A different take on our economic woes

The wild fluctuations of the stock market last week seem to be a reaction to the national deficit and the downgrading of American bonds.  But, as financial analyst Liaquat Ahamed, points out, investors were dumping stocks and investing in government bonds, despite the downgrade and despite record low interest rates.

So, if financial markets aren’t worried about the full faith and credit of the United States, why is the stock market falling? An alternative view, most prominently expressed by New York Times columnist Paul Krugman, is that the markets have concluded, given the struggling economy, that budget cuts are precisely the wrong medicine for what ails us. The Obama administration was backed into a corner by the S&P downgrade and must now focus on cutting the budget deficit to the exclusion of all other policy objectives. Such austerity — whether achieved through spending cuts or tax increases — at this moment in the business cycle would only exacerbate a slowdown. In this reading, the stock market is preparing itself for the coming double-dip.

If this is the market’s message, what should we do? Instead of instituting deeper budget cuts and other austerity measures, the government should pursue the opposite: It should take advantage of the fact that it can essentially borrow for free to finance badly needed infrastructure investments. After all, our airports, roads and bridges are in need of urgent repair, and the extra investment would provide job opportunities and inject money into the economy.

via What is the stock market telling us? – The Washington Post.

Expect that to be the Democrats’ position, that we should stop worrying about the deficit and spend even more money to create jobs and get the economy going.  Mr. Ahamed says, however, that this isn’t politically possible.  Mainly because ordinary Americans saw the government bailing out big banks and corporations, but doing nothing to bail them out.  He proposes a different kind of government activism aimed specifically at consumers and homeowners, which, I suspect, may also become Democratic proposals:

A large-scale government program to restructure residential mortgages and help households refinance underwater mortgages would reduce the debt overhang and support consumer demand. Most important, by channeling public money to help individual families, rather than Wall Street, this initiative could alter the political dynamics that currently doom any government efforts to jump-start the economy.

Can you answer this take on the economic problems and what government might do about them?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Pete

    Call me stupid but, if the fundamental problem is expenditures outpacing income, I can’t for the life of me figure out how upping the expenditures helps. Just sayin’.

  • Pete

    Call me stupid but, if the fundamental problem is expenditures outpacing income, I can’t for the life of me figure out how upping the expenditures helps. Just sayin’.

  • WebMonk

    No one should ever take economic decisions based on anything a newspaper says. Not just the Washington Post, but any newspaper. This is just a particularly horrible example of an article.

    Which is a serious shame. Ahamed has pretty serious financial chops and should know better, but I guess you turn off your brain when you write a newspaper column.

    Not one single mention of the Fed’s announcement, which had a huge impact. Oh, and no mention of the financial nastiness in both China and Europe. Especially Europe’s troubles impacted the movements in the stock and bond markets that Ahamed is talking about, but he never touches on either of those issues.

    If he had submitted this as some sort of economic analysis for the businesses for which he has worked, he would suddenly get bumped to the front of the line for future lay-offs because of obvious and gross incompetence. I’m sure he does better work in the business world, but in writing newspaper columns …. yetch!

  • WebMonk

    No one should ever take economic decisions based on anything a newspaper says. Not just the Washington Post, but any newspaper. This is just a particularly horrible example of an article.

    Which is a serious shame. Ahamed has pretty serious financial chops and should know better, but I guess you turn off your brain when you write a newspaper column.

    Not one single mention of the Fed’s announcement, which had a huge impact. Oh, and no mention of the financial nastiness in both China and Europe. Especially Europe’s troubles impacted the movements in the stock and bond markets that Ahamed is talking about, but he never touches on either of those issues.

    If he had submitted this as some sort of economic analysis for the businesses for which he has worked, he would suddenly get bumped to the front of the line for future lay-offs because of obvious and gross incompetence. I’m sure he does better work in the business world, but in writing newspaper columns …. yetch!

  • Lou

    I can’t for the life of me, either, comprehend this thinking process. In fact, this is exactly the type of rationale from the Dems that scares the pants off of me. I see it all the time from the MSNBC commentators as well. I pray to God that this is not the mindset of any of the members of the Super Committee.

    On a slightly different note, I actually thought this post might be referring to Warren Buffet’s Op-Ed:
    http://www.nytimes.com/2010/11/17/opinion/17buffett.html
    Be interested to read what your thoughts are on his article.

