The Obama White House likes to say that the theories of John Maynard Keynes form the foundation for its fiscal policies. Most notably, it draws upon the legendary British economist’s idea of spending big to pull out of a recession.
But one economist says the administration has gotten Keynes only half right. Allan Meltzer of Carnegie Mellon is one of the most influential monetarists of the past 50 years. He has served in the Department of the Treasury under President Kennedy and on the Council of Economic Advisors during the Reagan Administration. He also authored the book, Keynes’s Monetary Theory: A Different Interpretation.
While the Obama team is laying out huge sums of money, Meltzer says it’s neglecting a key part of Keynes’ plan: You can’t run up a debt without a way to cover it.
Meltzer recently sat down with Fortune editor-at-large Shawn Tully. Below are edited excerpts from their conversation.
If Keynes were alive today, what would he think of President Obama’s fiscal policies?
He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.
Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.
We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that’s gone.
Didn’t Keynes advocate temporary deficit spending in a recession?
Keynes wanted deficits to be cyclical and temporary. He wouldn’t have been in favor of efforts to raise tax rates in a recession to eliminate deficits. He viewed that as suicidal. He was opposed to the idea that governments should balance the budget during a downturn, and advocated running short-term deficits to spur the economy.
The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation. He also said that the deficits should be self-liquidating, so that the increased economic activity caused by the stimulus inevitably generated a combination of extra tax revenues and lower unemployment payments. With higher revenues and lower outlays, the deficit would disappear.
The Obama administration’s main objective, in the name of Keynes, is boosting consumption. That sounds very different from the focus on investment that you say Keynes advocated.
Keynes didn’t favor at any time that I know spending to increase consumption. He didn’t want that, and in fact he believed that was taken care of by the marketplace.
Keynes wanted to increase employment by smoothing the amount of investment through the up and down parts of the business cycle. He knew that recessions cause a decline in investment, and that the fall in investment caused unemployment to rise. So he wanted the government to stabilize investment through a recession.
What specific policies did Keynes advocate for smoothing investment?
Keynes is very vague on the subject. He believed that the government should plan and direct investment, but not nationalize it. He talked about how well utilities were run under state regulation in Britain. Keynes wanted to apply that model to more of the economy. He thought government planning of investment was the best way to reduce risk for private companies and lower interest rates to spur investment.
Did Keynes champion tax cuts or government spending increases in a recession?
Again, he was extremely vague. On spending, he did say that deficits should be temporary and self-liquidating. He clearly did not advocate long-term spending in excess of revenues, since that causes structural deficits. Nor did he specifically recommend tax reductions for individuals or companies. Those types of cuts, however, are an obvious way to achieve his goal of boosting investment in a recession. And it’s been used with great success by his Keynesian disciples. For example, the Kennedy Administration tax cuts were championed by Keynesian economists, and proved very successful at raising investment.
And one of the leading Keynesians, Franco Modigliani, developed a theory of consumption stating that temporary tax cuts are mainly saved or used to reduce debt. Milton Friedman, the ultimate champion of free markets, independently developed an alternative model that came to the same conclusion. The temporary reductions under Carter, George W. Bush and Obama were all failures, since people spend more only when they’re confident their take home pay will rise permanently.
This is standard economic theory that the current administration ignores.
What would Keynes think of Obama’s stimulus plan?
It’s unbelievable that a man whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.
My advice on the stimulus plan was, don’t do it. Let’s look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero. Second, the temporary tax cuts went to paying off credit cards and other debts, not spending that would have increased economic growth.
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Aircraft makers such as EADS’s Airbus and Boeing Co. are counting on Asia to pull the industry out of a slump and spur growth for years to come, executives said Wednesday.
Fueled by a growing middle class eager to travel, the region will need about 8,000 planes costing $1.2 trillion by 2028, France’s Airbus estimates. Passenger traffic in Asia is likely to grow an annual average of 5.9 percent in the next 20 years, overtaking the United States and Europe to become the largest air transport market, said Airbus, the world’s biggest airplane maker.
