Opinion Forum

Comes Another Soothsayer

March 10th, 2009

In the previous post, I compared economists and soothsayers, opining that there isn’t much difference between the two. I used Paul Krugman as an example. He’s firmly (to understate the fact) in the liberal camp. He thinks that President Obama and Congress aren’t going to spend enough money to resolve the economic crisis.

Now comes Kevin Hassett, a conservative economist. He believes that Obama is headed down the wrong road. To make his point, he imagines Obama as a “Manchurian Candidate” put among us by a mysterious enemy for the purpose of destroying our economy and “finishing off” the country:

Imagine that some hypothetical enemy state spent years preparing a “Manchurian Candidate” to destroy the U.S. economy once elected. What policies might that leader pursue?

He might discourage private capital from entering the financial sector by instructing his Treasury secretary to repeatedly promise a brilliant rescue plan, but never actually have one. Private firms, spooked by the thought of what government might do, would shy away from transactions altogether. If the secretary were smooth and played rope-a-dope long enough, the whole financial sector would be gone before voters could demand action.

Another diabolical idea would be to significantly increase taxes on whatever firms are still standing. That would require subterfuge, since increasing tax rates would be too obvious. Our Manchurian Candidate would have plenty of sophisticated ideas on changing the rules to get more revenue without increasing rates, such as auctioning off “permits.”

These steps would create near-term distress. If our Manchurian Candidate leader really wanted to knock the country down for good, he would have to provide insurance against any long-run recovery.

There are two steps to accomplish that. …

First, one way the economy might finally take off is for some entrepreneur to invent an amazing new product that launches something on the scale of the dot-com boom. If you want to destroy an economy, you have to persuade those innovators not even to try.

Second, you need to initiate entitlement programs that are difficult to change once enacted. These programs should transfer assets away from productive areas of the economy as efficiently as possible. Ideally, the government will have no choice but to increase taxes sharply in the future to pay for new entitlements.

A leader who pulled off all that might be able to finish off the country.

Let’s see how Obama’s plan compares with our nightmare scenario.

Treasury Secretary Timothy Geithner has been so slow to act that even liberal economist and commentator Paul Krugman is criticizing the administration for “dithering.” It has gotten so bad that the Intrade prediction market now has a future on whether Geithner is gone by year’s end. It currently puts the chance of that at about 20 percent. …

Hassett continues with specific examples of what this “Manchurian Candidate” might do to further his nefarious plan.

Is Dr. Krugman right because he’s a liberal and has a Nobel Prize? Well, Al Gore is a liberal with a Nobel Prize, as is Jimmy Carter, so…please. (Spare me the tutorial; I know the difference.) Or is Dr. Hassett right because he’s a conservative? There are those on the left and right who actually think that way. And spare us the argument that conservative economists failed during the past eight years, so now it’s time to listen to liberal economists. Anyone who thinks Bush & Co operated under conservative economic principles misapprehends both conservative economic theory and the actions of the Bush Administration.

So, whom do we believe? I’ll just point out that Hassett was co-author with James K. Glassman of the 1999 book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. Krugman gave Hassett a kick in the nether regions on that one:

Mr. McCain doesn’t know much about economics — he’s said so himself, although he’s also denied having said it. That wouldn’t matter too much if he had good taste in advisers — but he doesn’t. …when the McCain campaign announced that the candidate had assembled “an impressive collection of economists, professors, and prominent conservative policy leaders” to advise him on economic policy, who was prominently featured? Kevin Hassett, the co-author of Dow 36,000. Enough said.

Now, children, play nicely. Paul, stop hitting Kevin!

Of course, Krugman himself said in 2005,

Social Security as it is currently constituted is very efficient. We’re talking about a system that really works quite well.

And on global warming, he believes that

The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral.

President Obama obviously isn’t a “Manchurian Candidate;” he’s just a guy who should have listened to the wisdom of the old admonition, “be careful what you wish for.” Should he, and we, put the future of our nation in the hands of soothsayers who pontificate from ivory towers, think-tank sinecures, and op-ed pages of the agenda-driven media? Or would we be better off taking economic advice from a committee of 100 people chosen randomly from the Kansas City phone book? At this point, I’ll go with the phone book.

