On QE2, the American people, and the benefits of “polarization”

November 9, 2010

Fed Chairman Ben Bernake has created a large and interesting group of opponents to his $600 billion-plus bond-buy/money-printing (a.k.a., a second round of “quantitative easing” or QE2 for short).  Sarah Palin whacked the plan, noting Germany’s concern in the process (NRO).  The Chinese Communist Party and yours truly both think Bernake is making a mistake, albeit for different reasons.  Still, those who have followed this blog may be surprised to see Zhongnanhai and the China e-Lobby founder on the same side.

That said, it’s Palin’s reaction that fascinates me here.  Among Republican politicians, Palin is perceived as the most populist and least-policy-oriented (and she tends to revel in the former perception).  For her to wade into the thickets on monetary policy is a big deal – and quite the surprise.  It does, however, reflect something about the American people that should give hope to all of us.

Before QE2 set off a firestorm, monetary policy debate was usually reserved to university faculty halls and quiet corridors in Washington.  To this day, almost no one who avoids being inflicted with my lectures in Macroeconomics at Germanna is aware of Alan Greenspan’s desperate attempts to spur the economy with loose money in the early 1990s.  His second big money flow, in the early aughts, only garnered attention after the bubble it caused burst in 2007-8.  Even Bernake’s QE1 was largely unnoticed by the American people or those they elected to govern (save Ron Paul).

Yet today, QE2 is rapidly evolving into the next major political debate – and that’s a very good thing.  Credit for this can go directly to the Tea-brewers (my term) and Paul for forcing the Fed into the spotlight and showing the American people how it can basically become a super-mint for the government.

That any mainstream discussion of the American economy can expand to include monetary policy is a sign of something my economics training drilled into me: that people over time gather more information and become more informed.  While we can all lament the sad decline of knowledge of American history, the fact remains that today’s average Americans are more aware of economics than their parents or grandparents were (or, dare I say, still are).  What was considered too complex for even politicians to understand just a generation ago is now common fare for argument across the country.  That’s a dramatic change, and one for the better.

There is one other factor in this that has been forgotten: the effect of “polarization” or “partisanship.”  These have become dirty words to many (especially centrists), who prefer everyone to get along.  In reality, though, bipolarization brings new issues to the floor, and new arguments.  Let’s face it, without the opposition instinct that has been drilled into most Republicans by the Obama Administration, QE2 may very well have been unnoticed (or worse, the reaction of Germany, the CCP, and Brazil may have triggered a nationalistic defense of QE2).  Instead, Republicans like Palin are seizing upon the longstanding but previously lesser-known arguments against easy money, and Palinistas (much like the Ron Paul backers) are giving themselves a crash course in monetary policy.

That sort of political self-education does not happen without “polarization.”

This is something we should keep in mind when we pine for the supposedly halcyon days of “consensus” politics and earlier generations: debates can be beneficial, inform the public, and yes, even wake up the political powers that be.  The reaction to QE2 is the best evidence of that.

Note: It works for the left, too. For years, opposition to Bush forced the Democrats to reach for any argument they could find to oppose the liberation of Iraq. They seized upon the increasing influence of the Iranian mullahcracy, and the argument was so persuasive (because it was right) that Bush himself changed course in 2007. Iraq and America are far better off because our politics didn’t quite stop at the water’s edge.

Cross-posted to VV

The Fed turns on the money spigot again, but will it work?

November 5, 2010

The Federal Reserve’s recent decision to throw at least $600 billion into the money supply (dubbed “QE2″ as in the 2nd round of “quantitative easing”) has caused a firestorm around the globe . . . and a debate among economists as to its wisdom.  At present, the debate centers on whether the late Milton Friedman, champion of Monetarism, would approve.  After examining the arguments, I would say Friedman would oppose it, and so do I.

Interestingly enough, it wasn’t John Taylor or Allan Meltzer (in the Wall Street Journal, albeit behind subscription wall) – both of whom are certain Friedman would have opposed QE2 – who convinced me, but rather (accidentally) David Beckworth, in his attempt to argue Friedman would favor it. 

