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July 13, 2010

Comments

The last Democratic President ended welfare as we knew it. It's not hard to imagine this one doing the same for Social Security. All he needs is a GOP Congress to lead him there.

Shudders

There was also this Dean Baker piece on the invented "consensus" on the need for cuts in Social Security.

The good news is that the peasants are revolting. I read the recommended comments on NYT stories as a sort of view into the hivemind (as opposed to the NYT-selected "highlights" that tend to be a view into the line the NYT wants pushed about a particular story), and was browsing those on a recent conventional wisdom-fest about raising the SS retirement age, and the peasants were not buying it. Raising the FICA cap: popular. Raising the SS retirement age: are you out of your mind?

Of course that does make you wonder whether the Obama administration & Democratic leadership are out of their mind to be pushing for cuts to Social Security in the run-up to an election during a time of great economic stress. I mean that seems about as effective an election platform for the Democrats as "We Will Take Your Childrens Toys and Burn Them" or "Free Money For Wall Street Bankers and Reintroduction of Debtors' Prison".

Anyway, what I was saying about the comments is that I detect a distinct flavor of revolt in the air lately. The conventional pap about deficits and Social Security and how we just need to free up big business by removing all regulation, taxes, and moral constraints doesn't seem to be selling as well as it used to. It gives me a little tiny bit of hope, which is then taken out and stomped on when I remember that people will probably express their displeasure with the policies of Republicans and Blue Dog Democrats by ... electing more Republicans. Which the Democrats will react to by adopting more of the policies from the bin labeled "Unpopular Republican Ideas They Never Intend To Implement" and rolling them out.

Our party is run by geniuses, clearly.

Eric, a couple of random points. If I'm off topic, I apologize. First, Bush was bad on deficit spending, but once the Dems got both house and senate in 2006, spending got worse. Second, I don't speak economics, but I am closely related to someone who does, who is pretty bright and who manages a substantial portion of a Fortune 500 pension fund. This person reports what he perceives to be a consensus among economic thinkers and planners who are in the private sector and who are no more involved in the winners/losers of government spending than any of the rest of us--that consensus is that the country is rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts. A stimulus is a temporary boost and nothing more and we don't have the money to do the kind of stimulus being discussed here and elsewhere (JD's recent posts). Bottom line: anyone along the spectrum can find any kind of "evidence" they wish to support whatever position they favor, but the people who do this for a living do not think further deficit spending will either spark the economy or be anything but bad in the long run.

Whether all of this was some nefarious conservative/Republican conspiracy to gut social security and medicare, in my view, gives republicans too much credit for being able to even come up with a plan, much less execute it. As for generic conservatives such a moi, well, we'd like to see a balanced budget and a defense that is more than adequate to meet any foreseeable challenges (and lower tax rates, which I think goes without saying but I said it anyway). Beyond that, I haven't seen, heard or read of any articulated strategy to spend the government into an inability to meet current obligations (not that someone on the periphery hasn't made a case for this, I'm just saying there is no identifiable, consistent pitch in this direction). If anything, many conservatives fell out of love with Republicans because they spent money like drunk sailors.

Let's hope the Obama administration doesn't really intend to follow through with such political, and policy, folly.

hope is so 2008.

the emotion of 2010 is dejected bewilderment.

...which is also something that I'd like an emoticon for.

First, Bush was bad on deficit spending, but once the Dems got both house and senate in 2006, spending got worse.

Well, that was due in part to the increasing costs of Afghanistan and Iraq, as well as long term structural spending, not any policy pushed through by the Dems over a Bush veto.

Bush and the GOP did the damage themselves.

Bottom line: anyone along the spectrum can find any kind of "evidence" they wish to support whatever position they favor, but the people who do this for a living do not think further deficit spending will either spark the economy or be anything but bad in the long run.

McTex: Economists, the ones that do this for a living, have different opinions. They always have. Economists advising Hoover - that were advising Hoover for a living - recommended belt-tightening austerity in the face of a deep recession. The result was the Great Depression.

See, also, Ireland in recent years and other such examples.

Economists whose theories benefit the uber wealthy also have a tendency to be very popular economists.

Alan Greenspan was famously wrong on a number of issues - even he admits. Namely:

1. If not for Bush's tax cuts, we could pay down the debt too quickly.

2. Markets self-regulate.

3. There was no housing bubble.

4. ARMs were good for consumers.

5. Credit default swaps and other exotic securities were stable, safe investments

6. Etc.

While wrong, his recommendations always benefitted the wealthiest Americans. Amazing coincidence.

Whether all of this was some nefarious conservative/Republican conspiracy to gut social security and medicare, in my view, gives republicans too much credit for being able to even come up with a plan, much less execute it.

Probably. That was more whimsy than prediction. However, I did see the budget crunch coming, and knew how it would be spun and utilized. Never let a crisis go to waste and all that.

But it's not like I was amazingly prescient. The budget crunch was entirely predictable and foreseeable, and instead of girding for it, Bush and the GOP pushed through a series of massive, massive tax cuts that primarily benefitted the wealthy at a time that the country was fighting two wars. To Alan Greenspan's cheers.

Whether or not that was calculated cynicism or merely gross, reckless incompetence is up for debate. Either way, we all got screwed (unless you're lucky enough to be in Bush's base - the have mores as he joked).

And I'm a lot less inclined to listen to the same voices now - especially when their advice, magically, benefits the uber wealthy again!

McKT: the people who do this for a living do not think further deficit spending will either spark the economy or be anything but bad in the long run

Not trying to jump on you, cause I always appreciate it when you take the time for a nuanced response.

But the people who do this for a living, those in the financial services sector, bankrupted every major US bank and hundreds of smaller banks. Not a little oopsie you can fix in a few years - bankrupt, as in, liabilities greatly exceeding assets; insolvent; broke; bereft of funds. Requiring multi-trillion dollar bailouts. That is not behavior that leads me to think that they understand anything special about the economy. Or anything about the economy, period.

