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Restore confidence first
The NYT asked me to give policy advice to our President elect. Here is my piece and here is an excerpt from my very simple argument:
Rebuilding confidence might seem a small matter, but it is not. The truth is this: America is a wonderful and magnanimous nation when it is a winner, but Americans are not used to losing and Americans are not used to panic.
Often we respond to negative events badly, so we need to be especially careful when we are in a losing or risky position.
Very bad events can cause a panic among the citizenry or its leaders, which translates into subsequent bad decisions. For a classic example of a negative policy dynamic, look at 9/11. The United States lost 3,000 lives and a great deal of wealth and confidence. The government then took actions, most of all the Iraq war, which led to even greater losses.
We are in danger of getting stuck in another negative dynamic, but this time in the realm of economics. We might follow up the financial crisis with some worse responses and policies.
It’s not just the country’s future that is on the line. Despite the commonality of anti-American rhetoric, the United States sets the tone for much of the world.
Addendum: Here are related pieces.
Posted by Tyler Cowen on November 9, 2008 at 07:29 AM in Economics | Permalink
Comments
Bravo.
Posted by: meter at Nov 9, 2008 8:43:35 AM
Did the Times ask you for policy advice or personality advice? :)
Posted by: Bob Murphy at Nov 9, 2008 10:45:22 AM
And another addendum would be Stiglitz,
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/06/AR2008110602997.html
Posted by: John B. Chilton at Nov 9, 2008 11:06:47 AM
In addition to repealing the 2001-03 tax cuts for the wealthiest, Obama should also consider taxing dividends and capital gains at the same rate as ordinary income: It would reduce the deficit, have few short-term adverse effects on an already reeling economy and make the tax code more fair. After all, why should speculators -- whether on oil, food or real estate -- be taxed less than those who work long hours to make a living?
I always make sure to call the retired folks I know who count on dividends and capital gains "speculators."
Heck, anyone who relies on Social Security is a "speculator."
Posted by: at Nov 9, 2008 11:23:32 AM
Another major problem Obama has to tackle is growing inequality in this country. Some of these trends will take decades to reverse, but ensuring that no Americans are denied a college education because they can't afford it, providing adequate funding for public primary and secondary schools and so forth would be a good beginning .
A good beginning for another bubble. This one in education.
Oh, wait. Already way too many kids go to college who shouldn't be there, and now we want to fund more of it. Oh heck yes!
The cost to educate K-12 students continues to rise while test scores aren't rising. We just haven't poured enough money into education.
For more, see:
- "America's Most Overrated Product: the Bachelor's Degree," by Marty Nemko, The Chronicle of Higher Education, May 2, 2008
- "Are Too Many People Going to College?" By Charles Murray, The American Magazine, September 8, 2008
- "It may not matter all that much where you go to college," by Paul Graham, September 2007
- "Is AP Good for Everybody? It's Debatable," a debate with Jay Mathews and Patrick Welsh, The Washington Post, April 10, 2005
Posted by: at Nov 9, 2008 11:34:37 AM
Another major problem Obama has to tackle is growing inequality in this country. Some of these trends will take decades to reverse, but ensuring that no Americans are denied a college education because they can't afford it, providing adequate funding for public primary and secondary schools and so forth would be a good beginning .
I had a moment of panic before I realized that must be Stiglitz and not Cowen.
I think the best way to make education affordable is the old fashioned way, by making it cheaper, and not by "innovative financial products" in the college loan area. Use tech, slash funding for majors that ill-serve their graduates, and make higher ed cheap enough for everyone.
Posted by: odograph at Nov 9, 2008 11:48:49 AM
Heck, anyone who relies on Social Security is a "speculator."
Or, if you are under 65 or 70, a hopeless optimist.
Posted by: at Nov 9, 2008 12:07:26 PM
This column was evasive and, for that reason, quite useless. What type of policy advice is this? Tell Obama--a man renowned for his consistent demeanor--to stay calm. I expect more from a Tyler Cowen column.
Posted by: at Nov 9, 2008 12:15:03 PM
yeah, i don't see too much policy advice here.
the question is what should Obama DO to rebuild confidence? "tone" isn't enough.
today China announced a massive stimulus/infrastructure/investment package. i'd like to see the U.S. do something similar as a first step. Then we need to tackle energy, health care, and education.
Posted by: raft at Nov 9, 2008 12:15:09 PM
I think capital gains should be ordinary income. That was Ronald Reagan's position, too, I think. Most capital gains are in mutual funds. People in 15% bracket pay 15%.
