Voodoo, Eh?

If you knew someone was a Nobel laureate and he told you that the sky was green instead of blue, would you believe it?

You might. Especially if that laureate had gotten his prize for work in a scientific field that dealt with the atmosphere. Even if your own eyes contradicted his assertion, you might just figure, well, surely they wouldn’t have given him that prestigious prize if he wasn’t a lot smarter than I am about these things.

Well, I’m sorry, but I would rather risk exposing my own ignorance than be one of those in the crowd going on about how great the emperor’s new clothes look.

I’m thinking here of the things Paul Krugman writes on his blog for The New York Times (access limited by pay wall). By all accounts Krugman is an accomplished economist who has done good academic work in his field. I have not personally read the books that earned him his Nobel, but I understand they are solid. In fact, Krugman’s detractors have great fun citing passages from his books that directly contradict assertions he makes in his blog, which is titled The Conscience of a Liberal. I suppose the blog’s title should be a clue that these writings are less about economics than about political ideology.

Let’s take his three of his most recent posts. On Wednesday he berated Federal Reserve Chairman Ben Bernanke for not following his suggestion of printing lots more money, suggesting that (in a Star Trek reference) Bernanke has been “assimilated” by the Borg-like Fed. Later that day, Krugman posted a chart comparing, month by month, the number of public employees under Clinton, Bush and Obama. It shows the number dropping drastically under Obama while it grew under Clinton and Bush. It’s a tad deceptive because it combines federal, state and local employees, thereby masking the huge growth in federal employees under the current president. Krugman makes it sound as though the elimination of so many state and local employees was simply a caprice of policymakers and not a direct result of public money running out due to a very bad economy. What Krugman is basically arguing is that the federal government should go into even more debt or else print even more money so that local governments can do more hiring.

Yesterday, in a post titled “The New Voodoo,” he railed against an editorial in The Financial Times which supported government economic policy in Britain, a country that is currently in a double-dip recession. This was accompanied by another one of Krugman’s charts, this time showing a correlation between austerity and shrinking GDP. Krugman suggests that the former is causing the latter. This is like drawing a chart showing a correlation between the availability of food and rates of starvation. Sure, you could argue that there isn’t much food around because people aren’t eating, but what kind of mind jumps to that interpretation? Krugman wants us to believe that the economy is shrinking because the government has decided to spend less, rather than the obvious conclusion, which is that the government is necessarily spending less because there is less money available for spending because the economy is shrinking.

Krugman is just one of many voices I keep hearing that repeatedly recite, “Austerity doesn’t work.” Yes, austerity is bad for an economy, which is why you want to avoid having to resort to it in the first place. But once you get to that point, then your only alternatives to austerity are 1) to keep borrowing money as long as someone is willing to lend it to you, which will not be an infinite amount of time, and 2) to keep printing money and debase your currency until your economy collapses completely. The problem isn’t that austerity doesn’t work. It’s that an economy that’s not working will necessarily lead to austerity.

I do not have any kind of degree or credential in economics, let alone a prestigious prize like Paul Krugman. So who am I to question this expert’s wisdom? That’s a fair question.

On the other hand, I’m not the one arguing that the government is going broke because it is not spending enough money.

Mi Vida Chilena (I)

It wasn’t part of my plan to go to Chile. The fact is that I was scared out of my life to go to Chile.

I hadn’t planned to be a Rotary Fellow either. But some members of the Rotary Club in my hometown in California persuaded me to apply. They were keen for a student from the local community to get a fellowship, and they figured I was one of the few locals who would have the academic and language credentials to have a shot.

So I applied for a Rotary Foundation Fellowship. I was required to list five universities in at least two different countries that I would be willing to attend. Priority would be given to candidates choosing non-English-speaking countries. As I recall, I listed two in France, two in Mexico and one in Spain. The fine print specified that the Foundation reserved the right to send the Fellow to any university, or even any country, that it deemed was suitable, even if it was not on the candidate’s list.

Sometime later I received a letter. It informed me that I had not been awarded a fellowship but that I was a first runner-up, meaning that, if a designated Fellow was unable or unwilling to accept his or her fellowship, I would be the next in line. Not much chance of that happening, I thought, and so I figured that was that. I got on with my life and with graduate school at Ohio State University.

Then another letter came. It congratulated me, saying that a fellowship had indeed opened up for me. And that I would be attending... the University of Concepción in Chile. My heart stopped.

