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Glassman interviewed by "Free Market Mojo"

Article by George W. Bush Presidential Center August 10, 2010 //   11 minute read

Free Market Mojo, one of the most influential and active economics blogs, interviewed Jim Glassman on economics and the Bush Institute’s activities.  The full interview is available here; here are some highlights. FMM: Based on the philosophy of its namesake, the George W. Bush Institute  holds that government is not responsible for creating wealth, but for creating the conditions necessary for markets and individuals to thrive. What specific policies will the Institute advocate to achieve its goal of economic security and well-being for Americans? Glassman: Free-market capitalism is now under attack. The Institute wants to lead a counter-offensive. Remember that we are young Institute (I started in September, and we won’t even have a physical home in Dallas until early 2013), and we are only now developing our strategy in the area of economic growth, but I can give you some hints: President Bush cares a great deal about trade and has been deeply concerned about isolationism. Also, in the spring we held a major conference on natural gas, with 30 presenters from academia and business. We wanted to shine a spotlight on the increased supply of gas in the U.S. as a result of new technology and what that abundance means to our economy, environment, and national security. In addition, one of our advisory board (See sidebar) members, economist Eddie Lazear at Stanford, is heading a steering committee to examine where the Institute can help the most in finding ways to increase economic growth in the US. I completely agree with your statement that government’s role is to create the conditions to allow markets and individuals to thrive – in sync with our mission of unleashing human potential. FMM: The Obama administration’s massive economic bailouts have not produced anywhere near the promised results. On the contrary, many argue that the bailouts have retarded a potential economic recovery. What is your opinion of the various bailouts? Was it a mistake for Bush to initiate the bailouts (albeit on a much smaller scale)? Glassman: I make a distinction between two sets of activities in which government engaged after the fall of Bear Stearns in March 2008 and the subsequent recession. The first set involved shoring up the financial system. That effort was funded mostly through the TARP, and, in general, I strongly approved of it. We did indeed face a systemic disaster, and government has a legitimate role as lender of last resort. President Bush and Henry Paulson were right to take the bold steps they did. Also, I would not call the shoring up of the banks through equity and debt infusions “bailouts.” More than half the TARP funds have already been repaid. The second set of activities involved “stimulus” – mainly the $800 billion law that was passed last year with promises that it would bring unemployment down. In my Commentary piece of March 2009, “Stimulus: A History of Folly,” I argued that pump-priming through spending of this nature would not work, and I think I have been proven right. This and other attempts at stimulus (the home-buying tax credit, cash for clunkers, bestowing federal funds on states to pay teachers, etc.) were misguided and, indeed, counterproductive. FMM: In your 1999 book, Dow 36,000, you predicted a substantial rise in the price of stocks, but things took a turn in the opposite direction. With the benefit of hindsight, what events occurred that adversely affected your predictions? Glassman: Once again, let me refer you to something I have written but is not yet public: in this case, my third investing book, “Safety Net: The Strategy for De-Risking Your Investments in Turbulent Times,” to be published by Crown in February. “Dow 36,000,” which I wrote with the economist Kevin Hassett of AEI, examined what economists call the “equity premium puzzle”: why is it that stocks historically have returned so much more than bonds if stocks are no more risky (in terms of volatility) than bonds? Our thesis was that investors were becoming more comfortable with the true risk in stocks and were bidding up prices and thus bidding down returns – a process that would end with the Dow around 36,000, at which time returns to stocks would be much lower. Obviously, that process did not play out. The reason – as I will argue in my new book – is that the world had changed and, instead of basing my conclusions on long-term history, I should have looked to the shorter term and to guesses about the future. The future appears unlikely to be like the past. How has it changed? First, developed economies will not be performing as well as they used to – for a number of reasons I explain in the book. Second and more important, the environment of risk (not just financial volatility but the kind of bolt-from-the-blue risk we saw on 9/11) has changed for the worse. For those reason, in my new book, I tell investors to adjust their portfolios in significant ways. But you’ll have to wait and buy the book. FMM: In 2004, former chairman of the president’s Council of Economic Advisers N. Gregory Mankiw stated that the outsourcing of jobs by U.S companies is “probably a plus” for the economy in the long run. Democrats pounded him for the statement while Republicans distanced themselves from his position. Is the outsourcing of jobs a legitimate concern? Can it be good for the country? Glassman: Certainly, a free flow of labor, goods, services, and capital across borders is good for any country. Adam Smith figured this out more than 200 years ago. He said that I benefit from having a miller grind grain into flour rather than growing my own wheat, building my own mill, and doing it myself. If our businesses shut themselves out from the world, rather than looking across the globe at the most efficient places to be home to part of their production processes or provision of services, then those businesses will be less profitable and productive, hurting the US economy and reducing jobs at home from the level they could be. What Mankiw said was completely unremarkable to an economist but obnoxious to the public. I really don’t blame politicians from distancing themselves from it. It is up to economists (and those of us who write about economics) to do a better job explaining trade to people. FMM: What is your opinion of the Dodd-Frank Wall Street Reform and Consumer Protection Act? Glassman: Mostly quite bad. It is a poorly drawn law that leaves enormous blanks to fill in over time – maybe years – and makes the regulatory apparatus even more unwieldy than it already is. It increases uncertainty for businesses that are ready to expand but worry that they don’t know what the rules are (not to mention what the tax rates will be). Government definitely has the steward’s role in preventing systemic failure. The problem is that, when government provides a backstop (or hints that it will), you have serious trouble with moral hazard (then tendency of insurance to encourage the behavior it is protecting against). One solution, which my friend William T. Nolan II and I proposed in the Wall Street Journal, is to require that investment banks re-assume the partnership form, to expose their owners and managers to personal liability. That’s probably unworkable, but it is the direction we should take. FMM: What do you foresee for the economic future of the US? Glassman: I believe in the imaginative power of the American people, and at the Bush Institute we focus on unleashing their potential, in large part by removing the systemic barriers that limit abilities. So I am betting that — thanks to the Tea Party movement, a resurgence in conservative and libertarian ideas, and the huge benefits that will accrue to us as China, India, and other developing economies thrive – we will do a lot better than rational analysis seems to indicate. Still, a more dispassionate analysis has got to admit deep concerns about the economy. I don’t think we will have a double-dip recession. The recovery will pick up a bit of steam later this year. But far more unsettling is this: Post-recovery, the Congressional Budget Office sees the US settling down in mid-decade to growth in the range of 2.3 to 2.4 percent as far as the eye can see. Sadly, I agree, except that the long-term range rate may be closer to 2 percent or even less – compared with post-World War II growth averaging about 3.5 percent. My reasons are a poor demographic balance (too many old people, not even young people), slow population growth in general, the enormous weight of our legacy entitlement system, the overhang of public debt (mainly what we’ve taken on in the past few years as a result of the crisis), and a kind of decadence that seems to set in when societies achieve economic success. Put it all together, and you have a formula for slow growth, on the level of what we have seen over the past decade in Europe. It certainly doesn’t have to be that way. At the Bush Institute, we aspire to helping boost the US growth rate to 4 percent (through a formula includes low taxes, unobtrusive regulation, free trade, and generally getting out of the way of entrepreneurship and imagination). No matter what the economic obstacles are thrown in their way, Americans overcome them.