Also, a lot of capital gains are in tax deferred pension plans which will be taxed at the lower retirement rate of tax. So, a lot of this capital gains talk is a red herring.
But a flat tax would be best. Take the politics out of taxation. No deductions, everyone pays above a certain minimum.
As far as investing in infrastructure, mass transit seems the most likely candidate along with inter-city trains and improving the freight system. If we spend a lot of gas on autos, we can save a lot on public transportation. But of course the Democrats are hypocrites on this, too. They talk about saving energy but they just added two lanes to the Dan Ryan X-way in Chicago. For more autos. You can't breathe the air at O'Hare now, but they are expanding. For more flights. Talk is cheap. It plays well with the ignorant masses.
Bill Clinton was successful because he basically avoided government meddling in the economy. But that didn't prevent the dot.com bust. Neither could government prevent the real estate bust. In fact, government meddling was a big cause. Obama could take a lesson from Clinton. Let's liquidate the failing companies and banks and stop trying to change human nature. Of course, there will be intense political pressure to bail out the auto companies. A slow liquidation may be in order.
In any case, Obama would by wise not to meddle too much. I think the next struggle in the Oval Office will be the command economy vs. the free marketers. Freedom vs. control. This is a main theme in Democrat politics. They just don't trust freedom, unless it comes with a bribe or kick-back. The Chicago Way...
The inequality myth remains to this day. If this is true, why are so many poor people coming to the United States? I think intelligent people know this is mainly left-wing propaganda. Again, it plays well with the ignorant masses.
Public education is a mess. Would the government restrict people to one grocery store for Groceries? Then why only one school? Government subsidies just provide guaranteed salary increases to union members. Let's get vouchers. For health care too if we are going to subsidize it. Personally , I like McCain's plan.
g2g
Posted by: jorod at Nov 9, 2008 12:48:30 PM
I am surprised Tyler you did not mention how to restore trust & confidence. Wharton has some great social science on that.
Posted by: StreetWalker at Nov 9, 2008 1:02:45 PM
"He will need to appear calm and purposive, and to articulate to the American people the underlying economic strengths."
vs.
"If our next president seems flip or overconfident, observers will be skeptical above all else."
It's an ominous sign that Obama won this election-- and praise from The Economist and perhaps now Tyler Cowen-- partly by seeming cool and collected. Yet there's no real sign that he knows how to fix any of the nation's problems. Just about every policy he has is calculated exacerbate either the deficit or unemployment.
Cowen takes his cue from Obama by mentioning scarcely a word about policy. Maybe that's wise. Obama's candidacy has always seemed like a cross between a vanity run and motivational speaker. Policies are posted on a website for plausible deniability, seem overall to be naive and infeasible, and seem to be mostly unknown to his supporters who are just in it for the cool buzz and the pig-with-lipstick soft-serve Bush-hatred. Maybe if we don't talk about policy, Obama will forget that that's supposed to be part of the president's job.
The word "placebo" is used by doctors to describe a remedy that possesses no real curative powers but may have a salutary effect because of a patient's mistaken belief that it does. To the extent that Cowen is saying that a placebo effect is the only real reason to be hopeful about an Obama presidency (at least on the economy; foreign policy is another matter), I guess I'd agree.
Posted by: Nathan Smith at Nov 9, 2008 1:08:20 PM
Bill Clinton was successful because he basically avoided government meddling in the economy.
Not exactly. His wife's bolshevism with healthcare created the turnover of the legislature to the other party and that stopped him from pursuing other "initiatives".
The one place where he really, really meddled was by allowing his HUD secretary to aggressively use banks as instruments of social policy, coercing them into lending to higher risk individuals, which expanded the use of "creative underwriting,low down payment, no income verification instruments.
If there's ever a politically indifferent story of the 90's written, it'll be about the productivity gained from the diffusion of IT to the employees. I started working at a large insurer in the late 1980's as an accountant, performing "suspense" account reconciliations. There were 6 of us us engaged in this task, with a supervisor. When I left that company in the late 1990's there was one individual using a spreadsheet product (Excel/123) with Macros doing the same job - and it was only a part of his duties.
However, I have to tell you I agree with the poster about the advice being personality driven.
I love this advice: Obama should also consider taxing dividends and capital gains at the same rate as ordinary income: It would reduce the deficit, have few short-term adverse effects on an already reeling economy and make the tax code more fair.
Notice the sneaky caveat "few short-term adverse effects".
Posted by: Superheater at Nov 9, 2008 1:28:00 PM
Tyler, not your finest hour, dude. Weak, flabby, and blathery.
