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June 23, 2008


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The government can and is supposed to do at a minimum three things: Provide stability, crisis management and oversight.

Without stability and oversight, any economy will falter and if it gets bad enough - fail. Our current situation is filled with instability and I think that has more to do with our current government than simply bad luck. One or two years of bad luck can be understood, but eight? And with the Iraq war, a weak Dollar, and the distinct lack of oversight from the justice department well, I see a pattern.

So my minimum plan for the next 4 years goes something like this:
- No more optional, massive, and undirected war efforts
- Restore legal oversight of financial institutions
- Invest in innovation/infrastructure at home
- Restore the dollar to a sustainable value

The other major and direct tool a government has is taxes, but that has been discussed in other posts.

Many people (usually of the anti-market sect of the political left) grossly underestimate the complexity of human interaction (the economy) and overestimate their own knowledge. They don't know the things they don't know. Check out F.A. Hayek's seminal paper, "The Use of Knowledge in Society." It's 60 years old but the concept that everyone's way of life depends on knowledge that is not and cannot be personally known to them is still perfectly valid.

"The government" doesn't control the economy, but through the Federal Reserve can influence economic direction in a significant way. Case in point: Bear Stearns. The Fed gets word from Morgan Stanley (who is part of the Fed) that Bear Stearns is about to fail. MS agrees to take over BS, but like any good business, isn't willing to take the risk without some sort of guarantee. The Fed approaches the Treasury (ala Hank Paulson) to tell him that if BS fails, then the rest of the financial sector will follow. Paulson agrees that would be bad and suggested that the Fed should take the only "asset" of BS that had any "worth" - subprime mortgages - as the Treasury couldn't issue any bonds. So, the Fed takes the toxic mortgages, "prints" a bunch of money and loans it to MS, MS gets BS for a song, and the financial meltdown is averted (or postponed). One other little thing that happened at the same time was that, for the first time in 75 years, investment banks were allowed to borrow at the discount window (a method for inter-bank lending), which alliviated some pressure the the broader financial markets. The "government" (through the Fed) stopped the economy from taking a significant downturn. What remains to be seen is the long term effect of the action; those mortgages are now part of the official assets that our currency is based on; Bear Stearns mortgages backed the Fed loans that allowed Morgan Stanley to buy Bear Stearns. Those mortgages were valued at face and currency was created to that value. What chances are, do you think, that those loans are actually worth face? Sure, it's only $29 billion, but the door is now open for the Fed to be the holder of last resort for those over one trillion in bad mortgages. Not to mention the moral hazard of the Fed now being in the real estate business, which is clearly not a part of the Fed mandate. (For you scholarly types out there, this is similar to what happened in France back in the 1700's; land was held by the government and currency was issued against that land. All other forms of money were outlawed, with threat of imprisonment if discovered. Eventually led to the French Revolution and Napolean as well as several occupations by Germany. Not a happy ending.)

To your question specifically, though. No, not really. The system is much bigger than any single President or any sitting Congress. Even Reagan succumbed to the "debt as far as the eye can see" mentality of the system. Bush Sr. was the last one to try and slow it's inexorable march and Clinton just used the system to get what he wanted (and most effectively, I believe). Fractional banking + margin trading + debt-as-money = logarithmicly inflated balance sheets. Re-read my article on Inflation and Purchasing Power; fiat systems allow borrowing from the future to pay for a critical situation today, and eventually, everything becomes critical. Especially if the people allowed to do the "borrowing" can borrow for themselves and their cohorts. Even if a Ron Paul were to get elected, it would take a systemic breakdown of the financial markets to affect real change - although a President or Congress could certainly hasten the fall. Of course, that may happen naturally soon anyway :)

There are countless government policies that have a net effect of either creating or destroying wealth. That is, raising or lowering the overall standard of living.

Well, actually, the ones that create wealth are really easy to count. 1: Law and order (including private property rights, evenhanded contract enforcement, some degree of environmental protection). 2: Public goods (meaning things that we benefit from, but are all but impossible to support through user fees like national defense, fire departments, infectious disease control, basic scientific research, and flood prevention). 3: Provide a stable currency.

Pretty much anything outside those three areas will hurt more than it helps, or at least be more efficiently provided through the private sector. No list could ever be comprehensive, but here are a few examples of ways in which government can destroy wealth: farm subsidies, airline bailouts, mortgage bailouts, tariffs, social security, healthcare, Amtrak, manned space flight, ethanol mandates, welfare, education, the Post Office, eminent domain, Sarbanes-Oxley, OSHA, inflation, standing in the way of oil extraction. Note that not all of the examples spend many taxpayer dollars; unfunded mandates can harm our standard of living too.

