Political Musings from a New Leader

After consecutive elections in which they experienced substantial defeat, Republicans are looking for new leadership. One of the figures to emerge has been Wisconsin Congressman Paul Ryan, a responsible Republican from the same hometown as the liberal Senator Russ Feingold. Congressman Ryan wrote the following piece for a recent edition of the Wall Street Journal. He offers clear political and economic suggestions for the future of his party, and more broadly, for his country. Enjoy.

Take Some Political Risks

By Paul Ryan (R-WI)

After two straight electoral defeats, it is time for a substantial party shake-up. We don't need a feather duster; we need a fire hose.

We need to be honest about the root causes of our current financial crisis: loose money, crony capitalism and a lack of market transparency and information. We need to adopt a policy of sound money by requiring the Federal Reserve to focus exclusively on keeping inflation in check, as I've proposed with my Price Stability Act. Fannie Mae and Freddie Mac, whose excesses helped lead to the current mess, must be taken off the backs of taxpayers. We need a complete overhaul of our outdated financial regulatory system to emphasize market transparency and accountability.

The greatest threat to our nation's future prosperity is the explosion of entitlement spending. Our entitlement programs are headed for a painful collapse that will bankrupt this nation and leave our children with an inferior standard of living. If we don't tackle these problems, they will tackle us.

We must also offer bold alternatives to the destructive tax policies that the Democratic majority will work to enact. We must go beyond simply calling for lower taxes. We need a complete overhaul of our tax code. At a time of fierce global competition, the individual and business tax reforms I put forth earlier this year would encourage companies to invest in America, promote jobs here at home, and strengthen the paychecks of American workers.

We must take control of the health-care debate, and champion patient-centered alternatives to the socialized health-care proposals advocated by the Democrats. Health-care decisions should be made by individuals and their providers, not government bureaucrats or insurance company bureaucrats. We need to offer reforms that make health care mor

We cannot simply put up roadblocks to the emboldened Democratic majority. We need to offer an alternative future. Absent reform, our federal government will double in size within a generation. We must change course from this path of stagnation, and we must have leaders willing to provide a path that keeps alive the American ideal and keeps our government limited.

Our party has become too fearful of our own ideas. Since 1997, congressional Republicans began a steady retreat from principled leadership to political expediency. A party built on spending discipline and government reform succumbed to the siren songs of government expansion and earmarked giveaways. Republicans squandered the opportunity to limit and reshape the relationship between the federal government and the individual.

I ran on these bold ideas and innovative solutions in a congressional district carried by Barack Obama -- yet I received 64% of the vote. I challenge my colleagues to rethink political risk taking. Taking on our most serious fiscal challenges will restore relevancy to the Republican Party and will keep alive America's commitment to freedom and prosperity.

Tough times ahead indeed

From the Wall Street Journal yesterday:

Glum Tidings: Santa Gets Sacked as Cities, Companies Look to Save

Well, good luck to Bay City (Michigan) mayor Charles Brunner if he tries to eventually address the save-not-spend problems the city will be (or has been) encountering.

How do you address those problems? Oh, I don't know, by making consumers want to spend? And how do you make them want to spend? Perhaps by not making it seem like the end of the world? As corny as it sounds, Christmas is the one time of the year to which (most) people look forward; what can beat getting together with families, exchanging gifts and putting up the Christmas trees? We all remember the excitement we had as kids on Christmas Eve -- the decorations everywhere, the ubiquitous jingles (whether or not you consider it as a bad thing), the stockings, and, oh yeah, that big old dude Santa Claus.

I feel bad for Bay City residents this year. No Santa Claus ornament? That's a travesty. I certainly wouldn't be blaming them if they wanted to leave town for Christmas. I mean, come on; way to inspire and inject consumer confidence. I was talking in our last Town Hall meeting about the importance of consumer confidence and the uselessness of the media (and everyone else) painting all this in a negative light. This is a prime example. What would Bay City residents think when they don't see an illuminated Santa Claus on that prominent rooftop on Christmas Day? Nothing remotely close to "what an awesome Christmas!" Probably somewhere along the lines of "well, I guess the economy is that bad, huh?" And they're probably going to be more inclined to save their money in the foreseeable future.

Sure, as museum director Scott Swank says, "it feels a bit frivolous to mourn a festival when so many people are losing homes and jobs and life savings," but isn't some consistency a pleasant sight? It seems more frivolous to mourn a festival and mourn the loss of homes, jobs and life savings at the same time; that sure makes for a dark Christmas. Especially without an image that's so central to Bay City citizens around that time of year.

But don't completely lose faith just yet. There's a guy from the same state that knows how to get things done. Jim Fouts, mayor of Warren, hats off to you, good sir.

Learning through mistakes

Just a short update today with two IHT articles and what I think are the two most insightful quotes from each:

"A commercial economy as large as ours should not be built on a short-term funding apparatus."
U.S. bailouts need transparency

"You don't ever want a crisis to go to waste."
Franklin Delano Obama?