The year was 1975. Two years earlier, the democratically elected government of Chile had been overthrown by the military. More than 2,000 people had been killed during and after the coup. Tens of thousands had been arrested. Many people were never accounted for and became known as los desaparecidos (the disappeared). Two of them were Americans, Charles Horman and Frank Teruggi. I was already quite familiar with Horman’s story, and people everywhere would become familiar with it in 1982 when the celebrated Greek-born director Costa-Gavros would make a movie about him, starring Sissy Spacek as his wife and Jack Lemmon as his father. It would be nominated for four Academy Awards, winning one for the screenplay by Costa-Gavros and Donald Stewart.

So the last thing I wanted to do was to go live and study under a military dictatorship that had such a recent and violent history. I was not the sort who was drawn to danger. So my first reaction was to refuse the fellowship, which is probably what the first guy they offered it to did.

I don’t remember exactly what changed my mind in the end. I suppose it was a case of youth overcoming caution. I really wanted to try living somewhere else outside of my own country. (I had already spent a year in France a couple of years earlier.) I had been studying Spanish since I was six years old and had majored in it (as well as French) at university. And my career plan was to be a journalist. Not taking the opportunity to go abroad out of fear would not be a very auspicious beginning to such a career. Besides, I wasn’t likely to get into trouble for political speech or activity. One of the conditions to which I had to agree in order to receive the fellowship was to avoid all political discussion or engagement while I was abroad under Rotary Foundation auspices. In this particular case, that seemed like a very prudent policy.

Because the academic year in Chile began in March (autumn in the southern hemisphere), I had nearly a year to wait before I went—time I used to acquire a master’s degree in journalism from Ohio State and to work for a few months at a weekly newspaper in California. Finally, the day arrived and I was off on a long plane journey from Los Angeles to Lima and finally Santiago. I made my way from the airport at Pudahuel to the train station in the city for the final leg by rail to Concepción.

One of the Rotary Clubs in Concepción was designated as my host club, and one of its members was designated as my counselor or, as I liked to think of him, as my surrogate father. As it happened my counselor lived just a couple of blocks from the university and his house had a room that was rented each year to a student. He offered me to rent the room to me, and I happily accepted.

I have often joked that I experienced more culture shock in Ohio than I did in Chile, and in a way it was actually true. The Buckeye State’s frozen winter, Midwest culture and focus on sports and fraternities was very foreign to me after the laid-back beach school I attended in Santa Barbara. Chile’s climate and landscapes, on the other hand, where not unlike California’s, the people were warm and friendly as Californians tend to be, and they were into things like barbecue. The language was a challenge at first, but I had been hearing Spanish spoken all around me my whole life. To top it off, the family I was living with were the children and grandchildren of German-speaking immigrants—the same as my own family.

My immersion into Latin American culture was going to have a definite Teutonic tinge.

Plus Ça Change...

Observing the current French elections from across the Celtic Sea brings back memories of another French election, 42 years ago, which I observed from a much closer vantage point.

During the 1973-1974 school year, I was part of an exchange program between the University of California and the University of Bordeaux. In the course of that year, it seemed as though nearly every major European country had a change of government, many of them unexpectedly.

Conservative British Prime Minister Ted Heath, buffeted by the 1973 oil crisis and a coal miner strike, called a snap election in February and wound up being replaced by Labour’s Harold Wilson. West German Chancellor Willy Brandt resigned in May after his personal assistant, Günter Guillaume, was revealed to be an East German spy. Brandt was succeeded Helmut Schmidt. Francisco Franco was firmly ensconced in power in Spain, as he had been since the 1930s. But he had to find a new head of government after his prime minister, Luis Carrero Blanco, was killed by Basque terrorists in a car bombing in December. Italian Prime Minister Mariano Rumor resigned and reshuffled his government a couple of times during the year, which was par for the course in Italy in those days.

France unexpectedly held an election in May after President Georges Pompidou (successor to Charles de Gaulle) died suddenly in office on April 2. I was in Scotland at the time, hitchhiking around Britain with friends. It was during Easter break, and the news came as a shock to us, since we hadn’t realized that Pompidou (who frankly never looked the picture of health) was even ill. I made my way back to Bordeaux, thumbing on my own back through London, Dover and Calais. I got a great lift from Calais to Paris with a handsome and charming young man in a red sports car, who told me how he had emigrated from his native Indonesia to the Netherlands and had subsequently cemented his rise in the world by becoming engaged to the daughter of “the second wealthiest family in Argentina.” As we drove through Paris, we saw the cortège of limousines of world leaders who had arrived for the state funeral.

