Posts Tagged US Economy

The Nutty Professor Reads the Polls

Donald Douglas writes at American Power that the latest New York Times/CBS News poll shows “disastrous” numbers for Democrats.  To make his case, he cites two results which indicate a preference for smaller government, and a third showing more concern over the economy and jobs than health care.  Douglas then points out that a bare plurality has more faith in Republicans to “ensure a strong economy” and a bare majority who don’t think the President has offered reasonable solutions to the economic problems faced by their families.

Not so fast.  These cherry-picked results don’t tell the whole story, and “it doesn’t take a statistician” to see that this grossly exaggerates the bad news in the poll for the President and Democrats.  That’s a good thing, because for a political science professor, Douglas isn’t much of one if that’s what he gets from this poll.

Now on the face of it, this looks like a solid argument: Americans care about the economy, they think the GOP could fix it, and they think Obama doesn’t have his eye on the ball.  If all of this is so, perhaps The Nutty Professor™ is right.

Not so fast.  Douglas’ analysis ignores other results from the poll, not to mention the behavior or real life politicians.  For starters, the same poll shows a 47-34 plurality approving Obama’s handling of terrorism, and a 55-34 majority approval of his foreign policy, suggesting that not all has gone south for the Administration.  Moreover, only seven percent each say they blame the President for the current state of the economy or federal budget deficits, which suggests that even those who don’t think he’s found the right solution yet may not be prepared to turn to someone else in a search for it.  And the respondents were evenly split on whether or not the stimulus package will make the economy better–suggesting that the American popular jury is still out on whether they think it was a mistake by an overactive government.  Finally, though somewhat more respondents said that they think the GOP would be more likely to ensure a strong economy, the same group had more faith in Democrats when it comes to creating jobs or fixing health care.  It is not clear from these contradictory results that the President or his Party are in trouble.

Douglas’ claim that this poll shows an American preference for smaller government also stands on less solid ground than he thinks.  Respondents said they thing government should spend to create jobs, 47-45%, and 62% think Congress should let the Bush tax cuts expire, even though this would raise taxes on high earners.  Fifty-six percent would like to see more regulation of banks and financial institutions, and 52% think the President should do more to fix the economy.  Half say they would change Senate rules to make legislation easier to pass, and 58% think that Obama has expanded government “the right amount” or “not enough.”  It looks like Americans worry less about the size of government than they do its effectiveness–they want more policy that works and less that doesn’t.

It’s no secret that politicians–even conservative, small government politicians–don’t behave as if their constituents want smaller government.  Indeed, according to the Washington Times, over a dozen Republicans wrote letters to one agency alone seeking money from the stimulus package, even though they had voted against it and claimed it had no effect (except in letters like Kit Bond’s request from the USDA for stimulus money for a project in his state on the grounds that it would “create jobs and ultimately spur economic opportunities.”  Even Republicans know that Americans want more government action to solve problems on the ground.

Donald Douglas is not a very good political scientist and an even worse poll analyst, based on this example of his work.  He pulled a few results that support his preconceived notion of the state of American public opinion from a long survey while ignoring data points which might refute his claim.  This poll contains nothing particularly disastrous for Democrats or President Obama.  If Douglas cared about good analysis, he would have pointed this out.


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Usury and Capital

Over the weekend I read two articles that gave me some new insight into how America got into its current economic fix and which policies might not just help us reverse the decline but also set the conditions for more effective markets in the future.

First, Thomas Geoghegan writes persuasively (Subscription Required) in Harper’s Magazine that the central cause of the current economic crisis is a shift of capital from manufacturing and production to financial markets after the repeal of usury laws made hedge funds and lending much more profitable than making stuff:

“That’s when we found out what happens when an advanced industrial economy tries to function with no cap at all on interest rates.  Here’s what happens: the financial sector bloats up.  With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking.  When banks get 25 percent to 30percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing.  Sure, GM is awful.  Sure, it doesn’t innovate.  But the people who could have saved GM and Ford went off to work at AIG, or Merrill Lynch, or even Goldman Sachs.  All of this used to be so obvious as not to merit comment.  What is history, really, but a turf war between manufacturing, labor, and the banks?  In the United States, we shrank manufacturing.  We got rid of labor.  Now it’s just the banks.”

This is not a socialist argument about how corporations exploit the poor by charging high rates of interest and constructing loan agreements to give consumers more information and power to make informed choices about whether and how they should borrow money.  Geoghegan is making a capitalist case that tax policy and regulatory institutions create incentives to which capital and investors will respond by shifting the components of production between sectors in search of the highest profits.  He is pointing out that the invisible hand sometimes slaps us.

In the same issue of Harper’s, Daniel Brook offers an example (Subscription Required) with the story of how Allan Jones invented the payday lending industry.  When Mr. Jones sought investment opportunities for his excess cash, he chose not to open a small factory, manufacturing plant, restaraunt or service industry firm (e.g., janitorial services).  Instead, he decided to lend it to people at usurious interest rates.  Jones might have opened his payday lending storefronts even with interest capped under 500 percent–the large numbers of transactions would deliver a profit even at a smaller margin.  And a careful reading of the story suggests that the high interest rates reflect exploitation of circumstances, not pricing of risk.

All of this suggests that the market predictably moved capital to its most profitable–if not its most efficient–use.  The problem then is not a structural problem with capitalism, but mismanagement of the capitalist system that delivered–whether or not intentionally–an unsustainable outcome.  We need to decide whether to accept market-delivered results like this just for the sake of ideology, or to make an effort to regulate the system sensibly so that we achieve mutually agreed upon goals.

Placing limits on interest rates could bring its own unintended consequences, and it is easy to see that this would likely limit access to needed short-term or consumer loans to those who need it least.  But Americans may find that moving capital back into making stuff makes the economy stronger and more resilient–and less dependent on too-big-to-fail banks.

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