AT&T and T-Mobile withdrew their merger application from the Federal Communications Commission Nov. 29 after it became clear that rigid ideologues at the FCC with no idea how to promote economic growth were determined to create as much trouble as possible.
The companies will continue to battle the U.S. Department of Justice on behalf of their deal. They can contend with the FCC later, perhaps after the next election. The conflict with DOJ will take place in a court of law, where usually there is scrupulous regard for facts, law and procedure. By comparison, the FCC is a playground for politicians, bureaucrats and lobbyists that tends to do whatever it wants.
In an unusual move, the agency released an analysis by the staff that is critical of the merger. Although the analysis has no legal significance whatsoever, publishing it is one way the zealots hope to influence the course of events given that they may no longer be in a position to judge the merger, eventually, as a result of the 2012 election.
This is not about promoting good government; this is about ideological preferences and a determination to obtain results by hook or crook.
The staff analysis makes it painfully clear that the people in charge have learned very little from the failure of government to reboot the nation's economy. For starters, the analysis notes points out that "there will be fewer total direct jobs across the business," notwithstanding various commitments the companies have made to protect many existing jobs and add many new ones. The staff should have checked with the chairman of President Obama's jobs council, for one. CEO Jeff Immelt drives growth at GE through productivity and innovation, not by subsidizing inefficiency (see this). He realizes that when government tries to preserve wasteful methods, firms become uncompetitive and lose market share. That's a recipe for unemployment. The FCC staff analysis has got it completely backwards. When politicians set out to "create" jobs, it is often at the expense of productivity. We don't need that kind of "help" from Washington. In a wonderful column I am fond of citing, Russell Roberts recounts a story that bears repeating here.
The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?"
FCC Chairman Julius Genachowski got it essentially correct when he remarked in a recent speech
that, "Our country faces tremendous economic challenges. Millions of Americans are struggling. And new technologies and a hyper-connected, flat world mean unprecedented competition for American businesses and workers." Sadly, he does not realize that a merger between AT&T and T-Mobile provides a vehicle for that.
The combined company would have the "necessary scale, scope, resources and spectrum" to deploy fourth generation wireless services to more than 97% percent of Americans (instead of 80%), according to a filing they made in April. That would make our nation more productive and improve our competitiveness, which is we want. An analysis by Ethan Pollack at the Economic Policy Institute predicts that every $1 billion invested in wireless infrastructure will create the equivalent of approximately 12,000 jobs held for one year throughout the economy, and that if the combined company's net investment were to increase by $8 billion, the total impact would be between 55,000 and 96,000 job-years. The FCC staff thinks this is an irrelevant consideration, because it might happen anyway.
Several commenters respond that even absent the proposed transaction, AT&T would likely upgrade its full footprint to LTE in response to competition from Verizon Wireless and other mobile and other mobile wireless providers * * * * Nothing in this record suggests that AT&T is likely to depart from its historical practice of footprint-wide technological upgrades with respect to LTE even absent this transaction.
They may be right, but this is wishful thinking at a time when millions of Americans are struggling. The best course of action at this point is to improve incentives for corporations to increase capital investment, improve productivity, capture market share and create more jobs. The Feds should obviously approve this merger, because the record clearly shows that the companies are willing to undertake a massive net increase in capital investment, now.
What about the counter-argument that if there are fewer wireless providers, that may lead to consumer price increases down the road? We can worry about that later. Right now, we need to worry about the unemployed. Incidentally, increasing supply in wireless is very simple. The FCC can simply award additional spectrum for mobile communications. Almost everyone agrees that this is the best tool the government has to promote competition in wireless.
The FCC committed another unforgivable error when it tried to blow up this merger. This is not the first time the commission has recklessly put entire sectors of our nation's economy at risk while it conducts idealistic experiments for attaining consumer savings through rate regulation or regulatory mischief in pursuit perfectly competitive markets. The FCC's cable rate regulation experiment in the early 1990s and its local telephone competition experiment in the late 1990s were both total failures and complete disasters.
This agency could use some humility, or some adult oversight.
From George Gilder's column in today's Wall Street Journal,
Meanwhile, Secretary of State Hillary Clinton and the president's friends at Google are hectoring China on Internet policy. Although commanding twice as many Internet users as we do, China originates fewer viruses and scams than does the U.S. and with Taiwan produces comparable amounts of Internet gear. As an authoritarian regime, it obviously will not be amenable to an open and anonymous net regime. Protecting information on the Internet is a responsibility of U.S. corporations and their security tools, not the State Department.
The full column is here
Thomas L. Friedman has a particularly good editorial in today's New York Times.
While the subprime mortgage mess involved a huge ethical breakdown on Wall Street, it coincided with an education breakdown on Main Street -- precisely when technology and open borders were enabling so many more people to compete with Americans for middle-class jobs.
He cites Harvard University labor expert Lawrence Katz who explains:
If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They've been much more exposed to global competitors that make them easily substitutable.
An untouchable is someone who can imagine new services, new opportunities and new ways to recruit work. Untouchables are being retained, while substitutables are being laid off.
Bottom line: We're not going back to the good old days without fixing our schools as well as our banks.
Originally featured in The Claremont Review:
In the current financial and political circus, with Fabian fantasists and climate cranks in control of economic policy, the mainstream media join Ivy League sages in condemning Adam Smith's invisible hand. Free market ideology has blinded conservatives, say many sophisticates, to a crime wave on Wall Street, as Adam Smith gives way to Bernie Madoff as the epitome of capitalism.
For perspective on what is going on, however, we should contemplate the view of Richard Armey, the crusty cowboy who long served as Republican majority leader and economic guru in the House, who pointed out to me more years ago than I want to recall, that economics has more hands and feet, visible and invisible, than the media imagines. Confounding the market's invisible hand during the past decade's financial follies were the government's very visible handouts. These outlays massively and conspicuously supported popular causes and constituents: low income mortgage seekers, affirmative action litigators, failed farmers, US automakers, ethanol junkies, sugar beet shysters, hustlers of solar power and windmills, socialist educators, climate cranks, and other altruistic but addled government dependents, plus all the interventionist CRAP (Community Reinvestment Act programs) that mandated the suspension of credit rules for politically favored home buyers. With much of this murky activity guaranteed by the government, it prompted orgies of overreach, with the "assets" of Fanny Mae and Freddy Mac rising from a few hundred million to five trillion in a decade or so. Democrats fervently celebrated all these visible handouts and wish to expand them hugely.
Meanwhile (in perhaps Armey's best trope), the invisible foot of government went to work. This millipedal regulatory force covertly kicks at the underpinnings of private economy activity by capriciously debauching the dollar; imposing onerously progressive tax rates on successful economic ventures but making investors eat the losses; fostering anti-business law suits and class action rackets; restricting access to energy resources; snarling international trade; and enacting ever more intricate mazes of contradictory laws and regulations with ever more acute moral hazard, which assures that the results of the intervention will be the opposite of its goals. The effect of these relatively inconspicuous activities is to unleash the visible foot of the market--all those bankruptcies and foreclosures--and increase demand for the visible hand of government largesse.
