amity-shlaes

Video: Paul on Debt Ceiling, Spending: Political Capital With Al Hunt

by on June 4, 2011

June 3 (Bloomberg) — Republican presidential candidate Ron Paul talks with Bloomberg’s Al Hunt about the U.S. debt ceiling, U.S. troop withdrawals from Afghanistan, Pakistan and Libya, and Federal Reserve monetary policy. Bloomberg’s Rich Miller and Hans Nichols discuss the state of the U.S. economy and the Fed’s quantitative easing program. Julie Davis talks about the debate over the debt ceiling and a documentary on Sarah Palin to premiere in Iowa next month. Commentators Margaret Carlson and Amity Shlaes discuss the outlook for former Massachusetts Governor Mitt Romney as a Republican presidential nominee. (Source: Bloomberg)

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Video: Paul on Debt Ceiling, Spending: Political Capital With Al Hunt

Washington, Bernanke, Still Fighting Wrong War: Amity Shlaes

by on January 5, 2010

Commentary by Amity Shlaes Jan. 5 (Bloomberg) — Sometime soon the U.S. Senate is expected to confirm Federal Reserve Chairman Ben Bernanke for a second term. Soon the Senate will also vote on legislation to overhaul the financial industry. Neither action directly determines the U.S. monetary outlook. Yet a monetary assumption underlies all of Washington’s finance- or banking-related activity these days. The shared belief is that the potential for deflation or credit-and- deflation-related spirals deserve our near-exclusive attention. One task for the Financial Services Oversight Council that would be created by the House reform bill, for example, is to sort out which are the too-big-to-fail institutions and prevent future Lehmans . In other words, we need to further systematize the dumping of cash into companies and the economy or face apocalypse. Our leaders treat an inflation crisis as the lesser threat, a remote possibility that warrants lip service, at most. Thus over the weekend Bernanke mentioned the possibility of having to increase interest rates at some later point — but it was really just a passing reference. Depressions, in the general line of thinking, come from deflation. Linking deflation and depression has become second nature. It almost seems an alliterative link, as though the two go together because both start with the same letters. In their recent Man of the Year portrait of Bernanke, for example, Time magazine editors seem to use the word depression as a synonym for deflation. “The first thing any Depression scholar comes to understand is that nothing — not hyperinflation, megadeficits or irked Chinese creditors — is as bad as a full-on Depression,” it said. Effects of Deflation Deflation, as we hear so often now, hurts good people, strivers who over-borrow. What’s the reality about deflation and inflation? Deflation can cause depressions, as the U.S. saw in the early 1930s, the period Bernanke has studied so intensely. In the Great Depression, there wasn’t enough money around — literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed. Deflation doesn’t always spell apocalypse. It can coexist with prosperity — or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard. Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier. Steady Tuition As Harvard University’s alumni magazine reported recently, in wonderment, Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II. Such consistency is something tuition-juggling families would trade a lot of financial-aid dollars for today. What about inflation? Many economists treat inflation as an acceptable evil. Over the weekend Bernanke spoke of concerns about a “possible unwelcome decline in inflation.” The trouble is that mild inflation can become significant inflation faster than central banks can act. And significant inflation can match deflation blow for blow. In the 1970s, inflation coexisted with slow growth or outright shrinkage of the economy. Those who don’t think about inflation also didn’t think about the first half of 1980, when West Coast mortgage rates rose to 17.5 percent. That meant people could afford less house than today. The U.S. homeownership rate dropped below 65 percent and did not come back until 1996. Wheelbarrows of Cash The German hyperinflation of the early 1920s lives in memory as a black-and-white visual of men with caps pushing around wheelbarrows of cash. This cartoon obscures bitter reality. Hyperinflation isn’t the opposite of depression. It’s a kind of depression. The effects of Germany’s hyperinflation were worse than the effect of our Great Depression. Like a deflation, the German hyperinflation ruined the lives of good people, many of whom were not rich. How? By making fixed incomes — pensions, government salaries — worthless. In the same years that deflation ruined the farmer in Minnesota, inflation was ruining the bureaucrat in Germany: “A man who had been saving for 40 years and who, furthermore, has patriotically invested his all in war bonds, became a beggar,” said the author Stefan Zweig, according to “Culture and Inflation in Weimar Germany” by historian Bernd Widdig. The creepy thing about hyperinflation is that it also ruins businesses, as well as charitable and educational institutions. None can plan. As Widdig notes in his book, “The Department of Canonical Law at the University of Munich had a budget of 2,000 marks in 1922. Yet the subscription price for a single scholarly journal was already 10,000 marks.” Inflation Misery Hyperinflation has a capacity to mock virtue that deflation lacks. Even that symptom that we tend to assume is unique to the Great Depression, raging unemployment, came eventually. In 1924, unemployment among German union workers was 24 percent. Hyperinflation helped make Hitler possible. Much more recently, in Zimbabwe, hyperinflation helped keep President Robert Mugabe in power. Serious inflation has dogged Latin America for a century, causing, overall, magnitudes more misery than even the storied deflation of Japan. It is monetary narcissism on the part of the U.S. to assume that just because serious inflation hasn’t occurred here lately, it can’t materialize in 2011, 2012 or 2015. Two centuries ago, the Prussian military expert Carl von Clausewitz warned that generals who fight the last war confront defeat in the next. Clausewitz’s rule holds true for 21st century monetary policy makers as well. There is nothing about deflation that is more modern than inflation. Optimal Fed The optimal Fed fights for stable money alone, not employment as well. The optimal financial governance reform replaces discretion with a rules-based system that treats inflation and deflation like twins. The current legislative proposals won’t yield either an optimal Fed or an optimal financial reform. So it’s all up to Chairman Ben. That means not only making statements about future bubbles, but using his moral authority to push through reforms that make it easier for our system to prevent inflation as well as deflation. Herr Bernanke, meet Herr Clausewitz. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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Washington, Bernanke, Still Fighting Wrong War: Amity Shlaes