"We’re very optimistic this region will play a leading role in global economic growth and particularly aviation," Airbus Chief Executive Tom Enders said at the Singapore Airshow.
Global passenger traffic dropped about 2 percent last year amid a recession in most developed countries. Most Asian countries, meanwhile, continued to expand in 2009, and growing populations and vibrant economies are making the region the center of the aviation business.
Domestic air travel in China rose 21 percent last year, and Boeing estimates the Chinese market will need about 3,800 airplanes costing $400 billion over the next 20 years.
Aircraft makers are targeting local carriers such as Garuda Indonesia, which will receive 23 planes from Boeing and one from Airbus this year, part of a plan to boost its fleet by three quarters to 116 planes by 2014.
Niche players also are eyeing Asia. EADS unit Eurocopter, which says it has about half of Asia’s helicopter market, expects demand to grow at least 10 percent a year for the next decade.
If regulations that limit helicopter use in China and India are lifted, demand will explode further, said Eurocopter CEO Lutz Bertling.
"The Asian market is for sure the fastest growing," Bertling said. "It’s going to be bigger than the U.S. by 2020."
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Diversified Restaurant Holdings Inc. has bought nine Buffalo Wild Wings Grill & Bar locations, including three in the Tampa Bay area.
The company, based in Southfield, Mich., said it exercised its option to buy the restaurants in Brandon, Fish Hawk Ranch and Sarasota, plus another three in Michigan, for $3.1 million.
Diversified (OTC BB: DFRH) already managed the locations, which generated $18.3 million in revenue during the nine months ended Sept. 30. DRH’s management fee was 15.9 percent for that time, a release said.
The company received the right to exercise the purchase option as part of its initial public offering in August 2008. The deal was financed through a 6-year promissory note from the sellers, the company said.
Diversified (OTC BB: DFRH) now owns 16 Buffalo Wild Wings locations, including five in Florida.
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President Obama walked a financial tightrope in his State of the Union address on Wednesday.
Faced with an unexpectedly high unemployment rate, he talked at length about the need to spur job growth and help ease the financial strains on the middle class through tax credits, targeted spending and other measures.
But he made one thing very clear: He also wants to address the unsustainable growth rate in U.S. debt.
"[I]f we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery - all of which could have an even worse effect on our job growth and family incomes," the president said.
Indeed, the Congressional Budget Office reminded policymakers this week that the U.S. government’s fiscal outlook is "daunting."
Here’s why: The interest on the debt and unfunded promises to future retirees in Medicare and Social Security are on track to consume an ever-increasing share of the federal budget. And that depletes resources for many of the basic functions Americans expect their government to provide.
To begin to tackle the problem, the president said he would create a bipartisan fiscal commission by executive order.
The commission would make recommendations to Congress for how to address the looming fiscal shortfalls. Deficit hawks have said such a commission should be allowed to put all spending and tax breaks on the table for consideration.
"This can’t be one of those Washington gimmicks that lets us pretend we solved a problem," the president said. "The commission will have to provide a specific set of solutions by a certain deadline."
Nevertheless, Obama’s panel is a weaker version of a commission that was voted down by the Senate on Tuesday because Congress won’t be required by law to consider the presidential commission’s recommendations or to vote on them.
And beyond the fiscal commission, many of the president’s deficit-reduction proposals were baby budget steps.
It’s not that they’ll be easy to accomplish given how deeply partisan lawmakers have become. But the actual savings achieved from the proposals relative to the accrued debt is very small.
Spending freeze: The president proposed a three-year freeze on non-defense discretionary spending, which accounts for $447 billion, or roughly 13%, of the 2010 federal budget. The freeze would start next year, he said, when the economy is stronger.