In general, to rectify the situation, the invisible foot of government must be removed--regulations retrenched, tax rates reduced, tariffs eliminated, the value of the dollar restored. But instead conservatives focus most of their energies attacking Leviathan at its strongest and most popular point: the visible handouts of government spending--earmarks, subsidies, and such--which matter relatively little if the invisible assaults are suppressed. Since the visible handouts cannot be reduced in a recession, the only spending cuts that actually happen as a result of the Republican complaints are in defense.
A few decades ago, supply side economists, such as Arthur Laffer and Robert Mundell and inspired journalists such as Jude Wanniski and Steve Forbes pointed out the politically feasible remedy. Lower tax rates and retrenched regulations result in more revenues for the government and less need for visible handouts. Because this footloose outcome allows the expansion of government and the defense of the country while the private sector grows even more rapidly, it was extremely popular for a few years.
Its truth, demonstrated globally (look it up), is incontrovertible. Supply side policies enable the otherwise impossible combination of guns and butter: large defense efforts with low tax rates and rapid economic growth. Countries with low or declining tax rates can increase their government spending three times faster than countries with high or rising tax rates, because the low tax countries grow six times faster than the high taxers.
Why then is this truth controverted today by all reputable economists?
Even the disreputable supply siders seem to concede to the Democrats that it is possible to increase revenues by increasing tax rates from current levels or to sustain social security and medicare without reducing the payroll tax. The reason is that all economists have been tied to the procrustean bed of existing national models which exclude all the factors--economic growth, tax shelters, entrepreneurial innovations, transnational and interstate investment flows and demographic migrations--that register the supply side effects.
Meanwhile, the profession upholds the phantasmagorical models of demand side economics. Because these models find no confirmation in reality--as Jean Baptiste Say proved centuries ago, demand is always and only a side effect of real supply--established economic theories are extremely difficult to learn and remember. You get Nobel prizes for minor and obvious insights in economic geography. Thus the exponents of the standard model are deeply threatened by any reality-based economics.
These experts are now completely in control of Washington, attempting to spend their way to political dominance, while taking well over half the voters off the federal tax rolls and giving actual taxpayers a greater incentive to hide and shuffle existing wealth than to earn or create new wealth. These measure will retard recovery from the recession and reduce revenues. But globalization means that entrepreneurial creativity--in which the United States is increasing it lead--can survive by adopting foreign locales and resources. Countries such as Israel (a global center of innovation) and Ireland (a low tax haven), China (a manufacturing dervish) and India (ascendant in software), are taking the lead and will help capitalism survive the Lilliputians currently trying to ruin it in the United States. What will matter, after all, is not whether President Obama approves of markets but whether markets approve of President Obama, who may think he has protected his future by buying off the middle class with tax rebates but will soon discover that his future will be decided by global markets for currencies and stocks.
To any socialist revival, the invisible hand will still deliver the final finger.
What we've got with this worsening recession is a political failure, not a market failure.
A clueless partial truth from the one man who can do more than anyone to restore faith in the economy or bankrupt the nation:
"You know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."
Jim Cramer sums
...Obama has undeniably made things worse by creating an atmosphere of fear and panic rather than an atmosphere of calm and hope. He's done it by pushing a huge amount of change at a very perilous moment, by seeking to demonize the entire banking system and by raising taxes for those making more than $250,000 at the exact time when we need them to spend and build new businesses, and by revoking deductions for funds to charity that help eliminate the excess supply of homes.
Aside from the obvious need to moderate the tax-and-spend impulse, Steve Forbes has some great advice
for the politician-in-chief:
If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies.
Naturally, now that government plans to intervene in the economy with a massive stimulus package, everyone wants their "fair" share. Robert D. Atkinson, president of the Information Technology and Innovation Foundation, is arguing for digitized health records, a smart power grid and faster broadband connections:
While creating jobs by upgrading the nation's physical infrastructure may help in the short term, Mr. Atkinson says, "there's another category of stimulus you could call innovation or digital stimulus -- 'stimovation,' as a colleague has referred to it." Although many economists believe that a stimulus package must be timely, targeted and temporary, Mr. Atkinson's organization argues that a fourth adjective -- transformative -- may be the most important. Transformative stimulus investments, he said, lead to economic growth that wouldn't be there otherwise.
A new report by the Information Technology and Innovation Foundation [to be released Wednesday] presents the case for investing $30 billion in the nation's digital infrastructure, including health information technology, broadband Internet access and the so-called smart grid, an effort to infuse detailed digital intelligence into the electricity distribution grid.
And a Silicon Valley petition calls for a tax credit for companies that spend more than 80 percent of what they had been spending annually on information technology like computers and software.
Usually when politicians hand out targeted tax breaks or grants there are strings attached.
Free Press is already proposing that the Internet services receiving subsidies "must be an open, freely competitive platform for ideas and commerce." There is a possibility no one would accept the subsidies to build the network Free Press envisions.
Remember last summer when the FCC tried to auction some spectrum in the 700 MHz band with the caveat that "Whoever wins this spectrum has to provide ... truly open broadband network -- one that will open the door to a lot of innovative services for consumers." Bidders could have received a subsidy, in effect, because they could choose their bid; they could submit lower bids for the spectrum that would have come with restrictions than they might be willing to consider for similar spectrum unencumbered by such conditions. No one bought it.
And lobbyists for various industry segments are proposing to define the broadband services which would qualify for the tax breaks or grants according to transmission speed. Of course it would be nice if everyone could have the best, i.e., fiber to the home, but that isn't practical in many parts of the country. Should policymakers disqualify "inferior" technologies because we don't consider them cutting-edge, even if they are currently best suited to make a real difference in the lives of people who happen to live in places where the "best" would be prohibitively expensive?
Professor Andrew Odlyzko posited in a 2003 paper that fiber to the home "may never become widespread ... there is a substantial probability that residential demands might be met by fixed wireless services."
Then there is the fact someone has to pay for targeted tax relief and grants.
Former Senate Finance Chairman Russell Long (D-LA) once joked, "Don't tax you, don't tax me, tax that fellow behind the tree." He was referring to the fact someone must pay taxes, but Congress can either impose low rates on everyone or high rates on a few people.
Targeted goodies have a way of multiplying as various interest groups come forward with clever arguments for still more targeted benefits. Congress wants to be "fair," so it enacts more targeted subsidies. But basic tax rates rise and/or new things are taxed as Congress tries to reduce deficit spending. Finally, Congress is forced to eliminate preferences so it can reduce taxes, as it did with the Tax Reform Act of 1986. But at every step of the process there are winners and losers chosen by politicians and bureaucrats.
