Maurice Papon has just died at the age of ninety-six, but his name will always stand for France’s moral collapse in 1940, and that country’s inability—or reluctance—to redress matters afterwards. In his capacity as a ranking Vichy official, the documentation proves, he signed the deportation orders to Auschwitz for 1,690 Jews, 223 of whom were children, organizing sixteen trains for them, the last in June 1944 when German defeat was certain. It was also his idea to send the bill for the expense of the requisite cattle-trucks to the Jewish representative council, thus obliging the victims to pay for their journey to be murdered. One of his German superiors described him as a sincere collaborator, “co-operating correctly with the Feldkommandatur.”
Collaboration with Nazism was the political choice taken by Marshal Pétain after the fall of France; it was pre-war appeasement in the new context of military defeat. Pétain and his Vichy regime imagined that they were sparing France the sort of horrors inflicted on Poland, but in reality they were facilitating them. In the absence of enough German personnel trained in mass murder, the Nazi authorities had to rely on the French to do their work. The turning point was the accord signed in May 1942 between General Karl Oberg of the SS, and René Bousquet, general secretary of the French police. That accord placed the French gendarmerie at the service of the Nazi machinery of murder. One among many who could now obey orders zealously was Papon, and another was Jean Leguay, Bousquet’s representative.
At the end of the war, Bousquet was condemned to five years of “national indignity,” a somewhat unspecific term, then immediately granted reprieve and decorated for “resistance,” in this case an even less specific term. Bousquet then enjoyed a spectacular career as an industrialist, protected by President Mitterand for no very evident reason except that he too had a compromising Vichy past. Leguay also had a successful business career. Papon fared best of all. General de Gaulle, no less, protected him, appointing him prefect of police in Paris. In that capacity, he supervised a crack-down on Algerians with thousands of arrests, and the massacre of perhaps a hundred of them, their corpses simply thrown into the Seine. Papon showed himself as adept at murdering Muslims as Jews. Under President Giscard d’Estaing, he entered the cabinet as budget minister.
Researching in the archives, Michel Slitinsky came across his own death warrant with Papon’s signature on it. Slitinsky’s father had been killed in Auschwitz, while he himself only just managed to escape arrest. In 1986, more than twenty years after the event, he brought Papon to justice. At his trial, Papon denounced the proceedings as “fake,” claimed to have helped the resistance, and dismissed the evidence as lies, speaking of “plots,” the usual fascist code for supposed Jewish world domination. Sentenced to ten years in prison for crimes against humanity, he fled defiantly to Switzerland, but was sent back and imprisoned. After he had served three years, the Chirac government had him released. The protection of such people by so many French presidents speaks volumes.
Like Papon, Leguay was indicted for crimes against humanity (though he died before going to prison). When I was writing my book Paris in the Third Reich, in which I describe his role in deporting Jews, he used to seek me out in order to plead that he had not really done anything wrong, and in any case had no choice, and would I please understand his predicament. Like Papon again, but in his more oily way, he showed no trace of remorse. Nor did Bousquet, who became more and more arrogant with the passing of time even though he too was facing a trial for crimes against humanity. One day, someone named Christian Didier—always labelled as “unbalanced”—turned up at his house and shot him dead.
The wish to hide complicity in mass murder may be humanly understandable, but it has rotted France’s national conscience and self-respect. Unwillingness to acknowledge complicity in Nazi crime explains the lack of conscience—the sheer bad faith—of the French stance in so many post-war issues.
I’m fine with lower tax rates but I don’t think that’s why capital is on strike. After all, investors were happy to risk huge sums on inane dot com ventures when a modicum of prudence would have saved them ten times as much money as a capital gains cut. The problem today is a perception that the system has no adult supervision. Of course many investors behave like cry babies too but that’s a given. Like Private Benjamin, they need structure. Whoever can take credit for re introducing that will have a formidable political advantage.
Now Kudlow is talking about being against bailouts, when he was for the biggest bailout in U.S. history? Shoot. I agree with him about the tax cuts, but that should have been the case when the original $700 billion was being debated. You could have cut all those taxes he talked about and more with that $700 billion spent over 3 years. Now they are talking about spending another $1 trillion! With no tax relief. We are going to be in for some very serious inflation when the business cycle turn back in favor of growth.
Government spending, even on obvious pork projects, is never as unpopular as conservatives and Republicans make it out to be. Kudlow is correct. Republicans’ emphasis should be on tax cuts as a way to revive the economy. Their opposition to the expected huge spending from the Democrats should be secondary to a positive support of tax cuts, particularly as Kudlow suggests, aimed at the middle class. Giving political priority to opposing spending will make Republicans look like obstructionists. Opposition to spending must be crafted in terms of viewing them as more bailouts; the latter are unpopular and will get political traction. When the damage from the spending begins to appear, then the Republicans should move on the spending issue as a priority.
But by and large the free-market medicine men seem determined to learn nothing from this awful year. Instead they repeat their incantations and retreat deeper into their dogma, generating endless schemes in which government is to blame, all sin originates with the Community Reinvestment Act, and the bailouts for which their own flock is desperately bleating can do nothing but harm.
And they wait for things to return to normal, without realizing that things already have
Thomas Frank,WSJ,12-31-08
RCAR,
And so Obama’s solution is a trillion dollar pork-barrel bonanza.
pd Says:
December 31st, 2008 at 11:43 AM
RCAR,
And so Obama’s solution is a trillion dollar pork-barrel bonanza.
We’re already in for 8.3 trillion which accomplished squat/Obama’s Trillion looks puny. However,you are correct,The additional Trillion won’t stop the bleeding,(500000 jobs a month),but neither will tax cuts. What will stop it isn’t feasible.
The financial markets change swiftly, developing new approaches and new instruments, and so I think it is reasonable to ask for an updated approach to regulation, not increasing the burdens of regulation but removing regulations that do not effectively guide the economy and putting in place more effective ones. So I’m not against some regulations, properly targeted. And regulations and limitations should especially be placed on “government-sponsored entities,” or any company that is not half-market and half-government, since this is just ripe for governmental corruption.
