Two Alternative Approaches To Fundamental Economic Policy. Which One Works?

The mid-term elections are upon us. Time to recognize once again that there are two alternative approaches to fundamental economic policy, and that one works while the other does not. For most of my life, both political parties opted to advance the approach that does not work. Today, that is much less true.

There can be many details and nuances to economic policy, but here I am talking only about the one big overriding fundamental issue, namely, which is better for economic success and prosperity: higher taxes and bigger government, or lower taxes and smaller government? They are opposites, and they can’t both be right. Today, the Republicans, and President Trump, whatever else you might think about him, are (mostly) advocates for lower taxes and smaller government. The Democrats are universally advocates for higher taxes and bigger government, although not all of them go to the same levels of extremism.

We’ve just been through a big real-world experiment to test the two competing theories. . . .

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Some Fun With Paul Krugman Quotations

Now that Trump-era U.S. GDP growth has reached the 4.1% level according to the Bureau of Economic Analysis, shouldn't we go back and review a few choice quotes from Official Manhattan Contrarian Worst Economics Writer Paul Krugman?

It's been a long time since I've done any Krugman-bashing.  And why should we waste much of our valuable time on a guy who is so overcome with anger and invective that he has become a self-parody?  The answer is, occasionally you need to compare his prognostications to the real world to see just how wrong it is possible to be.  The operative word here is "occasionally."  I promise not to do it again for a while.

But anyway, if it's been a long time since you have read anything by Krugman (and I hope it has), it may be fading into the recesses of your memory that he devoted considerable energy during the Obama presidency to excusing sluggish economic performance as having nothing to do with Obama or his policies.  Slow economic growth had nothing to do with Obama's overall hostility to successful businesses; nothing to do with expensive increases in unproductive regulations; nothing to do with the war on fossil fuel energy and coal; nothing to do with corporate tax rates that were uncompetitive in the international arena; nothing to do with dozens of phony prosecutions and shakedowns of financial institutions; nothing to do with wasteful spending and debt accumulation; nothing to do, in short, with what I described all the way back in 2013 as Obama's "War Against The Economy."   No, instead, slow economic growth was just the "new normal," a natural state of late-stage capitalism that was completely inevitable and just had to be endured -- or perhaps ameliorated a little by the preferred prescription of a blow-out round of entirely wasteful government spending.

You don't believe me that his predictions could have been so bad?  Then I'll give you a few choice quotes. . . .

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Is Portugal Experiencing A Surge Of Growth Caused By "Casting Aside Austerity"?

Is Portugal Experiencing A Surge Of Growth Caused By "Casting Aside Austerity"?

I'm getting to this one a little late, but last weekend the New York Times had one of those big economic stories that just cried out for checking into the real data.  Here are the headline and sub-headline:  "Portugal Dared to Cast Aside Austerity.  It’s Having a Major Revival.  At a time of mounting uncertainty in Europe, the country has defied critics who insisted on austerity as the answer to the Continent’s economic and financial crisis."  Do real data actually back up this narrative?

Before getting too far, we should have a review of the defined term.  What is "austerity"?  From my post of August 18, 2013 ("The Horrors Of 'Austerity,' Singapore Edition"):  "[T]he term "austerity" is a befuddled Keynesian mixture of low government spending and taxes sufficient to cover all spending."  I've never understood why, in the progressive press, the alternatives for economic policy get divided between lower spending/higher taxes ("austerity") on the one hand, and higher spending/lower taxes ("stimulus") on the other.  What about lower spending/lower taxes?  You never hear about that one.  As my 2013 post noted, Singapore has long been the world champion of the combination of both low taxes and low spending, which have been accompanied by decades of world-beating economic growth, prosperity, and low unemployment.  (Singapore's GDP per capita is approximately equal to that of the U.S.)

So what does the Times have to say about Portugal?  

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Inside The Ignorant New York Times Echo Chamber

Yesterday, the New York Times ran an article reporting on the goings on at EPA as the agency moves toward rescinding the Obama administration's regulations aimed at controlling the weather by tripling your cost of electricity.  The headline was "Trump Takes a First Step Toward Scrapping Obama’s Global Warming Policy."  Lede:

The Trump administration will repeal the Clean Power Plan, the centerpiece of President Barack Obama’s effort to fight climate change, and will ask the public to recommend ways it could be replaced, according to an internal Environmental Protection Agency document.