  • Lou

    I can’t for the life of me, either, comprehend this thinking process. In fact, this is exactly the type of rationale from the Dems that scares the pants off of me. I see it all the time from the MSNBC commentators as well. I pray to God that this is not the mindset of any of the members of the Super Committee.

    On a slightly different note, I actually thought this post might be referring to Warren Buffet’s Op-Ed:
    http://www.nytimes.com/2010/11/17/opinion/17buffett.html
    Be interested to read what your thoughts are on his article.

  • Lou
  • Lou
  • helen

    Buffet’s “dividing line” is a bit higher than Obama’s. :)

    The middle class might see justice in that. ( A million is worth about $250K these days, isn’t it?)
    He’s right to include dividend & investment income. Why should someone who makes money on other people’s money pay at a lesser rate than the guy who sweats for his wage or works unpaid overtime for his salary?

    Never mind that stuff about “these people create the jobs”! “These people” minimize the jobs as far as possible, or send them overseas, to make their own pockets a little heavier. Maybe there should be a surcharge on overseas income (as well as a way to be sure it’s all reported here).

  • helen

    Buffet’s “dividing line” is a bit higher than Obama’s. :)

    The middle class might see justice in that. ( A million is worth about $250K these days, isn’t it?)
    He’s right to include dividend & investment income. Why should someone who makes money on other people’s money pay at a lesser rate than the guy who sweats for his wage or works unpaid overtime for his salary?

    Never mind that stuff about “these people create the jobs”! “These people” minimize the jobs as far as possible, or send them overseas, to make their own pockets a little heavier. Maybe there should be a surcharge on overseas income (as well as a way to be sure it’s all reported here).

  • http://www.thisweconfess.wordpress.com Lucas Woodford

    The government will not be able to adequately address the situation until they are willing to provide and honest diagnosis of the economy and be willing to consider that the stock market is not simply cycling, but evolving. There are six interwoven bubbles that have propped each other up and have begun to burst, which, to some extent the government can postpone (in some respects) for the short term, but at the peril of substantial inflation and dollar devaluation. 1) The real estate bubble, 2) the stock market bubble, 3) the private debt bubble, 4) the discretionary spending bubble, 5) the dollar bubble and 6) the government debt bubble are all interlinked, and when one bursts, as has happened, it puts tremendous pressure on the others. If the government pumps money into the economy, even though there is not real substantial growth in the economy (GDP), they will simply prop up the stock market, ensure inflation, increase government debt, decrease ratings (oops, that already happened), and destabilize the global economy. Unfortunately, there will not be a quick fix, but spending more money will only make it worse.

  • http://www.thisweconfess.wordpress.com Lucas Woodford

    The government will not be able to adequately address the situation until they are willing to provide and honest diagnosis of the economy and be willing to consider that the stock market is not simply cycling, but evolving. There are six interwoven bubbles that have propped each other up and have begun to burst, which, to some extent the government can postpone (in some respects) for the short term, but at the peril of substantial inflation and dollar devaluation. 1) The real estate bubble, 2) the stock market bubble, 3) the private debt bubble, 4) the discretionary spending bubble, 5) the dollar bubble and 6) the government debt bubble are all interlinked, and when one bursts, as has happened, it puts tremendous pressure on the others. If the government pumps money into the economy, even though there is not real substantial growth in the economy (GDP), they will simply prop up the stock market, ensure inflation, increase government debt, decrease ratings (oops, that already happened), and destabilize the global economy. Unfortunately, there will not be a quick fix, but spending more money will only make it worse.

  • fws

    greed.

    there is alot of money out there that investors want to park and make huge and PASSIVE gains out of. They are spoiled and want to make 15-20% on passive investments.

    Few, if any , organizations that actually MAKE things that people really need can generate those kinds of returns.

    So these investors are looking for the next bubble to participate in, jump out of just before the burst and leave the rest of the crowd to pay for that. They so far have succeeded in making governments everywhere pay for that sort of behavior under the cover of “free market financial deregulation”.

    So you see these enormous swings driven by computer modelling probably that are all about speculation and current events and not at all about underlying value and brick and mortar and real productivity.

    Even Apple stock is an example of this. They are being rewarded as they should be for innovation and production value, and at the same time there is a layer of value on their stock that is not really about value at all but rather about relative risk in the short term.

  • fws

    greed.

    there is alot of money out there that investors want to park and make huge and PASSIVE gains out of. They are spoiled and want to make 15-20% on passive investments.

