Wednesday, September 2, 2009

The Failure Caucus


Democrats, they know, are bad for markets and the economy, while Republicans are good for both—evidence be damned. They don't need any stinking data to tell them the rescue efforts are going to end in disaster. These are folks who believe that the stock market fell in February and March because it hated Barack Obama (and has rallied since then because he's become less popular)*; who believe that the New Deal prolonged the Depression; and who act as if the last 16 years of fiscal, monetary, and economic history didn't take place. In their view, fiscal stimulus can't work because it's done by the government and the Fed's expansionary efforts must, at all times, always be inflationary. Ergo, we're doomed. (This was the substance of the Paul Krugman-Niall Ferguson feud.) What's both impressive and annoying about these folks is their inability to process information that runs counter to their bedrock beliefs. When data comes in that suggests otherwise, they ignore it or declare victory. Niall Ferguson recently told the Times of London that he "won the argument" he and Krugman had about "the future path of long-term interest rates." (As this chart of the 10-year treasury note over the past two years shows, he's done no such thing.)

This crowd is downright hostile to the optimists. I spent some time on the phone this morning with Michael Darda, an economist at MKM Partners. Darda is no squish. He used to write a lot for the National Review. But when he tells conservative audiences he's expecting the economy to grow at a 4 percent annual rate through the end of 2010, the reaction is frequently disbelief. Darda bases his conclusions largely on his reading of leading indicators, credit markets, and past performance in the wake of recessions—not on who controls the White House. Yes, taxes are likely to rise in 2011, and the Fed will have to tighten monetary policy. But that's no reason to be bearish now, he argues. "The real risk is in being too negative."

That risk is highest for the political division of the Failure Caucus. The conventional wisdom on the right holds that President Obama and his Democratic allies in Congress are setting themselves up for a big fall through their overreaching. But I'd argue that it's the Republican Party, which was always on the side of greater growth, higher stock prices, and more wealth, that has painted itself into a corner.
Here in Utah, it's less of a corner, and more of a very small box without air holes.

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