Topic: Government and Politics

Stimulus: Kindergarten Keynesianism

It is very curious that some top economists are pushing the Bush/Pelosi $100 billion stimulus giveaway.

  • For years, these same economists told us that more savings is good for the economy. Now they are saying that more consumption is good.
  • For years, these same economists have lambasted the budget deficit. Now, they support blowing a new $100 billion hole in the federal budget.
  • Finally, many economists have long complained that Americans are shopoholics and have far too much credit card debt. Now stimulus-supporting economists are demanding that Americans spend, spend, spend!

It is surprising that anyone takes economists seriously anymore.

Anyway, stimulus proponents say that mailing $100 billion of cash to families will cause the nation’s output to grow. Yet this simple Keynesian chart illustrates that the result will be higher prices, not more output.

The stimulus causes the aggregate demand curve to shift to the right, as proponents suggest. That moves us along the aggregate supply curve, which I believe should be drawn vertically in this case. The result is that prices jump up from P1 to P2, but output does not rise.

Stimulus proponents would argue that the aggregate supply curve should be sloped, at least in the short run. In that case, the figure would show a temporary bump upwards in output.

But that seems unlikely to me. Keynesian theories about why output might increase usually rely on imperfections in markets or information. Producers get fooled into increasing their output for a while, before the errors are worked out and output falls back to its long-term level.

But that wouldn’t seem to be the case here. Let’s say the rebate checks get mailed out in May and June. A U.S. cigarette producer may notice a slight uptick in sales in those months as smokers spend their government checks. But cigarette producers probably watch the news and they will know that this is just a temporary blip. As such, they won’t add any new workers or buy any new machines.

So output would stay pretty fixed, while prices would adjust upward slightly to clear markets. But I don’t claim to be a Keynesian expert, so if one of our Keynesian readers wants to tell me where I’m wrong, I’d be happy to hear it. Until then, I remain convinced that the Bush/Pelosi scheme is crack-pot.

Shaken, Not Served?

As Jacob Grier notes, the Washington Post ran an excellent article highlighting a silly Virginia law that bans sangria. The law does not specifically outlaw sangria, but states that restaurants cannot serve beverages in which spirits are added to beer or wine. Sangria is a traditional Spanish beverage that runs afoul of the law because it is typically made from red wine and brandy. A restaurant in Northern Virginia is currently facing a $2,000 fine for violating the law.

As the article indicates, the law has broader implications

It’s not just sangria. Other popular drinks are also off-limits, including kir royals, which are made with sparkling wine, and boilermakers, which include beer and a shot of liquor.

This invites a question: does the law also make martinis illegal? Martinis are a mixture of gin or vodka and dry vermouth, which is a blend of fortified wine and herbs. Can a bartender in Virginia add fortified wine to spirits? The text of the law says you cannot “sell wine to which spirits or alcohol, or both, have been added,” but does not clarify if it is illegal to add wine to spirits.

Regardless of the legal implications for martinis, Manhattans, and other cocktails with vermouth, this is a silly and unnecessary law. Unfortunately this is just the tip of the iceberg, as many other states still have outdated, Prohibition-era laws on their books. The U.S. is riddled with ridiculous state liquor laws that impose restrictions on the size of beer bottles, the number of ounces of spirits allowed in a particular beverage, and the percentage of alcohol in beer, just to name a few. These attempts to reduce alcohol consumption are misguided and often counterproductive. State governments should get out of the nanny business and allow responsible adults to enjoy the alcoholic beverage of their choosing.

Creating A National Mortgage Scandal

Details are murky, but Senator Dodd appears to want to spend many billions on a new federal agency to buy-up undefined “distressed” mortgages at less than their original value.

Suppose Mr. Jones has a $300,000 mortgage on a house now worth $250,000. The new agency would offer to pay off the loan for $250,000 and then let Jones stay in the house with a new $250,000 mortgage that would then be guaranteed by the Federal Housing Authority (which ultimately means the U.S. taxpayer). FHA would debase its customary lending standards.