Obama’s Next Trillion Spending Might Be Worth It: Amity Shlaes

December 28, 2009

Commentary by Amity Shlaes Dec. 29 (Bloomberg) — President Barack Obama is under fire for saying he wants to boost investment in infrastructure in the next decade. The critics say this is flawed stimulus because infrastructure projects take too long to get started and don’t boost the economy now. Obama’s best move would be to stop spending. But given that he won’t, and that he has three more years in office, the right kind of infrastructure splurge might not be such a bad idea — especially if you don’t call it a stimulus. That at least is what the record of the 1930s, 1940s and 1950s suggests, especially when it came to the classic American infrastructure project, highway construction. Back in the 1930s, presidents started with the proposition that the primary aim of all spending should be to put people to work. Road construction was viewed as one of the tools to that end. In a single year, between June 1933 and April 1934, relief workers repaired 500,000 miles of highways. As historian Mark Rose has noted , in the mid-1930s, almost $3 billion, then a good share of an annual federal budget, was poured into highway projects by relief officials and the Bureau of Public Roads. But observers, including President Franklin Roosevelt himself, began to notice flaws with this plan. For one thing, as today, road projects were not shovel-ready — their lengthy planning coincided with the direst moments of recession. By the late 1930s, Roosevelt concluded that highway programs generally “do not provide as much work as other methods of taking care of the unemployed.” Cutting Spending In early 1938 the president suggested that federal assistance to roads ought to revert to pre-Depression levels. That April, he reluctantly allowed that appropriating an extra $100 million for roads was all right, but “only for projects which can be definitely started this calendar year.” What was worse, the Hoover and Roosevelt road outlays didn’t make enough sense as infrastructure. A highway expert, Wilfred Owen , pointed out that New Deal construction had “denied congested metropolitan areas” and were instead “lavished upon local rural roads.” As the country emerged from World War II, it was clear the unprecedented 1930s spending hadn’t prepared the U.S. for exploding postwar road use. General Dwight Eisenhower , for his part, was put off by the heavy political element of New Deal outlays. Washington doesn’t shift gears easily. As the 1950s began, lawmakers therefore also presented construction as a tool to create jobs or manage the business cycle. The memory of the Depression was fresh. Recessions were still hitting with regularity — there were four between the end of World War II and 1959. Man of Action But Eisenhower, now president, was a man of action. He recalled the embarrassing number of days — 62 — it had taken a cross-country convoy to get from Washington to San Francisco in 1919. In his view, the one good thing that Adolf Hitler had done was to build the Autobahn . Where was the American Autobahn? In the end the bill that Eisenhower was able to push through Congress was straightforward. Under the Highway Act of 1956, the federal government spent billions to build new roads and piece together older ones and construct a national highway system. There were secondary goals, such as national defense and job creation, among them. But the most obvious goal, serving a country that wanted to move at 65 miles an hour, came first. Less Than Optimal The outcome of the interstate highway program wasn’t optimal. It favored truckers over cities. The roads cut off some downtowns from the commerce that had heretofore sustained them. Minorities pointed out that their communities often bore the brunt of construction. According to Rose, some black political and business leaders spoke of white men’s roads going through black men’s bedrooms. As for budgeting, the interstate so far outran its original cost estimates that Senator William Proxmire awarded it his so- called golden fleece prize for federal profligacy. But on balance, the highway achievement lasted in a way that stimulus or make-work projects did not. In the 1960s, one quarter of all productivity gains came from highway improvements. The interstate did its part to make the U.S. an economic superpower. By concentrating on one coherent infrastructure project, we helped to assure growth. There were other benefits. As early as 1959, the New York Times was publishing headlines that said things like “Pay Roads Save Time and Tempers as They Lead Tourists to Far Places.” Today the country can ill afford another trillion in stimulus. But if such an outlay is inevitable, then let that trillion go to a national Big Dig. As Eisenhower demonstrated, a growth project like a road can be superior to a new social program. A road, or a railway, or a plan to collect water in space, after all, reflects more hope. Obama will achieve the happiest outcome if he simply makes like Ike and plows forward. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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Recession Repeat Lurks Without White House Truce: Amity Shlaes

