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I think Dan Drezner cheerleads a little too much about US developments

Daniel Drezner - who like me, is a Salma Hayek fan – has an article up in the latest edition of the UK’s Spectator (behind a paywall), entitled, “America is Back: Why The superpower is beating the slump – and Britain isn’t.”

There is a lot of good in the article. Drezner contrasts the go-for-it approach to shale gas – “fracking” – in the US with the Green-induced obduracy of the UK government, although I suspect there might be changes here. He talks about the revival of US manufacturing, in part due to the issue of sharply falling energy costs. He notes that the US budget deficit, as a percentage of the national economy, has fallen.

Even so, the scale of the debt that the US has is huge; and it is far from clear to me that that country – or indeed other indebted Western nations – can look to recent US actions with much relief.

So what to make of this?

“The US system of government has been surprisingly nimble despite its perceived political paralysis. In the five years since the financial crisis, Congress has passed legislation that saved the US financial system, rescued the car-making sector, enacted the largest fiscal stimulus programme in the world (which contained substantial tax cuts), overhauled its financial regulation, passed ambitious health care legislation, and then took steps to control spending.”

Oh boy. Let’s take these in order. First of all, is it really the case that it was legislation that “saved the US financial system”? What happened was that the US taxpayer, at vast cost, bailed out the Citis, Goldmans, AIGs and the rest. While the subsequent return of TARP money may have happened at a profit, we ended up with a banking system more rigidly regulated than before under the vastly complex, and possibly, unconstitutional, Dodd Frank legislation. The US financial system is also far more concentrated than before: about half a dozen big – “too big to fail” – banks such as Wells Fargo, BoA and JP Morgan now have control of a big chunk of the total market. Is this sustainable?

Second, the “rescue” of the US car-making industry. I assume that Drezner is talking about the bailouts of GM (and done at the expense of bond-holders in GM and to the benefit of Obama-voting unions). It is the good fortune of the auto sector in the US that cheaper energy makes that industry more competitive against overseas rivals, but the Washington DC has precious little to do with that, other than the negative achievement of not messing it up, or at least not much.

The large fiscal stimulus programme: it is a case of “not proven” as to whether there was much of a clear, Keynesian multiplier effect to justify the enormous sums spent. Peter Suderman at Reason magazine suggested the impact was possibly actually negative a few months ago.

Financial legislation overhaul. Well, all I can say about Dodd Frank is that if this is an overhaul, goodness knows what a bad piece of legislation will look like. Again, a book from the Mercatus Center suggests that Dodd Frank may encourage further crises.

The health care legislation is “ambitious”. Well, instead of ambitious, one might want to say “downright reckless” or something else. The legislation takes the US closer, much closer, to the socialised medical regime that Britain has, with its decidedly mixed results, as shown by the Mid-Staffs scandal.

So yes, America is resilient, and yes, rumours of demise are greatly exaggerated; yes, it is not obvious that China is taking over the world and some of the more breathless boosters of Asia need to get a sense of perspective. That is all fair enough. But spare us too much gush the other way, even though annoying the America-bashers is always good fun.

Here is another piece by Dan D, “Who’s your economic hegemon now?”

Meanwhile, it would be good if the US could wake up to the annoyance caused abroad by such things as the FATCA legislation, which is and remains an awful piece of regulation, although I suspect it will be moderated and changed over the years.

26 comments to I think Dan Drezner cheerleads a little too much about US developments

  • Tedd

    The US financial system is also far more concentrated than before… Is this sustainable?

    Desirable? No. Sustainable? Probably. Most comparable countries have more concentrated banking sectors than the U.S., and always have had. In recent decades the U.S. has been evolving (devolving?) more toward the approach in Europe and elsewhere in the Anglosphere: a small number of large, heavily-regulated banks. Since that approach has existed for centuries elsewhere I think we have to conclude that it’s sustainable, by any reasonable definition.

  • RRS

    In the text of Nicholas Eberstadt’s A Nation of Takers and in Yuval Levin’s accompanying commentary there are references to the implications of “transformation of the citizenry.” *

    What is becoming apparent, perhaps as a preservation (if not salvation) of the American Experience is the incomplete nature of that transformation and some recent reactions to political efforts to continue the transformations.

