The Agony of Mr. Nixon

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In 1966 Mr. Richard Nixon, reminiscing with a visitor, confessed that he had come by a maxim rather late in life which seems to be obvious; namely, that a Republican cannot win with the support of the right wing only, but that neither can he win without the support of his right wing. In I960 Nixon needed a mere handful of extra votes, whether left or right, to win the election. It wasn’t that loss that hurt him professionally—it isn’t bad for anyone’s prestige to miss being President of the United States by one-tenth of 1 percent of the vote. What he is even now reeling from is the California election, and what he did there, in 1962, was to neglect the conservatives. They beat him. And he knows that.

And now he is up against the same problem, how at once to commend himself to conservatives and liberals alike. Mostly, of course, politicians accomplish that kind of thing by a melodious swivel-hipping—who, for instance, except the most practiced historian, can remember where General Eisenhower stood on matters in general that separated the right from the left? But every now and again there is no way out, as when, a week ago, Richard Nixon found himself all alone, in front of a microphone, the spotlight fixed remorselessly on him, at a testimonial dinner to, of all people, Jacob Javits, senior Senator from New York, the man about whom the late George Sokolsky once remarked that he has about as much business in the Republican Party as Leon Trotsky. Continue reading ‘The Agony of Mr. Nixon’ »

The Good Senator McCarthy

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It looks as though Senator Eugene McCarthy of Minnesota is the chosen instrument through which left-leaning Democrats will commit damage on President Lyndon Johnson, and of course Senator McCarthy is splendidly qualified. On the one hand, he is meticulously liberal—never ever has he erred in the direction of common sense when the alternative was to vote liberal. On the other hand, he has managed not to get himself so far out on the left limb as to fall down and go kook, like Henry Wallace. When Mr. Wallace was fired from the Cabinet by President Harry Truman, it was generally accepted that he had become an ideological weirdo, as indeed he proved to be. History certifies that Mr. Wallace’s third-party movement was dominated by the Communist Party of the United States, which means dominated by Joseph Stalin. Eugene McCarthy is not a type so easily taken over.

Now the difficulties. They are several. In case you didn’t know it, Senator Eugene McCarthy is not a fan of Senator Robert Kennedy. Those who demand proof of that assertion cannot be satisfied. There is no proof, at least none of the kind you could discount with your local banker. It is generally remembered that at Los Angeles, at the Democratic Convention in 1960, the single most impassioned speech was by Eugene McCarthy—in favor of Adlai Stevenson. The Kennedy forces looked on, unamused. Not that they were afraid that Senator McCarthy, whose oratorical cadenza was dazzling in its beauty, could succeed in changing the prescribed outcome of the Los Angeles Convention, which was clearly Kennedy. But they did fear that Senator McCarthy’s extraordinarily effective oratory might have the effect, on certain critically situated people, of suggesting to them that the nomination of John F. Kennedy had nothing whatever to do with democratic idealism, that, in fact, John Kennedy got himself the nomination by wresting it from the truly qualified dauphin of democratic idealism, Adlai Stevenson. Continue reading ‘The Good Senator McCarthy’ »

What is Capitalism?

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What is Capitalism?  It is easy to get sucked into a series of punditry, of over generalizations and over simplifications.  I’d like to address some of the myths surrounding Capitalism.

Myth: Capitalism is all about profit.

Fact: Capitalism is about profit.  But it is also about loss.  Capitalists believe in the power of the profit motive to drive resources to where they are most valued.  For example, if there are extra-normal profits in an industry, say personal computers, then profit-seeking entrepreneurs will enter the market, bringing with them additional resources, new innovations, & lower prices.  Likewise, if there are negative profits in an industry, say horse drawn carriages, then firms will exit the market, freeing those resources to be used elsewhere.

Myth: Capitalists are only cronies of the Big Corporations. Continue reading ‘What is Capitalism?’ »

Thoughts on Thrift

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I’d like to discuss the Paradox of Thrift.  John Keynes says that, in bad economic times, people will keep money in their pockets, thus perpetuating the recession.

Keynesians would say spend for investments.  Others would say to save money to supply loanable funds for investments.

On both sides, you are talking extremes. One says only consumption is wrong. The other says only saving is wrong. But both sides are correct in this matter.

What we want is some spending and some saving. It’s ok to buy some things on credit (a house, for example), but you do not want to be going nuts. Unnaturally low interest rates will cause this to happen.

Likewise, it’s ok to save money for future (retirement, for example). But you don’t want to put every penny you earn int your account. Unnaturally high interest rates will do this

There is a way to reach the desired equilibrium of spending and savings. Just as prices coordinate supply and demand, interest rates coordinate savings and consumption (loanable funds and investment). If we allow interest rates to naturally develop in the same manner prices naturally develop, we can reach a level of savings and spending where the economy can grow. If we continue to try and manipulate interest rates, we will continue to see bubble after bubble, like the Tech Bubble (savings bubble), the Housing Bubble (spending bubble) or the soon-to-be Higher Education bubble (spending again).