I noticed that there were a couple of hundred comments on this article, so I decided to take a look.  This was quite a revelation.  Of course, the comments ran about 30 to 1 negative to what EPA is proposing to do; but I expected that.  And of course, many of the comments had a high degree of anger and vitriol and name-calling in them; but I expected that as well.  No, the revelation was the extraordinary extent to which the commenters at Pravda show themselves to be completely ignorant and uninformed on the issues relevant to the debate.  But then, these people rely on Pravda as the principal source of information on this subject.  I guess I should not have been so surprised.

For example, a substantial number of commenters had somehow gotten the impression that implementation of Obama's Clean Power Plan would be an effective measure toward staving off a catastrophic global warming.  For example, we have this from "Austin Al":

The planet is cooking, so strong actions are necessary to reduce greenhouse emissions. Going backwards is not the answer. We need to cooperate to insure survival of the species, apparently Mr. Pruitt doesn't get it.

Or, from "winthropo muchacho" of Durham, NC:

The power industry knows full well the consequences of continued unabated carbon emissions to the atmosphere and deliberately chooses profitability over the health of humankind and numerous other species threatened with extinction.  It's that simple.  

From "RLW" of Chicago:

To all of you out there who have children and grandchildren, be aware. This Trump presidency is on the way to destroying the planet for your grandchildren and all who follow.

From "SR" in the Bronx:

[T]heirs is a homicidal streak, that will roast us all in a stormy cauldron of hurricanes, ozone, and CO2 that no witch trio would want.

OK, NYT readers: Do you have any idea how the CPP is supposedly going to stop the "planet" from "cooking" and avoid "roasting us all" and "insure the survival of the species"?  The CPP has as its goal the reduction of greenhouse gas emissions from the U.S. electric power sector by about 30%.  The electric power sector is about 40% of U.S. greenhouse gas emissions, so the overall reduction in U.S. emissions from this regulation, assuming that it is fully implemented and that it completely works as intended, is about 12%.  Can we please calculate how much global warming by the year 2100 will be avoided by this reduction?  If you think that the whole "GHGs cause global warming" thing has not been proved and is a scam, your answer will be "zero."  But I ask you to assume for purposes of this question the accuracy of the worst-case models used by the U.S. government associating GHG emissions with increasing world temperature.  

Patrick Michaels and Chip Knappenberger at Cato undertook that exercise when the CPP was announced back in 2015.  For their calculations, they used the government's own model, known as MAGICC.  The results:

The EPA’s own policy analysis model, called MAGICC*, tells us how much global warming will be prevented by the new plan:  0.019°C by the year 2100 (based on procedures similar to those we detailed here).  That’s the amount of temperature change a person will experience in about every second of life. It is simply impossible to detect this change in any global temperature history.

Even that is an overestimate of the actual impact of the plan.  The EPA has also published a “base case” which includes emissions reductions expected from existing state and federal regulations.  The difference between the plan and the base—i.e., the future temperature savings directly attributable it drops to 0.009°C—let’s be generous and call that 0.01°C. 

Yes, this whole thing is to avoid 0.01 deg C of anticipated warming.  Frankly, it's pathetic.  No world temperature measuring system in existence or conceivable could even measure if such a reduction of previously-anticipated warming (over nearly a century!) had been achieved.  Of course, you can scour the archives of the New York Times, and you will never find this information.  

And how about the economic impact of the CPP?  The whole idea here is to force premature closure of a few hundred perfectly functional power plants running on coal and oil, and their replacement with new sources, many of which will be much more expensive and intermittent solar and wind facilities.  It's impossible to put a precise number on the costs, because the CPP leaves it up to states and utilities how they will respond to the new strictures.  But it's hard to imagine that the costs could be less than several hundred billion dollars.  These costs will go into your electric bill.  Is there any possible way that this could be anything but a gigantic negative for the American household?

Well, here is how a few commenters at Pravda view the economics.  From "leptoquark" in Washington:

It's so sad that Trump et al. would cede the enormous economic opportunity available in cleaning up power generation. He, and the GOP, can't hold back the country forever, though. At least the dam seems to be breaking on electric vehicles.

So in leptoquark's calculus, spending hundreds of billions to replace cheaper energy with more expensive energy is "ceding an enormous economic opportunity."  From "Jim" in California:

That the Trump-Pence administration, claiming to possess keen business acumen pursues a fiscally idiot policy of pouring funds into high cost coal energy is beyond idiotic.

Jim has somehow got the idea that EPA is proposing to "pour funds into high cost coal," rather than simply rescinding regulations that restrict coal.  From "Blue Moon" in Old Pueblo:

China will pick up the slack by developing green energy alternatives; the U.S. will be left behind. China will wind up being the key in staving off global warming and climate change . . . .    