One of Beckworth’s arguments is that Friedman would have reminded us about the entire Monetarist equation that he made famous, namely MV=PQ (for the uninitiated, V is the velocity of money; P is the price level; Q is the level of economic output; and M is, of course, the money supply).  Friedman always counseled for a steady rate of money supply growth on the assumption that stability would keep V and P relatively stable, while Q would grow.  Beckworth argues that V has not been stable lately, but has fallen during the Great Recession, and thus, Friedman would want that countered with actions such as QE2.

There’s only one problem: Beckworth doesn’t consider why money velocity (V) fell.  In fact, his own charts reveal that the decline in V could very well have been in response to the first round of “qualitative easing” (now known as QE1) in 2007-9.  In fact, V seems to have levelled off around the end of QE1.  This means either (1) given how Beckworth calculated money velocity, it was mathematically too dependent up money growth, meaning his model is flawed, or (2) the American people responded to QE1 not by spending, but by saving/reducing net borrowing, meaning QE2 will have the same effect.

Beckworth might not notice this, but Friedman certainly would have.  History has repeatedly shown us that the American people do not respond to temporary fiscal policies (I would submit that half the reason the growth in the “aughts” was so weak and uneven was that the tax cuts that partly fueled them had expiration dates).  The Great Recession and Japan’s “lost decade” are evidence that temporary monetary policies have the same impotence.

In other words, it is far more likely that the only effect of “QE2″ is lack of confidence in the dollar, greater concern over the the deficit being “monetized” (i.e., solved by printing money), foreign currencies depreciating in retaliation, and inflation – the very things Friedman opposed during his entire career.  This tells me he’d be with Messrs. Taylor and Meltzer (and yours truly) in opposing QE2.

Cross-posted to BD

What happened on Tuesday

November 4, 2010

While there are still a few races out there to be determined we have, for the most part, a good bead on what the voters did two days ago.

For starters, big-ticket Dem wins notwithstanding, this was a massive Republican landslide.  In fact, the best indicator of this is the Senate results – the one place where the GOP was disappointed.  Out of 37 Senate elections held on Tuesday, the Republicans won at least 24, and perhaps 25 if Dino Rossi pulls it out in Washington.  Either way, it’s a better result than any in recent memory – including the Reagan tide of 1980.

What made the GOP win look small was the Democrats’ lopsided majorities in the 2006 and 2008 classes.  Unlike the House, they were spared the voters’ wrath.  For the most part, though, Democrats who were on the ballot in 2010 – no matter what the office - were pasted.

That said, in some places the pain for the Democrats was excruciating, while in others, it just hurt.  To wit, the Republican wave weakened somewhat at the Missouri River.  This may be the first time the Missouri became a political boundary (the Mississippi, Ohio, and Potomac rivers are more familiar with this sort of thing), but the Senate and state legislative elections (see Jay Cost) show that the GOP underperformed in the southern Rockies and the Pacific Coast.  Now, there was some impressive Congressional gains for the GOP in that region, so it wasn’t as if the Republicans were frozen out.  However, I do find it interesting that among the party’s Teabrewer nominees in particular, only one east of the Mountain Time Zone lost (O’Donnell in Delaware).  Calfornia has been bleeding economic escapees for quite while; they may be doing to the southern Rockies what northeastern migrants have done to parts of the South – make them more receptive to Democrats.  It’s something to watch, in any event.

Meanwhile, two ballot measures jumped out at me: first, Washington state voted down a millionaire’s tax - perhaps even by a landslide.  Keep in mind, this is the deepest blue state west of Wisconsin no, wait, Illinois oops!  sorry, um  . . .  Maryland.  There we go.  Anyhow, Washington is one of the last places where one would expect tax-the-rich to go down in flames, but it did.