They also generally thought that blowing staggering quantities of money on the Bush tax cuts was a good idea. So again, the credibility of the people who do this for a living is quite diminished in my eyes.

What I see is that the people who do this for a living are - or identify with, or dream of becoming - people with extremely high incomes. Naturally they do not want to see higher progressive income tax rates. So they oppose anything they might think will lead to higher progressive income tax rates now or in the future (except budget-destroying cuts in said income tax rates right now - a bird in the hand is worth two in the bush, after all).

That's okay. If you ask a kid if they want ice cream for dinner or brussel sprouts, you know what answer you're going to get. No surprise there. That doesn't mean you should take their advice on dietary issues too seriously.

Also agree with JD on that.

The economy will likely force us futher into debt without well-targeted deficit spending than will well-targeted deficit spending. If we continue to waste resources on insufficiently value-creating endeavors, deficit spending will be ruinous, but no one (worth listening to, at least IMO) is advocating wasteful deficit spending.

I don't really know where confidence in US debt or the dollar hits a critical point, but it's a separate question from how we best avoid getting there.

Paradoxical as it may seem, spending properly may well be the best way to avoid a debt crisis, even if it makes the debt bigger in absolute dollar terms over the long term and as a percentage of GDP over the short-to-medium term. Belt-tightening will very likely result in a rapid downward economic spiral, which won't exactly help to reduce debt as tax revenue falls and welfare payments go up.

This, too, should be considered.

more things "people who do this for a living think" - this time from a professor at Yale:

1. Obama is insufficiently pro-business
2. Obama isn't doing enough to help American businesses grow
3. Obama isn't doing enough to fix the deficit
4. the deficit is hurting businesses
5. but (!) Obama will start 2012 with a new, pro-business attitude.
6. and that means he will/should push for:
6a. tax cuts for businesses
6b. higher foreign worker quotas
6c. stricter intellectual property enforcement

notice how many of those things concern American workers ? none - unless you count the negative effect of adding more foreign workers.

this is what concerns the people who do this for a living. not the average American worker. not Main Street.

no, all they care about is their bottom line.

shocking!

I second what Eric says about spending by Democrats. What major spending initiatives did the Dems initiate between Jan 07 when they came into the majority and Sep 08 when the markets blew up?

And I second Jacob's suspicion that someone who "manages a substantial portion of a Fortune 500 pension fund" may not be a dispassionate policy wonk.

Numbers seem more reliable than people. The interest rate Treasury pays is a number. Dean Baker and Paul Krugman are asking why that number is no more than 3%, when people like McKinney's friend are so worried about looming trouble on "multiple fronts". I'd love to know whether McKinney's friend is investing any of his pension fund money in Treasury bonds, at 3%, or not.

--TP

One point I failed to emphasize:

Bush's series of prodigious tax cuts came at a time we were fighting not one, but two wars.

No country in history had ever cut taxes while fighting a war.

We did it multiple times while fighting multiple wars.

And, surprisingly, deficits and debt grew.

JD, this is not jumping me, it's just a comment:
But the people who do this for a living, those in the financial services sector, bankrupted every major US bank and hundreds of smaller banks.

I am not talking about that kind of person. I am talking about money managers, people who have to forecast where the economy and their company's role in it are going.

And I'm a lot less inclined to listen to the same voices now - especially when their advice, magically, benefits the uber wealthy again!

Which is why I specifically excluded that class of economist who tries to influence policy or how the government spends or cuts.

Look, we can tell ourselves until hell won't have it that if we just spend money the smart, focused way (like the last brilliantly targeted stimulus bill???) it will all work out. If government spending was that big of a deal, we'd already be booming and Greece would be the 8th financial wonder of the world.

There is no historical precedent for a country of our size and diversity in post-industrial era, with our current existing debt problems, spending its way to prosperity.

The only real and timely stimulus is to cut FICA for employees making less than 150K or so. If you want to bring more jobs to the US, cut corporate rates to 15%, tax dividends only once, but put an excise tax on corporate retained earnings beyond a stated percentage of net worth. If you want to reduce debt, start by capping spending at current levels, then bump tax rates over 250K to 39.5% but apply the amount collected solely to debt reduction. It isn't rocket science. Quick, massive consumer stimulus, make the US a tax haven for corporations (who will employ more people), stop spending increases and then reduce debt. Try it before any more shots in the dark.

Eric: We did it multiple times while fighting multiple wars.

Well, American exceptionalism and all that.

"The good news is that the peasants are revolting."

reminds me of a classic Wizard of Id strip

Look, we can tell ourselves until hell won't have it that if we just spend money the smart, focused way (like the last brilliantly targeted stimulus bill???) it will all work out. If government spending was that big of a deal, we'd already be booming and Greece would be the 8th financial wonder of the world.

But McTex, why are the interest rates so low?

And, really, comparisons to Greece are beyond meaningless. Greece was a unique case for at least a few reasons:

1. It could not devalue because it was tied to the Euro - and wasn't ready for integration in the first place.

2. Was horribly corrupt.

3. Related to #2, did not collect tax revenue from its citizens - particularly its wealthy citizens - at anything resembling a sufficient rate. Tax evasion was a national sport, especially for the wealthiest Greeks.

Also, this:

Overall government spending did not go up by that much with the stimulus package because of offsets on the state and local level. The stimulus was weakened because of that, and that has a lot to do with the lackluster results.

I am not talking about that kind of person. I am talking about money managers, people who have to forecast where the economy and their company's role in it are going.

I'm not sure that's a major distinction here, unless they predicted the recent crash/recession. And regardless, so a consensus of money managers say "x" which means "x" is more likely, despite centuries of economics scholarship?

There is no historical precedent for a country of our size and diversity in post-industrial era, with our current existing debt problems, spending its way to prosperity.

