December 08, 2002
In the Bush Administration, Loyalty Is a One-Way Street Only

In the Bush Administration, Loyalty Is a One-Way Street Only

There is a story I have now heard three times about Larry Lindsey's first day in the White House in January 2001. At one point he met with the now-headless Council of Economic Advisers staff--no CEA council members had yet been named. "Well," he began. "You should all be happy: the people who understand economics are now back in charge."

Today such a claim sounds totally ridiculous--mendacious, or simply mad.

But Larry was not mendacious (biased, maybe), and not mad. Remember: he was speaking before the 2001 tax bill that did nothing to increase national savings and investment, something to further complicate our tax code, next to nothing to reduce marginal tax rates, and a good deal to transfer wealth from the middle class to the more-than-$300,000-a-year rich. He was speaking before the farm bill, the steel tariff, and Bush's summary rejection of Pakistan's request for an increase in its textile export quota marked the Bush administration's turn to protectionism. He was speaking before it became clear just how clueless the Bush White House was with respect to the government's important mission of making sure that corporations in financial trouble did not hide their true situation for months or years by telling large lies. And he was speaking before the Bush White House fumbled the stabilization-policy ball as it proved incapable of recognizing that the post-1994 acceleration in productivity growth meant that unemployment would rise even in an economic recovery that was moderately strong by pre-1995 yardsticks.

Today we know that it never crosses the minds of the powers-that-be in the Bush White House that good economic policies might be worth pursuing because good economic policies lead to a stronger economy. To the powers-that-be in the Bush White House, economic policies are way to reward favored groups of constituents. And their effect on the economy? They don't need to think about no stinking effect of policy on the economy.

So Larry lost in his attempt to get the 2001 tax cut to reduce marginal tax rates where they are highest--among the two-children-$25,000-annual-household-income class: in the mind of the Bush White House, the point of tax cuts is not to improve incentives but to reward contributors, and although the two-children-$25,000-annual-household-income class vote in large numbers for Republican presidential candidates, they don't buy tables at $1000-a-plate campaign fundraisers. He lost his fight to keep the White House from imposing steel tariffs. He lost his fight to maintain the progress toward freeing trade in farm products and reducing welfare-for-agribusiness made in the 1990s, when Bill Clinton cooperated with the Gingrich-era Republicans--who for all their faults really did believe in their free-market ideology.

Attempts to get the White House to understand the seriousness of the threat to America's capital markets from the corporate oversight crisis were doomed from the beginning. In his previous career the President had been a director of a company that used off-balance sheet vehicles to hide big losses. In his previous career the Vice President had been CEO of a company that had failed to report material accounting changes and so fudged its numbers. In such a context, what would happen to anyone in the White House to say that such practices seriously degrade the quality of financial information and keep financial markets from doing a good job of allocating investment funds where they ought to go?

As best as I can tell, Larry Lindsey batted .000 in his two years in the George W. Bush administration. For it turned out that the people who understand economics were not back in charge. As former White House insider John DiIulio wrote, the Clinton administration "[had] a leader with a genuine interest in the policy process who encouraged information-rich decision-making… teemed with knowledgeable people interested in making government work… substantive policy debate… a premium on policy knowledge…. The Bush West Wing is very nearly at the other end of this Clinton policy-making continuum." Or, to put it more pithily, the people who matter in the Bush White House--from the President on down--don't know what the government does or how what the government does affects the country, and don't care.

Lindsey's disillusionment must have been rapid. He must have expected the presidential inauguration to have been followed by something very much like what happened in January 1989 or January 1993: the spin-doctors would be handsomely thanked, and told that the President would see them in twenty months when it was time for the midterm campaign. The people who knew about government would take over, and would craft a program that satisfied as many campaign promises as possible while still being best for the country. But that didn't happen. It must have been a nightmare.

Larry must have concluded that he could do more good inside the tent than outside of it. So he soldiered on, like a good dog. Now don't get me wrong--Larry Lindsey is not my choice for Assistant to the President for Economic Policy. For one thing, he has been lamentably slow in marking his beliefs of the size of supply-side benefits from cuts to marginal tax rates to market. Lindsey also buys into the very, very dangerous strategy of relying on Democrats to be more responsible about deficits than Republicans: it is never a good idea to base any strategy of government on the hope that one's political adversaries will behave more responsibly than one's own party. And in my view Larry Lindsey proved himself too willing to be a good dog--to eager to burn his academic reputation by pushing the White House Media Affairs line and advancing protectionist arguments that he knows are very, very weak indeed. But compared to the other possibilities--Don Evans or the empty suit that Bob Zoellick appears to have turned into or Karl Rove or Josh Bolten--Larry Lindsey stands head-and-shoulders above them in his knowledge of how economic policy works and what the public interest is.

However, the attempts to tell the senior power brokers that economic policies mattered and that good economic policies were preferable to bad must have really annoyed a number of spin doctors inside the White House. And so when the spin doctors turn their attention to demonstrating that Bush cares about the economy and can act strongly and decisively, what do they decide to do? To summarily fire the badly-miscast Treasury Secretary, Paul O'Neill--and to fire Larry Lindsey.