Secondly, in California, the two-thirds majority requirement to pass a budget was taken down by the voters.  Much of the talk about California was driven by the fact that a very small Republican caucus in the Assembly (lower house) could block a tax increase because it was larger than 1 in 3 members.  What was usually not mentioned was that the Democrats were usually able to peel off of a Republican or two anyway, but not before the GOP was given heavily inflated “responsibility” for trying to spare the taxpayer another whack.  Even with Governor Arnold parting from the scene, this was the fate of California politics without Prop 25 passing.  Now that 25 did pass, Jerry Brown can raise any tax he wants without trying to buy off any Republicans.  For the California taxpayer, it means little (as I said, usually some Republicans would cave) but it does mean that the GOP can stand on the sidelines and take the time and effort to construct alternative budgets and plans – things an opposition is supposed to do, but that the GOP couldn’t.  On the surface, it will appear that the End of the Arnie Era will liberate the GOP – and it will, but Prop 25 will have a hand in it, too.  Don’t be surprised if the Golden State Republicans recover handsomely in 2012 and 2014.

Cross-posted to BD

Meanwhile, in my neck of the woods . . .

November 3, 2010

. . . the local Republican incumbents did very, very well.

Our local GOP Chairman has the details.

Go to Bearing Drift

November 2, 2010

Why?  Because that’s where I am.

It’s prediction time

November 1, 2010

As promised, I present my prediction for the Congressional elections.

We’ll start with the House, which for various reasons has become more anti-climactic these days.  If the Gallup poll is any indication (and like Riley at VV, I think it is), then we’re headed for a massive Republican landslide in votes.  What it would mean in terms of seats is less clear.

Still taking Gallup’s current numbers (55%-GOP, 40%-Dems) and coming up with the worst-case scenario for the Republicans (55%-43%, with 2% for others), and grafting it upon recent history, we get a 12-point GOP margin.

As it turns out, we’ve had 4 different elections under the current House district lines already (2002-2008), so a quick regression analysis tells us that 1 point in the popular vote equals 5.44 seats (with the GOP having a 8-seat margin in a 50-50 result).  That would mean 12 points equals a 73 seat majority (254-181), or a Republican pick-up of 75 seats.  This would be the best GOP performance in the House since 1928.

Now, on to the Senate, where, in a complete change of pace, I’m going to use the metaphor of an NBA game (on account of the fact that I’m apparently the only blogger in Virginia who’ll admit to watching pro basketball).

Before we get to that, one note: no GOP Senate seat will flip.  In fact, Marco Rubio will cross 50% as moderate Republicans abandoned Charlie of-course-I’ll-caucus-with-the-Dems Crist.  Meanwhile, in Alaska, Lisa Murkowski will finish a close third (although write-ins as a whole will come in ahead of Scott McAdams – Joe Miller wins in any event).

Now, on to the interesting seats defended by the Democrats.

These are interesting for the ESPN highlight reel only – if that: Arkansas, North Dakota, and Indiana.  These have never really been in doubt; the Republican candidates ran out to a huge lead and held it all the way through.

The big run in the 3rd quarter erased the halftime deficit and iced the game: Wisconsin.  Three months ago, no one knew who Ron Johnson was.  Tomorrow night, we’ll be stunned if he’s not Senator-elect.

The Knicks-Bulls 90s-era (Knicks win): Illinois.  As a Knicks fan, I always know if my team had a shot against the Jordan-era Bulls in the first quarter.  If they had a lead, they had a chance.  Usually, the next three quarters was a nail-biting back-and-forth of offensive runs, defensive toughness, and, well, a lot of fouls.  If the Knicks could hold the lead (more or less), they’d win.  Mark Kirk is the Knicks (not that he’d want to hear that), and he, too, will win (and he should be greatful elections aren’t best four-of-seven).

Held off the late run: Pennsylvania and Colorado.  You know the feeling: a ten-point lead becomes a two-point lead.  The coach calls timeout, the crowd is either defeaning in its noise or its silence (depending on who’s at home), and it all feels like it’s slipping away.  Yet the team with the wavering lead recovers, and the comfortable win becomes a gut-wrenching win, but it’s still a W.  Toomey and Buck are, and will be, in this position.

Won with the late run: Washington and Nevada.  In both cases, the Republican challengers (Dino Rossi and Sharon Angle) fell behind early, stayed in the game, and got the hot hand in the final minutes to pull it out.