Still, it just seems like good economic sense that we should create, right now, the most favorable environment possible for American businesses, and for overseas businesses that might find America an attractive place to relocate. The US government does not create wealth; it only reallocates wealth, taking from the private sector in order to redistribute or create government jobs. That’s why we need private sector job growth, with long-term jobs in modern fields. In other words, we don’t need temporary “shovel” jobs, where the shoveler is going to be out of a job again as soon as the government money is spent–and where the shoveler is only paid by taking money away from taxpayers, money that taxpayers would have put back into the economy or even used to hire others.
Republicans need also to push hard on American energy production, since the production of new pipelines, new refineries, and the extraction of our own oil, natural gas, and shale oil would produce millions of jobs, while making American energy cheaper and taking money away from OPEC nations. I think the American people are ready to support this, and the Republicans are missing a golden opportunity if they don’t press for this now.
I meant to say “any company that is *now* half-market and half-government…” Pardon the typo.
Tax cuts are like interest-rate cuts: both involve dealing with a rope. Sometimes, a rope is constraining something on the other end. Releasing the rope – lowering interest rates or taxes from restrictive rates – is a good thing. Pushing on the rope – lowering interest rates or taxes from unrestrictive rates – is of no use at all. That’s why any claim about the benefits of lowering interest of tax rates that does not state as a premise that those rates are the reason capital isn’t flowing or spending isn’t happening is unpersuasive.
I agree with Seth Halpern that rates are not the problem, that adult supervision is. A lot of “adults” abdicated their responsibility in this mess. My biggest gripe is with the ratings agencies, whose only job was to be adult supervisors. Everybody else could at least claim that their job was to originate, package, or sell paper to the market. I’m not saying that they weren’t misbehaving, just that their potential to misbehave is one of the reasons we have ratings agencies, so the last clear chance to prevent this mess fell to those agencies, and they blew it.
In any event, now we have savings accounts in desperate need of refilling and ratings agencies that investors do not trust. People will be putting their money in banks, and banks will offer the money to rent, and no one will want it except for refinancing (which just puts it back in another bank), and there it will sit until someone solves the ratings mess.
Until then, the Government must become the consumer of last resort so that jobs don’t evaporate. Tax policy can be helpful, but not by lowering rates willy nilly. Congress should encourage spending by restoring the sales tax deduction, geting rid of the $1,000,000 cap on mortgage interest, increasing credits for hybrids and fuel-efficiency home-improvements, and in general, tilting tax policy in favor of spending to avoid the nastiness known as the paradox of thrift. The sales tax deduction especially would be a boon to the car industry, expecially if the provision sunsets in a year or two.
One question for RCAR, where does the government get its money from?
Lawrence Kramer, I’m not quite sure what you mean by “government must become the consumer of last resort.” Are you signing on to the Democrats’ likely spending spree? After raising doubts about tax cuts, you go on to suggesst tax cuts, or, more precisely I guess, tax policies as solutions. In my opinion, there is no sound macroeconomic policy other than to not repeat the mistakes of the thirties which turned a recession into a depression:raise taxes, protectionism and contract the money supply. Short term solutions are essentially political and will not lead the economy into a sound and long-term recovery. My support for government intervention is based solely upon humanitarian reasons—I guess that’s somewhat of a safety net advocacy. Stability efforts are likely to worsen the problem which will further exacerbate the humanitarian one.
10
Steven Says:
December 31st, 2008 at 12:37 PM
One question for RCAR, where does the government get its money from?
At the moment,a computer connected to a printing press. Not even a tax “holiday” on individuals and corporations would restart the economy. It would take a “debt” holiday. I’m pretty sure that we’re not going to have either kind of day off.
Seth Halpern says, “The problem today is a perception that the system has no adult supervision.”
I think that’s called a feature, not a bug. To provide “supervision” is to distort free markets–it is to politicize capital allocation and investment decisions. And if I recall correctly, when the dotcom tech bubble melted down, no one asked to be bailed-out.
Where did the bailouts start? Ostensibly with the “conservatorship” of Fannie and Freddie, in order to protect the foreign/sovereign owners of Fan/Fred’s debt–so that these fixed income investors not take a financial haircut in said reorganization. That’s your supervision, and that’s wholly political, and a huge distortion. (Government guarantees were inferred on Fan/Fred mortgages, not on Fan/Fred’s capital structure.)
Capital is on strike because the ground rules are not clear, i.e. what obtains a government-backed guarantee, and what does not. Bear Stearns finds a government “supervised” sale, while Lehman Brothers files a bankruptcy that systemically distorts the staid world of money market funds–resulting in more government (FDIC) guarantees. (There’s your adult supervision.)
The now-little three auto mfgs receive a hearing in DC for life-line loans because DC has inflicted the distortions upon them, not because the free market isn’t working. That’s political (unionized labor as interest group politics), and that’s your adult supervision.
What failed was adult supervision.
Lawerence I disagree with you about taxes and the most effective way to stimulate the economy. The engine of our economy is not government, but free enterprise, because it there that jobs are created. The government remember should derive its power from the govern and this is obviously seen in the fact that government collect taxes from enterprises ultimately. That is why the corporate income tax is so erroneous because you can’t detach a corporation for its workers (as we have seen with the auto companies and their pension obligations). The best thing to do for an ailing economy is to enable companies to growth and thrive. That means cutting all taxes on capital. Any tax rate on capital is as you say a restraining rate, because businesses solely make investment decisions based on the cost of capital. A tax on capital raises the cost of doing a project that could have employed many people. If those taxes are removed, it is not a guarantee that all projects/investment are made, but does make some investments feasible that would otherwise not be in the taxed environment. So cutting corporate taxes, business capital gains taxes, and eliminating capital depreciation schedules would have very real positive impacts on the economy. I don’t like the word stimulate because it entails something temporary, we need long-term continuous growth and this can only be done with a change in the incentive dynamics of the economy set by government. Your ideas focus on the housing sector, but that’s the fallacy of central planning is that you can have a silver bullet to solve all problems. We need a broad based economic program that recognizes the complexities of a free market economy, because frankly we don’t know what new products and services entreperneurs are cooking up in this recession that will bring about the next boom period for this great nation. Broad based tax cuts simply concedes the complexities and enhances the incentives to work, save, and invest.