If you listen closely, you can hear what the assistants to the press secretary told the reporters as they informed them of what the White House story was: "they didn't quit, they were fired"; "notice how the President didn't praise anything O'Neill and Lindsey had done"; "notice how downbeat Ari Fleischer was in his description of their service to the country"; "see how decisively President Bush acts on the economy--he decides they have to go and they go, with no interval to allow them to save face and no pretense that this is what they want to do."

Admittedly, it doesn't make much sense to anyone who isn't a spin-doctor. They are obviously failures in their jobs, and yet you let them hang around for two full years? You fire them without having any replacements set up, so you demonstrate that you are in control of the economy by creating large holes in your table of organization where the people who prepare your briefings and present you with your options should be? The message is: "I wouldn't listen to them. So they were associated with the biggest failure area in my administration. So they must be fired!"

But the spin-doctors do know the Washington press corps well. Half of the Washington press corps is sufficiently partisan that they will buy the administration line, and the other half of the Washington press corps is too lazy and too cowardly to challenge what the White House spin-doctors say. So the media consensus will be that Larry Lindsey did a bad job in the George W. Bush White House, and was deservedly fired, and George W. Bush showed that he has too soft a heart in keeping him on for so long. Far better had Larry bitten the bullet, and resigned earlier on principle--over the steel tariff, or over the host of other substantive issues where the good guys lost inside the White House, for the people who understand economics are definitely not in control.

Posted by DeLong at December 08, 2002 06:55 PM | Trackback

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Comments

What did LL want to do in re: marginal tax rates and that $25K worker? I never heard any talk that he wanted MTRs lower than what was passed. Or are you saying the expansion of the child tax credit thwarted his plans regarding MTRs?

As for his rapid disillusionment, the press reported that he was sufficiently concerned about his status as to seek reassurances (which he got), which doesn't exactly square with being disillusioned. It does square with being very cynical, on the theory that the longer you hang around, the bigger your cash-out will be. Not a very good theory, since this sort of separation is not the greatest for future professional opportunities. But I'm sure he won't need to go on food stamps.

Posted by: Max on December 8, 2002 08:33 PM

I wish this were published somewhere, with your byline on it, so I could cut it out and put it next all the various republican propaganda up on the Department tackboard.

Posted by: Dennis O'Dea on December 8, 2002 09:04 PM

Great article.

Though I won't be shedding too many tears for Mr. Lindsey.

Posted by: on December 8, 2002 10:53 PM

So far, the example that's always to Lindsey explaining why he was fired is his statement that the Iraq war would cost $200 billion.

Now, you can see *anything* wrong with that? I can't. It even had zero effect on PR for the Iraq war; I don't recall "price" having much bearing on the debate. What the hell?

Posted by: Jason McCullough on December 9, 2002 12:08 AM

>>for the people who understand economics are definitely not in control.<<

And they won't be. Recall: it's an MBA administration... It's all about business (and more specifically the oil industry.)

Posted by: Jean-Philippe Stijns on December 9, 2002 12:09 AM

I'll add to Jean-Philippe's comment that with the appointment of John W. Snow, it's also a lot about coal.

Posted by: Dave Roberts on December 9, 2002 01:34 AM

A depressingly perceptive article. Two comments:

The President didn't care enough about economics to pay any attention to what was going on, especially during a period during which he had found his "calling": fighting terrorism.

Please note that it is a very difficult thing to resign on principle, especially so early in an administration, and there aren't alot of folks in Washington who would do it under any circumstances.

Posted by: Jim Harris on December 9, 2002 05:21 AM

That's when somebody leaves 'to pursue other opportunities', or to 'spend more time with their family'.

Posted by: Barry on December 9, 2002 05:33 AM

One can't help to read this situation as an instance of insincerity and hypocracy which will NOT sovle any problem. So Republicans hope to use advertising, accusations of disloyalty, and a war to smooth over the lack of an economic agenda based on principles of economics. It is hard to find for me to identify something as stupid. I wonder who is worse for the American people Osama or George. Maybe the expression with frineds like you I don't enemies fits the bill. Bush can't really worried about not being reelectable because of the economy. Karl Rove has it figured out. With demographics in their favor and domination of the three branches of government it will be along time before economic principles will be used to make public policy and prosperity might return.

Posted by: on December 9, 2002 05:44 AM

One can't help to read this situation as an instance of insincerity and hypocracy which will NOT sovle any problem. So Republicans hope to use advertising, accusations of disloyalty, and a war to smooth over the lack of an economic agenda based on principles of economics. It is hard to find for me to identify something as stupid. I wonder who is worse for the American people Osama or George. Maybe the expression with frineds like you I don't enemies fits the bill. Bush can't really worried about not being reelectable because of the economy. Karl Rove has it figured out. With demographics in their favor and domination of the three branches of government it will be along time before economic principles will be used to make public policy and prosperity might return.

Posted by: on December 9, 2002 05:45 AM

One can't help to read this situation as an instance of insincerity and hypocracy which will NOT sovle any problem. So Republicans hope to use advertising, accusations of disloyalty, and a war to smooth over the lack of an economic agenda based on principles of economics. It is hard to find for me to identify something as stupid. I wonder who is worse for the American people Osama or George. Maybe the expression with frineds like you I don't enemies fits the bill. Bush can't really worried about not being reelectable because of the economy. Karl Rove has it figured out. With demographics in their favor and domination of the three branches of government it will be along time before economic principles will be used to make public policy and prosperity might return.

