The job approval rating for President Obama in Kansas is on a downhill trend.
The following chart compiles Obama’s approval polls in Kansas since he took office. The surveys were conducted by SurveyUSA. Usually about 600 responses were collected, and the sampling error is 4 percent.
The question asked of respondents is: “Do you approve or disapprove of the job Barack Obama is doing as President?”
Sound money and income tax cuts — the elements of supply-side economics — have produced economic growth in America, according to Dr. Brian Domitrovic of Sam Houston State University. When our country imposes inflationary loose money policies and high income taxes, economic growth suffers, as in the period from 1973 to 1982. Unfortunately, these are the policies of President Barack Obama and his administration.
Domitrovic lectured on principles in his book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity last night at Friends University. His lecture was part of the Law, Liberty & the Market lecture series, which is underwritten by the Fred C. and Mary R. Koch Foundation in Wichita.
“Unemployment at nine percent, five grueling quarters of decline in GDP growth, the stock market snapped back from its horrid 50 percent decline, but still needing a good 25 percent to get back to its old high: this has been some economic contraction.” While this may sound like a description of the current recession, it’s not. Instead, Domitrovic was describing the recession of 1974 and 1975. The stagflation period from 1973 to 1982, characterized by both high unemployment and high inflation, was a dark period in American history.
There was also a mortgage and foreclosure crisis during that decade, but it affected the most prudent homeowners the worst. Property taxes in California went up five-fold in a period of ten years. Selling your house resulted in the loss of half your equity because of the capital gains taxes that were in effect then.
While unemployment is high today, inflation is low, with prices even declining slightly last year. Being unemployed while prices are rising at nine percent per year — or 33 percent during one two-year period — is much worse than being unemployed today.
In 1980 the bank prime interest rate reached 22%. (It’s 3.25% today.) It was impossible to save money in the 1970s, as the real tax rates on saving exceeded one hundred percent.
Our economic crisis today is the “junior partner” to the stagflation decade. Our current political leaders should not be comparing the current situation to the Great Depression of the 1930s. Instead, the stagflation period has better lessons to teach us. It took 20 years for American living standards to recover to the level attained before the Great Depression started, Domitrovic told the audience, so we should not implement the same policies in response to the current recession.
Instead, we have a fairly recent crisis — the stagflation period — which was solved “so firmly, so efficiently, so permanently” that the quarter-century following this period is known as the “Great Moderation.” There was economic growth year after year, inflation nearly vanished, unemployment was low, interest rates settled, businesses started, and stocks and bonds boomed.
It was supply-side economics that ended the stagflation and lead to the long period of prosperity, the Great Moderation. Failing to embrace supply-side economics as a response to the economic problems that arose in 2008 was one of our greatest mistakes.
As the current crisis enters its third year, we should not be surprised that recovery is slow to arrive. “Tepid and incomplete recovery was, in fact, the record of the New Deal, which our policymakers have looked to for inspiration,” Domitrovic explained.
Supply-side economics consists of stable money and marginal tax cuts. These are the policies that defeated stagflation and lead to the Great Moderation.
Domitrovic explained that in 1913, two great institutions of macroeconomic management were created, the Federal Reserve system and the income tax. Prior to this time, the United States had no ability to conduct macroeconomic policy, either fiscal or monetary policy.
Since 1913, the economic history of the U.S. has been that of “serial disaster.” From 1913 to 1919, prices increased by 100 percent. Prior to that, there had never a peacetime inflation in the U.S. The top rate of the income tax, which started at a rate of seven percent, had increased to 77 percent by 1917. From 1919 to 1921, the U.S. experienced its worse recession up to that time. Unemployment rose to 18 percent. Prior to this time, unemployment was not a problem.
The fix was President Warren Harding’s Treasury Secretary Andrew Mellon telling the Federal Reserve to keep the dollar stable instead of trying to manipulate the price level, and the income tax rate was cut by two-thirds. As a result, from 1921 to 1929 inflation was low, less than one percent, and that nation experienced the boom known as the Roaring Twenties. Economic progress boomed.
But in 1929, the Federal Reserve started to deflate the currency in an attempt to get prices back to the 1913 level. In 1932 the top income tax rate was raised to 63 percent from 25 percent. “There you have the Great Depression,” Domitrovic said. It was a crisis of macroeconomic management, not a failure of capitalism, as is commonly believed.
Franklin Roosevelt instructed the Federal Reserve to keep the price level steady, which was one good policy he implemented. But he increased income tax rates.
In 1947 income tax rates were cut and the Federal Reserve pursued stable prices after the inflation of World War II.
