On Determining an Approach to the Economic Problem

Maitland A. Edey and Donald C. Johanson, Blueprints: Solving the Mystery of Evolution. Boston: Little, Brown and Company, 1989.

Mom's book.

Don Johanson is the discoverer of the famous "Lucy" fossil.

From a file dated 11-24-1995:

The book Blueprints is a study of evolution and the development of thought on that subject. It describes some of the observations made by Charles Darwin which led to his theory. It describes Darwin's internal struggle over the publication of his work. It describes the religious spirit of the time and the controversy which Darwin knew would arise because of his theory of evolution.

Blueprints also examines some predecessors of Darwin, those whose work paved the way for Darwin's own. The first of these is Linnaeus; next is Buffon. Both Linnaeus and Buffon were born in the year 1707; both "rode the same surging wave of curiosity that was sweeping over Europe, an avid desire for explanation and description of the natural world." [p.10]

Linnaeus devised a scientific naming system. The system he devised is still in use today. The system organizes all living things in a hierarchy of categories based on physical traits, from kingdom and phylum, to genus and species. Buffon also devised a naming system. Blueprints authors Edey and Johanson write: "As one who sought to put the universe in order, Buffon, of necessity, had to become a classifier himself. He rejected Linnaeus's system [...but Buffon's] system of animal classification was preposterous." [p.15]

The authors explain that Buffon "graded animals according to how useful they were to humans, and started with the horse, 'the noblest conquest man has ever made.'" Now, the usefulness of things is clearly what makes things useful to us, so that a hierarchy based on usefulness is not entirely without merit. But the subjective nature of Buffon's approach makes it an unsuitable standard for widespread use. Moreover, as the authors point out, Buffon's approach "does make clear what a strong hold the idea of the centrality of humans in the cosmos had on humans themselves--before Darwin." [p.15]


Now, suppose we were having economic problems and we wanted to solve those problems. We would want to devise a system or an explanation to help us understand those problems. What sort of system would be most fruitful? Would it be the system which carefully describes how these problems affect us and our society? Or would it be the system that describes the problems and how they relate to the economy as a whole, organized in such a way as to lead to an explanation of causal factors? A system based on the human aspect of the problems is a more natural approach and, because it describes the aspect which is familiar to us, it seems quite reasonable; this approach is in widespread use. But an objective analysis of the problems would be more fruitful.

Given a set of problems that are known to be problems, we can achieve much by determining the causes of these problems, and then attempting to subvert those causes. But we can achieve little by quibbling over which problems are the most harmful to us and which are the easiest to live with.

If we wish to gripe about economic conditions, Buffon's approach is well-suited to our needs. But if we are to satisfy our curiosity, our need to understand, then we must use the Linnaean style. And if we wish to solve those problems, and most especially if we are to set economic policy, we must not base policy on how problems affect us, but on the nature and traits of the problems themselves.

Let's be practical

Recent thoughts from two guys at work who pride themselves on their conservatism. The one says:

Anything that lowers my taxes makes me happy.

The other says:

KISS -- Keep It Simple, Stupid.


I am not looked upon, by people who know me, as a practical person. But some things are obvious. If you want to fix the economy, you have to deal with 300 million people who want lower taxes and don't want to hear long-winded explanations.

Why?

Paul Krugman writes:

Another Kind of Financial Fragility
February 4, 2011, 10:46 am

Recent events have a lot of economists working hard at trying to determine the causes of financial fragility — the vulnerability of some economies, ours very much included, to disruptive shocks that cause credit and spending to freeze.

"Trying to determine the causes of financial fragility." Really?

Here:

We think that red blood cells cause inflation. We think that white blood cells don't. We think we can take red cells out of your blood, and encourage you to grow more white cells. We think this will keep you good and healthy.

Then, when you get sick, we try to determine the cause of your "fragility."

62 today

Will you still need me
will you still feed me
when I'm sixty-four?

So, what am I gonna do with this?

The graph shows the actual ("nominal") growth of GDP, and the very much greater hypothetical growth of output that would have been required to counterbalance the growth of federal debt. Economic growth enough to keep "federal debt relative to GDP" declining along its golden-age trend.

First thing I'm gonna do -- you're not gonna believe this -- is check my numbers.

I'm thinkin to spot-check 1974 and 2007 maybe, just to be sure.

The graph really highlights the growth of federal debt, really makes it stand out. I think you can tell, it's not at all what I expected to see.

