On July 17, 2006, Jon Burack wrote:
I am just back from Orlando (AP College Board conference). Á la Jed's report, I can well imagine there is consumer anemia in California. (I hope that fact is not presented as an argument against low taxation. In California?) A house like mine here in Stoughton would get me half a trailer in a trailer park out there. (But at least it would only get done in by earthquakes and not tornadoes, which out here target trailer parks with uncanny accuracy). Seriously, the Orlando airport is a bit different from the one Jed mentions. Shops, restaurants, internet cafes, Starbucks, waterfalls, stainless steel everywhere, screaming kids and Mickey Mouse. It's enough to make a Frenchman out of me. But poor it is not.
I did read the Harper's graphics, some of which impressed me more than others, though I can't recall which was which. [See link below. --Dave] I do not doubt for a minute a big welfare state entitlement crisis looms. W, a big spending Republican, is nevertheless the only president who has dared to touch that third rail. It nearly did him in. He wasted a year on it, and all he got from the Democrats was "don't you kill Social Security, you SOB." Some other president will have to take it on. No doubt in my mind that free enterprise capitalism is key to solving the problem. Still, Social Security-Medicare-Baby Boomer storm clouds approach. Okay? How's that for non-Polyanna.
So, to get back to the short run, which as a historian, I would insist is all you can have faith that anyone knows how to predict, if even that, I explicitly did not accept all of Kudlow's optimism -- as in, to quote myself, " I do not necessarily subscribe to all of the Polyanish stuff below..." I simply called attention to the prediction you all made in Nov. 2004 that the disaster was at hand because Bush was artificially proping up the economy. You guys can talk around your predictions then with all the long-term disaster-mongering now, but my focus is on your being wrong then. I don't ridicule you for it, since I am wrong about similar matters all the time, but I will ridicule you for denying it now. It was not based on all this long-term forcasting you like. It was based on a reading of George Bush as a cynical and stupid pol. I do not think he is that, except of course that he is a pol. I think it was unfair of you to see it that way and, to boot, was a sign that you mistake the way reality works.
It is clear enough to me that the tax cuts do appear to have worked as supply siders predict and generated extra investment, job creation, and revenue. I don't say they always do that, just that they do it under certain circumstance and appear to have done it here. If you disagree with that analysis, supply reasons for why you disagree that account for the same set of facts (4.6% unemployment, soaring tax revenues from the rich, growing GDP, inflation not seriously out of control despite war, the horrrors of Mideast Oil fanaticism and hurricanes in the South.)
Whether any of Bush's economic policies work over the long run is another matter. I would guess it depends on many, many other factors. The Chinese may be one. On that, however, I simply do not see them as the destabilizers you do. Yes, they are holding and investing dollars and could decide at some point to stop -- if they want to kill the goose that lays the golden eggs that keep their billion-plus working. I do not doubt they are every bit as cyncial and ruthless as you all appear to see Bush, but I do not think they are stupid. They have tied their (Red) star to the global capitalist economy, and they are not going to court the billion-plus upheaval of the century at home by destroying its engine. The demographic factors here also could disrupt the long run. As I say, Bush tried and failed to move the nation on these. However, and here I am being a bit Polyanish, I do not doubt for a minute this nation can figure out how to take care of old farts without bankrupting itself. A restoration of the notion that people ought to work most of their life (i.e., until their late 70s, the equivalent of 65 when FDR was around) would be a good start, good for old people, good for the economy, good for the entitlement diseases, etc. Learning how to keep old people productive, on the right meds, out of nursing homes and off the highways. That's my "chicken in every pot" slogan. I realize I won.t get elected on it. But I do think the good old USofA is going to find a way to keep itself going for a long time to come, however it does it.
One final point. Gibbon was wrong. Christians did NOT do in the Roman Empire. Spengler and Toynbee and all the rest were also wrong. Empires do not rise and fall by proceeding from stern virtue to corrupt laziness. There are no laws of history. It's all up for grabs.