Again, the silver lining: there are many lessons to be learned from this economic crisis.

The Economy vs. The Financial Sector

From a NY Times op-ed by Casey Mulligan, a professor of economics at the University of Chicago:

"There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think...The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated."

Mulligan then states that an important indicator of health in non-financial sectors is marginal product of capital (how much profit each dollar of invested capital produces). Throughout 2007 and 2008, marginal product of capital has been over 10% per year, which is well above the historical average.

Mulligan concludes:

"So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent."

cf. Steven Landsburg's article questioning the primacy of banking institutions in the U.S. economy.

Ownership Stake

The NY Times reports on the possibilities of the Treasury taking an ownership stake in banks in order to free up credit markets. 

Paul Krugman approves, giving credit to Chris Dodd and Gordon Brown. Nobel Prize winner Gary Becker dissents, saying: 

"There are many illustrations of the bad influence on corporate governance exerted by the governments of France, Italy, Russia, and many other countries that own shares in private companies…This and other examples of harmful government interference in the running of companies where they have an equity interest provides a very good lesson for the United States. Avoid taking any equity interest in private companies when buying assets of banks under the bailout bill."

Crisis talk

"When written in Chinese the word crisis is composed of two characters. One represents danger, and the other represents opportunity."

-- John F. Kennedy

Amidst all this crisis talk, all that ever gets thrown about is the "this is the worst financial crisis since the Depression" jazz. The panic, the emergency plans, the dramatization of meltdowns. In other words, the "danger" side.

Why doesn't anyone think about the opportunity? Since we're in such a bad situation now, what's the risk in trying something new instead of turning to the old ways that have been proven wrong? Why not try actually deregulating and letting the market fix itself instead of insisting that there's been too much deregulation (there's been too much regulation, not its opposite)?

Just some food for thought. The glass is not always half empty.


The Federal Reserve cut interest rates a half a point today, in an effort to reverse the increasingly dismal economic trends. The cut was yet another unprecedented Fed action, and another attempt by government to correct this economic downturn. This crisis has divided people in a number of ways (academic vs. financial economists, fundamentalists vs. realists), but in this post, I'd like to examine the more traditional debate between government interventionists and free market advocates.

I've wavered a bit on the bailout bill, because I haven't been able to pinpoint exactly what the bill was trying to do. If it is trying to increase confidence in lending markets in order to avoid bank runs and allow companies to receive short term loans, I understand (although I haven't seen evidence that credit markets are responding well). However,  if the argument is that AIG, Goldman Sachs, etc. are "too big to fail," the bill becomes harder to swallow. A market system must be a profit and loss system, otherwise the market will no longer focus on the consumer. Thomas Sowell, a magnificent economist, likes to say that economics is the study of "and then what?" When Americans allow the government to arbitrarily choose what the market should look like, what have we said about our economic philosophy?

What worries me most about the recent onslaught of government intervention is the lack of clarity about the problem we're trying to solve. Is this just another bubble that should be allowed to run its course, and did government intervention create the bubble in the first place? Does the Fed even know if these toxic assets will appreciate, or could this $700 billion bailout actually cost taxpayers even more? Is deregulation really to blame? Are we finding more flaws with free market principles, or is this crisis a market correction  of a policy-aided bubble and an overextended financial sector?

Undoubtedly, the past weeks have created a panic among most Americans. Government officials have added to the panic (namely, Barney Frank's assertion that "we don't have a choice now of debating whether (the bailout bill) is a good or a bad thing or Bernanke's and Paulson's predictions of imminent economic collapse). 

Amidst a panic, people see (wrongly, I think) government as a benevolent, omniscient entity. 

In the beginning...

For those who might like a general overview on the genesis of the economic crisis:

How it all happened

Whose fault it really is


In Defense of Government Action

Vincent, I think that throughout this crisis a fundamental reality has been consistently overlooked by those against the bailout. One reason that people seem to object to the proposal is on the grounds that it will spell greater government regulation of the financial markets. The fact of the matter is that the financial market is one of the most highly regulated sectors of the economy. The SEC conducts exhaustive reviews of every major investment bank and commercial bank, in addition to brokerage houses and asset management firms on a regular basis.
Other actions taken by government agencies with respect to the financial markets should perhaps be viewed as measures to vivify the economy rather than strict regulation. For example, the increase in the FDIC's deposit guarantee should ensure that bank deposits, especially those of high net worth Americans, remain in American banks. This will function to increase liquidity and should ease some of the pressure on the banking system.
As Europe continues to experience woes related to a discrepancy between the level of interconnectedness of the domestic economies and domestic governments (hitherto, the governments of Germany, Denmark, Sweden and Austria have all taken steps to fully guarantee bank deposits in their countries), we could see increasing pressure on European governments to form emergency funds to absorb distressed assets, a lá US Treasury.