The election of a new president gave us students an unexpected and instructive opportunity to observe the French electoral system first-hand. There were a dozen presidential candidates, but only three of them were considered to have any realistic shot at winning. I had the chance to see two of those three in the flesh. The Gaullist candidate was former Prime Minister Jacques Chaban-Delmas, who also happened to be the mayor of Bordeaux. Without realizing his significance or that he would so soon be a presidential candidate, I had attended a vin d’honneur, held for the foreign students attending the local university, at the city’s Hôtel de Ville. As a young idealistic student, my impression of him was that he was old and stuffy.

The other candidate I got a look at was the Socialist, François Mitterand. He held a rally in Bordeaux that seemed to be attended mainly by enthusiastic students. Indeed, his rally felt very much like one I had witnessed just a couple of years earlier in Santa Barbara for American presidential candidate George McGovern. The South Dakota senator would go on to lose to incumbent Richard Nixon in one of the biggest landslides in U.S. history. Mitterand, who struck me as quite similar to McGovern, on the other hand, would place first in the first round of voting with 43.25 percent of the votes in a 12-person field. His opponent in the second round was the centrist Independent Republican candidate, Valéry Giscard d’Estaing. I only saw Giscard on television, but he came off as urbane, patrician and extremely intelligent. Though he won only 32.6 percent of the vote in the first round, he defeated Mitterand by a mere 1.6 percent in the runoff, the closest election in French history.

Two months after the election, I was back in the U.S., which was about to undergo its own unexpected change of government. In August Richard Nixon would resign as a result of the Watergate scandal, making the unelected Gerald Ford president. I would continue to observe Giscard’s presidency from afar, and it had its problems. He ran into trouble over his intervention in the Central African Republic and some diamonds he received as a gift from that country’s former leader, who had been given asylum in France. Also he had a damaging break with his prime minister, Jacques Chirac, who went on to found his own party. When Giscard ran for re-election in 1981, he lost to Mitterand, who went on to become France’s longest serving President. Current President Nicolas Sarkozy doesn’t look like he’ll come anywhere close to challenging Mitterand’s record for longevity.

Another significant change in a government that occurred during that year I spent in France happened in well beyond the Atlantic Ocean, in Chile. On September 11, 1973, President Salvador Allende was removed from office in a coup led by General Augusto Pinochet and which resulted in Allende’s death by his own hand. Little did I suspect at the time that, in less than four years, I myself would be living in Chile. Or that I would be observing a vote in that country and, in fact, would be obliged to participate in it.

A Fairly Bad Recovery

A frequent rhetorical ploy of politicians is to find a quote or action by an icon of the opposing party that supports what they happen to be doing or advocating at the moment.

For example, Republicans have long reminded everyone that President Kennedy managed to revive the U.S. economy with a major tax cut. More recently, they have dug up quotes from Franklin Roosevelt opposing bargaining rights for government employees.

So it is no surprise that President Obama would have made use of a Ronald Reagan quote about how crazy it is for millionaires to pay less in taxes than bus drivers. Joked Obama, “If it will help convince folks in Congress to make the right choice, we could call it the ‘Reagan Rule’ instead of the ‘Buffett rule.'” Further, he asserted that “what Ronald Reagan was calling for then is the same thing that we’re calling for now, a return to basic fairness and responsibility, everybody doing their part.”

The difference between Obama quoting Reagan and the above cited instances of Republicans quoting Democrats is that the assertions about FDR and JFK fairly reflect what they said or did. Obama’s citation is misleading because, in that quote, Reagan was railing against tax loopholes and arguing for a simpler, flatter tax system. He almost certainly would oppose the Buffet rule as a further complicating layer to be imposed on top of an already overly complex tax system.

What annoys people like me about the Buffet rule is that 1) we have supposedly “solved” this problem before and 2) it plays on perceived ignorance or forgetfulness on the part of most voters as to why Congress lowered capital gains rates in the first place.

To be clear, I have no particular animosity toward the Buffet rule and it would not bother me one bit if it were enacted. Its proponents are correct when they say that the wealthy can certainly to pay more in taxes than they do now. And any amount of money that reduces the deficit, no matter how small, is a net positive. And the amount involved here is, indeed, relatively small—as the president himself acknowledges. He says that it is merely “a first step.” The problem is that, nearly three and a half years into Obama’s administration and with a recovery that is so weak that most people polled think they’re still in a recession, it’s a bit late in the game for a mild and mostly symbolic first step.

And let’s be clear, there is a down side to the debate over the Buffet rule. The more time and attention we spend talking about it is less time spent working on the real problem: a major imbalance between government revenues and government spending. By providing yet one more distraction and lack of positive action, Obama can fairly be said to be making the problem worse.

