POSTED ON FEBRUARY 10, 2010:
The Contrarian Manifesto
Boom or bust? We're always wrong
The Buck Stops Where? Obama is a typical victim of the fear reflex, proposing a budget that freezes federal spending for the rest of his term—except for the military.
My father taught me to go left.
Not politically. He was a right-wing Republican. At the movies.
"Most people choose the right entrance," he told me. "There are usually more seats on the left side of the theater." I've found that to be true.
He dressed like a conformist. But Dad was a contrarian. "If you don't know what to do," he said, "do the exact opposite of what everyone else is doing. On average, conventional wisdom is always wrong. Run away from the crowd--and you'll come out ahead in the long run."
Never has the wisdom of his words been more apparent than now. Acting like Chicken Little proven right--this time, the sky really is falling--government and business are making decisions that are the exact opposite of the right ones,which is nothing new.
Politicians and businessmen also do the exact opposite of what they should do during boom times too.
Consider prison policy. Hit hard by the Depression that began in 2008, cash-strapped states are releasing prisoners early. California's early-release bill even eliminated supervised parole.
Because the average recidivism rate is 80 percent, "(unsupervised parole) is designed to reduce the number of parolees returned to prison, essentially because the state will not know if they are violating the terms of their parole," reports The Contra Costa Times.
But facing a state underemployment rate of 23 percent, California parolees have no real chance of finding work. Most will commit more crimes. From the standpoint of social stability and public safety, it would make more sense to keep them locked up.
If anything, a better time for leniency would have been the 1980s and 1990s. Jobs were plentiful. Wages were steady. Some employers, dealing with a tight labor market, would have welcomed ex-cons. Criminals could have gone straight. But leniency is not what happened.
Instead, "tough on crime" politicians pushed through longer sentences, fueling a massive boom in prison construction. In 1975, there were fewer than 600 state prisons in the U.S. By 2000, there were over a thousand--a 70 percent increase.
Many of those prisons are now being closed due to budget cuts.
If the leaders of our government and major corporations were smart, they would respond to booms and busts the opposite of the way they do.
During a boom, salaries are high. Stock prices rise. State and federal tax revenues go up. Governments run a surplus. Soon we hear calls to "give back" the people's money--by cutting their taxes. As a result, tax rates fall. So do government revenues.
This is stupid. During a period of economic growth and low unemployment, governments should increase taxes. After all, people can afford to pay more when they earn more. And booms eventually end. So some surplus should be set aside for a rainy day.
During a bust, salaries stagnate or decline. Securities markets seize up or crash. Governments run into fiscal trouble. So they raise taxes.
This is stupid too. People are broke. The last thing they can afford during a recession is higher taxes. Governments should cut taxes when the economy sucks. They should be drawing on that big nest egg they should have stashed away during the fat years to pay bills and stimulate recovery.
The "Stupid Opposite Game" has been in full effect since the mid-1990s. Bill Clinton, who presided over the largest and longest economic expansion in U.S. history, slashed income taxes. Barack Obama, dealing with the gravest economic catastrophe since the 19th century, is effectively increasing them. To Obama's credit, he doesn't have a choice. The cycle can only be broken during a boom. It has to begin with that nest egg.
Then there's spending.
Obama is a typical victim of the fear reflex, proposing a budget that freezes federal spending for the rest of his term--except for the military. Hit especially hard would be the Army Corps of Engineers and NASA.
This is exactly the opposite of the budget he ought to be proposing.
The Army Corps of Engineers builds the massive public works projects that create a ripple effect through the economy, immediately employing thousands of workers and leaving a legacy of infrastructure that can promote future economic growth. As FDR did during the 1930s, Obama ought to increase spending on infrastructure. Funding for NASA ends up paying a lot of salaries for scientists--people we ought to be encouraging.
The military budget, on the other hand, ought to be slashed. True, wars stimulate the economy. But they cost more than they earn--in lives, subsequent foreign aid and international contempt.
If CEOs and government officials were smart, they would be hiring like crazy. Millions of smart people are out of work. They can be hired much more cheaply than in the late 1990s. Plus they'll stay longer. Competitors--real and imagined--have vanished. There's less pressure to expand too quickly.
Venture capitalists ought to be loosening, not tightening, their purse strings. After all, there's no better time to start a new business. Eighteen of the top 30 Dow Jones index companies were founded during economic downturns, including Johnson & Johnson, Caterpillar, McDonald's, Walt Disney, Adobe, Intel, Compaq and Microsoft.
So what is a good contrarian to do? Celebrate. Take chances. Because the sky really is falling--and that's great.
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