Friday, May 16, 2008


By Donald Luskin - SmartMoney

IT SEEMS THAT the world is beginning to come around to my point of view, that the credit crisis has been averted and the economy is not going to weaken enough to deserve to be called a "recession."
Several speeches this week by Federal Reserve officials have talked about the credit crisis very much in the past tense. The Fed finally came up with new liquidity facilities that were effective at easing the crisis — after nine months of flailing, doing everything wrong and nothing right. This after years of keeping interest rates too low, and triggering the cycle of speculation that led to the credit crisis in the first place. So now the Fed speechifiers can pontificate about the mistakes that bank lending officers and brokerage firm risk control experts made.
Even my longtime ideological nemesis Paul Krugman, the economist who writes a column for the New York Times in which, for years, he has forecasted every possible horrific outcome for the economy, admitted last week that "the worst of the financial crisis is over."
The Wall Street Journal ran a front-page story this week about how most professional economists have changed their gloomy minds. Just a month ago the consensus agreed that the economy is already in recession — now the consensus says it's not, and that we won't fall into recession from here.
I have to say, all this worries me. I am always much more confident of my views when I am out-of-consensus. When everyone starts to agree with me, I have to start looking for a new point of view.

But I don't think the credit crisis will erupt again. And I don't think the economy will fall into recession.
But as others are getting more confident, I'm getting more worried. In fact, I've told my institutional clients that I still expect a substantial recovery in stocks over the next several months. But I've also told them that looking out a little further, I think that it's time to prepare to get out.
What I'm worried about is politics. In economic matters, I am a conservative. I favor low taxes, no trade barriers, little regulation, sound money and a minimal role for government in the marketplace. For short, call it Reaganomics.

In today's politics that kind of economics is in retreat. When it came into ascendancy in the early 1980s, it was a revolutionary solution to deep structural problems in the economy. It's what lifted the American economy out of the rust bowl of the 1970s, and made the U.S. a technology leader coming into the new millennium.
In the 1970s the economic pie was shrinking. Now it's grown tremendously. So our psychology has changed quite a bit. Now we have the luxury of not worrying about how to make the pie grow, but instead to worry about how we distribute the pie.
So now there are calls to raise taxes on the rich (though it's low taxes on the rich that grew the pie in the first place). There are calls to stop global trade to protect jobs at home (though it's that trade that has collapsed the prices of most consumer goods). There are calls to nationalize health care, so that everyone can have an equal call on the miracles of modern medicine (though it's the mostly private approach to medicine that enabled those miracles in the first place). There are calls to heavily regulate financial services (though deregulation is what enabled almost every American, rich or poor, to carry a credit card, and so many to own their own homes for the first time).

It's not particularly a matter of Democrats versus Republicans. John McCain more closely represents the kind of economics I prefer than either Barack Obama or Hillary Clinton. But none of the candidates really embraces it fully.
Why? Because the American people don't embrace it anymore. We've forgotten what created the prosperity we enjoy today. We're fat and happy. We're complacent. And in my view, that means we're being very stupid.
So is it any surprise that politicians on both sides of the aisle say what they say and do what they do? They're just giving us what we want. However stupid it may be.
And talk about stupid! This week the McCain campaign sent out a press release trumpeting the fact that "eco-friendly" clothing is now available for purchase on their web site. For instance, you can buy a "Go Green McCain Embroidered Polo Shirt with New Recycle Logo," made of 70% bamboo and 30% cotton. I won't ask why that's more "eco-friendly" than an ordinary one made of 100% cotton. For eco-fanatics, it's the thought that counts.
I wish it were just a matter of clothing. But no. In this time of great prosperity, we have the luxury of being nonrational on a grand scale when it comes to the environment. McCain, Obama and Clinton have all embraced the need to legislate caps on carbon emissions. All three support the idea of "cap-and-trade," in which industries that undershoot their emission caps can trade pollution rights to others who have overshot theirs.
Oh, sure, it sounds good to say we're going to stop global warming. But global warming is just a theory. And even if the theory is true, it's just another theory that capping emissions will stop global warming. And even if that theory is true, it's yet another theory that the cost of stopping it will be less than the cost of not stopping it.
I'm not just talking about the dollar cost of higher utility prices, reduced manufacturing capacity and lost jobs — and all the other inevitable consequences of setting an arbitrary carbon cap. Let me be fashionable, and say that money doesn't matter. So let's talk about the opportunity cost. Whatever we spend to maybe stop global warming that may or may not even exist, that's money that won't be available to, say, cure malaria. Malaria definitely exists. And we definitely know how to cure it.
So this is why I'm worried for the long term. When even the most conservative of the candidates embraces something as economically nonrational as capping-and-trading carbon emissions, you know that the economic philosophy of the nation is in decline.
That means higher taxes. More regulation. More barriers to trade. Government doing more things that the private sector can do better. It won't matter who the next president is, except perhaps in degree.
I truly believe that economic philosophy is what moves the world. We had a quarter century of a philosophy of free markets. Suddenly, we are moving very much the other way.
Our marvelous economy still has a lot of momentum. And there's still lots of opportunity to take advantage of the recovery from the credit crisis and the recession that was never a recession. But the philosophy is changing.
At some point, it will be time to sell, and probably stay out of the market for several years — until we've learned our lesson.

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