The Wall Street Journal has consistently supported policies of cheap money and rapid legal and illegal immigration over the past few years. Last week its editorial line wavered, with a lengthy nuanced piece on immigration by James Q. Wilson and Peter Skerry Thursday and a lead editorial worrying about inflation Friday. Is this just a random wobble, or have they been reading Bear’s Lair?
On immigration, the WSJ is a convinced booster of business profitability, while very few of its readers fall in the bottom third of the income distribution. Given its liking for free trade and free markets, it’s thus hardly surprising that it also favors high immigration, which appears a logical extension of free trade, and is certainly beneficial to those employers of low-skill “commodity” labor who cannot outsource their business to Mexico or better still India.
Conservative Republicans who expect the WSJ to be in their corner on the immigration issue are misguided; like The Economist, the paper is economically Gladstonian liberal to the point of fanaticism, not Conservative. It favors low taxes and small government, sure (more so than The Economist), but it also favors unilateral free trade, of the kind that wrecked Britain’s industry in 1846-1932, free international migration whatever the social consequences, and a “level playing field” traders’ free market that moves business activity from the gentleman’s club to the jungle, with the inevitable adverse effects on transaction costs, information quality and business ethics that we are only now beginning to realize.
On cheap money, the position is more straightforward. The great majority of business likes an expansionary monetary policy; it increases profits, very attractive when most of your compensation takes the form of profit related bonuses and stock options. Easy money becomes even more attractive to the WSJ’s readership when it lasts for more than a decade, and encourages first a stock market boom (from which they mostly benefit) and then a housing boom (from which they pretty well all benefit). In addition, easy money makes available huge amounts of debt capital for leveraged buyouts and equity capital which can be attracted to very high paying hedge funds – more fun, lucrative jobs for WSJ readers!
Except for a few gold standard nostalgics, there is little constituency among the WSJ’s readership for tight money, the beneficiaries of which (apart from the economy as a whole) are retired folk with savings in debt instruments, few of whom read the WSJ. Even the downside of cheap money, higher inflation, has taken a remarkably long time to appear in the official price statistics, the massaging of which (by taking out housing in 1980 and inventing “hedonic pricing” in 1995) was wholeheartedly approved by the WSJ when it was carried out.
The WSJ’s longstanding positions are thus explained – gotta keep the readers happy! The rationale for their change is more interesting. On immigration, Wilson and Skerry, outside writers with expertise in the field, put foremost the public’s demand that the Mexican border be closed, by a fence if necessary and that employers should be prosecuted vigorously for hiring illegal immigrants, only then proposing a “modest” program for illegal immigrants to become citizens. While hardly likely to satisfy hardline immigration restrictionists, this is a long way from the WSJ’s previous championing of the right of innocent (non-Muslim) immigrants to flout U.S. immigration laws, its repeated dismissal of the economic case against huge low-skill immigration and its barely-veiled contempt for the “racist” restrictionist opposition.
Since the Wilson/Skerry piece was not written by WSJ staffers it’s possible that it’s a statutory bow towards fairness before the paper reverts to its previous position. Whether or not that’s the case, given the vehemence of previous WSJ editorials on the subject, it’s likely that the paper will have been receiving heat from its readers, or at least from those of its readers who aren’t direct recipients of stock option benefits from immigrant-employing companies — or likely to head to the slammer for immigration fraud. (Every year, the WSJ loses a few readers to the likes of New York Attorney General Eliot Spitzer, and tight enforcement of immigration rules would doubtless increase the proportion of its circulation delivered to Sing Sing.)
If so, from the moderate restrictionist viewpoint (as held by Bear’s Lair) this is very encouraging; it suggests that President George W. Bush’s feeble speech of last Monday may merely have aroused the American public to the issues involved in the current Senate debate. We may be about to witness one of the rare occasions when public opinion genuinely affects U.S. public policy, as distinct from going along with being molded to fit the policy agreed by political and media insiders.
Any such victory will not be easy. Thursday, the U.S. Senate affirmed a clause in the proposed legislation by which illegal immigrants could draw social security benefits for contributions based on social security numbers they had not legally obtained. The devil’s certainly in that detail of the proposed legislation; it’s one thing to provide amnesty and thus encourage mass illegal immigration, but for the taxpayer to reward identity theft as well is surely carrying liberality too far.
