Surfing the New York Times editorial page today, I got to read two howlers, one by Bruce Bartlett, and the other by Thomas Friedman. The Times may be essentially bankrupt, but that does not stop the editors from providing levity for this sad era.
Bartlett, who once was a decent economist, has discovered the cause of our economic malaise: We are in a “liquidity trap,” and we just are not spending enough money. Now, that usually is Paul Krugman’s line, but I guess that Krugman’s recent Nobel Prize has spread his influence. Bartlett writes:
This (“hoarding cash”) explains a great deal about what is at the root of the economy’s problem today. People are so risk-averse that they are hoarding money, refusing to spend; banks are refusing to lend even to their best customers; and businesses are so desperate for safety that they would rather get a negative return on a safe asset than invest in something remotely risky, no matter how high the potential return.
When everyone in the economy suddenly stops spending, the number of times that money turns over falls. Since the gross domestic product equals the money supply times its rate of turnover — something economists call velocity — this means that if the money supply is unchanged then G.D.P. must fall.
Theoretically, the Federal Reserve can compensate for a decline in velocity by increasing the money supply. But in times like these it is very hard for it to do so because of something economists call a liquidity trap. When this occurs, the Fed cannot inject liquidity into the economy because its normal means of doing so no longer works. In a liquidity trap, trying to expand the money supply is like trying to push on a string.
The solution? Why, inflation, of course! He continues:
First, it needs to increase the budget deficit. This expands the amount of Treasury bills in circulation and is the same as expanding the money supply, which is necessary to keep G.D.P. from shrinking due to a fall in velocity.
Second, the Fed needs to revise its operating procedures. Instead of buying only T-bills it needs to buy securities with positive interest rates. These include longer-term Treasury bonds and securities issued by government-sponsored enterprises like Fannie Mae. If necessary, the Fed could also buy corporate bonds, state and local government bonds, or even bonds issued by foreign governments.
Third, the government must try to raise velocity by stimulating aggregate spending in the economy. This is harder than it sounds. Buying bonds and securities may expand liquidity, but it doesn’t increase spending. And we know from experience that tax rebates don’t work because people save them.
The trick is to find a way to get people and businesses to spend money over and above what they would have spent anyway. A stimulus is not a stimulus unless it causes an incremental increase in aggregate spending. Simply replacing private spending with public spending doesn’t do any good unless total spending increases in the process.
You just cannot make up this stuff. Now, while Bartlett has set a high bar for absurdity, it seems that Friedman is going to try to raise the idiot bar even higher. In “Time to Reboot America,” he declares that we have to have massive central planning to bring our economy into the 21st Century.
(Earth to Friedman; socialism tends to drag an economy backwards, not forwards. Go to Cuba and see the world as it was — in the 1950s, complete with 1957 Chevys and, at least until recently, steam locomotives.)
Here is a wild one from Friedman:
That’s why we don’t just need a bailout. We need a reboot. We need a build out. We need a buildup. We need a national makeover. That is why the next few months are among the most important in U.S. history. Because of the financial crisis, Barack Obama has the bipartisan support to spend $1 trillion in stimulus. But we must make certain that every bailout dollar, which we’re borrowing from our kids’ future, is spent wisely.
It has to go into training teachers, educating scientists and engineers, paying for research and building the most productivity-enhancing infrastructure — without building white elephants. Generally, I’d like to see fewer government dollars shoveled out and more creative tax incentives to stimulate the private sector to catalyze new industries and new markets. If we allow this money to be spent on pork, it will be the end of us.
America still has the right stuff to thrive. We still have the most creative, diverse, innovative culture and open society — in a world where the ability to imagine and generate new ideas with speed and to implement them through global collaboration is the most important competitive advantage. China may have great airports, but last week it went back to censoring The New York Times and other Western news sites. Censorship restricts your people’s imaginations. That’s really, really dumb. And that’s why for all our missteps, the 21st century is still up for grabs.
John Kennedy led us on a journey to discover the moon. Obama needs to lead us on a journey to rediscover, rebuild and reinvent our own backyard.
I had no idea that JFK helped us to “discover” the moon, but if it is in the Times, it must be so. It must be so.9:23 am on December 24, 2008 Email Bill Anderson