cost of Obama’s spending it will be 28.1% this fiscal year, a peacetime record!

My dinner companion was alarmed. She was not simply alarmed by the bills our president and his Democratic colleagues were ringing up on the Hill. My friend, the independent, was alarmed by something much more important, the cost to our freedoms. As I believe she put it, “the question here is our liberty.” Increasingly, thoughtful Americans understand the Obama era in these terms. With the government suddenly looming so large in the life of every American, it is time for us to consider what is a singularly American possession, individual liberty. The Founding Fathers created a government that was uniquely solicitous about individual liberty. With the federal government so deeply involved in our healthcare, our banking, our manufacturing, and the many targets of its $787 billion stimulus program, it is time to think about your liberty vis-a-vis the government bureaucrats who are about to minister to you.

Ronald Reagan’s modern conservative movement began thinking about the loss of individual liberty to government encroachment half a century ago thanks in part to the wake up call from Friedrich Hayek, delivered in his indispensable book The Road to Serfdom. Hayek believed government was a threat to freedom, enterprise, and the rule of law. Later another vigilant advocate of personal liberty, Frank Meyer, came along and became a major figure for American conservatives, propounding the exhilarating argument that freedom is essential to mankind. Freedom, he wrote, is the “essence of [man's] being,” for without it a citizen cannot be moral, by which he meant cannot choose good over evil. Meyer believed freedom was at our essence because God put it there. God gave us freedom to choose, good over evil, art over schlock, a knee replacement over a Botox treatment.

Personal liberty makes each American citizen a creature of dignity. Obama overlooks this. Though in presenting Congress a $3.9 trillion budget on February 24 he insisted that “I’m not” for big government, he is. Consider the vastness of the budget, its far-reaching domestic policies, and much of his background as a community organizer. Clearly he is a big government guy. No other American president has been so committed to big government.

Historically most of our experiences with big government have been unhappy. Big government is expensive, inefficient, and once corrupted very difficult to clean up. Moreover, once a government bureaucracy has made its judgment on you, whom do you appeal to? With Obamacare, government will decide when and if you can get that knee replacement. From the clear utterances of the president’s healthcare advisers, namely, Drs. Ezekiel Emanuel and David Blumenthal, that knee replacement will depend on such factors as your age and your overall health. If you are too old or decrepit, government will have a more economical place to spend its money. In other words, your health will not be decided by what you want to pay for it but by government policy. That test you wanted for colon cancer might be denied. You might just be too old. Such decisions are made by the nationalized British system all the time.

Almost any service the government provides can be more efficiently and effectively provided by private enterprise. The most striking example is the inefficiency of the money-losing U.S. Postal Service that has been swept aside by the internet and by such private carriers as UPS and FedEx. Government is not even very effective in its efforts at regulation. Consider the recent failures of Fannie Mae and Freddie Mac and at the Securities and Exchange Commission.

There is another unappreciated failing of government. It politicizes everything that it touches, including the simplest human relations. Agreements that ought to be arrived at voluntarily or through the rule of law are arrived at by lobbyists or thanks to the political power of your group — ethnic, economic, or otherwise.

One of the little noted projects of the government healthcare reforms being considered on Capitol Hill today is the channeling of healthcare money away from the elderly and toward community services and drug or alcohol rehabilitation. Equal rights before the law is all well and good, but it is political favor and political power that matter when big government is making your decisions for you.

That is why so many Americans have opted for freedom from government. We recognize that the free society is the most humane…and the most productive.

Obama is Costing Us More than Money – Emmett Tyrell, American Spectator

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Recessionary Road

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Making Payroll

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Ron Paul hits his stride

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Why the West should beware of Beijing’s commodity splurge.

The Great Haul of China Slate

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Innovation can give America back its greatness

Over the past few decades, many in business and government bet that the US could transform itself from an innovative, export-orientated ­powerhouse to an economy based on services and consumption – and that we could still expect to prosper. For a time, it looked like a can’t-miss bet.

Then we missed – badly. Trillions of dollars vanished, along with America’s competitive edge. An economic hurricane shook our financial system to its foundation, leaving our middle class hurt, bewildered and looking for cover. General Electric was not perfect through all of this but, throughout our 130-year history, we have adapted and remained competitive.

The challenge ahead is not impossible. The first step is recognising that we cannot simply go back to the way things were. This downturn is not simply another turning of the wheel but a fundamental transformation. We are, essentially, resetting the US economy.

An American renewal must be built on technology. We must make a serious national commitment to improve our manufacturing infrastructure and increase exports. We need to dispel the myth that American consumer spending can lead our recovery. Instead, we need to draw on 230 years of ingenuity to renew the country’s dedication to innovation, new technologies and productivity.

GE plans to help lead this effort. We have restructured during the downturn, adjusting to market realities, and have continued to increase our investment in research and development. We are reinvesting in American jobs in places such as Michigan and upstate New York. We plan to launch more new products than at any time in our history.

One place where GE is reaping the benefits of this strategy is our plant in Greenville, South Carolina, where we make turbines for gas and wind power generation. We are now selling their products around the world. In fact, their biggest customer is Saudi Electric Corporation.

Some people subscribe to a Darwinian theory of economic evolution – that America has naturally evolved from farming to manufacturing to services. We should pay attention to the example of countries that are growing rapidly by emphasising technology and manufacturing, especially China. They know where the money is and where the opportunities reside and they aim to get there first.

America has to get back in the game. Renewing American competitiveness will not be accomplished through protectionism, but by rebuilding American technology, manufacturing and exports. To get back to making great things, we should clearly strive for a manufacturing workforce that is growing.

To do this, the US government can play a catalytic role. America has a long history of spending that prepares new industries to thrive for generations. Today, my country needs an industrial strategy built around helping companies to succeed with investment that will drive innovation and support high-technology manufacturing and exports. And it needs a robust trade policy that seeks to open ­markets abroad for US companies while being fair to international ­competition.

I consider myself to be the chief executive of a global company that is headquartered in the US. We are firmly committed to globalisation. Our employees – in India, in China, in the US and the UK – deserve to be able to compete and win around the world. At the same time, American business leaders have a responsibility to drive competitiveness in their own country.

On a personal note, I would hate to think that the lasting impression of this generation of American business is the one that exists today. We can do better. We have made our companies globally competitive; now we must do the same for our country. We can help solve difficult problems and create an optimistic future.

The reset economy has clarified the scope of the American challenge and offered us a chance for renewal. The best companies will concentrate on real value and real needs and invest for the long term, creating a firm, new foundation on which a stable, strong economy can grow.

The US has faced difficult odds many times. We have beaten them throughout history. With a commitment to technology and manufacturing-driven exports leading the way, America can do so once again.

Innovation Can Give U.S Back its Greatness – Jeff Immelt, Financial Times

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