What Ends Recessions?

With the economy slowing and fears of recession percolating, the Bush White House and both Democrat and Republican lawmakers are talking about possible stimulus legislation to get the economy moving. Before they pass anything, and before the press and the public get all excited about “bold,” bipartisan action, we should ask ourselves whether stimulus packages are helpful in ending recessions.

The definitive historical review of U.S. government responses to recession is Christina and David Romer’s 1994 NBER Macroeconomics Annual paper “What Ends Recessions?” [$]. The Romers examine each U.S. recession from the end of World War II to the article’s publication date (that is, the recessions of 1954, 1958, 1960, 1970, 1975, 1980, 1982, and 1991) and determine what government actions were taken in response and how successful those actions were.

Government response to recessions comes in three forms: monetary policy (the Federal Reserve’s Open Market Committee lowers interest rates to spur investment and borrowing), automatic fiscal policy (the automatic increase in government spending during recessions that results from increased unemployment insurance claims, welfare disbursements, etc.), and discretionary fiscal policy (the adoption of stimulus packages that contain increased government spending and/or tax cuts).

The track records for both FOMC action and the automatic stabilizers are strong, the Romers show. Both kick in quickly when recessions begin, and the economy turns around fairly soon afterward.

Stimulus packages have a much shoddier record, however: they take months to move through Congress, and additional months to implement — long after the recession has come and gone. Moreover, many of the specific actions initiated by stimulus packages are hardly stimulatory — extending unemployment benefits or launching major government construction programs requires several months to several years (and sometimes even decades) before the federal monies hit the economy.

A look at the various proposals now floating around Washington show that a 2008 stimulus package will be more of the same.

Saturday, New York senator Charles Schumer used the weekly Democrat radio address (who listens to those things, anyway?) to outline his party’s stimulus package proposal, which would use a temporary (and likely tiny) tax cut for the middle class, coupled with “longer-term investments such as in clean energy and infrastructure” — not exactly the stuff of effective economic stimulus.

President Bush’s proposed stimulus package focuses on tax cuts. The package includes a proposal to move up an already-approved income tax cut (President Eisenhower made a similar move — with some effectiveness — in his stimulus package for the 1954 recession) and abolish taxes on stock dividends. The centerpiece of the Bush proposal, however, is the permanent adoption of his 2001 and 2003 tax cuts that are set to expire in 2010 and 2011 — a desirable proposal but also not the stuff of economic stimulus in 2008.

If I were a cynic, I’d say these proposals indicate that neither congressional Democrats nor the Bush White House is really interested in stimulating the economy to ward off recession. Instead, I might believe that the Dems and the Bushies are just trying to look like they’re doing something about the economy during an election year when, in fact, they want to use the risk of recession as cover to adopt policies that they’ve wanted to adopt all along and to funnel money to special interests. But then, if I were a cynic, I’d say that Congress and the White House used 9/11 as an excuse to adopt just about every bad, police-state idea that’s been floating around D.C. bureaucrats’ offices for a decade. If I were a cynic…

The good news is that the two government tools that are effective at combating recession are already at work. The automatic stabilizers are in play and the FOMC has cut interest rates significantly since October. Fed Chairman Ben Bernanke has indicated that more cuts are forthcoming as long as recession risks are elevated.

Thus, I have to agree with this excellent Washington Post editorial on recession-fighting: Congress and the White House should leave recession-fighting to the Fed and the automatic stabilizers, and still their stimulus package excitement.

REAL ID Regulations Issued

Today, the Department of Homeland Security issued final regulations implementing the REAL ID Act, our moribund national ID law that several states have already refused to implement.

The regulations, in two parts, can be found here and here.

I will have more to say after studying them, but the House Committee on Homeland Security’s chairman has already registered his preliminary objections. Cost issues, the difficulty of implementing this national ID, and privacy issues concern Chairman Thompson, who notes that DHS has spent close to $300 million on programs that have been discontinued because of failure to adhere to privacy laws and regulations.

REAL ID is, of course, a wasteful affront to privacy whether or not DHS follows all the rules. The department is not in a position to correct the errors in this fundamentally misguided policy.

Campaign Finance Regulation without Romance

Candidates are in hot pursuit of the party nominations and eventually the presidency. That means they are defining enemies, inducing fear, and offering voters hope — that their enemies will be punished and their fears relieved.

The rhetoric of campaign finance regulation is replete with such  enemies — the special interests, “Big Money,” the rich and so on — and one set of friends, “reformers.” Barack Obama has been especially skillful practicing this politics of fear to pave the way for additional restrictions on money in politics.

However, the reality of campaign finance regulation is a lot different from the rhetoric, and the 2008 campaign has already brought an exemplar of regulation absent romance.

Unity08 is an organization that tried to put together a “centrist, bi-partisan approach to the solving of our nation’s problems and the possibility of an independent, unity ticket for the presidency.” Unity08 sought to be a movement first and a third party with a candidate, second. I use the past tense here because a posted letter to their supporters suggests their effort has come to an end.

