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“Fight of the Century” – Keynes v. Hayek

   Posted by: FMFP    in Budget/Economy   Print Print

George Mason economist Russ Roberts has teamed up with video producer John Papola again for Part 2 of Keynes v. Hayek titled “Fight of the Century.” The first web video, “Fear the Boom and Bust,” was a major success, drawing lots of attention to the contrasts between the two economists’ theories. In short, the two Leviathans in the econ world represent the competing visions for how much government intervention is optimal for people’s well-being and the nation’s long term growth. John Maynard Keynes takes the position that government needs to spend and regulate more to address a shortage in the country’s labor and consumer spending habits. Conversely, Frederick Hayek wrote about the perils of a command and control economy where the government sets prices, redistributes wealth and determines the supply levels. He envisioned a laissez-faire economy where the masses made their own decisions as to what they needed and when, rather than a few people far away trying to predict and plan for the tastes, needs and abilities of the many. Check out the debate here:

The second video, released today, places the economists in the ring to duke it out. Testifying before a committee on the success of their theories, the 2009 Obama stimulus is used as the representative for Keynes’ economic theory. Keynes obviously defends the stimulus as a proof positive that Keynesianism works – the main data point being the fact that the Great Recession ended in the summer of 2009. While this might be true technically, Hayek argues, the country is up to its knees in debt two years later due to all the government spending and the unemployment rate is still just as high (hovering around 9%). A well-written back and forth explaining each economists’ position, it’s worth your time to watch this educational and very entertaining second round of Keynes v. Hayek, “Fight of the Century:”

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Where Are Our Leaders?

   Posted by: Pat    in Budget/Economy, health care   Print Print

Today we need a leader, not a politican or celebrity.

Senator Barack Obama in 2006 in reference to his ‘No’ vote on raising the debt limit:

The fact that we’re here today to debate raising America’s debt limit is a sign — is a sign of leadership failure. Leadership means the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.

Senator Obama was right. Today, President Obama is set to make a speech outlining how he would lead the country through our mounting fiscal crisis. I have the word ‘lead’ italicized because so far as President, Barack Obama, has done everything but lead on this issue. Just a few months ago he put out a budget for the next ten years that featured more than a $1 trillion dollars of debt annually. He used the fiscal crisis to pass another unfunded and uncontrollable entitlement program at a time when our current ones were becoming untenable. This is a time for leadership and so far President Barack Obama has refused to lead. Let’s hope today that changes.

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I would like to thank David Harsanyi of the Denver Post and The Detroit News for helping me compile this small list featuring just some of the bureaucratic web that is our federal government:

  • 56 separate programs to help people better understand their finances
  • 18 federal food and nutrition assistance programs, costing taxpayers $62.5 billion in 2008
  • 10 agencies or departments administering 82 programs dealing with teacher quality
  • 80 different economic development programs
  • 15 different agencies overseeing food safety
  • 18 programs responsible for delivering food assistance to the poor
  • 24 federal agencies operating data centers
  • 20 programs dealing with homelessness
  • 44 programs among Education, Labor and Health and Human Services Departments delivering employment and job training programs
  • 5 agencies within the Transportation Department administering more than 100 involved in surface transportation, highway, traffic safety, and railroads

I’m sure many of these programs serve a valuable purpose, but the redundancy of similar programs showcases a federal government that has grown to such a size that it is just feeding off it self. Bureaucracies by their nature grow they don’t wither and the plethora of these programs and departments listed above is proof. Eighty-two programs for promoting teacher quality! We are just talking federal level here, folks. Under President Obama, the budget of the Department of Education has more than doubled, with even this year, where ‘austerity’ is in vogue, seeing it grow another 4.2%. This is not money for books or better teachers, this is a raise for the bureaucracy known as the Department of Education.

