Category Archives: Economics

PowerPoint and Video of Keynes vs Hayek (May 16th NSF Meeting)




We were very fortunate last week to hear a spirited discussion between two very talented and nationally renowned economists/entrepreneurs, Atul Minocha and Jerry O’Driscoll. The two presented very different perspectives on rejuvenating our weak economy that we characterized as “Keynes versus Hayek”.

Indeed, Atul “Keynes” Minocha argued that the current deficit is not our most serious problem, instead recommending more targeted stimulus spending on education and infrastructure. Jerry “Hayek” O’Driscoll stressed that the national deficit, now over $17 trillion, must be addressed through real austerity measures—which, despite protestations to the contrary—virtually no country has implemented.

In the past many of you have asked if we could videotape the discussions and make them available. Thanks especially to Atul, today we are able to: (1) Post the entire PowerPoint Jerry and Atul used; and, (2) To post the video of the discussion and then the Q&A session. Let’s see how that works.

In addition, for your viewing pleasure, here is a “rap” video entitled, “Hayek and Keynes”, that you may also appreciate.

Lots of work by our crack NSF team to make this happen. Let us know how you like the product.


First, here are the PowerPoint presentations:

US FIscal Policy Discussion- Jerry O’Driscoll

Jerry O’Driscoll wishes to acknowledge Juan Carlos Hidalgo of the Cato Institue for his slides.

US FIscal Policy Discussion- Atul Minocha


And here is the video of the two presentations


Followed here by the video of the Q&A session


And, finally, the Hayek-Keynes “rap” video:

Click here: The Brilliance of That Hayek vs. Keynes Rap – Jeffrey A. Tucker – Mises Daily

Budget Wars

Colleagues: Three disparate items on the budget/debt morass today. First, this from a very fiscally conservative friend, who has become suddenly optimistic about the prospects for serious deficit reduction. Leo writes:

However, I am newly hopeful of progress on the budget. Why, you ask:

1) Both parties have given real ground: R’s have accepted defense spending cuts and agreed to a tax rate hike; Dems have cut pet discretionary programs and seen us compile a roughly 5-to-1 ratio (of $4T in cuts to date, only $650M is new tax revenue) spending reduction to new revenue.

2) The Republicans in the House are serious about long-term debt reduction. They have passed budgets the last four years and two separate bills to forestall sequester. They now intend to do the straightforward thing on the CR….a yearlong CR with few frills.

3) Of late, Boehner has started to make the case for regular order: each house pass a budget, go to conference, send to president. This would get Congress into the game in the intended way and can produce a broad, properly-vetted bill with fulsome support (or livable compromises…same thing in political terms).

4) The lone holdouts are Obama (whose 2nd inaugural outlined an unrealistic “equality agenda”) and the most execrable character in the whole play – Harry Reid.

5) Despite his 2nd inaugural, BHO now knows that hope for a legacy is dead. He can have a legacy, but it lies in a big tax reform – entitlement reform down payment on long-term fiscal sanity.

So, my hope is that there are only two renegades left, and one of them seeks a legacy. I can only hope Reid can be shamed/cajoled/forced into doing his job and leading the senate to produce a budget. Then we can get down to closing loopholes (broadening the base); reducing rates (this is the sticky part, the R’s will seek budget neutrality, the D’s will want new revenues – this is the heart of any compromise), and curbing entitlements – both present spending, but more importantly the long-term obligations (e.g. moving the retirement age from 67 to 72 wouldn’t cut immediate expenditures, but it would lower by tens of billions the expected value of our long-term obligations).

So, take heart. If we can get those two C-D’s (crazy Dem) onboard, we can make some progress! Enjoy the sequester….from my perch, it’s a many-splendored thing!!

–Leo the Happy Conservative




And this abridged column from the Washington Post:

A way out of our budget wars

By E.J. Dionne Jr., Published: March 6

There are, believe it or not, grounds for hoping that the so-called sequester, stupid as it is, might open the way to ending our nation’s budget stalemate.

Hope is in short supply right now, but the case for seeing a way out of the current mess rests on knowable facts and plausible assumptions.

