Uneasy Money

Donald Trump announced his stable of 13 economic advisers last Friday. Most of them are professional business types — hedge fund managers, bankers, financiers, real-estate men, one oil man — who have contributed heavily to Trump’s campaign.  Three of the advisers — Peter Navarro, Stephen Moore, and David Malpass — have some background as professional economists. Peter Navarro is a Harvard Ph. D. and a professor of economics and public policy at the University of California at Irvine, Tyler Cowen recently wrote a short piece about him for Bloomberg. Stephen Moore is a visiting fellow at the Heritage Foundation, a former member of the Wall Street Journal editorial board and a frequent contributor of op-ed pieces to the editorial page of the Wall Street Journal and other publications. David Malpass was undersecretary in the Treasury Department during the Reagan administration and later was chief economist at Bear Stearns before starting his own consulting firm.

I don’t know any of these people, but as it happens, I have written about both Moore and Malpass on this blog. In fact, both of my posts were written almost exactly five years ago in August 2011; they were both provoked — I choose that verb carefully — by op-ed pieces they wrote for the Wall Street Journal editorial page.

The first post (“There They Go Again” on 8/5/2011) was about Malpass. Here’s what I had to say about him.

In today’s Wall Street Journal, David Malpass, who, according to the bio, used to be a deputy assistant undersecretary of the Treasury in the Reagan administration, and is now President of something called Encima Global LLC (his position as Chief Economist at Bear Stearns was somehow omitted) carries on about the terrible damage inflicted by the Fed on the American economy.

The U.S. is practically alone in the world in pursuing a near-zero interest rate and letting its central bank leverage to the hilt to buy up the national debt. By choosing to pay savers nearly nothing, the Fed’s policy discourages thrift and is directly connected to the weakness in personal income.

Where Mr. Malpass gets his information, I haven’t a clue, but looking at the table of financial and trade statistics on the back page of the July 16 edition of the Economist, I see that in addition to the United States, Japan, Switzerland, Hong Kong, and Singapore, had 3-month rates less than 0.5%.  Britain, Canada, and Saudi Arabia had rates between 0.5 and 1%. . . .

As for Malpass’s next sentence, where to begin?  I won’t dwell on the garbled syntax, but, even if that were its intention, the Fed is obviously not succeeding in discouraging thrift, as private indebtedness has been falling consistently over the past three years.  The question is whether it would be good for the economy if people were saving even more than they are now, and the answer to that, clearly, is:  not unless there was a great deal more demand by private business to invest than there is now.  Why is business not investing?  Despite repeated declamations about the regulatory overkill and anti-business rhetoric of the Obama administration, no serious observer doubts that the main obstacle to increased business investment is that expected demand does not warrant investments aimed at increasing capacity when existing capacity is not being fully utilized. . . .

From here Malpass meanders into the main theme of his tirade which is how terrible it is that we have a weak dollar.

One of the fastest, most decisive ways to restart U.S. private-sector job growth would be to end the Fed’s near-zero interest rate and the Bush-Obama weak-dollar policy. As Presidents Reagan and Clinton showed, sound money is a core growth strategy—the fastest and most effective way to tell world capital that the U.S. is back in business.

Mr. Malpass served in the Reagan administration, so I would have expected him to know something about what happened in that administration.  Obviously, my expectations were too high.  According to the Federal Reserve’s index of trade weighted dollar exchange rate, the dollar exchange rate stood at 95.66 when Reagan took office in January 1981 and at 90.82 when Reagan left office 8 years later.  Now it is true that the dollar rose rapidly in Reagan’s first term reaching about 141 in May 1985, but it fell even faster for the remainder of Reagan’s second term. . . .

Then going in for the kill, Mr. Malpass warns us not to repeat Japan’s mistakes.

Only Japan, after the bursting of its real-estate bubble in 1990, has tried anything similar to U.S. policy. For close to a decade, Tokyo pursued a policy of amped-up government spending, high tax rates, zero-interest rates and mega-trillion yen central-bank buying of government debt. The weak recovery became a deep malaise, with Japan’s own monetary officials warning the U.S. not to follow their lead.

