Gotta go with one for Jonathan Chait, who spots a Republican Member of the House claiming that "Congress should do everything in its power to tackle deficits" and then a few sentences later saying that "he rejects any talk of offsetting the cuts with new tax revenue."
Of course, this is familiar as the Republican war on budgeting, in which deficits are basically "unwarranted spending or taxes." As opposed to, you know, the difference between government revenues and government spending. I'm willing to be that isn't not just taxes; I'm willing to bet the Republican here, Doug Collins, would also be horrified by all sorts of specific budget cuts if they were proposed to him (I haven't read the original paywalled article -- I'm not a WSJ subscriber -- but for what it's worth the headline was about Republicans willing to cut defense).
Back in the real world in which federal budget deficits are in fact the difference between government revenues and spending, this means that (most) Republicans don't actually care very much about budget deficits at all. Indeed; I've yet to see, from most Republicans, much of anything they're willing to accept in order to cut the deficit that they otherwise would support. Perhaps that's changing on military spending, but I doubt it; I suspect instead that some anti-government conservatives are coming to believe that military spending can be as wasteful as domestic spending, rather than that they believe well-spent military appropriations which help the nation are worth sacrificing in order to lower the deficit.
Also: nice catch!
Somewhat related, I think it was Krugman who caught someone (Rand Paul?) the other day talking about this soaring inflation we're having. It made me wonder whether "inflation" is like "deficit," i.e. a word that has stopped meaning, for a lot of people, the specific thing it names, and instead means undesirable economic conditions of some other sort. If I'm recalling correctly, Paul was complaining about the big expansion of the monetary base, which perhaps in his mind and that of other Republicans is "inflation" even if prices aren't actually rising. Might be worth keeping an eye peeled for other examples of this, anyway.ReplyDelete
And even if they were actually trying to do something about the budget deficit, that's the wrong deficit to be doing something about right now.ReplyDelete
Dean Baker and Jared Bernstein:
> Simply put, lowering the budget deficit right now leads to slower growth. But reducing the trade deficit would have the opposite effect.
Because the meme is out of fashion, we might think of deficit-reduction in rhe early 21st century US as a three-legged stool. The legs, obviously, are:ReplyDelete
1) Tax increases,
2) Entitlement reform, and
3) Defense cuts
As we all no doubt know, there are three massive constituencies in the Republican tent, each holding a solid veto, as well a white-knuckle death grip on one of the legs of that stool. Because that's universally known, calling out the inevitable resulting chicanery as 'hypocrisy' has all the sophistication of that finger-pointing Nelson character on the Simpsons.
For a deficit hawk, the much scarier thing about Republican equivocation is this: the US is currently at a historic debt:GDP ratio, without the benefit of something like the expanded post-WWII industrial base that saved our bacon last time, and the ideology that's charged with worrying about this stuff can't do a damn thing about it.
It's true that the GOP is against deficits until faced with cuts they dislike or tax increases. But my impression is that the Dems aren't any better. At this point they seem to insist on tax increases as the price for trying to do any budget cutting. There's no iron law that you can't cut your way to a lower deficit, especially when you're spending $3.5 trillion. Why not try another round of cuts before calling for another increase?ReplyDelete
If one side is willing to accept some but not all of the burden of deficit reduction, but the other side refuses to accept any of the burden, then if your impression is that both sides are equally bad than that impression has nothing to do with reality.Delete
If the only way we reduced the deficit was by cutting entitlements and domestic discretionary spending, that would hurt our country. It is not a given that government spending is too high--there are some sectors of the economy, like pensions, medicine, education, and infrastructure, in which government does as well or better than private industry. Those sectors happen to be growing in importance now.
If both sides are making demands that are complete deal-breakers, why should I worry about the magnitude of the deal-breaker?Delete
When does JP do a post about how counterproductive the Dems' demand for new taxes are, especially considering the tax hike at the beginning of the year? I thought that the Dems would be satisfied with that, but somehow it wasn't enough. The Dems need more taxes if they'll consider more cuts. That doesn't make sense, because if more cuts are reasonable, GO MAKE THOSE CUTS. No increase tax revenue is required to make those cuts happen--it's just the Dems' position that turns them into a "requirement."
Also, when you say that spending might not be too high, you still ignore the burdens that taxation makes on people and on the competitiveness of our products.
