Free Markets, Free People

Arnold Kling

Deficit Spending – Pimping The Great Lie

When the NY Times entitles anything, especially an editorial, starting with “The Truth About …”, you should be immediately suspicious.  As Arnold Kling says, that normally means “The liberal elite narrative about …”.  And it’s editorial, “The Truth About The Deficit” is no exception.  The first part of the editorial is spent on a selective history lesson which makes all of our troubles, as you might imagine, something brought on by the GOP’s focus on tax cuts for the wealthy.  Nevermind that they were across the board marginal cuts – this narrative won’t die.

The entire bit of revisionist history (with the normal “blame Bush” tautology) is aimed at justifying this paragraph:

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

What the NYT and the Krugman’s of the world believe is government spending can be substituted for private spending and have the same result – economic growth. And that economic growth, spurred by this spending, will create jobs. But if you think about it, unless the government is buying goods and services produced by the private sector, that’s most likely not going to happen, is it? Temporary jobs located in “infrastructure improvement,” unemployment benefit extensions and jobs “programs” don’t create jobs. Private sector growth does. And when government is borrowing .40 cents for every dollar it spends, it starts to dry up the private credit market. That means if there is a desire to expand, the credit isn’t as readily available as it would be if the 800 pound credit hog weren’t in the market.

Then there’s this:

To truly tame deficits will require serious health care reform …

To which Kling replies:

In Washington, serious health care reform means “fixing” private health insurance. But our deficits are caused not by problems in private health insurance. They are caused by the structure of Medicare and Medicaid. That is where we need reform. But the Times and other liberal mouthpieces need to create a narrative that makes it sound as though unsound government programs are the fault of the private sector.

Spot on. This has been the most irritating part of the “health care reform” issue. It is the public programs – which neither party will touch – that are breaking the bank, yet we continually hear politicians on the left talk about “greedy [private] insurance companies” as the sole reason health care costs or so high. In fact, without private health care insurance to pay the difference, Medicare and Medicaid would have foundered long ago. But the point is the deficit problem is not one caused by private insurance.  It has no effect on public debt.  That is caused by the mismanagement of the government programs. And other than a passing wave at “stopping waste, fraud and abuse” – the promise of every politician since the inception of those programs, and accomplished by none of them – this “reform” package ignores the real problem while attacking the private market.

But back to the primary point of the NYT’s attempt to persuade you that deficit spending – massive deficit spending – is a good thing:

Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

And here’s the undeniable economic truth about the snake oil they’re peddling:

The narrative is that we are suffering from a shortfall in demand. The reality is that the private sector has decided that workers should be hired on the basis of profits, rather than on the basis of debt. The government may choose to make a different decision, of course, but that will not necessarily strengthen our economy.

One of the many economists not at all in agreement – despite President Obama’s claim to the contrary – with the prescription that deficit spending is not only good, but necessary. And while they can blame the situation on anyone they choose, the decisions being made to run up this massive debt based on some pretty flaky economic logic are theirs and theirs alone.


The “Pay Czar” Diversion And How That Works With Health Care

David Brooks has an article today in which he takes on the concept of a “pay czar” and opines that human arrogance is about to play into the law of unintended consequences in a huge and, most likely, unwanted way.

Arnold Kling takes the opportunity of the Brooks column to change the subject slightly and point out that while what Brooks says is true, the “pay czar” nonsense is really a diversion to keep us fr-om looking and focusing on one of the most serious problems in the financial meltdown – the government’s Freddie Mac and Fannie Mae:

The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.

Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.

Remember what supposedly started this meltdown was subprime loans. As Kling points out, guess where most of them are located? And, given the government role in these institutions (not to mention the “why” for such loans in terms of policy and incentives fr-om government) it isn’t at all surprising that -as it tries to convince us that government is the best choice for running health care- government tries to divert our attention fr-om its huge role in the meltdown to a group that may have only had a limited role but is a very unsympathetic group in the public’s eyes.

In fact:

I am not sure if I wrote this on my blog, but I did write in a chapter of the forthcoming Fr-om Poverty to Prosperity (with Nick Schulz) that none of the major regulated institutions was involved in subprime.

But they are indeed the focus of the public’s ire thanks to the government’s demonization of them. Meanwhile, Freddie and Fannie escape both scrutiny and blame.

Which, Kling says, is similar to what is going on in the health care debate concerning the pubic option:

Incidentally, the debate over the “public option” in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.

Absolutely correct. It is the point I continue to wonder about and see nowhere in any of opinion or fact based pieces concerning this subject. We are talking about turning over the rest of our health care to an institution that has run the piece it has had for decades into 52 trillion dollars of future debt. Yet we’re being told, by them, that they can run it more efficiently and for less money than private insurance. And, even in the face of evidence that it’s not true, a good portion of us have chosen to believe them.

It boggles the mind.


Quote Of The Day

From a commenter on Arnold Kling’s Atlantic site, one of the more succinct summaries of what Waxman-Markey really is:

‘Cap and Tax’ simply provides more opportunities for political favoritism — creating arbitrary credits to be awarded to pet projects while getting others to pay for the favors. Meanwhile the energy expense baseline of the entire economy goes up. Waxman-Markey are gushing about how historic this bill is. That it is — it puts Smoot-Hawley in second place as potentially the most misguided economic legislation of the last 100 years.

Take the time to read Kling’s post as well.

If you’re wondering who will be paying “for the favors”, Conor Clarke at the Atlantic has been kind enough to put that in chart form using the CBO’s data on tax distribution:

cap and trade share by income

But remember you 95% out there – your taxes won’t go up by a single dime – not one dime. Your fuel, electric, transportation, food and just about anything else you can imagine? Dimes won’t even begin to describe the increases you’ll see.