Keynesians in the White House

President Bush is considering a “stimulus package” to boost the U.S. economy. But the idea that the government should be trying to manipulate short-term economic performance with fiscal policy is very misguided. 

The Washington Post today quotes a Bush advisor: “What everyone’s looking at is what is the fastest way to get money out there.” Huh? Where does the advisor think the money is going to come from? This stimulus concept is Keynesian mythology and should have been buried decades ago.

What Bush and Congress should consider are long-term, permanent changes to the tax code to make the economy more productive, such as a corporate tax rate cut or more favorable treatment for capital investment. If that helps in the short-term, that’s good, but spurring long-term growth in the economy is far more important than worrying about temporary ups and downs.  

Another Anti-Immigration Campaign Flops

With his disappointing second-place finish in the Iowa caucuses last night, Mitt Romney joins a growing list of politicians who have failed to ride the immigration issue to success when it counts.

To woo conservative voters, Romney has run a series of hard-hitting ads attacking his Republican rivals for being soft on illegal immigration. His ads and campaign speeches have thumped John McCain for supporting “amnesty” for unauthorized immigrants already here and Mike Huckabee for supporting in-state tuition for the minor children of illegal immigrants.

Although Romney had struck a more constructive tone toward the issue when he was governor of Massachusetts, polls and talk radio have convinced him that sounding harsher-than-thou on illegal immigration would be a key to winning the hearts of conservative Republicans. The strategy didn’t appear to help him in Iowa even though he outspent his rivals by millions of dollars.

Romney isn’t the first politician to push the immigration button and come away empty-handed. Just before the Iowa caucuses, Colorado Congressman Tom Tancredo announced he was dropping out of the Republican primary race even though he trumpeted the most hard-core anti-illegal-immigration stance of any candidate. California Congressman Duncan Hunter barely registered among Iowa caucus goers last night even though he too had staked out a hard-line position against any legalization. And let’s not forget that in 2000, the articulate and amiable Pat Buchanan spent $12 million in taxpayer dollars to spread his anti-immigration message as the Reform Party candidate for president, and attracted a paltry one half of one percent of the vote on Election Day.

Americans have always been ambivalent about immigration, and a solid majority today wants the government to seriously address the problem of illegal immigration. But as I have argued here and here, voters have not rewarded politicians who demagogue the issue. Let’s hope the rest of the Republican field takes notice.

McCain Wants US Troops in Iraq for “100 Years”

I couldn’t believe it when I saw it either, but the dang thing is up on Youtube. Flanked by Joe Lieberman, John McCain on the stump responds to a question about George Bush talking about staying in Iraq for 50 years by quipping “Make it 100!” He then hedges, if you can call it that, by saying “as long as Americans aren’t being killed.”

And we wonder where these conspiracy theories in the Islamic world about the US trying to dominate the region come from…

Iowa Winners and Losers

The voters of Iowa have had their say and the 2008 presidential election campaign is now officially underway. While the Iowa dust (or snow) is just beginning to settle, it’s already possible to pick out winners and losers.

WINNERS

Barack Obama: He not only won, he won big. If he had lost in Iowa, the Clinton inevitability train might have been unstoppable. But now he has vaulted into possible frontrunner status. The race is far from over, but Obama has shown that his upbeat message of change and opportunity resonates with voters. Two big questions remain: What will happen when scrutiny moves beyond his positive generalities to his very liberal record? And can he survive the coming attacks from the Clinton machine?

John McCain: He finished in a rough tie for third despite putting in little effort in Iowa (and opposing ethanol subsidies). More important, Mitt Romney took a big hit. McCain was already surging in New Hampshire. With Romney wounded and Huckabee having little New Hampshire traction, a win is now a very realistic possibility. The media would love a McCain comeback story. But where doers he go next?

Mike Huckabee: A win is a win is a win. But Huckabee built his win almost entirely on a turnout by evangelical Christians who ignored his big-government positions. It’s hard to see how he can compete in anti-tax New Hampshire or socially moderate states like California that vote on Super Tuesday. Remember Pat Robertson surprised everyone by finishing second in the Iowa Caucuses in 1988.

