Saturday, December 01, 2007

Paulian economics vs. reality

The political press should be embarrassed, but they probably won't be. Most of them are beyond embarrassment over the low quality of their journalism, it seems. But star business reporter Maria Bartiromo's interview with Ron Paul gives a better picture of his crackpot extremist views on economics than any of the articles I recall seeing recently about him, Ron Paul on the Evil Fed, the IRS, and Saving the Buck 11/29/07.

In her brief opening summary, she writes, "Paul, an obstetrician and 10-term congressman from the Texas Gulf Coast, voted against the war in Iraq and wants the troops home fast, but it's his economic ideas that are the most radical: He detests the Fed and would abolish the IRS." (my emphasis) Why can't regular political reporters give a straightforward assessment like that?

Straightforward but polite. His economic ideas read a lot like a high school student who just discovered Ayn Rand. This post focuses on his economics. But at the end, I discuss a remarkable response the "antiwar" Republican gives to a question on Iran. First question in the printed version:

MARIA BARTIROMO
As President, how would you strengthen the economy?

RON PAUL
The most important thing is to get control of the budget, because the more we spend and the higher the deficit, the more we have to tax and borrow and inflate the currency - literally create new credit to buy Treasury bills. We need to restore confidence in the dollar before [its decline] gets out of control. The easiest place to cut spending is overseas because it's doing so much harm to us, undermining our national defense and ruining our budget. I would start saving hundreds of billions of dollars by giving up on defending the American empire. I'd start bringing our troops home, not only from the Middle East but from Korea, Japan, and Europe, and save enough money to slash the deficit. We can actually pay down the national debt and still take care of people here at home. That would restore a lot of confidence. (my emphasis in italics)
The phrase "literally create new credit to buy Treasury bills" is a classic weirdo rightwing construction.


There may be some Bircher buzzword or something in the phrasing that I'm missing. But what the phrase itself means is "borrowing money". When you take out a mortgage to buy a house, you "literally create new credit to buy" a house.

The Dems need to get their act together over balancing the budget. There's nothing inherently wrong with governments borrowing money. In fact, for long-term infrastructure like highways, there's a good argument to be made that borrowing money and paying for the project over its useful life is preferable from an economic point of view. What's critical is not the deficit, which is calculated by bizarre accounting in any case (a five-year capital construction program is counted as current-year expense in the year it's first budgeted). What's critical is the amount of debt in relation to income and GDP and its actual effects on credit markets.

The last time there was a serious bipartisan effort to reduce the deficit was during Old Man Bush's administration. And, even then, that was primarily an alliance of Old Man Bush and Congressional Democrats against Congressional Republicans. Ever since the Reagan administration, the Reps have been committed to credit-card financing of government. During the Clinton administration, the Dems pushed successfully to get down the deficit to the point where budget surpluses were projected. Then Dick Cheney and George Bush came to town and gave it all away in tax cuts targeted to the very wealthiest and in massive military spending allegedly to fight a bunch of terrorists hiding in caves and peasant villages in Pakistan.

The Dems should never be put in that position again. It doesn't mean that a Democratic administration should be as fiscally reckless as Cheney and Bush. They probably literally can't. Private foreign markets for American bonds have recently dried up. But they shouldn't make budget-balancing or debt reduction a first-rank priority over critical programs like health care. As soon as the Republicans lost control of Congress, they suddenly realized what a terrible problem the budget deficit was, which of course they want to solve by slashing civilian spending even more so that the wealthy can continue to have their tax subsidies and Halliburton can have its accountability-free contracts.

When Paul says, "The easiest place to cut spending is overseas because it's doing so much harm to us", I do know what that means in Bircher-speak. It means, we need to get rid of foreign aid. Especially foreign aid to Israel. (The latter not because Birchers give a flying [Cheney] about the problems of Palestinians.) You think the Paulians want to boost the percentage of GDP going into international AIDS prevention, to health and hygiene programs overseas, or economic development in Africa? Forget about it.

