Towards A Good Samaritan World

Monday, June 20, 2005

A (MACRO)ECONOMIST'S ENDEARING CONFUSION

Robert Samuelson admits:

[O]ur ideas for explaining trends in output, employment and living standards—what we call "macroeconomics"—are in a state of disarray. If you're confused, you're in good company.


Among the mysteries: what's the deal with consumer spending and why has the personal savings rate been falling through the floor? Why did productivity growth accelerate in the 1990s-- and continued at a fast or even rising clip ever since? Why are long-term interest rates so low? How long can the US afford to keep running a trade deficit? (My small contribution to the last question is here: I argue that the trade deficit can be re-interpreted as "hard currency exports," and that it's future will depend on factors affecting the supply and demand for a good, dollars, which is useful because it performs the traditional roles of money better than other currencies, namely: a store of value, a unit of account, and a medium of exchange.)

Makes me eager to get started on a PhD in economics sometime soon. "Crisis" and "opportunity" are the same word in Chinese...

UPDATE: While a traditional macroeconomist like Robert Samuelson is confessing confusion, Steve Moore of the Club for Growth is crowing at the vindication for supply-side economics evidenced by the jump in tax revenues this year. It's a good time to be an Austrian economist!

If only we could control federal spending! Last weekend I was fantasizing about a McCain candidacy, with McCain winning conservative support by saying something like this: "I wasn't a strong supporter of the Bush tax cut because I wasn't sure we could afford it. Now we have some big deficits that we have to deal with, and it's possible that we'll have to reverse part of the tax cut during my administration. But the tax cut is popular-- people do prefer to keep their money, after all-- and it's good for the incentives to work and save, so I want to try to keep it as long as we can. To do that, we've got to control spending.

"The Constitution gives the president a tool to restrain spending which Bush didn't use: the presidential veto. If we compare the government to a person, Congress is like the impulse inside you to want things and buy, buy, buy. Each Congressman has constituents at home he wants to please with pet spending projects. It's understandable that Congress tries to get all their pet projects funded. It's not just that they want to get votes; they care about their constituents too. But if you buy everything you want, you'll end up in lots of debt and in lots of trouble. That's what happened to us for the past eight years. The presidential veto is like that part of your brain that adds up the dollars and cents and figures out what you can afford to buy and what you can't. When the presidential veto is asleep, spending gets out of control. I admire our current president in a lot of ways, but when it comes to restraining spending, he didn't do the job that the Constitution meant for him to do.

"I can't promise to slow federal spending if I'm elected to the presidency. Ultimately, Congress has the last word on how much the federal government spends. All I can promise is my best, and federal spending will still increase by whatever amount Congress can get past my veto. Of course, that means some pet projects may not get funded. But I think the public will accept this, because I believe every American understands that we can't go on the way we've been going."

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