RCAR I agree with you, but ultimately even with the printing press the people pay the bill. So the government has essentially two options, it can either believe that it knows best how to manage this economy or concede that entrepeneurs, individuals, and businesses make things happen in the economy. If its the latter, then government would be wise to make an “investment” in the latter group and that means cutting tax rates. That’s the quickest, most effective way to get money into the economy, to motivate future growth, and most importantly put the decision making power back to those entrepeneurs, individuals and businesses. If you tax something less, you get more of it. For example, if taxes were eliminated for overtime, you would get more people working overtime. In the end, the government will make a “return” on that investment with higher revenue from the increased growth and eventually a balanced budget if government can constrain its spending tendencies (which didn’t happen under Bush despite the higher tax revenues).
It’s one thing to come to the aid of a valuable, viable industry, but the UAW has rendered the “Big 3″ … unviable.
I agree with Forbes: capital is on strike because investors know that government is going to increase its involvement in markets, and they don’t know the extent or direction of this development yet.
I am no McCain booster, and never was, but it’s a good bet that if McCain had been elected in November, investors would be reaching different conclusions in this pre-inauguration interim. Their guess would be that McCain would tax, spend, and regulate less than Obama will. We would all, if we are sensible, expect McCain to have continued Bush’s overly-statist policy for the financial crisis — but we would not expect McCain to have reverted to a New Deal level of “dirigisme” and economic intervention. And we would almost certainly have been right.
Investors do think such a level of intervention is likely with Obama. They justifiably expect to lose on investments into an increasingly statist economy, because that’s what always happens. Market-oriented investors lose when government takes the helm; only favored political cronies and constituencies win. Those who wield capital care about the economic return it brings, and can’t afford to commit it to losing propositions. The risk of doing so is very high right now, precisely because the direction and interventionist bent of the “adult supervision” is uncertain.
Obama will eventually declare himself, even if only by default: i.e., the default positions of his cabinet and advisors. If his policies are as Rooseveltian as investors fear, we can expect capital to remain on strike for some time to come. You can’t get the result of innovation and prosperity by defining limits to people’s potential rewards, and ordering them around. It simply doesn’t work. Apologists for statism never — never — seem to learn that.
When I say that the government must be the consumer of last resort, I am saying that when the paradox of thrift takes hold, and individuals won’t spend, the economy collapses. Under that circumstance, and only under that circumstance, keeping individuals employed so that they can eventually resume their role as the consumer of choice is good policy. If that’s
signing on to the Democrats’ stimulus plan, then it is. I could care less. Should I really base my economic views on whose bed I’ll be sharing?
I draw a sharp distinction between tax reductions and other tax policies. Reducing taxes because it’s our money or because we know better how to use it is the direct opposite of creating incentives for consumption through the tax code. The last tax rebate proved that the paradox of thrift was in full force. I am arguing for a tax plan that neutralizes the urge to save, not one that lets us do what we want, because what we want is to rebuild our individual savings to our mutual damage.
I subscribe to generalizations, but I do not invoke them when the circumstances are at the margin. Government is not the “engine” of our economy, but it sure as hell can be the tow truck when the engine breaks down. Government’s job then is to keep the system in tact, the people at work until they are ready to spend again. The dirty little secret of a free economy is that it only works to the extent that the spending matches the production. If we don’t buy, we don’t work. If we don’t work, we can’t buy. Breaking vicious cycles is Government’s job. Ideological generalities just don’t teach us what to do when everyone has become a saver.
Paul Zissetrson says that stability efforts are likely to worsen things. I’d be intrerested in a description of precisely how those dominoes would fall. The assertion alone is not self-evident.
I think Forbes treats “adult supervision” too narrowly. Not all adult supervision comes from the government. As I said earlier, I believe it is the job of the ratings agencies to provide such supervision, something they failed to do. It’s not more government we need, just better private safeguards.
I would add, though, that this situation was worsened by naked short selling and the booming market in credit default swaps with respect to risks that the buyers of the swaps did not carry. Those transactions are tortious in my estimation, and the failuire of government, through law, regulation, or litigation, to squelch them was unfortunate. There is such a thing as too much regulation, but there is also too little – think antitrust before the Sherman Acts. Generalizations about government action don’t tell us much about the wisdom of any particular piece of regulation.
Clear ground rules ARE adult supervision. As Gandhi said of British justice, they would be a good idea. Perhaps McCain would have been more likely to oversee their re-establishment than the Bush/Obama crew. But the markets are still waiting for whichever party seizes the moment. Investors will not swim after a shark attack if there are no lifeguards on duty.
Steven –
I think you are ignoring history. We had plenty of investment in the Clinton (can you say “dotcom”?) and Bush years. Taxes were not a restricting feature then. Why do you believe they are one now?
And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance, and top individual rates.
With all due respect, I’m not sure how reducing or increasing inheritance taxes stimulates or stifles economic growth one way or another. Dead people can’t be incentivized to spend money.
Diane , death taxes impact family businesses, not just trust funds, I think.
Come to think of it, a high death tax WOULD incentivize someone to spend money since it couldn’t be passed on to an heir. It might cause a business owner to sell prematurely, or the heir to do so.
Lawrence Kramer, I don’t agree at all with your invoking the paradox of thrift to explain the past tax cut’s ineffectiveness and the cause of general declines in consumption that necessitate government spending intervention. The tax cut failed because of the permanent income hypothesis: short term increases in income do not have the same effect as long term increases do. Thus, people are more likely to pay down debt or save. Further, the rebates indicated that the Keynesian multiplier is much closer to 1 than most Keynesians assume.
I would also suggest that rather than the paradox of thrift causing a continued downward shift in demand, the increase in savings would cause a fall in interest rates which, in turn, would cause an increase in long-term projects which would, then, result in greater output. Moreover, during a downturn in output, downward prices would eventually cause an upward adjustment in output.