Posted by: on December 9, 2002 05:45 AM

One can't help to read this situation as an instance of insincerity and hypocracy which will NOT sovle any problem. So Republicans hope to use advertising, accusations of disloyalty, and a war to smooth over the lack of an economic agenda based on principles of economics. It is hard to find for me to identify something as stupid. I wonder who is worse for the American people Osama or George. Maybe the expression with frineds like you I don't enemies fits the bill. Bush can't really worried about not being reelectable because of the economy. Karl Rove has it figured out. With demographics in their favor and domination of the three branches of government it will be along time before economic principles will be used to make public policy and prosperity might return.

Posted by: on December 9, 2002 05:45 AM

Well, if the new Secretary of the Treasury is an ex-Ford offiicial who is CEO of an old economy industry I'm sure everything will be different.

Posted by: Rob on December 9, 2002 06:10 AM

Yep, another poor choice. Between O'Neill, Pitt and now Snow, the Administration isn't looking very good on it's major capital markets oriented appointments. Friedman might be a good elevation to Treasury Secretary down the road a year or two when he's got some seasoning; maybe somebody was looking at the Rubin model there?

Oh, and loyalty in most Administrations is a one way street, isn't it? Serve at the pleasure of the Prez and recognize that if things are going wrong, he's not going to fire himself, that's just not the way things work.

Posted by: Anarchus on December 9, 2002 06:31 AM

Prof. DeLong, a question: Aren't there any economists that could serve in either of these two positions? Am I wrong in assuming that a detailed knowledge of economics would be necessary in either (or both) of these jobs? Or aren't there any professional economists who would take either of these jobs?

Posted by: Chuck Nolan on December 9, 2002 08:16 AM

Chuck Nolan, there's the distinct danger -- by no means a certainty, but a very real possibility -- that an economists would know some economics. If you were Bush, would you take that risk when appointing someone to a cabinet-level position?

Posted by: Julian Elson on December 9, 2002 08:55 AM

The second point from Anarchus is on the money. Loyalty is a one-way street when working for politicians. The best of the lot understand that and make some allowances when things don't work out. The post-election holiday period is sort of traditional for firings (the rumor that O'Neill was out circulated last holiday season, but I guess the election needed to be dealt with before error could be admitted). I'm not sure it's much different in corporate offices, though. Everybody who stays benefits from the leader's lack of loyalty to one or two staff members (a new leader means a housecleaning), so it is easy enough to decide those who were sacked, rather than the leader, were the problem.

Brad is sounding a bit like he came from a presidential admnistration that was to his own liking, which is to say, he is speaking up for economists. This isn't the first time he has been hugely partisan when it comes to his party of choice. If you read carefully, you can actually detect a preference for a specific wing of the economist party - the highly accomplished scholarly wing. There have been postings in the past suggesting regret that Lindsey, who started life in much the same way as that other Larry, Summers, didn't stick to the path. Sadly, political life ain't likely to allow intellectual puritans much time in the sun. It is good that some still feel indignation when this is proven true. However, expecting good economic policy out of Bush, or even tolerance for those who advocate good policy, was clearly a mistake. The tax/social security privatization/military (and other) spending positions during the presidential campaign made clear that Bush had no love for economic facts.

Posted by: K.Harris on December 9, 2002 09:44 AM

Snow actually has a Ph.D. in economics from the University of Virginia. He was briefly an econ prof at the University of Maryland. See the sidebar on this Wash Post article: http://www.washingtonpost.com/wp-dyn/articles/A30445-2002Dec9.html

Posted by: L Getzler on December 9, 2002 10:07 AM

On paper, Snow sounds like a reasonable choice ... for Sec. of Commerce. He must have some idea of what he wants to bring to the job. If it's only to apply his lobbying skills on behalf of some prefab program excreted by a Texas think tank, confidence will not increase. At some point he will express himself at length ... let's hope for the best.

The Friedman pick is more perplexing. He sounds like the sort of person who might say some of the right things, which would get him removed in short order. Is there (as Max speculates) a covert policy refurbishment in the works? If so, who the heck is the architect?

Posted by: RonK, Seattle on December 9, 2002 11:46 AM

"Bush blamed Lindsey for many of the administration's economic missteps in recent months and even complained privately about his failure to exercise physically, aides said. "

Next they'll start complaining about his personal hygiene. What a class operation.


Posted by: on December 9, 2002 12:05 PM

Excellent piece -- I wish it were in print so more people could read it. But how to we know that Larry Lindsey had such noble intentions inside? It does raise a good question: Why would anyone want to be loyal to a family that treats them like this?

Posted by: Bobby on December 9, 2002 12:31 PM

Doctorate or no (know?), Snow is a bad choice. As noted, good for Commerce, bad for Treasury.

The Friedman pick is straight out of the Clinton playbook. He's getting the same Admin position that Bob Rubin (Friedman's old co-CEO at Goldman Sachs) started out with in the Clinton Admin, before ascending to Treasury Secretary himself (and most folks consider Rubin to have been a solid Treasury Secretary, I know I do).