The estimated total savings from the freeze: $250 billion over 10 years. But that’s a fraction of the $9 trillion in debt the CBO projects the country could incur over the same time period.
"I think it is a small step," CBO chief Douglas Elmendorf told lawmakers on Wednesday. He added that there is no single step that can adequately balance the budget.
Pay for new policies: Obama has also thrown his support behind the push for statutory pay-go rules. Those rules would legally require lawmakers to pay for proposed tax cuts or spending increases by raising taxes or reducing spending elsewhere in the budget.
Pay-go rules don’t actually reduce the debt load already accrued, but they put the brake on future increases in the debt load, which is helpful first step, budget experts say.
The effectiveness of pay-go rules, however, depends on their parameters. The strongest form would not allow any policy to be exempt.
But the president has backed a proposal that would only apply to "any new non-emergency tax cut or mandatory spending expansion," according to a White House statement.
The problem: That would exempt Obama proposals that are not deemed "new" — for instance, the permanent extension of the 2001 and 2003 tax cuts for most Americans — which is estimated to cost federal coffers more than $2 trillion over 10 years.
Curbing some tax cuts: The president also reiterated some pledges he has made before but that have yet to be passed by Congress. He favors, for instance, taxing the portion of profits paid to managers of hedge funds and private equity funds as ordinary income rather than as a capital gain. That would subject it to much higher tax rates than the 15% capital gains rate currently imposed. Such a provision is estimated to raise roughly $24 billion over 10 years.
What’s really needed
Any credible long-term solution to the country’s fast-growing debt puts Obama in a tight political spot.
That’s because it would have to involve a combination of tax increases (sure to rankle Republicans) and spending cuts (certain to disturb Democrats).
To use just one would be economically prohibitive.
Just how prohibitive?
Suppose Obama and Congress wanted to rely solely on individual income tax increases to get annual deficits down to 3% of GDP by 2015. If they just raised taxes on high-income households — something Obama has promised — they’d have to more than double the top two tax rates.
And that would push the top rate above 75%, according to research by the Tax Policy Center.
If they relied only on spending cuts, they would have to slash the federal budget to the bone. That means they would have to cut much of the discretionary spending pot, including defense.
Elmendorf noted that lawmakers often object in general to "wasteful" discretionary spending.
But when it comes to the specifics, individual programs have fierce defenders, he said. It is after all the pot that pays for everything from public schools, safe roads, health research, national parks, veteran benefits and the court system. To name a few.
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Arizona State University is partnering with Teach For America to transform ASU’s teacher education program.
With a five-year, $18.9 million investment from entrepreneur and philanthropist T. Denny Sanford, ASU will partner with Teach for America to bring changes to the way ASU recruits, selects and prepares K-12 teachers.
The Sanford Education Project will use Teach For America’s tools to recruit teachers to work in low-income communities. Since 1990, Teach for America has recruited, trained and placed more than 24,000 teachers in low-income communities guaranteed payday loans. It has developed strategies to attract people into teaching who otherwise may not have chosen the profession. It also has developed support systems to help those teachers in the classroom and built a pipeline of leaders in the community focused on quality education.
As part of Sanford’s investment, ASU’s College of Teacher Education and Leadership will create a summer institute based on Teach For America’s model.
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About 1.5 million Graco strollers have been recalled because they could pose a risk of fingertip amputations and lacerations to children, federal safety officials announced Wednesday.
The recall includes certain models of strollers and travel systems made by Graco Children’s Products, including the Graco Passage, Alano and Spree Strollers and travel systems, the Consumer Product Safety Commission said.
The hinges on the product’s canopy pose a fingertip amputation and laceration hazard to the child when the consumer is opening or closing the canopy, the CPSC said.
Graco has received seven reports of children injured when they placed their fingers in the stroller’s canopy hinge mechanism, including five fingertip amputations and two lacerations, according to the commission online cash advance.
The CPSC said consumers should immediately stop using the recalled strollers and contact Graco to receive a free protective cover repair kit.