Asking me to cite how stability efforts are likely to worsen the situation is like throwing me a beachball to hit. Look at the trend of the price of gold. Most commodities have tanked, but gold has remained relatively high; today it closed above $880. As you know, this is an excellent indicator of what markets think likely price inflation to be. With the Fed creating money like the Democratic Congress intends to spend, this price is telling us what may be down the road. Further, look at the dollar: another indicator of what markets anticipate will happen in the price area. It’s beginning to weaken seriously against the Yen and Euro. These indicators are pointing in the direction of serious inflation even before the spending programs are implemented and the Fed’s burst of money creation have been felt. And what will happen if the Fed begins a counterstabilization policy to fight inflation through higher interest rates? Exactly what the Keynesians told us couldn’t happen: the staglation of the seventies.
A Happy New Year to you and all Contentions’ readers. Let’s just hope in the New Year the economy recovers, regardless of the theoretical underpinnings.
Of course you shouldn’t base your economic ideas on whose bed you’re sharing, but you better know who’s making it. There may some very unpleasant surprises inside.
Ah, Double O Seven. You’ve been out and about I see. Happy New Year.
Paul -
I agree that short-term increases are perceived differently from permanent ones; I just don’t believe the difference is relevant to the current mess. IMHO, the most important macro thing that happened in the past quarter was the destruction of wealth. That, and not the one-time nature of the rebate, is what I believe put us all in such a thrifty mood. A permanent tax-cut would generate more savings until people don’t feel under-reserved.
I also agree that savings promote investment, which turns things around, eventually. But it takes time, and during that time, people lose jobs. I guess I need to ask, therefore, whether you are denying that the paradox of thrift ever takes hold or just that it is not operating now. Your point about temporary vs. permanent tax cuts suggest the latter; but the claims about saving promoting spending suggest you don’t believe in the paradox at all.
It seems to me that savings only lower interetst rates significantly when savings represent the most significant source of capital. If the big bucks are in the hands of our trading partners, our own piddling savings won’t move the needle. Meanwhile, the Fed has already lowered short rates, and the problem is the TED spread, not rates per se. Again, back to the ratings agencies and the damaged USA AAA brand.
I think you make too much of the price of gold and the weakness of the dollar (which is higher against the Pound and Euro than it was last Spring). These trends are not inconsistent with your view, but I don’t see them as “pointing” to anything other than market sentiment, which is as often wrong as it is right. What was the price oil “pointing to” in July?
I believe that our printing press won’t hurt us until our nominal wealth has been replaced so that the number of dollars chasing investment assets is back to its old level. Until then, I’m not sure where the inflation will come from. That’s not to say we won’t overshoot the mark or that we won’t have a weak dollar, expensive gold, and inflation. We defaulted on the trade deficit this time by destroying the bonds. Next time, we may have to destroy the currency. That’s why getting off iimported oil is so important.
In sum, I don’t believe we see the mechanics all that differently, but we do assess the factual background differently. Time will tell.
Happy new year to you as well.
Lawrence good discussion! To your question about whether taxes are really restricting or not, I say that taxes will always encumber firms from doing all of what they want to do at some level. With that said, the business cycle is still driven by profits and interest rates. When profits are strong, firms will look to invest at the cost of capital (essentially the interest rate) almost at the exclusion of tax rates that are not confiscatory. Nonetheless, at the margin, tax rates can affect investment decisions by firms and this is seen whenever tax rates are lowered on capital. When you see a corporate tax cut like the cut in dividends we had under Bush, you see firms pay more dividends. When you saw a cut in the capital gains rate under Clinton, you see the amount of investment in stocks increase, again showing the impact of taxes at the margin. So taxes do have an impact, but their impact is often muted because of the business cycle and the necessity of firms to expand their operations and increase shareholder wealth. And this leads to the basic point about the difference between private job creation and government job creation and why its more desirable to have the former rather than the latter. In the private economy, the profitability of enterprises drives their investment decisions and of course it is these investments which create jobs. But those jobs are created to bring about a return on the initial investment, in other words to bring about growth. With the government, “investment” decisions are not made for a return, therefore no growth really results. Indeed, government really can only grow and create new employment if enterprises are growing. Otherwise, any growth in government apart from that of the private sector produces inflation. In this environment, this maybe desirable as you have intimated in your comments, due to the fear that deflation may set in, putting us in a real savings paradox. But my contention is that the government need not resort to these schemes, since ultimately in a free market economy creative destruction must take place in order for enterprises to retool and continue producing wealth for their shareholders. Cutting tax rates on capital can increase the level of employment (because of increased investment from home and abroad), thus stabilizing the housing market and boosting demand and production faster than any arbitrary government spending can. When the economy grows, the government can grow as well, increasing its employment and making the prosperity cycle more virtuous. However, artificial government inflation of the economy will have major consequences which will then lead to another needed government response, which further infringes on our economic liberties.
Steven -
Taxes are always restricting at the margin, but the issue is diminishing returns. At some point, a further reduction in taxes produces too little action to matter. And in some circumstances, the amount of investment that matters is more than at others. I just don’t believe lowering the tax on entrepreneurship further at this particular time will reverse this particular recession.
As for the difference between governmental and private job creation, I think you are positing a false dichotomy and ignoring the second-order effects of the stimulus, which is its goal. The public spending creates private jobs. When the government builds a dam or a bridge, private contractors do the work. Private contractors buy the trucks from private manufacturers. Private companies make the cement. Everyone who gets a paycheck spends it in a private enterprise, employing restaurant workers, clothing sellers, and so on. The government spending binge is just one environmental factor contributing to the investment decisions of private players. Last year it was condos; this year it’s bridges. What difference does the customer make to the builder?
Would it be better if the private economy provided its own stimulus? Probably, although there are those strategic investments like alternative energy that need to be made whether they entail “growth” or not. And we need repairs to our infrastructure so that private investments will produce growth. Make no mistake about it: foreigners export to us because we have a comparative advantage in distribution. We are the best place on earth to sell in quantities that enable scale. We have roads, and media, advertising skill and consumer tastes. We have to maintain those things, so we are in a sense lucky enough not to have anything better to do with our money right now.