December 15, 2009

Commentary by Amity Shlaes Dec. 15 (Bloomberg) — “Fat cats” is what President Barack Obama just called bankers. He also invited them to the White House this week. The reason for the mixed message is that the president is cross with banks: they have refused to heed his orders to lend. The dynamic of preachy executive and elusive lenders recalls the mid-1930s, when a petulant Franklin Roosevelt gave a label to banks’ puzzling behavior: “capital strike.” In the 1930s, the capital strike was followed by the depression of 1937-38 within the Depression. Today too, capital ponders going on strike. And without big policy changes the economy will face similar consequences. Consider the parallels. In 2009 government seems to be spending enough for the cash to flow all around. The scope of this effort to drown the nation in money is unprecedented. In the mid-1930s Washington was also dumping dollars around in a then-unprecedented fashion. In 1936, federal outlays outpaced state and local spending for the first time with the nation not at war. Another similarity: a government that won’t say when the spending will stop. The Obama administration is generous with timetables when it comes to foreign policy, but withholds them when it comes to domestic budgeting. Withholding was also a feature of the mid-1930s. In a comment reminiscent of presidential adviser Lawrence Summers , Senator Robert Wagner of New York told citizens in 1935 that that the U.S. would “maintain our public efforts until private businesses take up the slack.” A third big parallel is exceedingly low interest rates . Flawed Assumption What causes the strike? For one thing, White House assumptions that the banks are the same institutions that they were at the start of the economic crisis. Bear Stearns, Lehman Brothers and Countrywide Financial may be gone, but the bitterness of their experience has been internalized by commercial and investment banks alike. So they hesitate. Observing that banks maintained what had once been considered ample reserves, 1930s monetary authorities reasoned that increasing reserve requirements on paper would have little effect: their increase was merely a de facto recognition of an accumulation that had already occurred. The authorities forgot these bankers had been burned. The wary banks reacted by stashing away yet more cash. The result was an unforeseen tightening and less cash in the economy. Election cycles also contribute to capital strikes. Banks today know that whatever the White House says, it has to stop pouring out the cash eventually, probably after midterms. Banks in the 1930s held onto cash because they knew Roosevelt would stop spending after the 1936 election, and he did. House Winnings High taxes , or the prospect of tax increases, do damage as well. In 1937, a tire company executive explained the effect of Roosevelt’s confiscatory rates upon the investor: “He will not risk financing new ventures if the government take is greater than that of the average gambling house.” Infantilizing the private sector also makes it shut down. In the 1930s, Roosevelt, like Obama, alternated between coddling banks and companies and giving them the equivalent of a good spanking. Both can be counterproductive. The editors of Time magazine formally recognized that by printing a regular rubric over its weekly reports: “Last week the U.S. Government did the following for and to U.S. Business…” The insistence on executive discretion is a real killer as well. Adolf Berle, Roosevelt’s assistant secretary of state, sounded for all the world like Hank Paulson or Timothy Geithner when he argued in the late 1930s for a “modern financial tool kit.” Tool kit means “let me fiddle around” and not “let us agree together on rules and abide by them, together.” Dow’s Retreat The results of the 1930s capital strike were wicked. The Dow Jones Industrial Average erased two years worth of gains, heading to Hoover-era levels. Unemployment, in the lower teens, leapt to almost 20 percent. What stops a strike? Not the too-big-to-fail doctrine. Then and now, it is better to make clear the private sector is responsible for itself. That’s what current calls for return to the old Glass-Steagall Act separation of the banking and brokerage businesses are about. Business wants autonomy and respect. In a February 1939 New York Times article, a writer, Howard C. Calkins, gave voice to the longing for White House consistency: “By ‘following through’ its apparently revised attitude toward business generally the government would be going a long way toward rebuilding the confidence of business men, in the opinion of many in Wall Street.” In the late 1930s the government finally did back off. That was in part because of New Deal fatigue. Roosevelt critics made gains in the 1938 midterms. But it was also because the White House needed a partner, an equal, to prepare for World War II. Companies that had recently been in court fighting the administration for their lives now were winning enormous Lend- Lease contracts from that same administration. Traditional explanations for the Depression’s end focus on war spending or monetary easing. It is this truce, however, that is relevant today. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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Palin, Olympia Snowe Battle for State of America: Amity Shlaes