The recalled strollers were sold at Babies "R" Us, Toys "R" Us, Kmart, Sears, Target, Walmart and other retailers nationwide from October 2004 and December 2009.
The strollers had a suggested retail price of between between $80 and $90. The travel systems, which include a detachable car seat, sold for between $150 and $200.
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Nike Inc. built its $648 million golf business on the back of Tiger Woods.
Now it appears the Washington County athletic footwear and apparel giant (NYSE: NKE) will try to sell some golf clubs without him.
The Wall Street Journal on Monday reported that Nike will launch the Victory Red STR8-FIT Tour fairway woods on Jan. 28 that were designed with the help of 13 U.S. golf stars that promote the Nike Golf brand. The new line’s promotional materials, however, make no mention of Woods, the newspaper reported.
The new clubs were tested during a tournament by Lucas Glover, who won the U.S. Open championship last year, according to the report.
General Motors, AT&T Corp., Accenture, Gillette and Swiss watch maker Tag Heuer have all ended their relationships with Woods since a Thanksgiving weekend car crash and later admission to marital infidelity.
Nike, however, has stood by his side.
In an interview last month with the Sports Business Journal, Chairman Phil Knight referred to the Woods scandal as a “minor blip.”
It’s unclear whether the latest product release is an indication that the company’s support for Woods — who has since taken a leave of absence from golf — is wavering.
A Nike spokeswoman couldn’t immediately be reached for comment.
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Luxembourg’s Jean-Claude Juncker said the group of euro-area finance ministers, which he heads, may not reach a decision next week on a successor for European Central Bank Vice President Lucas Papademos.
“Whether we do this on Monday evening or in February, I cannot yet say,” Juncker said at a press conference in Luxembourg today. The so-called eurogroup of finance chiefs is scheduled to discuss the three candidates to succeed Papademos at a regular monthly meeting on Jan. 18 in Brussels.
The candidates to take over the central bank’s vice- president post on June 1 are ECB Governing Council members Yves Mersch and Vitor Constancio and Peter Praet, a director at the Belgian central bank who also is chairman of the Frankfurt-based ECB’s Banking Supervision Committee low interest rate personal loans.
Juncker said he lobbied French President Nicolas Sarkozy on behalf of Mersch, who is head of Luxembourg’s central bank, at a meeting yesterday in Paris.
“I’m in touch with all the euro-zone countries. I outlined the merits of Mersch’s candidature to President Sarkozy,” Juncker said. “It’s not my intention to reveal publicly the various reactions I’ve had.”
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Renters who are caught up in foreclosures or short sales may get more time to get out before the sheriff shows up to evict them, if a proposed bill gets traction in the Florida Legislature.
HB 125, sponsored by state Rep. Hazelle Rogers, D-Lauderhill, and co-sponsored by state Rep. Darren Soto, D-Orlando, is scheduled to be taken up Tuesday by the Civil Justice & Courts Policy Committee. Its companion bill is SB 854.
Soto, an attorney who is handling more than 250 foreclosure defense cases, said tenants often get served the same paperwork from the bank as the owner, which causes stress and confusion.
“They basically receive a complaint, but it doesn’t tell them their rights, other than that they have to respond,” he said. “They don’t know to not pay the rent or to pay the rent, and their landlord is usually pretty mum.”
However, some worry that the bill could limit owner rights by requiring the owner or lender to give the tenant first right of refusal to buy the property.
“A lease with a tenant has a beginning and an end date,” said Stephen Weiss, VP of business development for Fort Lauderdale-based Foreclosure Response Team, a private company specializing in short sales. “It doesn’t give tenants a right or obligation to own my property. This is hindering and impairing on the value of real estate.”
The bill:
Scott Coloney, president of the Foreclosure Response Team, added that if the tenant is awarded the first right of refusal, it could prolong short sales, which are already long, creating problems for buyers.