Articles written by Tom Carter
Tags: economists, economy, Obama
Categories: Economics, Politics | Comments (12) | Home

12 Responses to “Comes Another Soothsayer”

Kevin | March 10th, 2009 at 12:48 pm

Krugman was absolutely correct about SSI. The current troubles aren’t because SSI is inefficient… they’re because President after President, Congress after Congress has raided the SSI Piggybank to balance the books and then neglected to repay any of it.

Tom | March 10th, 2009 at 1:29 pm

Problem is, there’s no “piggybank.” The Social Security Trust Fund is an accounting device. The excess funds “contributed” by forced payroll deductions (excess in the sense that they weren’t paid to SS beneficiaries) are simply spent by the government for whatever it wishes. The money in the “Trust Fund” is replaced by special government bonds that are used only for this purpose. In other words, the government takes the money and gives the Fund IOUs. When current receipts are no longer sufficient to pay recipients, the government will have to make good on the IOUs, i.e., the bonds. The only money they can do that with is taxpayer money.

Look at it this way: If a banker took depositers’ money and spent it, leaving an IOU in place of the funds, he’d go to jail. If a lawyer took clients’ funds for his personal use, replacing it with IOUs, he’d go to jail, too. A thief is a thief, unless it’s the government.

Maybe Krugman thinks this is “a system that really works well.” I don’t. It’s like a Ponzi scheme that hasn’t collapsed yet. Take in money, use it to pay earlier investors, then skim off the excess. Then, when the math flip-flops, head for the hills. Except in this case, the government will just tax us more to pay for something we’ve already paid for.

doris | March 10th, 2009 at 3:46 pm

AND they made fun of Al Gore’s “lock-box” for Social insecurity!!!!!! Couldn’t have hurt? He is the only one who tried to save it for seniors, why didn’t we listen? Even he had one good idea. Under the bridge is looking mighty cozy–except I think it will be crowded.

Brian | March 10th, 2009 at 4:08 pm

Doris, as Tom indicated, there is no “trust fund.” You cannot do that with federal money. The federal government was sued in the late 30s for putting the money in a sort-of trust fund, and lost. Ever since then, the money has gone to the general fund, as the original social security legislation indicates that it can. It is monumental dishonesty for any politician to talk about a trust fund.

The “return” on the social security “investment” you make out of your payroll check is about 2-3% – less than inflation. We are losing wealth on top of wealth by even having it exist. And then you are taxed on your SSI “income” once you start receiving it. Could legislation be any more Byzantine than this? The legislation should never have been enacted. It needs to be repealed. Yesterday.

Robert | March 10th, 2009 at 10:30 pm

We really do need to consider doing away with the ss tax and letting people save for their own retirement. In the next few years, I think the quote I saw said by 2040, Social Security and Medicare will exceed the GDP. This could be a major problem (sarcasm). I needs to be addressed now or it will bankrupt us later.

Tom | March 10th, 2009 at 11:00 pm

Robert, I don’t think you meant to say GDP. According to current estimates, Social Security was 4.3% of GDP in 2007 and is expected to be 5.8% of GDP in 2048. Medicare was 3.2% of GDP in 2007 and is expected to be 10.8% of GDP in 2082. Huge numbers, to be sure, and problems that are going to have to be dealt with somehow.

Kevin | March 11th, 2009 at 12:07 am

Granted, the “piggybank” is figurative. That doesn’t negate Krugman’s point. But then I don’t think what you’re saying contradicts what he said so much as it simply focuses on a different part of the equation. I’d be very surprised if he disagreed with your banker/IOUs analogy.

Point is, it seems self-evident to me that what Krugman was referring to was the mechanism by which SSI brings in funds for future payouts. In your analogy you wouldn’t judge whether the banker had set his interest rates properly based on his embezzlement. They’re two different issues.

duggy | March 11th, 2009 at 5:13 am

Alas, Social Security much like the weather is something we all talk about but have little hope of changing. Both parties seem to veiw the fund as the gift that keeps on giving. Of course at the rate Obama wants to spend money, the giving may dry up even sooner than expected.