In this chart below made by the Cato Institute, one can easily see the growth of all aspects of government from 2007-2012:

I would like to highlight the tremendous growth of ‘Other Mandatory’, which according to CATO features federal employee benefits, food stamps, etc and ‘Domestic Discretionary’, which of course features funding for bureaucracies like the Department of Education, Transportation, etc. President Obama has said that he wants to freeze spending on these sectors. Well, that’s nice, but how about we bring them back down to a level pre-Stimulus spending binge instead. It’s like our government has had 10 shots of patron and said ‘that’s enough, I’m done’. Unfortunately, that leaves us all in a sick and woozy position.

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Budget Politics: Defense vs. Entitlement Spending

   Posted by: FMFP    in Budget/Economy   Print Print

As I wrote yesterday, the Continuing Resolution (CR) likely to arrive at the President’s desk today or tomorrow will grant the government a two week reprieve from what many people were preparing for – a government shutdown. Rightly criticized for simply kicking the can down the road, I’m curious to see what will happen in two weeks considering the broader divide between the Senate Democrats and House Republicans has not really been addressed. In fact, all sides knew this deadline was coming since the 111th Congress passed their CR back in December. So passing this two week CR doesn’t exactly inspire confidence that an agreement to fund the government through September is imminent.

Like many major budget battles, much of the dispute (and ultimately, the resolution) resides in the varying effectiveness of each side’s public relations effort. The Republicans’ position is that America’s high debt and stagnant economy are symptoms of the larger problem – a government that is bloated and spending at unsustainable levels. Therefore, we need to cut the size of government starting with discretionary spending (as opposed to entitlement spending that is considered mandatory). The Republicans claim these cuts are both a down payment on further spending reforms to come and a fulfillment of their campaign promise to rein in our debt (roughly $14.3 trillion) and deficit (projected at $1.6 trillion for 2011).

The Democrats’ position is that our economy is fragile right now and any major cuts like the ones proposed by the Republicans will deflate our current recovery (see yesterday’s reference to Goldman Sachs and Moody’s analysis claiming a loss of 700,000 jobs if Republicans plans to cut $61 billion are adopted). In a nutshell, their argument is that now is not the right time for cuts (without necessarily stipulating that cuts in the future are altogether necessary).

So who’s right and perhaps more importantly for our current discussion, who is winning the public relations battle? Well that’s obviously a complicated question but it just might be the Democrats. On one hand, we see a sustained interest among the public in reining in government spending – cutting the Republicans’ direction.

But on the other hand, we see a real misunderstanding among the public over the composition of government outlays (spending in real people language). For instance, a recent poll released by Tarrance Group shows:

“A majority of voters incorrectly believes the federal government spends more on defense/foreign aid than it does on Medicare and Social Security (63%). Also, a similar majority (60%) incorrectly believes problems with the federal budget can be fixed by just eliminating waste, fraud and abuse. Voters do not casually agree with these untruths- at least 40% strongly agree. Further, less than half (44%) believe Medicare and Social Security costs are a major source of problems for the federal budget (49% disagree).”

These numbers should hearten Democrats because they cut against (factually correct) claims made by Republicans that 1) entitlements/mandatory spending remains the biggest budgetary problem and 2) spending on non-defense discretionary programs (where most of the stimulus dollars were allocated) is also out of control. I’ll back up the assertions just made in a second, but first one more point for the Democrats. The poll demonstrates the prevalence of a long-standing liberal position among the public. Specifically, the claim that defense spending is at least as much – or more, depending how liberal you lean – to blame as entitlements for our budget problems.

Now for the facts. Discretionary spending – including defense – is roughly 1/3 of the federal budget. The other 2/3? You guessed it – mandatory spending, made up primarily of the big three: Social Security, Medicare and Medicaid.

Even if we were to take the poll’s findings head on, we would still find the public’s beliefs dubious. Defense/security spending equals roughly 20% of the federal budget. Social Security and Medicare? Roughly 35%. And even scarier, mandatory spending is growing nearly five times the pace of discretionary spending. So it’s really not even a close call. (Btw, I used a liberal-leaning think tank for these numbers in case you were wondering – the Center on Budget and Policy Priorities).

