Lawson for Congress

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC. He also authored an article over the weekend in the New York Times this weekend arguing that “One Rebate Isn’t Enough”. Here are some key quotes:

TAX rebates have been arriving in bank accounts and mailboxes, and will eventually put more than $100 billion into the hands of consumers. The hope is that by spending the money, they will lessen the risk of economic disaster from the subprime crisis.

The theory supporting tax rebates was originally devised by John Maynard Keynes, one of the most influential economists of the last century. In 1931, during the Great Depression, he compared the economy to a stalled car. (The car, he said, had “magneto trouble,” referring to a device once commonly used in automobiles to generate an electric spark for ignition.)

In Keynes’s analogy, when an engine is running properly, each stroke of a piston gets the next piston ready to fire, which in turn gets another piston ready, in rapid sequence. Similarly, he said, when the economy is functioning properly, each time someone spends money, he provides income for another person, causing that person to spend money, and so on.

What was needed in the dysfunctional economy of the 1930s was a government stimulus to get things started again. Keynes referred to the additional rounds of expenditure, set off by the initial stimulus, as “repercussions,” and to their total effect as the “multiplier.”

But people who have studied such models find that these repercussions aren’t powerful enough unless the initial stimulus is really large. Consider the Fair simulation model (fairmodel.econ.yale.edu/main2.htm), a free Web site that embodies much of Keynes’s theory and is offered by Professor Ray C. Fair of Yale. With the “U.S. Model” on this site, I increased transfers from government to households (“TRGH”) by $100 billion in the second quarter of 2008. The results showed a $59 billion increase in 2008 gross domestic product. That is less than half of 1 percent of G.D.P.

The reality of the subprime situation, augmented by the energy crisis, at least suggests that we’d better get ready for another round of rebates. There is little talk of it now, but we should be putting in place another stimulus package like the current one, and stand ready for another after that, and another.

Let’s think about that for a moment. Our government is deeply in debt, and the declining value of our dollar on international markets reflects the fact that we’ve been borrowing and printing a lot of money. Now we have a decorated economist advancing the discredited Keynesian economic theory that we can “print our way to prosperity” — just by reloading the monetary guns and firing a few more times, we can spend our way through this latest crisis.

Well, if Keynes isn’t fully discredited yet, he will be once we listen to Prof. Shiller.

It’s true the American people do need more money, and they must keep more of what they earn. But it’s not just the money — it’s what the money will buy. We can try following Shiller’s advice of borrowing and printing a few hundred billion more dollars to throw at the American consumer, and it will be interesting to see what those dollars will buy in terms of gas and food at the end of that exercise.

If it were possible to “stimulate” the economy by printing money, Zimbabwe would be the richest nation on the planet.

Such suggestions, coupled with the mismanagement of our economy by the Federal Reserve, should give Americans pause as we consider our place in the global economic order. Is there anyone who will stand up to the destructive policies of our own government and financial system?

Well, it’s just been reported that we have finally acquiesced to undergo a Financial Sector Assessment Program by the International Monetary Fund:

Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests — worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.

Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members — but never the United States — have already endured this painful procedure.

The IMF has a long history of taking away irresponsible governments’ credit cards, and enforcing so-called “austerity measures” on the people of developing nations. I can imagine what they’d have to say about Shiller’s Theory of Repeated Stimulations.

I don’t consider an IMF assessment to be good news, however. It should concern all Americans who value national sovereignty, and economic sovereignty.

There’s one silver lining in the IMF investigation, at least for President Bush’s legacy. According to the article:

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush’s last year in office, but it may not be completed until he has left the White House.

A recent Supreme Court decision in the Medellin v. Texas case fortunately reaffirms that we have not yet completely lost our national sovereignty, and indeed state sovereignty, to the vagaries of unaccountable international law. From the ABC News article:

In a defeat for the Bush administration, the Supreme Court ruled 6 to 3 Tuesday that President George W. Bush does not have the authority to force a state to reconsider a death penalty case, even if the conviction in that case violates an international court’s ruling.

Jose Medellin, a Mexican national, was convicted and sentenced to death in 1994 for raping and killing two teenage girls in Houston.

However, the International Court of Justice at The Hague, Netherlands ruled that his conviction was in violation of international treaties, which ordered that the home country of any defendant had to be notified upon the arrest of a foreign national.

Article 36 of the Vienna Convention requires authorities to notify “without delay” a detained foreign national of his right to request assistance from the consul of his own state. At the time of Medellin’s arrest, the United States was a signatory to the treaty, but Mexico was never notified of his arrest.

Medellin, a Mexican citizen who had lived in the United States most of his life, claimed that had he known that he could inform Mexican consular officers of his detention they could have potentially assisted him by providing funding for experts or investigators or ensuring that he was represented by a competent defense counsel. Currently, there are 50 other Mexican nationals on death row in America.

Taking the side of Medellin, Bush had issued a statement admitting that the United States had breached the applicable article of the Vienna Convention, and determined that state courts had to abide by the treaty. This meant they had to then review and reconsider the sentences and convictions of the death row inmates.

Bush claimed that his determination to have the states reconsider the cases came from his “authorized power to effectuate” treaty obligations.

The Bush administration ordered the Texas state court to reopen Medellin’s case in order to comply with the treaty.

Writing for the majority, Chief Justice John Roberts wrote, “Indeed, the Government has not identified a single instance in which the President has attempted (or Congress has acquiesced in) a Presidential directive issued to state courts, much less one that reaches deep into the heart of the State’s police powers and compels state courts to reopen final criminal judgments and set aside neutrally applicable state laws.”

Roberts wrote, “not all international law obligations automatically constitute binding federal law enforceable in United States courts.”

As a friend noted:

I’ve not yet read the decision, but based on the news reports it sounds like this decision may be particularly important as a repudiation of the liberals who want foreign treaties to act as amendments to the U.S. Constitution, so that the federal government can get around that pesky 10th Amendment and impose its will on the States in matters that it would otherwise be forbidden to meddle in.

We are fortunate that an unprecedented assault on self-government was prevented in this case. Allowing a state’s criminal due process to be subverted by international court decisions enforced by our federal government should make every Constitution-respecting American recoil in horror.