Mark Zaccaria: Money, Politics, and PR Legerdemain in the Public Sector, Part 2

Mark Zaccaria concludes his response to Bruce Bartlett’s postulates on the relationship between deficits, monetary policy, interest rates with some specific economic suggestions of his own…
Raise Interest Rates: Money is like water, in that if you want it to flow you have to tilt the table. With effective rates at zero there is no incentive whatsoever to risk private capital on innovation or new infrastructure. Even if the start-up you back is a success it could be that all you’ll get in return is the original check you invested in it. Using federal capital is not the answer. Deficit spending will always go to pork and pet projects because of the political process that has to take place to authorize it in the first place. (Remember: Inefficient Spending).
I am certainly not counseling a return to the double digit primes of the Carter Administration. To get money now sitting on the sidelines back into the game and then to get it moving more quickly there has to be an incentive. So far the best one ever devised is Profit.
Create Industries, not just Programs: Recently the federal government arranged for massive loans to be made to Chrysler and GM to keep them afloat in their present configurations. Their present configurations are the problem. That loan money will be spent to perform high cost manufacturing of products consumers don’t want. If the government had, instead, created a tax credit or other individual incentive to BUY any American automobile it would have created demand that favored the low cost producers and those with the best products to sell. That still might have cut Chrysler and GM out of the transaction, but it would have made them move a whole lot faster to shed inefficiencies and focus on strengths. To put it another way, nobody ever runs as fast as they do when their hair is on fire. As it stands, politicians may claim some short term victory because employees of these two behemoths will get their pay checks for a couple more months. It just puts off the inevitable, though, and you have to wonder if the loans were a better idea than just having a bonfire with the Hundred Dollar Bills on the East Lawn of the White House. The fire would at least rein in the money supply slightly.
Federal action on the requests from the car makers is just one example of a policy that has to change…because it won’t work. Look at what’s happening to the big banks. They are being nationalized through deficit spending to bail them out. I say nationalized because their new venture capitalist, the US Government, is imposing all sorts of requirements on them. You may think its just deserts to force limits on executive pay or make them send back a private jet or two. When the US Government insisted that the payment of dividends be suspended until its loans were repaid, however, it effectively downgraded the investment value of the banks’ common stock to zero. Have you been watching? As I write this Citi Group is trading at just above $2.00 per share, a 52 week low (of course), down from nearly $30.00 per share last year. Bank of America? Today it’s trading around $3.50 per share, down from well over $40.00 last year. The Shareholder of last resort? You and Me, in the form of our federal government. I call that nationalizing the banks.
The programs the government devises are inherently flawed because they do not take market forces into account, only political forces. It’s time for government to start promoting manufacturing and get out of the business of owning equities. And what’s the best way to do that?
Reduce Government Spending: The trillion dollar emergency bailout will not work but it will run up the balance on our National Credit Card such that we will all be indentured servants of the government for generations. It is exactly the wrong thing to do. If the government reduced spending it would also reduce BORROWING. That would leave more money available for productive use by the private sector, the one more likely to make efficient decisions with money.
Reduce Marginal Tax Rates: When you cut taxes you create new taxpayers. The net dollar impact of that larger taxable base is an increase in the overall number of dollars flowing to the US Treasury. That may sound counterintuitive but it has worked every time it’s been tried. Look at the Kennedy Tax Cuts in 1961, or the Regan Cuts in 1981, or the Clinton edition of tax cuts in 1997. The money may not have always been used wisely but it has always materialized.
This time let’s bring in the extra income and resolve to use it in the best interests of re-establishing a conservative financial foundation for the United States of America.
Conclusion
Mr. Bartlett has far more big government experience than I do, but that very fact may prejudice his judgments. He may be like a military general fighting the last war rather than this one. Things may be sufficiently different today to make the policies that worked for Mr. Bartlett in the past unusable today. Two of those changes are the massive accumulated debt and the nearly complete globalization of the economy. New times demand a new analysis of the environment and fresh approaches to having government fulfill its most fundamental responsibility: to protect the people.
Mark Zaccaria is a small businessman in North Kingstown. He is a former member of the North Kingstown Town Council and was the Republican Candidate for the state’s District 2 seat in Congress in 2008.

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scott
scott
12 years ago

I do like Mark, i had a sticker on my car and a sign in my yard.
But we really do need more conservatives to run for higher office.
Also, those of you who have had a face to face conversation with the man know he isnt big on capturing attention or creating energy.

