Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at thinking, intelligent individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

27 August 2009

Steve Hanke: The Misery Index Reality Check


Steve H. Hanke, professor of applied economics at The Johns Hopkins University and a senior fellow at the Cato Institute wrote a useful short article for the September 2009 issue of Globe Asia in which he uses data on the misery index to assess claims that Ronald Reagan's policies caused human misery. He says:
According to some left-wing elements in the chattering classes, the free-market, entrepreneurial capitalist system caused the economic crisis. In the United States, politicians have jumped on this bandwagon. Representative Barney Frank, the colorful chairman of the powerful House Financial Services Committee, put it this way: "This is the end of the era of extreme laissez-faire, of 'Don't tax it, don't regulate it.' That has now been totally evaporated." Pundits have also swung into action. For example, New York Times columnist Paul Krugman wrote: "For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years."
Hanke then shows the chart [click on it to enlarge it] above based on the modification of the original Okun misery index by Robert Barro of Harvard. The Barro misery index takes into account the difference between the average inflation rate over time, the difference in unemployment rate, the change in the 30-year government bond yield, and the difference in the real GDP growth rate from the long-term trend. This index was used to measure the change of misery in a president's term in office. I will offer my usual comment that Presidents have less impact on the economy than does Congress, but even with that caveat, there are interesting lessons here.

Rated as presidential terms, Reagan's first term was the most improved in the time covered, Clinton's second term was next, Reagan's second term was third most improved, the Kennedy/Johnson first term was next, then came Clinton's first term, followed by George W. Bush's second term. I would argue that Reagan's and Kennedy's tax cuts and control of government spending are the reasons for the improvement in the misery index for them. In Clinton's case, there were tax increases in 1993 and then some tax cuts in 1997. Throughout his terms there was real constraint on spending brought on by a balance of power between Clinton and the Congress. His second term with the tax cuts performed better than his first term with the tax increases.

Of course, it might be possible for the near-term economic improvements of Reagan's two terms to result in problems far down the road. But, if you wish to prove this, the burden of proof should be seen as much higher than that acknowledged by Barney Frank or by Paul Krugman. But, their claims require no proof among the Progressives of the Democrat Party. They are taken as simply unchallengeable dogma.

The current economic recession cannot be due to a sharp spike in oil prices in 2007, which was preceded by several years of steep price increases, because this cannot be blamed on the Republicans. What is more, it was the Democrats who were opposing drilling everywhere in the U.S. and preventing added U.S. supplies from moderating increasing oil costs. It was also primarily Democrats who were eager to limit growth in many communities and states, which led to very high land prices for those lots on which homes were allowed and created the need for many sub-prime home mortgages. It was the Democrats at the national level who responded to this need for sub-prime mortgages with the changes in the Community Reinvestment Act that put more pressure on banks to help provide them. Democrat trial law firms, ACORN, and other community organizers were eager for the business of suing banks and lenders if they did not bow to the will of the Democrat Congress with plentiful sub-prime mortgage loans. And, of course, it was the Democrats who encouraged Fanny Mae and Freddy Mac to facilitate the sale of these risky sub-prime mortgages. Meanwhile, the Democrat majority did not pass stricter business regulations until that seemed to become the only way to deny all of those real causes of the recession, aside from some business decision-making errors.

Those of us who are less gullible than the Progressive wing of the Democrat Party will continue to give very little credence to these silly claims that it was the Republicans and their failure to heavily regulate the financial industry which led to the recession.

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