November 24, 2009

Commentary by Amity Shlaes Nov. 24 (Bloomberg) — It is beginning to look like Olympia Snowe will vote for the Democratic health-care legislation. The support of the Republican senator from Maine is crucial because it will enable the Democrats to depict an essentially left-wing bill as bipartisan and centrist. Fellow Republicans are furious. What’s wrong with this anti-Palin? They note that Susan Collins , the other Republican senator from Maine, seems to be standing by her party. Doesn’t Snowe understand the importance of freedom? No, is the answer. At least not the kind of freedom that libertarians in Wyoming or Alaska are describing when they use that word. Sarah Palin may have pointed to similarities between Maine and frontier states during the 2008 campaign — “I feel like I am at home because I see the Carhartts and the steel-toed boots” she said in Bangor, Maine. Snowe, however, isn’t “rogue,” but rather a public servant. If she or Collins vote with Democrats, they do so because they are responding to the concerns of their constituents. Political commentator Michael Barone summed up the dueling tendencies in American culture in the title of his 2004 book, “Hard America, Soft America: Competition vs. Coddling and the Battle for the Nation’s Future.” Maine has historically been one of our harder states, as anyone who has stared out on the cold blue waters of Penobscot Bay in October can attest. But in terms of day-to-day life, Maine is shifting. It used to be a conservative state that led a relatively conservative country. “As Maine goes, so goes the nation,” ran the old line. In 1936, however, Maine stayed conservative when every other state but one, neighboring Vermont, voted for the Democrat, Franklin Delano Roosevelt . Falling Behind Soon after, Maine fell behind. And stayed behind. Old industries such as textiles or furniture-making faded, and none took their place. Today half of Maine college graduates who work in business or technology do so outside of the state’s borders. Maine also is one of the poorer states in the nation. Mainers want benefits and know how to collect them. The federally funded Children’s Health Insurance Program , which subsidizes health care for poor children, spent $31 million in Maine in Fiscal 2007, compared with $11 million in neighboring New Hampshire, which has about the same population . Maine’s seniors are especially poor, and spend lots of energy accessing federal programs: in 2005, a full 41 percent of Maine seniors on Medicare were also on Medicaid, the highest rate of so-called duals in the nation. State Health Care A public option for health care dressed up as a free-market reform? Maine already has that, in the form of DirigoChoice , under which taxes on the private sector were levied to pay for insurance for the undercovered. It turned out the tax revenue was far from sufficient to cover the uninsured. The principal outcome has been higher premiums everywhere and still significant numbers of people without insurance. Paying for all this government involvement has been expensive. The Mercatus Center, a markets-oriented think tank at George Mason University, ranked Maine 48 out 50 states when it comes to fiscal and tax freedom, and 50th when it comes to regulatory freedom. Over time — the time period since Snowe was first elected to Congress, in 1978 — the state has only become more progressive, and more expensive. Maine is near the top of the list, rather than the bottom, when it comes to Mercatus’s “personal freedom” measure, ranking No. 2 among states for its liberal treatment of medical marijuana, gaming, and the use of firearms. One can see this contrast in rank as a negative for the Pine Tree state. Mainers have many rights, but not so many responsibilities. Defensive Work What would give Maine confidence to grow again? To rip up the tax code and reshape it to match that of states that ranked high when it came to economic freedom. But the state’s political leaders seem to have made a decision — defensive work is all right, but it’s late for aggressive moves like that. Collins and even, at least conceivably, Snowe may vote against the Democratic legislation, but they will never lead the necessary charge for a Reagan revolution in Maine. Other states may not be so different. Palin’s state, or Wyoming, has a “soft” benefit that allows it the luxury of looking hard in the form of revenue from mineral resources. The inflows make budget balancing in Alaska or Wyoming look like child’s play compared with Maine’s work. Alaska, for example, gets plenty of pork from Washington, hardly a trait you’d expect in the Palin states. The division between Snowe, more inclined to the bill, and Collins, less inclined, mirrors the national division. On balance, the pro-government side in Maine seems to be prevailing. Maybe Republicans will stick with Collins, and defend the status quo. Or they will emulate Snowe, and start acting more like Democrats. Either way, the truism is true again: As Maine goes, so goes the nation. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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Harvard Giving Ends When Reject Letter Arrives: Amity Shlaes