All kinds of things can be said, of course. If the economy continued to grow at a "golden age" rate, there would have been a lot less call for the sort of stimulus spending that arose in response to declining growth. This alone would have pushed the federal debt down and the GDP up, reducing the massive difference from both ends at once. But I have no way to tell how much less stimulus spending would have been enacted over those several decades.

And, of course, the main problem is that we use credit for money. So no matter how much we grow, we're always gonna have too much debt. A result of confused policy.

I do think it is reasonable, since our goal is to achieve adequate growth, reasonable to look at a desired level of growth -- realistic growth -- and go from there.

"The Debt Commission and Government Excess"

The size of government is none of my concern. When I run across one of those Founding Fathers quotes about limited government, I like it. I don't object to reducing the size of government. But I don't want government extinguished.

Jeffrey H. Anderson (Dec 2, 2010) writes

The debt commission's report, to be voted upon tomorrow by the commission's members, is a provocative proposal that should help to jump-start serious discussions about paying off (or at least not continuing to add to) our $13.8 trillion debt...

While the debt commission's efforts are laudable, however, its basic premise that we have both a spending and a revenue problem is mistaken. And its notion that 75 percent of our debt-reducing efforts need to come from spending cuts, while the other 25 percent need to come from tax increases, is only 75 percent right. What we have is not a spending and revenue problem, but merely a spending problem....

The story is, it's the excessive size of government that hinders our economy.

The fact is, it's the excessive public and private debt -- especially private debt -- that hinders the economy. And the fact is, this problem has lasted so long now that it has got quite bad, so that now more and more people are taking an interest in the problem. But these people, too many of 'em, are looking only at the current situation. They're not looking at how we got into this situation.

They're looking at their taxes and government debt and stuff, rather than at the burden of private debt that has hindered economic growth for 40 years or more.

And the fact is, you cannot solve results. You have to fix the causes.

"Starve the Beast"

Wikipedia:

Bruce Bartlett
In 1976, Bartlett changed careers, going to work for Congressman Ron Paul...
In January 1977, Bartlett went to work for Congressman Jack Kemp...
In late 1984, Bartlett became vice president of Polyconomics, a New Jersey-based consulting company founded by Jude Wanniski...
In 1987, Bartlett became a senior policy analyst in the White House Office of Policy Development...

 
In his "Starve the Beast" PDF (2007), Bruce Bartlett writes:

The earliest reference I have seen to the phrase starve the beast appeared in a Washington Post article one hundred years ago. The author, Charles Edward Barnes (1907), used it literally to refer to intentionally starving an animal. [p.5]

The oldest expression I have found of the notion that tax cuts will hold down government spending comes from economist John Kenneth Galbraith. [p.6]

The earliest recent use I have seen of the precise term starve the beast as it relates to the budget appeared in a Wall Street Journal news story in 1985. [p.6]

...

Richard Nixon, Eisenhower’s vice president, continued this policy of resisting tax cuts and supporting tax increases after his election as president in 1968. One of his earliest actions in 1969 was to ask Congress for extension of the 1968 surtax... [p.7]

Gerald Ford, after succeeding Nixon in 1974, similarly resisted political pressure to cut taxes permanently... [p.7]

In an influential article in early 1976, Wall Street Journal editorial writer Jude Wanniski blasted Ford for timidity in cutting taxes. He argued that the nation needed each political party to be a different type of Santa Claus—the Democrats being the spending Santa Claus and the Republicans being the tax-cutting Santa Claus. [p.7]

After Ford’s defeat, Republicans in Congress and in the states began to experiment with tax cuts as a way of reviving both the economy and their political fortunes. In 1977, Congressman Jack Kemp (R-N.Y.) and Senator Bill Roth (R-Del.) introduced the Kemp-Roth tax bill, which would have cut statutory tax rates by approximately 30 percent across the board without corresponding spending cuts. In 1978, voters in California enacted Proposition 13, which cut and capped property tax rates, leading to further tax-reduction efforts in other states and giving rise to a national tax revolt. [p.8]

The political popularity of these two measures encouraged a reconsideration of the balanced-budget orthodoxy among conservative intellectuals. They found the starve-the-beast idea to be a way in which they could support tax cuts without abandoning a commitment to fiscal responsibility. [p.8]

Writing on the Wall Street Journal’s editorial page, which often sets the Republican agenda on economic policy, columnist Irving Kristol made clear the political connection between tax cuts and government spending. Tax cuts, he explained, are essential to shrinking the size of government. [p.9]

At this point, the circle had been largely squared. Instead of being viewed as the height of fiscal irresponsibility, cutting taxes without any corresponding effort to cut spending was now seen as the epitome of conservative fiscal policy. [p.9]

The political popularity of tax cuts would also help to elect more members of Congress with a desire to shrink government. [p.9]

In the 1980s, public-choice theory developed the idea that a conservative government might intentionally increase the national debt through tax cuts in order to bind the hands of a subsequent liberal government... More of the budget would have to be used for interest payments, thereby precluding a liberal government from spending as much as it would like on consumption. [pp.10-11]

...