Plus, you missed the chance to use the forum provided by the New York Times to push the ideas of Luigi Zingales, who would make an extremely important counterweight to the advice (and biases) or Warren Buffett and Larry Summers on the bank bailout/stabilization issue.
Posted by: Keith at Nov 9, 2008 1:32:09 PM
Tyler, not your finest hour, dude. Weak, flabby, and blathery.
Plus, you missed the chance to use the forum provided by the New York Times to push the ideas of Luigi Zingales, who would make an extremely important counterweight to the advice (and biases) or Warren Buffett and Larry Summers on the bank bailout/stabilization issue.
Posted by: Keith at Nov 9, 2008 1:32:36 PM
Tyler, the next time you're under deadline pressure, here's where to go to steal some ideas: http://blogs.ft.com/maverecon/
Posted by: Keith at Nov 9, 2008 1:34:38 PM
Exactly how does a president "restore confidence", when his every inclination is
going to be to pursue the redistribution, regulation and intervention?
There was a column a whle back (not here, I think) entitled "just don't just do something, stand there".
They're actually thinking of "allowing" (hmmm) people to trade in their 401k's to "buy" social security credit. That'll help (not)
Send him a some Friedman, Hayek, Mises, Schwartz, Shumpeter, Smith and say here, brush up on the important stuff they didn't teach you in law school....
Posted by: Phil at Nov 9, 2008 1:52:29 PM
Overreaction is the curse that plagues us. Government officials always must be seen doing something to fix this or that problem. A truly revolutionary Obama action would be sitting back and doing nothing for a while to see what happens. These economic systems really do have self-correcting mechanisms that work if not preempted by half-assed interventions.
In a very short time of just two months, we have made turn in the road that is well-likely to lead to disaster, and all because government officials have been acting out of panic.
Posted by: Yancey Ward at Nov 9, 2008 2:41:24 PM
I like the column although it is indistinct policy-wise. The point is to send clear messages about what is being done, to not make scary pronouncements, and to not take a crisis as a license to fulfill an ideological impulse that isn't germane to the underlying problem. The comparison to 9/11 is one that occurred to me as well and I think it is apt.
I am encouraged on this front by Obama's obviously deliberative nature and his seeming pragmatism. I am less encouraged by his rhetoric on the campaign trail, which repeatedly drew an under-argued and seemingly tenuous connection between the crisis and tax cuts for the wealthy.
In other words, it's the same move as after 9/11 -- figuring out how to spin the latest crisis to strengthen the push for whatever policy one had long wanted to push.
Posted by: mk at Nov 9, 2008 2:53:33 PM
It's not only a matter of restoring confidence. There are too many cooks and too many recipes. Yet, "The philosophers have only interpreted the world, in various ways; the point is to change it (Karl Marx (1845), Theses on Feuerbach (Thesis XI)). This is to say that now we have to be more pragmatic and pay more attention to practical activities to change the world and way of thinking. We do not have to interpret according to ideas, but to interpret ideas according to material practice. The latter needs a radical change because we cannot continue to bail out banks and businesses (for instances automotive) while putting together fiscal stimulus based on borrowing.
Let's put priorities and make more and better cost-benefits analysis e.g.:
a) Invest in high-yielding sectors. For instance green energy while saving on defense
b) Tax speculation and financial short-termism by revamping the Tobin Tax at world level. It's a fact that financial institutions have not allocated money efficiently with due regard of risk/return ratios.
c) Take care of climate change adopting the polluter pays approach and tax accordingly;
d) Get on board with Europe on all the above to bring more peace and stability around the world.
Posted by: Massimo GIANNINI at Nov 9, 2008 2:59:29 PM
"but ensuring that no Americans are denied a college education because they can't afford it, providing adequate funding for public primary and secondary schools and so forth would be a good beginning" .
"A good beginning for another bubble. This one in education"
I'm sorry but universal collegiate education is lunacy. We may be equal in the eyes of the law, but intellect isn't equally distributed. IQ is certainly an imperfect measure of aptitude, but there's a big difference between 110 & 140.
We have spent decades selling the myth that a college education is the be all and end all of life. The bubble is already here. College is oversold. The best example I know is a couple where the wife has a BS in Accounting, and is a CPA, but works as the office manager for her vocational school graduate husband, who has a plumbing business.
What is generally not known is that banks and State Higher Ed Lending Agencies (SHELA’s) have been as busy securitizing student loans as they have mortgages. There's been no crisis because the bailout package already existed in the form of the federal guarantee and especially the "exceptional performer status". Generally, when banks make student loans, they are interested in the upfront origination fees (a joke, since there's no real creditworthiness underwriting). By selling the loans to another party, such as state SHELA-the DOE becomes the Fannie Mae of education lending-they can "unlock" the origination fees which would otherwise have to be recognized over the life of the loan according to FASB 91. In addition, they transfer the risk of default with a loan that has no collateral.