However, he did like the provision that requires the lender to give notice.
“It’s one less thing that the landlord has to do,” he said.
When General American Life Insurance Co. commissioned acclaimed architect Philip Johnson to design its downtown St. Louis headquarters in the mid-1970s, the firm sought to create something striking to bolster what was then a barren area along the south side of Market Street.
Many architectural aficionados say Johnson delivered.
In essence, he designed a three-story dark-glass box that was just under 130,000 square feet. But here’s the twist: As if slicing a sandwich, Johnson divided the building diagonally, then perched half of it on columns.
"What he did, very creatively, was take a building, cut it on the diagonal and lift one part of the triangle," said H. Edwin Trusheim, General American’s chairman who retired 18 years ago. "You’ve now created a six-story building out of a three-story building."
General American moved to a location in south St. Louis County in 2004. Since then, the building has sat vacant, but a revival of sorts is in the works.
Centaur Properties of New York, which bought the building in 2005 for $6.1 million, says it will spend as much as $10 million in 2010 to spruce up the building to lure potential tenants and restore its historic appeal.
The building’s exterior glass remains in good shape, but the heating and cooling systems will be replaced. The rest of the rehab budget will go toward specific tenants’ needs, said Mike Donovan, a principal at Balke Brown Associates of St. Louis, which is marketing the building for sale or lease. Its $21 per-square-foot rent is at the upper end of the downtown office market.
By itself, a multimillion-dollar refurbishment won’t eliminate the General American building’s competition for tenants downtown, where the overall vacancy rate remains at about 20 percent. Finding the right fit among potential tenants hasn’t been easy, said Kevin Farrell, director of economic and housing development with the Partnership for Downtown St. Louis.
He pointed out that two law firms considered moving into the building since General American moved out.
While the building’s architect is noteworthy, Farrell said prospective tenants will be enticed by the building’s views of Citygarden, the Old Courthouse, Busch Stadium and the Arch.
"It’s a building with a lot of interesting attributes," Farrell said. "You need to find somebody who falls in love with it."
Johnson helped launch the Modernist movement of glass skyscrapers in the 1950s easy online payday loans. In New York, he had a hand in Mies van der Rohe’s Seagram building, the epitome of the sleek corporate headquarters. The Pritzker prize, architecture’s version of the Oscar, was established in 1979. Johnson was the first recipient.
His Modernist towers in the 1980s included the Pittsburgh Plate Glass Co. building in Pittsburgh and the Transco Tower in Houston. He also helped start a Post-Modernist phase of architecture with his AT&T building in New York.
Above the AT&T’s Modernist facade is an enormous pediment resembling the top of a Chippendale desk. Johnson was 98 when he died in 2005.
Even compared to such high-profile projects, the General American building ranks high in the Johnson portfolio, said John Berendzen, a partner at Fox Architects in St. Louis. "It’s a very clean Modernist building," said Berendzen, who years ago designed some interior remodeling there.
"It’s a very simple, yet very complex structure."
It was General American’s vice president, Stanley Richman, who should be credited for bringing Johnson to St. Louis, Trusheim said. Richman, who died in 1985, was a "Renaissance man" of many interests, including architecture.
"Stan searched out architects and, at that time, Philip Johnson was one of the leading architects in the United States," Trusheim said during a recent phone interview from his home in Minneapolis.
For now, however, the building remains empty.
Though intended for a single tenant, the "tremendous amount of public-type space" could allow for retrofitting the structure for several occupants, Berendzen said.
Law firm Blackwell Sanders nearly relocated to the General American building from the Laclede Gas building in 2006. The deal fell through at the last minute. Blackwell merged last year with Husch & Eppenberger and consolidated this year in Clayton. Bob Tomaso, a Husch Blackwell partner involved in the General American negotiation for Blackwell Sanders, wouldn’t explain why the firm passed. Still, he said he admires the building.
"It’s a shame it has sat empty for so long."
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