Although the starve-the-beast theory still has adherents, even among reputable economists, the growth of spending and deficits even in the face of large tax cuts has worn down at least some of its former supporters. There is now a growing fear among such people that the ultimate result of relying on starving the beast to support tax cuts may be to make future tax increases inevitable. [p.20]

Perhaps a future fiscal crisis will provide political cover for massive cuts in entitlement programs that would be politically impossible except in such dire circumstances. [p.20]

 

A truly remarkable story, without a lick of economics in it.

Wanniski-nomics

I have described the six decades of the post-WWII era as 30 years of Keynesian economics followed by 30 years of Reaganomics. But I think that's wrong. I think "Reaganomics" is the wrong name. I think the right name is "Wanniski-nomics"

From mine of 18 January:

Our so-called "golden age" -- 1947 to 1973 -- occupies the post-war uptrend shown on the graph. But by the last years shown, you can see the uptrend tapering off just as it did during the Depression. We squeezed out only a few more good years before that golden age ended.

After that, economic growth wasn't so good anymore. That's when the Laffer Curve, the Two-Santa-Claus Theory, and Supply-side economics, and Reaganomics arose, and lots of other trendlines started changing.

1974: The Laffer Curve

The term "Laffer curve" was reportedly coined by Jude Wanniski (a writer for The Wall Street Journal) after a 1974 afternoon meeting between Laffer, Wanniski, Dick Cheney, Donald Rumsfeld, and his deputy press secretary Grace-Marie Arnett.

1976: The Two Santa Claus Theory

The Two Santa Claus Theory is a political theory and strategy published by Wanniski in 1976, which he promoted within the U.S. Republican Party.

The theory states that, in democratic elections, if one party appeals to voters by proposing more spending, then a competing party cannot gain broader appeal by proposing less spending.

1978: Supply-side Economics

In 1978, Jude Wanniski published The Way the World Works, in which he laid out the central thesis of supply-side economics...

1980: Reaganomics

Reagan himself claimed to be influenced by "classical economists" such as Frédéric Bastiat, Ludwig von Mises, Friedrich Hayek, and Henry Hazlitt. Upon Reagan's death, a memo released by Jude Wanniski, economics advisor to Reagan during his 1980 campaign, highlights Reagan's firm grasp of economic concepts and his knack for conveying them so a layperson could understand.

Ratios

So we can go to FRED and find the numbers on Federal Debt Held By Federal Reserve Banks (FDHBFRB) and compare it to the Gross Federal Debt (GFDEBT):

GRAPH #1

Those are both discontinued series, ending in 1998. So we can do the same thing using New data series (FDHBFRBN and GFDEBTN):

GRAPH #2

The first graph shows an increase in the ratio from 1955 to 1973 or so, roughly commensurate with the "golden age" that followed World War Two. It shows decline from 1975 to 1992. And it shows slight increase from 1992 to 1998.

The second graph repeats the "decline" part of the first. It repeats the slight increase and extends it beyond 1998 to 2003. And it shows slight decline thereafter, until the recent disturbance. Without looking at the numbers, I presume the sharp drop during the recent recession is a "denominator problem." That is, Fed holdings of U.S. debt didn't drop. But the trend-line dropped because of the sudden large increase in federal debt in response to the sudden large recession.

One can say that Federal Reserve holdings of federal government debt are low by historical standards. One might even suggest they ought to be increased. An increase of this nature would increase the quantity of money -- the quantity of interest-free money -- in circulation. Assuming, of course, they get it into circulation and not just into reserve accounts and corporate coffers and other hoarding hiding places.

Oops, I didn't post this first on my testing and development blog.

Taking a second look at the second increase, the "slight" increase that runs from 1992 to 2003 about, it occurs to me that this increase is commensurate with the golden decade described by Dean Baker and John Schmitt in The Real Economic Crisis -- "From the mid-1990s ... to ... the second half of 2004."

These correspondences are not coincidence. Interesting, however, that the first uptrend, while it occurred during the "golden age" did not prevent the end of that period of good economic performance. Other important factors -- such as the growing accumulation of private-sector debt -- are not considered in this post.