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The Short-run and the Long-run in Economics and Politics
“In the long-run we are all dead” said the late great economist John Maynard Keynes who revolutionized economic thinking. He recommended fiscal stimulation to increase aggregate demand which would increase production and employment. He was responding to the dominant view of free market economists that the free market would create full employment if wages were flexible. Because wage levels are very slow to respond to changes in the demand for labor, government intervention is required to increase aggregate demand in the short-run. Keynes’s ideas have dominated economic thinking since the 1930s. Accordingly, Pres. Obama’s administration pursued Keynesian fiscal and monetary policies which included an $800 billion stimulus program beginning in 2009 and authorized a $200 billion rescue of two private mortgage insurance companies, Fannie Mae and Freddie Mac. The preceding administration of Pres. George W. Bush began fiscal policy stimulus with a lump sum rebate of $300 per person plus dependents to all income taxpaying households. This was an application of Keynesian economics. He also enacted TARP which authorized the Treasury to buy the troubled assets of banks, investment companies, and insurance companies. This accorded with all schools of economics.
The federal debt in 2009 was $11.9 trillion and 83% of GDP while five years later it reached $18 trillion, exceeding the total production of goods and services in 2014. As for monetary policy, the Federal Reserve adopted a policy of monetary expansion and low-interest rates, buying government bonds and other assets with newly printed money. The most often used aggregate of the money stock, M2, increased from $1.6 trillion in 2009 to $10.9 trillion in 2014. The combination of a huge federal debt and money supply threatens serious budgetary and another financial crisis inflation in the not too distant future. We may have solved a short-term problem but in the process inaugurated serious long-term problems.
The slow recovery from the recession and slow growth in GDP from 2008 to 2014 suggests that such policies have had a limited success. What would have happened if non-Keynesian policies had been pursued? Some economists believe that was all that is necessary. One cannot be sure but non-Keynesian economists believe the while some of the measures helped to reverse the downward slide in the economy, continuation of fiscal and monetary stimulus beyond 2010 created the probability of an even greater crisis in the near future. They point to the fact that the FED has continued to postpone allowing interest rates to be determined by free market supply and demand, that many American corporations have out-sourced much of their production and even moved factories abroad, that private investment in manufacturing has stagnated, that many workers are employed part-time involuntarily, that many persons are no longer seeking jobs. If those are counted, the unemployment rate is in the double digits. An additional worry is that the policy of low interest rates intended to increase spending has raised asset prices, particularly common stock and real estate which may be two bubbles likely to burst and cause another world-wide financial crisis. Policies guided by short-run considerations can produce an agonizing death in the long-run.
The media and people including politicians are concerned by the increase in wealth inequality during the past decades. But that is a short-run problem. Where are the billionaires of yesteryear? Where are the Fords, Carnegies, Vanderbilts, Edisons? They are all dead and much of their wealth has been taken by estate and inheritance taxes. They have rich survivors but few are billionaires. Today’s billionaires include the likes of Gates, Buffett, Ellison, Walton, and Koch, none of whom are the children of billionaires. What is more important is what has been the economic impact of the disparity in wealth and income? The rich eat more expensive meals but the same amount of calories, own and occupy more expensive houses, own yachts and luxurious automobiles, eat more expensive meals, sit in the boxes in theatres, dress in more expensive clothing, use more expensive perfumes and cosmetics, own yachts, and sports teams. They may spend more money on health care but live no longer that the rest of us. The rest of us eat three meals a day, sleep in one bed, own and drive the millions of autos on the streets and highways, occupy the sports stadiums, fill the cruise ships, and take vacations. What do the rich do with their incomes and wealth? They save and invest. They give much of it away while they are alive and when they die, they bequeathe enormous sums to charities, universities, museums, and many other institutions that benefit people of low and modest incomes and society in general. They pay by far a much higher rate of income taxes that support governments and upon their deaths, Their wealth is more than halved by estate and inheritance taxes. What is more important as one can see from their names, they got their wealth from and inventions, innovations, and private enterprises that have provided us with the jobs that enable us to buy all the things we spend our wages and salaries on.
Another great concern of environmentalists and Congress is the phenomenon of global warming which many scientists theorize is man-made, caused by the burning of fossil fuels. While there is a group of scientists who deny that the burning of fossil fuels has much effect on the climate, we are not concerned here about the science. The believers expect the globe to warm by a degree or two over the next five or ten decades. Although the negative effects are not expected to occur in the short-run--in fact there has been no discernible global warming during the past two decades--the federal and state governments have spent billions of dollars and caused the public untold financial harm in the form of increased prices for autos, trucks, electricity, and taxes. In the long-run—the next five or ten decades?—the supply of fossil fuels will decline because they are an exhaustible resource. Economists expect as the price increases there will be be run is anticipating the exhaustion of fossil fuel and encouraging research and experimentation with alternative fuels. There are also benefits of global warming which we have to consider. Agricultural fuels are expected to increase as a result of increased carbon dioxide in the atmosphere. Some countries are expected to benefit, Canada, for example and Russia. In the economic studies that have been made to date, the US is expected to be affected very little and some economists believe that the benefits have been underestimated. The damage done by severe winters has not even been calculated.
Similar to the preceding are the short-run and long-run consequences of our initiatives abroad. We invaded Yugoslavia and broke the country apart without asking would the residents be better or worse off as a result. We invaded Iraq, Afghanistan, and Libya without asking what would come after our victory. We foolishly thought we could build them into successful democracies and economies. The short-run in each case was a success and the long-run a failure. Our short-run objective in each case was laudable but the unintended consequences costlier than the short-run victories.
Finally, Congress in the past has spent unwisely in the short-run on programs that yield little or no return and often yield negative returns. Congress is reluctant to end such programs out of fear of offending the groups of voters or contributors who desire such programs to continue. That is the principal reason why many believe the elites of the two principal political parties are so much alike, like Tweedledum and Tweedledee. Failure to distinguish between the short-run and long-run effects of prospective legislation and its possible unintended consequences led to the passage of such legislation.
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