LOSERS

Mitt Romney: He built his entire strategy on winning early in Iowa, New Hampshire, and Michigan. Now, despite spending $7 million in Iowa, that strategy is in tatters. He lost in Iowa and is trailing in New Hampshire polls. If he loses next Tuesday, it becomes very hard to see how he comes back. Perhaps money and perfect hair doesn’t overcome a lack of core political beliefs after all.

John Edwards: He had to win in Iowa to be viable. He had campaigned there virtually nonstop for four years. After all that time and effort, second place just isn’t good enough. Obama is now the anti-Hillary candidate. Edwards appears ready to limp on, at least until South Carolina, but if he does it will be more as spoiler than as potential nominee.

Hillary Clinton: Third place? For the inevitable, unstoppable candidate? For a campaign whose entire rationale was built on the idea that she was going to win, she now looks suspiciously like…well…a loser. Still, she has the money, organization, and determination to fight back. There is no more ruthless politician in America. Obama had better be ready.

Fred Thompson: The whole idea of his campaign was that he would unite the party and give all stripes of conservatives someone to rally around. A distant third place tie doesn’t suggest much of a rally. And, he is running even worse in New Hampshire polls. It’s hard to see why he will stay in a race he never really seemed to want to be in.

IT COULD HAVE BEEN WORSE

Ron Paul: His supporters were hoping that Paul’s fundraising prowess, internet popularity, and the zealousness of his followers would translate into a third place finish. Instead, he finished a disappointing fifth. Still, 10 percent of the vote is not bad for a previously unknown congressman from Texas with minimal media exposure. His limited government message clearly touched a chord and has inspired a new generation of libertarian activists. It’s hard to see where he goes after New Hampshire, but he can take satisfaction in what he had already accomplished.

Bill Richardson: He kept his vice presidential hopes alive with a respectable showing. Reports suggest that he actually received some 10 percent of the first round vote, although Iowa’s complicated system ended up giving him only about 2 percent of the regional delegates.

Rudy Giuliani: His Iowa showing was dismal, he trails in New Hampshire, and he has lost his lead in national polls. But the Republican race is now wide open. With no one likely to win all the early primaries, it may be that Giuliani’s strategy of playing rope-a-dope until Florida and the Super Tuesday primaries may be viable after all.

Mike Huckabee on Education

Iowa Republican caucus winner Mike Huckabee has a lot to say about education policy, much of it contradictory. Asked to point to the spot in the Constitution authorizing a federal role in education [hint: there is none] Huckabee responded “I don’t think there is really a federal role or responsibility, constitutionally, in education.” We have a winner!

But wait, there’s more. Huckabee continued: “I think if there’s a role [uh, you just said there isn’t one…], it is to encourage, it’s to recognize the value and importance.” What might this mean, you ask? Apparently, it means that the federal government should perpetuate the No Child Left Behind act (with some unspecified revisions), continue to operate a cabinet level education department, promote arts instruction, and use extortion to pressure state governments to act in accordance with its dictates (that is, collect taxes from every state for education but only return those dollars in the form of federal grants to states that “voluntarily” decide to follow federal rules.)

I wonder what gov. Huckabee would have the feds do if he thought the Constitution did delegate them any authority in education?

An Unconvincing Evasion

Michael Goldfarb of the Weekly Standard offers what I think is a pretty unconvincing defense of his post that I criticized yesterday.

The whole thing started because Goldfarb thought it would be appropriate to snicker at the fact that Greenwald had estimated China’s annual defense spending at $65 billion. His post was titled “When Lefties Pretend to Know Anything About the Military,” and he sneered at those “who act like they understand military spending but find themselves flummoxed over terms like ‘purchasing power parity.’”

But in truth it is Michael Goldfarb who demonstrates beyond doubt that he is flummoxed over PPP. We can see this in the fact that he refuses to back down from his claim that $450 billion is a “pretty good guess” for Chinese defense spending. It’s not a pretty good guess. It’s absolutely absurd, and if he can find one serious PLA analyst anywhere who will endorse it, I’ll buy him lunch.

For reference, the Pentagon, which has historically offered the high-end estimate of all estimates of Chinese defense spending, argued in 2007 (.pdf) that Chinese defense spending was between $85 and $125 billion, much closer to Greenwald’s estimate than to the one that Goldfarb continues to endorse of $450 billion.

