Archive for March, 2013

The wizard of oz.

9 March 2013

This weekend’s opening of the Disney blockbuster “Oz the Great and Powerful” is my opening for a little shameless self-promotion. My nearest claim to fame is a book I co-wrote called The Historian’s Wizard of Oz: Reading L. Frank Baum’s Classic as a Political and Monetary Allegory. My “co-author” is L. Frank Baum himself, as the book includes all of the first Oz book, The Wonderful Wizard of Oz, with about 65 footnotes that I put in to point out various alleged symbolism. The supposed symbols have to do with the political and economic landscape of the 1890s, when Baum wrote the book.

There are several versions of Oz as a political or monetary allegory, but almost all of them focus on farm distress (opening gloom in Kansas, a hotbed of “prairie populism”), the gold standard (yellow brick road), bimetallism (silver shoes (not ruby slippers in the book) on a yellow brick road),  quest for the political power center of the nation (Emerald City), supposedly dim farmers who turn out to be quite clever (scarecrow), supposedly all-powerful president who turns out to be a “humbug” (wizard), and so on. The original allegorical interpretation, Henry Littlefield’s “The Wizard of Oz: Parable of Populism” (1964), had a symbol for seemingly every major character and incident in the book, including the name Oz as an allusion to “oz.,” the abbreviation for an ounce of gold or silver. A later version by economist Hugh Rockoff (“The Wizard of Oz as a Monetary Allegory,” 1990) added many more symbols.

The annotations in my book draw on Littlefield’s and Rockoff’s interpretations, as well as those of several others, and add a few of my own. I also have chapters on understanding the gold standard, the “Populist” farm-protest movement, and the inevitable question of whether Baum intended the book to be in any way a commentary on politics or economics. I reach a definite conclusion on that one, but I’m not going to give it away here. Besides my book, I have a freely available article in Essays in Economic & Business History that says all I have to say on the subject.

The law can’t touch them at all

9 March 2013

“Too big to prosecute” is the recurring headline this week after Attorney General Eric Holder’s remarkable statement before the Senate Judiciary Committee on Wednesday:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

Where to begin? “Too big to fail” is one thing, but to say these institutions are too big to clean up their act is another. The attorney general seems to be implying that the big banks are more important than the laws themselves. It is one thing to say that the outright collapse of these institutions would bring economic ruin. It is quite another to assume that prosecuting criminal acts by them or some of their employees would also bring ruin.

Skeptics have long called the big banks “too big to prosecute” because their lavish campaign contributions give them unparalleled access and influence in Washington, but Holder’s remarks point to something more insidious: ideological capture. When cabinet officials are products of Wall Street or, worse, credulously believe Wall Street claims that their firms are delicate life-giving flowers that must never be disturbed, we have a problem that won’t go away anytime soon.

Fortunately, several members of Congress, including Republicans David Vitter and Charles Grassley and Democrats Sherrod Brown and Elizabeth Warren, are pushing back. Vitter and Brown have co-sponsored a bill to limit the size of the big banks. But we have been here before, as recently as 2010, when a similar bill lost by a vote of 61-33 and was opposed by the Obama administration. Until further notice, it’s hard to disagree with these words of Huey Long from 1932:

“They’ve got a set of Republican waiters on one side and a set of Democratic waiters on the other side, but no matter which set of waiters brings you the dish, the legislative grub is all prepared in the same Wall Street kitchen.”

The law can’t touch them at all.

Sequester: We have been here before

4 March 2013

My views on the $85 billion meat cleaver of federal spending cuts, also known as the “sequester,” are entirely predictable to anyone who knows me or has been reading this blog. I think it’s a dumb thing to do when the economy is still weak and needs more deficit spending rather than less, it’s bad public policy to make indiscriminate cuts instead of selective cuts, and it’s not surprising that Congressional Republicans chose sequester over a balanced package of spending cuts and tax increases. I didn’t blog about it earlier because I didn’t want to be too predictable.

What’s interesting to me is that the sequester is nothing new in a sense. We had the opposite policy for two years, in the form of the 2009-2010 stimulus package, which pumped about $394 billion per year in new federal spending into the economy, and then the federal stimulus went down to about $0. The original yearly amount was about 2.5% of GDP, which should have boosted the economy quite a bit. Many leading estimates are that it did. The Commerce Department’s Bureau of Economic Analysis breaks down the contribution to GDP growth of the different components (household consumption, business investment, government purchases, net exports). Their estimates are that the federal government’s contribution to economic growth was just 0.74 percentage points in 2009 and a minuscule 0.14 points in 2010. (In both years, consumption and investment accounted for most of the change in GDP.) Possibly those numbers are underestimates and they probably do not account for any “multiplier” effects on consumption (people get money from the government and go out and spend it, etc.), but what I want to focus on is the next year, 2011, when the stimulus basically ran out.

In 2011, the combined federal, state, and local government contribution to real GDP growth was -0.67 points (which looks kind of small to me considering that stimulus spending fell by about $300 to $400 billion). It wasn’t much better — -0.34 points — in 2012. A problem with fiscal stimulus is that it’s temporary — if the patient doesn’t respond immediately, Dr. Congress decides that the medicine doesn’t work or is too expensive.

The sequestration amount for 2013 is $85 billion, or roughly 0.5% of GDP. Economists’ estimates of the size of the multiplier vary, from below 1 to about 1.4, so the likely reduction in GDP would be  in the range of 0.3% to 0.7%. This would definitely hurt, but keep in mind that the government was tightening its fiscal policy in 2011 and 2012, too, with negative impacts of about the same size. To further play devil’s advocate, while the sequester is bad news and bad public policy, it’s unlikely to push the economy into recession, not if consumption and investment continue to grow as fast as they did over the past three years (with an average combined contribution to growth of about 2.5 percentage points). It’s still a lousy time to cut spending and raise taxes, but in the aggregate these cuts are mild enough that they’re merely misguided, not catastrophic.