There are certainly many factors beyond the control of our government, but we're quite far from optimal economic policy at this point. The reason we move farther and farther away from that optimal policy, regardless of which party is in power, is that the limitations of federal power in the constitution have eroded so much that now the only way to survive in politics is to outdo your rivals at doing expensive favors for special interests.

Seriously? Seriously?!? Every aspect of the economy that the government already is involved (either greatly or limitedly) is a farce. Assuming the we wouldn't have recessions or inflation?!? Inflation is something that is very unnatural in the economy (for the most part); it happens BECAUSE of government manipulation of the money supply. Recessions... they are supposed to happen. The economy gets bloated because things get to easy, and then a recession occurs and that is GOOD in the long run because it improves efficiency, which grows the "economic possibilities curve."

Name for me just ONE thing, we will limit it to the economy, that government has EVER done that has improved our situation in the long run. I will make sure that we eliminate a few things that are obviously a drain on the economy so that no one foolishly states that it has made us better off:

1. Social Security
2. Medicare
3. Medicaid

These things has limited the growth of our economy, drastically, and have had a great hand in actually increasing the overall cost of healthcare. The Fed messes with inflation all the time. Inflation is a tool that the government uses to marginalize its debt so that we don't riot (which is at the expense of our own personal savings and investments); so instead of actually taxing us more to pay down the debt, they make our money worth less so that they in turn make the debt worth less, and don't have to actually tax us.

Here is the only thing that the government has done in regards to the economy (and they have messed it up since we went off the Gold Standard): mint currency. It is much better for our economy to operate with standard currency than it is to have multiple currencies (like trading gold, silver, etc.) or via direct barter.

That's it.

Compounding: One thing? The make-work plans of the New Deal (public road-building, etc.). It brought employment back up so that the economy could get moving again (although WWII certainly didn't hurt, either). Note that this was a temporary, short-term fix, not a permanent program.

"Bush Sr. was the last one to try and slow it's inexorable march and Clinton just used the system to get what he wanted (and most effectively, I believe)"

That is a common myth.
Bush Sr. ramped up debt faster than Regan, Clinton reversed it, and then Bush Jr. shot it up again.

Chris - you're right. I was confusing current account deficit with public debt; the last President to try and bring the current account deficit into balance was Bush Sr (at the expense of the budget deficit, mind you.)

I gave my middle school summer school students an assignment last week to tell what they would do if they were president. The majority of them said they would change gas prices. I am sure it is due to hearing their parents complain about the strain of rising prices. The scary part is that they think the president has this kind of power. If only it were that simple.


The make-work programs of the new deal are a perfect example of something that does not help the economy, except when they're actually creating public goods. But usually the term "make-work" implies work for work's sake, not work incidental to production. The goal is not to provide jobs; it's to provide the goods and services that enable us to live well. Spinning our wheels with make-work schemes doesn't improve our standard of living in the long run.

The President has limited power to control the economy. The Federal Reserve has more power than the President, but is independent of him. Congress has some power over the economy through its taxation and regulatory authority, but even in the case of Congress the power is limited. I believe Adam Smith's formulation of the "invisible hand" is still the best explanation of how a free market economy works.

Now, to correct a couple of misapprehensions, I'll note that budget deficits (and surpluses) are the result of Congressional spending, not the power of the President. Although the President can sign or veto a spending bill, only Congress can initiate one. Thus, for example, Bill Clinton did not balance the budget; the Republican-led Congress did by submitting a balanced budget which Clinton then signed into law.


The president, with the cooperation of congress, CAN do that...Carter did in 1979. It's just that it doesn't turn out well and it's not sustainable for very long. When such economic idiocy is sustained longer, like in Mao's China or Stalin's USSR, it comes at a tremendous cost of human lives.

Jen - actually, the President and Congress do have this power.. sort of. Both can implement controls and subsidies on both wages and prices. While not really "changing the gas prices", the effect would be to lower or fix prices at a certain level so there would be less pain at the pump. TANSTAAFL (There Ain't No Such Thing As A Free Lunch) plays in here, however; we'd end up just paying for our gasoline through other taxes, currency devaluation, deficts, etc. Probably with interest to boot.