If you are a SHELA, and you obtain U.S. DOE "exception performer" status your defaulted student loans are AUTOMATICALLY assumable by the US DOE. Typical of governmental double-talk, about 90% of all FFELP loans have EP status. EP status was the subject of the below GAO report, and both the GAO & the U.S. DOE agreed it should be eliminated to save money.
http://www.nasfaa.org/publications/2007/lneliminateexceptionalperformer072707.html
http://www.gao.gov/products/GAO-07-1087
When I was involved in one of those EP audits, it was astounding to see the amount of debt kids were assuming without any knowledge of its consequences. There's a predatory aspect to schools that spend four years inflating egos and instilling the idea that you are a finished product, when you graduate. If you are borrowing $100,000 plus to get a non-technical BS, you are in for a rude awakening. Employers pay for specific value adding skills, not a “liberal education”. Hence the ITT Tech’s are growing.
Education is already heavily subsidized by the government and society. I know why a tenured professor wants the gravy train to keep rolling, but any reasonable disinterested person should be asking if government educational involvement has done nothing more than create a dependent constituency. Yeah, no kidding Universities are dominated by leftists.
Just think of the scope and magnitude of federal and societal financial involvement. There's the direct grants to the institutions, loans and grants to students, tax-exempt status under Sec 501(c)(3), and the attendant deductability of public donations under Sec 170 of the tax code. In addition there’s unlimited exemption from gift-taxes for payments of another tution. Institutions sit on enormous endowment funds. Many take advantage of federal tax laws ( loopholes?) that allow them to sell Charitable Remainder Trusts. They have a legally protected sports monopoly in the form of the NCAA (or duopoly, if the NAIA still exists and you consider it viable competition). There’s special exemptions (once again, loopholes?) from Unrelated Business Income Tax.
I graduated from that large eastern state university that blew its shot at the college football national championship last night. When I matriculated in 1980, an entire year's tuition was $1,416. A couple years ago, I compared tuition with that of a new hire who graduated in 2002 or 2003. We calculated that the geometric mean increase over a 20+ year period as 8%, clearly outpacing inflation. For anybody to propose addition explicit or implicit government funding of education is like proposing that obesity be treated with more food purchasing subsidized by the government.
Posted by: Superheater at Nov 9, 2008 3:53:52 PM
And how might President Obama restore confidence in this fine country of ours T.C.? By relying on the same bullshit free markets that conservative economists love to worship at the alter of Friedman and Hayek? The country cannot afford a center-right government as proposed by the pundits.
"The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings..." --T.C. 8-23-2008 New York Times
That was written not so long ago. But then the question is, why would people treat rising asset prices as a substitute for personal savings? Conservatives love to talk about how people don't save enough, but why? Why would a bartender earning $60,000 a year feel the need to own three houses during the recent real estate bubble?
My opinion is that conservative economic policies resulting in increasing income inequality made people think that the only way to get ahead and look better than the person next to them was to try to make a buck the easy way. So, when food servers making a huge chunk of money from tips quit their day jobs to become real estate speculators they do so out of the belief that no one, from either the private or public sector, is going to help them out. It doesn't necessarily have to be out of pure greed or stupidity, but from a loss of faith in social safety nets like Social Security which conservative economics has been trying to tear down for years.
And so I'd agree with T.C. that Obama needs to first restore confidence. But it will be a confidence that was lost some time ago because of people like T.C. himself. And it won't have a chance of being restored if Obama's advisors think in lines of T.C. and Mankiw and the others. As Nassim Taleb said in an interview on PBS, with everything that's happening now, $700 billion dollars is pocket change. Scary words for scary times.
Posted by: sammy at Nov 9, 2008 4:02:43 PM
November 09, 2008
Big Spender?
Was Bush a big spender? Did voters penalize Republicans for lack of fiscal discipline?:
Big Spender, by Kevin Drum: National Review editor Rich Lowry addresses the party faithful today about the reason Republicans got trounced so badly this year:
One temptation will be to say that if only Republicans had stayed truer to the faith, especially on fiscal discipline, none of this would have happened. ...
Bush ... didn't run as a strict fiscal conservative when he was elected in 2000, and he wasn't any more profligate in his second term, when he was roundly rejected by the public, than in his first term, when he was on his way to reelection.
