In Love with the Counterintuitive

There are a lot of absurdly rich people out here in Hollywood – there are far too many rare brand-new Ferraris and big-as-house Bentleys in the streets, and in Beverly Hills there are a lot of sixty-million-dollar homes lined up one right after the other – a big fake colonial next to a big fake English manor next to a big fake Cape Cod thing and so on. And of course all the money sloshing around is generated by the entertainment industry – movie stars and recording stars, and sports stars like David Beckham who lives here now, and wildly successful directors and those richer than anyone else – studio heads. It’s pleasantly absurd, as this is all new money – not generations of wealth like back east with the Astor and Vanderbilt and Rockefeller families, where their tons of money were spent slowly and carefully, with relative restraint, and only on the very best. Much of Vanderbilt’s massive Gilded Age chateau – Biltmore – high above western North Carolina – was imported, stone by stone, from France. Here, where young Paris Hilton is actually a comparatively poor kid, they’ll try anything, just for the fun of it. Will Roger’s polo fields are still here, over in Pacific Palisades – the folksy everyman humorist decided he liked the sport of the idle and useless British aristocracy. It was a whim, and you saw those polo fields in Pretty Woman – that smash-hit movie about a fellow with far too much money and no idea what to do with it, until he meets the right woman, the whore with a heart of gold, who teaches him about kindness and goodness and all that. It’s a bit of a parable about Hollywood.

But the conservatives have it wrong about Hollywood. Of course Tinsel Town is tacky – sudden unimaginable wealth always causes that – but Hollywood is not subverting America with all its tales of sex and violence and its scorn of traditional values and the hard-working decent man who plays by the rules, who does the right thing and goes to church each Sunday, because he’s a Jesus Guy, really. It’s true you don’t get much of that, ever, but no one gets rich telling people they live narrow and pinched lives and they’re fools. That scorn is not what Hollywood is selling at all. They don’t make such movies. Actually all the money comes from telling people what they want to hear – that the unlikely might happen. Tinsel Town is also the Dream Factory. It sells America the counterintuitive. The unlikely hero wins, or the guy finally gets the girl, or the truly evil person sooner or later gets his, but good – against all odds.

Heck, that’s every Hollywood plot right there. And yes, we all know life’s not like that. In real life the good guy never really wins. That’s what both Occupy Wall Street and the Tea Party are about. And, perhaps secretly, all men know they didn’t get the girl of their dreams – just the current wife. Of course the parallel for women is just as true. And as for the truly evil person sooner or later getting his comeuppance, the guys who caused the 2008 economic collapse, that pretty much ruined America, got a seven hundred billion dollar taxpayer bailout and are now richer than ever and doing just fine. No distressed homeowner got a dime, and now the talk is of dismantling what is left of our halfhearted social safety net – Medicare and Social Security and food stamps and unemployment insurance and public schools and all the rest – privatizing much of it so these guys can get even richer. Yes, we know how life really works and we really, really, really want to believe in the counterintuitive, against all odds. You know the standard line from half the screenplays ever written – “Why, that’s so crazy it just might work!” And it does – in the movies.

Yes, we’re dealing with an alternative universe, where the counterintuitive always works just fine. But it’s a trap, as you can come to believe that universe is the real one. And the danger was clear when we had a president who came from the Dream Factory, the former Hollywood actor Ronald Reagan. Yes, there are all the tales of how, in his last years in office, he used to get confused about war movies he was in and the real war against Hitler and Tojo. He really didn’t fight. He made patriotic War Bonds films in Culver City and Burbank. He just didn’t know the difference anymore. It was kind of sad.

But that’s a minor matter – no real harm there. The real harm was in the Hollywood mindset, being immersed in the counterintuitive as a way of thinking. The real problem was the famous Laffer Curve describing how things really work, in a counterintuitive way. It may make no sense, but against all odds, lowering if not eliminating taxes, at least many of them, results in a sudden dramatic and then sustained massive increase in tax revenues for the government. That’s the fact the Supply-Side guys say you cannot ignore.