Tom | March 11th, 2009 at 7:14 am

Kevin, if all Krugman meant to say is that Social Security is efficient and works well because it receives and disburses money and does so rather efficiently, in an administrative sense, I wouldn’t disagree. In fact, I believe that if we didn’t have a social security system, we’d have to invent one.

Beyond that, there’s a lot to criticize. For example, there are too many programs tacked onto Social Security beyond the basic retirement insurance. So many, in fact, that folks sometimes need a paid professional to advise them on what they’re entitled to. Aside from the confusion, this helps create a misperception that the retirement money you receive from Social Security is one of those hated “entitlements” that the government should stop giving away to people. The reverse is true. The odds are extremely high that many people will never recoup what they contributed–and that’s without any thought of interest or gain of any kind on the money. And, to add insult to injury, for many people Social Security retirement income is taxed again when received. That’s a perverse system that is by no means holding your forced payroll taxes “in trust” for your retirement.

There are changes that could and should be made, but Social Security really is the “third rail” of politics. President Bush found that out when he tried to work toward a system that would permit people to take a small part of their contributions and invest them, with complete freedom of choice. The idea was horribly mischaracterized, and the vicious attacks that resulted taught a lesson to anyone who might want to reform the system.

I’ve seen government retirement and medical care systems up close in a number of countries, and I’ve read about others. What we have now, for all their faults, are better. It would be nice if we could correct some of those faults without going completely overboard, but that seems unlikely.

Brian | March 11th, 2009 at 9:48 am

Tom, a fellow by the name of Ponzi was sent to prison back in the 20s for doing what SS does. More recently, another fellow by the name of Bernie Madoff is going to go to prison for it as well. How do we justify imprisoning an individual for a behavior, while empowering a mob to do the very same thing?

Theft is theft, whether by the individual or by a cabal of millions. One cannot engage in immoral activities in order to engage in moral activities. Moral and ethical codes do not long withstand such glaring contradictions.

doris | March 12th, 2009 at 9:05 am

Thanks, Brian, I can always count on you and Tom to correct my misinformation. That said, I think Gore’s plan was to change that system and prevent the Ponzi scheme from continuing. He would start again, protecting our money from use by the Gov. and keep it in a seperate fund, capish? That was my understanding. What would all those poor little people [like me] do in their old age, those of us who didn’t save for our future or else lost it in the current stock market, how will we eat, pay our exorbitant taxes, have medical attention??? Should we all just go back to dog food, oh yeah, dog food is deadly, and costs more than tuna, now. Our system of social security may need help, but we need it and it is our only hope for a dignified old age. Tom, do you really think Bush’s plan would work??? If I can’t save for my future, do you think giving me my social security will make me save it??? People who barely make ends meet can’t save for retirement and a little more money will also be spent, don’t you see that? Social Security was formed to keep poor people out from under the bridges and to take care of our parents, even if they had no one to help them, it must be saved. Thank God, I am not one who has nothing, but that could all change, for us all with one personal catastrophy, right?

Brian | March 12th, 2009 at 10:33 am

Doris, the problem with any government program of this sort is that it cannot sustain the participants economically. For an economic system to work, there must ALWAYS be an exchange of value for value. When the government taxes away what your remuneration (what you earn in exchange for your labor or capital investment), and then “gives it back,” no value for value exchange has taken place. In fact, what you “gave” to the government with your taxes has lost value because the money handlers in the government do not work for free, yet they contribute no substance in their “work.” I do not doubt the sincerity or good intentions of many government workers, but the fact is that they do not contribute to the creation of wealth for anyone because they do not produce anything.

Gore’s plan would ultimately meet the same fate as the one we now have. Since the government cannot invest tax revenues, the only way for it to return more money to you than you put in is for it to increase the population of those paying the tax (any thoughts about why no one in government is particularly interested in immigration reform?) or to raise the tax rate on those paying the tax, or both. It is a house of cards that will crash. Ask Bernie Madoff.