    Few, if any , organizations that actually MAKE things that people really need can generate those kinds of returns.

    So these investors are looking for the next bubble to participate in, jump out of just before the burst and leave the rest of the crowd to pay for that. They so far have succeeded in making governments everywhere pay for that sort of behavior under the cover of “free market financial deregulation”.

    So you see these enormous swings driven by computer modelling probably that are all about speculation and current events and not at all about underlying value and brick and mortar and real productivity.

    Even Apple stock is an example of this. They are being rewarded as they should be for innovation and production value, and at the same time there is a layer of value on their stock that is not really about value at all but rather about relative risk in the short term.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    @7

    Yup.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    @7

    Yup.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    One other thing about expecting guaranteed returns on risk based investments. Don’t go crying when you lose your money gambling. There are no gangas. The potential return is balanced by the risk. Don’t like risk? Don’t gamble. When people whine about losing money in the stock market, you just have to shake your head. I mean that is the whole point. The trend followers (401k investors) pump up the values and the inside trend setters take the profits. Sure, you might get lucky, but let’s face it, that isn’t investing. It is gambling.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    One other thing about expecting guaranteed returns on risk based investments. Don’t go crying when you lose your money gambling. There are no gangas. The potential return is balanced by the risk. Don’t like risk? Don’t gamble. When people whine about losing money in the stock market, you just have to shake your head. I mean that is the whole point. The trend followers (401k investors) pump up the values and the inside trend setters take the profits. Sure, you might get lucky, but let’s face it, that isn’t investing. It is gambling.

  • DonS

    The market is gyrating because the downgrade confirmed what everyone already knew — that our economy is unsustainable and a day of reckoning is coming quickly. But, the market also is a short term investing tool, and in the short term, there are clear profit opportunities. P/E ratios are very attractive for many companies, and profits are up, as is normal when we are theoretically coming out of a recession (companies are running lean because re-employment lags increasing business). Additionally, there is a record amount of cash on the sidelines, looking for an investment home.

    It should take advantage of the fact that it can essentially borrow for free to finance badly needed infrastructure investments. After all, our airports, roads and bridges are in need of urgent repair, and the extra investment would provide job opportunities and inject money into the economy.

    This is inanity, of course. I love that term “borrow for free”. Um, you still have to pay back the principal, sir. Sometimes it can be a good deal to borrow money at low rates and invest it at higher rates — but that’s because you are retaining the principal. Here, the author is proposing to spend the principal. So, how exactly are we to repay yet more debt, on top of $15 trillion we already have no plan to repay?

    One might ask why “our airports, roads and bridges are in need of urgent repair”. Why have we let our infrastructure get into so dire a condition? Of course, we know the reason — our government has lost its mission. Its real purpose is to provide for the common good — to build common infrastructure that everyone benefits from. But, unless you are pandering to pork interests, that doesn’t win votes. So, we have allowed the “progressives” among us to convince us that government’s purpose is actually to play Robin Hood — to take from the “wealthy” and give to the “poor”. Our budget is now overwhelmingly devoted to entitlements and other transfer programs, and there is precious little left to actually build infrastructure.

    Another shame of the modern age.

  • DonS

    The market is gyrating because the downgrade confirmed what everyone already knew — that our economy is unsustainable and a day of reckoning is coming quickly. But, the market also is a short term investing tool, and in the short term, there are clear profit opportunities. P/E ratios are very attractive for many companies, and profits are up, as is normal when we are theoretically coming out of a recession (companies are running lean because re-employment lags increasing business). Additionally, there is a record amount of cash on the sidelines, looking for an investment home.

    It should take advantage of the fact that it can essentially borrow for free to finance badly needed infrastructure investments. After all, our airports, roads and bridges are in need of urgent repair, and the extra investment would provide job opportunities and inject money into the economy.

    This is inanity, of course. I love that term “borrow for free”. Um, you still have to pay back the principal, sir. Sometimes it can be a good deal to borrow money at low rates and invest it at higher rates — but that’s because you are retaining the principal. Here, the author is proposing to spend the principal. So, how exactly are we to repay yet more debt, on top of $15 trillion we already have no plan to repay?