Andrew
Editor
12 years ago

Scott,
It’s been my experience that when somebody brings up a bunch of ad hominem talking points in response to a substantive presentation of a topic, that somebody is afraid of the substance of the actual discussion.
And having interacted with Mark Zaccaria several times, I can safely say there’s nothing wrong with his energy level or his ability to generate political attention.
Now, back to the substance…

scott
scott
12 years ago

i wasnt looking to harp on the guy.
Like i said i really really wanted hijm to win.
i just saw this post as a manner of getting on my values soapbox

Patrick
Patrick
12 years ago

Scott-
Since you didn’t respond before, I’ll ask again, why is it that someone who can have a conservative stance on every issue except abortion, then I’m a RINO?
What is a conservative and what is a New England conservative? And which is an electable conservative?

Russ
Russ
12 years ago

I’d take Mark a lot more seriously if he showed the same concern over the $3 trillion spent invading and occupying Iraq and Afghanistan, which I guess had no effect on the domestic economy. What did Mark say at the time?
“Question: What should we do about the Wars in Iraq and Afghanistan?
Answer: We should Win Them, and then Leave.”
He continued…
“If we opt to save the Blood and Treasure we are now spending on our military efforts by simply concluding them, we will find ourselves marginalized and ignored as both an ally and a trading partner by nations far beyond the Middle East.”
So where’s the concern for the effect of running up debt on “our National Credit Card?” Where’s the concern for debt peonage? It’s not like there weren’t a few brave Republicans who said as much at the time. But absent that, it’s hard to see this as anything but partisan posturing now.

Mario
Mario
12 years ago

I think this is wrong. The problem has been that inflation expectations have been too low, not too high, and raising interest rates would make that worse. As of the end of last year we were talking about the potential for deflation. To the extent that this has subsided, it is due to the commitment to increasing inflation through the stimulus spending.* I don’t dispute that a large amount will be (and has been) wasted on pork and pet projects (some stimulative regardless, some not), but the combination of no stimulus and higher interest rates would be far, far worse.
* That is, until the President decided to pledge to cut the deficit in half in his first term. How do you reconcile deficit spending (to increase inflation expectations) and a contractionary fiscal policy (decreasing inflation)? You can’t have both. If the stimulus had any hope of working at all, that might have done it in (if anyone believes him, but I get the sense that many do).

Andrew
Editor
12 years ago

Russ,
Blaming defense spending shows a very limited understanding of the fiscal situation the United States is facing. As a percentage of GDP, the current defense budget is not even at the levels of even the mid-1980s. More importantly, using the figures compiled by Brian Riedl of the Heritage Foundation, 63% of the $675 billion increase in annual Federal spending above the rate of inflation since 2001 has gone to entitlements (social security, Medicare, etc.) and other non-defense related areas. The increases add up to around $2 trillion dollars in new domestic spending since 2001. Even if you eliminate the Department of Defense in its entirety, it doesn’t address the problem of non-defense spending climbing at twice the rate of inflation.
Furthermore, analyzing defense expenditures purely in terms of costs is incomplete. On September 11, the United States could have immediately surrendered to Al-Qaida, recalled all troops from areas where Al-Qaida ordered us to remove them from, and converted half of the money “saved” from the defense budget into a jizya payment as a show of good faith. That might be viewed as a money-saver in the short term, but wouldn’t have been a good policy in the long run.

Russ
Russ
12 years ago

Are we questioning here the percentage of GDP or the effect on US debt? Clearly the war effected our deficit spending under Bush, yes?
One other interesting point is the “recall of troops from areas where Al-Qaida ordered us to remove them from”. In 2001 we’re talking Saudi Arabia.

Bin Laden’s ambitions in the short run are plain. His first goal is to compel the U.S. to withdraw its military forces (today numbering 6,000) from his native Saudi Arabia. The presence of foreign troops in the cradle of Islam is, for him, “the latest and the greatest” of all infidel aggressions against the religion in its 14-century history. By their very presence, he believes, the U.S. forces defile the Muslim holy land. “Now infidels walk everywhere on the land where Muhammad was born and where the Koran was revealed to him,” he lamented to TIME in a 1998 interview.

