Stiglitz's Brainchild: Trust Government To Restore Trust!

Economists divide into those who theorize about the economy and those who use data to understand how it works. Theorist Joseph Stiglitz has impressive credentials – a Nobel Prize, appointments at the best universities and to top positions in government and international organizations. He counts, along with Paul Krugman, as the most prominent economist of the American left. 

Stiglitz’s tone-deaf article for the New York Times (In No One We Trust) argues that private enterprise and the profit motive have destroyed trust without which the economy and society cannot function. It is up to government to restore trust and to make us all better people in the process.

The timing of Stiglitz’s “government is the cure” message, amidst the catastrophic roll-out of ObamaCare, confirms the ivory-tower detachment of Stiglitz and his ilk. Just as Obama’s administrators are turning the lives of Americans topsy-turvy with contradictory, improvised health-care regulations, Stiglitz wants state planners and bureaucrats to expand their control of our lives all the way down to enforcing their version of business ethics.

go to forbes.com

World Economists Confirm America’s Decline under Obama

U.S. voters are being barraged by claims and counter claims of how many jobs were lost or created under the Obama administration, did the Detroit bailout hurt or help, and whether Obama or  Republican stonewalling are to blame for the feeble recovery. This partisan din kicks up a huge cloud of dust as self-appointed “independent fact checkers” and “nonpartisan” think tanks contradict each other. Large numbers of economists, some prominent and others less so, line up on both sides. Pity the harried undecided voters in search of non-partisan information.

American voters could well look above our political fray to the World Economic Forum’s Global Competitiveness Index (GCI).  Every year starting in 2004, the GCI ranks the world economies by their “competitiveness,” defined as “the set of institutions, policies, and factors that determine the level of productivity of a country,” which, in turn, determines “the level of prosperity that can be earned by an economy.”

Throughout most of its short history, the GCI ranked the United States first or second. At times, Switzerland, Finland, Singapore, Denmark, and Finland have given the U.S. a run for its money.

The GCI, to its credit, addresses what should be the core issue of any political debate in any country: How well have country leaders managed the economic and political institutions that create prosperity and growth? Obama should be re-elected or “let go” depending on how American voters evaluate his stewardship of America’s political and economic institutions.

The World Economic Forum’s motto is: “Committed to Improving the State of the World.” Its annual winter meeting in Davos, Switzerland  attracts the world’s jet-setting political, business, and intellectual glitterati as they discuss issues de jure -- the world economy, health and HIV, climate change, and globalization. Presidents, prime ministers, central bankers, queens and parliamentary/congressional notables rub shoulders with Bill Gates, Russian oligarchs, Henry Kissinger, Bill and Hillary Clinton, Al Gore, and Kofi Annan.

Barack Obama fits the intellectual, cosmopolitan, and global profile of the World Economic Forum to a T. A GCI conclusion that U.S. political and economic institutions deteriorated under Obama’s stewardship could not be spun as partisan by Obama’s spin masters.

go to forbes.com

Americans Believe in Conservative Principles, According to Public Opinion

American voters better understand what’s wrong than our politicians and chattering classes.  Public opinion polling shows voters have three basic insights about government that support the Republicans:

First, government is too large, tries to do too much, and regulates too much.

Second, government is run by crooked politicians for special interests.

Third, government is more likely to make things worse rather than better.  Two thirds believe that “big government” is the biggest threat to America and a majority believes government action will make the economy worse. 

Any Republican candidate who speaks to these three core American concerns can easily defeat Obama’s attacks on free enterprise and arguments for a redistributive regulatory state. 

Accordingly, the Republican platform should state two core principles:  

First, oppose to all special interests as creating massive waste when government is large and interventionist. This waste leads to generally lower living standards and less prosperity.  With small government and minimum intervention, special interests have little to gain from government, and the problem disappears.

Second, recognize that politicians and bureaucrats do not remotely have the knowledge to intervene successfully in the economy. Instead, interventions produce negative unanticipated consequences, to the perennial surprise and shock of Washington pros.

These two core principles suggest specific policies, which include:

1. Cap federal spending at a low percent of GDP and balance the federal budget over the course of the business cycle.

2. Limit government to creating stable legal and fiscal rules of the game that encourage the private sector to do its job efficiently. These rules must protect private property from seizure “in the public interest” or de facto confiscation by excessive regulation.

3. Reject all subsidies and bailouts of business, no matter how big. The private enterprise system functions well only if those making economic decisions bear their consequences, positive or negative. Reject government-private partnerships and industrial policy that let the state pick winners and losers. Taxes, bailouts and subsidies favor special interests, do not serve the general welfare, and divert resources from their highest and best use. 

4. Forego counter-cyclical fiscal policy. Instead, create a tax system that promotes growth and efficiency and entitlement programs that we can afford.