What is the most important change you would make?

Aim for the federal government to immediately live within its means, to take the pressure off the Fed to create money.

And that means what?

Means no more inflation. If the Fed doesn't create money out of thin air - and they do it mostly to accommodate the deficits - that would restore the soundness of the dollar and give us our purchasing power back.
You have to remember that for "libertarians", requiring "the federal government to immediately live within its means" does not mean increasing taxes to cover spending. It means basically gutting all civilian functions of the federal government.

This business about the Federal Reserve Bank creating "money out of thin air - and they do it mostly to accommodate the deficits" is also classic Bircher chatter. If creating "money out of thin air" has any real-world meaning at all - "rolling the printing presses" is another common phrase - it means expanding the amount of currency in circulation to accommodate the federal deficit, a procedure known as "monetizing the deficit".

In some of the years immediately following the Second World War, the Fed did pursue a policy of monetizing the deficit. But that's not how the deficit is currently being financed. It's being financed by borrowing. Borrowing, which Paul describes by the kooky phrase "literally create new credit to buy Treasury bills".

But Paul and the Paulians don't restrict themselves to the boring real-world stuff. Paul argues that our present American currency isn't real. Now, I'm kind of fond of the philosophical concept that money in general isn't real, but rather a dream with a nightmare side. But that's not what he's talking about. He wants to go back to some kind of gold standard, which is closer to the delusional-nightmare side of money. (I'm telling you, you have to get a little mystical to process stuff from the Bircher fringe.)

The following is pure Bircherism:

But as President, you're supposed to be independent from the Fed. You would encourage the Fed to stop printing money?

You know this idea that we can create a secret bank and they manage things and rarely tell us - or Congress or the Executive Branch - what they're really doing, there's a problem there. I can't even go to a monetary policy board meeting of the Federal Reserve, and I'm on the Banking Committee of the U.S. Congress. I want open government, and certainly the Fed ought to be open. But it's an institution that really shouldn't exist. [Its financing] allows Big Government to get bigger without being responsible. And that's why we have runaway spending for both warfare and welfare.

Hasn't the Fed been effective in providing liquidity in the current credit crisis?

You're right, but it's sort of like a drug addict. The drug addict demands more or he's going to have convulsions. The economy would have a convulsion if the Fed didn't inject more credit. But if you continue to do that, the problem gets worse. You can't solve the problem of monetary inflation with monetary inflation. These circumstances have all been created by our government and the Fed.
You have to remember in these things what messages the White Citizens Council crowd hears in things like this. When they hear about how "they manage things" in secret "and rarely tell us", they're picturing "they" as the Jewish World Conspiracy and its alleged collaborators, and "us" as good Christian white folks. No, Paul himself doesn't say that. But the far-right crowd he has cultivated for many years does understand things that way.

Abolishing the Federal Reserve Bank has been a John Birch Society cause since, like, forever. Here in the real world, we need to remember that Congress sets the rules for the Fed. If they want to change the composition of the Federal Reserve Board, or even create a rule that the Fed has to monetize the deficit (which under the right set of conditions could be a good idea), they can do so.

This one is a classic:

How would you change tax policy?

Ideally, get rid of the income tax. In the meantime, I'd give huge tax credits to anybody who wanted to take care of their own medical care. I'd give tax credits for all educational benefits. I'd get the government out of managing education and medicine. And do it by changing the tax code.
Uh, if you abolish the income tax, how are you going to give people federal tax credits for somebody to "take care of their own medical care"? Just asking. Abolishing the income tax is a also a favorite Bircher cause.

I'll interject here that just because an idea is incorporated into some crackpots' framework doesn't mean it's tainted forever. It would be theoretically possible to replace the income tax with a consumer tax (along the lines of the value-added-tax in Europe) and an effective inheritance tax that could be structured as a progressive taxation system. But that's really not on the national agenda right now.

