A Daily Reckoning White Paper Report
By Bill Bonner
Today is the anniversary of the beginning of the War Between the States. Southern troops fired on the Federals at Fort Sumter, S.C, on this day in 1860.
What is perhaps most amazing about the conflict is the way Abraham Lincoln’s reputation grew after it was over. His Gettysburg Address is quoted as an example of the Republic’s most beloved orator in his finest moment. Yet, the technique of the speech is little different from Goebbel’s ‘Big Lie’ approach. Lincoln referred to the American Revolution, “four-score and seven years ago,” and made it sound as though the fight to subdue the South was a continuation of the struggle for independence. It was, of course, the exact opposite. The South fought for the liberty to decide for itself how long to keep its blacks enslaved. The North fought to avoid allowing the Southern States to go free.
Had the American colonies remained part of the British Empire, by the way, the Yankees might never have had a moral pretext for marching through Georgia. Britain outlawed slavery throughout its empire in 1838.
Everybody, at one time or another, seems to want to boss other people around. Prescriptivism is a fact of life. So is intestinal gas and rap music, but neither should be let out in public.
What brings this to mind is a cursory look at recent editorial pages from the International Herald Tribune. In one column Pat Buchanan tells the Bush Administration how it should deal with the Ruskies. In another, the great geo-political thinker, Maureen Dowd, tells the Bush Administration how it should deal with the Chinese. Over on the facing page, The Washington Post editorial team offers advice to the Bush Administration on how to deal with Sharon and Arafat.
But what particularly interested me – as I’m sure it will you – was the advice offered by two Nobel Prize winning economists, Franco Modigliano and Robert Solow. The article demonstrates two things about people who give advice: they can be very smart and total numbskulls at the same time.
Let us begin with the positive.
FORT SUMTER…AND THE U.S. TRADE DEFICIT
The prize-winning team has noticed what you and I have discussed often in the Daily Reckoning:
“Throughout [the 1990s] spending grew faster than what the country earned, spilling over, in large part, into a growing trade deficit. By the end of 2000, the excess of expenditure over income had reached about 4% of GDP and was apparently still rising.
“For a country, just as for a family, there are only two ways of getting the money to spend more than one’s income: borrowing it and selling assets. In the case of nations, the creditors and buyers of the assets are foreigners.”
The economists note, as we have, that spending more than you can afford cannot go on forever. Eventually, the foreign investors and creditors are going to want their money back. They may begin to doubt the value of the U.S. dollar…or worry that their U.S. assets will continue to fall, as the Nasdaq has done for the last 12 months.
So far, say Modigliani and Solow, “the size and power of the American economy have protected it from capital flight…but there is no guarantee that this will remain true.” What’s more, once foreigners begin to drift out of the dollar, U.S. reserves of foreign currency “would be woefully inadequate to stem the tide.”
The result would be a sharp drop in the value of the dollar, a rise in the cost of imports, falling stock and bond prices, higher interest rates, lower employment and a drop in output.
All well and good. Tall guessing, but what isn’t?
But then the two Nobel prize winners cannot resist the urge to tell the Bush Administration what to do. Not that the Bush team couldn’t use some good advice, but the advice the economists come up with is so moronic it makes you wonder about the Nobel selection committee.
“Many have criticized President George W. Bush’s proposal for a deep and lasting cut in income taxes,” they write, “but hardly anyone has addressed its implications for…the large and growing deficit in the international trade balance.”
Yes, hardly anyone has. Because to do so would be silly.
Give people back their money? Are you kidding? They would only spend it!
Prescriptivist economists carry such a heavy burden on their shoulders, it is a wonder they can walk. They not only want to set the broad policies of the U.S. Federal government, but also direct the behavior of every Tom, Dick, and Harry in the nation.
FORT SUMTER…AND THE U.S. TRADE DEFICIT
It is as if a judge, before ordering a defendant to give back stolen money, turns to the rightful owner and says, “Wait just a minute…what are you going to do with the money if we give it back to you?”
Professors Modigliani and Solow do not really know what people would do with their money. Perhaps the public mood is already changing, and most people would use the cash to pay down debt. Or maybe they would go out to the movies.
Nor do they know what would happen if the money were not given back to the people who earned it. It could be that the dollar has already topped out - and that a dramatic decline is ready to begin. In either case, the tax cut is probably insignificant and irrelevant.
“Debt-addled Americans added another $10.5 billion to their credit card balances in February [alone],” writes the Mogambu Guru. “The communists and socialists in Congress are dragging their feet over a few lousy billions in tax cuts, while at the same the time the budget is already slated to be almost two trillion bucks…the government now takes in the highest percentage of income in all U.S. history…a fifth of GDP, for crying out loud, there isn’t enough slack for a pittance of a tax cut? Jeez…”
But Modigliani and Solow know what is best for people. “A large, permanent tax cut would make the international economic position of the United States worse, not better,” they say.
On the public stage, these people are tedious meddlers. But at home they must be insufferable -
telling their spouses how long to cook the spaghetti and how much to pay for their underwear.
Or, perhaps they have already learned – as so most husbands do at home – that trying to boss your
spouse around rarely pays. Probably even Lincoln had the good sense not to try to tell Mary Todd what to do.
Your editor, sharing his opinions, but keeping his advice to himself…
Bill Bonner
Related Articles:
US Trade Deficit: Does the widening U.S. trade deficit pose a threat to the economy?
Government Deficits: Do Deficits Matter?
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