Monday, February 23, 2009

Wisdom from the past

As my friend Tom Burger pointed out to me over the weekend, economists have known of the dangers of government spending for centuries. Here are some quotes that Tom dug up which date back to the early 1800s. The Hayek quote doesn't go back quite that far, but does provide the explanation for why politicians continue to ignore the wisdom of the ages.

J.S. Mill: “Consumption never needs encouragement.”

J.B. Say: “It is the aim of good government to stimulate production, of bad government to stimulate consumption.”

J.S. Mill: “The usual effect of attempts of government to encourage consumption, is merely to prevent savings; that is, to promote unproductive consumption at the expense of reproductive, and to diminish the national wealth by the very means which were intended to increase it.”

F. A. Hayek: "Knowledge in our field is never established by experiment, but can be acquired only by following a rather difficult process of reasoning. No knowledge can be regarded as established once and for all … you have always to convince every generation anew. In fact, knowledge once gained and spread is simply lost and forgotten.”

15 comments:

Bernard said...

Most fitting! Here is a tried and true qoute...

"I have never known much good done by those who affected to trade for the public good."

-Adam Smith

Paul said...

Scott,

Looking for some of your usual optimism to keep me from freaking out....

"Thursday: President Obama is scheduled to unveil his budget and provide a blueprint that will "tip the president's hand on his plans for near-universal health care, changes to entitlements such as Social Security and Medicare, tax policy, and a budget deficit widening into territory never seen in peacetime,"

http://finance.yahoo.com/tech-ticker/article/191261/Is-Obama-Up-to-the-Task-Economic-Policy-on-Center-Stage-This-Week?tickers=%5Edji,%5Egspc,C,BAC,XLF,SPY,DIA

Brian said...

Scott,

I could use some optimism as well - could you explain (in another post) why a change to the mark-to-market rule would not have sufficed in this situation and why we need trillion dollar spending plans instead? It sure seems like Emanuel's plan to make use of a crisis is working out great for our political class...

Donny Baseball said...

Brian-
I agree but it may not work out so well for the political class. It may start with a few incumbents getting voted out and it may end with widespread tax cheating. Hear me out. A huge portion of our economy is small biz, either S Corps or LLCs. It is very easy to hide personal expenses in an LLC, driving down taxable income. Do you not think that many small business owners who have played by the rules and now see what Obama and Congress are doing will conclude that they want to keep their hard earned money rather than hand it over to a bursting leviathan government? What is our government going to do when vast swaths of our most prductive and reliable citizens 1)vote against those in charge 2)refuse to invest in their businesses and 3) hide income from the government. The bloodbath in the political world could be just as bad. Frankly, I'm counting on it.

Tom Burger said...

Those looking for optimism, consider what the government actions really mean: synchronized capital consumption around the world on an unprecedented scale. Read George Reisman's comments here: http://www.georgereisman.com/blog/

Reisman is a very solid "Austrian School" economist who studied with Mises, Hazlitt, and Rothbard at NYU. He has written his own economic tome: "Capitalism". It's a good book.

To get optimism, we've got to change this global program of destruction. Otherwise, we are going to have a relatively bad global economy for as long as this insanity continues.

Sorry, guys, that's the way I see it. Maybe Scott can come up with an optimistic angle.

Scott Grannis said...

I am encouraged by the number of states (11 apparently, see http://www.humanevents.com/article.php?id=30807) that have formally protested the federal government's intrusion into their affairs.

I think Donny makes some good poitns. We need to see a citizen uprising before these guys get the message. The Santelli rant's amazing popularity is a very good sign in that regard.

I don't think Obama is going to have an easy time getting higher taxes into his budget.

Scott Grannis said...

Brian: a good friend who knows more about this than I do notes that we don't even need a change in the MTM rules, that the same results can be achieved by "regulatory forebearance."

I don't know why this hasn't been tried, as it wouldn't cost anything.

Cabodog said...

Brian Wesbury makes some good points today on his website (http://www.ftportfolios.com/Commentary/EconomicResearch/2009/2/23/dont_nationalize;_suspend_mark-to-market).

Mark-to-market came to be in 2007 and I'm a firm believer that the shorts jumped all over this accounting change to cause the chaos that is now occurring.

Suspension of mark-to-market, regulatory forbearance, whatever... Something needs to change this spiral. I'm just having a tough time figuring out why they're not changing this -- it doesn't make sense -- but then again, it's Washington. Nuff said.

reasonableminds said...

Regarding mark-to-market: Call me simplistic, but it seems to me that balance sheets should always show assets at market value. I don't rule out the possibility that the market may undervalue a given asset at a given time, but the market as a whole is more trustworthy than any one individual owner who has an incentive to overstate the value of the assets he's holding. Those who despise government bailouts and other intrusions should logically believe that it's up to individual investors (even depositors!) to assess the health of a bank's balance sheet. How are they supposed to do that if the balance sheet is allowed to contain wishful thinking?

Donny Baseball said...

reasonablemind-
Huh? It has been basic accounting practice for centuries to report assets on the Balance Sheet at historical cost. Furthermore, we've historically let companies wait until assets prove to be impaired before they write them down. This has been our long standing practice to keep wishful thinking from infecting the balance sheet. MTM accounting does not keep wishful thinking from the balance sheet, it only forces temporary conditions on to the balance sheet, which may or may not jibe with intrinsic value. Land isn't marked to market, why should bonds?

reasonableminds said...

Donny, I'm perfectly willing to be taught: How is an ordinary bank customer supposed to know whether the bank is solvent or not if the assets are not marked to market?

To take a real-life example I'm dealing with, how should a small business go about finding out which banks can safely handle account balances in excess of FDIC limits? There are expensive "sweep" options that allow the bank to move the money into Treasuries overnight, but that's currently a big money-loser because the interest is far exceeded by the fees. Do you believe there is any way for someone in my position to assess a bank's stability without MTM?

david said...

scott, did you see this article at Seeking Alpha?

Thanks,

Dave

http://seekingalpha.com/article/118339-end-of-the-recession-in-2009

Scott Grannis said...

david: I did see the article and I believe I had a related post. I think it makes sense.

Donny Baseball said...

RM-
That is a good question. I have always just adhered the following rule - NEVER put more cash into a bank than than the FDIC guarantee. If you have $2.5 mil then you need to find 10 banks. I have traditionally just put excess cash into MM funds or T-bill ETFs - precisely b/c looking at the many capitalization ratios of potential banks is not feasible for the average consumer. Cheers.

Scott Grannis said...

That's a good reason for why the suspension of MTM accounting rules would not necessarily harm consumers. How is the typical bank customer going to be able to evaluate the security of the banks he has to choose from without help from some third party?