Unity08’s analysis of the reasons for their failure merits attention. They now lack enough members or money to go on. The two are interdependent: more members generate more money and vice versa. The Unity08 leaders think a lack of money posed the biggest obstacle:

The Federal Election Commission … has taken the position that we are subject to their jurisdiction … and, therefore, that we are limited to $5000 contributions from individuals (even though the Democrat and Republican Parties are able to receive $25,000 from individuals). Needless to say, this position by the FEC effectively limited our fundraising potential, especially in the crucial early going when we needed substantial money fast to get on with ballot access and the publicity necessary to build our membership. We were caught in a peculiar catch-22; we wanted to break the dependence on big money by getting lots of small contributions from millions of members, but needed some up-front big money to help generate the millions of members to make the small contributions. And the FEC (in effect, an arm of the parties) didn’t let that happen.

The need for large donations to build fundraising capacity was first discovered by the best political science book you never heard of. Contribution limits complicate political organizing by outsiders and thereby stabilize the status quo and benefit those who hold power.

Campaign finance regulations are sold as a panacea for all that ails Americans. They are said to foster competition, prevent corruption, and purify political speech. The Unity08 leaders have found out the truth about such regulations. Such rules are largely created to stifle electoral competition to help out one party or the other, or — as in this case — to permit both parties to stifle a third alternative. Such regulations don’t outlaw competition; they do establish arcane rules that discriminate against outsiders like Unity08.

When a candidate starts demonizing Big Money, remember Unity08 and the reality its leaders discovered, too late for their cause.

Ron Paul’s Ugly Newsletters

For the past few months most libertarians have been pleased to see Ron Paul achieving unexpected success with his presidential campaign’s message of ending the Iraq war, abolishing the federal income tax, establishing sound money, and restoring the Constitution. Sure, some of us didn’t like his talk about closing the borders and his conspiratorial view of a North-South highway. But the main themes of his campaign, the ones that generated the multi-million-dollar online fundraising spectaculars and the youthful “Ron Paul Revolution,” were classic libertarian issues. It was particularly gratifying to see a presidential candidate tie the antiwar position to a belief in a strictly limited federal government.

And so it’s understandable that over the past few months a lot of people have been asking why writers at the Cato Institute seemed to display a lack of interest in or enthusiasm for the Paul campaign. Well, now you know. We had never seen the newsletters that have recently come to light, and I for one was surprised at just how vile they turned out to be. But we knew the company Ron Paul had been keeping, and we feared that they would have tied him to some reprehensible ideas far from the principles we hold.

Ron Paul says he didn’t write these newsletters, and I take him at his word. They don’t sound like him. In my infrequent personal encounters and in his public appearances, I’ve never heard him say anything racist or homophobic (halting and uncomfortable on gay issues, like a lot of 72-year-old conservatives, but not hateful). But he selected the people who did write those things, and he put his name on the otherwise unsigned newsletters, and he raised campaign funds from the mailing list that those newsletters created. And he would have us believe that things that “do not represent what I believe or have ever believed” appeared in his newsletter for years and years without his knowledge. Assuming Ron Paul in fact did not write those letters, people close to him did. His associates conceived, wrote, edited, and mailed those words. His closest associates over many years know who created those publications. If they truly admire Ron Paul, if they think he is being unfairly tarnished with words he did not write, they should come forward, take responsibility for their words, and explain how they kept Ron Paul in the dark for years about the words that appeared every month in newsletters with “Ron Paul” in the title.

Paul says he didn’t write the letters, that he denounces the words that appeared in them, that he was unaware for decades of what 100,000 people were receiving every month from him. That’s an odd claim on which to run for president: I didn’t know what my closest associates were doing over my signature, so give me responsibility for the federal government.

But of course Ron Paul isn’t running for president. He’s not going to be president, he’s not going to be the Republican nominee for president, and he never hoped to be. He got into the race to advance ideas—the ideas of peace, constitutional government, and freedom. Succeeding beyond his wildest dreams, he became the most visible so-called “libertarian” in America. And now he and his associates have slimed the noble cause of liberty and limited government.

Mutterings about the past mistakes of the New Republic or the ideological agenda of author James Kirchick are beside the point. Maybe Bob Woodward didn’t like Quakers; the corruption he uncovered in the Nixon administration was still a fact, and that’s all that mattered. Ron Paul’s most visible defenders have denounced Kirchick as a “pimply-faced youth”—so much for their previous enthusiasm about all the young people sleeping on floors for the Paul campaign—and a neoconservative. But they have not denied the facts he reported. Those words appeared in newsletters under his name. And, notably, they have not dared to defend or even quote the actual words that Kirchick reported. Even those who vociferously defend Ron Paul and viciously denounce Kirchick, perhaps even those who wrote the words originally, are apparently unwilling to quote and defend the actual words that appeared over Ron Paul’s signature.

Those words are not libertarian words. Maybe they reflect “paleoconservative” ideas, though they’re not the language of Burke or even Kirk. But libertarianism is a philosophy of individualism, tolerance, and liberty. As Ayn Rand wrote, “Racism is the lowest, most crudely primitive form of collectivism.” Making sweeping, bigoted claims about all blacks, all homosexuals, or any other group is indeed a crudely primitive collectivism.