On the economic front, the WSJ’s conversion appears somewhat firmer – it’s difficult to argue away one’s leading article. It called for a “change in the psychology in elite political and economic circles” to recognize that the Fed had kept interest rates too low for too long, that inflation may be increasing, and that postponing interest rate increases would only increase the pain for the U.S. economy.
The WSJ’s message didn’t seem to have got through to the Administration Friday, when Treasury Secretary John Snow told CNBC he believed inflation was “well contained” and would remain so, since global central bank governors have inflation “much better figured out than in the past.” “Nobody is talking about “irrational exuberance” today,” he exulted, ignoring the substantial minority of us who believe that irrational exuberance never really went away after 2000, because the Fed’s easy money policies kept the un-dead spirit of 1999 alive, merely diverting the flood of cheap money into housing and commodities rather than dot-com stocks.
Snow also claimed that there was no sign of a sharp downturn in the housing market. I suppose it depends what you mean by “sharp.” Since the National Association of Homebuilders’ confidence Index has declined from 72 a year ago to 45 in May, and is now at its lowest level since 1995, there would certainly seem to be storm clouds about, though we’re not yet near the low of 20 the Index reached in January 1991. How bad the coming storm will be remains to be seen, but the housing bubble’s size and duration suggest it will be no mere summer shower.
To be fair, political leaders have generally acted as boosters for cheap money bubbles while they’re inflating, rather than attempting to quell them. King George I and most of his ministers were both supporters of and participants in the 1720 South Sea Bubble, while in recent years both Bush and President Bill Clinton have cheered on investors in their eras’ bubbles. Even the cautious President Calvin Coolidge did little to quell speculation in 1927-29. The only contrary example in history, as far as I can tell, was Prime Minister Robert Lord Liverpool’s House of Lords speech of March 1825, as the bubble of that year roared to its climax: “I wish it however to be clearly understood, that those who now engage in Joint-Stock Companies, or other enterprises, enter on those speculations at their peril and risk. I think it my duty to declare, that I never will advise the introduction of any bill for their relief; on the contrary, if such a measure is proposed, I will oppose it, and I hope that Parliament will resist any measure of the kind.”
Liverpool, unlike subsequent political leaders, appears to have understood the concept of moral hazard. It will be interesting to see whether, following the WSJ’s conversion, Snow too gets the message and becomes less “irrationally exuberant.” Somebody has to be last to recognize new information, after all.
It will also be very interesting to see whether and when the WSJ signs on to other elements of the Bear’s Lair’s analysis. Will it recognize that U.S. productivity growth is nothing very special? Will it recognize that the U.S. economy is much more stable with tight money than with loose money, since tight money produces higher savings, less wasted capital on housing and entrepreneurial flim-flam and better business ethics? Will it recognize that M3 money supply is a pretty good indicator of inflation to come, and that by this measure the Fed has been excessively lax since 1995, and has now compounded its laxity by deceit, in ceasing to report M3 last March?
Will it recognize that, because of the Internet, modern outsourcing is very different from the international trade of David Ricardo’s day, so that the Doctrine of Comparative Advantage no longer applies in many sectors, and trade is no longer always win-win? Will it recognize that in today’s world, the principal cause of structural and irremovable poverty is population growth, so that both economically and environmentally, a return to the 1 billion world population of 1800 (at the start of the Industrial Revolution) is in the very long run not just desirable but essential?
To come closer to the WSJ’s editorial heart, will it recognize that top management and Wall Street have become grossly overpaid, and that the lack of control over their remuneration has produced a securities market of extraordinary opacity and untrustworthiness? Will it recognize that the financial services business has metastasized into a rent-seeking monster, that is devouring more and more of the world’s economic output, and giving little of value in return? Will it indeed recognize that the U.S. stock market has been hopelessly overvalued since 1996, and needs to drop by more than 50 percent from current levels before any semblance of value for money has been restored?
Probably not. The Wall Street Journal has and will doubtless retain the most powerful media influence in U.S. policymaking, at least while the Republicans cling to power. The Bear’s Lair is a modest column, with influence on policy measurable only with the most sensitive instruments.
Yet David did after all beat Goliath!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.