The alternative is to let private investors decide how to invest society's resources. Of course if they are successful they may become wealthy. But if they fail they may have to declare bankruptcy. The penalty for failure is severe. Politicians and bureaucrats, on the other hand, are rewarded either way. They merely wait for the next "client" to come along.
Whether or not politicians and bureaucrats are our "best and brightest," they are captive to political pressure. One should never automatically assume politicians and bureaucrats will aim primarily to help the most needy because they are the most deserving, the middle class because they are the most numerous or the most influential because they are the wealthiest. Politicians and bureaucrats only have to convince a majority feel they are gaining something whether they are or not.
If lower taxes would be good for health information technology, broadband Internet access, the so-called smart grid, computers and software; then -- let's face it -- lower taxes would be good for the whole economy.
That said, telecommunications services are not subject to the same taxes other businesses pay. They remit higher taxes owing to the fact they used to be captive ratepayers because they were once monopolies or luxuries. So, for example, even though the sales tax in the District of Columbia is 5.75%, wireless services are taxed 15.71% (this includes a 4.19% federal tax to subsidize phone service in rural areas and computers and Internet access for schools, libraries and rural health care facilities).
Maybe the federal government ought to subsidize those things directly and states and localities ought to apply only their sales tax to telecommunications services -- which might lower the price of telecommunications services and stimulate demand for broadband offerings?
Or maybe the objective is not to get broadband to the people but to increase broadband taxes?
Like Ronald Reagan said, "Government's view of the economy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
I think McCain and Palin will win. I was in the Nixon campaign in 1968 and watched him try to coast to victory. If the election had been held a day or two later Humphrey would have won. Obama is already coasting even sooner than Nixon did. His idea that deregulation caused the crash is delusional. Hedge funds are actually outperforming banks and more regulated entities. Fanny and Freddy were pure political tools, regulated to the hilt to promote and mandate come-and-get-it EZchump mortgages, and the Democrats loved them both to death.
The Glass-Steagall Act of 1933 separated the investment and the deposit banking businesses. A bipartisan majority repealed it and President Clinton signed it into law in 1999.
Is the repeal an example of deregulation leading to catastrophe? According to "A Mortgage Fable" in today's Wall Street Journal,
Washington is as deeply implicated in this meltdown as anyone on Wall Street or at Countrywide Financial. Going back decades, but especially in the past 15 or so years, our politicians have promoted housing and easy credit with a variety of subsidies and policies that helped to create and feed the mania.
The editorial lists several contributing factors besides the "original sin of this crisis" -- easy money -- and "mark-to-market" accounting.
- Fannie Mae and Freddie Mac ("They channeled far more liquidity into the market than would have been the case otherwise, especially from the Chinese, who thought (rightly) that they were investing in mortgage securities that were as safe as Treasurys but with a higher yield.")
- A credit-rating oligopoly ("Thanks to federal and state regulation, a small handful of credit rating agencies pass judgment on the risk for all debt securities in our markets.")
- Banking regulators ("[B]anks that made some of the worst mortgage investments are the most highly regulated .... Meanwhile, the least regulated firms -- hedge funds and private-equity companies -- have had the fewest problems, or have folded up their mistakes with the least amount of trauma.")
- The Community Reinvestment Act ("This 1977 law compels banks to make loans to poor borrowers who often cannot repay them.")
Numerous circumstances separate and apart from the 1999 repeal of Glass-Steagall conspired to cause this mess.
As President Clinton made clear in 1999, repealing Glass-Steagall made sense and could hardly have caused the current crisis:
Beginning with the introduction of an Administration-sponsored bill in 1997, my Administration has worked vigorously to produce financial services legislation that would not only spur greater competition, but also protect the rights of consumers and guarantee that expanded financial services firms would meet the needs of America's underserved communities. Passage of this legislation by an overwhelming, bipartisan majority of the Congress suggests that we have met that goal.* * * *Although the Act grants financial services firms greater latitude to innovate, it also contains important safety and soundness protections. While the Act allows common ownership of banking, securities, and insurance firms, it still requires those activities to be conducted separately within an organization, subject to functional regulation and funding limitations.
I am not sure which is worse, Rep. Barney Frank's proposal to limit executive compensation, or Treasury Secretary Henry Paulson's reported justification for opposing it:
Rep. Frank's draft would mandate that any company selling assets into the program 'meet appropriate standards for executive compensation,' including limits on what could be deemed excessive or inappropriate, according to a copy seen by The Wall Street Journal. The government would also have the ability to 'claw back' incentive pay that was based on 'earnings, gains, or other criteria that are later proven to be inaccurate.'* * * *Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it "hard," according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate. (emphasis added.)
William Kristol is right
when says limiting compensation "would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble."
Maybe Paulson's argument was misconstrued. I hope so.
Normally CEO compensation ought to be governed by the laws of supply and demand, but arbitrary limits hardly seem inappropriate in the context of a taxpayer bailout. A painless bailout will only tend to beget more bailouts.
No, cut the marginal tax rates more and the deficits will go away.
Raise the rates enough and the deficit will grow even if spending is cut. Then spending will have to be further retrenched, ultimately reaching the point where the country will not be able to defend itself.
In general, around the world, the countries with low or declining tax rates increase their government spending more than countries with high or rising tax rates. That's because the low tax countries grow six times faster than the high tax countries do.
What matters is not the deficit, but the rate of economic growth, which depends on low tax rates, secure property rights, open trade, and stable money.
Bret Swanson and George Gilder predict that the U.S. Internet of 2015 will be at least 50 times larger than it was in 2006. Their report, "Estimating the Exaflood: The Impact of Video and Rich Media on the Internet -- A 'zettabyte' by 2015?," estimates that annual totals for various categories of U.S. IP traffic in the year 2015. It projects:
- Movie downloads and P2P file sharing of 100 exabytes
- Internet video, gaming and virtual worlds of 200 exabytes
- Non-internet IPTV of 100 exabytes, and possibly much more
- Business IP Traffic of 100 exabytes
Gilder notes that an exabyte is equal to one billion gigabytes, or approximately 50,000 times the contents of the U.S. Library of Congress.
This report expands on Swanson's article "The Coming Exaflood," which was published in the Wall Street Journal on January 20, 2007.
Let Technology Revive the Economy
Swanson and Gilder point out that the network isn't currently designed to handle this increase.
Internet growth at these levels will require a dramatic expansion of bandwidth, storage, and traffic management capabilities in core, edge, metro, and access networks. A recent Nemertes Research study estimates that these changes will entail a total new investment of some $137 billion in the worldwide Internet infrastructure by 2010. In the U.S., currently lagging Asia, the total new network investments will exceed $100 billion by 2012.