You don't have to "care" about the magnitude, but if you're going to make a claim that the two sides "aren't any better", then either you have to look at the magnitudes, or you're lying.Delete
JP did a couple of posts, here and at Plum Line, saying Democrats should give up on higher taxes. Understand, though, that giving up on higher taxes, to Democrats, mostly means giving up on deficits, at least for the time being. It means both sides agreeing to relieve the sequester, or some other similar deal that involves both sides tolerating more debt.
Keep in mind that we've had more spending cuts than tax increases. If we've had enough tax increases, then we've had enough spending cuts. If you don't agree with that, then you're part of the reason deficits are so high.
"The Dems need more taxes if they'll consider more cuts. That doesn't make sense, because if more cuts are reasonable, GO MAKE THOSE CUTS."
$1 dollar of entitlement cuts would be bad by itself, but is worth tolerating if it means $2 of debt reduction--if there's a matching dollar of revenue increase. The spending cuts are BAD, but TOLERABLE if it means we get other good policies changes (revenue increase) in exchange. They make absolute no sense on their own--then the policy change would be all bad, no good. Democrats are taking the position that they do because they don't want to hurt the country.
You can disagree with this position, but you can't say it "doesn't make sense".
"Also, when you say that spending might not be too high, you still ignore the burdens that taxation makes on people and on the competitiveness of our products."
No, I'm not. It's just that the benefits of education, research, infrastructure, health care, pollution control, defense, and caring for the poor, elderly and disabled are greater and more morally significant than those burdens. And this becomes more true as our GDP rises and we can afford greater burdens.
"if we've had enough tax increases, then we've had enough spending cuts" Why is that a priori correct? It's a position, and you have to defend it, not just assume I'll go along.Delete
The reason why spending cuts make sense on their own is because we are in deficit. We have a high debt to GDP ratio and that makes us susceptible if interest rates should rise, which probably won't happen because of our printing presses. But the debt service on our existing debt is somewhat of a burden and grows each year. It crowds out the kind of spending you support, so you should care about it.
You obviously want to tax our way out of this, so go run on that platform. I see lots of spending that we should be looking at trimming. Food stamps is one--they got an increase at the same time as most people were getting pink slips. There is too much fraud in Medicare and Medicaid, so we should increase spending on enforcement, and they would pay for themselves. I'd cut back on research for new environment regulation and see if we maintain good compliance with existing regulation with less paperwork. I'd cut crop subsidies to most farm operations. And I'd required each secretary to submit a slate of cuts, and I'd welcome suggestions from other interested parties too.
I'd also change tax rules so that all income gets taxed like earned income, so no special rates for capital gains or dividends. We don't really need to encourage capital formation because we have plenty of capital, much of it parked safely in low-risk areas.
You pretend you care about tax burden, but you don't actually act that way, so please stop pretending. By the way, I don't consider taxation over 50% to be moral unless we're in a survival situation, so, yes, I think about moral issues too. Would you give half your income away? Would you want it taken from you?
I think MP gets at something really important just above. There's a sense in which the deficit is simply a math problem, per the open of this post and Chait's linked column, but there's another sense in which the deficit is so much more than simple math.ReplyDelete
For example, a government that collects $1 in revenue and disburses $1 will have a balanced budget. Similarly, a government that collects $10 trillion in revenue and disburses $10 trillion will have a balanced budget. From a "deficit math" standpoint, there is no difference between the two governments. For what we care about, though, the difference is huge.
So while Republican fuzzy math is certainly misleading where the deficit is concerned, so is the Democratic tendency to treat the budget as a simple T-account, such that if the debits and the credits add up, all will be well. That's also misleading, which I think MP was (accurately) getting to in his post above.
If you're talking about the deficit, then you're talking about the math. No one is saying that math is all you have to care about. Just stop calling everything you care about "deficits".Delete
Democrats have things we care about other than budget balance, to say the least! We aren't spending enough on the poor, on infrastructure, on research or education. We aren't taxing carbon enough. But we don't try to pretend that all of those are "deficit" concerns.
As I've said before, deficit cutting in a downturn is counterproductive. Reducing government demand when consumer and business demand are already down only makes the economy smaller. Europe has been cutting deficits, and even by optimistic interpretations they are only now reaching the point we reached in the summer of 2009. You should expand the deficit in the downturn, and then pay it down when the economy is healthy. At that point, not only will you be able to survive the reduced government demand created by lower spending and/or higher taxes (because consumer and business demand will be up), but the Fed can reduce the negative impact by lowering interest rates (which it can't do now because they're already at zero).ReplyDelete
By the way, according to Lawrence Summers:Delete
"Data from the CBO imply that an increase of just 0.2 percent in annual growth would entirely eliminate the projected long-term budget gap. Increasing growth, in addition to solving debt problems, would also raise household incomes, increase U.S. economic strength relative to other nations, help state and local governments meet their obligations and prompt investments in research and development."