It starts with the significant number of Republicans in the Senate — possibly as many 20 — who think what’s going on is foolish and counterproductive. The White House is betting that enough GOP senators are prepared to make a deal along lines that President Obama has already put forward.

Obama’s lieutenants argue that, while Republicans are aware that the president is seeking new revenue through tax reform, many did not fully grasp the extent to which he has offered significant long-term spending cuts. These include reductions in Medicare and a willingness (to the consternation of many Democrats) to alter the index that determines Social Security increases. Obama has proposed $930 billion in cuts to get $580 billion in revenues.

Senior administration officials note that Obama cannot stray too far from his existing offer, which was already a compromise, without losing the Democratic votes a deal would need. But his framework, they believe, could create a basis for negotiation with Republican senators, such as Sen. Lindsey Graham (S.C.), who dislike the deep, automatic cuts in defense spending, and others, such as Sens. Susan Collins of Maine and Bob Corker of Tennessee, who dislike government-by-showdown.

Graham was especially bullish, declaring that Obama’s outreach to Republicans — the president invited about a dozen GOP senators to dinner Wednesday night — was “the most encouraging engagement on a big issue I’ve seen since the early years of his presidency.”

If the Senate actually passed a bipartisan solution, it would still have to clear the House, requiring Speaker John Boehner (R-Ohio) to allow yet another bill through with a large number of Democratic votes. But the sequester almost certainly marked the high point of solidarity among House Republicans. Letting it take hold was an easy concession for Boehner to make to more militant conservatives; it kept them from pushing toward a government shutdown or a politically and economically dangerous confrontation over the debt ceiling.

Now comes the hard part for Boehner. Already, more moderate conservatives are pushing back against the depth of the budget cuts that Rep. Paul Ryan will have to propose in order to balance the budget in 10 years. At least some House Republicans may come to see a bipartisan Senate-passed deal as more attractive than the alternatives.

From Obama’s point of view, engaging with Senate Republicans now to reach a broad settlement makes both practical sense, because there is a plausible chance for a deal, and political sense, because he will demonstrate how far he has been willing to go in offering cuts that Republicans say they support. In the process, he would underscore that the current impasse has been caused primarily by the refusal of House Republicans to accept new revenues.

While it’s the GOP that has been using serial, self-created crises to gain political leverage, many in the party are no less worn out by them than the Democrats. “Even we are tired . . . of lurching from one cliff to another,” Sen. John McCain (R-Ariz.) told the Wall Street Journal on Wednesday. “I think that’s lending some pressure towards trying to come up with some kind of a grand bargain.”

Thus does the strongest reason for hope arise from one of the most basic human responses: exhaustion.


And now, a graph that startled me, that UNR Professor Glen Atkinson sent, showing how much private debt has soared as compared to the public debt we have been focusing on. If accurate, this may be the REAL long term concern!GDPvsDebtGraph

The Fiscal Cliff Compromise

The Fiscal Cliff Compromise:

 What are the key provisions?

Who won? Who lost?


Key Provisions of the Compromise

  • Cancels large tax increases on middle income earners; extends Bush-era tax cuts for individuals earning up to $400,000
  • Delays severe government spending cuts (Sequestration)
  • Renews unemployment benefits that were to expire
  • Creates $600 billion in new tax revenue by raising the tax rate on those earning more than $400,000 ($450,000 for families) to 39.6% from 35% (only on the marginal increase, not on their 1st $400K)
  • Employees portion of Social Security payroll tax not extended, reverts to 6.2% (from 4.2%). This represents a tax increase for most, especially lower income earners by wiping out the gain from the extension of the Bush tax cuts.
  • Personal exemptions and itemized deductions reinstated at higher threshold of family incomes above $300,000; eliminates pre-2010 phase out
  • A 20% rate applies to capital gains/dividends, but only for those in the top bracket. Rest remains at 15%
  • AMT—permanent extension of the “Patch”
  • Estate and gift tax exclusion retained at $5 million
  • About 50 special interest provisions, including for film makers, Alaska natives, railroad maintenance credit, etc. Many medical care related.
  • Permits debt to rise $4 trillion (compared to what would have happened if we went over the “cliff”). New revenue in 2013 amounts to a paltry 0.4%of GDP.