5. Review all existing and new regulations using meaningful cost-benefit analysis that does not overstate benefits. Special interests disguise regulations that favor them using false public interest arguments that overstate benefits.

6. Lower marginal tax rates across the board in conjunction with the removal of all subsidies and tax preferences.

7. Require that all government decisions on taxation, spending, and subsidization be perfectly transparent, exposing anyone seeking or receiving preferential treatment to public scrutiny.

8. Support free trade so as to raise living standards, competition, and efficiency. Resist the onslaught of special interests that stand to lose markets through free trade.

9. Insure that health care is provided by markets based on private insurance and co-payments with limits on malpractice damage claims.

10. Continue social security as a payroll tax based system but increasingly give participants ownership of their accounts.

11. Transfer political decision-making to the state and local level and reduce the influence of Washington. Decisions made closer to voters better reflect their preferences.

For a longer version of this piece, see Public Opinion Says a Conservative Message Wins In 2012.

The Government Kills a Bank, Small Business, and Jobs

In my introductory economics classes, I teach that a well-run bank spends its time getting to know it customers and then makes loans to those who are credit worthy. I point out that the most important employees of banks are its loan officers, whose job it is to know its customers.

With creation of the mega-bank, much of this wisdom has been lost. Mega banks lend money to customers they do not know. They buy syndicated mortgage derivatives they do not understand, and they are surprised when they are left holding the bag with worthless paper. Once bitten, they fear making loans and sit on he cash reserves.

Main Street Bank of Kingwood Texas, was one of the traditional banks I teach about in my class. It got to know its local customers. It made loans primarily to small local businesses – the very ones who provide jobs for the local community. Man Street Bank was profitable, and its portfolio of bad loans was well below the national average.

Enter the federal regulators.  In July of 2010, Federal regulators ordered the bank to boost its capital and bring in a new top executive. More tellingly, it ordered the bank to shrink its lending to small businesses. It ordered that small business loans be dropped from 90 percent to 25 percent – there were too many eggs in one basket.

On Wednesday August 10, Main Street Bank surrendered its bank charter and sold its four branches. We lost a bank that was doing exactly what the economy needs – a  bank that actually makes loans to small business customers whom it knows well.

This intrusive regulation is part of the federal program to identify excessive risk and prevent bank meltdowns. As you can see, the Feds are using a one-size-fits-all approach. Regulation of this type is scheduled to get even worse with the looming Dobb-Frank Act.

Do we wonder why there is so little lending and so few jobs? Do we really need Washington bureaucrats telling small banks how to run their business? Do we really think that a Washington bureaucrat can foresee risks that private companies that are risking their own money cannot see?

Obama Does Not Understand Business

As a teacher of comparative economics and textbook author on the subject, I cannot refrain from commenting on President Obama’s unfortunate lack of understanding of business.

Obama’s last weekly address to the nation shows his profound misunderstanding, despite an international consensus as to what determines a good business climate. The various indexes that purport to measure it have one thing in common: A good business climate is one where the government gets out of the way of business. Overregulation, inconsistent application of the rule of law, a heavy tax burden, and insecure property rights reduce business formation, investment, and economic growth. The strong positive correlations between such measures of business climate and economic performance prove this basic fact.

Obama’s pronouncements suggest a quite different understanding: In his mind, a good business climate emanates from public and private alliances, subsidies of progressive business activity, industrial policy, state-directed investment, the “saintly” non-profit sector, and massive infrastructure campaigns. It should be noted that none of President Obama’s “good business climate” measures are included in the existing business climate indexes.

Obama’s stated goal is as American as apple pie: to “make America the best place to do business” In return, businesses should “set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That's their obligation." Contrary to Obama’s assertion, the real obligation of businesses is to make profits for their owners. In pursuing this goal, far sighted businesses will hire, invest and pay decent wages.

Three examples, among many, illustrate the President’s thinking:
The most recent is his vaunted “move to the center” in appointing the “pro business” Jeffrey Immult, the CEO of General Electric, as his chief economic advisor. Immelt and GE exemplify a business whose fortunes hinge on a cozy relationship with government -- aan American version of Crony Capitalism. Notably, he did not appoint a true self-made entrepreneur, who made it on his own without the government.

The second example was the notorious bullying of secured Chrysler creditors – an outright attack on contracts and property rights. The shoving of Chrysler’s creditors to the back of the line helps explain much of the current reluctance to lend.

The third example has been the Obama administration’s conclusion that it was the government’s responsibility to deal with “excessive” executive pay rather than leaving the matter up to shareholder owners, as has always been the case.

It will not be possible to make America the best place to do business in the world with such thinking, but there are few signs, other than some PR forays, that this message has been heard. If such misconceptions continue to shape government policy, the result will be a continued deterioration in the U.S. business climate.