If banks and mortgage service companies are willing to write-off a large part of the value of some mortgages, why would we need to put U.S. taxpayers at risk? Why couldn’t each borrower simply negotiate a new contract, as hundreds of thousands have already done (though usually for a lower interest rate rather than forgiveness of principal).

If a home owner or speculator like Mr. Jones could get a smaller mortgage through a government agency by not making payments and threatening to default, that would create a huge moral hazard. His neighbors would resent his special treatment, and threaten to default on their loans too.

Since everyone would rather have a smaller mortgage than a larger mortgage, there would be rationing problem of deciding who is or is not worthy for such special treatment. Such priorities are likely to be based on political considerations rather than sensible economics or risk management.

Since Mr. Jones is already seriously delinquent on the current mortgage, he may well have a history of not paying other bills and therefore a poor (subprime) credit rating. There is no good reason to expect that he will not also default on the new FHA mortgage. Risky loans still remain risky, but because of the FHA guarantee that risk would be shifted to taxpayers.

This scheme would convert a localized mortgage problem into a national mortgage scandal.

Welfare-Warfare Conservatism

The New Republic runs an article on the New York Times’ decision to hire Bill Kristol, and provides the short list of candidates for the spot:

[L]ast fall, [Times publisher Arthur] Sulzberger and Times editorial-page editor Andrew Rosenthal prepared a list of some 25 conservative writers. According to a person with knowledge of the search, the names included Washington Post columnist Charles Krauthammer, The Atlantic’s Ross Douthat, senior fellow at the Council on Foreign Relations Max Boot and three Weekly Standard staffers: senior editor Christopher Caldwell, associate editor Matthew Continetti, and the magazine’s editor and founder, Bill Kristol. On December 30, Sulzberger selected Kristol, who gave up his column at Time magazine for the Times appointment.

This is really pretty striking. Every author mentioned is an ardent supporter of the welfare-warfare state, with admittedly varying emphases. Douthat’s focus, for example, has been on attempting to craft a European Christian Democrat-style conservatism that fuses political sops to social conservatives to economic populism (read: “expanding the welfare state”) in an attempt to buy middle class votes. Max Boot and Charles Krauthammer, by contrast, have focused more on urging the United States into pointless and massively destructive foreign wars, the first of which has already killed more Americans than 9/11 and sucked half a trillion dollars from taxpayers’ pockets.

I’m loath to predict political outcomes. Maybe as a political matter this sort of thing will sell. But abandoning conservative economic principles in the pursuit of political success and simultaneously indulging the worst jingoist excesses of neoconservatism is a positively revolting platform. Looking at the slate of candidates for the Republican presidential nomination, maybe this new welfare-warfare fusionism has legs. But it certainly doesn’t offer very much to libertarians.

Hillary and the 22nd Amendment

Sen. Hillary Clinton has campaigned strongly on the theme that she is the most experienced candidate for president, “ready on day one” to handle the challenges of the world’s toughest job. As the New York Times says, “She has cast herself, instead, as a first lady like no other: a full partner to her husband in his administration, and, she says, all the stronger and more experienced for her ‘eight years with a front-row seat on history.’” I think she has a point. I’ve said for months that she can credibly claim to be the best-prepared presidential candidate since Franklin D. Roosevelt in 1940: she spent eight years in the White House, seeing the way politics and policies work from the eye of the storm. I accept that, more than any other First Lady, she was heavily involved in both policy and politics.

But then that raises a problem: If she does have eight years’ experience in the White House, and if we are once again going to get two presidents for the price of one, doesn’t that violate the spirit of the 22nd Amendment? After the FDR experience, Americans decided that we never again wanted one person to serve as president for that long. Indeed, it’s surprising just how fast they came to that conclusion. Roosevelt, we’re told, was a beloved president, the man who ended the Great Depression and won the war, who died before his final victory was complete. Yet within two years of his death Congress had passed the 22nd Amendment, and within another four years three-fourths of the states had ratified it. That’s how strongly people felt that we should never again let a president, no matter how great or how admired, serve more than eight years in the most powerful position in the world.