There is never an exact historical precedent for anything. But I'd have to hear how and why our current condition means that Keynesian economics doesn't apply anymore.

There is no historical precedent for a country of our size and diversity in post-industrial era, with our current existing debt problems, spending its way to prosperity.

There is no historical precedent for a country of our size and diversity in post-industrial era. (And I mean ".")

Look, we can tell ourselves until hell won't have it that if we just spend money the smart, focused way (like the last brilliantly targeted stimulus bill???) it will all work out. If government spending was that big of a deal, we'd already be booming and Greece would be the 8th financial wonder of the world.

1. Part of the argument is that we have to do better than the last stimulus bill, so no, not like that one.

2. Greece has nothing to do with it, and does not represent a model remotely similar enough to the US for meaningful comparison.

3. The last stimulus was too small and poorly focused (see 1.) and the spending on Iraq/Afghanistan and whatever private spending resulted from the Bush tax cuts were not productive, nor was letting ridiculous private debt accumulation to create a false economy fueled by poorly regulated financiers. The economy sucks for reasons pre-existing the insufficient stimulus, which was insufficient.

McTex:

I'd also point out that your solutions, more tax breaks for corporations, are belied by data on cash reserves by corporations.

Corporations have cash. They have money. But they aren't hiring.

Because there is not enough consumer demand to justify hiring more people to make products that...not enough people are buying.

This is a crisis of demand. Demand needs to be primed.

McT,

Look, we can tell ourselves until hell won't have it that if we just spend money the smart, focused way (like the last brilliantly targeted stimulus bill???)

Well, it would have been a lot better targeted if it hadn't been necessary to appease a few borderline Senators by letting them show how tough they were. It's pretty annoying to hear that it all didn't work when:

A) It did work as well as could be expected
B) the reason it didn't work better was because it was sabotaged by those who didn't want it to work.

There is no historical precedent for a country of our size and diversity in post-industrial era, with our current existing debt problems, spending its way to prosperity.

True, but then there is not much historical precedent for a country of our size and diversity in the post-industrial era doing anything. How much such history is there?

And of course we did spend our way to prosperity in WWII. Not that I'd care to try that again.

I'm usually wary of any economic analogy that tries to compare national budgets with state, state with corporate, and corporate with household--or any combination thereof. There are just too many differences for most comparisons to be at all meaningful.

What they all have in common, however, are circumstances where it makes sense to spend--or invest, if you prefer--money now in order to address an acute problem or lay the groundwork for future benefit. Nearly all of the conservative objections to deficit spending I have heard manage to neatly ignore this in favor of arguments that amount to "debt bad mmkay", absent any context or nuance.

If someone in our family has a major medical issue, or my car suddenly breaks down, or some other expensive crisis occurs, we may or may not have the money on hand to deal with it--but there are circumstances where the right choice is to go into debt in order to do so rather than throwing up our hands and declaring we can't afford it. There are costs associated with going into debt, but in many cases the cost of inaction is far greater than the cost of debt.

This is true for businesses and governments as well--the differences are in the context and the nature and scope of the crises. Most conservatives have been attacking anything that adds to the debt without examining the costs--both financial and intangible--of /not/ dealing with the problem. There should not even be a debate on whether or not it is appropriate for the government to spend money in order to address a national crisis like the current recession--not among serious, informed people anyway. The debate should instead center around what kind of spending is most likely to produce results.

The problem with attacking the problem from this angle, however, is that it gets into territory that is not favorable to conservative ideology. Supply-side economics is a completely discredited fringe theory at this point, refuted time and time again by the results it produces in practice. Our economy is driven by consumer spending, and consumers cannot spend money they do not have. Tax breaks do not benefit people who are not receiving taxable income. Businesses will not hire or produce if there is no demand for their services, and that demand flows from consumers--one out of every five of whom is either unemployed or under-employed.

What's this "post-industrial era" we're supposed to be in? Are we also in a "post-agricultural" era?

What good does eliminating FICA do for unemployed people? What does it do to the SS Trust Fund?

Why are US corporations sitting on trillions of (presumably after-tax) dollars, instead of hiring people with them? Why would having more after-tax dollars cause them to hire workers they don't need?

Is war spending "stimulus" (as in WW2)? Are top-end tax cuts "stimulus" (as in Dubya's reign)? If so, why didn't the US economy positively boom in the last 10 years?

These questions are mostly for McTX, but any other non-rocket scientist is welcome to answer them.

--TP

McKT:

"I am not talking about that kind of person. I am talking about money managers, people who have to forecast where the economy and their company's roles in it are going."

Up above, in an earlier comment, you referenced your relative, the money manager, who "reports what he perceives to be a consensus among economic thinkers and planners in the private sector ..."

O.K. How is his portfolio invested now to reflect his forecast?

Further, I'm not no enamored of "consensus thinking" among money managers and neither should you be. There was a consensus of fully invested money managers (did your guy own REITs on September 1, 2007?) at the 2008 top in the market, at the top of the dot.com bubble, and at the top of every market bubble in history.

Have you checked the performance of pension fund managers (we'll leave aside equity mutual fund managers, all of whom got their heads handed to them regardless of their investment approach), public and private, from top to bottom during the 2007-2009 bear market? Very few escaped slaughter.

There is only one kind of person at market tops.

There is only one kind of person at market bottoms.

So, is your guy predicting inflation, deflation, stagflation, sovereign bankruptcy ... what, for God's sake ... unpack these long-term negative impacts for us. Should we buy catfood futures?

Also, if this a Fortune 500 pension fund, I doubt his investment guidelines and benchmarks permit more than tinkering around the edges. If he's managing retirement money, he'spretty well diversified among financial asset classes, including Treasury bonds of various maturities.

So, tell us. We're dying to know. I'm also dying to know if he's one of those money management strategists who, when asked (a mug's game at anytime) what he recommends, says, for example, "We'd look at something like Bristol Myers."