What the Compromise Accomplished

  • Likely will prevent the country from going back into recession (at least for now)
  • Renews unemployment benefits
  • Cancels massive tax increases on the middle class
  • Sequestration-demanded spending cuts put off at least two months


What the compromise failed to do

  • Does nothing to reign in soaring government debt.
  • Absolutely NO significant spending restraints. Nothing about entitlement programs, particularly Medicare/health care costs.
  • No tax simplification; zero tax reform.
  • Fails to raise revenues beyond token amounts. President Obama originally sought $1.6 trillion over 10 years; Boehner offered $800 billion. So they compromised…..on only $620 billion!
  • Does nothing to address current high levels of unemployment.
  • America’s long-term finances are in severe jeopardy, more so after this token compromise…..real crunch will come in less than two months when the debt ceiling mandate will hit again…..In many ways the threat of national “default” in less than 60 days is even a more serious threat than the “cliff”.
  • With no real deficit reduction, the debt to GNP ratio will worsen. Today our debt stands at an unhealthy 73% of GDP. That’s actually the good news—in the near term we will be at Greece-levels of 100% and by 2030, if nothing is done, the debt will probably be at an unsustainable 200% of GDP!
  • Much of the future federal budget will be overwhelmed by health care costs.

 The Next Crisis Cometh: In Less Than Two Months

  • Next up is the debt ceiling, which technically we reached on Dec 31. Through some deft accounting measures, Treasury managed to postpone the debt ceiling crisis until late February. The Sequester—the automatic spending cuts—which were delayed, will also come due at the same time!
  • Governing by deadline and uncertainty, one observer noted, is a bad way of doing business, but that’s the reality. The continuing uncertainty will be a drag on the economy. Just “on to the next Cliff”.
  • If Congress does not increase the “debt ceiling”, the government will be unable to pay the nation’s bills and pay interest on the outstanding debt. Any failure by the government to make these payments could be seen as a “default”. The nation would certainly then be pushed into recession.


 So Who Won, Who Lost?

  • President Obama: Lost overall, despite short term gains. He won a tax increase on the wealthy and can claim that the system is now “more progressive”. He gave up no spending cuts, particularly in the entitlement programs so important to his base……Wanted tax increases at least double what he got; couldn’t get the debt ceiling off the table; no new stimulus measures….His achievements fell far short of his stated goals…More importantly, he abandoned any attempt to achieve a “grand compromise” that would place the economy on a more stable footing….Had virtually no vision or strategic plan to defend before the American people
  • Congressional Republicans: Probably won more in the compromise than they might have expected at the outset—making the Bush tax cuts permanent for 98% of Americans, permanent breaks on the estate tax and dividends. Overall, major loser, as the perception of American public of House Republicans diminished; indeed, the House GOP caucus appears to be permanently fractured. Hue and cry for “spending cuts”, without substantive proposals where specifically to cut.
  • Senate leadership. Fell into line and passed compromise, but Harry Reid and Democrat leadership offered no plan. Reid marginalized as Biden-McConnell relationship became key to securing needed votes.
  • Well-off senior citizens no longer working. Won big!! Hey, no cuts to Medicare, Social Security or Defense. Unless you are very wealthy, no tax increases, and unless you are still working, no additional levies. Debt continues to rise, but what the hell, we’ll be dead before it impacts. Just keep that train a running, folks!
  • Our grandchildren: Major losers. They may not realize it but we have succeeded in foisting an enormous debt on future generations. The young continue to subsidize the rest of us—on Social Security, Medicare, Medicaid, government or other pensions/health care. Of course it is all unsustainable—just wondering when they will figure that out.

