Monday, June 14, 2010

Monday items.

Larry Kudlow endorses Art Laffer’s view on a downturn in 2011.

Don Luskin thinks the oil spill is hurting stocks.

John Tamny suggests education does not necessarily lead to business success.

CNBC’s John Carney says lawmakers should invest in companies they regulate.

The WSJ editorial board opposes efforts to politicize Federal Reserve lending.

Fortune features an analysis of Keynesianism.

The House GOP Whip argues the party should focus on spending.

Bruce Bartlett warns of a possible debt default.

Heritage has a video on federal spending.

Paul Krugman cites the Mundell-Flemming model as he warns against austerity.

And according to that model... fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a whole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)


  1. If there was ever any question that the Republicans don't get it, you only need to look at the comments of Eric Cantor. This past weekend (see my commment under the weekend thread below) John Boehner preached the austerity line and now Eric Cantor jumps on the band wagon. So now we have the number 1 and number 2 Republicans in the House prescribing bleeding the trauma patient to bring recovery.

    Are the Republicans so thick that they cannot understand the supply side revolution of Ronald Reagan? When are the Republicans going to call Robert Mundell, Art Laffer, and the other engineers of the greatest recovery our nation has ever seen? What can't they grasp what Jack Kemp understood? Supply side policies do not call for sacrifice and pain. Supply side economics calls for policies that will allow us to create growth and prosperity.

    If the choice given to the voter is either artificial boom with ultimate economic bust in the future from Democrats, or painful austerity and decline right now in the present from the Republicans, which will they choose? Which would you choose?

  2. Krugman doesn't get the Mundell-Fleming model right. Here's Mundell in 1963, in the paper that won him the Nobel and founded the model: "fiscal policy has no effect on unemployment under flexible exchange rates." Furthermore, Krugman makes no mention of the major control in Mundell's model, namely that the major countries have seignorage rights and the minor ones don't. Major country currencies don't depreciate at the rate minor country currencies do in the event of manifestly currency-weakening moves such as the debasement of the currency or extreme budget deficits. (Witness the dollar in the face of near-zero interest rates and the outsized deficits of the last 2 years).

    That's why Mundelll said that for major currency issuers (the US and the EU qualify today), the policy toward crisis should be tight money and tax cuts. Tight money incurs a rush of foreign capital into countries with seignorage rights. This money will not merely sit in banks earning the nice new interest but will be lent out if there is a new higher rate of return in the real economy thanks to tax cuts. In turn the major economy will grow, necessitating new net monetary creation. Monetary tightness, it turns out, will not be monetary tightness at all, on account of the accommodation of real growth.

    So: stabilize the currency and cut taxes, with no "austerity." This is the solution that the US and the EU could coordinate today and put to pasture this crisis for good.

  3. Brian --
    Brilliant as always. Great comment.
    Question: do you think CPI and interest rates were so high in the 1970s vs today because the dollar's fall was so much more severe (gold up 1000 percent)?
    Also, any comment on Mundell's view that the dollar is too high/scarce even though gold is at a record?

  4. A very simple rebuttal to Brian's piece: Cut taxes? No! We like to drive on paved roads.

    Let's try to not make it any more complicated than that. An argument on behalf of the middle class never does raise anyone's attention.

  5. TSG - do you understand that tax revenues rose after the supply-side tax cuts of 1981, '86, '97, and '03, in line with GDP?

  6. Reply to Sean: No, I didn't know that was true but statistically true, I'll take your word on it with some reservations. I feel no need to discuss it further than that, only to say that you haven't provided any proof that ss policies were responsible. Nor will you and now can you. Now let's put that aside until you or somebody else does.

    What "is" true, and I have addressed above in another thread, is that this is not a time to contemplate cutting taxes. The effects of that in this time of near destruction of the economy could be the final blow. This is a time to be stimulating the economy with sensible spending by creating more employment. There are proven methods with which to do that but cutting taxes to big business at this time would only help to raise the deficit in a way that would pay back no return on the investment.

    If you are going to allow a discussion on the pros and cons of SS economics then at least post all the comments and allow everyone to argue it's merits or otherwise. Trust in people being smart enough to finally figure out the fact of the ugly situation by hearing all of other's input. And maybe forget about what SS'ers "think" led to some success in 81, 86, 87, etc. There's too much at stake to continue this charade any longer. That's my opinion.