To which I'd ask: "Something LIKE Bristol Myers, but not actually Bristol Myers?

Answer: Well, Merck might be something to look at if you have powder you don't need to keep dry."

Me: "How long should I look?"

Answer: "At something like Merck?"

Me: "Nope, right at Merck, the real deal."

Answer: Well, I'd look until we have finished establishing our position in something like Novartis and then I'll be willing to tell you when to put your powder to work and pull the trigger.

Me:(channeling Lou Rukyser): Well, it sounds like there will explosive gains in store for something like an investor."

Disclaimer: I'm not advocating violence, but I could change my mind at any moment.



Private debt to GNP approaches 300%. Do we hear the screeches of doom from the cat food deficit hawks? Nary a peep.

They truly do not take this stuff seriously. You can tell by their absolutely lame arguments.

The question is still the same: It's the country of the rich. They bought and paid for it, and they want to keep it. That means keeping their outsized share of our wealth. All this balony about "long term impacts" of the national debt is simply nonsense, and their political agenda is pretty damned obvious.

Missed McK's response or I would've wrapped this into my last comment. But this demands an answer:

The only real and timely stimulus is to cut FICA for employees making less than 150K or so.

This is emblematic of the kind of shallow thinking that permeates conservative dogma. First of all, FICA already applies only to the first $106,800 of income--what you propose is functionally equivalent to eliminating FICA altogether.

But that sidesteps the broader problem with this kind of proposal: in what way is a FICA tax cut beneficial to someone who is unemployed? Tax cuts are fundamentally, unequivocally meaningless to people who have no income to tax.

"What I see is that the people who do this for a living are - or identify with, or dream of becoming - people with extremely high incomes."

. . . or have their paychecks signed by people with extremely high incomes. ""It is difficult to get a man to understand something when his salary depends upon his not understanding it" -- some socialist

What we've basically are in now is the end stages of a Monopoly game. Two titans own most of the board and all of the non-foreclosed property. 2 players have busted out and 3 more peons remain circling the board, without hope, except for hitting on the Free Parking square and its loot that's been put there contrary to the rules.

This nation has a lot of money. The problem is that the rich have all of it. Our Gini coefficient is now up there with the Swiss.

These questions are mostly for McTX, but any other non-rocket scientist is welcome to answer them.

There was a stealth stimulus in addition to the Bush tax cuts and deficit spending of 2002-2006 . . . the rule changing going on with real estate that inflated that sector 2X or so.

This resulted in hundreds of billions of fake economic activity (loan brokering, real estate agenting, and other make-work paper shuffling) and TRILLIONS of home equity monetization as home prices were pushed up, up, up 2003-2005. At the peak there was around $500B a year of cash borrowed against homes, that may not sound like much but that's TEN MILLION median jobs, ten million jobs that are, oddly enough, gone now.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CE16OV&s[1][range]=10yrs

Eric, a couple of random points. If I'm off topic, I apologize. First, Bush was bad on deficit spending....

As has EVERY Republican president since Eisenhower. Allow me to repeat; every Republican president since Eisenhower has left the US budget deficit bigger, our dollar weaker and our trade position worse off.

Ironically, the mid-terms will probably push me closer into alignment with the Republican ideology. If we're so stupid to put them back into power, then I have absolutely no sympathy for the people who will get screwed.

First, to be SUPER clear, I think that we need a very large Keynesian (which is to say temporary) stimulus right now to shake out of the depression. Worrying about deficits in a discussion about *that* is a case of misplaced priorities.

However, I am not at all thrilled when the discussion starts going this way:

Not trying to jump on you, cause I always appreciate it when you take the time for a nuanced response.

But the people who do this for a living, those in the financial services sector, bankrupted every major US bank and hundreds of smaller banks. Not a little oopsie you can fix in a few years - bankrupt, as in, liabilities greatly exceeding assets; insolvent; broke; bereft of funds. Requiring multi-trillion dollar bailouts. That is not behavior that leads me to think that they understand anything special about the economy.

especially when that is a response to

This person reports what he perceives to be a consensus among economic thinkers and planners who are in the private sector and who are no more involved in the winners/losers of government spending than any of the rest of us--that consensus is that the country is rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts.

This really is the consensus among not-just-private economists. That is what left wing economists like Krugman and Quiggin think, what right wing economists like Mankiw think and what centrists like DeLong think.

And the fact that we think bankers were really stupid doesn't mean that they are wrong when they agree with pretty much every main stream economist and almost all of the non-mainstream economists when they say that overall debt is trending too large.

And if we do think that they are wrong, we need to have much better arguments than "well they drove the economy into a ditch" because the 'therefore debt can't possibly matter' argument doesn't follow logically from that.

The argument isn't that 'huge debt is good' or that 'huge debt does not matter'. The argument is that while large debt does matter, being in a multi-year economic depression matters a lot more. And if it requires increasing our debt temporarily to deal with that, we should do so.

If we're so stupid to put them back into power, then I have absolutely no sympathy for the people who will get screwed.

Hey, I'm not voting for them. Why don't I get my allotment of sympathy for being screwed? (because I surely will be, along with just about everyone else commenting here)

If government spending was that big of a deal, we'd already be booming and Greece would be the 8th financial wonder of the world.
There is no historical precedent for a country of our size and diversity in post-industrial era, with our current existing debt problems, spending its way to prosperity.

I think this is a strawman- no one is arguing that just government spending will usher in an era of prosperity. It's meant to counter a very specific, relatively short term (couple of years at most) problem.
Is it the right solution to that problem? I think you can find people who don't think so. But no one is proposing government spending as a panacea.

I'd love to know whether McKinney's friend is investing any of his pension fund money in Treasury bonds, at 3%, or not.