Government and Economics

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I was reading the New York Times this morning on my coffee break, and I came acrossthis blog post by the incomparable David Leonhardt.  Now, I don’t always have to agree with what Dave has to say, but he is always a good read and usually informative.  However, one line in this blog caught my attention:

When it comes to economics, we know that a market economy with a significant government role is the only proven model of success.

I had to do a double take when I first read this.  Actually, I did a triple take.  I had to read it again to make sure I read it correctly.  Then I read it just one more time.  Leonhardt makes a rather sweeping sentence: we know the economy can only be successful with significant government involvement.  With all due respect, if Mr. Leonhardt had remembered either his Econ 101 or taken a look at the historical record, he would not have made such a statement.

The basic economic theory states that, when there is an outside influence on the market (such as government interference), the market fails to allocate resources efficiently, thus leading to lower prosperity.  So, theoretically, he has no standing.

What about historically?  Let’s start at the basics.  The Medieval period.  A market economy with significant government and guild interference.  Not really the best of times was it?  Lots of poverty.  With the exception of nobles and guild masters, most people didn’t live too well.

Let’s jump ahead to the 18th and 19th centuries.  Mercantilism runs rampant.  The definition of a significant government involvement.  Who gets rich here?  No one.  All countires try to export and not import.  So who buys?  No one.  Granted, life is better than during the 14th Century, but still not that great.

But in 1776, a wise man saw the dangers of Mercantilism and advocated a new system that would become, over time, Capitalism.  That man was Adam Smith.  Since then, the standard of living of people in countries where the government intervened minimally has grown exponentially.  The historical record is quite clear on this.

And let’s look at some recent government involvement in the markets: historically low interest rates (as dictated by the Federal Reserve) which helped fuel the housing bubble.  Trillions in stimulus funds and unemployment is still over 9%.  Free trade across the world hindered by Congressional bickering.  A default crisis that causes major worries throughout Europe.  Government bailouts in the 80?s that set a precedent for failure in the auto market.

My point is you cannot make a sweeping statement like Mr. Leonhardt did.  Or, if you are, at least make sure the facts are on your side.

On the Debt

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A lot has been made recently, and for good reason, on the current fight in Congress regarding the debt.  On August 2nd (my birthday), if an agreement cannot be made to rise the debt limit, then the United States will default on our obligations.  Both sides claim that, if this were to happen, it would be the first default in American History.

Well, that is hardly true.  The United States has defaulted on our debt several times, most recently in 1979.  The situation was similar to currently.  Congress was arguing over raising the debt ceiling (which was $829 million).  A deal was reached at the very last minute.  However, a series of “word processor issues” caused the Treasury to not send about $120 million in checks to creditors.  Thus, the US defaulted.  And the markets reacted.  According to a paper written by Terry Zinvey (Ball State University) and Dick Marcus (also of Ball State), the “series of defaults resulted in a permanent increase in interest rates.”  In fact, they estimate interest rates increased by 0.5%, which translated into billions of dollars in extra interest payments.

Of course, if the US reaches the Aug 2nd deadline and defaults, it will be an entirely manufactured crisis.  Even without raising the limit, the US has trillions in assets (such as oil, land, etc) it can sell to pay our bills years into the future.

Just a thought

Stagflation?

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As we enter the Summer of 2011, we are faced with, in my opinion, a dangerous combination: inflation and persistently high unemployment.  Despite of (and in some cases, in spite of) the actions taken by the Obama Administration, unemployment is still over 9% in the United States and prices are on the rise.  The Federal Reserve bank argues that inflation is muted, but anyone who has filled up their gas tank or gone to the grocery store lately will big to differ.  In economics, we call this combination of inflation, lack domestic demand and high unemployment stagflation.  The last time the nation suffered from stagflation, Jimmy Carter was president and I was still 19 years away from being born.  Really, the only way to combat stagflation is to both get people back to work and to get prices under control.  There are many ways to do this.  So which should be taken?

Rent Control in the Bay Area

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We’ve all heard the stories of rent control (government mandated price-controls and restrictions on rented properties such as apartments).  In fact, rent control is the canonical example economists use to demonstrate the effects of price ceilings.

Well, this article from The Bay Citizen explain the consequences economists have long understood to come from rent control.  The TL;DR version of this lesson is this: when prices are set artificially below the natural level of prices (as in this case, controlling rent), then the quantity demanded exceeds the quantity supplied (since consumers want more at the lower price and producers are less willing to supply at the price) and the market will suffer a shortage.  That is precisely what we see here: apartments are being left empty.  The stated aim of rent control is to allow those with a lower income the ability to find and keep apartments.  If they are being left empty, then are we achieving this goal?