On the loyalty bit, Clinton trashed his people just as bad as Bush 2. Remember Bernie Nussbaum? Joycelyn Elders? Michael Espy? It just goes with the territory - if you want one of the big power positions, you serve at the pleasure of the Prez, and his interests and the country's interests come first.

Posted by: Anarchus on December 9, 2002 01:32 PM

"you serve at the pleasure of the Prez, and his interests and the country's interests come first."

Well, at least you're 1 for 2.

Posted by: on December 9, 2002 02:19 PM

Perhaps it was Picardian economics after all: "Make it Snow!

Re loyalty, the norm in presidential administrations (and other semi-formal non-authoritarian quasi-hierarchical coalition structures) is loyalty that is mutual but not symmetric. A subordinate can have an agenda, and think it's important, as long as he/she doesn't act like it's more important than the group agenda (as articulated, in most cases, by one's superior(s)), and the finger can certainly be removed to save the hand.

Bush43 appears to exercise loyalty by retaining obviously problematic subordinates ... but that could just as well be the pervasive ethos of denial.

Posted by: RonK, Seattle on December 9, 2002 02:38 PM

The bottom line is this: the Bush administration has run out of excuses. Tom Daschle is no longer the Senate majority leader. The previously legitimate charge that he’s an obstructionist is now a moot point. President Bush’s reelection chances may very well depend on the turn around of the national economy. We will see if he’s up to the task.

The direction of the stock market in early 2003 should be a good indicator. I must add that Bush’s people should have displayed some guts and told the Louisiana voters in no uncertain terms that its sugar industry will no longer be protected. Will they also chicken out the next time when put to the test?

Posted by: David Thomson on December 9, 2002 03:45 PM

I would be interested to see some evidence that Lindsey fought and lost these battles you are attributing to him. Is there someone other than Donald Lambro in the WashTimes who argues that Lindsey was on either side of the steel tariff question? Lindsey may have not been lying when he addressed the CEA staff, but his later pronouncements on the tax cut were at times spectacularly mendacious; is there evidence that he was in support of the cut you suggest? I'm all for lionizing the dearly departed, but it would be nice to have some proof in the pudding, is all I'm saying.

Posted by: MarkS on December 9, 2002 03:57 PM

'Will they also chicken out the next time when put to the test?'

Name a time when this administration has took a politically unpopular stand on principle.

Posted by: Jason McCullough on December 9, 2002 05:32 PM

"Name a time when this administration has took a politically unpopular stand on principle."

Unfortunately, in regards to economic issues---I cannot offer even one example! This has to change immediately. A real test will be the Mexican sugar agreement.

Do you truly wish to eradicate poverty in the Third world nations? If so, advocating free trade policies is far more important than giving money to worthy charities.

Posted by: David Thomson on December 9, 2002 06:01 PM

(That's why Bush proposed to cut all manufacturing tariffs down to zero... Sounds very good at face value but then you recall that it is developing countries that have the highest manufacturing tariffs... Without any genuine effort to dismantle agricultural trade bariers in both the EU and the US, this sounds just like an other Bushy "I am pro-trade : let all nations discover the great products of America".)

Posted by: Jean-Philippe Stijns on December 9, 2002 06:30 PM

Do we have to go over why unilaterally cutting tariffs benefits everyone involved again?

Posted by: Jason McCullough on December 10, 2002 12:36 AM

"Do we have to go over why unilaterally cutting tariffs benefits everyone involved again?"

We shouldn’t have to constantly return to this theme. Even a half brained idiot should be able to figure it out for themselves. Unfortunately, in the real world many people still don’t quite get it. This is why so many of them prefer to simply donate money to Mother Theresa or other such do-gooders. Their economic illiteracy hinders them from comprehending the really important solutions to Third world poverty.

I blame a lot of this nonsense on religious organizations. Their adherents are often anti-intellectual and inclined toward feel good responses that serve little long term good. A quasi-socialism pervades the philosophical underpinnings of many Judeo-Christian groups.

Posted by: David Thomson on December 10, 2002 04:08 AM

"Do we have to go over why unilaterally cutting tariffs benefits everyone involved again?"

Please do.

Explain exactly why the primary recipient of the tariff (in the US, the company gets it, not the state exchequer - see the related WSJ article) benefits from lower tariffs?

How does the Sugarcane planter in Florida benefit from the US cutting tariffs on imported sugar?

Economists often mistake the forest for the trees.

Trees vote, forests don't.

Posted by: Suresh krishnamoorthy on December 10, 2002 06:32 AM

"How does the Sugarcane planter in Florida benefit from the US cutting tariffs on imported sugar?"

“How does the Sugarcane planter in Florida benefit from the US cutting tariffs on imported sugar?”

The sugarcane planter in Florida is not helped by “US cutting tariffs on imported sugar.” On the contrary, those people earning a living in this industry will likely be severely hurt. That’s simply the price that must be paid for the greater good. Protecting their earnings exacts too high of a cost on the rest of us.

How often do I have to bore everyone with the obvious: the gods of creative destruction are a bunch of mean spirited bastards! Progress always comes with a huge price to be paid by certain sectors of the benefitted society. Or, do you prefer that I lie and say that Santa Claus will be coming down your chimney?