On July 12, 2006 David Burack wrote:
An additional ecological add-on to the economics, about interaction of these factors as escaping the grasp of today's "business economist" journalists: What you look for in a self-stabilizing system are positive feedback loops. I do not see any. Quite the reverse. If interest rates and mortgage paykments go up, investment and jobs dip, then you have a strong negative feedback loop, one of many others we can describe that drag the system further downwards.
On Jul 11, 2006, at 10:14 PM, Jedidiah Burack wrote:
I agree with my father since he agrees with me but seriously did you send Jon the graphics from that spread in Harper's?
jed
For reference, here is a link to the Harper's Magazine"The New Road to Serfdom,", a brief PDF download. --Dave
On Tuesday, July 11, 2006, at 07:21PM, David Burack
After a hiatus that wasn't really a hiatus because we moved the whole household down the street to our new address,
I returned to the office and got loaded up with all kinds of new work. Summers are our busiest season, it seems. Plus, were housing one of Bronwyn's grandaughters this week, so my time is not my own.
I reject your Polyanna-ish view of the economy. This is such a huge economy that the effects are going to be long time coming, long time gone. We're going down slow. I will elaborate, but I think that Dr. Jed's analysis of many months ago, the one showing how much debt the Chinese hold is still apros pos. The thing that the pundits do not take into account is the interactions. You have huge debt and deficits, and minor tick down is not going to stop the trend up, despite the nice headlines it makes for Bush for one or two months. The combination of deep debt, weak job c reation, higher interest, so much consumer credit and no money down ARMs that will be hit badly once the interest rate starts to bite, the utterly stupid tax cutting over the past decade when we should have been raising taxes, the lack of investment, the glut of housing, etc, etc.. We are in deep trouble. You will see.
Dave
On Jul 10, 2006 Jon Burack wrote:
Still waiting for the trenchant economics lesson in response to what I sent a few days ago.
On July 8, 2006, Jed Burack wrote:
David and Jed,
Okay, come on, I will give you guys a chance to give it back to me (I know you can do it). Back in November, 2004 [It seems to have been March 2004. --Ed.], I heard from you how Bush had cynically manufactured a temporary prosperity and after the election, le Deluge.
Now I do not necessarily subscribe to all of the Polyanish stuff below (one item is from The New York Times, after all), but I do think the media has outdone even its distorted Iraq chicken-littling with its horrendous anti-Bush economics reporting. (I love the NYT's absolutely predictable and precious "unexpectedly" here). So what say you all?
Item 1 (NYTs)
WASHINGTON, July 8 — An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief.
On Tuesday, White House officials are expected to announce that the tax receipts will be about $250 billion above last year's levels and that the deficit will be about $100 billion less than what they projected six months ago.
Item 2. Larry (the optimist) Kudlow (á la Powerline)
Did you know that just over the past 11 quarters, dating back to the June 2003 Bush tax cuts, America has increased the size of its entire economy by 20 percent? In less than three years, the U.S. economic pie has expanded by $2.2 trillion, an output add-on that is roughly the same size as the total Chinese economy, and much larger than the total economic size of nations like India, Mexico, Ireland and Belgium.
This is an extraordinary fact, although you may be reading it here first. ***
For those who bother to look, the economic power of lower-tax-rate incentives is once again working its magic. While most reporters obsess about a mild slowdown in housing, the big-bang story is a high-sizzle pick-up in private business investment, which is directly traceable to Bush's tax reform. It was private investment that was hardest hit in the early decade stock market plunge and the aftermath of the 9-11 terrorist bombings. So team Bush's wise men correctly targeted investment in order to slash the after-tax cost of capital and rejuvenate investment incentives.
Here is Dr. Jed's original, March (?) 2004 screed that Jon recalls for us:
Like much of history, economic history is a repetition of the past but with a new and unique twist each time.
At present we have the latest cycle of a Republican administration borrowing its way into a false and dangerous boomlet.
The illustration shows the crux of the matter:
The Japanese, in an effort to weaken the yen and support the only source of growth in their economy—exports, will print yen and buy US treasuries no matter what the long term consequences for them.
