Hobson's Choice

Recent Frissons

There has been an astonishing amount of action going on in the last eight-nine days. I'm almost in a dither as to what to say about it. Here is a bulletted list.

• The transition of sovereignty in Iraq occurred two days ahead of schedule, presumably in order to avoid a guerrilla strike against the ceremony (Reuters, BBC, NYT). I find it a bit curious that so few are connecting the dots: Paul Bremer has just been replaced as proconsul in Iraq by Amb. John Negroponte. Why did Bremer leave in such haste? Suppose we all agreed that Bremer was a fair-to-excellent administrator. Then would it not seem likely that efforts would be made to debrief him now that his attention was not directed elsewhere? Even the hawks seem to believe, however, that his advice was better dispensed with than dispensed. No surprises there, but I think the long-neglected Transitional Authority will require more attention in a subsequent post. They possibly played a role in the sudden departure of the CPA's management.

MacLean receives a visit

Since moving to Seattle, your humble correspondent has striven mightily to adapt to the different mileau. From the air, Seattle looks indistinguishable from the surrounding expanse of forest. The houses are fashioned in Seattle post-modern, which I think would bring great pleasure to my dear friend EF Schumacher. You see, buildings are essentially heaps of pine cones and fallen branches. High above them tower trees of every imaginable variety--redwoods, dogwoods, cherry, pine, fir, poplar, larch, ash, dandelions, and so on. The Seattlites themselves wander about in edenic splendor, clad in figleaves and goretex. For reasons not yet established, they wear beards but the vertical component of the face is shaven. They also are constantly accumulating tattoos, apparently to render themselves unpalatable to hawks and falcons. The Seattlite young are taken to a great camp at the age of seven where they are tattooed, pierced (15 times through each ear, seven times through the lower lip, four through each nostril, twice through each eyebrow), and then take turns being in the State legislature.

Recently Scheherazade and Dinarzade paid me a visit. They were dismayed to notice the old comity that prevailed between Mumtaz (my enormous white cat with blue eyes) and Xochitl (my medium-sized cat with luxuriant black fur and golden eyes) was gone. Mumtaz, formerly relaxed and playful, was now sauntering about and hissing at empty space, as surly as a cat can be.

Reagan out of the loop?

From Secrets of the Temple, by William Greider:

If the Reagan Administration had chosen to state the true consequences of its tax reductions at that moment [viz., in 1981 when it faced its first budget approval], the 1980's might have been utterly different. Congress might have balked at the tax cuts. Or the President might at least have felt compelled to moderate his tax proposal. At the very minimum, federal deficits would not have soared to $200 billion a year, doubling the national debt in five years. The recessio still would have occurred, but as Paul Volcker had warned obliquely six months earlier, interest rates might have been considerably lower.
[p.397]

*Sigh.* Then the foreign scapegoat was the Japanese. Now it's the Indians and the Chinese.

More on The Temple

(Continued from below)

In the period 1927 to 1970, the Federal Reserve was a comparitively passive actor. In the period from '27 to '34, this was because the financial sector--very much global in scope, then as now--was intensely personal. The Fed then was a lot like a pre-War Japanese zaibatsu, more a trust of almost-private banks under the supervision of a single man. When that man died suddenly in the autumn of 1927, no one had the personal knowledge and relationships to take his place. The Fed was a dead hand until the New Deal got under way. During the period '33 to '52 it was quietly professionalized by Marriner Eccles, while the Treasury was massively more involved in the matter of regulating the general price level. After '52, the economic establishment was convinced that monetary policy was relatively insignificant--it was fiscal policy that mattered. In 1970, after 43 years, the arrival of Arthur Burns coincided with a major upheaval in global markets.

Secrets of the Temple, by William Greider

A few days ago I finished reading Secrets of the Temple, by journalist William Greider (Amazon). This book explains the composition and history of the Federal Reserve; its methods for managing inflation and economic growth; the scope of choices open to it, and to Congress; and how it has exercised those choices (while Congress sat on its hands). The period covered in the book is mostly summer 1979 to October 1987. This was the most dramatic phase of Federal Reserve history since the War. In order to put it in historical perspective, Mr. Greider occasionally lapses bck to earlier periods, such as Pres. Wilson's decision to favor a federal reserve system under bank control rather than a central bank, such as most other countries have, or the role of the Federal Reserve in the Great Depression.

Budget Battle Brewing?

For months the drama of the state budget battles have been brewing. For those interested in a brisk synopsis, the story is blunt and coarse: in the '80's and '90's the states entered a period of rather steady revenue growth, gradually increasing balances, and largely Democratic Party control. Towards the end of this period, Republican numbers in the legislatures and governors' mansions grew; then—a coup de main!—and the GOP engineered a mighty tax revolt, with business as the beneficiary. Corporate income taxes were reduced, pushing most states into a fiscal crisis (Tax Foundation). Several state governors/legislators tried to introduce new taxes, and mostly failed; in several states, major changes in the tax code placed ironclad ceilings on revenues (e.g., CO).

The effect of the fiscal crisis was a shift of partisan control of state legislatures to the GOP (NCSL). In 1998, 20 state legislatures were D-majority; today, 17 are. In 1998, 12 were split; now 11 are. The GOP picked up control of 4.5 legislatures. Not since 1952 has it held so many. At the same time, all governors suffered from the fiscal crisis, and since there was a majority of state governors from the GOP (since 1994, actually), this majority diminished slightly over the same period (Newsaic). So the general effect of the state fiscal crises has been a backlash against the parties in state government. At the same time, following the impressive GOP gains of the last six years, the problem is now being solved with tax increases.