I do not believe that we are seeing creative destruction in the economy. We are seeing something more pernicious. The credit markets froze up because our paper became suspect. Good companies’ paper is suspect because the rating agencies cannot be trusted. Good companies were torched by naked shorting, with the accelerant of naked CDS purchases. With the private rating system out of order, only Federal paper is trusted – hence the absurdly low market interest rates throughout the yield curve. For people who have to lend (viz., boomers facing retirement), the government is the borrower of last resort. For people who have to sell, the government is the consumer of last resort. After all, if the government is the only entity that can get credit, it has to be the only entity that can spend borrowed money.
Cutting tax rates seems to me couterproductive at this point, but even if it weren’t, even if it contributed to the resuscitation of the economy, I do not believe that it can do any more than support the more powerful effects of government spending.
Wunnerful. In #4, wheelless is even reduced to citing the great economist Thomas Frank.
People are not clinging to zero-interest paying, almost certainly overvalued Treasuries and shunning even undervalued, high-interest paying stocks because they are worried that Obama may marginally raise companies’ cost of doing business through problematic regulation or marginally tinker with capital gains taxes. They are just plain spooked by a system they no longer trust or comprehend. That is not an argument for dirigisme although even dirigisme would probably improve investor morale in the short run. But it is an argument for transparency, accountability and anything else that restores systemic legitimacy. Whether such goals are best fostered by government is understandably debatable, but the GOP would be unwise to relinquish that role to the Democrats, who could easily capitalize on it. Continuing with my earlier analogy, after a shark attack you can stand back and let people panic, you can shut down the beach entirely (which will accomplish much the same result) or you can hunt down the shark and hire lifeguards.
Folks, let’s see what the IRS got in tax payments last year. It collected $56.4 billion, $2.8 billion lest than in 2007. Expect less of tax collection in 2009 as well, maybe $50 billion. So Omama wants to send $400 billion in bailout money to the states, that’s equivalent to 8 years of the taxes collected in 2009. Clearly the governement needs to print more money, a sure recipe to financial Armageddon for the USA. The time of responsible behavior has passed by a long time ago. That’s why the market has accounted for this behavior and will be down for a while until the governement shows a more rational behavior. Until then, no matter how much stimulus is primed by the government the misery index will keep rising. Let’s get back to basics by first going back to the gold standard.
I believe there is a consensus that WWII ended the Great Depression. WWII was different from the New Deal projects principally in size. The war was an exceedingly wasteful undertaking in terms of wealth creation, and the New Deal provided a very helpful infrastructure build-out (TVA, REA), but as it turned out, it was size – the amount the government spent on whatever it spent it on – that mattered to rescuing the economy.
We don’t need to have a war to spend like it. At least, we shouldn’t. The problem, in political terms, is that everyone agreed that we had to fight WWII, no matter the cost, so fiscal conservatives held their piece. Now, we cannot get the same consensus about the need to fight global warming, energy dependence, infrastructure obsolescence, or cancer, so the conservatives are opposing the masive spending required to fight them. The neecessity of fighting the war obscured its economic lesson: ending a depression requires massive spending. On ANYTHING. Instead, we learned only that to win a war, you spend what you have to spend (hence the metaphoric “wars” on everything the government wants to spend too much money on), when an equally valuable bit of learning available to the observant was that you need to do the same thing to fight a depression.
A complicating factor is the trade deficit, which drains money out of the system and only pumps it back in if foreign lenders have confidence in our paper. We must fix that problem, either by ending the deficit, so that ratings become less important, or by fixing the ratings thing through some sort of Underwriters’ Laboratory of finance. If we don’t end our reliance on skittish foeign capital, either by ending the reliance or ending the skittishness, I don’t see how we get out of this mess no matter how much we spend.
Seth Halpern at #30 — no, investors are NOT worried that Obama “may marginally raise companies’ cost of doing business through problematic regulation or marginally tinker with capital gains taxes.” They are worried that he may fundamentally eliminate the unguided incentive mechanism that makes investment worthwhile in a free market. They are worried that he will introduce a Newer Deal, and interest the government in prescribing limits on profit and return on investment. That is exactly what FDR’s New Deal did, and one of the top few reasons it prolonged the Depression.
The reason people don’t trust the markets right now is that we don’t know what the government is going to do that will affect them. If there were a guarantee of no further government intervention, you would see investors immediately begin making judgments based on their estimates of how market forces will work. How market forces work is what experienced investors are experts on; they would act with confidence if market forces were the only anticipated variables. But government is a variable driven by politics, not economic profit or even the most basic financial soundness. Guessing government’s intentions is too big a risk. You have to KNOW government’s intentions. That’s what investors are waiting on.
Lawrence I don’t dispute that government spending has great effect on the economy. I am disputing what type of effects it has on the economy. Government spending in excess of growth in the economy creates inflation. Government spending in excess of tax revenue displaces private investment. Government spending is arbitrary and doesn’t take into consideration any return on the initial spending (otherwise with each government project we would have a capital analysis). You can spend on infastructure all you want, but is this the most efficient allocation of resources to resusitate an ailing economy? It will have its effects as you describe but those effects will not be as far reaching as an across the board tax cut on corporate profits. Again what causes the business cycle are profits and interest rates, period. Those two variables determine the amount of investment that will take place and thus the amount of jobs that will be created. To the extent that taxes affect profitability directly (taxes on capital) and indirectly (taxes on the factors of production, namely labor) is the extent tax rate changes can influence investment decisions. Government spending and projects work best in the context of real growth in the economy at large. Second point of dispute is your comment about diminishing returns setting in with additional tax cuts. The point of tax cuts is to remove as much as possible the negative effects of taxation on investment decisions. Your point presumes that taxes are low! If you lower the top tax rate which small businesses and entreprenuers pay from 35% to 25% or even 15%, it will have a major impact. The same with corporate taxes and any tax on capital (I more favor consumption taxes since taxation is necessary). So there is still room to manuever and the goal is to enable the maximum possible circumstances where investments can be made and government can be funded that encumbers enterprises the least. Because ultimately, government derives its power(money) from these enterprises.