Tyrus W. Cobb 

    January 11, 2013

The Fiscal Cliff


The combination of expiration of tax cuts and automatic spending reductions at year’s end would mean throwing the country into a deep recession

Unless the laws are changed, at the end of this year a series of revenue enhancement measures coupled with mandated draconian cuts in spending would likely plunge the country into another deep recession, possibly even a depression. Included in the measures are the expiration of the Bush-era tax cuts, the payroll tax reduction, and certain tax-relief provisions. These revenue enhancements are meant to bring significant new funds into the federal coffers. In addition, on the spending side, a series of severe reductions known as “Sequestration” would automatically cut outlays across the board, with a particularly devastating impact on defense spending.

This is the so-called “Fiscal Cliff” the nation will drive over unless Congress and the President agree in the interim on a comprehensive deficit reduction package. And there is little chance of that happening!

Impact of the Revenue Enhancements and Spending Cuts

On the plus side, the revenue increases and spending cuts should significantly cut our annual deficits. The expiration of the Bush tax cuts is far and away the major factor on the revenue increases. Should these and lesser, more recent, tax reductions be allowed to phase out, that could bring as much as $400 billion into the U.S. Treasury. On the spending side, sequestration would reduce defense and entitlement spending roughly equally, with $27 billion each in 2013 for defense and non-defense spending, plus $12 billion in cuts to Medicare.

The deficit would be reduced by a net $560 billion in 2013, nearly half the $1.4 trillion deficit. Deficit reduction could be as high as $7.1 trillion over a decade, which advocates feel, would mean a reduction in the debt burden and higher growth rates over the long term.

On the negative side, the CBO estimates that the total impact of these provisions could mean a 4% reduction in the GDP growth rate next year. No doubt the nation would be thrown back into recession.

While the provisions ostensibly call for equal cuts to defense and entitlements, in fact because military spending accounts for a much smaller percentage of total federal outlays, the Pentagon would be hit much harder. Some estimates posit that sequestration would result in $1 trillion in cuts to defense spending over the next decade. It would likely result in the smallest Army since WWII, the smallest Air Force in the history of that service, and the smallest Navy since the First World War!

It should be noted that others feel that DOD would not be hurt as badly as its protagonists insist. They point out that we spend more today on the military than we did during the height of the Cold War (in real, inflation-adjusted terms) and that our defense budget is greater than that of all of our allies and likely adversaries taken together. They would prefer that the U.S. be more discriminating in the use of force and encourage other countries to assume greater responsibilities. But that is another discussion for another day!

If the negative ramifications of the fiscal cliff are so great, why even consider such draconian spending cuts and revenue enhancements?

The simple answer is, “the deficit” and the “national debt”. The United States produced budget surpluses in the “Clinton-Gingrich” years, but has been posting increasing deficits every year since. While those shortfalls were once manageable, the annual deficit has soared recently, due to the combination of the recession, stimulus spending and tax cuts. Last year the deficit grew to over $1.4 trillion! The cumulative debt has now surpassed $15.8 trillion and soon will equal 100% of our national GDP. That has not happened since World War II!

Interest paid on the national debt is only 5% of the federal outlays right now, due to previous smaller annual deficits and especially to historically low interest rates. But interest on the debt is expected to quadruple by 2020 to $840 billion annually, and even higher if interest rates rise. It will soon be the 4th biggest spending account, a situation that simply can’t continue.

Prospects for debt reduction over the long term are not promising, with health care cost inflation and an aging population the primary deficit drivers. For the short term the deficit is driven more by the unemployment and the tax reductions that have been implemented.

The conundrum is this—the annual deficits and accumulated debt are simply not sustainable, yet any spending reduction measures or revenue enhancements are likely to drive the economy into recession. Most deficit hawks agree, but feel that if we don’t bite this bullet now, the end result will be a fiscal crisis of vast proportions.

Can the Fiscal Cliff be Averted?

With the two parties unable to agree on revenue measures or spending cuts, agreements were set in place to trigger automatic provisions at the end of this year. Most players felt that such a fiscal cliff would not happen—that more reasonable representatives and the White House would agree on a less draconian set of tax measures and spending cuts.

Not only has that NOT happened, but there is little prospect of any agreement this year. Certainly no compromise will be reached before the November elections. After that we have a 7-week “lame duck” Congressional session that is equally unlikely to convene a “Budget Summit” with the President (who himself may be a lame duck!) that will produce the grand compromise needed to prevent the “Fiscal Cliff” from occurring.