    One might ask why “our airports, roads and bridges are in need of urgent repair”. Why have we let our infrastructure get into so dire a condition? Of course, we know the reason — our government has lost its mission. Its real purpose is to provide for the common good — to build common infrastructure that everyone benefits from. But, unless you are pandering to pork interests, that doesn’t win votes. So, we have allowed the “progressives” among us to convince us that government’s purpose is actually to play Robin Hood — to take from the “wealthy” and give to the “poor”. Our budget is now overwhelmingly devoted to entitlements and other transfer programs, and there is precious little left to actually build infrastructure.

    Another shame of the modern age.

  • helen

    The “wealthy” have been taking from the rest of the country, from time immemorial, but especially in the last 30 years of deregulation (which finally got us into this mess).

    Buffet can see it; why can’t you?

    FDR wasn’t all that “compassionate”; he wanted to avoid riots and robbery. Look at the UK now and think about it.

  • helen

    The “wealthy” have been taking from the rest of the country, from time immemorial, but especially in the last 30 years of deregulation (which finally got us into this mess).

    Buffet can see it; why can’t you?

    FDR wasn’t all that “compassionate”; he wanted to avoid riots and robbery. Look at the UK now and think about it.

  • DonS

    Helen: The reason why I used “wealthy” in quotes is because our tax code doesn’t go after the wealthy, i.e. those with a lot of assets. It goes after those having higher than average, but still relatively modest (when compared with guys like Buffett) incomes. So, if your objective is to “get” the ones who are “taking from the rest of the country”, you need a whole new tax system that taxes wealth, not income. By focusing on earned income, you are disincentivizing the very productive activities that make life better for the rest of us by creating good jobs, while leaving the truly rich, like Buffett, who make all of their wealth passively, pretty much unscathed.

    Buffett “can see it”, as you say, but notice that he wants us to continue taxing earned income, not his passive earnings. Note also that, despite all of his talk, there is no evidence that he pays more than the minimum absolutely required under the tax code.

    He’s all talk.

    I didn’t use the term “compassionate”, so I’m not sure why you quoted that. Perhaps you were thinking of or responding to another comment. However, don’t kid yourself. FDR was an ideologue — study his biography and you’ll see that. He used the Great Depression opportunistically to install programs that he thought were long overdue.

  • DonS

    Helen: The reason why I used “wealthy” in quotes is because our tax code doesn’t go after the wealthy, i.e. those with a lot of assets. It goes after those having higher than average, but still relatively modest (when compared with guys like Buffett) incomes. So, if your objective is to “get” the ones who are “taking from the rest of the country”, you need a whole new tax system that taxes wealth, not income. By focusing on earned income, you are disincentivizing the very productive activities that make life better for the rest of us by creating good jobs, while leaving the truly rich, like Buffett, who make all of their wealth passively, pretty much unscathed.

    Buffett “can see it”, as you say, but notice that he wants us to continue taxing earned income, not his passive earnings. Note also that, despite all of his talk, there is no evidence that he pays more than the minimum absolutely required under the tax code.

    He’s all talk.

    I didn’t use the term “compassionate”, so I’m not sure why you quoted that. Perhaps you were thinking of or responding to another comment. However, don’t kid yourself. FDR was an ideologue — study his biography and you’ll see that. He used the Great Depression opportunistically to install programs that he thought were long overdue.

  • http://www.toddstadler.com/ tODD

    DonS said (@12):

    Note also that, despite all of his talk, there is no evidence that he pays more than the minimum absolutely required under the tax code. He’s all talk.

    A popular talking point, that. If one believes in a need for a systemic change, then, goes the argument, one must personally engage in that behavior voluntarily at an individual level. Even though it is almost certainly true that doing so will have a negligible impact compared to that of the desired systemic change. To fail to do so voluntarily means that you’re a hypocrite.

    So, DonS, given your insistence on the need for reduced government spending, how many checks have you sent off to the government to offset any benefits you’ve received as a result of federal spending?

  • http://www.toddstadler.com/ tODD

    DonS said (@12):

    Note also that, despite all of his talk, there is no evidence that he pays more than the minimum absolutely required under the tax code. He’s all talk.

    A popular talking point, that. If one believes in a need for a systemic change, then, goes the argument, one must personally engage in that behavior voluntarily at an individual level. Even though it is almost certainly true that doing so will have a negligible impact compared to that of the desired systemic change. To fail to do so voluntarily means that you’re a hypocrite.