To your points about what has contributed to what we are going through now, your guess is as good as mine. I frankly do not think CDSs are as bad as you say they are and indeed they have held up pretty well in the aftermath of many of the bankruptcies we’ve had (Lehman Brothers and Fannie and Freddie).
I think the big culprit was Fannie and Freddie. Once those two entities went into receivership, then the whole house of cards got rickety from the Feds perspective. However, I believe the government has made things worst by propping up failing firms with their equity stakes in them, since the entire banking system was not in peril. We saw healthy banks like Morgan Stanley, Bank of America, WellsFargo, and JP Morgan Chase enter in the fray to snatch up assets at bargain prices. So I think this was a ratings agency problem, but more so a perspection that Fannie and Freddie had government guarantees so that means their stamp on mortgage debt was the seal of approval. That was false and it would be best that in the financial sector, we not have government sponsored enterprises selling implicitly guaranteed debt. But I think where we are now is a recession resulting from this crisis and the traditional tools to get us out will get us out–low interest rates and firms returning to profitability–will get us out. The government through tax policy can help the former through the Fed and the latter with tax cuts.
Excuse me Lawrence I meant to say perception, not perspection.
J.E., I absolutely agree than uncertainty is a deterrent to investment. But if Wall Street was frightened by the prospect of fundamental constraints on profit, it had a funny way of showing it : Around sixty percent of its campaign donations went to Democrats. I would submit that investors will pay a high price for certainty. Higher, in fact, than is conceivably optimal for economic health. That’s why Republicans should make sure Democrats don’t make the only policy bid. Otherwise Wall Street may well accept it.
Steven -
You seem unwilling to address the unique nature of this collapse. You offer rules of thumb that usually apply as if they were absolute truths. But they are not. They are rules of thumb that usually apply. This ain’t usually.
Government spending in excess of growth in the economy creates inflation UNLESS the money supply has been decimated. Then it combats deflation. Government spending in excess of tax revenue displaces private investment UNLESS there are no private investors who wished they had more money to invest. Then, it replaces investments the private sector refuses to make. Spending on infrastructure is not “the most efficient allocation of resources to resuscitate AN ailing economy,” but it is the is most efficient allocation of CURRENTLY AVAILABLE resources to resuscitate THIS ailing economy.
I wish you were right that a broad-based tax-cut would cause the Arabs and Chinese to lend money to GMAC again or cause me to buy a new car. This is not a cyclical downturn that we can invest our way out of. This is massive wealth destruction on an unprecedented scale, and we need the perception of imminent profitability to restore creditworthiness first and equity values second. Only the government is willing to spend enough money quickly enough to create that perception. Call it priming the pump if you will, but don’t fight the last war.
I’ve enjoyed this exchange. In fact I think it deserves an award as one of the more enlightening, informed, and cordial conversations I’ve ever seen in a comments thread. We’ve had (at least) two viewpoints ably represented here, and I think I understand both sides of the argument better as a result.
I am not an economist, but It seems to me, to simplify, that in circumstances such as these the government should do whatever most benefits the private sector, creating the most favorable possible business environment. Some mixture of government spending and tax relief seems in order. The government spending should be precisely targeted, following clear rules, and it should be aimed toward benefiting American businesses large and small. I don’t believe we need government spending on the scale of World War II. I think our government expenditures should honor at least two principles. First, it should be geared toward the improvement of economic infrastructure; cost-of-living investments (dog parks, etc.) can wait for another day. We don’t need to spend for the sake of spending; we need to spend wisely and ensure that our funds are going most efficiently toward the improvement of business profitability and hiring. We can also use government expenditures for research, and to award those who develop innovative solutions to vexing problems. That money should be used to support the starting of new businesses, and the expansion of existing ones that have shown themselves effective. Second, our government expenditures should be directed outward into the private sector as swiftly as possible; we do not need to create more government bureaucracy, which (as we all know) is nearly impossible to eliminate after it has once been created. With a minimum of bureaucracy, the money should go outward to contracting American companies, and with clear rules and open competitions it should be used to stimulate competition and reward the best companies (not the best-connected).
But I am also in favor of reducing taxes on investment and entrepreneurship. I don’t think our tax rates are so low that reducing them further would have little benefit. In the long term, the market will be more efficient and cost-effective in directing capital to where it is most needed and most likely to produce economic growth. The government is simply not as flexible and creative as thousands of companies competing in an open market. Moreover, reducing the burden of the tax structure, and thus making the economic environment more profitable, will attract more investment from abroad and attract companies to relocate their operations to the US. With economic infrastructure improvements, and reduced tax burdens, we should position ourselves as the strongest bet in an unstable world. This will also serve to make our products and services more affordable to foreign nations.
I also think we need to reorient our immigration policies, which in many cases keep highly trained and educated individuals from entering our country and benefiting our economy. I think highly trained and educated individuals should be permitted to enter, regardless of national quotas.
Finally, I am *hugely* in favor of opening the doors for American energy development. This could be a real gold mine that gets the American economy humming again. The internet (in spite of the bubble) has brought enormous growth to the American market, and I think allowing the development of American energy resources could have a similar wealth-creation effect. So clear the way, eliminating frivolous lawsuits, for development of oil, natural gas and shale oil, both on the outer continental shelf and on American soil. Direct some of this massive spending toward researching and developing new energy technologies and building the new energy economy.
Just my two cents.
Ahithophel -
You are making the classic supply side argument: if business builds it, customers will come, so if government makes building cheap, businesses will build. I don’t believe generic supply-side incentives (i.e., lower prices occasioned by increased production) will motivate a public obsessed with its decimated savings. If you build it, they will save anyway.