Of course, the US did in fact withdraw troops from Saudi Arabia in 2003. Under Bush, no big deal, but what would the reaction have been under Obama?

matt
matt
12 years ago

There are too many problems with Mr. Z’s analysis to even begin to address them here. The complete confounding of fiscal and monetary policy, and the just plain false assumptions his arguments are based on are tremendous (such as his statement that the Fed prints money – it does not, Treasury does). –“Raise Interest Rates: Money is like water, in that if you want it to flow you have to tilt the table. With effective rates at zero there is no incentive whatsoever to risk private capital on innovation or new infrastructure.”– I guess Mr. Z here will not be an economics professor anytime soon. This statement is completely false. Prime rates set by the Fed represent the Risk Free Rate of interest. That means that the higher the interest rates, the more banks and people will “lend” money to the Fed by buying treasuries (“cuz the rate’s real good!”). The lower the interest rates, the more people will lend/invest/put their money somewhere else. From a borrower’s perspective, if the rates are nearly zero, it costs nearly nothing to borrow money from the Fed and invest that money it in private enterprises. Thus, even a company returning a lousy 3%, by definition, is a money-maker if the money used to finance its operations is borrowed at around 0%. The lower the Fed interest rates, the more money flows out the Fed’s doors and into the private sector. That is why rates kept too low for too long overheat the economy. That is what led to the housing bubble – too much “nearly free” money chasing too few goods (houses), and driving up their prices. That was the inflation Mr. Z talks about. It already happened. His house went way up in value in a very short time span just like… Read more »

Andrew
Editor
12 years ago

Russ,
If debt is at historically high levels, yet expenditures in one area of government — in this case defense — are below their historical norm, it’s difficult to blame the debt on the one area of spending.
I understand that you don’t like defense spending, but unless you’re willing to look at the whole budget, it’s hard to buy that the rationale is a dedication to fiscal conservatism.

Russ Conway
Russ Conway
12 years ago

Ah, so clear now. Reckless spending including massive fraud is no concern to fiscal conservatives so long as we’re only as wasteful and bloated as we’ve been in the past?
I say you’re projecting: it’s you guys who have a beef with only certain types of spending. I’m happy to criticize massive bank bailouts and wasteful defense spending.

Andrew
Editor
12 years ago

Who’s projecting? Fiscal conservatives don’t hide the fact that they don’t believe that all government spending is good. With regards to domestic policy on most issues, that’s one dimension that separates them from progressives.
Waste and fraud is of concern because it impairs the ability of the military and the Defense department to carry out its mission of providing the common defense. If we rooted out the waste and put the savings towards accelerated debt payments, then yes, we could continue with all of our current commitments, with defense spending as an even smaller percentage of both GDP and the Federal Budget. So you are right in the sense that, a fiscal conservative should always be concerned when we’re not getting the most bang for the buck.
Yet the idea the growth in the Federal budget (especially the automatic growth of entitlement spending, which you neglected in your above comment) wouldn’t be a problem, if only defense spending was maximally efficient, and the even further stretch that it’s somehow defense spending that is at the root of the current economic/fiscal crisis, isn’t borne out by the numbers.

mattt
mattt
12 years ago

Spending on defense and spending on entitlements are both simply GOVERNMENT SPENDING. There is waste and fraud in both. There are too many failed defense projects to make the argument that there is no waste there. On the other hand, don’t get me started on the waste of entitlements… Here is where Mr. Z was wrong again. Spending in the 1930s on “alphabet soup” public works programs and spending in the 1940s on the war was precisely the same. Both spending is public sector spending using confiscated (taxes) or borrowed dollars (war bonds). The reason we came out of the Depression in the 1940s was because of our shift to a total war economy, and the inherent (nearly guaranteed) rise in productivity during such a period. During the war economy, people were less motivated by personal gain (in the form of income), but were more motivated by national pride, patriotism, and the need for victory. Factory workers worked 12+ hour days. Factories produced around the clock. Production of “wasteful” luxury items was halted and resources diverted to making tanks and ammunition. Production was simplified, streamlined, and a lesser variety of goods were produced. People donated household materials to the war effort; a one time “free” infusion of raw material. New factories were built. Refineries. Power plants. Liberty ships were rolling off the dry docks every few hours…the list goes on and on. Women and minorities entered the workforce in a huge way. Color and gender didn’t matter so much when national survival was at stake. After the war, we were the only industrialized nation left in the world without so much as a scratch on a single factory or piece of national infrastructure at home. Thus, our goods and food and services were in tremendously high demand because we were… Read more »

Tom W
Tom W
12 years ago

Well said Matt.
Too bad Obama is deliberately going down the 1930’s FDR path – not for the stated reason of pulling the economy up, but the unspoken reason to lock in failure while using the “crisis” to engineer the “tipping point” of the Wilson-FDR-LBJ initiated efforts to transform the United States from a free market republic adhering to the letter and spirit of the U.S. Constitution, and make it a “socialist democracy” of the European mold.

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