Wow, this is roughly comparable to the projected cost of the economic stimulus bill now winding its way through Congress ($146 billion). But I'll bet no one's thought of empowering the telephone and cable companies to revive the economy. That would mean scrapping welfare for Silicon Valley (aka
network neutrality legislation) and eliminating discriminatory taxation of communications services. Nah, not as long as they can contribute boatloads of cash for politicians through their political action committees. Swanson and Gilder correctly point to a fact that's lost on the political class:
Technology remains the key engine of U.S. economic growth and its competitive edge. Policies that encourage investment and innovation in our digital and communications sectors should be among America's highest national priorities.
Driving the economy are not dollars in peoples' pockets but the ideas in their heads. Not buying-power but incentives impel people to take risks and make efforts and investments. More dollars may even reduce peoples' incentives to work and invent and invest. Every dollar rebated to a consumer comes from another consumer or investor. You cannot increase spending power (real income) without first increasing output. Supply creates its own demand. Demand does not increase supply except to the extent that the demand symbolizes previous productive efforts that expanded output.
Democrats and wobbly Republicans are panicked by class rhetoric from lowering the top rates which most affect incentives. These top marginal rates yield all the revenue (the lower the rates the more the revenue--see Art Laffer's superb piece in today's Wall Street Journal). Therefore the pols lower "business" taxes, helping profitable established businesses compete against fast growing new businesses, such as our technology companies.
The fact is that the only way to get more revenues without hurting the economy is to lower the rates on the rich. Cutting corporate rates is an indirect way of doing it.
In the political debate it is worth recalling that so-called Bush's tax cuts on capital gains and dividends were in fact proposed by Bill Thomas on Ways and Means and merely signed by Bush, after he proposed wimpy phased reductions of income taxes. The Bushes all consult Yale Keynesians who know nothing about the economy. Bush's entire administration, including its ability to prosecute the war in Iraq while drastically reducing the deficit, was fueled by Bill Thomas's revenue gushing tax rate reductions on capital gains and dividends.
Everyone should check out this new site covering economics and financial markets: RealClearMarkets.com.
James Surowiecki and Megan McArdle are resonably interesting economic commentators -- he a liberal from the New Yorker, she a slighted more market-oriented blogger for The Atlantic who was formerly known as Jane Galt -- but they continue the long tradition of cluelessness about supply-side economics.
Here's Surowiecki with a typically superficial essay about the "great lie."
And McArdle, (1) claiming that a right-wing magazine just spiked a book review of hers because she didn't toe the line on taxes.
...and (2) saying again yesterday that the supply-siders are "simply incorrect."
I tried commenting on McArdle's blog today, but she refuses to post my polite note despite accepting all sorts of other worthless nonsense. I've been spiked!
UPDATE: McArdle had a really bad day and also is having spam problems. So it's probably not her fault my comment wasn't posted on her blog. My sympathies and apologies to Megan.
Quick, Jon Chait, which raving supply-side moon-bat wrote this today?
"In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of "inflation targeting," which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives. As a result of these changes, steady GDP growth, low unemployment rates and low inflation rates -- once thought to be an impossible combination -- have been a reality in the U.S. for more than 20 years."
Yes, of course, it was that frothing fringe dodo named Robert E. Lucas, Jr., winner of the 1995 Nobel Prize.
(See my review of Jonathan Chait's book The Big Con here: http://www.disco-tech.org/2007/09/the_big_boom.html.)
See my review of Jonathan Chait's new book The Big Con.
The Big Boom
By Bret Swanson | September 13, 2007
In 2007, U.S. GDP will approach $14 trillion, tax revenue will easily top $2.5 trillion, and the budget deficit will drop towards a trivial 1% of GDP. Despite recent volatility, domestic stock markets remain near all-time highs achieved earlier this summer. Riding a worldwide surge of tax cuts, free trade, and innovation, global output this year will surpass $50 trillion. But in reading Jonathan Chait's new book "The Big Con," one would assume that the Reagan and Bush economic programs had plunged the U.S. into depression and the global boom did not exist.
One would have to assume. Because in this book about "crackpot economics," Chait has remarkably little to say about economic growth, tax receipts, budgets, or the epochal story of globalization. With all the global evidence refuting Chait's predetermined conclusion that supply-side economics doesn't work, he retreats to a political analysis of the Republican Party and petty defamation of some of the era's most important economic thinkers.
Chait's thesis is that the Republican Party has been captured, and the U.S. therefore governed, by the supply-siders, a small economic "cult" of "off the wall," "insane," "totally deranged, completely nuts," "sheer loons." He begins with the assertion that supply-side economics has been "conclusively disproven" and moves on to ridicule the excesses of K Street lobbyists. Chait's exposÃ© of K Street bloat is undeniable and humorous, but he seems not to realize that the K Street explosion utterly contradicts his central charge against supply-side economics.
After 25 years in which supply-side tax cuts dominated U.S. economic policy, how is it possible to pay for K Street's preposterous pork, perks, and narrow tax preferences, not to mention Iraq, Afghanistan, and entitlements, all with a miniscule deficit? If supply-side tax cuts didn't positively affect economic growth and thus tax receipts, how could federal tax revenue, at nearly 19% of GDP, possibly be higher today than the 18.2% average of the last 40 years?
Continue reading "The Big Boom" »
Contrary to reports in the popular press, neither Chinese stock market swings nor the sub-prime mortgage market are likely to stop the American expansion.
Will there be more foreclosures, bankruptcies and sad stories? Yes, yes and yes. Will it bring down the current expansion? Unlikely - the diverse and flexible nature of the $13 trillion U.S. economy gives it a depth and sturdiness that is vastly under appreciated.
See this good column from our friend Ashby Foote on the sturdiness of the U.S. economy.
Policy makers should recognize information technology as the centerpiece of economic policy and develop their plans accordingly, concludes the Digital Prosperity study published this week by the Information Technology and Innovation Foundation.
"In the new global economy information and communications technology (IT) is the major driver, not just of improved quality of life, but also of economic growth," writes Foundation president, Dr. Robert D. Atkinson, author of the study.
Atkinson is a widely respected economist who formerly served as project director of the Congressional Office of Technology Assessment, and is the former director of the Progressive Policy Institute's Technology and New Economy Project of the centrist Democratic Leadership Council.
Based on reviews of other studies, and Atkinson's own research, the report maintains, "IT was responsible for two-thirds of total factor growth in productivity between 1995 and 2002 and virtually all of the growth in labor productivity" in the United States.
Continue reading "Digital Prosperity Report Concludes IT Investment Critical" »
I had just last night finished reading Alan Reynolds' spectacular new book Income and Wealth, and I wake up this morning to find that he's written a great article about the "top 1%" in The Wall Street Journal.