The Knicks-Bulls 90s era (Bulls win): California and Connecticut.  The game stays close despite a serious difference in talent (always dangerous to the favorite), but the underdog never seems to erase the lead entirely (or if they do, it’s far too brief to matter).  Barbara Boxer and Richard Blumenthal are the favorites who should have been able to put it away, couldn’t, but ended up with the win anyway.

Anybody keeping count would now notice that I have a Republican gain of nine seats – one seat short of an improbable majority – with one state still outstanding.  Here’s the majority-maker.

Reggie Miller stuns the Knicks, 1995: West Virginia. For those who follow neither the NBA nor ESPN’s 30 for 30 series, Reggie Miller was the Indiana Pacer who stunned the Knicks (and Madison Square Garden) when he erased a six-point deficit in the final 18 seconds – by himself – to win the Game 1 of the Eastern Conference Semifinals: 107-105.  That’s what West Virginia will look like – a near-impossible comeback for Republican John Raese against Governor Joe Manchin.

Note that I said, “look like.”  I noticed an interesting trend in West Virginia polling at the federal office level: GOP support tends to be underestimated.  In 2000, there was talk of a “surprise” in this state as polls showed Bush and Gore to be neck and neck; when the votes were counted, Bush won by 6 points.  Four years later, polls again showed it close until the very end, when Bush opened up a small lead against Kerry; the voters gave Bush a 13-point victory.

Now, Manchin’s biggest lead is 5 points (Rasmussen has him up four, inside the margin of error); add the GOP’s history here to the fact that Manchin is well-like dbut asking for voters to send him away from the job that earned him his reputation (how many Chicagoans wanted Jordan to try baseball?), and it looks to me like Raese will come out the winner tomorrow.

So, to recap:

House: R-254, D-181; GOP pickup of 75

Senate: R-51, D-47, Centrist I-1, Leftist I-1; GOP pickup of 10

Cross-posted to VV

On the ballot initiatives

November 1, 2010

Despite the whirl and rush of the Congressional races, attention is finally being paid to the three ballot initiatives here in Virginia.  For the most part (From On High, BVBL, and TQ), they’re not doing very well in the blogosphere (especially #3).  My take is a little different.

The first two ballot initiatives sound the same (property tax breaks for veterans), but are in fact very different.  The first one allows counties and cities to establish the tax break; the second forces them, too.  One of the biggest problems we face in government these days is lack of accountability – and none more so than at the local level.  Spending is opaque; transparency is weak; and squawking at Richmond is on the rise (this is not to say said squawking is never justified).  The fewer decisions made at the local level, the more government is removed from the governed.  Question 1 reverses that trend, but question 2 accelerates it.  Therefore, I’m voting Yes on 1, and No on 2.

Question 3 (upping the Rainy Day Fund to 15%) is the trickiest one, but I’m going to part company with nearly all of my friends in the blogosphere and vote Yes.  Two reasons why:

  • Theoretical: The main question behind the Rainy Day Fund issue is this: what happens when you get a revenue windfall? Like most opponents on this question, I agree giving the money back to the people is the best option – but how we do it is just as important.  Tax rebates sound great, but they dohn’t change the overall structure of state government.  By contrast, tax reductions permanently make government less dependent upon the governed.  That said, reductions usually lead to revenue dips while the economy responds and the resultant growth brings revenue back up.  Thus, the Rain Day Fund can be used to bridge that gap, and make tax cuts easier to do.  More importantly, using tax reductions in this manner means that – at worst – you have the same size government with a larger economy, making the government a smaller imposition upon the people.  Rebates can’t do that.
  • The practical: Usually, opponents aren’t thinking about the above, but rather the concern that Rainy Day Funds will encourage higher spending.  To which I can only respond – do you really think they need encouragement? Since 1996, we have seen the most Republican state legislatures in Virginia history, but that didn’t stop the state budget from doubling in a dozen years.  Clearly, our elected officials in either party (as a group) do not share the thriftiness for which their predecessors made the state famous.  Moreover, because the Rainy Day Fund law mandates that some of the revenue windfall be placed in it, it has become – in the current climate – an accidental bulwark against government spending.

Therefore, for those reasons, I’ll be voting Yes on 3.

Next up: Predictions

Cross-posted to VV


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