Or is he putting his money where his mouth is and shorting Treasuries (hoping that rates will rise and they will lose value)? Really, my big concern now is that we're going to follow the model of Japan's Lost Decade- bad banks, insufficient stimulus, ineffective monetary policy bc we're up against zero yield. If you haven't read up on that era (googe "Liquidity Trap") then you ought to, speaking of 'historical precedents'.
And apparently the wisdom of the market thinks so too- at least, the wisdom of the market (that would be all of those money managers you speak of) is *not* betting on rising interest rates so far. So perhaps your friend has misinformed you on the consensus outlook.

JT, O.K. How is his portfolio invested now to reflect his forecast?

Fair question. 10% cash, 50% bonds, 40% equities on the personal side. Pension side, can't say due to rules, laws, etc.

Also, so that we are on the same page: not being able to pick a stock isn't congruent with grasping the big picture of over-sized debt. And while a lot of dumbasses were all over REIT's, my relative was studying in school pre-2005 and even then the discussion was whether the real estate bubble would crash hard or have a soft landing. People can know, and be correct, that the debt level is approaching the point of severe, structural risk and still be wrong, or have been wrong, about the brilliance of derivatives. And a lot of people thought derivatives were stupid.

Eric and also TP, Corporations have cash. They have money. But they aren't hiring.

I wasn't clear enough--lower the rate to 15% and more corps will come back and others will move to the US because of more favorable tax treatment. The new arrivals will produce new hires. The lower rates will also keep more companies from moving offshore. If and when the recovery comes, we'll have more companies to put people back to work.

Catsy, Tax cuts are fundamentally, unequivocally meaningless to people who have no income to tax.

As slow as I sometimes am, I actually did know this. The idea of a stimulus is to stimulate consumer demand by sticking a bunch of money into the economy which will produce jobs and spending and thus spark growth. Well, the quickest way to produce consumption, and thus demand, is to give people who are absolutely going to spend most of what they get. You do this by giving a FICA rebate on the employee side only. Good point about the cap, though, I completely missed that one.

Awe, As has EVERY Republican president since Eisenhower.

Not exactly a compelling argument since for only four years has there been a Republican president with both a Republican House and Senate. Ford, Nixon, Reagan and Bush I all had Democratic Houses and only Reagan had the Senate (but I can't remember if he had it all 8 years). And I'm pretty sure LBJ left a deficit, but if he didn't it's because he was the author of putting SS tax dollars in the general revenue fund.

Where I part company with Seb, if i do, is that gov't funded stimulus has been, if anything, shown not to work in the current era. The WWII phenomena is unique and doesn't compare at all with today. First, you had a population of 130 million people of which 12 million were in uniform. Second, the domestic impact of WWII on the economy was to transition the US from a mostly rural operation to the only functioning industrial nation in the world (well, the UK still had its infrastructure intact, for the most part, but everyone else was in ruins). Third, the GI bill sent millions to college, transforming the workforce. This paradigm shift, occurring in so brief a time and with such a vaccum in the rest of the world's competitiveness, was beyoned unprecedented. If it was Keynesianism that saved the day during and after WWII, it was only in conjunction with other, non-recurring, incomparable and equally over-arching conditions, none of which, or anything comparable, are in play today.

"'The good news is that the peasants are revolting.'

reminds me of a classic Wizard of Id strip"

This really is the consensus among not-just-private economists. That is what left wing economists like Krugman and Quiggin think, what right wing economists like Mankiw think and what centrists like DeLong think.

Does Krugman really think this? cite:

Britain embarked on austerity even though there was no hint that bond markets were actually worried about its solvency. American politicians are saying that we have to cut now now now or become Greece, even though interest rates on US debt are at near-record lows. As I’ve written repeatedly, we’re running scared of invisible bond vigilantes.
The point is that policy makers aren’t responding to what financial markets demand — they’re responding to what they believe, thanks to some mystical source of knowledge to which I’m not privy, markets will demand one of these days.
This isn’t the tyranny of the bond market; it’s the tyranny of fiscal fantasies, of speculation about what the bond market might do.

Also, so that we are on the same page: not being able to pick a stock isn't congruent with grasping the big picture of over-sized debt.

On the contrary- if you know where treasuries are going, then you know exactly how to place your bets in the market to capitalize on that movement. This does not hold water- if your friend just knows that we're headed for higher rates, but he hasn't put his money where his mouth is (personally or professionally), then even he does not believe in his prediction, no reason why you should.
As for a near-consensus on the matter- I will tell you what a consensus that "30-year treasury yields will rise" would look like: an increase in the yield on 30-year treasuries. This is like saying that a stock at 50 has a "consensus" value of 75- the consensus value is what it trades for.
[absent things like a government spending to defend its currency]

I wasn't clear enough--lower the rate to 15% and more corps will come back and others will move to the US because of more favorable tax treatment. The new arrivals will produce new hires. The lower rates will also keep more companies from moving offshore. If and when the recovery comes, we'll have more companies to put people back to work.

That seems like an odd suggestion- a long-term fix to a short-term problem, and one that creates it's own long-term problem (ie lower rates than we'd otherwise have on corporations). Unless we were to bait-and-switch, raise rates after the economy recovers, but I dont like introducing that kind of uncertainty into businesses.
The only reason I can think for suggesting this is that you prefer it as a policy outcome anyway- it just is not well-designed for a short-term stimulus of the economy.

Where I part company with Seb, if i do, is that gov't funded stimulus has been, if anything, shown not to work in the current era.

If you put the burden of proof high enough (higher than would be appropriate for this sort of thing) then you might get away with "not shown to work". But "shown not to work", that's a pretty bold claim. Unsupportable, I think, without ph.d-level gyrations.

Okay, seriously, the corporate tax cuts thing is silly. Do we really want the US to become a tax haven where corporations move their HQs to just to avoid paying taxes? The whole tax haven thing hasn't worked out all that well for the little countries that have done it, because inviting companies in that have no interest in your country other than to exploit your laws for their own profit isn't a good way to create good corporate citizens, or much of anything other than corruption.