Among other malignant myths, statistical slights-of-hand, dubious data, and conceptual quackery that Reynolds demolishes, he shows in the book that:
-- Comparing the top and bottom household quintiles can be highly misleading because the top quintile has almost SIX TIMES more full-time, year-round workers than the bottom quintile. Some 56% of bottom-quintile households have no workers at all. As Reynolds says, "work matters."
-- Age matters. The median net worth of households headed by someone 45-54 years old is $144,700. And by someone 25 or younger? Just $14,200. Aren't we usually describing the same people at different points in their lives?
-- Tax law changes make useless or downright misleading many comparisons over the last several decades. Dramatically falling income and capital gains tax rates, combined with the major tax reform of '86, mean that top earners report far more income as individuals that used to be reported as corporate earnings. At the same time, just the opposite is true for middle class workers as IRAs, 401(k)s, Keoughs, 529s and other tax deferred or tax exempt savings mechanisms have proliferated and thus shielded many trillions of dollars of income (both original labor income and build-up of income within accounts) from tax statements. There are more than $10 trillion in such plans, and in 2004 alone middle class savers contributed $172.5 billion. Top earners are mostly prevented from using these savings vehicles.
-- Nevertheless, despite assertions of "stagnation" and the statistical and analytical mistakes so often cited in the newspapers, real compensation per hour is up 40% since 1973, and real per capita consumption is up from $11,000 in 1973 to $25,000 today.
These are just a few of the multitude of startling figures that Reynolds offers to obliterate completely the dismal discourses from Paul Krugman and the rest of the envy brigades.
Update: Don Luskin, commenting on this great feat of economics, says, "I totally bow down before Alan Reynolds."
"It is ironic that cellphone service is widely available at low cost [in India] because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government."
--Former Council of Economic Advisors Chairman Martin Feldstein, writing in the Wall Street Journal, Feb. 16, 2006.
* * *
On net neutrality:
"with or without a new law, the FCC will affect the future in a major way by its approach to the question of broadband's openness. Sometimes called net neutrality, the question of openness is multidimensional. It is hard to define and harder to answer. Chairman Martin and his colleagues have the talent, expertise, and courage to come up with the right answers on this topic."
--Former FCC Chairman Reed Hundt, speaking at George Washington University on the 10th anniversary of the Telecommunications Act, Feb. 6, 2006.
* * *
On video franchising:
"When there was no competition to the telephone and cable companies, local governments could tax and over-regulate both of them and use the extracted revenues for perks and to cross-subsidize consumers or finance unrelated public services. Cable television and phone companies submitted to this over-regulation and over-taxation because their government-sanctioned monopolies meant they could recover their investment by raising prices. Consumers had no choice but to pay. But cable tv and telephone companies are no longer monopolies."
--Senator Jim DeMint (R-S.C.), at the Senate Commerce Committee hearing on local franchising, Feb. 15, 2006.
Don't get cocky. This week's news that your cellphone won't give you brain cancer isn't cause for relief or rejoice. You see, it's really 1933 all over again:
"Americans' personal savings rate dipped into negative territory in something that hasn't happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items."
Although the definition of "deplete" is "to use up" or "to empty out," it's hard to see how consumers have "depleted" their savings when U.S. households have a record $51 trillion in net worth and a near record $27 trillion in financial net worth (excluding homes).
By all means, let's employ policies that encourage more savings and investment, but let's not scare with the financial equivalent of junk science.
Our colleague George Gilder yesterday in The Wall Street Journal explained the real source of egregious earmarks:
How McCain-Feingold Favors 'Earmarking'
January 26, 2006; Page A11
Your Jan. 17 editorial "The Keepers of K Street" ignored the most crucial source of "earmarks" in the congressional process -- a campaign finance system that favors the bribery of interest groups over the contributions of citizens. Under McCain-Feingold, a citizen with diverse interests in the future of the nation is permitted to contribute $2,000. A political action committee representing a single interest group is permitted essentially unlimited contributions.
In other words, a PAC is a monomaniac with a single legislative goal. Until ordinary taxpayers with diverse interests and common sense -- perhaps kids in school, a stake in the Iraq war, a direct grasp of the counterproductive effects of the tax code -- are allowed to contribute as much as a governmental union or Archer Daniels Midland, earmarks will flourish regardless of budgetary reforms, which usually end up as obstacles to cuts in tax rates.
Congress has ears on both sides. You cannot end special interest politics by removing the earmarked spending unless you also remove the McCain-Feingold system favoring earmarked contributions.
Forcing politicians to scrounge for tens of thousands of small contributions does not democratize the campaign finance system as the conventional wisdom has it. It makes fundraising the central thing politicians do and thus leads them inexorably to the professional fundraisers who can bundle elite special interest money for special projects far easier than they can bundle individual citizen money for support of a general government philosophy. McCain-Feingold centralizes the power of incumbents and lobbyists. Unlimited campaign contributions would make political money abundant so that politicians could ignore gifts from suspect or narrowly focused sources, thus freeing them from money's hold.
UPDATE: Dan Henninger of the Journal today picks up the same theme -- how "good government" regulations yield bad government:
"In 1974 -- the start the Long Era of Chaos in our politics -- Congress claimed it was curing the abuses of Watergate by mandating that no individual could contribute more than $1,000 to a candidate per election. So of course candidates were going to need a lot of "individual" contributions to finance a modern campaign. Thus was born the current co-dependency between members of Congress who hold the power to confer federal spending and Washington lobbyists who have the power to bundle campaign contributions in PACs and such for incumbent earmarkers.
"A friend who was part of this world back then described it for me recently: 'If you lived in Washington in those years, the change was dramatic. We moved to California in 1973. Returning to visit in 1976, the evening landscape had changed completely. There were fundraisers everywhere. Friends who were Congressmen were stopping at two or three cocktail parties an evening, touching base with single-subject organizations who had established PACs in reply to the 1974 reforms. We knew a caterer; her life had changed.' Her business today is probably a publicly traded company...."
My colleague Hance Haney mentions below a new IRS regulation that kicks in this month that will subject small start-up companies to specific accounting rules for stock options that could reduce the use of these important employee incentives. We should also call attention to new SEC regulations, initially meant for hedge funds, that could impose new reporting requirements and potentially even onerous investment clamps on venture capital and private equity. John Berlau of CEI has the story here...
Ben Bernanke, President Bush's nominee to succeed Alan Greenspan as chairman of the Fed, is the John Roberts of monetary policy. He is intelligent, erudite, apolitical, pleasant, and prepared. Credentialed at the best schools and immersed in the theory and practice of monetary policy for the last several decades, Bernanke, says supply-sider Arthur Laffer, is "the right person at the right time."