But there are the facts – try that and you find yourself two hundred billion dollars short and you’ve blown up the deficit because you have to borrow to make ends meet. That’s what happened the first time this was tried – the deficit exploded under Reagan. And now there’s a general agreement that this might have been one of the all-time worst ideas in economics – see Debunking the Laffer Curve (Politics and Current Affairs Forum) and Tax Cuts Don’t Boost Revenues (Time) and most recently The Laffer Curve Debunked (a multi-part series in the Atlanta Journal Constitution from Jay Bookman).

And you might recall that Ronald Reagan made supply-side economics a household phrase, as he promised an across the board reduction in income tax rates and an even larger reduction in capital gains tax rates. And when competing with Reagan for the Republican Party presidential nomination for the 1980 election, George H. W. Bush sneered at Reagan’s supply-side policies, calling them “voodoo economics.” But he gave in – he had to, to win the Republican nomination in 1988. And he lost in his re-election bid in 1992 when, after buying into the counterintuitive – Read my lips. No new taxes – he then raised taxes. He had to.

And see this:

On January 3, 2007, George W. Bush wrote an article claiming “It is also a fact that our tax cuts have fueled robust economic growth and record revenues.” Andrew Samwick, who was Chief Economist on Bush’s Council of Economic Advisers from 2003-2004 responded to the claim:

“You are smart people. You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one.”

So there you have it. Reagan went for the counterintuitive and blew up the deficit. The first Bush gave it a go – and he had to back down and leave that alternative universe so that the government didn’t go broke. And the economists working for his son sat around and talked about how the whole thing was pretty much a farce – not one of them believed this cut-taxes-to-raise-revenue crap ever worked. But it is orthodoxy on the Republican side still. They’re still stuck in Ronald Reagan’s Hollywood. Sure, it’s a crazy idea, but it just might work. But it turns out that we’re not in that movie, or any movie.

But there’s another movie, which takes place in Greece. Greece was what we are told is an object lesson for us all. Greece had run up incredible debt they could never pay off at all. By insisting on providing infrastructure and basic social programs for their citizens they had just borrowed too much money, and now they could sell no more bonds to keep it all going – no one would buy those and the whole thing would come crashing down in a massive default and disaster, taking down all of Europe too. This is an awful scenario and the Republican line was that we would surely end up like Greece if we didn’t stop spending on infrastructure and basic social programs, particularly entitlement programs like Social Security and Medicare, right now. Yes, the economy has stalled, but Obama has us borrowing money – selling treasury bonds – to get people back to work.

And that must be the wrong thing. We are doing what the Greeks have been doing. So full austerity is the answer – we really should shut down all government spending, or as much as we can, and lay off all those government employees and deny them unemployment benefits, because we’d have to sell more treasury bonds to pay for that. Yes, all those corporations that rely on government contracts to stay afloat, providing everything from paper clips to janitorial services, will go under, and of course the number of unemployed will then really skyrocket. But we have to live within our means. That is the way to prosperity – cut and grow, as they like to call it. Yes, that’s counterintuitive, but well, it just might work.

Almost all economists, or at least more and more of them, think this is nonsense – shut down spending and collapse demand and you plunge the nation into a deep recession. But it sounded good politically. Yes, just stop spending money you don’t have and learn to live with the consequences – tough it out. The alternative is to accept high inflation and deficits for five or ten years and actually spend that money you don’t have, as an investment in growth. Build roads and dams and schools and whatnot, as in classic economic theory you actually grow your way out of such crises. But there’s no talking about this now. Everyone seems to believe in austerity. We love the counterintuitive.

And Britain tried it, and it didn’t work:

The surprise fall in output at financial and business services firms in the City of London and beyond has wrongfooted a raft of economists who had been expecting the most powerful part of the UK economy to have expanded sufficiently in the first three months of the year to stave off a return to recession.

Not only did business and financial services output fall by 0.1%, but, within that performance, the vast financial services subsector – including banks, building societies and insurance firms – “made the largest negative contribution”, according to preliminary estimates from the Office for National Statistics.

And to get more technical about it:

The unexpected 0.2 pc contraction in UK growth followed a 0.3 pc fall in gross domestic product (GDP) in the fourth quarter of 2011 signaling a technical recession and Britain’s first double-dip since 1975.