And as a practical matter, I don't think going from a nominal rate of what, 35% (which only ends up being an effective rate of ~17% iirc) to a nominal rate of 15% would make that much difference, even for big companies. To get a big difference, we'd have to go to 0%, which is psychologically much different than even 1%. Which is why Delaware has all the credit company HQs, but there's not much difference between the rest of the states.

Also, if they brought their HQs here, that wouldn't mean they'd hire many people, a few janitors maybe, but the manufacturing would still be in China and the tech support in India. All it'd do is let them transfer the "savings" to the CEO's bonus for their wisdom in moving the HQ to a tax haven.

Yes Krugman rally does think this. cite

Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?

...

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.

I wasn't clear enough--lower the rate to 15% and more corps will come back and others will move to the US because of more favorable tax treatment. The new arrivals will produce new hires. The lower rates will also keep more companies from moving offshore. If and when the recovery comes, we'll have more companies to put people back to work.

A corporation much in the news recently is TransOcean. It moved its corporate HQ to Switzerland. This cost the US a couple of dozen jobs. TransOcean still employs thousands of people in the US, probably because there's not a whole lot of deep-sea drilling in Switzerland.

Now, suppose we start acting like Switzerland: cut corporate taxes like McKinney wants. Entice all sorts of Swiss companies to move their HQ to the US. Get them to move a VP and a couple of secretaries to Boston, leaving their thousands of real workers in Basel where their actual operations are. Just like TransOcean, but in reverse.

Good plan?

--TP

Seb,
You may think that the Krugman quote supports this position: that consensus is that the country is rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts.

I don't at all. Krugman is describing long-term fixes to be made at some point in the intermediate future. He is not describing solutions to a "rapidly approaching" problem, but one on the horizon. In fact, Krugman is advocating the exact opposite of the quote that you claim he supports- he is advocating more spending now, while the quote clearly advocates for fixing the deficit asap before it creates "long term, negative impact across multiple fronts".

"Anyway, what I was saying about the comments is that I detect a distinct flavor of revolt in the air lately"

A timely measurement of here . An ABC poll summarized

A year and a half into his presidency, 51 percent in a new ABC News/Washington Post poll would rather have the Republicans run Congress "to act as a check on Obama's policies," vs. 43 percent who want the Democrats in charge to help support those policies. That's accompanied by a 7-point, one-month drop in approval of Obama's handling of the economy, to a career low

followed by:

While Democrats are most at risk, the danger's not theirs alone. Registered voters by 62-26 percent are inclined to look around for someone new for Congress rather than to re-elect their current representative – the broadest anti-incumbency on record in ABC/Post polls since 1989. Backing for incumbents has lost 11 points since February, an unusually steep decline.

Now the question is how all that translates when people show up, or don't show up, to vote.

I think Krugman is a partisan hack, but he is right. We should find and spend 3 trillion dollars just for stimulus.

We should then tie deficit reduction to the growth it generates.

How we should spend it is a different answer. Shovel ready, union labor construction projects aren't the answer, but lets compromise. 1.5 trillion in across the board tax cuts, and 1.5 trillion in infrastructure, over 2 years, front loaded 1 Trillion each in year 1.

I prefer the electrical grid and focus on alternative ways to generate electricity. Just because I believe we could move alternative energy (and address GCC) faster if we didn't have to perfect new delivery systems.

But I really don't care as long as we also redo HCR and just pay for the uninsured/uninsurable with a Medicare based solution and don't touch SS.

That's all I want.

GIven that the poll notes And a mere 26 percent express confidence in the Republicans in Congress to make the right decisions for the country’s future, trailing the Democrats (32 percent) and Obama (43 percent, a new low) alike. (p 4 from PDF linked to the article), it seems more logical that the question was taken more as 'would you prefer the Republicans to continue to move into the tea partiers embrace or would you prefer they act as a check on Obama's policies' rather than 'would you prefer the Dems to enact everything they want or...' Maybe 51% are really longing for the Republicans to have some sort of mandated minority status...

Sebastian,

That is what left wing economists like Krugman and Quiggin think, what right wing economists like Mankiw think and what centrists like DeLong think.

How much do you read DeLong? I read him a lot, and if you think he is worried about deficits in the near term you are mistaken. He has frequently likened those worried about such near term deficits to "people yelling 'fire' in Noah's flood."

Plus what Carleton said about interest rates.

"We should then tie deficit reduction to the growth it generates."

Please cite an economic theory/hypothesis under which deficit reduction 'generates' growth. Historically, deficit reduction in the good ol' USA has been followed by recessions.

"Please cite an economic theory/hypothesis under which deficit reduction 'generates' growth. Historically, deficit reduction in the good ol' USA has been followed by recessions."

Sorry Bobby, thee it in that sentence refers to the 3 trillion stimulus.

However, recessions follow growth cycles, usually when deficit reduction happens. Probably not a direct causal relationship.

"I read him a lot, and if you think he is worried about deficits in the near term you are mistaken"

They all agree on major stimulus spending now. They all think that the debt problem is likely to be a problem in the not too distant future. Krugman was warning about it in 2005 and the position has only gotten worse since then.

DeLong's ire is appropriately directed against those who worry about the deficit instead of the stimulus, but he also believes that in the medium term--i.e. in the next boom, we are going to have to deal with the debt.

Basically if by 'near term' you mean 'before we are well into the recovery', you're right. But I feel like that is what I said.

"Please cite an economic theory/hypothesis under which deficit reduction 'generates' growth. "

Under the Keynesian economic theory, deficit reduction during a growth period continues the growth and enable better government action in recession.

Ah. I get it. Busts follow booms, and surpluses generated during booms may not be 'causal' but some kind of mysterious warning...like reading goat entrails.

Thus the solution is government spending now then magically ratchet it back as the good times return....thus ensuring there will be a future bust.

This is progress? I don't think so.

"I think Krugman is a partisan hack".