Thoughts on the Bailout...

And so Wall Street's being bailed out.

Now that the government's going to be regulating the economy, free market's going out the window. Nope, no more free market. The system now will be anything but.

Two articles from the Motley Fool (both pretty heated)

Dear Wall Street: We're watching You

6 Thoughts on the Bailout Buzz


Look long term, not short

Here's the real problem with the bailout plan. It's not about any moral hazard of saving the companies/corporations just because they're so crucial to the economy (although I do agree that it's morally wrong). It's not about requiring the American people to support the bailout via their tax money (personally, I believe that citizens have the duty to support their country whether they like it or not; if not, no one told them to live in that country in the first place). The problem is that people are looking into the short term and not into consequences further down the road. And, in doing so, they're failing to trace the cause (I decided "put the blame" would be a fairly inappropriate way to phrase that) to the right source.

By approving the bailout plan, we'd be supporting more governmental control in the economy. Would we, then, actually be sacrificing our freedom for security? One of the so-called "fundamental American values"? Even if we did that (the US losing its tag of the democratic and free nation in the process), that still doesn't solve the problem. Short-term security almost never translates into long-term stability. By generating sufficient funds to support the bailout, further inflation would result, and we all know what that's going to do to the already-spiraling US dollar. With a weak dollar, what would happen (besides the Europeans laughing at us) is the world economy being seriously affected.

Not to mention, again, that freedom would be sacrificed for a short-term security measure that would be disastrous in the long term.

(A very animated) Ron Paul seems to share the same view: http://www.youtube.com/watch?v=YBVB1Uc0nko

McCotter's Vocal Criticism to the Bailout Bill

While the House is debating and voting on the bailout bill, a Republican Representative from Michigan, Thaddeus McCotter, is a vocal critic of the bill. He said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term. He said once the federal government enters the financial market place, it will not leave. "The choice is stark," he said. He also compared the bailout to the Bolshevik Revolution, saying that it is a choice between "bread or freedom." Although it is debatable that his stirring speeches caused the bill to fail, I wonder if McCotter's words had any impact on lawmakers' subconsciousness. Did they really think, "Maybe this will one day haunt us..." Any thoughts?

To Bail Out or Not to Bail Out?

As Michael mentioned, the issue of a bailout of financial firms holding so-called "toxic assets" on their books was raised at the Town Hall meeting last night. We discussed both sides of the matter, but failed to reach a definitive conclusion. The Treasury's proposed bailout has been amended from its original version; rather than having the federal government purchase the securities directly from the ailing financial firms as was initially suggested, the Treasury would, in effect, act as an insurer and provide security to private firms that buy the assets.
Our discussion at the meeting centered primarily around the issue of whether or not the Treasury Department should be proposing the package at all. Economists have weighed in on both sides of the issue. A plethora of economic heavyweights have voiced opposition, based on a number of factors. Two primary issues that they have taken with the plan are as follows: 1) the seemingly unwarranted burden that would be placed on the average American through taxes to finance the deal, and 2) the concern over a case of moral hazard being presented to the firms bailed out.
Conversely, the plan has been defended on a number of fronts. A compelling argument in favor of the bailout plan would seem to be the potential danger posed to the greater American economy if such a deal were not enacted. It is constructive to note that many financial institutions as well as other corporations have significant portions of their assets tied up in credit markets, some of which remain frozen. If these firms are not able to gain access to cash, we could very well see a leftward shift in aggregate demand, resulting in inhibited growth and income per capita.

Other thoughts?

Addendum: Insurers in the private sector use statistical analysis to calculate the expected value of a given event occurring, and base premium payments on that calculation in an attempt to make a profit. Although the Treasury is certainly not trying to turn a profit from this deal, I'd be interested to know their calculation of an expected value of the further depreciation of these assets after their transfer.

David Brooks on Dubious Regulation

At the EA's first Town Hall last night, I mentioned this article by NY Times columnist David Brooks. In it, Brooks questions both the need for more rigorous financial regulation and the ability to implement it.

I thought this quote was especially insightful:
"We don't even have a clear explanation about the past, yet we're also going to need regulators who understand the present and can diagnose the future."

McCain, Obama, and Dilbert

Scott Adams, the creator of Dilbert (and an economics major), recently took a poll of American Economic Association members about the candidates' policies. The results can be found here (the CNN article, via Mankiw's blog).

The economy has been the most important issue since March, and the events of the past week have only magnified its importance. Still, it's important to remember that the president has a limited amount of influence when it comes to economic policy. The executive's actions are obviously important (e.g. Treasury Secretary Henry Paulson's recent prominence), but the Congress still has the final say in fiscal matters, and the Fed has almost complete control over monetary policy.

George Mason professor Tyler Cowen has an excellent description of how presidential elections relate to economic policy in this NY Times article.

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