Posted by: David Thomson on December 10, 2002 06:57 AM

The sugarcane planter in Florida is not helped by "US cutting tariffs on imported sugar."

actually i'd argue that in a way they are helped... if being spurred on to be better at growing sugar is help. which, in a roundabout way, i think it is. protectionism never lasts, but real gains in becoming better at what you do does. but slashing tariffs without doing anyhting about subsidies is just a way for rich nations to play a protectionism game that poor nations can't afford. it's vile.

Posted by: quinn norton on December 10, 2002 10:04 AM

I was hoping Jason would defend his 'everybody benefits' argument.

My point was that economists often argue from the 'forest' viewpoint where the general level of societal benefits rises. I agree. Tariffs are bad and so is protectionism in the long run

But ignoring the 'trees' (the individuals who benefit / suffer from any kind of tariff move) is foolhardy, because individuals perpetuate tariffs.

Personally, I would love to have the sugar tariff removed, getting a double benefit: sugar prices fall plus the land goes back to being wetlands, part of the Everglades.

Posted by: Suresh Krishnamoorthy on December 10, 2002 10:49 AM

I'm not writing to bark at DThomson about philospohy, merely about reading comprehension. Suresh understands perfectly what you're trying to say, and points out the critical mistake you're making: "everyone" does not benefit from cutting tariffs. Almost everyone may. But certain people most assuredly will not (as you acknowledge - "mean spirited bastards," etc.); and those people will squawk, and policy makers who care more about politics than policy will not hesitate to harm almost everyone (slightly) to keep a few people from squawking loudly. For better or worse, that's reality. To claim that everys single person benefits from tariff reduction is dishonest, and counterproductive. You generally admit the cruelty, but then you turn around and fog it over.

I will bring up a couple points, however, directed at your philosophical underpinnings: without tariffs, US industry develops less, later, and slower in the early 19thC. The short-term harm done to the US can hardly be claimed as larger than the long-term gains made by the growth of the largest industrial power on earth. Maybe it happens without tariffs, but it's hard to argue the cost-benefit analysis for the US. I know there are all sorts of complications, and tariffs long outlive their usefulness, etc., but the bottom line is that tariffs (subsidies, whatever) for developing industries can have long-term benefits that far outstrip the short-term costs. Sometimes the God of Creative Destruction looks an awful lot like Uncle Sam.

Second, I don't buy your application of "Creative Destruction" to every job loss, ever, anywhere. Absolutely, artisan to factory to assembly line to robots is creative, and destructive to older, less efficient ways. But how is replacing a non-obsolete plant in the US with a similar plant in a low-wage place "creative"? There's no advance in technology, very often none in efficiency or quality; it's just finding someone whom you can hire cheaper. And less safely. I'm not sure where the gain is to society. The only resource being used more "efficiently" is people - the ones who are allegedly the beneficiaries of change. If we could have cheaper T-shirts made by slave labor, would that simply be the cruelty of the GoCD? Or would it be cruelty by you, David Thomson, who values "economic efficiency" above actual human society?

Posted by: JRoth on December 10, 2002 11:13 AM

OK, and Suresh ably came to his own defense while I yattered on.

For the record, I have big problems with agrisubsidies, particularly in the US. I wouldn't mind seeing some land use-based intervention from the gov't (so we see fewer housing tracts on productive farmland and less farming in arid regions), but the kinds of subsidies we have now serve little to no purpose; they don't even benefit the Jeffersonian farmer who is used to foist them over on the public.

Posted by: JRoth on December 10, 2002 11:18 AM

Though the administration is "conservative," I do not find there is any cohesive economic policy. Rather, there are scattered initiatives aimed at satisfying various big business interest groups and high income individuals. No matter who is head of Treasury or Economics Advisor to the President, business lobbying interests and the wealthy will be catered to. Should this mean turning back New Deal economic protections, they will be turned back. Should this mean a contradicting trade initiatives, there will be all sorts of contradictions.

Posted by: on December 10, 2002 12:03 PM

““The sugarcane planter in Florida is not helped by "US cutting tariffs on imported sugar."

actually i'd argue that in a way they are helped... if being spurred on to be better at growing sugar is help. which, in a roundabout way, i think it is.””

I’m sorry but I refuse to indulge in mealy mouthing. Some of these worker inevitably will be hurt. They will likely never again earn their current wages and benefits. Lying to ourselves helps nobody. Unfortunately, this price has to be paid for the good of the overall society.

Posted by: David Thomson on December 10, 2002 12:26 PM

There is a destructive aspect to capitalist development. That is clear. But, is there no rationale for easing the transitions that must occur? Where would we be if there was no unemployment insurance? Of course unemployment insurance may lessen some incentive to quickly search out work, but the program eases economic swings and protects many individuals through periods of rising unemployment. Capitalism needs to be somewhat protective of the individual to be most effective. Besides, there are all sorts of inbalances of power in markets and some must be lessened.

Posted by: on December 10, 2002 12:42 PM

"There is a destructive aspect to capitalist development. That is clear. But, is there no rationale for easing the transitions that must occur?"

We must never protect these jobs if they are no longer of value. Still, I have absolutely no problem with your justified concerns. A viable social order should indeed provide some transitional help to the affected workers. Not to do so, is in many ways a betrayal of the social contract.

