State of the Union: From Ringside to the WSJ

I was at the State of the Union tonight. You cannot help but love the pomp and circumstance of the event, even if you do not agree with everything the President says. In this case, his opening lines on what we can learn from America's “generation of heroes,” the next greatest generation, were particularly moving to hear in person as was the closing which returned to that theme with “Each time I look at that flag, I’m reminded that our destiny is stitched together like those fifty stars and those thirteen stripes."

But in between there was much to disagree with, especially from an economic policy perspective as I describe in tomorrow’s Wall Street Journal piece which I excerpted from First Principles. For one thing it is a stretch to say that “The state of our Union is getting stronger.” We are not really recovering from the recession, at least not compared to the period after previous big recessions such as the early 1980s as this graph makes clear.

The reason is pretty clear. In the Wall Street Journal piece I refer to and quote from a memo written by President Reagan’s economic adviser George Shultz and others after the 1980 election. It laid out the long run economic strategy they recommended and which Reagan followed. Contrast that with the memo Larry Summers sent to President-elect Obama after the 2008 election, which is making the internet rounds. It laid out the short-run Keynesian policy Summers recommended and which Obama has followed. The big policy differences largely explain the big economic performance differences.

First Principles on the Business News Networks

Yesterday I spent the day visiting the TV studios of CNBC, Bloomberg Television, and the Fox Business Network to discuss my new book First Principles. Thanks to the news anchors the discussion—and debate—was interesting and lively.

I started early, co-hosting Squawk Box from 7 to 9 am with anchors Becky Quick, Joe Kernan, and Andrew Ross Sorkin on the set at CNBC studios in New Jersey. Here is a video from the opening where I briefly presented the theme of the book—that America has deviated from the principles of economic freedom—and responded to some good questions from Joe and Andrew (author of the best seller, Too Big To Fail). Later in the show Steve Liesman joined us on the set and we had a rousing debate segment about the Fed and why economists so often disagree while Joe Kernan raised doubts about the whole subject of economics (had to work hard to get a word in edgewise here). At the end of the show Andrew and I wrapped up with a brief discussion of the economic implications of the 2012 election and where the big economic differences are between Mitt Romney, Newt Gingrich, and Barack Obama

Then over to midtown Manhattan to Bloomberg News studios on Lexington Avenue for an hour’s visit on Surveillance Midday anchored by Tom Keene. Tom has great ways to bring economic ideas into the news of the day and make them entertaining, and he certainly did that with the ideas in First Principles. Here is a video of the opening and ending of that show. Allan Meltzer joined us halfway through the show via a remote video feed, and he added his strongly held views that monetary policy needed to be less discretionary and more rule-like, which I appreciated.

At the end of the day I went over to News Corporation Building on Sixth Avenue for an interview with Gerri Willis on her Fox Business News show The Willis Report . It was a fast-moving on-point interview (4½ minutes) in which she managed to bring out a host of issues ranging from Fed policy to crony capitalism.

Different Economics Texts for Different Economic Views

Alan Blinder and I are frequently on different sides of economic debates, especially when it comes to the effects of monetary and fiscal policy and the impact of short-term discretionary actions. For example, we have both testified together in Congress about the recent stimulus packages. He says they worked. I say they didn’t.

We also both have introductory economics textbooks which we have just revised in different ways in light of the experience with the recent financial crisis, the great recession, the policy response, and the slow recovery. In fact we have the same publisher who recently asked us to explain the rationale for the revisions, and then made videos of the answers. Here is Alan’s video and here is my video. It is not surprising that our approaches to the revisions are somewhat different, but perhaps not as much different as one would expect given the big differences in our views.

American Economic Freedom: Moving in the Wrong Direction

Economic freedom in the United States continues to decline according to the latest Index of Economic Freedom (compiled by the Heritage Foundation) as reported today by Ed Feulner in the Wall Street Journal.

This chart plots the Index from 2006 to 2012. There has been a decline every year since 2007 with a record decline from 2009 to 2010 and another large decline from 2011 to 2012. While nearly every component of the index has declined since 2007, two of the larger declines were due to an increase in government spending as a share of GDP (forcing that component down from 60.3 to 46.7) and a reduction on monetary freedom (bringing that component down from 83.8 to 77.2). The decline in monetary freedom was not due to all the discretionary interventions by the Fed (which the index does not measure), but rather to more government interventions in the price system. Here are the details.


This is not the only quantitative measure to show a decline in economic freedom for the United States. The Economic Freedom Index (compiled by the Fraser Institute) also shows a decline as Gene Epstein points out in this recent Barron’s column, though the data only currently go through 2009

No, Austan, Washington Is Spending Too Much

In yesterday’s Wall Street Journal, Austan Goolsbee argues that Washington Isn't Spending Too Much.  "It’s completely normal,” he says “that spending rises during big downturns….As the economy grows back to health, the government share of the economy will fall,” making it seem as if the Administration’s plan all along was to bring the federal spending share back to what it was before the recession started. It wasn’t.

Take a look at this chart. The top line shows the federal spending share with the budget plan submitted by the Administration last February when Austan Goosbee was Chairman of President’s Council of Economic Advisers. It makes no attempt to bring spending back to pre-recession levels as a share of the economy. While the Congress was able to make a dent in the Administration’s spending plan, we still have a long way to go to gradually get spending back to 2007 levels, which is the pro-growth thing to do, as I explain in First Principles, out later this month.