2/8/13 - A Day Without Wi-Fi and Dinner with Two Great Economists

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Feb 8, 2013 8:30:48 AM

and tagged Europe, Politics and the Economy

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First of all, an apology—I didn’t post yesterday. I was in New York at a Morgan Stanley conference, and I blithely assumed that Wi-Fi connectivity would be available. For some reason, which was not the fault of the venue or the sponsor, I could not connect with my laptop. Even on the train home, the Wi-Fi was out for the first hour of the trip, and by that time, it was too late in the day to post.

It is surprising how dependent I have become on connectivity. I have a Mac Air laptop, which I love, and it usually works seamlessly with all sorts of connections, but not yesterday. And trying to connect with only an iPhone, which was heaven just a couple of years ago, was instead incredibly frustrating. How quickly we get spoiled. It was not all that long ago that I refused to even carry a cell phone.

One of the benefits of not being connected to the net was that I was able to concentrate on the content of the conference, which was terrific. The first evening featured a debate between Joseph Stiglitz and John Taylor, two very distinguished and very smart economists. This debate was actually the primary reason I went to the conference—it is rare to see two people of this stature in a relatively informal, unstructured situation. Stiglitz is best known as being more of the “left,” while Taylor is known as being of the “right.” I put these in quotes because the views of each man are much more nuanced than that, but as a general characterization, it is fair.

First, the areas of agreement. Both thought a sustainable recovery was under way in the U.S., both thought Europe was not out of the woods yet and faced potentially serious turbulence, and both were very concerned about income inequality and government spending going forward. When two people from these divergent perspectives agree on something, they are probably speaking truth. I was very glad to hear my views confirmed in many cases.

The areas of disagreement were, perhaps surprisingly, more in the nature of means than ends. Taylor’s biggest point was that government spending, as a percentage of GDP, is well above historical levels; were we to pare back that spending to historical levels, we would not have a deficit, which is correct. Stiglitz’s biggest point was that much of the spending and deficit problems are due to the government’s response to the financial crisis; they will go away as economic growth resumes—as is already happening. He therefore doesn’t believe we need to cut spending substantially.

On income inequality, Taylor spoke in favor of lifting up the lower-income cohorts through improving education, something no one would disagree with but which would require additional spending—which he did not address. Stiglitz, on the other hand, spoke more of the need for taxing the more affluent; in other words, bringing down the higher-income cohorts, which would have negative effects on growth—which he did not address. This is not criticism, by the way, as given the format and limited time, what they did say was totally appropriate. Same goals, diametrically different perspectives, just as with spending.

I did have a chance to ask them about the contribution of entitlement spending growth to the overall government spending level/deficit, and the answers were interesting. Both agreed that, in essence, the problem is health care spending; Social Security could essentially be fixed relatively easily. Within health care spending, Taylor called for a voucher program, leaving consumers to constrain spending on health care, which certainly has merit, but Stiglitz pointed out that if health care costs increased above the voucher amount, that would amount to rationing health care—something very few politicians are willing to favor publicly.

A fascinating evening, and the big takeaway for me was that although the smartest and best informed people can agree on the problems, defining a solution has to be values based, not analysis based; therefore, solutions will be based on politics. Which brings us back to the current debates under way in Washington, DC and at the state level.

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