Wednesday, January 23, 2008

Hillary and Say's Law 1/23/08

This is the title of an article in today's WSJ by former deputy editor of the Journal, George Melloan. I have read his columns for years and have great respect for what he writes. He writes "the now usually discredited Keynesian economic theory, discredited eventually by Keyes himself, was the idea of forced government spending to stimulate demand. The theory, originally praised and propagated by many, was expanded from it's original intent to an overall panacea by politicians, many journalists and academics.

Governments are good at transferring wealth and income to favored constituents, such as rice farmers or ethanol producers. (Now biodiesel plants seek taxpayers largesse). These subsidies are called "economic stimulus". Senator Hillary appears to want to expand these "costless stimulus" to a broader base including low income earners. Her intent is to pump up consumer demand by showering tax rebates on people with a "greater propensity" to spend. President Carter tried the same thing as Roosevelt did in the 30"s in 1970 when the economy was in the doldrums but his rebates didn't help so he turned to-what else?-more government spending.

Some Democrats and Republicans too, still think government stimulation is an antidote, not only to a slowing economy but using taxpayers money to pay "Paul" who is often trying to compete with "Peter" who is in the same business. Now enters "Says Law", enunciated by a Frenchman in the 18th century called Jean-Baptiste Say. He said basically that societies can't consume if they don't produce. Problem is somebody has to pay for what's produced and Hillary asserts, her exact quote was "But this stimulus shouldn't be paid for". One man's consumption must be paid for by his own or someone else's production. This production may exceed consumption for a wide variety of reasons that could include one's use of credit or inheritance from a productive parent.

Nation states can consume more than they can produce through use of credit but unless they attract foreign investment, the difference will be adjusted by a decline in in their national currency as witness the decline of our dollar.

Hillary would also freeze interest rates in the same manner of Nixon and a Democrat Congress in 1970. Keyes theory then collapsed when the U.S. suffered slow economic growth and high inflation: stagflation, now threatening us, was the consequence. There was an easy explanation available in classic economics that Ronald Reagan learned early in life as did all children of Donat (Tony) and Lillie Widmer, that one has to do productive work to eat.(Unfortunately, our slide to socialism, that I first wrote in a 1993 letter printed by the JSEB, appears to be accelerating) Enter the supply side" movement that was nothing less or more than a return to these simple "Reagonomics" principles.

When government hampers production through heavy taxes, over-regulation-or by inflating the currency-production will slow down and there will be less to consume. More will be imported at a cost of U.S. jobs. The solution appears simple, reduce taxes and regulation burden and kill inflation which is what Reagan did. Hoover's attempt to protect farmers by protectionism and FDR's unconstitutional scheme to help producers with price-fixing cartels nor will tossing "free" dollars to most everyone didn't work long term then and won't work long term now.

Clearly, world stock markets are not cheered by all the current talk of stimulus and a further cheapening of the dollar. They know all too well how politicians can convert adversity into catastrophe. Instead, the right policy is to make the Bush tax cuts permanent and pull out the regulatory "weeds" like the semi-disastrous Sarbanes-Oxley. Sound money and relief for the producers is the best anti-recession prescription. It worked in 1981 and Say's Law is just a valid today as it was 200 years ago.

And stop at least 50% of the earmarks and many entitlements.

Almost all of the above is taken from Mr. Melloan but if I were as talented as he, these statements are the same as I strongly believe.

Trying to please all people was never my ambition. Too many politicians try to do so today. Many, mostly Democrats, are trying to pease all those with their hands out. Some may think Hillary is a populist, wait till Obama becomes president. And he will unless people see through his false charisma and realize, as Columnist Kathleen Parker says, "Obama gives us hope, but we require a lot more".

Many sub prime mortgage buyers suffer little loss from foreclosures because by definition they had little equity in the house. The losses will be far worse, for both borrowers or taxpayers, if some unwise measure of the type Hillary proposes, gums up the responsibility of lenders to just take their lumps for their mistakes and continue lending.

While most Democrats credit Roosevelt for ending the depression, it was the demand to ramp up production for WW2 that allowed my dad to replace his 8 year old car.

2 comments:

Georgee said...

I largely agree with your point on stimulus package.

However, 5 year interest freeze is Hilary's idea not Obama's. This bad idea is supported by Edwards as well. Obama alone among democratic contenders does not support 5 year interest freeze. His plan mainly consists of the creation of a trust fund to support homeowners in trouble, immediate tax rebates and provision of non-preditory lending practice.

Unknown said...

Merle, I would like to respond to this but for clarification purposes please tell me who you mean when you're talking about "those with their hands out"?