Not even close to the hackery put out by Greg Mankiw during the Bush administration. It was Yoo-like in its abjectivity.

Basically if by 'near term' you mean 'before we are well into the recovery', you're right. But I feel like that is what I said.

The question is, does that jive with
that consensus is that the country is rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts.

I agree that almost all economists think we need to address the long-term deficit. But I think that statement is the sort of thing Krugman and DeLong are railing against- sacrificing any significant stimulus on the altar of deficit reduction.

"But I think that statement is the sort of thing Krugman and DeLong are railing against- sacrificing any significant stimulus on the altar of deficit reduction."

Yes we shouldn't sacrifice short term stimulus for it. But yes we are also rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts.

The point is that while that is bad, not doing a stimulus is worse. But is a lesser of two evils, not a positive good.

The thing about recessions that pisses me off, besides the human suffering, and the enormous waste of time and resources, and the fear they cause, and so on is in lots of ways, they're completely unnecessary. Numbers on a column change, so suddenly there's all sorts of productive work we can't do. Money's just pretend, it's a thing that lets us sort of keep score, and place priorities on resources, and so on. So we end up wasting years of people's lives, throw families and the country into chaos, and so on, because of this pretend game. In that sense, the government spending money that doesn't exist, by printing it, is basically saying "Let's pretend we do have the arbitrary numbers to do the things we need to" to try and get everybody back into playing the game and believing the pretend money is real. Because if we stop treating it as real, then it stops working, like Wyle E. Coyote off the cliff.

Of course, the idea of using money as a way to place priority on things society needs the most breaks down when most of the pretend points end up in the hands of a few people, who can then put their priorities ahead of everyone else's.

Perhaps one positive that will come out of this deficit hawk madness is that when the Bush tax cuts are set to expire the administration can use the ‘we can’t increase the structural deficit’ argument to increase the tax burden on higher incomes. It is probably the only way that taxes can be raised.

But the new GOP mantra is: You can't raise taxes* to lower taxes**.

Translation: Deficit's don't matter anything for tax cuts for the rich but everything for spending on priorities the rich do not profit from ot tax cuts for the not so rich. Some leading GOPsters openly argue that any tax cut not skewed towards the rich is immoral.
Btw, I am actually surprised that Matthew 25:29 is not quoted more often as justification since it is the current rage to 'prove' that the US and all in it is 94% based on the Bible.

*i.e. let Bush's tax cut for the rich expire
**for those not profitting from Bush's tax cuts for the rich

"But yes we are also rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts."

Total. Unverified. Assertion.

Define this "point". How does this 'point' lead to 'long term negative impact'? What are these 'multiple fronts'? The assertion is unambiguously wrong.

We have reached a point where continuing a trend will have "long term negative impact across multiple fronts":

http://www.nakedcapitalism.com/2010/07/58-of-real-income-growth-since-1976-went-to-top-1-and-why-that-matters.html

This is a real distributional issue. Concern about deficits, by comparison, reveals the political differences that are effectively masked by the invocation of "economic laws".

Ditto Nate at 1:25 AM. The tail wags the dog. It's as though we are only here for the sake of the economy and not the other way around.

It reminds me of companies that start off with a great business model and that are excellent at what they do. Then they start doing things the way their accountants think they should be doing them, and what made them great slowly fades away.

There are so many obviously worthwile endeavors, some desperately needed even, that we're not doing because some supposed economic gurus say we can't afford to do them. The problem is, in reality, we can't afford not to do them. Sucks for us suckers.

The argument isn't that 'huge debt is good' or that 'huge debt does not matter'. The argument is that while large debt does matter, being in a multi-year economic depression matters a lot more. And if it requires increasing our debt temporarily to deal with that, we should do so. [...]

The point is that while that is bad, not doing a stimulus is worse. But is a lesser of two evils, not a positive good.

I tend to agree with Seb on these matters, and I think that Krugman does as well, though I am not making that the benchmark of wisdom.

Our debt can increase forever, so long as our economy grows faster in the long run than our debt. We don't really have to pay it down so much as outpace it. But that would require us to have the right priorities. That's my worry. It doesn't matter what we try to do with regard to the budget if we don't spend on the right things.

Seb,
I agree with you. I think Krugman and Delong agree with you from what Ive read. But neither you, nor I, nor those economists, agree with: that consensus is that the country is rapidly approaching the point where further increases in the deficit will have long term, negative impact across multiple fronts.... the people who do this for a living do not think further deficit spending will either spark the economy or be anything but bad in the long run.

That's the point you seemed to be originally supporting. Now, you might take the language of the first part of that and say that, depending on how you define "rapidly", this is true. But the original argument was that 'we cannot afford a stimulus because of the deficit'.
So you can see why someone would object to characterizing eg Krugman's views as being sympathetic to this, since he regularly mocks it.

"it seems more logical that the question was taken more as 'would you prefer the Republicans to continue to move into the tea partiers embrace or would you prefer they act as a check on Obama's policies' rather than 'would you prefer the Dems to enact everything they want or..."

Despite Eric's assertion elsewhere that the poll results are inconsistent, IMO it is more logical that the Dems and Reps have convinced the country that neither of them have the solution.

Everything below here is my personal interpretation.

It is the downside of aggressively talking about "failed" policies that when all of the policies suggested have "failed" in the public's mind then they become skeptical of any solution.

The difference between 32% for Dems and 26% for Reps simply should be interpreted as neither side has the confidence of the people.

So since the Dems already have veto power in the WH then people want the Reps to have a measure of control in the Congress. Then BOTH sides have to agree on what gets done.

The low numbers for Congress in general is because people perceive that getting that last two or three votes isn't close to coming up with a compromise, it is just forcing through the Dems failed policies.

The declining numbers for the President are a reflection of the continued inability, I think unwillingness, to adopt real bipartisan solutions, along with the natural downside of watching his cerebral (translate: plodding) style. He may "win" the long game but it comes at a cost. In fact, his numbers might go up if he publicly gave the Reps a meaningful win.