    So, DonS, given your insistence on the need for reduced government spending, how many checks have you sent off to the government to offset any benefits you’ve received as a result of federal spending?

  • DonS

    tODD @ 13: Hmm. I’m pretty sure I’m very much a net taxpayer, writing far more in checks to the government than I have ever received in benefits.

    I agree with you that one is not a hypocrite for advocating for systemic change while participating fully in the system as it presently exists. In fact, I have made that very argument when liberals insist on the ridiculous argument that people who take social security or medicare benefits have no right to argue for reform of those systems.

    However, the very specific point I was making about Buffett is that he, like other multi-billionaires who continually whine how they don’t pay enough in taxes, ISN’T advocating for the kind of systemic change which would truly change their circumstances. He wants earned income taxed at higher rates — that won’t affect him with any significance. Instead, it hits the people who are trying to climb up in the world — who are trying to amass a few assets for their old age. It’s like he is in the boat and now he is trying to pull up the ladder so no one else can climb in. He’s got his, and unless he is advocating for a wealth tax, he is going to keep it.

    I don’t have any time for those guys. And if someone’s going to throw the “Buffett” (liberals’ favorite billionaire — maybe after George Soros) card at me to counter a reasonable argument that increasing tax rates is counter-productive, I am going to call them on it.

  • DonS

    tODD @ 13: Hmm. I’m pretty sure I’m very much a net taxpayer, writing far more in checks to the government than I have ever received in benefits.

    I agree with you that one is not a hypocrite for advocating for systemic change while participating fully in the system as it presently exists. In fact, I have made that very argument when liberals insist on the ridiculous argument that people who take social security or medicare benefits have no right to argue for reform of those systems.

    However, the very specific point I was making about Buffett is that he, like other multi-billionaires who continually whine how they don’t pay enough in taxes, ISN’T advocating for the kind of systemic change which would truly change their circumstances. He wants earned income taxed at higher rates — that won’t affect him with any significance. Instead, it hits the people who are trying to climb up in the world — who are trying to amass a few assets for their old age. It’s like he is in the boat and now he is trying to pull up the ladder so no one else can climb in. He’s got his, and unless he is advocating for a wealth tax, he is going to keep it.

    I don’t have any time for those guys. And if someone’s going to throw the “Buffett” (liberals’ favorite billionaire — maybe after George Soros) card at me to counter a reasonable argument that increasing tax rates is counter-productive, I am going to call them on it.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “it hits the people who are trying to climb up in the world — who are trying to amass a few assets for their old age.”

    There is the problem right there: “trying to amass a few assets for their old age.” Your children are your only wealth. They are the “assets” you amass that take care of you when you are old, period. Clearly the government recognizes this because all they are doing is socializing everyone’s kids to collectively pay for all of the retired folks, even those who never contributed any kids to the system. Social Security is a pyramid scheme. There aren’t enough kids to make it work if folks hoard their wealth for retirement and tax their kids to supplement and pay for the elderly poor. We used to help our kids by getting them job training or getting them in on the family business. We used to help them with housing. We used to leave them an inheritance. Now kids are saddled with student loans and mortgages and are taxed to pay for the elderly and poor. No wonder they want free medical care. Their parents are amassing wealth not to help their kids, but to live it up in retirement. This is the reason we will not leave this country better off. We are only interested in making ourselves comfortable to the very end of our earthly lives. Then we blame the government(!) for the sad state of affairs that started in our own hearts.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “it hits the people who are trying to climb up in the world — who are trying to amass a few assets for their old age.”

    There is the problem right there: “trying to amass a few assets for their old age.” Your children are your only wealth. They are the “assets” you amass that take care of you when you are old, period. Clearly the government recognizes this because all they are doing is socializing everyone’s kids to collectively pay for all of the retired folks, even those who never contributed any kids to the system. Social Security is a pyramid scheme. There aren’t enough kids to make it work if folks hoard their wealth for retirement and tax their kids to supplement and pay for the elderly poor. We used to help our kids by getting them job training or getting them in on the family business. We used to help them with housing. We used to leave them an inheritance. Now kids are saddled with student loans and mortgages and are taxed to pay for the elderly and poor. No wonder they want free medical care. Their parents are amassing wealth not to help their kids, but to live it up in retirement. This is the reason we will not leave this country better off. We are only interested in making ourselves comfortable to the very end of our earthly lives. Then we blame the government(!) for the sad state of affairs that started in our own hearts.


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