Besides, as I alluded above, we have “solved” this problem before. When lawmakers got upset about millionaires getting away with low or no taxes in the 1980s, they set up the Alternative Minimum Tax. And what happened? Over time, because the AMT was not indexed to inflation, more and more lower income taxpayers fell into its net, while the super-wealthy still managed to find legal ways to minimize the percentage of taxes they paid.

And let’s remember why the tax rate on capital gains was set low in the first place. It’s because, when cap gains income is taxed lower than regular income, it provides an incentive for the wealthy to invest in companies, thereby creating more jobs. This is a very well documented fact, which was cited by then ABC news anchor Charles Gibson in a question to a presidential candidate in 2008, i.e. raising capital gains rates historically results lower government revenues.

The candidate was Barack Obama. His response? He said he would favor raising the rate anyway “for purposes of fairness.”

The president’s recent reference to Reagan was not his first. He raised some eyebrows, by speaking admiringly of the Gipper during the 2008 campaign. He had good reason to want to emulate Reagan, at least in certain ways. Reagan was a successful two-term president who came into office amid an economic situation not unlike that which existed at Obama’s inauguration. He won re-election in a landslide because of a roaring recovery that was well under way by the end of his first term. There was every reason, based on historical precedent, to expect the same thing to happen for Obama. As a rule, the deeper the recession, the steeper the subsequent recovery.

But Obama’s recovery has been barely perceptible to most. Is that because of really bad luck? Or is it a testimony to how badly the Bush administration screwed things up? Or could it have something to do with the policies of president who has said in public and on the record that he would rather have things be “fairer” than to encourage economic investment?

Where Are the Alternatives?

I heard it again yesterday.

A financial commentator on BBC radio pronounced that austerity is a bad idea. He was talking specifically about Spain, but I have heard other pundits say the same thing about Greece, Ireland and even the United States.

It’s something I have heard callers say to National Public Radio’s Talk of the Nation: “Austerity never works.” I’ve heard that exact phrase so many times from so many people that I suspect it is on a list of talking points somewhere. But it’s such a strange thing to say.

While technically accurate, the statement is basically nonsense. It is like saying that starving doesn’t work. No, it doesn’t, and who in his right mind would choose to starve?

And that is the problem with the argument that “austerity doesn’t work.” By implication, it supposes that austerity is simply one policy choice among several. But let’s be clear. No politician chooses to implement austerity, which means cutting government spending and/or raising taxes. It is something that happens because a government has no other remaining options or it is imposed by other governments or agencies outside the country. Governments resort to austerity for the same reason an individual cuts up his credit cards. The money is gone, and no one is willing to lend you more. Austerity is simply an acknowledgement that there is no point writing checks only to see them bounce.

Of course, the rules that apply to individuals don’t necessarily apply to governments. Some of this rhetoric describing austerity as something purely optional stems from the fact that governments are seen to always have options that you and I don’t. What this means is that governments have more places to try to find credit and/or gifts of money. If they control their own currency (something that is not true of Spain, Greece or Ireland), they can confiscate money from their citizens by issuing more currency (thereby reducing the value of money in the citizens’ pockets) and appropriating the excess for themselves. But this only works for so long because you can only debase a currency so much before creditors stop taking it.

I have heard Representative Paul Ryan’s proposed budget described as an austerity budget, but it can hardly qualify for this description for any thinking person. It merely slows the growth of government. It doesn’t reverse it. It fundamentally changes how Medicare works and has been roundly attacked for that. But every honest person has conceded for years that the current form of Medicare is not sustainable. If the people who say they want to “save” Social Security are sincere, why do they not propose their own solution? The answer is that there is no solution that doesn’t involve some pain, so they simply attack Ryan’s budget—for political advantage. Or they imply that higher taxes on the rich is the solution, despite the fact that even a 100-percent rate on high-income individuals would not cover the deficit. Obamacare has only made the problem worse because it cannibalizes Medicare so that its authors were able to produce on paper the fiction that it would not increase the deficit.

It is no surprise that so many politicians are choosing to criticize rather than to solve. But what surprises me is how many opinion makers in the press are playing this game as well—taking potshots at the Ryan budget and suggesting no alternative.

Is there a better solution than the Ryan budget? There could well be. But right now Ryan’s plan is the only game in town. The president’s latest budget did not get a single positive vote in the House of Representative and the Senate has not passed a budget in three years. Ryan’s budget may be doomed and may even doom Mitt Romney’s presidential campaign. But some day, in a worst case scenario, it may be looked back on as the final missed opportunity that could have kept the U.S. economy from tanking.