The Chinese, on the other hand, will not decouple the yuan from the dollar in spite of enormous pressure to do so. They will not tolerate a strengthening of the yuan which would make their ultra-cheap exports less competitive in the US and abroad. They want to maintain explosive growth, again regardless of the long-term consequences.
The US, forming the third corner of this triumvirate, also is very happy with the situation. While the Treasury Secretary gives official statements supporting a strong dollar, it’s all very tongue in cheek. He practically gives a sardonic smirk as he says the US has a strong dollar policy—We all know that everything we DO indicates that we absolutely do not support a strong dollar. Why? A weak dollar continues the pressure favoring foreign purchases of Treasuries, which is really lending to finance the Federal deficit. This allows us to keep our idiotic tax cuts in place without raising interest rates or causing inflation. The tax cuts for the wealthy, while doing nothing to redistribute money and keep consumer demand high, do have the benefit of placating Bush’s most important political constituency, the corporations and the wealthy. Further, this currency/fiscal policy keeps cheap imports flowing from China—imports that we don’t have to pay for now since the Chinese will sell goods to us in exchange for owning US treasury bonds.
So, we have the Far East—Japan doing relatively more of the lending, and the Chinese doing relatively more of the producing—maintaining cheap goods and easy credit for us. Doesn’t this give you the slightest inkling of concern? Do you think this all comes for free? Of course not; it should make you nervous.
All this talk of “deficits don’t matter”—bullshit. There is a big difference between fiscal deficits financed internally and those owed abroad. Lack of concern about deficits is somewhat true when they’re used as a way to print money to stimulate a recessionary or depressionary economy, especially when the deficit is financed internally, not when it is financed externally. That is part of what Warren Buffett was getting at in his article Write him off at your peril. Do you really believe he is an anti-Bush partisan? He’s writing in Fortune ‘cause he’s scared of this.
Here are some of the down sides:
The more we owe abroad, the more interest we will pay for decades to foreign governments. We have been a creditor nation since the nineteenth century to the rest of the world. The present level of foreign debt is unprecedented. This will provide a constant sap on our resources and a constant weakening pressure on our currency.
International political implications are daunting. If you don’t think the Chinese plan for the long run and if you don’t think that the Chinese understand the political power of being the lender, you’re a fool. They understand very well that when they hold hundreds of billions in US treasuries and other securities (The above graph shows only the government holding of US treasuries, a tip of the total investment iceberg.), and they decide it’s time for them to take over Taiwan or whatever their agenda, then being the banker to the US is a far more powerful power instrument than military might. An instructive lesson in my mind: Ayatollah Khomenei immediately after the revolution, a more bitter enemy hard to imagine, announced that Iran’s foreign debt to the US was void. David Rockefeller was interviewed on PBS a few days later and asked about this. I remember the shot of him sitting in a 1970’s Swedish type modern chair, corner office of glass windows behind him, high up in lower Manhattan, in his quiet and very understated way, fingertips delicately pressed together, slumped in his seat, saying “They may choose to do so but that will be the end of any foreign lending to the regime.” Next day, the Ayatollah reversed his position and the debt was honored.
Trapped. Just as the present situation is a sweet irresistible convergence of low inflation, cheap imports, low interest rates, rising asset prices (due to the low interest rates, not real growth of productive capital), the contrasting situation is an inescapable vicious cycle. For at some point, the above exponential curve (as you like to point out all exponential curves do) must reverse. At some point the Chinese will have to decouple the yuan from the dollar, and Japanese internal production and exports to other economies will allow them to stop printing yen to buy Treasuries. What will happen? No financing of our deficit externally. Rising interest rates at home and increased cost of our deficit. Much weaker dollar, rising prices for imports (Please don’t tell me that we’ll just start making the goods instead; we don’t make a single TV any more.), higher inflation, and drain of capital to pay the foreigners interest on all the debt we owe. Better known as stag-flation, the delightful combination of economic stagnation and inflation.
Thank God we’ve been redistributing wealth to consumers so that internal growth and demand could pull us out of this debt? The only problem is: we haven’t been doing this. Personal income for the last 20 years is flat.
Call me a hysterical democrat with a political agenda, which I may be. Unfortunately, I don’t think that changes the situation.
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