It's the old theory that the way for the people to get rich is for the government to waste as much money as it can as fast as it can.  Where did we learn that economic theory?  Oh, I remember -- Paul Krugman!  But here's the news for Blue Moon:  while China is putting out press releases about some Potemkin village wind and solar projects, what it is actually doing is flooding its own territory and the world with coal power.  

They read their Pravda every day, and they think they know what is going on in the world.  Sad.


Trump Administration Takes First Baby Steps Pushing Back Against The Dependency State

Every time you start thinking that Trump leaves something to be desired as President, just keep in mind that the alternative was Hillary.

Consider one of the little-mentioned areas of distinction:  the dependency state.  The left in general, and Obama in particular, think that every dollar handed out by the government is a big positive in the world.  We're "helping struggling families," or something like that.  It seemingly never has occurred to them that increasing dependency on government handouts has any down side.  Without doubt Hillary as President would have brought more and yet more of same.

Consider the trajectory of food stamp recipients during Obama's tenure.  Here is a chart of recipients by year (source):


Obama's first term was supposedly a time of recovery from a deep recession, but in sharp contrast to previous recoveries, the number of food stamp recipients went up instead of down, and by dramatic amounts.  The number of recipients shot up from about 28 million in 2008 to some 47.6 million in 2013, and then despite continuing economic improvement declined only marginally thereafter, ending when Trump took office at about 44.2 million, some 16 million higher than the pre-Obama record level.  What was going on?  If you remember my post from back on April 25, 2013, it turned out that the government had hired an army of "food stamp recruiters" to get every possible person onto the handouts, and in addition (with Congressional support) had waived work requirements and asset restrictions on eligibility.  (My post was in part based on a series in the Washington Post by Eli Saslow, for which he won a Pulitzer Prize.)

And food stamps were far from the only example of the Obama administration actively seeking to increase and maximize dependency.  The other obvious big example was Obamacare, where the program launch brought a truly enormous federal marketing effort to attract more and yet more people onto subsidized "healthcare."  Back in 2013 the AP identified at least $684 million budgeted by governments at all levels, mostly federal, to advertise and promote enrollment in Obamacare.  Yet another area of dependency is social security disability, which went from 9.2 million beneficiaries just prior to Obama taking office in 2008 to 10.6 million in 2016.  Once on social security disability, almost nobody ever gets off.

It seems that the Trump administration is actually taking an intentionally different course on the issue of dependency.  First, Trump's budget outline that came out back in May proposed that the food stamp budget would be cut by some 29% over 10 years.  OK, but that was only a projection, and based more on assumptions of an improving economy than on specific changes in policy.  Then, in August, the Centers for Medicare and Medicaid Services announced that they would reduce the Obamacare advertising budget from about $100 million in the current year to only $10 million in the coming year.  This time it's a real one-year change in policy by the administration itself.  This is starting to sound like something.

And here's another item that you may have missed.  On August 1, according to the National Law Journal, Trump nominated a wounded Iraq vet named Daniel Gade to the EEOC.  One of EEOC's missions is assisting military veterans who have claims for discrimination or disability.  But Gade, according to the NLJ,  is actually a guy who has been a leader in criticizing disability pay for wounded vets:

Gade has been an outspoken critic of disability pay for wounded veterans, traveling the country in recent years making speeches and giving interviews about his views that the U.S. Department of Veterans Affairs should move away giving disability checks to wounded soldiers. He was twice wounded during service in Iraq, which led to the loss of his right leg. He spent six months in hospital and six months as an outpatient when he had 40 surgeries.

He has warned about misguided efforts to help veterans with government assistance. . . .  “People who stay home because they are getting paid enough to get by on disability are worse off,” Gade told The New York Times in 2015. “They are more likely to abuse drugs and alcohol. They are more likely to live alone. You’ve seen these guys. And the system is driving you to become one of them, if you are not careful.”

Well, that's about a 180 degree change from how the Obamanites approached this subject.  But an administration that actually works on this issue could probably reduce overall dependency by as much as 25% in one four-year term.  And the effect on the "poverty" rate could be dramatic, since nearly everyone who gets removed from dependency and gets work thereby exits from "poverty."             

Can We Learn Any Lessons From Brazil?

