Echoes Dispatches From Economic History

I was in a hotel room in Tokyo on Sept. 11, 2001, preparing for negotiations at the Japanese finance ministry. I had just been sworn in as U.S. Treasury Under Secretary for International Affairs. We immediately cancelled our meetings and were soon on a C-17 military jet flying back to the U.S. To get back faster we refueled in midair over Alaska that night. The pilot invited me to watch the procedure from the cockpit; it was the most impressive combination of advanced technology, hand-eye coordination, precision teamwork and raw nerve that I had ever observed.

Our pilot approached the tanker jet from underneath, using a specially designed joystick with a monitoring device consisting of rows of lights that turned red or green depending on whether our plane was coming up at the right position relative to the tanker. These two huge jets were zooming through the dark at something like 500 miles per hour, so close that I could see the faces of the guys in the tanker as they lowered the fuel hose. After a while the tank registered full, and we headed home across Canada. As we flew into U.S. airspace there were no commercial airliners to be seen. The plane’s radar screen was nearly blank.

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Joseph J. Thorndike

Taxes in the Age of Terrorism: Echoes

over 3 years ago

Since the Sept. 11 attacks, the U.S. has been waging a different kind of war. It’s been both smaller and longer than previous wars, taking less money to fight and more time to win. It’s also been the nation’s first war to be fought entirely on credit.

For almost a decade, military operations -- first in Afghanistan and later in Iraq -- have been the most visible front in the War on Terrorism. Taken together, they are not yet the nation’s longest war; Vietnam still holds that title, having claimed American lives from 1961 to 1975.

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No doubt, President Barack Obama will call for stimulus when he talks about job creation in his speech Thursday. Since many of us by now recoil at the word, perhaps it helps to ask, once again: Which Obama stimulus would be the least bad?

The answer, as it happens, is neatly framed in a recent photo of young women posing as Rosie the Riveter, the symbolic female factory worker from World War II. They were snapped on the occasion of Obama's Labor Day visit to the Detroit area (unemployment 15 percent). Defense spending is the key: More hiring and spending by the Army, Navy, Air Force and affiliated departments, such as the Defense Advanced Research Projects Agency, the high-end military technology developer known as DARPA.

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Amity Shlaes & Ilan Kolet

How Right-to-Work Laws Lead to More Jobs: Echoes

over 3 years ago
A Persistent Edge

Earlier this week, we argued that right-to-work laws keep unemployment lower. This chart bears out that assertion: right-to-work states have for many years performed better on this measure than non-right-to-work states. That's because although less regulation makes it easier for employers to fire their workers, it also makes it easier for them to hire.

A right-to-work law suggests to business owners that a state's legislature, and the local culture, will back them up in labor disputes. It also makes employers more willing to hire workers if they know they can adjust quickly to changed economic circumstances, without worrying about overbearing regulation or heavy-handed union intrusions when they need to cut back. In the end, that will make businesses more flexible, productive and profitable. And nothing encourages hiring like profitability.

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Joseph J. Thorndike

Taxes Should Favor Work Over Wealth: Echoes

over 3 years ago

Two weeks ago, Warren E. Buffett called for raising taxes on wealth. In honor of Labor Day, let's consider a different question: should we lower taxes on work?

As Buffett pointed out, rich people -- especially investors -- get a relatively easy ride under the current tax law. Much of their income comes in the form of capital gains and dividends, both of which are usually taxed at a maximum rate of 15 percent.

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Sure, we push people into unions. But that's OK. Unions are good for the worker. You gotta love 'em.

That's the Labor Day message Americans have received for three-quarters of a century from both organized labor and the National Labor Relations Board. These days the pushiness is still evident.

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Amity Shlaes & Ilan Kolet

How Active Government Chills Markets: Echoes

over 3 years ago
Echoes Chart 8/26 Revised

This week, we looked at the so-called Congressional Effect, the phenomenon whereby stocks rise more when Congress is out of session. The data underlying that effect suggest that active government chills markets. Another way to consider the same dynamic is to ask: Was the federal government more active or less active in the most recent recession than in preceding ones?