    From the commentary here at Samizdata, and the continuing evidence from elections in the UK, the transformations have been more extensive and more complete in the UK than in the US. Experts and laymen continue to supply reasons for the transformations. What is unclear is whether or not there can be a reversal of the transformations of the citizenry that have taken place in the UK since 1960.

    In the US there appear to be growing reversions from many of the transformations that have occurred since 1960, they are slow but growing in intensity with some regional emphasis. There is a “hard-core” of non-transformed citizenry. There is also a significant body of fully transformed citizenry. The effects of these differences is reflected in Charles Murray’s Coming Apart.

    The US political class is attempting to continue the transformations (as, apparently, is the UK political class). But in the U S reaction has set in. It remains to be seen whether that reaction will result in substantial reversion. However one may hope that the experience will be similar to that of the American Tomcat who was seduced into a harem of female skunks, but after a few nights, finally excused himself from their company with a polite phrase: “Ladies, I have had all this pleasure I can stand!”

    This “reaction,” not the legislation that continues the efforts at transformations, is what is stopping the decline and allowing some recovery in the U S. That reaction is not seen to any sufficient extent in the UK.

    *my term, not theirs

  • Gene

    I’ve been reading Drezner for years and have always found him annoying though often interesting. I have in fact often tried to figure out exactly what annoys me about him, though it might just be his generally smarmy tone and the implication that people in his business are somehow smarter than everyone else.

    I’m grateful for this latest missive from him, though. If this is reflective of the quality of his thought, I can add him to the list of people whom I no longer have to take seriously, thus gaining just a smidge more free time for myself.

  • Paul Marks

    The oil and gas development is amusing – as Obama hates it and it has happened anyway. This is a real bit of economic good news – and it has the “knock on” effect of helping American manufacturing via less expensive energy than would otherwise be the case.

    However, (come on – it is Gloomy Guts Paul you knew there was a “however” on the way), the financial system is a credit bubble mess. The stock market, the property market, the BOND MARKET it is all dependent on the flow of funny money from the Fed.

    Tick, tick, tick goes the unexploded bomb.

  • jdm

    I’ve [...] always found [Drezner] annoying though often interesting

    Like a less awful version of Thomas Friedman. ;-)

  • Laird

    jdm, that’s pretty harsh (but amusing nonetheless).

    Drezner certainly is an optimist, but I can’t agree with his conclusions. Clearly, he is an unreconstructed Keynsian, celebrating all the governmental interventions in the market and the endless rounds of Quantitative Easing (although he never used that word) and applauding the explosion in government debt as “consistent with the successful path that Scandinavian countries pursued in the early 1990s” (as if that’s a good thing). I certainly agree with the criticizms Johnathan levelled against the paragraph he quoted. The financial system was not “saved”, it was metastized and the American taxpayer was fleeced to line the pockets of a few Wall Street oligarchs. The automobile sector wasn’t “rescued”; it was brazenly stolen for the benefit of powerful labor unions. “Stimulus” grossly misallocated resources and, in the long run, will be seen as having been ruinous. The chickens are just beginning to come home to roost on Obamacare, and the results will be disastrous. And far from his claim that “taking the [foreclosure] pain then has allowed recovery now”, whatever “recovery” there seems to have been in the housing sector is illusory: the two giant Federal housing agencies (Fannie Mae and Freddie Mac) are still sitting on a huge inventory of unsold foreclosed properties and deferring the foreclosure of many others. And the other federal housing lenders (HUD and UDA) are still operating at the same old stand, making foolish loans at subsidized rates while their delinquency and default rates climb alarmingly.

    And of course we can’t forget the recent run-up in the stock market, fueled by endless almost-free money from the Fed
    and driven by a combination of program trading and institutional investors desparate for yield while the Fed relentlessly forces interest rates down. (Note that individual investors have almost completely disappeared from the market.) One can see the evidence of the fragility of the stock market in the panicked sell-offs which occur whenever Bernanke even hints at cutting back (not even ending!) QE.

    Despite all the supposedly marvellous governmental actions Drezner celebrates, our economy continues to putter along, barely keeping its head above the recession line. (We just learned that first quarter GDP growth was a miserable 1.8%.) Sorry, but his pollyanism just doesn’t wash. This economy is one small blip from another collapse, and I fear it’s inevitable as interest rates inevitably increase to more normal levels. We may indeed be doing better than the UK or EU, but it’s small comfort to be the best-looking horse in the glue factory.

