Book Review: Bruce Bartlett - The New American Economy

Bruce Bartlett's conservative economic bona fides are apparent in his resume: he started as a member of Ron Paul and Jack Kemp's Congressional staff, then became Executive Director of the Joint Economic Committee during the Reagan administration and later served as Deputy Assistant Secretary of Economic Policy at the Treasury Department under H. W. Bush.  He literally wrote the book on supply-side economics, with Reaganomics: Supply-Side Economics in Action in 1981.  With such unimpeachable conservative economic credentials, Bartlett feels free to slaughter some of the right's sacred cows in his recent book, The New American Economy: The Failure of Reaganomics and the New Way Forward.  He rehabilitates John Maynard Keynes as a misunderstood conservative, calls for the victory celebration and subsequent retirement of supply-side economics and defends President Obama's stimulus plan as the only thing to do.

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A Final Note on a Softer Economic Policy

There is a famous joke about the tendency of economists to consider their chosen field akin to the natural sciences: a physicist, a chemist, and an economist are stuck on a desert island.  A can of beans washes up on the beach.  The physicist devises a mechanism using twigs and rocks to attempt to force open the can, but after several hours with no results, during which the economist sits and smugly smiles, the physicist gives up.  The chemist attempts to extract some sort of substance from plants on the island to melt the can.  The economist continues sitting and smiling arrogantly as the chemist also fails in his efforts.  “What?” the physicist and chemist say, “do you have a better plan?”  The economist stands and walks proudly towards the can on the beach: “Let’s assume we have a can-opener.”

This joke is often told by economists to economists at economic conventions or by economics professors to economics students during economics class, which was where I first heard the joke.  Yet the same economists who make this joke forget their own lack of hard science credentials when they make predictions; and non-economists seem to forget the incorrectness of the last prediction when they hear the next prediction.  In times of trouble, the poor track record of economists at predicting the future is never called into question, and political leaders often blindly surrender national sovereignty to “experts.”

I undoubtedly believe that central economic planners are capable of coordinating and herding hundreds of millions of people to some greater economic purpose by simply printing money and increasing government spending, but I also believe that the negative consequences of these policies usually outweigh their beneficial effects.

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Our Old, Misunderstood Friend: Inflation

Recently, Chris Carr wrote an article advocating allowing natural deflation instead of using expansive monetary policy from central banks to artificially maintain persistent inflation.  I disagree with several aspects of Mr. Carr’s analysis, including some of the data. For example he misrepresents the level of deflation in the economy since the financial crisis by only examining September of 2009 and ignoring that this deflation exists despite a huge monetary stimulus.  Most fundamentally, however, I believe that he dramatically underestimates how dangerous deflation can be, as even tiny amounts of deflation can increase trade deficits and consumption and leave the indebted particularly vulnerable.  Mr. Carr's proposal for less centralized money might apply to countries, like China, needing to boost domestic demand in the face of massive budget and trade surpluses, but it would amount to economic suicide for the United States which has record budget and trade deficits and far too much consumption in the economy.

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Deflation, Savings, and Where We Go Next

The Japanese media has recently been obsessed with defure, or deflation.  The September annualized rate of deflation for Japan was 2.24%, compared to September annualized deflation rates of 0.18% in the U.S. and 0.80% in China.  Canada, the U.K., Australia, and the European Union had very low rates of annualized inflation in September.  Why does the media panic about anomalous low-single-digit deflation while ignoring the well-documented effects of seventy-five years of chronic inflation?  The rationale for the panic is that deflation can lead to a liquidity crisis (government stimulus is rendered impotent) and/or a deflationary spiral (hyperdeflation); yet, blind to the lessons of history, inflation is considered a necessary evil, and the possibility of an inflationary spiral is underserved. 

First, an explanation of the relevant terms.  Originally, inflation meant an increase in the money supply, and deflation meant a decrease in the money supply.  However, modern understandings of the terms are more nuanced; now inflation and deflation are related more to purchasing power and price levels.  Because when there is more of something it becomes less valuable, inflation is now understood as a devaluation of currency.  Deflation is when a currency becomes more valuable.  Usually during economic booms, there is a robust rate of inflation as people move their collective wealth from cash-based resources into assets; there is more cash around, so people treat it with less respect and tend to spend frivolously.  During recessions, people tend to value security over potential profits, and attach more value to cash-in-hand; a dollar is worth more as a result.  Deflationary periods indicate increasing aversion to risk among the population, but not necessarily recession: in the late nineteenth century the U.S. experienced both persistent deflation in the absence of a central bank and high rates of economic growth.

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A Rumination on Deflation and Savings

This is the second part of a two-part series.  For the first part, please click here.

People have started saving recently, after years of taking on debt. However, the fact that the savings rate has increased recently seems inevitable: from zero, there's nowhere to go but up.It is often suggested that deflation encourages savings over investment or consumption.  This is because as the value of currency rises, or, as people notice the value of currency rising, they forego unnecessary purchases like new automobiles and that extra Christmas present, and instead save, that is, do not invest and do not consume.  This analysis makes sense logically, however, the impact of deflation largely depends on the decisions of individuals relative to an awareness of persistent deflation.  If individuals were rational in an aggregate sense, they might hold on to their money, but most people are too excited about ten-dollar DVDs and supermarket sales to wait for prices to get even lower.  Plus, if there is 0.18% deflation now in the U.S., is that really enough to reverse 75 years of persistent inflation? 

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A Rumination on Deflation

Recently, the Japanese media has been obsessed with defure, or deflation.  The September annualized rate of deflation for Japan was 2.24%, compared to September annualized deflation rates of 0.18% in the U.S. and 0.80% in China.  Canada, the U.K., Australia, and the European Union had very low rates of annualized inflation in September.  However, it is inconsistent for the media to panic about anomalous low-single-digit deflation while ignoring the well-documented effects of seventy-five years of chronic inflation.  The rationale for the panic is that deflation can lead to a liquidity crisis (government stimulus is rendered impotent) and/or a deflationary spiral (hyperdeflation); yet, in apparent blindness to the lessons of history, inflation is near universally considered a necessary evil, and the idea that inflation could lead to an inflationary spiril is underserved. 

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Brookings Goes Rogue

Education level versus births outside of marriageBrookings is often described as a liberal thinktank, the other side of the coin to the Heritage Foundation or the American Enterprise Institute.  However, while they certainly were pressed into the opposition during the Bush years, this article on their website is enjoyably heterodox and non-partisan- a point of view we hardly endorse.  It lays out five myths about America:

1. Americans enjoy more economic opportunity than people in other countries.

 Actually, there is relatively more economic mobility by poorer people in Nordic countries and in the United Kingdom, though America does provide excellent opportunities for immigrants.

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