No, this is a demand-side crisis, and the reverse mantra applies: if you come, they will build it. Spending for spending’s sake is precisely what the doctor ordered. If there are billions in contracts to be won, contractors will gear up to perform them, and if the contractors are working, the camp-followers will be along shortly. Details like efficiency, transparency, and fairness are nice, but they are not really all that important to the recovery. Anything that boosts the value of the stock market (and thereby restores wealth) will break the grip of the thrift paradox, and that’s what really counts.
So I will repeat my plea that people analyze this particular collapse with higher resolution glasses. This is not a cyclical recession. It is a massive default on our trade debt, taking with it tons of domestic wealth and, incidentally but perhaps most damagingly, destroying the USA AAA brand in the process. These things don’t happen in cyclical recessions, and one ought to at least convince oneself that these things have not happened, or that they don’t matter, if one is to apply cyclical recession remedies.
Lawrence, thanks for your response. I understood that this was your viewpoint; I was simply registering my vote. I’ve listened to your “higher resolution” argument, and it’s the reason why I am in favor of more spending now than I had been before. I am not yet convinced that this is as unique as you quite apparently believe; yet it is clearly something much more than the ordinary cyclical recession.
Being a philosopher and not an economist, I can only go with what seems reasonable. I would like to address the demand-side in the short term (thus targeted government spending, spending that will clearly and quickly benefit the private sector, especially in economic and energy infrastructure) and the supply-side in the long term (thus changes to our tax structure). We have to address the near-term challenges, of course, but we also improve our present prospects (since investment concerns future performance) by laying the proper legal and tax foundations for more economic growth in the long term. I’m afraid that if we spend too much, and spend for spending’s sake, we will only dramatically increase the size of government and warp the market for a long time to come. If we follow the approach you suggest, I’m concerned about its effect upon the dollar and foreign investment in the United States. If instead, in addition to establishing clear regulations and improving our ratings mechanisms, we create a more favorable taxation environment for businesses, I think overseas investors will evaluate America’s prospects more favorably and act accordingly.
I’m not bound to supply-side dogma, though on the whole I find it more convincing. Still I recognize there are times when increased government spending could help, but I still want it to be wisely directed. The government could put forward a “spending” bill of five trillion dollars, and it might be able to float our wealth level for a few years, but I’m afraid in the end we would have a much harder crash, with a weakened dollar and massive debt on top of the looming entitlement crisis, not to mention a now-gargantuan government that will not simply go away. There will be some painful years as we adjust our debt imbalances. But even if some of the money saved by lower taxation is simply put back into savings, this in itself strengthens the financial sector and ultimately increases the amount of capital available for investment and development. It’s not as though people are hiding the money under their mattresses; it’s not as though redressing our credit imbalance is unimportant to our long-term economic health; and it’s not as though 100% of tax savings would be unspent. Some of it would go to entrepreneurs who recognize opportunities, opening new markets, developing new products and new technologies, new companies and new hires–more efficiently than the government could.
In short, $500B in government spending targeted at economic and energy infrastructure, and $500B in tax cuts for the next ten years (in the hope of extending those cuts permanently), along with adjustments to our immigration and energy laws, seems to me to give us the best prospects for an immediate stimulus as well as long-term economic health.
I’m somewhat of a reductionist, and almost every policy position I take reduces to this: the role of government is to neutralize life’s prisoners’ dilemmas.
Prisoners’ dilemma games arise when the best thing each player can do for himself is throw everyone else under the bus, but the best thing all players can do for themselves is help each other out. The paradox of thrift is a case in point. With my savings depleted, the best thing I can do is save, even if the result of everyone saving is that my savings lose value. That’s because everyone else will save or not independently of my decision. I cannot fix the economy by spending if no one else does, nor can I perpetuate its misery by saving if everyone else spends, so my best play is to save. Kant, of course, had an answer to this line of thought, but unless everyone subscribes to his maxims -and trust me, they don’t – it is foolhardy to go it alone.
The way to neutralize a prisoners’ dilemma is coercion. Government has the monopoly on the legitimate use of force, so government has to do the coercing. So, if the problem is that peole refuse to spend, government has to coerce them to spend How does government do that? It taxes them and spends the tax money. Or it spends money it don’t have and taxes people to pay it back. Same difference, better politics.
Thus, government’s stimulative spending can be, and I submit should be, seen as coerced spending by citizens intended to neutralize the prisoners’ dilemma implied in the paradox of thrift. When there is no prisoners’ dilmma afoot, when the people are not “selfishly” saving, such coercion does no good and is, therefore, not a proper use of government power.
I have no inherent preference for supply-side or demand-side economics. I believe in a free economy, and as a default position, and I think taxes should be as low as will pay the necessary cost of government. But taxation to raise revenue to pay for cops and schools is an existentially different phenomenon from taxation to coerce spending to restore economic balance. Recognizing this functional difference in the purpose of a tax, and ignoring the morphological similarity – eschewing nonsense like “a tax is a tax is a tax” – is, I submit, the only way to think through the current mess.
It’s an interesting way to frame the matter, and anyone who references Kant in the midst of an economic discussion certainly wins style points. The reason the prisoner’s dilemma is a dilemma at all is because the categorical imperative is not, as an empirical matter, the maxim that all (or even most) people choose for their actions. However, your reductionism is getting the better of you, here, I feel, in several respects. First, the prisoner’s dilemma is a forced decision between two options (to speak and betray the accomplice, or to keep silent and hope the other does the same), with no way of splitting the difference. Second, in the prisoner’s dilemma one cannot know the decision the other makes until it is too late to alter the course of events. And third, prisoner’s dilemmas don’t have the sort of ameliorating factors and feedback loops that we’re talking about here.