  • veryretired

    I don’t care much about Drezner one way or the other, but the idea that the massive recession we have experienced, which was a political collapse with economic symptoms, caused by political actions and policies, has been ameliorated by further statist actions by the same over-reaching political forces that brought it on to begin with is blindness so profound as to be deadly dangerous.

    As, indeed, the continuing exaltation and expansion of the state is ever more clearly proving to be.

    They don’t know what they’re doing, and they never have.

  • We may indeed be doing better than the UK or EU, but it’s small comfort to be the best-looking horse in the glue factory.

    I’d like to nominate THAT for tomorrow’s SWORD.

  • SQOTD that should be.

  • PeterT

    I don’t think interest rates will increase until it is politically feasible for this to happen. That is how things have panned out so far so I don’t see why it wouldn’t continue, especially under Carney.

    Inflation of course matters. Since Jan 2008 to May 2013 the general price level has increased by 20%. If this goes on for five more years (say) and then the real value of your mortgage will have fallen by almost half. If your salary has kept pace with inflation, or at least increased, you will be better off. The same argument goes for the government debt; most of which is fixed (although the UK has quite a high proportion of inflation linked debt, compared with other countries).

    The downside of all this is that those on fixed incomes become much worse off. I never understood how inflationary policy could be advocated by those who favoured ‘social justice’.

    Footnote:

    For those of you that don’t have ready access to this data you may be interested to know that the market currently expects interest rates to be 0.4% in one years time, 0.7% in two years time, 1.4% in 3 years time, 2.1% in 5 years time, 2.7% in 5 years time, and in 10 years time; 4.3%. This is off the gilt forward curve. For the next 5-6 years interest rates are expected to be lower than inflation. Whether it turns out to be correct is a different matter.

  • RRS

    Peter T.

    Consider:

    The demand for gold is in decline.

    The demand for the U S 10s is in decline.

    The “prices” of “safety” are dropping.

    the “cash” positions are artificial.

    Interest rates will rise.

    The Vigilantes

  • Paul Marks

    Is the demand for gold in decline?

    There are still lots of people (especially in Asia) who want PHYSICAL GOLD.

    Perhaps what is “in decline” is the demand for bits of paper from the London (and other Western) gold markets saying that one owns “X amount of gold” – gold that DOES NOT EXIST.

    As for the Spectator cover article – I have now read it.

    Dan Drezner says that the “Stimulus” passed in 2009 “contained tax cuts” – he must mean the Payroll tax cut (since reversed), this is misleading as the “Stimulus” was mainly GOVERNMENT SPENDING. Nor did the Nordic countries in the 1990s go on a government spending orgy (as Mr Drezner implies).

    Mr Drezner also implies that both the financial services Act (Dodd-Frank-Obama) and that Obamacare were good things – to believe that either of these pieces of legislation (let alone both of them) were good things, is demented.

    There have been some good economic developments in recent years – two of them.

    The expansion of oil and gas production – which Barack Obama tried hard to PREVENT (and then claimed credit for the failure of his own efforts).

    And the run down of WAR SPENDING.

    Vast sums of money were wasted under Bush in the effort to spread liberal democracy to Afghanistan and Iraq – Obama has (basically) given up on that policy, and that giving up has saved some money. Iraq is now ruled by sectarian Shia government (democratic but hardly liberal democratic) and in Afghanistan President K. was allowed to blatantly rig the last election (because the Obama Administration could not care less about ballot rigging), and now even the Taliban (dedicated to the extermination or enslavement of all non radical Muslims in the entire world – to draw a distinction between the Taliban and AQ shows a failure to understand that they share a common theology, which is as dedicated to the crushing of the infidels in New York City as it is in Afghanistan) is acceptable to the United States.

    Actually I do NOT attack Obama for all this (apart from for the dishonesty of pretending that he is not throwing these countries to the wolves) as I believe that the situation in Iraq and Afghanistan was fundamentally hopeless anyway (how can one save nations for the logical consequences of Islam when their populations are overwhelmingly Muslim?).