A pattern emerged: stable prices coupled with income tax cuts lead to recovery. When these policies are not applied, recovery was weak and collapsed. These patterns repeated through the rest of the century.
During the Eisenhower Administration, the top tax rate was 91 percent. Eisenhower refused to cut taxes, and there were three recessions during his presidency.
John F. Kennedy wanted to solve the crisis. His advisors told him to loosen money and raise taxes, even though the top marginal rate was 91 percent. The idea, according to recently-deceased economist and Kennedy adviser Paul Samuelson, was that by increasing the money supply people would spend money, which would cause production to increase and workers to be hired. But increasing the money supply produces inflationary pressures. The solution was very high income tax rates, which sops up the extra money that causes inflation.
But Robert Mundell, only 29 years old at the time, wrote a memo that advised the opposite, advocating stable money and low taxes. Kennedy adopted this policy, and a great boom resulted for seven years.
But Lyndon Johnson asked his Federal Reserve Chairman to increase the money supply, and passed an income tax surcharge to attempt to control the danger of inflation — the “neoclassical synthesis.” Inflation rose. Nixon increased the capital gains tax and established the alternative minimum tax. The result was the double-dip recession of 1969 to 1970, which cost more in economic output than the cost of the entire Viet Nam war.
Still, the Federal Reserve kept increasing the money supply, and the income tax rate was increased. Nixon insisted that printing money would save the economy, and in order to control inflation, Nixon imposed price controls. The result was an investment strike. If businesses could not charge the prices they needed, they would enter other fields of businesses, such as commodities. The prices of commodities rose rapidly, and there was the terrible double-dip recession of 1974 to 1975.
Mundell, along with Robert Bartley of the Wall Street Journal and others, started to encourage government to tighten the money supply and lower taxes. At the same time United States Representative Jack Kemp introduced a bill calling for a large tax cut and stable money. Kemp’s bill passed both houses of Congress with a veto-proof majority. But Jimmy Carter had it killed in committee.
If not for Carter’s action, the Kemp-Roth tax cuts would have become law in November 1978. These tax cuts, had they been passed and been coupled with Carter’s appointment of Paul Volcker — an advocate of stable money — as chairman of the Federal Reserve in August 1979, would have found the policy elements of “Reaganomics” in place at that time. Domitrovic said the economy would have recovered rapidly, and it is likely that Ronald Reagan would not have run for president in 1980.
Instead, the period from 1979 to 1981 was a brutal period of economic history, with high unemployment, high inflation, and tanking markets.
Upon entering office, Reagan was able to implement sound money policy and tax cuts — by then called supply-side economics — and the economy started the boom that lasted for 25 years. During this time there was only one recession, in 1990 and 1991. This is in contrast to the three recessions during Eisenhower’s eight years in office.
Supply-side economics is one of the greatest success stories in economics and government, Domitrovic said. Despite evidence of its success, despite the fact that every objection to it has collapsed, policymakers did not follow its policies in 2008. Objections to supply-side economics that have proven to be unfounded include:
It is inflationary. This is the basis for George H.W. Bush’s characterization of supply-side economics as “voodoo” economics. But inflation since 1982 has been very low.
It would cause crowding-out. This refers to the fact that tax cuts can cause budget deficits, and the government would have to borrow so much money that none would be available for private business investment. But the 1980s, 1990s, and 2000s were a period of historic expansion, with the Dow Jones stock market average increasing by a factor of 15 during this time.
Government debt is a burden to future generations. But the nation experienced great prosperity and economic expansion during the Great Moderation, and interest payments on the debt were not a major burden.
Tax cuts would place the U.S. in a “fiscal hole,” with budget deficits forever. But by the 1990s we were running budget surpluses. Domitrovic said that when Clinton balanced the budget in 2000, the total level of government expenditure was 18.4 percent of gross domestic product. In Reagan’s last year in office (1989) revenues were 18.4 percent of GDP. “In other words, Reagan’s tax policy plus Clinton’s spending policy was exactly sufficient for a perfectly balanced budget.”
Supply-side economics causes inequality. But Domitrovic said that tax cuts mean that wealthy people don’t have to hide their income from taxes, making their income more productive publicly. Inequality has decreased.
Summarizing, Domitrovic told the audience that the lessons of the Great Moderation are that when the institutions of 1913 — Federal Reserve and the income tax — are tamed, the American economy does wonderful things. Stable money and low taxes, combined with the entrepreneurial knack of Americans, produces remarkable economic growth and job opportunities. But when the macroeconomic institutions of 1913 run a muck the economy will suffer. The current policies of the Obama Administration — loose money and rising taxes — are not going to produce prosperity.