October 27, 2009

Commentary by Amity Shlaes Oct. 27 (Bloomberg) — You know the stereotypes about college giving. Alums give after their school’s marquee team, football or basketball, wins a conference championship. They give when there’s a family connection to the school. They give when they want their child to get admitted. These assumptions are mostly correct. But there’s a lot more drama to the donor-college relationship. That’s what scholars Jonathan Meer of Texas A & M and Harvey Rosen of Princeton reveal in a series of papers that make good reading for the college-obsessed. The authors surveyed tens of thousands of instances of alumni giving between 1983 and 2007 at a highly selective private university they call Anon U. They tracked both frequency and quantity of giving. We’ll infer that Anon U is an Ivy League school or equivalent from the following facts. Some 28 percent of Anon U alumni went to private high school. At Anon U, alums’ children are admitted at three times the rate of other children. Anon U started admitting women only in the 1960s. Anon U athletes fence and play water polo. Anon U has squash courts. The nuances start with men. Male graduates indeed reach into their pockets at the news of an Anon U football or basketball championship. But they give even more when the specific team for which they themselves played in college wins a championship, even if the team plays an obscure sport, such as fencing. There are differences among the sports. Crew and lacrosse players give a lot. Past Is Present For men, it turns out, the past is still present. If your team was conference champion your sophomore year, you give about the same amount to the athletic program as the average athlete alum. If your team won your junior year, you give more. If your team took the prize your senior year, your lifetime giving is highest of all, about 8 percent higher per annum over decades than the giving of an athlete whose team didn’t get the prize in the last year at school. That lucky fellow whose team was conference champion junior and senior years gives the most among athletes. This suggests a deep need to re-experience the triumphs of youth. Female athlete grads, by contrast, don’t seem to get that nostalgia buzz . Their gifts don’t correlate to their team’s performance while they were at Anon. When it comes to families in which more than one member attended Anon, the scholars found that “legacies,” or grads whose parents, aunts and uncles attended the school before them, give more frequently than the average donor. Children Matter Children matter most to alumni. A person with a child at Anon is 20 percent more likely to give than another person with some other family connection. When a niece or nephew has attended Anon, giving increases as well. Men and women in these families give in similar patterns. “Broadly, past generations matter a little bit, the current generation doesn’t matter at all, and the future matters a lot,” Meer writes. It all suggests that donors view children as investments. And the burning child admission question? Here the authors’ studies ranked donors by the frequency of their gifts. As soon as a child is born, an alum begins giving substantially more often than an alum with no child. Giving frequency stays high until the child reaches age 13. After that, about ninth grade, parents seem to divide their offspring into Anon candidates and kids without Anon in their future. Those parents whose child does eventually apply give more in the four years leading up to application year than those whose child in the end doesn’t apply to Anon. At Peace Giving by applicants’ parents peaks when the child turns 17, at which point parents are almost half again more likely to give than the childless. Those alumni whose teens never apply seem at peace: they just keep on giving steadily after their child goes elsewhere. Not so households that experience the arrival of the dreaded thin envelope. After a first child is rejected, an alum parent gives substantially less often than before. And the disappointment builds. A few years out the parent’s giving drops all the way to that of a childless alum. Those whose last child has been turned down by Anon U actually give less and in smaller amounts than the average alum. Harvard, you are dead to me. Given such theatrics, it’s hard to resist inquiring about the behavior of donors whose children get rejected the same year a school team wins a conference championship. Such a conundrum confronted plenty of Harvard alumni in 2008, 2007, 2004, and 2001, years when Harvard took the football crown . That analysis isn’t done yet, but Meer hypothesizes that child rejection wipes out sports satisfaction. You don’t need a college degree to sense he’s right. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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