Monday, June 11, 2012

Gramm-Hubbard: So Many Misconceptions, So Little Time

Glenn Hubbard appears to be getting drunk on GOP Kool-Aid again with an assist from Phil Gramm. As they try to argue that Mitt Romney will be the saving grace for our economy, they also contrast the current recession/recovery with what happened in the early 1980’s making so many ridiculous arguments, it is hard to keep track. But let’s start with their explanation for the most recent recession:
The more recent recession resulted from excessive government intervention to increase homeownership by expanding subprime housing loans, on which substantial leverage was built. The resulting wave of defaults damaged the base of the banking system.
Two points here. The first is that Glenn served as economic advisor to that President who kept bragging about rising home ownership. Secondly, the problem was more too little government regulation of the banking system – not excessive regulation. But that line of reasoning is not nearly as bizarre as the following:
The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy … By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, Reagan sought to make it profitable to invest in America again. He clearly succeeded. President Obama's polices would, by contrast, make permanent a significant surge in federal spending and raise marginal tax rates on earnings and entrepreneurial returns.
Paul Krugman partially addresses my problem with this aspect of Gramm-Hubbard:
Because recessions like those of 1990-91, 2001, and 2007-2009 have very different origins from recessions like 1974-75 or the double-dip recession of 1979-82. The old recessions were more or less deliberately created by the Fed via tight money to control inflation, which meant that you had a V-shaped recovery once the Fed decided that we had suffered enough and loosened the reins.
Gramm-Hubbard admitted earlier that it was Volcker’s tight monetary policies that lead to the double-dip recession of 1979-82. One would think these two economists understand our macroeconomic history enough to realize the Volcker reversed his monetary restraint. One would also hope that they understood – as most economists do – that Reagan’s fiscal stimulus wasn’t necessary and ended up leading to less investment not more. Paul’s point is that under the current liquidity trap situation, we need fiscal stimulus to restore full employment. Gramm-Hubbard also paint current U.S. fiscal policy as being very expansionary, which is not even remotely true. They also play the card that our current woes could be cured by less regulation. President Reagan did preside over the deregulation of the banking sector but note early in the Gramm-Hubbard op-ed their recognition of the savings-and-loan crisis. They blame the Volcker FED for this crisis but most economists blame what John Kareken dubbed putting the cart before the horse. Luigi Zingales appears to now support Glass-Steagall because of concerns similar to those that Kareken had with the financial deregulation during the early 1980’s. Somehow – all of this seems to have been missed by Phil Gramm and Glenn Hubbard.


spencer said...

If you actually check the data,
under Reagan we saw the largest drop in interest rates in recorded history.

Moreover, Fed Funds peaked only some four months into Reagan's term started.

ProGrowthLiberal said...

Nominal rates declined but by less than inflation fell. So real rates increased - which even Greg Mankiw noted in his first macroeconomic text which said the same thing I just did about fiscal policy under Reagan. I'm sure Glenn has read that - and you should as well.

mischy said...

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