It's true President Bush could have done far worse. But I worry. You see, Bernanke is worried about gaps. He's worried about trade gaps -- he thinks the U.S. trade gap is caused by a global savings glut. And he worries about something called the output gap -- a variant of the Phillips Curve, which supposes a trade-off between unemployment and inflation. But the Phillips curve really gets the relationship backward. As economist Mike Darda wrote
I don’t like this model because the empirical linkage between growth and inflation is non-existent, or inverse, while the relationship between unemployment and inflation is significant and positive. The data clearly show that inflation raises unemployment with a lag, precisely the opposite of the original precept of the Phillips curve. Wage pressures and capacity constraints can result from excess liquidity and thus be positively associated with inflation, but on their own they have no power to raise the dollar price level without the accomplice of excess money.
Inflation is a monetary phenomenon, not a cost-push event.
Bernanke was perhaps the first member of the Fed to acknowledge the possibility of deflation
in the U.S. when he joined the central bank in 2002. Bernanke had studied the world's rare deflationary events and gave major speeches
on the topic when the U.S. was still reeling from market crash and recession/stagnation. Bernanke gets some credit for grasping the concept and verbalizing it -- something no other Fed member, and few other economists, were able or willing to do. But Bernanke was too late. The dollar had already experienced a five-year deflationary event and was even then, in the fall of 2002, already reflating. Deflation wasn't a remote possibility in the future. It had just happened. The ultra-strong deflationary dollar crashed Asia in 1997-98, then bankrupted Russia, Turkey, and Argentina, and finally made it's way to the strongest, most flexible, least vulnerable, least commodity-based economy in the world, the U.S. The result was zero profit growth from 1997-2001, a stock crash, a recession, and record corporate defaults, especially in the debt-laden telecom sector. Bernanke himself has written that deflation is hardest on debtors, but bankruptcy across the globe did not seem to tip him off. Chairman Greenspan's liquidity injection after the 9/11 attacks of 2001 had begun the process of relieving the deflation that had already occurred.
Bernanke was the key force in bringing the Fed Funds rate to 1% and leaving it there for, well, for too long. Today's inflationary environment, in fact, is a perfect example of the backward looking nature of Bernanke's favored mechanism of "inflation targeting." By targeting conventional measures of inflation, like the CPI (consumer price index) or the PCE deflator, one necessarily must look "in the rear view mirror." Today's CPI tells you what monetary policy was like 18 months or two years ago. Thus the Fed's tendency to overshoot on either side. Tighten to squelch inflation. But by the time the CPI is under control, you've tightened too much and have caused a recession. Then you loosen to relieve recession, leaving the Funds rate at 1% as long as the CPI looks tame. Meantime, real-time prices of traded commodities have gone through the roof, the dollar has severely weakened, and American politicians are complaining that the dollar-linked Chinese yuan is too weak. Hey, guys, the value of the yuan depends completely on the value of the dollar. Is it Beijing you are worried about, or the Fed?
Which brings us to China. Bernanke's real test will be China and all international monetary and trade relationships. Greenspan has acquiesced to Sec. John Snow's calls for a strong yuan and a weak dollar, though the Fed chairman publicly persuaded Sens. Chuck Schumer and Lindsey Graham to pull their China tariff bill. Will Bernanke go a step further and explain the importance of international currency stability? We have no indication that Bernanke looks at the value of the dollar, or at foreign exchange rates, in his inflation targeting model. George Gilder and I met with National Economic Council director Al Hubbard at the White House last week, talking China and currencies, and hold out hope the Administration could make an intellectual breakthrough. But whether Bernanke fills in those gaps -- trade, output, intellectual, and otherwise -- remains to be seen.
Well, our favorite for Fed chair David Malpass of Bear Stearns didn't get the top central banking job. But congratulations are still in order. Institutional Investor Magazine (sub. req.) has named Malpass the number two economist on its 2005 All-American Research Team. Ed Hyman of ISI was number one for the 87th year in a row (or something like that).
U.S. Treasury Secretary John Snow is in China for a nine day visit. But which nation's leader is offering supply-side economic advice? If you guessed Chinese President Hu Jintao, you are correct. Citing evanescent "imbalances," Snow continues his calls for de-linkage of the yuan from the dollar and subtly still pushes for a major yuan appreciation. The U.S. thus inexplicably continues its weak dollar currency policy. Hu, on the other hand, believes that "All countries, major economies in particular, should keep major currencies reasonably stable and prevent trade protectionism." Bingo.
Over the past decade, the dollar-yuan link has been a key source of growth and stability not only for the U.S. and China but also across the global economy. China's trade policies have not always matched Hu's positive free trade rhetoric, but at least they have made their stance clear and can now be called to account. The U.S., however, damages its own free trade credibility when it muddies the waters with monetary protectionism and tariff threats. China is not likely to substantially revalue the yuan for a number of both internal and external reasons: an overly strong yuan would hurt not just the overall Chinese economy but especially its rural farmers in the country's interior, where Beijing is focused on improving incomes relative to the coast. Deflation would reduce commodity prices and thus farm income, exacerbating income differences with the fast-growing coastal free zones.
Money is a store of wealth, a standard of value, and a unit of account. Change its value, and you change every relationship across the economy. In the short run some will win and some will lose. But in the medium and long term, everybody loses. The value of money should not fluctuate freely at every arbitrary geographic border. In an economy, money and law should be stable. Everything else should be dynamic.
With a few days left in his Asian trip, hopefully Secretary Snow will second Mr. Hu's call for stable money and free trade.
Ten Days of Quantum Science and Supply-side Economics
With our annual Telecosm conference in Lake Tahoe sandwiched by two trips to Washington, D.C., it was a whirlwind two weeks. Seeing old friends and meeting new ones from the Telecosm Lounge (www.gildertech.com) is always a great part of Telecosm. It was no different this year, as we had enough EZchip (LNOP) owners to convene a significant shareholders meeting with CEO Eli Fruchter at lunch on Wednesday even though the company’s official
annual meeting was taking place that very day in Israel. “No one comes to our official meeting,” Eli said. He was amazed that Glen had memorized every word of every press release of the last five years and that West knew every dollar and decimal of the company’s slim financials.
Wednesday began with a bang as Steve Forbes delivered a compelling survey of the world economy and a critique of economic policy here at home. Three years in a row now, Mr. Forbes has delivered home-run speeches full of personality and comedy -- with his usual incisive analysis -- that might have put him in the White House if performed just a few years before. China, India, Europe, Social Security, Telecom, Katrina, Money, Trade -- he knows it all. Scheduled to speak after Mr. Forbes was John Rutledge, economist, investor, and early Reagan revolutionary. Rutledge was just returning from Beijing and was to give an update on Asia, with a special thrust on energy and technology. But at the last minute he was diverted to the East Coast by an urgent call from a cabinet secretary. And so it was left to Mr. Forbes, George Gilder, Rich Karlgaard, and me to tackle Asian issues and implications. Judging from the crowd reaction, we did okay.