The answer is more active, going back at least as far as the Great Depression. As the federal government created the National Recovery Administration and a number of other "alphabet" agencies in the 1930s, markets slowed and unemployment stayed high. For the entire decade, neither stocks nor employment returned to 1920s levels. This chart shows a similar effect this time around: the recovery in stock prices has been far weaker than the average for post-war recessions. And unemployment remains stuck at around 9 percent.

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The world’s financial leaders are again on their way to Jackson Hole, Wyoming, for what will be the 30th annual monetary-policy symposium in the Grand Teton Mountains. Anticipations are running high that Federal Reserve Chairman Ben S. Bernanke will say something in the opening address to move markets, like he did last year.

Some even attribute a stock-market rally this week to rumors that he will hint at new interventions, like a third round of “quantitative easing” or an “Operation Twist” to lengthen the maturity of the Fed’s Treasury portfolio.

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Joseph J. Thorndike

Are Divided Governments Good for the Country?: Echoes

over 3 years ago

"That government is best which governs least," Henry David Thoreau said in 1849. As Amity Shlaes pointed out this week, investors have generally agreed, bidding up stocks whenever Congress leaves town.

Even more striking, Wall Street has rallied when Democrats and Republicans split control of the federal government. Apparently, investors prefer bipartisan gridlock to single-party activism.

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Not what they expected. That's the take on the stock market's sudden decline this August. The third year of a president's term is normally a good one for stocks -- and history shows that when Congress is in recess, as it is now, markets almost always rally.

One product makes clear exactly how unusual this year's slide has been, and offers a clue as to why 2011 broke the rules. It's called the Congressional Effect Fund. Founded by Wall Streeter Eric Singer in 2008, the fund is premised on the idea that equity markets dislike a hostile Washington, tolerate a friendly Washington, but prefer an inactive Washington above all.

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Amity Shlaes & Ilan Kolet

In Swing States, A Hard Slog for Obama: Echoes

over 3 years ago
Echoes Chart

Jobs were one of the things President Barack Obama and his supporters pushed most when they campaigned in closely contested territory in 2008. In the battleground state of Ohio, for example, the AFL-CIO's state leader told voters that Obama would "advance the interest of working people for a change."

But as this chart shows, creation of nonfarm jobs in most swing states has been well below the national average, which itself is not so great. (Swing states are defined here as those in which the winning candidate received less than 52 percent of the vote 2008.)

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Joseph J. Thorndike

Why Reagan Raised Taxes and We Should, Too: Echoes

over 3 years ago

On a foggy morning 30 years ago at his Santa Barbara ranch, Ronald Reagan signed the Economic Recovery Tax Act of 1981. Talking with reporters afterward, the president reveled in his legislative victory.

The law, he said, represented "a turnaround of almost a half a century of a course this country has been on and marks an end to the excessive growth in government bureaucracy and government spending and government taxing."

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Amity Shlaes & Ilan Kolet

Nixon's Legacy, a Bad Decade: Echoes

over 3 years ago
Chart: Nixon's Legacy

Four decades ago, Richard Nixon announced his new economic policy, which included wage-and-price controls, disincentives to import, and the end of the gold-exchange standard. In the short term, meaning the period before the election of 1972, the result was strong growth. Strong enough, in fact, that in November 1972, the U.K. Prime Minister Edward Heath imposed his own wage-and-price controls.

The justification for these steps by national leaders was economic theory so contrived that today it is difficult even to re-read it. For example, explaining Heath's move, a commentator wrote in the New York Times on Nov. 8, 1972: "The lesson of recent experience is that the twin goals of simultaneously reducing unemployment and checking inflation requires use of at least two policy lessons, a stimulative overall monetary and fiscal policy to make jobs grow, and direct controls to keep prices and wages down and curb inflationary expectations." Economists advising both Nixon and Heath told them that the simultaneous occurrence of inflation and slow growth, or inflation and unemployment, was unlikely.