I don’t want to dry up this otherwise juicy conversation with a long discussion of defense economics, but since they’re so central to understanding why the $450 billion figure is absurd, I’ll just refer readers again here. (Goldfarb for some reason omitted the link from his excerpt of my post.) You can’t do what Tkacik does, and just blanket the CIA’s figure for the PLA budget with the PPP converter and then take that number out and run with it. Moreover, the World Bank estimate of the PPP converter for China was recently revised downward by 40 percent, further undermining the figure. Goldfarb seems either uninterested or unaware of this.

There are even more problems with the Ramesh Ponnuru/Goldfarb argument that we should view the entirety of the rest of the world as “criminals” or “arsonists” against whom we should judge our defense budget:

We’d expect the police department to have a budget many times that of all the criminals combined, wouldn’t we? Fire departments spend a lot more fighting arson than arsonists spend.

This is just nuts. Here is a listing of the top 10 defense spenders out there, from Greenwald’s list (I’m not sure whether the rankings are still exactly right, but you get the idea):

1. United States
2. China
3. Russia
4. France
5. United Kingdom
6. Japan
7. Germany
8. Italy
9. South Korea
10. India

These are the “criminals” against whom we are supposed to be arming ourselves? Okay, so Russia and China are on the list, and we aren’t absolutely certain of their intentions. But England?!? Japan? Italy? India? Is it really America Alone, taking on the rest of the world? Please. Is this sort of thing supposed to pass for serious analysis?

$100 Oil

One of the big stories today is news that oil deliveries for February topped $100 for the first time in history yesterday and are again over $100 today. Lots of ink has predictably been spilled covering this story, but it’s unclear why. The $100 threshold is purely psychological and holds little import to the market. The macroeconomy is hardly more affected by $100 oil than it is by $98 oil. Likewise, the great public hunt for the “tipping point” at which oil price increases induce significant changes in consumer behavior is akin to Captain Ahab’s hunt for Moby Dick. Since oil prices began their run up in 2003, demand has remained relatively strong and consumers have responded far less robustly than they did during the price run-up from 1975-1980. Although it is unclear why consumers are so much less inclined to conserve fuel today than they were yesterday, there is little reason to expect any radical change in consumer response to fuel price increases in the short term.

The more interesting question is why oil prices have risen so dramatically since August of last year – one of the three or four largest price increases of the last 30 years. The standard explanations – turmoil in oil producing regions, demand growth in India and China, global crude oil shortages, speculation, and low oil inventories – are not very satisfactory. Turmoil in oil producing regions has, if anything, declined since August. Demand growth in India and China is hardly a new phenomenon. Oil production in the 3rd quarter of 2007 actually increased (4th quarter data is not yet in) and Middle Eastern producers are increasing discounts available to buyers of heavy crude. Oil inventories are likewise being liquidated - hardly a sign that speculators are hoarding oil to drive up price.

The only significant change in world crude oil markets has been the buy orders coming out of the United States for crude oil destined for the U.S. Strategic Petroleum Reserve. Oil economist Philip Verleger believes that most of the recent price movement can be traced to that fact alone, although the evidence for that proposition is not dispositive.

Regardless, there is little reason to succumb to panic. First, there is strong empirical evidence to suggest that consumers invest efficiently in automotive fuel efficiency. Hence, long-run demand response may prove much more robust than short-run demand response. Second, the economic burden of high gasoline prices today is greatly overstated relative to what that burden has been in the past given the increases in per capita and median household income. In fact, the “hardship price” of gasoline (that is, gasoline prices adjusted for inflation and changes in household income) is about average what it has been since the end of World War II. Third, belief that high oil prices are important macroeconomic events that are capable of triggering recessions or worse have been shattered by recent experience. Fourth, the fact that inventories are being released - not built up - tells us that market actors are betting that today’s high prices are not long for this world.

Taken together, those observations imply that government should treat high oil prices with benign neglect. If consumers want to reduce their fuel bills, there are ample opportunities available for them to do so. A good rule of thumb - even for non-libertarians - is that government should not do for you what you can do for yourself.