Posted by: David Thomson on December 10, 2002 01:32 PM

“But how is replacing a non-obsolete plant in the US with a similar plant in a low-wage place "creative"? There's no advance in technology, very often none in efficiency or quality; it's just finding someone whom you can hire cheaper.”

The scenario you present is one of make-believe. There is no such thing as a plant that can indefinitely stay in business without constantly improving. Shunning new technology is a sure fire way to become irrelevant--and ultimately bankrupt. Also, you overlook the immediate benefits to the workers in the poorer nation. The are usually very glad to get those jobs. Those in the wealthier one must be helped to find better employment.

Posted by: David Thomson on December 10, 2002 01:45 PM

Thank you. The point you have made on always allowing market transitions is most important.

Especially in our suggested economic policies for developing countries, however we have been far too willing to ignore ways to cushion the problems caused by necessary market-oriented changes. The examples are both micro and macro.

Argentina was urged to adopt an exchange rate tied to the dollar. The result was an end of ruinous inflation. But as the dollar strengthened and Argentina's economy began to falter, instead of adjusting the currency peg to remain competitive with neighbors Argentina kept the peg and a depression was the result.

Similarly, we have pushed for needed micro changes in Mexican agriculture with no provision for cushioning a transition. Again, we have an agriculture subsidy policy that creates even more problems for Mexican farmers.

Posted by: on December 10, 2002 01:57 PM

“Tariffs are bad and so is protectionism in the long run

But ignoring the 'trees' (the individuals who benefit / suffer from any kind of tariff move) is foolhardy, because individuals perpetuate tariffs.”

This is why I quite often make fun of people who like to place too much emphasis on macroeconomic insights. Indeed, the individual who is threatened by the proposed improvements usually could care less about the greater good. They are focussing on their own needs. The long run benefits are a moot point if they can't pay next week's grocery bill.

Posted by: David Thomson on December 10, 2002 01:59 PM

http://www.nytimes.com/2002/12/08/international/americas/08MEXI.html

December 8, 2002

Growing Poverty Is Shrinking Mexico's Rain Forest
By TIM WEINER

EJIDO EMILIANO ZAPATA, Mexico — Manuel López Gómez is watching the green world around him disappear, ravaged by people whose only path from starvation lies in slashing and burning the jungle to plant a patch of corn.

"We are out of balance here," said Mr. López, 60, a local farmer turned conservationist. "We are trying to stop the destruction. If nothing changes, all the land around here will be destroyed."

Five miles up a muddy trail from Emiliano Zapata, in southeastern Chiapas State, is Mexico's largest unpolluted lake, Laguna Miramar, and beyond that stands the last rain forest in Mexico. But today almost half a million poor people, speaking six different languages, live in that dying forest. For some here in Chiapas, the issue is turning from saving the trees to saving the people.

A century of government reaching into this most remote corner of Mexico has left most citizens with next to nothing. President Vicente Fox's plans to build dams, railroads, highways and industries linking Chiapas to the outside world in a 21st-century free-trade network are grand but unrealized. And in Chiapas, development often means destruction.

Starting in the late 19th century, the government sold foreign companies the right to tear the great mahogany and cedar trees from Chiapas. In 1972, the government deeded what was left — a forest as big as Connecticut — to the tiny and untrammeled Lacandón tribe, a few hundred people, who farm by trimming the forest canopy, not erasing it.

Since then, more than two-thirds of the Lacandón forest has been sawed down, first by timber companies with heavy machinery, then by peasants — some from Chiapas, some from farther north — all seeking a little land by which to live....

Please do read this important article....

Posted by: on December 10, 2002 02:01 PM

'I'll add to Jean-Philippe's comment that with the appointment of John W. Snow, it's also a lot about coal.'

I haven't seen this mentioned elsewhere, but you're right; Snow's appointment no doubt has a lot to do with Bush's designs on ending the democratic lock on WV.

'My point was that economists often argue from the 'forest' viewpoint where the general level of societal benefits rises. I agree. Tariffs are bad and so is protectionism in the long run

But ignoring the 'trees' (the individuals who benefit / suffer from any kind of tariff move) is foolhardy, because individuals perpetuate tariffs.'

I'm getting rather tired of people simultaneously claiming to agree that trade is good but opposing the increase of trade in *every single instance*. We simply can't let the third world build automobiles, or grow food, or make textiles, or any damned thing; the domestic dislocations (which will happen eventually anyway) are too horrible!

What good is a principle if you can't find a single use for it? If you think trade is beneficial, than you should spend your time talking the pro-trade voting block into providing dislocation assistance.

Unless, of course, you think the adjustments are going to be *so bad* that they make the trade increase not worth it, which contradicts the "trade is good principle." Pick one, but you can't doublethink the both of them.

Oh, and for 3rd-world destruction of the forests to support substience agriculture: theoretically, they could do manufacturing while we grow their food, couldn't they?

Posted by: Jason McCullough on December 10, 2002 02:28 PM

"EJIDO EMILIANO ZAPATA, Mexico — Manuel López Gómez is watching the green world around him disappear, ravaged by people whose only path from starvation lies in slashing and burning the jungle to plant a patch of corn."

