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.

Walter Williams - Congress's Financial Mess

Walter E. Williams, professor of economics at George Mason University, has written another interesting commentary on the current financial crisis called Congress's Financial Mess. He notes that the new media have repeatedly insisted that the current financial crisis was caused by deregulation and free markets. He goes on to show that this is not at all the case.

Professor David Henderson, research fellow at the Hoover Institution of Stanford University, studied how regulation has grown in general over the last few decades. He published his results in "Are We Ailing From Too Much Deregulation?" in Cato Policy Report (Nov/Dec 2008). He examined the Federal Register for its lists of new regulations.

• 1977-1980, Carter, annual average of 72,844 pages of new regulations
• 1981-1988, Reagan, annual average of 54,335 pages
• 1989-1992, Bush, annual average of 59,527 pages
• 1993-2000, Clinton, annual average of 71,590 pages
• 2001-2008, Bush, annual average of 75,526 pages

Employees in government regulatory agencies:

• 1980, 146,139 employees
• 2007, 238,351 employees, an increase of 63%

[How do you measure the efficiency of a regulatory agency employee? Is it by the number of new pages of regulations per employee? If so, in 1980 there were 0.50 pages of new regulations per employee and this had dropped by 2007 to about 0.32 pages per employee! Apparently, the more employees, the less efficient they become.]

Regulatory spending by the banking and finance industries:

• 1980, $725 million
• 2007, $2.07 billion, an increase of 286%
  

Under the recent George Bush, there was no hesitation at all in creating new regulations. In fact, the Bush administration specifically wanted to tighten down on risky mortgage and other loans by banks, but Congress would not allow it. The most outspoken critics of tighter credit controls in Congress were Democratic leaders and committee chairmen, including Rep. Barney Frank and Senator Harry Reid.

The Clinton administration made a concerted effort to force Fannie Mae to expand mortgage loans to low and moderate income people in 1999. They used the 1977 Community Reinvestment Act to make the banks make high-risk loans they otherwise would not make. Banks not submitting were fined and their mergers and branch expansion plans were denied or held-up.

In 2008, about $5 trillion of mortgages outstanding were owned or securitized by Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing, and the Veterans Administration. This was one-third of all such mortgages.

[Government also encouraged the inflation of home and property values with extremely low interest rates through inflation of the money supply by the Federal Reserve Board over the last several years.]

To make matters still worse for us taxpayers, Bush gave the auto industry a bailout of $17 billion in addition to about $700 billion in bailouts to banks and financial institutions. Now, the presidents of 36 state government universities are asking for a bailout. State governors and local governments are readying proposals for bailouts, with California $15 billion in the red, Florida $5 billion negative, and Michigan shutting down a prison to save money.

Williams notes that the news media is insulting our intelligence! Unfortunately, they appear to be right about the intelligence, or at least the attention span, of the average voter.