Probably, you haven't been much following the news coming out of Brazil.  If you had, you would have seen that last week ex-President and left-wing icon "Lula" da Silva was convicted in his corruption trial and sentenced to 10 years in prison.  Lula, who rose up as a charismatic labor leader and left-wing rabble rouser,  had served as President of Brazil from 2003 to 2011.  His hand-picked successor from the same political party, Dilma Rousseff, was accused in the same corruption scandal.  Rousseff was impeached (charged) back in April 2016, and formally removed from office by vote of the Brazilian Senate in August.

The corruption charges basically center around the cozy relationship that left-wing politicians seem inevitably to form with the major state-controlled economic institutions that are the hallmark of left-wing governance.  Wikipedia has a synopsis of the complex situation here.  During Lula's term in the presidency, Rousseff, as his right-hand woman, served as the Chair of the Board of Petrobras, the monopoly state-owned Brazilian oil company.  The most significant charges against Rousseff were that, during the time that she chaired the Petrobras board, she took large bribes from oil services contractors to get some billions of dollars worth of Petrobras business directed to them.  As to Lula, the charge on which he was just convicted involves a contractor refurbishing his beach apartment for the relatively modest sum of just over $1 million.  The Reuters article at the first link above notes that he is also accused of orchestrating the entire massive corruption scheme in which dozens of Brazilian politicians have been caught up, and that he faces some four more trials.  However, other articles I have seen do note that Lula (unlike many of his party colleagues) does not seem to have taken the opportunity to get extraordinary wealth for himself.

The easy lesson to learn here is that corrupt politicians need to be caught and punished.  Fair enough.  But before the world moves on from the tragedy of Brazil, I just want to note a few items that seem to be a pattern in essentially all populist left-wing governments:

  • In the early years in power, government-produced economic statistics seem to show rapid economic growth, improvements in wages, declines in poverty and income inequality.
  • Then one day, the economy suddenly goes into free fall, even as other surrounding countries continue to have growing economies.
  • And finally, it turns out that the political leaders of the left-wing government were massively on the take for years.

For another example of this classic pattern, see my coverage of Venezuela, for example here.  

Is it fair to conclude that Brazil fell into the classic socialist trap -- falsely counting big increases in government spending as "economic growth," even as dependency was exploding and the real economy was hollowing out?  I don't know enough about the details to make a definitive evaluation, and in any event the policies undertaken in Brazil were far less extreme than those of Venezuela.  But still, the parallels to other situations like Venezuela are hard to miss.

Certainly, while Lula was President, the economy of Brazil seemed to be going swimmingly.  Here is a long write-up from the Economist in September 2010, toward the end of Lula's term of office, titled "Lula's Legacy."   A man-on-the-street is quoted as saying that Lula was "the best president ever."  Lula himself is given the chance to expound on his achievements, all of which seem to involve spending more on government programs to benefit the poor:

“Wherever you go in Brazil you will see work financed by the federal government,” he says, highlighting railways, power stations and basic sanitation. After 25 years in which the country failed to maintain its infrastructure, let alone build any more, it is “reacquiring the capacity to carry out the grand infrastructure works that Brazil needs.”  For many of the poor and working-class Brazilians who are his most ardent supporters, Lula's crowning achievements have been big rises in the minimum wage and pensions, and the Bolsa Família programme, which gives 12m families small but life-changing amounts of cash in return for having their children vaccinated and keeping them in school. By boosting domestic demand, these policies have also contributed to economic growth.

Note in that last sentence the abiding faith that more government spending is the sure-fire route to economic growth.  This report from CEPR records average growth of real GDP per capita in Brazil of 2.5% per year from 2003 to 2014 -- which would be quite impressive if it were real.  But then, who can forget David Sirota in Salon writing about Hugo Chavez's "economic miracle" in 2013, 15 years after Chavez's ascension to power and just as the bottom was starting to fall out?

A big recession then hit Brazil some time in 2014.  According to CNN here, Brazil's economy proceeded to contract by 3.8% in 2015 and 3.6% in 2016, even as the world economy continued in a basically expansionary mode.  (By contrast, according to Federal Reserve statistics here, the entire contraction of the U.S. economy from peak to trough in the "Great Recession" was 4.3%.)  Unemployment shot up from about 5% in 2014 to 12.6% early this year.  Nor is it clear that the recession is over for Brazil.

The situation is complex, and again, the government excess is not nearly as extreme as that of Venezuela.  A boom and subsequent bust in commodity prices --on which Brazil is unusually dependent for such a large country -- is very likely to have exacerbated the damage from socialist-style programs.  But Brazil is definitely emerging as another example where big portions of government-led economic growth ultimately prove illusory.  Oh, while the political leaders became wealthy via their crony capitalist friends.