Daily Archives: September 7, 2010
I really don’t know how to actually characterize my reaction to this nonsense from Paul Krugman except to say if you thought he was in bizarro land before, check this out. The irony is he calls others stupid and invokes "Economics 101" when it’s clear … well you take a look. Here he’s talking about the proposed $50 billion "stimulus" focused on infrastructure. And he begins to pontificate:
Beyond all that, the new initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.
Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.
I had a friend who would accuse people like Krugman of being like a goose and waking up in a new world everyday. Apparently in today’s new world Krugman has forgotten that we just spent most of a trillion borrowed dollars on infrastructure stimulus. And then there was TARP, cash for clunkers, home buyers tax credit, mortgage payment relief and unending unemployment benefits. But it’s all too small now and it’s the fault of the usual suspects.
What Krugman doesn’t want you to remember, of course is his own recommendation on the size of the stimulus package:
All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.
In fact, the administration added 30% to his number and now, suddenly, it’s all too small. Not only that, it failed miserably. And, when you add it all up, it’s about 3 trillion in spending for “public goods” over two years added to the federal debt.
Result? 14.9 Americans unemployed, the economy in a shambles and consumers afraid to spend. And Krugman, in his new world today, demands more spending and has the temerity to call those opposing it stupid and his approach “econ 101”.
To add to the Krugman madness, we have him essentially pining for the good old days of spending like we did during WWII. Despite the fact that it all but destroyed the world and did destroy about 80 million lives, that’s the level of spending he now thinks is needed.
From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.
Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.
But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.
This is possibly the most blinkered and absurd bit of revisionist history I’ve read in a long time. There’s a "rest of the story" that makes this so much word salad that Krugman obviously studiously ignores in order to attempt this absurd plea to what, spend the equivalent of 30 trillion in deficit dollars (or to drive home the point that 3 trillion isn’t nearly enough)?
Victor Davis Hanson handily disassembles Krugman’s “work” and shows it up for the dishonesty that it is:
As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound — often receiving cheap oil, gas, minerals, and interest in exchange, which supplemented our own vast supplies of comparatively cheap and easily recoverable resources. Nor should we forget the psychological element: Americans, after winning two wars, were enormously confident about their newfound international stature and influence.
At home, four years of consumer deprivation during the war and the weak demography of the 1930s had combined to create huge demand, all while society was increasingly leaving the farm for good and becoming suburbanized. The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.
Today’s situation is not comparable: We are in hock to foreign creditors for trillions and have not been a net creditor since the 1980s. A China, Brazil, South Korea, Taiwan, or India is as or more likely to supply recovering demand for food, steel, or electronics. One can read Krugman-like arguments in Greek newspapers today — that only more massive borrowing can stimulate Greek demand, provide jobs, and grow Greece out of its recession. As if present-day deficits and aggregate debt with soon-to-be-rising interest payments don’t really matter.
It is always an indication that you probably shouldn’t pay much attention to a certain economist when it takes an expert in history to tell the economist his business.
But then that’s to be expected if you wake up in a new world everyday as it appears Paul Krugman does.
Obama’s former Budget Director has landed a job at the NY Times as a columnist, and for his first column, essentially says that plans to end the Bush era tax cuts at this time are, well, stupid.
Apparently, finally being able to breath the air outside the beltway has reinvigorated the “common sense” node in his brain.
In the face of the dueling deficits [jobs and budget –ed.], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt.
Instead, what we got today from the administration was more of the same – a proposal for $50 billion in infrastructure spending over 6 years. Not only that, dear friends, but within that proposal is one for a new government run “infrastructure bank” After our glowing successes with Freddie and Fanny, this is the perfect answer. And, if you’re as cynical as I am, you’ll probably assume the only jobs that will come out of this are those in the new “infrastructure bank” and those who will still be doing the environmental impact studies in 6 years time on the projects Obama wants to fund through the bank.
Back to Orszag though. While he is right about the tax cuts, he then says this:
Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.
Anyone – what hasn’t been calculated in all of this? That’s right, cut spending by that amount over the next decade. That’s 300 billion a year.