    Anyway – contrary to Dan D. the American economy is doomed. The markets (especially the bond market – but the property market and the stock market) will crash and the whole House of Cards will come down. The only question is when the doomed nature of the American economy will become obvious.

    I have always felt that it would be THIS year (2013) – but Jim Rogers tells me I am wrong, that the crash will not come till next year (2014) when Obamacare really kicks in (basically forcing companies to know longer offer independent health cover, because it will be so incredibly expensive to do so, and forcing most people into the government backed “crony capitalist” “exchanges” at taxpayer expense – it does not really matter if their are so called “private providers” in the exchanges or not, what matters is who is picking up the bills).

    How dare a billionaire investor claim to know more than a Northamptonshire car park attendant.

    Bah humbug – and I was so looking forward to the crash being this year.

  • Midwesterner

    Paul, I agree on the prospects for the bond markets or any other currency denominated investment vehicle that doesn’t float, but physical asset backed markets, which includes real estate and many corporate stocks, will almost certainly become one of the safe havens from QE/inflation. While they may not generate profit in real, cross-commodity measured terms, I think they are a useful shelter for investors looking to get out of Fed Notes and other country’s fiat money ‘printing’.

  • Paul Marks

    Mid – in Britain the property market is a government created bubble.

    Is the situation fundamentally different in the United States? I know that house prices have fallen in the United States (that has not been allowed in Britain) – but has the market really been allowed to clear? Or does it vary depending on where in the United States one is talking about?

  • Midwesterner

    The mortgage based real estate market appears to be very much diminished in market share. Most sale I am aware of are cash sales. They are people who have cash and don’t want to hold it so they put it into real estate. There is probably some element of mortgage bubble left but most of the recovery in the US appears to be driven by cash buyers.

    There are distinct regional variations but the trends generally seem to point to cash sheltering. At least that is what it looks like to me. I pay attention to all contrary evidence I can find so if anybody has some, I’m listening. Some building firms are playing around at ramping up building again but that doesn’t seem to be where the most action is.

    Markets appear to have more or less cleared and now sellers are beginning to raise prices.

  • Julie near Chicago

    Mid–

    When you say house (I assume) prices are beginning to rise, I take it you mean “rise in dollars”?

    Per PeterT, “Since Jan 2008 to May 2013 the general price level has increased by 20%.” If this is correct, will the rise in house prices keep up with that rise? And if so, starting when?

    (Not entirely an academic question, by the way. My house was paid off many years ago, but the ever-increasing property taxes near Chicago are eating me alive. :>((( We are currently paying nearly $500/mo for the privilege of “owning our own home,” and there is currently an initiative going on whereby we would be in incorporated Naperville, which would soon enough double our property taxes.)

  • Midwesterner

    The problem with real estate transaction reporting is that most of the data is quite stale by the time it hits the reports, so I take all of the reports and prognostications with a grain pound of salt. Professional appraisals are a ludicrous joke.

    The specific article I’m recalling (but can’t find a link to) noted that as various markets cleared and time on market dropped, sellers had responded by raising their askings (seems like a d’uh to me). Whether conventional housing is going to keep up with commodities prices going forward, I doubt it. But it probably won’t be a big loser. The main factor driving my decisions is anticipation of QE coming home to roost. If you are sitting on a pile of cash, raw land – particularly rural land – is probably going to retain value quite well. But factoring in $6,000/yr taxes? Or $12,000!? Hhmmm . . .

    The problem with owning property in Illinois is, er, owning property in Illinois. I lived in DuPage county back when all of the cities had lots of farmland between them. Naperville was a small town with probably 30 to 40,000 population surrounded by corn. I guess those days are gone.

    My presumption is that Illinois is going to wring blood out of stones trying to keep the public employee gravy train rolling. I’ve never regretted leaving.

  • Julie near Chicago

    Thanks, Mid. I’m afraid my tea-leaves agree with yours. And I have to tell everyone, every word you say about Illinois and DuPage County too is right on. :>(((

    We moved from Chicago to Naperville in 1974, I think. Seems to me the population was a little over 20,000 then, but it could have been twice that. And, yes, it was still mostly a farming and college town. When we bought our present house (in 1980) it was a strictly-rural subdivision. And definitely unincorporated.

    Heh…it was also part of little Plainfield (pop. 3000?), not Naperville at all. The Plainfield City Council had assured everyone that P. would remain a small, rural farming town. It was only two or three years later that we found we had somehow moved to Naperville.