I've been idly speculating the chances of price controls and wage subsidies coming from the next administration. While I think the chances are low we'd get another Nixon experiment, I feel they are the highest they've been in almost 50 years.


You left out the most predictable and obvious consequence of price controls: shortages.

Todd - we haven't had a free market in a century, so the analogy breaks down. Congress is the authority over the Federal Reserve; it made it and it can break it as well. There is just no desire to make the Fed adhere to it's mandate; for the most part, Congress just wants the Fed to manage the currency and forget about it. It's cooperation beweeen the President and Congress that impacts the marketplace; remember that it was the back-and-forth between Bush Sr. and Congress that eventually led to PAYGO - which is credited by some for eventually creating budget surpluses in the 90's (it expired in 2002, btw.) And, let's not forget those few times Clinton shut the government down while bickering with the Congress over the budget.

Matt - yeah, I did. I was imagining the current system continuing, where the producer (unlike in the 70's, now overseas) would still get the same price but the consumer would pay less with the government in the middle trying to juggle it. You're right, of course; chances are the government would juggle poorly and we'd just have to make due with less.


Oh, I see. You're talking about gas subsidies, not price controls. You're right, that would be pretty disastrous too.

To all the important points being put forth here, I'd like to add just one: irrespective of the hard reality facing any government that tries fend-off an economic crisis, the unfortunate fact is that PEOPLE ACTUALLY BELIEVE that the government has this power.

What is unfortunate is that, when the effects of economic collapse are being felt by everyone, everywhere, and where people are enfranchised to pick lawmakers and presidents through an electoral process such as exists in the United States, there is the possibility for a dangerous demogogue taking high political office.

Luckily, we're not there now, but what about in 2012?

Anyone who beleives that the President and Congress can control the price of gas, for instance, are fooling themselves.

> And, let's not forget those few times Clinton shut the government down while bickering with the Congress over the budget.

Thanks for reminding folks; I swear people in the US have the memory of gnats; or maybe it's just the partisanship.

> Thus, for example, Bill Clinton did not balance the budget; the Republican-led Congress did by submitting a balanced budget which Clinton then signed into law.

A more accurate accounting of history is that Clinton balanced the budget by refusing to sign the bloated Republican budgets, even to the extent of shutting down the government.

Of course, as to the power of the President, while I agree that Clinton was lucky and did manage the money well by forcing congress to balance the budget and giving targeted tax cuts, one of the biggest factors of the housing/credit crisis was Clinton's repeal of the Glass-Steagal Act.

As for high oil prices those are definitely a result of the Bush administration's policies. There are several reasons why the Bush administration wants high oil prices but most notably: 1) The Saudis required high oil prices in exchange for lending money to the US. 2) The desire to keep oil out of the hands of poorer countries like India and China. 3) Driving up the price of oil increases the rate of inflation and thus reduces the value of the massive $9+ trillion debt, which is necessary to keep the banks solvent. 4) And of course the fact that Bush and his cronies (who are heavily invested in oil) make a lot of money when prices are high. Thus the Bush administration has pursued policies which have driven up the price of oil.

Look, I remember telling folks in 2001 to invest in oil. I mean, come on, if you have oil men in the white house the price of oil is going to go up (except about a month before elections when it will drop a bit; I saved myself a bundle in 2004 buying my heating oil in October). And if the US does attack Iran, we'll all be fondly reminiscing about when people had to pay *only* $4 a gallon for gas. But you can bet the oil companies will get yet another year of record profits.

Obviously, gov't policies do affect the economy. Does it take effect immediately, or even within the 4 years of a presidential term? Perhaps not. But, if you think things like raising the minimum wage or entering into foreign trade pacts (this is a global economy, after all) or even tinkering with tax rates don't have an impact on our economy, you are fooling yourselves. So, they definitely 'impact' the economy. That's different than asking, however, can they 'fix' the economy merely by passing some new laws.

What's difficult to gauge is how much a single factor has on the economy, when it is a too-many-variables-to-count system and we don't exactly have a control case.

Interesting revisionism of the Clinton years, although it was Clinton himself who declared that "the era of big government is over" as he signed into law a number of Republican initiatives, including NAFTA, the '97 capital gains cut, DOMA, the Welfare Reform Act and so on.

The comments regarding Bush and the price of oil are laughable. Indeed, if it were the case, Mr. Bush would have hardly waited until near the end of his second term to unveil his dastardly plot to, inter alia, inflate away the national debt.

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