Wednesday evening, legendary physicist-inventor-entrepreneur Carver Mead offered his annual conference-closing lecture. This year it was a fascinating history of the study of superconducting rings, with robust hints that new work on these miraculous supercooled loops of coherent quantum energy could revolutionize our understanding of all physics and possibly show the way toward practical new technology paradigms for electronics and communications. For several hours after Telecosm IX’s thrilling conclusion, Dr. Mead sat on the hearth of the massive fireplace in the Squaw Creek lobby, sipping Cabernet and extending his superconductive remarks as Louisa Gilder, George, Nick Tredennick, Sandy Fleischmann, and I listened and probed. The crackling blaze mere feet behind Dr. Mead could not compete with his candlepower. Although we did not highlight it at this year’s conference, one of Dr. Mead’s half-dozen new companies, Impinj, is tagging home runs in the explosive RFID (radio frequency identification) space. My mention of Impinj as our conversation drew to a close brought a broad smile to Dr. Mead’s face. That is how I left Dr. Mead and Tahoe Wednesday night -- it was a look of quiet pride at the emerging success of Impinj and of fiery determination for the potentially world-changing future of his collective quantum ideas.
Just a few hours later, still dark in California, George and I were off cross-country to Washington, D.C., hoping to make it in time for Thursday night’s dinner commemorating the life and work of political-economist Jude Wanniski. Jack Kemp greeted us at the door of the private room at Mr. K’s, an elegant Chinese restaurant on K Street. There were columnists Bob Novak and David Brooks. From out of nowhere came Donald Rumsfeld, squinting, laughing, and ridiculing the Weekly Standard’s Bill Kristol, who had now called for his resignation some five times, the first instance occurring in April -- of 2001. Pat Buchanan was taller than I had assumed from television. Supply-siders, mostly those “present at the creation,” were crawling the room: Alan Reynolds, Richard Rahn, Jeff Bell, Steve Entin, and also Wayne Angell, David Malpass, Larry Hunter, and more. Then comes a great surprise -- the grand-daddy, Nobel winner of 1999 Robert Mundell. Teacher of Arthur Laffer and progenitor of Jude’s “Mundell-Laffer Hypothesis,” Mundell now lives mostly in Beijing and I had not expected to see him.
I sat next to Reynolds and a charming Chinese woman getting her Ph.D. from Mundell friend Dominick Salvatore at Fordham in New York. We and most in the room spent the evening discussing China, both its historical implications and the more immediately infuriating currency kerfuffle with the U.S. Over the previous months, I had written of America’s good fortune that although Washington was not demonstrating any understanding of trade and currency matters, leading to self-destructive calls for tariffs and a massive Chinese yuan appreciation, at least Professor Mundell was in Beijing advising the Chinese on their own internal transition and especially on how to deescalate tensions with the U.S. without swallowing our poisonous advice. A year ago, the Chinese established the Mundell International University for Entrepreneurship in the largest of Beijing’s technology zones, and this July Professor Mundell was the very first foreigner to receive China’s new “green card” allowing permanent residence, work, and movement within the country and without.
After George Gilder offered the night’s final toast among many, saluting Jude’s eternal optimism, that the last can be first and that good can prevail, the party slowly broke up. Although George had sat at Professor Mundell’s table, talking China and relating the events of Telecosm, I did not get to introduce myself until after dinner. I told him we admired his work in China, that we were writing a book on China and the world economy, and that we hoped to cooperate with him and his young protégé at my table. Yes, of course, he said. What a night.
Racing back to the Midwest, my wife and I found two days to visit great Washington friends with a beautiful weekend home on a bluff overlooking the Missouri River in Columbia, MO. Two more days of fascinating political-economic conversation centered on China and one Texas Longhorn trouncing of Mizzou later, it was time to reacquaint myself with our three little girls.
Back home in Indiana, I prepared for Monday testimony on telecom reform with a downtown dinner Sunday night. Who should appear at the other end of my table? None other than Telecosm no-show John Rutledge! Rutledge was scheduled to testify with me in the Indiana Senate the next morning. He had just returned from Beijing visiting one Robert Mundell and was slightly surprised to learn I had seen Mundell Thursday night. Rutledge had just dined with Mundell in New York Saturday night. In a thrilling development, Rutledge had just been appointed president of the Mundell University in Beijing and would be spending half his time there. It seems the Chinese are now listening to two stalwart supply-siders, even sending the children of the ruling elite to study under them, while American elites and policymakers do their best to keep a safe distance. After a few minutes in which we allowed our dinner mates to recover from our cross table excitement, Rutledge motioned back to my end of the table. “Now it’s all coming together, Bret,” Rutledge exclaimed with a chuckle. “Mundell said he saw George in Washington. But he also said he met this young scientist named Carver Mead.”
The Wall Street Journal reports this morning that the White House may be looking beyond the presumed "list of four" (Lindsey, Bernanke, G. Hubbard, Feldstein) to fill Alan Greenspan's chair at the Fed. This is great news, as it may open the door for monetary stalwarts like David Malpass of Bear Stearns, or, as Cesar Conda suggests on the Journal's editorial page, Manuel Johnson, who in 1996 wrote one of the very best books on monetary policy. Malpass and Johnson are supply-siders who favor a price-rule to maintain a stable value of the dollar and who deeply understand the global nature of all economic policy. Columbia's Glenn Hubbard, who was President Bush's CEA chair in charge of the excellent 2003 tax cut, might also be a terrific choice, but his views on monetary policy are mostly unknown.
President Bush has proposed another Green Zone for the Gulf. This one is not a fortress in Baghdad, however, but a greenlined "opportunity zone" in Louisiana, Mississippi, and Alabama. Although I share concerns that Washington will shovel money South indiscriminately, the free zone portion of the proposal is just the right strategic approach. Not just because of what it might do for New Orleans and the Gulf region but for its potential follow-on effects across the nation.
China has already shown us the way. In the late 1970s, Deng Xiaoping established four Special Economic Zones in Shenzhen, Fujian, and Shanghai, where tax rates and regulations were low or non-existent. Financial and human capital poured into the zones, and they became the most prosperous and productive spots in the nation. Shenzhen was then a swamp with a few tens of thousands of people but today boasts many millions. Before long, other local officials and citizens across China were demanding more capitalism, asking for their own zones, and by the early to mid-1990s, some 8,000 free zones were established. "Zone fever" swept China and has been a fundamental source of its 25-year boom. By starting small, and in out-of-the-way places where the hardline Communists were unlikely to take notice, Deng and his successor Jiang Zemin planted the seeds of capitalism. They let the people do the rest.
In the same way, if Bush's "opportunity zone" can be intelligently designed and implemented in the Gulf, the economic growth that is likely to result will gain admirers across the nation. Other depressed and not-so-depressed areas will agitate for their own zones of freedom. It's too bad it's taken a tragedy to give rise to this idea, but it could be the start of something big.