    I agree with you on getting out of Illinois. But there are problems…. How are you feeling about how Wisc. is going now?

  • Midwesterner

    I wish I could give you a clear answer on Wisconsin. We are tottering between Tea Partyesque personal independence and Doctrinal Progressivism. Personal independence has won many rounds but it isn’t a sweep. Two big downers for me where when the Republicans adhered to the spirit of judicial elections in Wisconsin and stayed out of the IV Circuit race. The Democrats went all out fielding the totally partisan “Kloppy“. Had even a pathetic effort been made to field a liberty minded candidate, that candidate would have won – such is the reputation Kloppenburg earned herself during the Wisc Supreme Court race that the Democrats miscalculated. For reference, that was the race where a clerk ‘lost’ a Republican city until after the Democrats had reported all of their precincts and victoriously claimed a squeaker of a win. Then the clerk found the missing city, turned in the votes and the Democrats had already reported the precincts they were holding back to to be sure they had the votes they would need. There are Democrat precincts in Wisconsin that report more D votes than they have total registered voters. Quite a few in fact. Holding back the Republican city was the first smart thing the R’s have done and it appears to have genuinely been a lucky accident.

    The other downer was when Kohl left an open seat in the US Senate and Wisconsin elected Tammy Baldwin, possibly the furthest left Senator now that Obama is in the WH, to Kohl’s seat. It was an election that a libertarianish candidate should have won pulling away.

    The paleoRs still have far too much power in Wisconsin due to national Republican party rules and procedures. For example, they routinely blow their party campaign coffers trying to swing the Republican primaries to their insider candidate and the result is that the wrong candidate is sent to the general election and there is no money left to support their candidate in the general election. They don’t call Republicans “The Party of Stupid” w/o good reason. Until that is resolved, everything close will swing D.

  • Rational Plan

    I think you’ll find that property prices have fallen in Britain, the exception is London, where foreign money is flooding in looking for ‘safe assets’

  • Paul Marks

    Rational Plan – the national decline in house prices was small and is being reversed. G.O. actually thinks his support for the house price bubble is a good thing.

  • Paul Marks

    Julie – if you are not dependent on your location to work, why not move over the border into Indiana? It is not a vast distance and I suspect you would find things less corrupt.

    Mid – well not all the Wisconsin Progressives were corrupt, as you know there was a famous political family in Wisconsin whose economic ideas we would totally oppose but were straight. No surprise that Richard Ely (the leading figure the “intellectual” Progressives)grow to hate this family and plot against them – for the crime of taking the Progressive talk of peace seriously. The family did not understand that the talk of peace was to be dropped whenever the Progressives felt like it – to be replaced by “four minutes hate” (an invention of Woodrow Wilson’s people – not George Orwell).

    Ironically Richard Ely (who owned so much to German interventionist thought) was at the front of the “hate Germans” (not just the German Emperor – but anyone who spoke German in public) movement.

  • Paul Marks

    People in Wisconsin have to choose – do they want to go in the direction Illinois is going or the way Indiana is going?

    They have to choose.

  • Julie near Chicago

    Paul, Indiana would be my first pick. I’ve lived there, and liked it. Unfortunately I have it been able to sell it to The Kid and her husband so far. :>(

    You mentioned the Political Family in Wisconsin — did you mean the La Follettes?

    Yes, the folks in W. must choose, but the problem is that they seem to disagree. (Lot of that going around.) I don’t see why the Proggies (and Chicago Machine types) can’t hie themselves to California or NY or Taxachusetts or some such benighted place, they’d be so much happier there, no?!

  • Paul Marks

    I did indeed mean the La Follettes – I do not agree with them, but they were decent people (it is worth keeping in mind that people with whom one fundamentally disagrees may be good people).

    Keep working on the The Kid and her husband – Illinois is not going to get better (it is going to go bankrupt).

    Of course the Federal government will drag everyone down – but at least (to some extent) people in American States still have some sort of choice (if one side or the other wins in a State).

    Right from 1875 (the Dizzy Act) national government in Britain has told local government more or less exactly what it has to do.

    Moving (unless you move to the Isle of Man or the Channel Islands) does not make much political difference round here.