Both parties and the White House have drawn firm lines in the sand. For House Republicans especially, and the GOP in general, the Bush tax cuts and associated measures cannot be allowed to expire, but must be extended. Democrats, including the President, would agree except that they insist that taxes should rise for “the wealthiest”, principally those making over $250,000 (their tax rate would go from 35% to 39%). They also want deeper cuts to Defense and Medicare.

Republicans also insist there must be a fairer reduction in spending between defense and entitlements, with many insisting that the Pentagon must be spared entirely from the deficit reduction measures. The Democrats, led by Senate Majority Leader Harry Reid, insist on the allocation agreed on and claim that defense would not be unfairly singled out. Most likely this is a “going in” position and one they would compromise on if the GOP gave some ground on taxes.

Will we go over the Fiscal Cliff on Jan 1, 2013?

Most likely no, but not because the Congress and the President will reach a grand compromise budget agreement by that time. Probably the Congress and the White House will agree on a stop-gap measure that essentially kicks the can down the road for 3-5 months. However, that truly will be an interim step—the need to finally agree on a comprehensive deficit reduction and revenue enhancement package is critical to the long term health of the U.S. economy, even if that means considerable pain and anguish in the short term.

–Tyrus W. Cobb

Post-Election Uncertainties

After the Elections

Egypt, Greece and France Leap into the Unknown 

Over the past two weeks we have witnessed three crucial elections that will influence the course of events in the Mid-East and the outcome of the “Euro-Crisis”. In Egypt, the “Islamist” candidate won the Presidency, but only after the military essentially usurped all powers of the President and Parliament. In Greece, a “Greek exit” from the EuroZone was temporarily staved off, as backers—albeit tepid—of the harsh bailout terms won a narrow victory. And in what might be the most crucial of the three elections, French voters gave newly-elected President Francois Hollande and his Socialist Party an absolute majority in the Parliament. But perhaps this just lays the ground for an inevitable Paris-Berlin clash over “austerity”.

Egypt: Are the Military and the Brotherhood Moving Toward A Showdown?

Egyptian voters went to the polls in the country’s first free presidential election and selected Islamist Mohammed Morsi. Morsi has been a dedicated member of the Muslim Brotherhood for 35 years, but is also a US trained (USC) engineer.

There are two major question marks hanging over Morsi’s election: first, will Morsi continue the Brotherhood’s tradition of enunciating a hard-line ideology while following a pragmatic course in practice? Secondly, will the ruling military clique permit the president and the parliament to act in accordance with the wishes of the populace or will it institute further actions to strengthen what is becoming a military dictatorship?

The Egyptian revolution that began in Tahir Square has now completed a very discordant first phase. Left on the sidelines of the political drama are the leftists and secular youth groups who began the uprising against Hosni Mubarak. They can only watch as a struggle emerges between the Islamist parties controlling the parliament and the ruling military council.

The Supreme Command of the Armed Forces (SCAF) recently stripped the presidency of most of its powers, while the puppet judiciary essentially dissolved the parliament. The SCAF has declared itself to be the country’s only legislative authority, has excepted itself from any form of civilian oversight and will oversee the efforts to write a new constitution. This would seem to herald an eventual confrontation between the president and the generals, between the Brotherhood and the Military.

Is Morsi a pragmatist at heart, or a true believer? His actions do not give one much hope for the former. Morsi has been an avid supporter of the most doctrinaire beliefs of the Brotherhood, calling for religious law, segregation of the sexes, and a strict anti-Zionist policy.  He seems to share the Brotherhood’s goal of a global Muslim caliphate with the Quran as the sole source of law (Sharia).

President Morsi has pledged not to disrupt existing international obligations, which first and foremost means the longstanding peace treaty with Israel. At the same time he said that he would never meet with any Israeli official himself (although, in the pragmatic tradition of the Brotherhood, he would allow lower level officials to have such contact). But Morsi will be under considerable pressure from other Islamic elements which are much more hard-line on domestic human rights and regional issues, especially the Salafist Nour Party.

