8 Aug 2011

Panic in the markets

MD writes:
As an economist, you’ve got to be watching yesterday’s markets with fascination. From where I sit, it’s looking more and more like the collapse of the Washington Consensus, this just 20 years after the USSR kicked the bucket. Now no one seems to know what the dominant philosophy will be in this new global/technological world. I’m no economist; that’s my read as a layperson.
The market panic is the exact OPPOSITE of the collapse of the WC, which (1) hasn't really collapsed (look at Chile, Brazil, Estonia and other countries with low debt, small deficits, openness to trade, etc.) and (2) describes the kind of prudent macroeconomic policies that the US/EU are NOT pursuing.

Let's just list WC policies here:
  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform – broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
  10. Legal security for property rights.
I'd say that the US and the EU have failed (zero for ten) in terms of policy DIRECTION -- even assuming good policies in the past, e.g., Kelo weakened property rights in the US; the Italians and Greeks are opposing deregulation and privatization to protect special interests.

The "markets" panicked because people started to understand that political "solutions" like raising the debt ceiling, promising to print more money (QE3), or bail out Greece from wasteful loans do NOTHING to make the economy strong. At best, they transfer money to incompetent losers; at worst, they waste time and resources (shuffling deck chairs while the Titanic sinks).

Note that the Tea Partiers are not exactly paragons of macroeconomic wisdom. Their obsession with lowering taxes -- to zero percent, it appears -- is just as stupid as an obsession with the President's birth certificate.

Bottom Line: Political shenanigans [e.g, The Economist] will not strengthen the economy, and a weak economy will not support social programs that protect the weak.


The Pasadena Pundit said...

Dr. Zetland's understanding of the Tea Party is apparently a media caricature. My bet is that he does not know one Tea Party member nor has he attended any of their meetings to find out what they are about.

Here is what the Tea Party is:

1. Tea Partiers are economically rational not extremists or "wingnuts" who hate those on welfare.
2. Tea Partiers are mainly retirees or soon retirees who are members of the Creditor Class who want to protect their retirements but are not opposed to progressive taxation or welfare programs per se.
3. The Gold Standard Movement in the late 1800's and early 1900's was the precursor to the Tea Party, not the Boston Tea Party. The Gold Standard Movement was opposed to the diluted value of money and the Free Silver Movement (i.e., Sub Prime Loans) that only ended up hurting the poor.
4. The forerunner of the Tea Party was not Ayn Rand but Isaias Hellman, a Jewish California banker.

You can read more about this here:

Dr. Zetland is partly correct, however. Cutting taxes without also deregulation could trigger economic depression. But a cure to stagnation caused by maxing out our credit cards is not more stimulus but reduction of debt, increasing savings and exports, and reindustrializing using the newly generated and saved capital. This is the reverse of the stimulus policies that have been in vogue.

Unions and environmentalists are blocking access to the cheapest sources of energy, to cheap water storage and canals, and available zoned land that could facilitate economic recovery. instead government is spreading overmarket prices for energy and water and everything else that only ends up hurting the poor the most.

The Tea Party may not be my cup of tea, but they aren't what Dr. Zetland mischaracterizes them as.

benjaminpink said...

People should not be allowed to leave anonymous comments.

M.F. Callaghan said...

I'm not sure I agree that the U.S. has failed on all ten of the WC points, but, I agree that it is a serious concern in direction.

I also don't know much about the Tea Party, but I truly think that there would not have been any debate on the debt ceiling without their activism.

Not many appreciate what the national debt problem is: They know the debt is about $14 trillion, but compared to what? It is often compared to GDP as a percentage. I guess economists like to do that, but to me, you pay off debt with income, not GDP. In 2009, Total U.S. receipts were $2.1 trillion. Payroll taxes of $0.9 trillion are reserved for social programs, so theoretically those revenues should not be counted in the receipts available to pay down debt (even if -or maybe, especially because - the government borrows from that fund routinely). If we compare the current national debt with 2009 receipts, net of payroll taxes, we get $1.2 trillion of income against $14 trillion of debt: a factor of 11.7 times! A company in this condition would be called bankrupt.