Economist Jude Wanniski passed away suddenly yesterday at the age of 69. More than any other thinker, Wanniski educated the public about supply-side economics, after learning its key principles from Robert Mundell and Arthur Laffer in the early and mid-1970s. On my bookshelf behind me I have several binders worth of his Supply-Side University essays (written every Friday for the last decade or so) and several copies of his 1978 book The Way the World Works. Wanniski was a key force in the economic debates that led to the election of Ronald Reagan and to the implementation of his successful agenda of tax rate cuts, deregulation, and sound money. In his book he predicted that China was at the dawn of a great supply-side economic boom. For the last 25 years Wanniski analyzed the economy and stocks for Wall Street and other institutional clients.
Recently, Wanniski was alienated by -- or some might say excommunicated from -- the conservative movement for his criticism of the war in Iraq. Wanniski's split from establishment conservatism began in the mid-1990s when he declared that the U.S. should have a different foreign policy in a now unipolar post-Cold War world. Wanniski's tone, as much as the content of his thoughts, was responsbile for more than a few rocky professional relationships. Jude didn't strive merely to win arguments. He sought utter and total capitulation. Even 99 percent agreement from a would-be debating partner was not enough. His argumentative and contrarian style flowed from his firm belief that all important things happen "on the margin," in intellectual jousting as much as in the macroeconomy.
I am proud to have solicited and edited Jude's 2001 essay, "The Deflation Monster
," for The American Spectator
at a time when most people, even sophisticated economic observers, either did not know or would not acknowledge the monetary deflation that had wrecked Asia in 1997-98, swept through Russia, Turkey, and Argentina, and finally crashed the U.S. markets and economic growth in 2000-01. The Federal Reserve in its opaque and ambiguous way, I believe, has now acknowledged that Jude was correct. Board member Ben Bernanke and Fed chairman Greespan began talking about a potential threat of deflation in late 2002. This of course was after the real deflation had already been relieved by the Fed's post-9/11 liquidity surge. But implicitly acknowledge it, they did. Even in his Jackson Hole address last Friday, Chairman Greenspan said the Fed's unusually low interest rate targets of 2002-2004 were designed to avoid the potential catastrophy of deflation.
I am grateful for Jude's generous teaching over the years and hope that he will be remembered for his many virtues and for his part (however small or large) in changing the
course of world economic history. May he rest in peace.
Globalization scholar Jagdish Bhagwati this morning takes on Tom Friedman's "Flat Earth" metaphor. The Earth is not flat, writes Bhagwati, author of last year's In Defense of Globalization, but "kaleidoscopic." Bhagwati thinks Friedman's analogies are too simplistic, that flat and round don't accurately convey the diversity of the global economy, and that China and India still have a long way to go to match Western sophistication and wealth. No doubt, Bhagwati is right in some of his particular criticisms. Friedman's overuse of analogies makes him vulnerable to such charges of over-generalization.
Nevertheless, Friedman's basic premise of a highly integrated and connected world economy stands. The funny thing to me and my supply-side friends is that this has been the foundation of our economic analysis for more than 40 years. The keystone was laid back in the early 1960s by economist Robert Mundell, who developed the models of international economic interaction that are still used today. Mundell and his protege Art Laffer were the key intellectual force behind the monetary and fiscal policies that came to life in the 1960s, percolated in intellectual and policy circles in the 1970s, exploded onto the world scene in the form of the successful Reagan agenda in the 1980s, and now govern the globe.
More than "tax cuts to stimulate growth and tax receipts" or "sound money to restrain inflation," the key insight of Mundell and Laffer was that the earth is flat. "There is only one closed economy," Mundell always said, "the world economy." From this fundamental understanding, Mundell and Laffer offered more accurate explanations of all economic activity and derived the monetary and fiscal policies that, even though they were ridiculed at the time, would change the world for the better.
From the very concept of "globalization" to the flat-tax revolution in Eastern Europe and Russia to the sound money and tax-cutting program in China, supply-side economics now propels the world economy and is its intellectual foundation. Only in America is it really still controversial.
To the extent Friedman sees that the world is getting flatter and more competitive, and that the chasm of wealth, technology, and freedom that separated the West and East for decades or centuries is closing, he is right. But it was supply-side economists who both foresaw the "flattening" of the world economy and indeed did the flattening. On this point, Friedman falls, well...very, very short.
Why is 2004 economics Nobel laureate Ed Prescott so optimistic [registration required at Wall Street Journal] about Western Europe's economic propects over the next decade? Because things are so bad, he writes, even most French and German politicians now realize they must change their ways.
Prescott has done key research on the effects of taxes on labor markets and has shown virtually the entire difference between hard working Americans and liesurely Europeans can be explained by Western Europe's high tax rates. Although Prescott's Journal op-ed today does not mention Princeton professor and New York Times columnist Paul Krugman by name, the article seems a direct refutation of Krugman's attempt last week to paint France's high unemployment rate, low productivity, and low growth as a counterintuitive boon for French citizens and a demonstration of their superior family values.
I'm stunned the pundits aren't discussing John Roberts' potential impact on communications law!
Seriously, I was surprised to learn he grew up
in my home county in Indiana and attended a small, private, country school outside my hometown of La Porte. La Lumiere School's other famous alum was a genius of another sort -- the late comedian Chris Farley.
The Wall Street Journal did report that when Roberts listed his personal investments when he became an appellate judge, among his stock holdings were Time Warner Inc. (TWX), Dell Inc. (DELL), Texas Instruments Inc. (TXN), Microsoft Corp. (MSFT), and Intel Corp. (INTC). Maybe this is standard fair, but it could reflect a mild interest in technology. Also, his father was an electrical engineer and an executive at a steel company, and one might suppose that upbringing could inform his views on business and tech.
See this morning's Wall Street Journal for an editorial (subscription required) on the tech stock rally and a reference to Bret Swanson and our new blog.
It's impossible to model the stock market with absolute certainty. But is it a coincidence that since the FCC announced a week ago it would seek some measure of deregulation for telecom companies, the technology heavy Nasdaq has risen over 4 percent? Before the Supreme Court Brand X decision and the related FCC statements, the Nasdaq had been down year-to-date about 6 percent. Now we're close to even for the year.
Our Gilder Technology Index, which is even more concentrated in technology, is up almost 6 percent in the last week.
Several of my Discovery colleagues have voiced valid concerns that the Brand X case confirms and centralizes the FCC's powers -- often an ominous thing, to be sure -- but if the FCC follows through on its recent directional statements, it will be good for the economy and stocks. So far the market seems to think so.
Discovery's George Gilder meets with members of the Senate Republican High Tech Task Force on June 29th to discuss telecommunications reform. Clockwise from left: Gilder, U.S. Senators John Ensign (R-NV), Richard Burr (R-NC), Wayne Allard (R-CO), George Allen (R-VA), and John Thune (R-SD).