A good summary of the problems with American health care, and of what the future holds is from Competitive Enterprise Institute‘s Gregory Conko. In his piece Health Care Crisis About to Get a Whole Lot Worse he writes:
Most of the problems in America’s health care system — high and rising prices, lack of consistent and reliable access for millions, rampant cost shifting, and an inability to distinguish between effective and ineffective services or between high and low quality, to name just a few — stem not from some supposed market failure, but primarily from existing government interventions in the market for health care and health insurance.
One of the government interventions that leads to market dysfunction is the reliance on employers to provide health insurance for so many Americans. This happened because of government policy, not by accident. As a result, workers have little choice in their coverage, and some feel tied to their present jobs just for the insurance.
Americans — some anyway — complain that health insurers will collect premiums for years, and then not pay when the covered become sick. There’s also not a vigorous market for health insurance for individuals, partly because the employer market swamps out efforts to sell to individuals or families.
Contrast this situation with the market for automobile insurance. This is a product that is regulated, to be sure, but much more lightly than health insurance. It’s something that no employers purchase for their workers and their private cars. Instead, drivers have to seek out and purchase their own policies.
And what is the result? There’s a thriving and competitive market for auto insurance. The pitchmen for two large companies — the quirky lizard and the exuberant Flo — are well known to television viewers. Auto insurance companies innovate to see who can produce products that meet the needs of consumers.
Do auto insurance companies fail to pay claims, as it is alleged health insurance companies do? If an auto insurance company developed a reputation for not paying, customers would quickly and easily leave that company for others. That is a credible threat, as there is a competitive market for auto insurance. Those who feel they have been wronged by a health insurance company often have no alternative to turn to — there is no credible threat of taking one’s business to another company.
One of the things that President Obama’s health care reform is designed to do is to create a marketplace for health insurance. But we don’t need more government regulation to accomplish that. Such government-sponsored effort is likely to fail. Less government intervention and less regulation, like in the market for auto insurance, would produce a result better for consumers.
Last year Secretary of Education Arne Duncan created a program named “Race to the Top” which would make grants to states that are willing to make certain reforms. Two such reforms prominently mentioned by Duncan and President Barack Obama are charter schools and merit pay for teachers.
We now know that Kansas was not selected to receive a grant, at least not in the first round. Kansas had applied for $166 million.
Kansas is falling behind the rest of the states in the types of innovation that Race to the Top was designed to promote. Specifically, the Kansas charter school law is weak. Anyone wishing to start a charter school must seek approval of the local school district. Most school districts in Kansas, especially the Wichita district, are hostile towards any lessening of the government school monopoly. As a result, there are very few charter schools in Kansas. It is likely that this played a role in the decision not to award a grant to Kansas.
Kansas is also unlikely to implement any sort of merit pay for teachers. As I reported last year in Kansas school establishment rejects reform: “In particular, the document Teaching in Kansas Commission: Final report, makes it clear that teacher merit pay in Kansas is not desired unless it is so watered-down as to be meaningless.”
Besides resisting merit pay, the Kansas National Education Association (or KNEA, the teachers union) is also opposed to charter schools. The national teachers union is too, as the Wall Street Journal reported last year: “NEA President Dennis Van Roekel told the Washington Post last week that charter schools and merit pay raise difficult issues for his members, yet Education Secretary Arne Duncan has said states that block these reforms could jeopardize their grant eligibility.”
It turns out that the prediction of Secretary Duncan was fulfilled. Kansas, with a teachers union that blocks reform at every step, is failing to keep up with innovations in education. Kansas should implement these reforms for their own good.
Last week the Wall Street Journal reported a piece that analyzes whether the Obama stimulus plan, after one year’s time, can be judged a success. (See The Stimulus Evidence One Year On)
Robert J. Barro, who is professor of economics at Harvard University and a senior fellow at Stanford University’s Hoover Institution, writes that the stimulus may be a good deal in the short run — if the government spends on things that are truly worthwhile. As we’ve seen, that is not always the case.
But Barro says, correctly, that this spending, paid for with borrowed money as it is, generates debt that must be repaid at some time. This is something that government spending advocates seem to conveniently forget.
Barro comes to this conclusion:
We can now put the elements together to form a “five-year plan” from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier” — the response of GDP when government spending and taxes rise together — is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.
The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.
The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.
“Net neutrality” sounds like a noble concept, doesn’t it? But it’s another example of one political position co-opting language in a way that mislabels the underlying agenda.
In this case, net neutrality is a struggle over who should control the Internet. Some describe the contest as between government and free markets, while some think it’s between two competing set of corporate interests.
