Wednesday, September 07, 2016

Bilbo's Thoughts on Economic Policy

Yesterday in this space I wrote about some of my thoughts on tax reform, admitting at the end that I know next to nothing about economics. My knowledge of economic theory is limited to one simple fact: if I don't pay my bills, I will end up without food, water, or a place to live.

My meager understanding of economic theory is that it lies at the intersection of greed and herd psychology. You don’t need an MBA from Harvard Business School or a PhD in Economics from Yale to know that the economy is in trouble. I have a BA in Linguistics and an MS in International Relations, and even I can recognize that the economy is slowly clawing its way out of the toilet, largely to the benefit of the higher income classes. Why is this? While I’m untutored in the Mystical and Arcane Rites of the Holy Mysteries of Economic Policy, I nevertheless perceive a few things that ought to be obvious, and since lack of knowledge has never stopped any good blogger before, with a ruffle of drums and a blare of trumpets, here are my observations on national economic policy:

1. Spending More Than You Earn Is Bad. If you and I engage in reckless deficit spending, we go to jail. If the government does it, reinforced platoons of dry-as-dust economists with PhD’s, bow ties, and leather elbow patches will be marshaled to explain why it’s a good thing. Whether you’re a Tax-and-Spend Democrat or a Don’t-Tax-but-Spend-Anyhow Republican, balanced budgets are smart. You and I need to pay taxes and the government needs to spend responsibly. Unfortunately, only you and I are held to our part of the bargain.

1a. We Desperately Need a Rational Tax System. See yesterday's post.

1b. And Some Adults in Congress Willing to Consider Responsible Spending*.

2. Unrestricted Capitalism Is As Bad As Blind Communism. John Kenneth Galbraith once said that under capitalism, man exploits man, while under communism the exact opposite is true. A purely capitalistic society focused on the generation of wealth tends to protect the business community and upper classes at the expense of the middle and lower classes. A purely communistic society removes the incentive to work hard by removing its rewards. Sound economic policy lies somewhere between the two, and requires a free-market economy governed by rational regulations to prevent the sort of excesses with which we are now all too familiar.

3. Quarterly Earnings Reports Are Stupid. One of the biggest faults of US markets is that we lack a long-term perspective. Businesses driven by the need to show profits each quarter will focus only on short-term gain at the expense of long-term growth and health. The solution: eliminate quarterly reporting of all economic statistics and replace it with annual reporting. This will help focus on long-term economic health rather than short-term profit, and minimize the whipsawing of the markets in reaction to short-term problems.

4. “Too Big to Fail” Equals “Too Dangerous to Survive.” When a Fannie Mae, Freddie Mac, Lehman, or Bear Sterns has grown so large that it’s failure can drag down large portions of the economy, something is wrong. Bigger is not necessarily better. The government must exercise some prudent judgment in determining how large a financial institution can grow before it becomes too much of a threat to the rest of the economy. Huge financial institutions are too big to fail, but you and I are too small to matter. Fired CEOs get huge golden parachutes, but you and I will get cents back on the dollar - if that - when our investments tank.

5. Bring Back the Concept of “Moral Hazard.” In economic terms, “moral hazard” refers to the responsibility borne by economic decision makers for their performance, judgment, and prudent risk-taking. It implies that those who make the huge salaries should also bear the risk of punishment if their performance is poor. In practical terms, moral hazard is dead. The CEOs of Fannie Mae and Freddie Mac were fired, but each will walk away from the wreckage with millions of dollars in severance payments. Real People who exercise judgment that bad go to jail.

6. Publish the Full Details of Every Congressional Budget Deal in The Congressional Record, Along With the Names of the Sponsors. The Common American Taxpayer (Americanus Emptypocketus Ignoramus) has a right to know how the money he pays in taxes is being spent. Perhaps shedding a little light on the process will help bring it under control. Yeah, good luck with this one, too.

Remember that it was George Bernard Shaw who famously said that, "A government that robs Peter to pay Paul can always depend upon the support of Paul."

And Paul's doing a lot better than you and I.

Have a good day. More thoughts tomorrow.


* "Responsible Spending" is not created by petulant squabbling that results in endless Continuing Resolutions rather than a coherent federal budget.


Mike said...

3a. If you buy a stock you have to hold on to it for 3 years, not 3 seconds.

eViL pOp TaRt said...

Those are great suggestions. Bilbo for Budgetary Czar/

Linda Kay said...

Some interesting thoughts for us today. Being an accountant, I have no concept of the mess we have gotten ourselves into with unbridled spending.