That is to say, it is possible to stimulate both demand and supply, though I suspect a two-pronged attack of the sort I am suggesting does not allow for government spending on the scale you seem to prefer. Still, given $!00B in tax savings for individuals and $400B for companies large and small, certainly you do not think that all $500B would remain unspent? Even if we stipulate that only 50% would be spent, that’s $250B of spending that is serving the private sector, and not leading to government bloat, cronyism and distortion of market forces. Then (to get to the second point), we can keep track of the economic behavior of others, removing the “blindness” that makes the prisoner’s dilemma a true problem. We don’t need to guess what others will do; we can observe, and can design tax relief that is geared more toward spending and less toward savings. Still, even if $250B is saved, the fall in demand will lower prices, and the $250B is paying down home loans, reducing foreclosure rates and thereby strengthening the housing market, cutting down the American imbalance of debt on the global market, increasing the amount of capital available to financial institutions, redirecting spending away from short-term consumption and toward long-term investment, and cultivating wiser financial habits that will better serve us in the long run. Then, alongside this, as previously stated, I am in favor of targeted government spending, more modest than the “stimulus” bill currently being discussed, but more geared to economic infrastructure and less toward silly community pork.
In any case, you know my position. What more concretely would you recommend? If you were the Treasury Secretary advising the Congress on its legislative response (from this moment forward) to the economic crisis, what would you advise?
Suffice it to say Lawrence that we won’t be able to solve this crisis in this forum. If you are a policymaker, I will hope that you consider business cycle analysis in constructing your policy prescriptions. You raise interesting points concerning the prisoners’ dilemma, however I think you are misdiagnosing this crisis as one that is intractably bound in this construct. It is not according to business cycle analysis and no different from previous crises involving banks and government. This is why I subscribe my view about using incentives to boost the normal retooling that occurs during these times. Indeed the savings paradox you talk about can only happen in this case if deflation sets in. However, this “deflation” is not being caused by hording, but by asset price declines. Recall in the Great Depression, bank failure prompted the very hording of money (driven by fear) which brought about the debilitating deflation that required WW2 to get us out of. This is not the case today, because of the FDIC and the Treasury back stopping the money market funds–all appropriate actions of government. I will concede to you that at that point in the crisis there was a potential prisoner’s dilemma that could have set in with the failure of money market funds. However I submit to you that we have passed the crisis stage (again business cycle analysis) and now what is needed is a means to usher in the growth stage in the fastest way possible. So Lawrence, I agree with Athipothel, that this was a good discussion and your viewpoints have given me much to consider. Nonetheless I still remain convinced (as I am sure you are) that at present, tax incentives encouraging investment all for the purpose of promoting increase labor employment is what is needed now. Government should grow and invest with the growth in the economy, to in a sense, extend the growth phase of the business cycle. Lastly infrastructure investment and long-term entitlement reforms remain the best actions the government can take to best secure our future prosperity. The latter action will ensure our AAA rating that you are so concerned about.
Well, guys, we have at least come to a point where we essentially disagree as to what the operant facts are. I regard that as a good thing, as we seem to be on the same page regarding the logic to apply.
In response to Ahithophel’s direct question, I believe I stated earlier that I would use tax policy to stimulate consumption – restoring the sales tax deduction and raising the mortgage interest deduction, etc. – not to stimulate investment directly. I believe that tax and interest rates are already low enough that a return of demand would elicit all of the non-governmental investment we need. As regards direct government spending, I would spend on infrastructure and energy projects, directly or by additional subsidy, price supports, whatever, with the object of getting us off foreign oil.
I do not draw the sharp distinction that Ahithophel draws between public and private spending. Most of the government spending I would favor would be spent buying goods and services from the private sector. Yeah, there’d be some waste, abuse, and fraud, but we’d get over it. In the meantime, the wealth destroyed by the real estate and stock market collapse would be recreated by the profitability of the vendors. My goal would be to undo the paradox of thrift by restoring wealth and, thereby, changing the pay-offs in the save-or-spend game so that it no longer fits the PD model, i.e., so that most people feel that their lives would be improved more by buying something now than by saving for something later.
On the matter of how well the PD model fits the current situation, I believe we are dealing very much with a succession of discrete, one-shot games and not a single iterated game with meaningful feedback. Yes, we can choose a mix of spending and saving, but the pay-off for cooperation is achieved only if the spending reaches a particular level. Thus, the “forced option” is to spend enough to increase wealth or not to spend less than that. We may not know where “enough” lies, but that does not mean that we are not in fact choosing every day between spending “enough” and spending “not enough.” If we all spend “enough,” we get a plus-sum result; if not, then not. Of course, the size of the minus-sum result varies with the extent of the “not-enoughness,” but that doesn’t change the basic structure of the game.
I say that the situation presents a series of discrete games rather than an iterated game because I do not believe that any one player can influence the conduct of the other players by retaliating. Retaliation is possible in a two-player game, but in the massively multiplayer game of macroeconomics, there is no way to retaliate, so no way to send a message to the other players that they will feel any need to heed.
In response to Steven, I would submit that the issue is not whether Americans will withhold money from American banks but whether foreigners will withhold it from American bonds. Bernanke and Paulson realize this, which is why they have moved to back Fannie and Freddie’s paper. But they cannot back all of the promises that the ratings bozos misrated. Thus, prosperity will not restore the credibility of the USA AAA brand. We already have lots of companies that merit AAA (or at least AA) ratings. But those companies cannot get foreign money, or even US pension money, because the buyers want paper of a certain grade, and they don’t trust the corrupted graders. Fixing the grading mechanism would be a way quicker solution to the credit mess than trying to rehabilitate all credits by a return to generalized prosperity as a consequence of lower tax rates.
So, no, perhaps we cannot solve this problem here, but I don’t see why we cannot thrash out the factual underpinnings as long as we are presenting new views on what those facts are. Ahithophel has suggested that a more granular look at the PD model would affect the outcome, and I have offered a different take from his on what that enhanced level of granularity reveals. I think the ball is still moving down the field.
*Thus, the “forced option” is to spend enough to increase wealth or to spend less than that. [sorry].
Looks like Krugman (http://www.nytimes.com/2009/01/05/opinion/05krugman.html) and Samuelson (http://www.washingtonpost.com/wp-dyn/content/article/2009/01/04/AR2009010401435.html) are debating the same issues we debated here.
In any case, it will be interesting to learn more about the bill Obama proposed, and I’m sure I’ll see your comments on that bill in future threads.