Libertarians should make it clear that the people who wrote those things are not our comrades, not part of our movement, not part of the tradition of John Locke, Adam Smith, John Stuart Mill, William Lloyd Garrison, Frederick Douglass, Ludwig von Mises, F. A. Hayek, Ayn Rand, Milton Friedman, and Robert Nozick. Shame on them.

Energy Price Controls in China

From our “never thought I’d live to see the day file,” Chinese Prime Minister Wen Jiabao announced yesterday that China would freeze energy prices as a means of combating inflation and appeasing public anger over escalating fuel prices. Well, been there, done that. If past is prologue, don’t expect a happy ending to this story.

Catching Flak for RomneyCare

Over at The Corner, Jonathan Adler is discussing the health care reforms Mitt Romney signed into law while governor of Massachusetts with an advisor to Romney’s presidential campaign. 

The Romney advisor claims: “The fact is that since healthcare reform was passed just over a year ago, the number of uninsured and the price of the average individual market health insurance policy in MA have decreased substantially.”  He may be right about the uninsured, but that’s a terrible measure of success.  Health insurance does not equal access to medicine, and access to medicine does not equal health.  Regarding the second claim, here’s what I wrote in September:

The Boston Globe truth-squads a similar claim and finds the reduction in premiums came from factors like political pressure, restrictions on access to providers, and greater pooling — not deregulation. Moreover, political pressure cannot last, while pooling raises someone else’s premiums to compensate. Overall, premiums under the Massachusetts law came in at more than projected. And premiums in Massachusetts are growing at 8-12 percent per year, compared to 6-8 percent for the rest of the country. Romney may not be responsible for that trend, but does anyone but Romney claim he has done anything to temper it?

Looking back on that, it occurs to me that the restrictions on access to providers part probably was deregulation.  The Romney plan did repeal the Commonwealth’s any-willing-provider law.  On balance, however, the plan increased regulation.  The rest of that paragraph stands.

The Romney advisor writes: “Critics like Mr. Tanner [my Cato colleague] want to condemn the reforms as a failure just three days after the individual mandate has gone into effect.”  Actually, all Tanner has done is make a few predictions about the ill effects of the plan, plus predict that the plan would fail to achieve Romney’s stated goal of universal coverage.  Last time I checked, all of Tanner’s predictions had come true.

Finally, the advisor rather cynically argues: “bear in mind that any implementation hiccups are primarily the responsibility of the current (Patrick) Administration.  If there are cost overruns, inefficiencies, etc., it’s very hard to blame someone who’s not in power to do anything about it anymore.”  And if a bank security guard dynamites the safe, it’s very hard to blame him for the looting that occurs after his shift is over.  

Adler responds ably: ”If a government program is only good when controlled by the ‘right’ people, then it is not a good government program.”

Pot vs. Kettle

As you may know, Tuesday marked the No Child Left Behind Act’s sixth birthday. At best, it was approached with mixed emotions, like a person’s 50th—it’s a nice milestone, but everything is starting to ache and will almost certainly just get worse. So while President Bush headed to sweet home Chicago to cut cake and blow up balloons for his signature domestic achievement, Senator Edward Kennedy—a crucial NCLB proponent in 2001—wrote a somewhat doleful op-ed in the Washington Post about the once promising law’s problems, a judge resurrected a lawsuit challenging NCLB as an unfunded mandate, and people with sense called for the law’s demise.

Yesterday, Secretary of Education Margaret Spellings spoke at the National Press Club in an effort to keep whatever joyful NCLB partying there might have been going. I won’t rehash most of what she said, but want to focus on one part in particular, and encourage you to read her whole speech to see if it doesn’t fully illustrate the point I’m about to make.

Here’s what she said toward the end of her talk:

We are hearing all kinds of rhetoric from the campaign trail: proposals to “scrap” NCLB, to “overhaul” the law, or to “turn around” education in just three years. As a parent, taxpayer, and voter I want more than a sound bite or quick fix. I want someone who recognizes that NCLB has sparked a more sophisticated dialogue that’s driving real improvement for all students. We have to ask, which comes first, politics or kids? No Child Left Behind is not just a catchy phrase. It’s a statement about who we are, and what kind of country we want to be.

Spellings makes a very important point here, one that I have made ad nauseum: Government control of education is almost always driven by political, not educational, concerns, which is why we spend tons of money on education and get almost no positive return on it. But if Spellings truly recognizes and believes this, how can she continue to support NCLB or any other government control of education? After all, as long as government controls schooling, politicians will control it, guaranteeing that politics, not kids, will almost always come first.

The answer, of course, is that Spellings and her boss are politicians; government provides their jobs and their identities, and they are just as interested in quick fixes and whatever works best for them politically as any other of their ilk. Spellings’ speech, with all its lovely, inspirational—but ultimately empty and deceptive—platitudes, illustrates this brilliantly, as does the politically unbeatable name of her beloved law. I mean, if you’re against No Child Left Behind you want to leave kids behind, right?

NCLB, like everything else run by government, is by its very nature politicized. That’s why we need to stop listening to any and all politicians who promise to fix education through more government, and demand the one thing that will actually rip away paralyzing politics: Getting government out of education.