A Second Hand Conjecture

For those of us not living in the concentrated sprawl of the coastal and Midwestern metropoli, it is often extremely perplexing how urban Democratic mayors in places like Chicago and Philadelphia can compile lengthy and embarrassing records of incompetent and failed policies, yet remain wildly popular within their urban constituencies. Even as these mayors accumulate massive public debts while governing with a seeming indifference to economic and developmental realities, there is often a certain immutability to their popularity. It is doubly surprising how mayoral characters of this sort are consistently reelected to office in enormous majorities, frequently over vastly superior Republican opponents.

It occurs to me that as the United States becomes ever more urban concentrated, is it not conceivable that we should expect to see this bizarre phenomenon replicated in national politics?

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Departing director of the National Bureau of Economic Research, Martin Feldstein, on the economy, credit markets and a lot more in his latest opinion piece and discussion on the Charlie Rose show.

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 (cross posted at Risk and Return)

Ben Bernanke gives Congress and the President the green light to take steps to stimulate the economy along with a warning:
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Chris asked what he thought the Federal Reserve could have done differently. I gave him an answer, but there was more to be said. My full answer is here. Scroll around, there is a lot more on the what could have been done, what might be done, and the general risks which now surround our economy.

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The economy is slowing, and if we are not already in a recession (I think we probably are) the risks of one are certainly high. So should our politicians do something with fiscal policy? Alex Tabarrok says no :

Fourth, in their desperation to “do something” politicians will often do something foolish. If a spending increase or tax cut isn’t worthwhile on its own merits then it’s highly unlikely to be worthwhile once we add in the benefits of “stimulus.” Thus, it’s one thing to argue for extending unemployment benefits as a matter of welfare it’s quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment! (The implicit view of Larry Summers.)

I admit to being dubious of legislation and federal government action being useful for short term economic swings. Here are the other quite compelling reasons why:

First, the money for any new spending or tax cuts has got to come from somewhere, right? Thus there is usually substantial crowding out of any stimulus.

Second, by the time the new spending or tax cut gets through the political process the economy has moved on and the stimulus is no longer relevant except by accident.

Third, there just isn’t that much discretionary spending to play with and even a large increase in spending, say tens of billions, is too small to make much of a difference in a 13 trillion dollar economy.

My emphasis above. I am always amused at the power people ascribe to what seems to be a large action, but in the context of the US economy and financial system is actually pretty paltry. That goes for most actions undertaken by the Federal Reserve as well. Finally, even for those amongst us, especially economists, who find those arguments less than compelling, we should all remember this:

Economists may call for “temporary,” “conditional,” and “targeted” stimulus but they won’t be the ones designing the plan. Spending increases and tax cuts are policies with long term consequences that we need to think about carefully.

My own view relates to the first reason I quoted. Spending and tax decisions should make sense in and of themselves, not because of some quixotic attempt to influence the short term course of the economy.

Update: McQ is dubious about the specific package being offered by the Democrats in Congress on far less general grounds as well.

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I seem to have caused some confusion with my previous post, “Putting the Question to the Bishop,” by an inartful use of the term “small-government libertarian.” The more I think about, the clearer it becomes to me that this term is redundant — libertarians are, by definition, in favor of small government. To me, the term has always been a way to distinguish between the minarchist (such as Hayek or Friedman styled libertarians) and anarcho-capitalist (such as fans of Murray Rothbard or Robert Nozick) flavors of libertarianism. Minarchists find value in some minimal level of government, whereas anarcho-capitalists are usually anti-state in nearly every form. However, when the term “small-government libertarian” is used in any other context it just becomes confusing. Frankly, I was simply wrong to employ it the way I did.

The intended point of my previous post was to highlight the choice being forced on the Democratic Party by the netroots crowd — those who support the war vs. those who don’t — and to suggest an alternate choice: the anti-war left vs. the pro-small government electorate. The choice I envision does not involve the war, but instead hinges on how one views the State. Of course, anti-war views are well represented amongst those who prefer small government, and that’s fine. A good argument can (and has been) made that if Congress and the Executive branches were filled with small-government types, there would be no War in Iraq. But, in my view, the Democratic Party needs to focus less on netroots voters who would hold their support of the war against them, and more on voters who are (justifiably) wary of the Democrats’ propensity for big government. The latter have been abandoned by the Republican Party. If the Democrats decided to occupy that small-government ground that the Republicans vacated, such small-government voters could easily be swayed to vote Democratic.

In short, instead of “small-government libertarian” I should have simply said “small-government voters.” My underlying premise is this: as the two major parties continue to cater their policies of governance to increasingly smaller and divisive, albeit increasingly more vocal, special interest groups, they are creating an ever-growing swath of independent voters.

If you think about it, don’t you hear more and more people claiming to be libertarians today, despite their seemingly disparate views? I surely do. I believe this is the natural result of the Democrats and Republicans being more concerned with single-issue voters (e.g., pro-choice vs. pro-life; homosexual rights vs. anti-gay marriage; anti-war vs. pro-strong defense; etc.), than with broad policy measures. Eventually all you have left are moneyed special-interests who promise to get out the vote. Left in the wake of this rush to divvy up the battleground into pro and anti groups are those who feel the government is foisting itself too much on ordinary citizens. Most people just want to be left alone, even though they gladly take free goodies when they are a member of a favored interest group (which is, of course, quite rational). In my opinion, a significant number of voters are out there who will choose small-government policies over single-issue candidates (such as pro-defense/anti-war). I only wish one of the two parties would act on that.

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