Mon 1 Dec 2008
It appears clear that Keynesian economics is back in vogue. I thought it had died an ignoble death a decade or two ago, but apparently not. The morning papers that I read, the Washington Post and the New York Times, offer perspectives on the upcoming Keynesian stimulus our government is the process of formulating. I’m not ready to make firm conclusions myself, other than perhaps to conclude that we need to take great care not to do stupid (counterproductive) things.
From today’s New York Times comes one of the perspectives from ”Nobel Prize winning economist” and New York Times columnist Paul Krugman. The column is entitled Deficits and The Future. He argues that we can’t let concern about long-term deficits diminish the economic stimulus the government must undertake now. It makes sense. Another perspective, not necessarily contradictory but certainly cautionary, is offered by George Will in a column yesterday entitled Same Old New Deal. Among other things, he points out some of the stupid (counter-productive) things we should avoid doing in any government stimulus effort.
My concern is that with liberals, and their predisposition to pay too much heed to organized labor, running Capitol Hill it is hard to imagine that we won’t end up with some stupid along with the smart. Here’s an excerpt from the Will column that’s informative in this regard:
In “The Forgotten Man: A New History of the Great Depression,” Amity Shlaes of the Council on Foreign Relations and Bloomberg News argues that government policies, beyond the Federal Reserve‘s tight money, deepened and prolonged the Depression. The policies included encouraging strong unions and higher wages than lagging productivity justified, on the theory that workers’ spending would be stimulative. Instead, corporate profits — prerequisites for job-creating investments — were excessively drained into labor expenses that left many workers priced out of the market.
In a 2004 paper, Harold L. Cole of the University of California at Los Angelesand Lee E. Ohanian of UCLA and the Federal Reserve Bank of Minneapolis argued that the Depression would have ended in 1936, rather than in 1943, were it not for policies that magnified the power of labor and encouraged the cartelization of industries. These policies expressed the New Deal premise that the Depression was caused by excessive competition that first reduced prices and wages and then reduced employment and consumer demand. In a forthcoming paper, Ohanian argues that “much of the depth of the Depression” is explained by Hoover’s policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.
Wills goes on to note that “Obama’s ‘rescue plan for the middle class’ includes a tax credit for businesses ‘for each new employee they hire’ in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies — labor costs not justified by value added.”
While we’re on the topic of stupid things and the economy, readers will be aware of my concern with the cozy relationship between Democrats and environmental groups. The country is at great risk right now of creating a situation in this country that will be decidedly non-conducive to domestic oil and natural gas production, production which this country desperately needs. The problem is that much of the “rap” against domestic oil and natural gas is much less real than imagined or purposely misrepresented by opponents. The risk we run in letting zealots make policy is that we will diminish this country’s ability to produce domestically, particularly natural gas, and force greater dependence upon product from abroad. If this happens, all on the back of largely unsubstantiated allegations and an overriding desire to replace use of oil and natural gas with renewables, we will make all but certain a massive natural gas price spike in 18 months. Current shale production in the U.S. requires the constant drilling of replacement wells. The drop in natural gas prices has already resulted in a decline in new drilling. Federal land policy and measures to impose unnecessary new environmental rules on new development (whether enacted by Congress or imposed by the incoming administration) will exacerbate this situation dramatically. It will mean higher natural gas prices just in time for the next election cycle. It will also mean crippling a struggling economy with higher fuel prices and more dollars once again heading overseas to pay for energy purchases (rather thanrecirculating in our domestic economy). Sane heads need to prevail here. Let’s tighten some environmental rules where the facts support the changes (this will require a much more open and thorough process of vetting any new environmental legislation and rules) and review some of the Bush public land decisions. But let’s keep the process open and transparent. Additionally, let’s make sure the charges by environmentalists are balanced by listening to industry and particularly the states that regulate that industry in America. This is essential to avoid the stupid. There are difficult times ahead that will be made more difficult if we aren’t careful.