In the end, all of those numbers would be higher if there was any light at the end of the tunnel on unemployment. The trading range of the markets, the confidence level of the public, the numbers in these polls are all tied to only one number now.

EVERY financial analyst and executive I know says that the cycle of riding the earnings season numbers up a little and then watching those numbers decay will continue until companies start hiring again in significant numbers. We are at a level in the economy that can sustain these companies, but they won't grow the top line meaningfully, so the market won't give them the long term reward for short term profits based on cost savings.

Significant increases in private sector hiring is the number everyone should be focused on, to the excusion of the debt, the "tax cuts for the rich", public spending for long term energy independence or clean energy or education or even unemployment benefits.

Only one number matters, then we can go back to talking about all of those things.

The declining numbers for the President are a reflection of the continued inability, I think unwillingness, to adopt real bipartisan solutions

Like what? What bipartisan solutions were even offerred by the GOP that you would rank as "solutions" to the applicable issues?

"Like what? What bipartisan solutions were even offerred by the GOP that you would rank as "solutions" to the applicable issues?"

We are talking about public perception here Eric. Again I will say that he would be better served to publicly give the Reps a win, probably not unemployment benefits, but, instead of talking about financial reform as a "victory" for the Obama administration, sell a few things, get a few meaningful votes and sell it as a great set of ideas the Reps added to the bill.

I am not there to know what things would get him those votes, but if he doesn't know what they are then the polls are right.

I am not there to know what things would get him those votes, but if he doesn't know what they are then the polls are right.

Marty, many months ago we discussed this issue, and I pointed out to you that internal GOP strategy memos revealed that the GOP strategy was to say "no" to everything.

Since then, they have.

Including tax cuts and other measures that were traditional GOP favorites.

I don't blame Obama for this.

The only real and timely stimulus is to cut FICA for employees making less than 150K or so.

Unless I misunderstand something (not unlikely), this has been done.

The HIRE Act, signed into law in March, offers an exemption on the employers' share of FICA for any new employee hired who had previously been out of work for 60 days.

There are some exclusions (people making a lot of money, people related to the employer), but other than that it looks like straight-up forgiveness of the employers' share of FICA for new hires.

Isn't that what McK is calling for?

If so, it's been done, and so far has not made a significant dent.

You know what made the biggest positive impact on employment numbers over the last few months?

Census hires.

"So since the Dems already have veto power in the WH then people want the Reps to have a measure of control in the Congress. Then BOTH sides have to agree on what gets done. "

... The Republicans already control the Senate with a 41 vote majority. Also, the Republicans have repeatedly, publicly said their strategy is to say no to everything the President tries to do, no matter WHAT.

"The declining numbers for the President are a reflection of the continued inability, I think unwillingness, to adopt real bipartisan solutions, along with the natural downside of watching his cerebral (translate: plodding) style."

... You mean like how he took that raging left-wing socialist single payer health care reform and rammed it down the poor Republicans' throats, instead of say, adopting pretty much exactly the plan the Republicans came up with in the 90s? And how he's shut out all the meaningful Republican debate, and turned away their many emissaries who came to the White House with plans to fix things, and...

Okay, I can't keep that up any more. The Republicans have no ideas, other than opposing everything the Democrats try to do, to try and make the Democrats look like failures so the voters will vote for the people who go us into this mess in the first place.

Maybe Marty's right, and people really think this outside the realms of Fox News. If so, then frankly, we're screwed.

Census hires.

Yes, and guess what happens when the census is done? Census layoffs.

The census hires are just pushing the unemployment numbers down the road, unfortunately.

Yes, and guess what happens when the census is done?

a lot of people end up with income that they might not have had, which they spend, which provides income to other people, which they spend, etc ?

sucks that it had to end. but on the bright side, it was a bit of stimulus.

Yes, and guess what happens when the census is done? Census layoffs.

The census hires are just pushing the unemployment numbers down the road, unfortunately.

I guess that was sort of my point.

The biggest dent in unemployment numbers was made by direct employment by the feds. Not tax incentives, not training programs, not whatever else.

Hire people and pay them to do something useful. There are plenty of useful things to do, no need to dig and refill holes.

Yes, it's true that doing so is just kicking the can down the road. Ideally, down the road other aspects of the economy will have balanced themselves out somewhat, and the overall picture will be better.

There's a hell of a lot of air yet to be let out of the big bubble. Soft landings are nicer than hard ones.

Worst case, a bunch of people bought groceries and paid their mortgages for a few months more.

And we got a census out of it.

I'm not an advocate of the government as the preferred employer. But we're not in a preferred situation.

Ideally, down the road other aspects of the economy will have balanced themselves out somewhat, and the overall picture will be better.

And, if the people the government puts to work end up doing, among the useful things they can be doing, things that lay the groundwork for the overall picture to be better (i.e. build, improve, repair the infrastructure that facilitates economic activity; improve public education and health), that would be more than a stop-gap measure. It would be an investment. It would make greater future prosperity, based on private enterprise, much more likely.

Nearly all of the more than one million Census workers hired over the past two years will be toast by September 1.

It's been a butt kicker -- the logistics of the thing were like D-Day. Lots of highly qualified professionals out of work did a great job and now begin shopping for catfood for the winter.

I didn't actually take the Census, in my region I leased, help design the spaces, and now supply them.

I have one regret, having to do with a certain well-known blogging political dweeb who threatened violence against the Census not too long ago, but I'll divulge that here once I'm out of work, in case the twerp wants to cause me trouble.

I promise I won't use the passive voice.


If anyone took me to be saying that the Census was a giant waste of time and dollars, that wasn't what I said or meant. Even I am aware that the Census is a mandated activity.

What I took away was your point that the census, for whatever value it provided, didn't solve the underlying problem of widespread unemployment.

To the degree that that's what you intended, we agree.

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