It shouldn’t be a surprise as to who President Obama believes should control the Internet.
Other resources on this topic:
Save the Internet
‘Net Neutrality’ Is Socialism, Not Freedom
The Durable Internet: Preserving Network Neutrality without Regulation
AT&T, Google Battle Over Web Rules
Net Neutrality: A Brief Primer
There’s a video concerning some obscure but vitally important ideas in economics that’s getting a lot of play on YouTube. Titled “Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem, the video tells the story about two competing theories of how the world works — the theories of John Maynard Keynes and Friedrich A. Hayek. The ideas of Keynes have been vastly more popular in mainstream economics and politics and are embraced by President Obama and his advisors. This, of course, doesn’t necessarily mean that Keynes and his followers are correct.
The video has been viewed nearly 700,000 times. Jeffrey Tucker of the Ludwig von Mises Institute has dissected the video and concludes that it’s great:
A hearty word of congratulations to Russ Roberts and John Papola for putting all this together and providing a fantastic example of how economics can be communicated to every person. It was Mises’s own view that economics should not be relegated to the classrooms but should be part of the study of every citizen. Roberts and Papola have taken his injunction very seriously and done something wonderful for Hayek, for Austrian ideas, for economics in general, and for the intellectual progress of the world.
The presentation manages to squeeze in one of my favorite quotes of Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The theories of Austrian economists such as Ludwig von Mises, Hayek, and Murray N. Rothbard are becoming more popular as their theories offer explanatory power that Keynesian theories can’t match. Here in Wichita, Austrian ideas were recently advanced to explain the nature of the unemployment in Wichita and what might lie ahead. Malcolm Harris, Professor of Finance at Friends University in Wichita, who blogs at Mammon Among Friends, appeared last Friday on the KPTS television public affairs program Kansas Week and presented an explanation of our current woes based on Austrian principles.
Harris said that today we have a “different kind of unemployment.” He explained that credit plays a crucial role in the business cycle, something that he said we don’t hear much about today: “An overexpansion of credit causes an overexpansion of activities that cause real trouble.” Cessna, he said built many airplanes in 2007 and 2008 because there was such a credit bubble, and Cessna produced planes to meet the demand the bubble generated.
But now the bubble is over and demand has fallen. This type of unemployment, Harris said, doesn’t get solved by a stimulus package. He said this is “Austrian” unemployment, because it was the Austrian economist Hayek who explained the importance of credit in the business cycle.
Roger Garrison of Auburn University has a Powerpoint presentation that explains the difference between Keynesian and Hayekian view of economics. You may need to download a Powerpoint viewer in order to use this presentation.
At any moment Martha Coakley will concede that she has been defeated in her effort for the Democrats to hold on to the late Sen. Edward M. Kennedy’s seat in the United States Senate, dealing a blow to President Obama’s prestige and the future of Democratic Party efforts to control increasing sectors of the American economy.
Today the Wall Street Journal released poll results indicating that Americans are already weary of the big-government policies of Obama and his administration:
For the first time, a majority of Americans — 53% — disapprove of the government’s increased role in the economy since the financial crisis, up from 44% in March. And 48% said Washington was doing too many things better left to businesses and individuals, a plurality seen in polling since September.
The government’s takeover of General Motors, the biggest economic intervention that happened solely on Mr. Obama’s watch, drew the strongest negative reaction. Nearly two-thirds of Americans surveyed, 65%, disapproved of the government’s taking a majority stake in the troubled auto maker. Independents were highly critical of the move, as were Republicans.
A test for President Barack Obama is coming up soon.
When campaigning for the presidency, Obama pledged to end earmark spending. As reported earlier this year in Time Magazine: “… both Obama and Republican nominee John McCain tried to outdo each other with their pledges to rid Washington of the notorious pet projects that legislators slip into spending bills. Obama, who authored 2007 legislation to overhaul congressional ethics rules governing lobbying and earmarks, runs a real credibility risk when he makes exceptions to his own rules.”
But did he make a pledge to end earmarks? MediaMatters says he didn’t make a specific pledge. But he certainly criticized the earmark process.
At any rate, a bill loaded with earmarks is heading to the president for his signature. As reported in the New York Times: “The bill includes 1,720 earmarks costing $4.2 billion for lawmakers’ pet projects, according to the watchdog group Taxpayers for Common Sense.”
Earlier this year, Obama signed a spending bill that contained earmarks. His defenders said that it was “last year’s business.”
Fair enough. Obama inherited certain conditions upon assuming office. But now — at least as far as this spending bill is concerned — it’s all his own doing.
We’ll know soon how Obama really feels about earmark spending.