ZAPATA? Oh my, does anyone remember the Marlon Brando movie? I don't recall Zapata ever giving homage to the works of Adam Smith. Have we also forgotten the childish behavior of Frida Khalo and her Communist friends early in the twentieth century. Mexico has long paid the price for the socialist sentiments underpinning its economy. A cynic once remarked that Mexico was unfortunate in that the United States only captured half of the country. Mexico got doubled whammed by its secular socialists and those of the Catholic Church.

Posted by: David Thomson on December 10, 2002 02:57 PM

Lindsey quit on principal? Principal! That's rich. Nobody quits on principal anymore. It doesn't pay.

Oh wait. He resigned as a Fed governor because he thought, or so I have heard, that Easy Al was nuts. That kind of out of the box thinking was less likely to be popular with the GOP than the Democrats.

What principal could Lindsey have been standing for anyway by joining the Bush crowd? My mind boggles.

Equally baffling is the willingness of the Lindsey's and Powell's and Whitman's and O'Neil's to accept endless public humiliation. Why do they take it? How can the Bush's keep finding suckers willing to pledge total fealty in return for contmept and humiliation.

I've got it. Masochism. These tired old white estabisment wannbe hacks are gluttons for it.

Posted by: on December 10, 2002 05:43 PM

Lindsey quit on principal? Principal! That's rich. Nobody quits on principal anymore. It doesn't pay.

Oh wait. He resigned as a Fed governor because he thought, or so I have heard, that Easy Al was nuts. That kind of out of the box thinking was less likely to be popular with the GOP than the Democrats.

What principal could Lindsey have been standing for anyway by joining the Bush crowd? My mind boggles.

Equally baffling is the willingness of the Lindsey's and Powell's and Whitman's and O'Neil's to accept endless public humiliation. Why do they take it? How can the Bush's keep finding suckers willing to pledge total fealty in return for contmept and humiliation.

I've got it. Masochism. These tired old white estabisment wannbe hacks are gluttons for it.

Posted by: Rapier on December 10, 2002 05:43 PM

Jason--
Boy, I hate to jump into this briar patch again. But as I understand J-Ps original post, he's objecting to Bush's attempt to try to twist everyone's arms into dropping tariffs on manufacturing, while keeping tariffs and subsidies on agriculture. Which amounts to "Developing countries drop their tariffs, we keep ours."

As I understand it, this is not likely to be the best deal for the developing countries. I hear that sometimes countries are helped by temporary tariffs while they develop industries; JRoth, is this what you were talking about?

Also, WVa went for Bush in 2000. Of course, appointing a coal exec (and imposing steel tariffs) may be about trying to firm up WVa and maybe make inroads in PA coal country as well--those are still important states.

On the big point, though, you win: Nobody named a time when this administration took a politically unpopular stand on principle.

Posted by: Matt Weiner on December 10, 2002 07:49 PM

Here's a gedanken question for you. Suppose that inflationary and deflationary forces are perfectly balanced in an economy, as in a Newtonian force diagram wherein the forces balance out.

If the forces are weak, then presumably, this could go on for a long time without significant consequence. If the forces are strong, something must happen. What path of events would lead to disequilibrium? And how would disequilibrium play out?

I propose an analogy to elastic materials. If pulled in two different directions, the principal effect is that the elastic limit may be reached. If it is exceeded, then of course the material tears. But if it is not quite exceeded, then only gradually does the material deteriorate, until it is no longer capable of bearing such a load.

In the present economy, we have moderately strong inflationary forces, such as deficits, both budgetary and current account. We have moderately strong deflationary forces, such as rising unemployment and the decline in the power of unions. Long-term interest rates have not risen as they should when facing the prospect of a $1.6T war and bottomless deficits. Outside of housing, inflation is non-existent. Unemployment has risen gradually rather than catastrophically. None of these features is particularly good for the economy, yet we have seen rough economic stability. It must fall apart... but in what manner?

Posted by: Charles Utwater II on December 11, 2002 09:21 AM

Here's a gedanken question for you. Suppose that inflationary and deflationary forces are perfectly balanced in an economy, as in a Newtonian force diagram wherein the forces balance out.

If the forces are weak, then presumably, this could go on for a long time without significant consequence. If the forces are strong, something must happen. What path of events would lead to disequilibrium? And how would disequilibrium play out?

I propose an analogy to elastic materials. If pulled in two different directions, the principal effect is that the elastic limit may be reached. If it is exceeded, then of course the material tears. But if it is not quite exceeded, then only gradually does the material deteriorate, until it is no longer capable of bearing such a load.

In the present economy, we have moderately strong inflationary forces, such as deficits, both budgetary and current account. We have moderately strong deflationary forces, such as rising unemployment and the decline in the power of unions. Long-term interest rates have not risen as they should when facing the prospect of a $1.6T war and bottomless deficits. Outside of housing, inflation is non-existent. Unemployment has risen gradually rather than catastrophically. None of these features is particularly good for the economy, yet we have seen rough economic stability. It must fall apart... but in what manner?