And, note carefully what Orszag is saying here. He’s talking about ending all the Bush era tax cuts, not just those for the “rich”.. Per the CBO, leaving those cuts for the very highest earners in place will only cost $700 billion over 10 years. The $3 trillion number includes the middle class.
Orszag, as expected of a former budget director, goes on to analyze the future budgets. He notes that by 2015 – a mere 5 years from now – the deficit will comprise 4 to 5 percent of the GDP. His analysis is below:
How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.
The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.
It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.
Summary – cut defense spending … a lot. Not going to happen with Republicans poised to sweep into the House and possibly take it over. Cut non-defense discretionary spending – most likely not going to happen regardless of who is in control of the government or the legislature … at least not the the level Orszag thinks is necessary. “Additional revenue”, a code phrase for “raise taxes”.
Don’t believe me? The first thing out of his pen after his analysis is this:
One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.
But the desire sure is. And, like health care, this is going to be on the left’s agenda from now on. Orszag just throws it out there as the panacea for capturing the revenue necessary to help “pay down” the deficit. They may have spent all the money, but it is up to you to pay it back.
Orszag finishes it up with this:
Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.
In fact, if I’m not mistaken, what Greenspan and Feldstein have said is the tax cuts can’t continue forever without commensurate spending cuts. That’s a much different point than the one Orszag is making. Frankly, most Americans, at least right now, want to see those spending cuts before they see any additional taxes. And they’re going to remain angry and uncooperative (or as the Dems like to say, ‘ungovernable’) until they actually see government serious about addressing the deficit with spending cuts.
Got that, Mr. Orszag – spending cuts are the key to deficit reduction, not new taxes. Put that in your economic model and crank out a new plan, will ya?
Have you ever wished it was possible to spend some time with any of those we call our Founding Fathers and ask them about the country they founded and the country it has become?
Would they be astounded? Shocked? Disappointed? Of course, no one knows because such a wish can never come true … until now.
I just finished a very good book entitled “Poorer Richard’s America”, subtitled “What would Ben say”. The “Ben” in question is Benjamin Franklin and the author, Tom Blair, perfectly – at least in my opinion – captures Franklin’s voice. He also captures the common sense and logic which made Poor Richard’s Almanac such a hit during Franklin’s time.
So, given the intriguing premise that Ben Franklin was going to discuss our America, the book was irresistible. From culture to politics to philosophy, this series of short essays captured in 39 chapters discusses most of the burning political issues of today with brilliant discussion of both the past and the present. In fact, it is the use of the past while pointing out the present problems that makes the book so compelling.
For instance, a simple example grounded in our US history helps explain our problems in seeding democracy in places like Iraq and Afghanistan. And why was Iraq actually easier than Afghanistan. Blair’s Franklin harkens us back to the founding of the country and Jamestown as well. Jamestown, some 150 years before our Constitution was ratified, was our first settlement in the “New World”. They almost starved to death and died out. Franklin wonders where on the priority list of Jamestown the establishment of democracy would have ranked. He supposes not very high. In fact, until the priorities of food, shelter and security were satisfied, and a modicum of prosperity established, “democracy as a form of self-governance” probably wouldn’t even gain a passing thought.
In Iraq it was much easier, in relative terms, to satisfy those basic priorities than it is in Afghanistan, where they still haven’t been satisfied. Of course there are other cultural problems as well, but I think the basic point makes sense. And it is that sort of easily understood “sense” that makes the book so compelling.
One other observation I’ll pass you way that resonated with me had to do, of all things, with reality TV. I find it to be a horrific form of entertainment. Blair’s Franklin agrees:
“Since I opened this diminutive essay by referencing television, let me return to the great giver of light and noise. For many Americans, television has become both a pacifier and a false voice of self-worth. I came, after much hesitancy, to this conclusion while considering the great Colosseum in Rome. A Colosseum where, for the morbid enjoyment of the masses, humanity was discarded and humans were first degraded, then slain. Many reality TV programs shown today on America’s networks likewise degrade humans for the enjoyment of the masses; but, unlike Rome, the Colosseum is brought to each American’s house – no need to exercise by walking to a great amphitheater.”
A perfect capture of that bit of culture in my estimation. Grab the book folks – you’ll be glad you did.