Lowry is right, but it's actually even worse than that. Bush's big spending ways have been overdramatized by the right, but it's true that domestic spending went up during his first three years in office. So did earmarks. And his big Medicare bill was passed in 2003. Did conservatives revolt over this? It sure doesn't look like it. The next year Bush rode a triumphant conservative coalition to reelection and Republicans picked up four seats in the Senate.
Starting in 2004, in fact, Bush got fairly stingy with his domestic budgets. Result: Republicans took a shellacking in 2006, and two years later took yet another shellacking. This is not exactly great evidence for a nationwide rebellion over profligate spending. In fact, you might even conclude that Americans like profligate spending. Conservatives don't seem to mind it that much either: their rebellion against Bush mostly started after 2005, three years after the 2003 budget was put in place and lower spending was already the order of the day in the Bush White House. ...
Bottom line (so to speak): Reining in spending and cutting back earmarks might be good things to do from a conservative perspective. But was it spending and earmarks that turned the American public against the Republican Party? Not a chance. My guess is that the answer is pretty much the obvious one: a combination of policy incompetence, an unpopular war, economic dogma that didn't even pretend to take middle class wage stagnation seriously, and an increasingly hard-edged social conservatism that turned off Latinos, seculars, and the young. But big spending? Not so much.
Reminds me of Bogus Bush Bashing and Is Bush a Big Spender?.
I think it's simple. Conservatives do not have answers for today's problems. We need government intervention on a variety of fronts, and there is strong public support for government action (though there is disagreement on the details). Conservatives have tried, I think unsuccessfully, to blame government intervention in the past for today's problems. But beyond blaming government policy in the past, what cures do they have to offer? By Ricardian equivalence, fiscal policy cannot work, so no help there. They believe money is neutral, or at least neutral enough to discount it as an effective policy tool, so that rules out monetary policy. They oppose regulation, so unless you beleive that lifting regulations is the answer to our current problems, there isn't much to offer there either. I've heard conservatives say that now is not the time to adhere to strict ideological principles, or that they were wrong about markets ability to self-regulate, things like that, but that doesn't seem like much of a selling point for their economic philosophy.
Their answer is, for the most part, for the government and policymakers to get out of the way and let the economy heal itself. If you believe that is the right answer, then you should support conservatives. But I think most people have come to the conclusion that lack of regulation and oversight is the problem, not the solution, that watching economy go into a tailspin without doing anything about it on the belief that trying to help will only make things worse is the wrong approach, and that on those occasions when help is finally offered, to argue that the solution is tax cuts that help those at the top rather than help directed at those who need it most does not find much public support. We have tried that approach, and most people understand that it didn't work (and it didn't help to seriously mislead people about the ability of those tax cuts to be self-financing). Since conservatives have so little to offer in response to the current economic crisis - they have little to say if they insist on sticking to their ideas about the harm that comes from government intervention - and since past conservative policies have not lived up to the promises made when they were implemented, I don't think it's much of a mystery why conservatives are having so much trouble finding an economic message that resonates with the public.
from MARK THOMA'S BLOG ECONOMIST'S VIEW
Posted by: sammy at Nov 9, 2008 4:15:17 PM
Well, can we conclude Mark Thoma is speaking as an ideologue with an Econ degree?
Its simple?
As we sit here debating the credit crisis, its been scarcely noticed that this is the 75th anniversary of the Securities Act of 1933, one of FDR's crown jewels and we've had plenty of subsequent laws. We're still muddling through Sarbox (remember how that was going to assure the integrity of capital markets)-we know there's been MASSIVE federal intervention in the securities and housing industries, as well as healthcare and education. All seem to be screwed up to some degree and the left always wants more, more subsidization or regulation. Ideologues like Thoma provide intellectual cover for the megalomaniacs that run for office.
Its nice for Mark Thoma to dismiss conservatives as not having answers for today's problems - except that We have SEVEN DECADES of increasing federal intervention. The empirical evidence is that the left has no answers other than "more intervention".
Mark Thoma needs to start searching the Oregon woods for the elusive Sasquatch. He'll find that before he finds these magic bullets.
Posted by: Phil at Nov 9, 2008 6:44:34 PM
Its nice for Mark Thoma to dismiss conservatives as not having answers for today's problems - except that We have SEVEN DECADES of increasing federal intervention. The empirical evidence is that the left has no answers other than "more intervention".
As Steven Horwitz said in "An Open Letter to my Friends on the Left":
- Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms' benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn't rig a new regulatory process in their favor.
Posted by: at Nov 9, 2008 6:51:44 PM