Posted by: Charles Utwater II on December 11, 2002 09:22 AM

Yes, Matt, developing industries in developing countries is a lot of what I'm talking about. The insistance that all trade is good, all the time, is just as naive as the one that laissez faire markets are all good, all the time.
Powerful companies can manipulate markets and manipulate trade. Hell, Nestle (I think) manipulated culture and human health by selling formula cheap in the developing world; trouble is, formula is less healthy than breast milk, and costs more. And so now they need cash for something that is a poor substitute for something their bodies would otherwise produce. But, cry the MarketThinkers, if there were no benefit, the women wouldn't buy the stuff. Except that information is imbalanced - 3rd world women (not to mention 1st world women of 10 years ago) assume that the scientific product is superior.
I might add that I'm not proposing a tariff, or even regulation necessarily. But too many people on this list like to imagine that Free Markets and Trade simply lead to a better world for (almost, they whisper) everybody, all the time. Markets are full of hiccups, and full of irrational decision makers, and free riders abound. Wind up the machine and turn it loose, and the results may include a trip ionto a ditch.
Oh, and David, you're the one living in a Fantasy World if you think that Chinese factories are technological marvels that far outstrip their US competition, and that is why Walmart operates there. Can you possibly address the substance of my point, instead of (ahem) misleading about the premise? Chinese factories are run on human rights; that is the resource exploited to make them competitive. If you think that's equivalent to creativity, then please say so in no uncertain terms.

Posted by: JRoth on December 11, 2002 10:47 AM

“Oh, and David, you're the one living in a Fantasy World if you think that Chinese factories are technological marvels that far outstrip their US competition, and that is why Walmart operates there. Can you possibly address the substance of my point, instead of (ahem) misleading about the premise? Chinese factories are run on human rights; that is the resource exploited to make them competitive. If you think that's equivalent to creativity, then please say so in no uncertain terms.”

Did I promise Utopia? There are indeed a lot of speed bumps along the way to the goal of perfect free trade. We are placed in a damned if we do and damned if we don’t predicament with China. There are no risk free options.

China must still compete for customers, and slave laborers are not a long term solution. Only workers receiving never ending training can be counted on to bring in the sales. Outdated factories will not keep you in the game.

Posted by: David Thomson on December 11, 2002 02:11 PM

'As I understand it, this is not likely to be the best deal for the developing countries. I hear that sometimes countries are helped by temporary tariffs while they develop industries; JRoth, is this what you were talking about?'

That was my point: unilateral tariff removal is *still* beneficial. Unless someone's got a model where it isn't that they'd like to present.

JRoth, let's say that you're entirely right about Nestle and formula: what the heck does that have to do with Mexican tariffs? Just becuase there's information problems in that market doesn't mean a whole lot for markets in general. Note, however, that the first world uses a lot of formula compared to breast milk, too, so I guess the market is also broken there.

Posted by: Jason McCullough on December 11, 2002 03:28 PM

Great article. Quick question from a snarky conservative friend of mine, hopefully someone smarter than me can answer:

If marginal tax rates increased, how did he "transfer"
more wealth from the middle class to the rich?


Posted by: Ed on December 12, 2002 04:19 AM

Dear Ed,

The Bush tax bill puts the budget into enormous deficits. Deficits are a borrowing against the future. If the money is borrowed as an investment, then fine: the expenditure now will reduce expenditures in the future.

The Bush deficits are not investments. The money is being given, primarily to wealthy individuals (and I recommend the analysis on www.ctj.org and www.cbpp.org to understand just how badly skewed the tax bill was). Will they invest it in productive investments that will boost the economy and raise tax revenues? That was the supply side fantasy with which the nation experimented in the 1980s. It did not work, because our taxes are already about the lowest in the industrialized world.

The Bush tax cut money is being given through repeal of the Gift and Estate Tax, through widening corporate loopholes to allow corporations to evade taxes, through outright socialism (as when the US funds the airlines) and through other actions that primarily benefit the wealthy.

Almost everything being done for the middle class is negative. The recent changes to pension rules should alarm everyone, since they allow corporations to loot the pensions of their older workers. Note also that veterans' benefits, combat pay, raises for federal workers and unemployment benefits have all been trimmed to pay for the tax cuts.

The marginal rates story is the misdirection that gets one to take one's eyes off the shell with the pea in it. A huge transfer to the wealthy is being made by writing a check, signed "Uncle Sam". Unless you make over $100K per year or have a net worth in excess of $1M, your name isn't on it. Even so, you don't really benefit unless your net worth is $10M and up. And then you make out very well.

Posted by: Charles Utwater II on December 12, 2002 04:58 PM

There's an interesting article by C. Fred Bergsten in the November/December issue of Foreign Affairs which puts the steel tariffs issue into historical context. Bergsten argues that every administration since Kennedy has had to be protectionist in the short-term in order to win the votes from Congress necessary to get broader trade powers - referred to as "two steps forward, one step back". By supporting steel tariffs - the Bush administration is following the pattern of history - and Bergsten optimistically predicts a renaissance for US trade policy.

The preview is available for free online at www.foreignaffairs.org. I'd recommend reading the article in its entirety either by purchasing it online or in print, or going to the library.

Posted by: ETC on January 6, 2003 12:28 AM

Actually - I found the article here too:

http://www.iie.com/papers/bergsten1002.htm

Posted by: ETC on January 6, 2003 12:31 AM
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