Economists had expected the Office for National Statistics data to show the economy grew by 0.1 pc between January and March.

The Prime Minister said the figure was “very, very disappointing” but added that that it would be “absolute folly” to change course and jeopardize Britain’s low borrowing rates.

And there’s this:

Figures released yesterday by the ONS showed that the government borrowed £2bn more than expected in March, but managed to meet its full-year target because of downward revisions to previous months. Total borrowing for the financial year came in £11bn lower than the same period last year, providing relief for the Chancellor who has repeatedly restated his commitment to austerity in an attempt to drive down the deficit and preserve Britain’s AAA credit rating.

Ratings agency Fitch put the UK on negative outlook last month, meaning that there is a one in two chance that the UK’s credit rating will be downgraded over the next two years.

The theory seems to be that if you shut things down, being quite responsible, then people will lend you lots of money at a low rate. But all they saw was a dead economy and thus a poor risk. Oops.

And see Joe Wiesenthal at Business Insider:

The first thing to note is that the US has recovered WAY better than either the Eurozone or the UK. So if you think Obama has been a disaster, you might first acknowledge that the US has performed better than all its major Western peers. But beyond that… the UK was recovering on a fine trajectory right up until early 2010, at which point UK growth hit a brick wall. What happened in 2010? That’s when conservative David Cameron came to power with an agenda of reigning in the debt.

And there’s Paul Krugman here:

It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position. The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite.

And now the results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost.

There’s more, but Krugman concludes with this:

I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose. Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.

It seems Hollywood isn’t the only Dream Factory.

And Andrew Sullivan comments:

The Tories, like Obama, inherited a huge debt, and with a much more vulnerable currency than the dollar, they opted for Romney-style austerity swiftly to avoid the fate of Greece and currency speculators. But if austerity kills growth and thereby revenues the debt problem can worsen. …

As I’ve said before, I have a long record of fiscal hawkishness. I’m a Tory and want them to succeed. But the one time I worry about fiscal retrenchment is in a period of global recession, where premature austerity can hurt, not help. The key is to stimulate enough to get the economy moving on its own momentum and then phase in serious long term structural budget cuts and tax reform. There remains a chance that the US can pull this off – because of Obama’s stimulus and extension of the Bush tax cuts. But a sudden collapse in demand that would occur if no post-election deal is reached could change all that – and put America on Europe’s path.

And a bit more Krugman:

When David Cameron became PM, and announced his austerity plans – buying completely into both the confidence fairy and the invisible bond vigilantes - many were the hosannas, from both sides of the Atlantic. Pundits here urged Obama to “do a Cameron” – Cameron and Osborne were the toast of Very Serious People everywhere.

Now Britain is officially in double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the 1930s.

Britain is also unique in having chosen the Big Wrong freely, facing neither pressure from bond markets nor conditions imposed by Berlin and Frankfurt.

Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence. Where’s the confidence?

So we have what he calls self-defeating austerity. The movie wasn’t supposed to turn out like this. But maybe real life is a different sort of thing.

And another comment from Sullivan:

If this US election is fought around amnesiac discontent at an incumbent during tough economic times, then Obama will lose – which is why Romney’s strategy appears to be entirely that argument. But if the choice is between drastic European-style austerity on Romney lines, with the burden carried primarily by the poor and working poor, and Obama’s emphasis on more long-term structural cost-cutting, infrastructure investment and more revenue from the rich now, then the equation shifts.

I may be wrong, and it doesn’t thrill me, but my bet is that the West is moving leftwards for pragmatic reasons. And that America will not be immune.

Maybe the West and America have figured out life isn’t a Hollywood movie, where the counterintuitive always works, against all odds – the unlikely hero wins, the guy finally gets the girl, and the truly evil person sooner or later gets just what he deserves – and having people pay less in taxes brings in massive tax revenue, and austerity creates prosperity. Or maybe they haven’t figured that out quite yet. And if Obama wants to run as the guy who operates in the real world he could be in trouble. We all like unexpected happy endings. We do love the counterintuitive.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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