Funny, Mr. Malpass seems to forget that Japan also pursued the sound money policy that he extols. . . . In April 1990, the yen stood at 159 to the dollar.  Last week it was at 77 to the dollar.  Sounds like a strong yen policy to me. . . .

I will just note that, given Mr. Malpass’s affection for a strong dollar, it seems a bit odd that Trump, who constantly rails against currency manipulation and devaluations by other countries, which tend to raise the exchange value of the dollar against those currencies, has chosen Malpass as an economic adviser and that Malpass has agreed to advise Trump, who seems to want anything but a strong dollar. But then again, it’s a strange world that we are now living in.

Then almost two weeks after Malpass’s little masterpiece, along came Mr. Moore with another gem of the kind that the Wall Street Journal editorial page specializes in. The result was that I wrote this post (“The Wall Street Editorial Page is a Disgrace” 8/18/2011).

Stephen Moore has the dubious honor of being a member of the editorial board of The Wall Street Journal.  He lives up (or down) to that honor by imparting his wisdom from time to time in signed columns appearing on the Journal’s editorial page.  His contribution in today’s Journal (“Why Americans Hate Economics”) is noteworthy for typifying the sad decline of the Journal’s editorial page into a self-parody of obnoxious, philistine anti-intellectualism.

Mr. Moore begins by repeating a joke once told by Professor Christina Romer, formerly President Obama’s chief economist, now on the economics department at the University of California at Berkeley.  The joke, not really that funny, is that there are two kinds of students:  those who hate economics and those who really hate economics.  Professor Romer apparently told the joke to explain that it’s not true.  Mr. Moore repeats it to explain why he thinks it really is.  Why does he?  Let Mr. Moore speak for himself:  “Because too often economic theories defy common sense.”  That’s it in a nutshell for Mr. Moore:  common sense — the ultimate standard of truth.

So what’s that you say, Galileo?  The sun is stationary and the earth travels around it?  You must be kidding!  Why any child can tell you that the sun rises in the east and moves across the sky every day and then travels beneath the earth at night to reappear in the east the next morning.  And you expect anyone in his right mind to believe otherwise.  What?  It’s the earth rotating on its axis?  Are you possessed of demons?  And you say that the earth is round?  If the earth were round, how could anybody stand at the bottom of the earth and not fall off?  Galileo, you are a raving lunatic.  And you, Mr. Einstein, you say that there is something called a space-time continuum, so that time slows down as the speed one travels approaches the speed of light.  My God, where could you have come up with such an idea?  By that reasoning, two people could not agree on which of two events happened first if one of them was stationary and the other traveling at half the speed of light.  Away with you, and don’t ever dare speak such nonsense again, or, by God, you shall be really, really sorry.

The point of course is not to disregard common sense — that would not be very intelligent — but to recognize that common sense isn’t enough.  Sometimes things are not what they seem – the earth, Mr. Moore, is not flat – and our common sense has to be trained to correspond with a reality that can only be discerned by the intensive application of our reasoning powers, in other words, by thinking harder about what the world is really like than just accepting what common sense seems to be telling us.  But once you recognize that common sense has its limitations, the snide populist sneers — the stock-in-trade of the Journal editorial page — mocking economists with degrees from elite universities in which Mr. Moore likes to indulge are exposed for what they are:  the puerile defensiveness of those unwilling to do the hard thinking required to push back the frontiers of their own ignorance.

In today’s column, Mr. Moore directs his ridicule at a number of Keynesian nostrums that I would not necessarily subscribe to, at least not without significant qualification.  But Keynesian ideas are also rooted in certain common-sense notions, for example, the idea that income and expenditure are mutually interdependent, the income of one person being derived from the expenditure of another.  So when Mr. Moore simply dismisses as “nonsensical” the idea that extending unemployment insurance to keep the unemployed from having to stop spending, he is in fact rejecting an idea that is no less grounded in common sense than the idea that paying people not to work discourages work.  The problem is that our common sense cuts in both directions.  Mr. Moore likes one and wants to ignore the other.  (continue reading here).

So, no question about it, Mr. Trump, the man who chose Corey Lewandowski and then Paul Manafort to run his campaign, and selected Meredith McIver to work with Melania Trump on her speech to the Republican convention, proves again that he is a great judge of talent.