"I'd get the government out of managing education and medicine," he says. Goodbye, FDA. Forget about having any confidence the drugs your doctor is prescribing or that you buy in the store have been tested for safety. Or counting on the list and proportions of ingredients written on the package to be accurate.

Do you consider yourself a friend or a foe of Wall Street?

If they believe in freedom, free markets, and sound money, they'll love me. But if they like creating credit out of thin air, they'll see me as a threat. I was one of three people who voted against Sarbanes-Oxley because I thought it was detrimental to Wall Street. I'd repeal it.
Sarbanes-Oxley, SOX to those who have to work with it a lot, is the major post-Enron accounting reform. Until the Paulians, you can forget about stock and business analysts being able to tell what a company's financial state is. But since presumably using insider information will be legal under a Paul administration, and I guess you will be able to pick your own accounting methods, too, wealthy traders can still get the good deals.

Finally, we all need to take a close look at what the Paulians actually say about their famous antiwar position:

You want to take the troops out of Iraq, but what about Iran? What do we do if other nations turn hostile?

I'd treat them something like what we did with the Soviets. I was called to military duty [as a U.S. Air Force flight surgeon] in the '60s when they were in Cuba, and they had 40,000 nuclear weapons and intercontinental ballistic missiles, and we didn't have to fight them. We didn't have to invade their country. But to deal with terrorism, we can't solve the problem if we don't understand why they [attack us]. And they don't come because we're free and prosperous. They don't go after Switzerland and Sweden and Canada. They come after us because we've occupied their land, and instead of reversing our foreign policy after 9/11, we made it worse by invading two more countries and then threatening a third. Why wouldn't they be angry at us? It would be absolutely bizarre if they weren't. We've been meddling over there for more than 50 years. We overthrew a democratically elected government in Iran in 1953; we were Saddam Hussein's ally and encouraged him to invade Iran. If I was an Iranian, I'd be annoyed myself, you know. So we need to change our policy, and I think we would reduce the danger. (my emphasis in italics)
Is it an accident that this reads like some prowar rightwingers stereotype of a "leftist" antiwar position?

Notice that he ducks the question (though what he says about it is very telling). The fact is that jingo isolationists can't really articulate any sensible policy on something like Iran's nukes. I'm very much opposed to starting a war with Iran even if they acquire nuclear weapons.

But dealing with nuclear proliferation in Iran and elsewhere is very much in the interest of the United States. But it requires effectively international diplomacy, effective multilateral agreements and UN enforcement mechanisms. How can isolationists like Paul who opposed all international alliances and want to get "US out of the UN", in the classic Bircher slogan, do anything about that? They can't.

War critics and opponents of the neocon/Cheneyist foreign policy really need to look at what Paul is actually saying. Look at what his response is here to the question about how to handle Iran. It wasn't specific, but it clearly dispalys the narrow nationalism that the Old Right isolationists share with the neocons and Rummy-Cheney nationalists:

I'd treat them something like what we did with the Soviets. I was called to military duty [as a U.S. Air Force flight surgeon] in the '60s when they were in Cuba, and they had 40,000 nuclear weapons and intercontinental ballistic missiles, and we didn't have to fight them.
That would be the Cuban Missile Crisis, in which the US erected a naval blockade around Cuba and went toe-to-toe with the USSR. It's seemingly universally agreed that the Cuban Missile Crisis is the closest the world ever came to a nuclear war between the superpowers, which would have pretty much killed off a large portion of the people on the planet.

That was an appropriate response to the Cuban Missile Crisis in response to a seriously escalated nuclear threat to the US mainland. But it was effective because Kennedy refused to do what the military hotheads wanted to do initially. And because they had the good sense and flexibility to leave the Soviets a way to back down without being completely humiliated.

But the "antiwar" Ron Paul says he would do something like that to Iran. Bartiromo's text doesn't show any follow-up questions to that.

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