Now, 48% of those on the tax rolls don't pay any income tax. Something like 80% of INCOME taxes (not payroll taxes) are paid by the uppermost 2% of tax payers. Maybe we need to figure out a way to get everyone paying SOME tax and stop the class warfare cries and notion that we can always take more from the rich.

The problem with increasing revenues is that Washington has always spent like crack addicts; habitually using more than they get. And they will keep on spending more than they get. With the alarming debt-to-income ratio, one philosophically wonders why there was any discussion at all about raising the debt limit.

It seems to me that the Tea Party is trying to stop the spending madness. What else they stand for, I don't know.

David Zetland said...

@PP -- You are not describing all Tea Partiers, but perhaps "poster child" Tea Partiers.

@MFC -- good point, but GDP does provide an easy way of comparing debts across countries (in terms of capacity), esp. when few governments are running fiscal surpluses. Your 12x income estimate (assume it's correct) might perhaps be compared to the multipliers of income that people owe as debt on their houses (usually less than 12x!), but the gov't can raise its income when it wants (Laffer curves aside).

I am also a fan of a broader tax base, e.g., http://www.aguanomics.com/2009/08/optimal-taxes-property-tax.html

M.F. Callaghan said...

I believe average household debt is roughly 136% of income. The government problem is actually worse than illustrated at 12x, because receipts are gross. What is germane is the amount of capital available to service debt. Of the $1.2 trillion the government receives, it has to spend to operate itself and it spent $987 billion in 2009 to do so. Then the government gave out subsidies of $58.9 billion, which leaves $202 billion available to service debt. However, interest on debt was $254 billion. How do you pay off debt when you can't even pay interest, let alone principal? And the White House and press have the nerve to label S&P's credit rating political? The real question is, why wasn't it done sooner?
BTW, my reference on household debt is from a Forbes article (http://webcache.googleusercontent.com/search?q=cache:gr2d3BsKCPgJ:blogs.forbes.com/moneybuilder/2010/06/24/one-big-difference-between-chinese-and-american-households-debt/+http://blogs.forbes.com/moneybuilder/2010/06/24/one-big-difference-between-chinese-and-american-households-debt/&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com), my government data - which strips out social program receipts ans expenditures -comes form the Federal Reserve's Z.1 report, page 23. (http://www.federalreserve.gov/releases/z1/current/z1.pdf)
I am not an economist, just a concerned citizen, so there is always the chance that I am interpreting data incorrectly, but I think it is correct.

David Zetland said...

@MFC -- I agree with the general tenor of your comments (WTF are they doing), but I think that you may be tacking the issue through the wrong lens. Numbers can be interpreted and assembled in many ways. The REAL problem is a basic failure to pursue efficient (lean) government. That's why earmarks (not much $$) are considered a bad sign.

Tim in Albion said...

If Tea Partiers are so rational, why do they support Michele Bachmann?

If the TP is "not opposed to progressive taxation," why are they fanatically opposed to the very idea of allowing the temporary Bush tax cuts to expire? (Recall that those cuts were originally sold to us as an "economic stimulus" - and without offsetting that lost revenue with comparable spending cuts, they were exactly the same as any other deficit-financed stimulus package; you know, the ones the TP mock and revile all the time.)

I'm afraid The Pasadena Pundit may be confusing the Tea Party as it exists (on the national scale) with the one he wishes existed.

We didn't get a "debate" on the debt ceiling - we got more posturing, polarization, and sloganeering. It was just another manufactured crisis to get screen time for the politicians, who used the opportunity to do some early-stage campaigning for their re-elections.

Allen said...

Nice work with the cartoon version, Tim. If you divorced libby talking points from the ability to employ some common sense, you'd be more likely to agree than disagree with their aims and methods.

Limit the exponential growth of government control, bureaucracy and spending.
Limit freeloading at the expense of working taxpayers.
Demand that the government live within its income rather than print fake money that fuels inflation and reduces the financial assets of the public at large.
Prevent politicians from buying votes to enhance and make permanent their power base.

This statement you made does make sense:
"We didn't get a "debate" on the debt ceiling - we got more posturing, polarization, and sloganeering. It was just another manufactured crisis to get screen time for the politicians, who used the opportunity to do some early-stage campaigning for their re-elections."
Unfortunately, it applies much more to the politicians that are in favor of making the debt problem even worse than it already is.

Big Al

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