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Forty years ago this month, President Richard Nixon sharply shifted his economic policy in an interventionist direction with deleterious economic results that continued for a decade and provide lessons for today.

On August 15, 1971, Nixon announced a freeze on wages and prices. This action paved the way for a series of monetary and fiscal policy interventions that eventually led to double-digit unemployment, double-digit inflation and double- digit interest rates. Had he stayed the course, rather than shift policy, the 1970s would probably have been a decade of strong employment growth with low inflation and low unemployment, much as we eventually saw in the 1980s and 1990s.

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When President Richard Nixon decided to dismantle the Bretton Woods monetary system, it stunned the world. So did his imposition of wage and price controls. Forty years later, we're still talking about both.

By contrast, the fiscal elements of Nixon's New Economic Plan have been long forgotten. And for good reason. Most were -- as Amity Shlaes noted in her post this week -- simply "short-term gimmicks" designed for political rather than economic effect.

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Head for Camp David. Convene meetings. Take advice from economists, your Cabinet, all the experts. Then put forward a giant new economic program, maybe including some dramatic form of shock therapy that will calm financial markets and create jobs.

That's the kind of response Americans are used to seeing in a president when the nation is suddenly confronted with bad news like last week's market turmoil and the U.S. credit downgrade by Standard & Poor's. But the results of such a response to economic alarm 40 Augusts ago suggest this isn't the way to go.

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I agree with what Amity Shlaes says, in her last post, about the immediate future: the pressure is now on for even more deficit reduction. But her rosy view of Newt Gingrich and the 1990s leaves a lot out.

First, wind back the clock to the summer of 1993, when Bill Clinton was a new president and the Democrats had control of Congress. Building on the historic budget deal that President George H.W. Bush completed in 1990 (Republicans hated it because he went back on his "read my lips" pledge, but it began a decade of fiscal responsibility), Clinton fought for his own budget. It included tax increases to bring down the deficit.

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Thank goodness for Mitch McConnell. Thank goodness Republicans in Congress didn't "pull a Newt." Welcome, Clinton Era II.

That's the conventional wisdom about the budget deal reached July 31. Commentators are emphasizing the statesmanship of the Senate minority leader. Without the Kentucky senator's diplomacy, the radicals in the Grand Old Party might have played too rough and shut down the government, as House Speaker Newt Gingrich did in the 1990s, rather than giving in to President Bill Clinton on the budget.

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The debt-limit battle of 10 years ago still echoes, but a new ring of accomplishment can also be heard.

I was Treasury Undersecretary in 2001 when the recession and the impact of the Sept. 11 terrorist attacks required the first debt-limit hike in four years. Treasury made the request to Congress in early December, and, unsurprisingly, Congress tabled it at first. A vote to raise the debt ceiling has never been popular.

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In reality the fight over whether the spending reductions to be obtained in return for increasing the debt limit are sufficient is spurious: the cuts in discretionary spending of the sort being tossed around represent reductions in projected spending years into the future that are subject to revision by a future Congress and Administration, and most of those reductions aren't due to happen for years anyway, making them even more tenuous.

However, House Speaker John Boehner's plan also calls for yet another commission to be charged with looking for ways to further reduce spending, and whose purview would include entitlements. Despite our collective frustration with yet another commission, this is the only development that truly bodes well for reducing the budget, because it represents the only avenue by which we can reduce entitlement spending.

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About Echoes

Echoes is Bloomberg View's economic history blog. It is edited by Stephen Mihm, an associate professor of history at the University of Georgia and the author, with Nouriel Roubini, of "Crisis Economics: A Crash Course in the Future of Finance," and of "A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States."