Today the Clintons campaign side by side, hailing the success of their eight years in the White House and promising to “get America back to the solutions business,” back to “the best economy that our country has seen in a generation.” There’s talk of “another co-presidency.” Just note how many news stories these days refer to “the Clintons” and their campaign and their policy agenda. There are no such references to “the Obamas” or “the McCains.”

Legally, of course, Hillary Rodham Clinton has not previously served as president. She is no less eligible for election to the presidency than was George W. Bush, the son of a president. But the intent of the 22nd Amendment, the spirit of a presidential term limit, is to ensure that no one person holds that vast power for so long. When the federal government and the presidency were vastly less powerful than today, George Washington thought that a republic should not be led by one man for more than eight years. His example set a standard for the American republic until that republic encountered the powerlust of Franklin D. Roosevelt, after which we made George Washington’s example a legal rule.

In weighing the candidates this year, we should consider whether “co-presidents” should be entitled to four terms in the Oval Office rather than the prescribed two.

NOTE: Click here for some reflections on governing teams Bill and Hillary Clinton, George and Lurleen Wallace, and Ma and Pa Ferguson.

DoJ’s Public Lobbying - A Legal Violation?

Here’s the language of 18 U.S.C. § 1913 (“Lobbying with appropriated moneys”):

No part of the money appropriated by any enactment of Congress shall, in the absence of express authorization by Congress, be used directly or indirectly to pay for any personal service, advertisement, telegram, telephone, letter, printed or written matter, or other device, intended or designed to influence in any manner a Member of Congress, a jurisdiction, or an official of any government, to favor, adopt, or oppose, by vote or otherwise, any legislation, law, ratification, policy, or appropriation, whether before or after the introduction of any bill, measure, or resolution proposing such legislation, law, ratification, policy, or appropriation; but this shall not prevent officers or employees of the United States or of its departments or agencies from communicating to any such Member or official, at his request, or to Congress or such official, through the proper official channels, requests for any legislation, law, ratification, policy, or appropriations which they deem necessary for the efficient conduct of the public business, or from making any communication whose prohibition by this section might, in the opinion of the Attorney General, violate the Constitution or interfere with the conduct of foreign policy, counter-intelligence, intelligence, or national security activities. Violations of this section shall constitute violations of section 1352 (a) of title 31.

Now here is some language from a Department of Justice Web site called lifeandliberty.gov:

FISA 101: Why FISA Modernization Amendments Must Be Made Permanent
FISA Amendments In The Protect America Act Of 2007 Remain Necessary To Keep Our Nation Safe

The Protect America Act modernized the Foreign Intelligence Surveillance Act (FISA) to provide our intelligence community essential tools to acquire important information about terrorists who want to harm America. The Act, which passed with bipartisan support in the House and Senate and was signed into law by President Bush on August 5, 2007, restores FISA to its original focus of protecting the rights of persons in the United States, while not acting as an obstacle to gathering foreign intelligence on targets located in foreign countries. By enabling our intelligence community to close a critical intelligence gap that existed before the Act became law, the Protect America Act has already made our Nation safer.

The tools provided by the Protect America Act are scheduled to expire in early February 2008 – it is essential that Congress act to make the legislation permanent. Congress must also pass legislation to provide meaningful liability protection to those alleged to have assisted our Nation following the 9/11 attacks.

A public DoJ Web site that says “it is essential that Congress act to make the legislation permanent” seems designed to influence Members of Congress. It was probably created and is maintained through the expenditure of appropriated funds. Did Congress expressly authorize this? Is a public Web site “proper official channels”? Did the Attorney General find that failing to advocate for this law would interfere with national security?

It looks like this Web site violates the law, but it’s hard bein’ a country lawyer here in the big city.