Retroactionary economics: The Republican debate

Drawing by Dan Piraro, 2013.

But enough of this talk about what divides Republicans! I want to focus on what unites them as seen in last night's debate, notably a totally delusional economic world view, as in this remarkable answer from Fiorina, in which she agrees ("yes") with the questioner by asserting the exact opposite of what he said:

GERARD BAKER:

...Now, in seven years under President Obama, the U.S. has added an average of 107,000 jobs a month. Under President Clinton, the economy added about 240,000 jobs a month. Under George W. Bush, it was only 13,000 a month. If you win the nomination, you’ll probably be facing a Democrat named Clinton. How are you going to respond to the claim that Democratic presidents are better at creating jobs than Republicans?

FIORINA:

Well, first of all, I must say as I think about that question, I think about a woman I met the other day.... A mother is going to bed afraid for her children’s future.

And the reason she’s afraid for her children’s future is because we’ve had problems for a long time. Yes, problems have gotten much worse under Democrats. But the truth is, this government has been growing bigger and bigger, more corrupt, less effective, crushing the engine of economic growth for a very long time. 

Unless she and that anxious mom really think there's a dangerous job surplus in our country, crippling our ability to compete (which her record as a CEO might indicate is actually how she feels), but that's definitely not what Baker meant.

But the strangeness came to a head especially with the candidates explaining their eagerness not to bail out wicked Wall Street and its arrogant bankers as was done in 2008, no matter what the consequences, as Neil Cavuto suggested:

I just want to be clear, if you don’t mind, that millions of depositors would be on the line with that decision. And I just want to be clear. If it were to happen again, for whatever the reason, you would let it go, you would let a Bank of America go?

It is a little surprising that neither Cavuto himself nor any of the candidates is aware that there is a little thing called the Federal Deposit Insurance Corporation which has existed since 1933, so that the default of the Bank of America would affect practically zero depositors (accounts are insured up to $250,000 now, and is anybody with that much money naive enough to keep it all in one savings account?). Except indirectly by destroying the economy, of course, like when they refused to bail out Lehman Brothers (moral hazard!), which had no depositors at all.

And then when compassionate Governor Kasich tries on the spur of the moment to invent an FDIC (hey, kids, wouldn't it be great if we had an institution to protect hard-working folks but not plutocrats from the fallout of bank failures?) the audience boos him:

KASICH:

…because if during — well, I’ll tell you what (ph).

CRUZ:

What would you do if the bank was failing?

KASICH:

I would not let the people who put their money in there all go down.

CRUZ:

So you — you would bail them out.

KASICH:

As an executive — no. As an executive, I would figure out how to separate those people who can afford it versus those people, or the hard-working folks who put those money in those institutions…

(BOOING)

But what was really startling was Cruz's own proposal, a little like one of those "What's Wrong" puzzles in kids' magazines where the job is to pick out a treasure of anomalies like plums in the Christmas pie:

I would not bail them out, but instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is, number one, keeping our money tied to a stable level of gold, and, number two, serving as a lender of last resort.

That’s what central banks do. So if you have a run on the bank, the Fed can serve as a lender of last resort, but it’s not a bailout. It is a loan at higher interest rates. That’s how central banks have worked.

And I’ll point out — look, we had a gold standard under Bretton Woods, we had it for about 170 years of our nation’s history, and enjoyed booming economic growth and lower inflation than we have had with the Fed now.

To start with, what is defined in the second paragraph as "not a bailout" is precisely what the 2008 bailout was, a loan at stiff interest rates, with the federal government serving as a lender of last resort. For an idea of how stiff, you can check out the numbers from ProPublica: since the 2008 bailouts, of the $230 billion that has been returned by banks (other than Bank of America and Citigroup) to the federal government in loan payments, $33.8 billion is interest and dividends, for a profit to taxpayers of 14.8%; don't ask me to reconstruct what the interest rates were from that, but they weren't excessively low. Bank of America has fully paid its debt of $45 billion with a $4.57-billion profit, which is less usurious. Of course in addition to the loans, the US also acted as a kind of private equity firm and bought up $426.4 billion of iffy paper in the TARP program, turning a nifty little profit of $15 billion, but that's not a "bailout" either, it's a compensated asset seizure.

And then I believe it's generally thought that there used to be lots of booms and busts in the time of the international gold standard, and the government's ability since 1945 to tinker with fiscal and monetary policy is part of the reason we no longer have true depressions in the US—like those of 1839, 1857, 1873, 1893, 1896, 1907, 1910, 1920, and 1929—except once in the case of genuinely catastrophic mismanagement during the presidency of  whoever that guy was before Obama:

Business cycles in OECD countries after World War II were generally more restrained than the earlier business cycles. This was particularly true during the Golden Age of Capitalism (1945/50–1970s), and the period 1945–2008 did not experience a global downturn until the Late-2000s recession. Economic stabilization policy using fiscal policy and monetary policy appeared to have dampened the worst excesses of business cycles, and automatic stabilization due to the aspects of the government's budget also helped mitigate the cycle even without conscious action by policy-makers.

Part of this governmental flexibility being the gradual untethering of currencies from gold between the Bretton Woods agreement in 1944 and October 1976.

And there you have it. When you heard Cruz say "We had a gold standard under Bretton Woods," you may have giggled for a second and then thought, well, that was just a slip of the tongue for "until". But if you recall one of the favorite instruments in our intellectual toolbox here at Rectification, it starts to add up to something more.

This would be the conservative thinking style which goes beyond the merely reactionary (wishing one could go back in time) to the retroactionary (literally reversing perceived temporal direction). In Cruz's formulation, "we had a gold standard under Bretton Woods, we had it for 170 years of our history", he is plunging into retroactionary mode, in which the Bretton Woods agreement actually led to 170 years of a gold standard in the United States, if you look at it backwards in time.

The same idea takes you from Obama's inauguration in January 2009 to the bank bailout of late 2008, which directly caused the financial collapse that took place earlier that year from the retroactionary point of view. Followed by the long period of monetary tinkering from the early 2000s until 1945, which in turn brought on the periodic crises of capitalism that marked the period of the Industrial Revolution. It's all Obama's fault!

US real GDP per capita (2005 dollars), 1790-2006. Via Conversable Economist. If you look forward in time, you can see growth taking off at unprecedented rates during the Second New Deal, and again after Bretton Woods, and then an almost unbroken climb until around 2001. What Senator Cruz sees I don't know.

Three centuries of inflation-deflation cycles, via Wikipedia; as you can see, periodic deflation ends at the same time as extraordinarily high growth begins, after the Bretton Woods agreement.

Don't know quite where in the retroactionary scheme Cruz got that "booming economic growth" that existed alongside low inflation and ended in 1945, but I guess some things are just pulled out of the ass.