Since I’m trying to keep these posts at a manageable length (and not really succeeding), I’ll close with my main points. The Democrats seem to be in a strong position if they can sell their position that the real problem is defense spending and the fragile economic recovery is dependent on maintaining government’s current level of support.

Meanwhile, Republicans have a long road uphill to educate the average American on the serious budget problems facing the country and the relatively minor impact the discretionary cuts they’re proposing will have on the economy. Ultimately, they need to convince Americans that the problem lies not just in eliminating waste, fraud and abuse, but rather setting priorities on what we can afford as opposed to what we would like to be able to pay for.

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For those not shaken enough by the Greek financial crisis (and this is more than possible as the Greek’s spending behavior seemed so abnormally destructive and self deluding, in other words ‘that’s the Greeks, not us’) the collapse of the Irish debt situation should get your attention. More importantly, it should awaken those tasked with running the United States government. The Wall Street Journal breaks down the steps Ireland will need to take to get their house in order (emphasis mine):

The measures are draconian. The government plans to shed nearly 25,000 public-sector jobs, slash welfare spending and reduce the minimum wage. A new property tax will be introduced, water charges imposed, and the tax base expanded to bring in lower-income earners. It all adds up to €10 billion in cuts and €5 billion in taxes over the next four years.

Ministers argue that such radical measures are needed to tame Ireland’s gargantuan budget deficit, which this year stands at 32% of GDP—the largest in Europe—and to reasssure investors who have stampeded out of Irish government debt. Yields of Ireland’s 10-year bonds reached a record Friday of nearly seven percentage points above benchmark German bunds.

Yikes. Though the US debt level is no where near Ireland’s astounding 32% level, it is solidly moving in the wrong direction. Ireland is now forced to live the worst of both worlds for a modernized economic state: higher taxes and less government services.

Economist Robert Samuelson describes the Irish bailout’s fallout for the rest of Europe:

The proposed rescue of Ireland, as with Greece before, represents a gamble that Europe can arrest growing doubts and win the patience of bond holders and voters: the investors not to continue dumping bonds (of Ireland and other countries) in panic, which raises interest rates and could precipitate a self-fulfilling financial collapse; and the ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions. Whether the gamble will succeed is unclear, as are the potentially chaotic consequences if it doesn’t.

With Portugal on the docket, and much more critically Spain (whose economy is bigger than Ireland, Portugal, and Greece’s economies combined), the EU is undoubtedly facing a financial crisis. When will the German voters bankrolling these bailouts say ‘enough’s enough’? Will the protests in Britain and France over government decisions to either cut back on education spending or raise the retirement age start to paralyze their respective state’s ability to address their growing debt issues?

These crises in Europe may not only foreshadow a future one in the United States, but according to Dr. Robert Shapiro, who served as Under Secretary of Commerce for Economic Affairs in President Clinton’s administration, they may negatively impact our economy drastically right now. Shapiro argues that “a default in Spain would endanger French and German banks and that would have serious consequences for U.S. financial institutions because they all have counterparty risk. Just as Lehman Brothers spread to Europe, a European banking crisis would spread to the United States.”

Many Western states have been living a life of getting their cake and eating it too. ‘I want low taxes and lots and lots of entitlement goodies.’ This combined with a willingness to pay for this all by letting others buy your bonds is unsustainable. In many ways, I view the rioting teenagers and college students in Britain and France as rather pathetic. The situation they’ve been handed is almost entirely not their fault, but now their just worried about getting to eat their cake. Want another metaphor? These youth are seemingly willing to throw good money after bad. Well, the way these governments have spent, more like bad money after bad.

For a worthwhile debate on the present and future role of American government and spending, I highly recommend this debate between Congressman Paul Ryan and New York Times columnist David Brooks.

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