Maintaining domestic tranquility, especially within his Muslim political allies, will not be easy, nor will engaging with the powerful military to reach a consensus on political power and policies. But Morsi is hardly Nelson Mandela and the military is unlikely to soon relax the imposition of martial law. Expecting the Muslim Brotherhood and its allies to embrace religious and political pluralism, and likewise expecting the military to step down from the dominant role it has enjoyed for more than 60 years, stretches the bounds of credulity.

The United States can do little in the short term to influence the course of events. Washington can withhold its generous foreign aid and military assistance it provides but it’s not certain who, if any side, that would assist.

Anyone have any bright ideas?

The Greeks back Away from a Euro Exit and Europe breathes a temporary sigh

The result of the elections in Greece temporarily eased fears that the country’s departure from the Euro Zone was imminent. The victory by Antonis Samaris and his center-right New Democracy Party provided a temporary respite. Germany was encouraged by the outcome, viewing it as an endorsement of the acceptance of further austerity moves in Southern Europe. Berlin believes this not only staved off a Greek default but lessened pressure to adopt a more concerted pro-growth set of policies.

The narrow victory for the pro-bailout forces in Greece restored what the New York Times called “an unhappy status quo, a situation dominated by bickering and uncertainty, one that was slowly bleeding the global economy of forward momentum.”  Many feel that the Greeks have been on a spending spree, treating Germany as an ATM machine. They have been living far above their means for years and seem to expect the north European countries to bail them out. Greeks are worried that won’t happen and that the country is heading for an economic collapse. Many Greeks are not paying their bills, withdrawals from banks are running at about 1 billion Euros a day, and we are seeing the rise of radical parties on the Left and on the Right. Shades of Weimar Germany?

However, the temporary victory hasn’t reduced the longer term issues of “keeping Greece on life support, rescuing Spanish banks, and preventing the crisis from infecting Italy.” In the future, particularly following the elections in France, we can expect Germany to be further isolated as support builds for softening the terms imposed on the Greeks. German Chancellor Angela Merkel is holding the line, believing that relinquishing on Greece will be followed by demands from Portugal, Spain, and Italy. The crisis has not been averted, only delayed.

France: Socialists Take Complete Control—Is a Showdown with Germany Inevitable?

It may be that the elections in France were even more significant. François Hollande and his Socialist Party will have an absolute majority in the parliament, freeing them from reliance on both the anti-austerity and “Euro skeptics” alike. Hollande earlier took the presidency from Nicolas Sarkozy due largely to unhappiness over the conservative government’s adherence to German financial dictates. In the parliamentary elections that followed, the Socialists took complete control of the legislature.

Hollande and his Socialists campaigned on a platform advocating a shift away from austerity measures in favor of growth-stimulating policies. At this weekend’s EU summit, Hollande is leading the charge for the creation of Eurobonds—a means of “mutualizing” the EU-wide debt. Germany is likely to resist, emphasizing that France—like the southern tier countries—must bring its own financial house in order through tough anti-deficit policies. The country has one of the highest levels of state spending in Europe and a deficit that runs about 4.3% of GDP annually, which Merkel thinks should be closer to 3%.

Hollande has the unenviable task of persuading “Europe’s pay master Germany” to support his call for a growth stimulus package while at the same time instituting measures to cut the deficit and produce a balanced budget at home. Campaigning against Sarkozy was easy; now the hard choices begin.

Amid rising tensions between Paris and Berlin, Merkel rejected Hollande’s call for joint efforts to resolve the crisis. She bluntly warned that France must immediately institute structural reforms and increase its competitiveness. Can that Paris-Berlin showdown be far off?

–Tyrus W. Cobb, June 29, 2012

This brief essay is replete with talk of “showdowns”, which will be the topic of two upcoming NSF meetings. On July 17 Bob Barone and Jerry O’Driscoll will discuss the EuroCrisis and its Impact on the United States, and in September Dick Hobbs and John Jandali will debate “Whither the Muslim Brotherhood”.