Assuming I accept your Keynesian economics, nobody deals with a structural deficit during good times. During the late 90s, knowing about the upcoming baby boom retirees, did we raise taxes or cut entitlements? Same for most state budgets.Delete
"You should expand the deficit in the downturn, and then pay it down when the economy is healthy."Delete
I agree with this statement with some caveats. If you expand your deficits a huge amount, which we did, you can't keep doing it for too long.
Our economy has handled the sequester so far without lapsing into another recession. Let's see whether it can handle more cutting, perhaps 30-50% on top of what we've already done.
If we wait until we have a "healthy economy" (whatever you mean by that), we may have such a huge mountain of debt that we can forget about 1) trimming government spending so that we aren't adding to the debt, 2) using our surplus to pay down the debt.
In the last 50 years, we've only had a surplus for, um, 2 years. When our healthy years are that infrequent, we need a different strategy to government deficit than the one you suggest.
That's the reality check on your proposal.
Morgan, in fact we adjusted the Social Security system to account for the Baby Boomers in the 1980s, and yes, we did raise taxes and cut expenditures in the 1990s.One problem with the adjustment to Social Security was the failure to foresee that the Reagan Revolution would leave lower- and middle-class incomes stagnant or declining for decades. If they had continued to grow at the rate at which they had been growing until then, anticipated revenues would have covered Social Security without a problem.Delete
MP, there's certainly a risk that future governments (or the same government in the near future) might not do the right thing. Bush, of course, did exactly the wrong thing by taking a surplus handed to him as a gift (one that the Fed at the time claimed was about to wipe out our national debt too completely and too quickly) and turning it into a structural deficit. But does that justify doing things that will make the situation worse today?
I just read a very curious article by Anders Aslund over at ForeignPolicy.com. He was attacking Krugman for not understanding Europe and recommending policies that are more appropriate for the US. He may have a point, but he kept referring to the successes that eurozone had enjoyed because it had engaged in austerity instead of deficit spending. So I looked at the Eurostat website. Germany, generally considered Europe's strongest economy, had an estimated real GDP growth rate for 2013 of 0.5%, and the rate had been falling for three years. The growth rate for the EU as a whole was 0.0%, and for the eurozone was -0.4%. If negative four-tenths is his definition of success, I guess he can have it.
The argument and data that Europe has gone too far with austerity and caused themselves damage is NOT the same as evidence that the US can't handle a small piece of austerity.Delete
As I pointed out, we seem to have handled the sequester pretty well. How about a bit more of it--a little more of this medicine since we have tolerated it. You haven't answered that argument. Pointing to Bush and Europe aren't answers.
The argument that austerity has been bad for the GDP growth of the countries that have tried it is, if true, an excellent reason not to pursue it here.Delete
You could literally replace the word "stimulus" with "sequester" in your second paragraph. Circa late 2011 during the super-committee meetings, it would have been true enough and persuasive to nobody.
I mean to say replace the word "sequester" with "stimulus," obviously.Delete
Again with the non-answers, this time from Anon. Anon, you aren't disputing that our economy has handled the sequester. That already shows a difference between us and Europe. But I don't think you're interested in evidence that contradict the conclusions you've already made.Delete
Your little joke about substituting stimulus for sequester--well let's just think about the consequences of that. Like piling more debt on. Like one increases the deficit and one decreases it.
Your weak diversion is what doesn't convince anyone. Me pointing out that we've been able to handle the sequester--that's something that matters. It's a major point, and it's still sitting out there unrefuted.
MP, I'm not really convinced that we've handled the sequester all that well; it will take time to tell. And I don't see doing more of it as "medicine." We're undermining the economy for the long term. We could be spending on infrastructure, which is in decay in too many places. (If you want to see a modern port, you have to go to Singapore or Shanghai.) And an infrastructure program isn't a ratcheting up of government spending that can't be undone later. To the extent that austerity undermines the economy, it may actually increase the deficit by reducing revenues and necessitating new emergency expenditures. Focusing on boosting the economy helps the deficit in the long run; focusing on the deficit undermines the economy and may not even help the deficit.Delete
In addition to what Scott said about your actual claim on the sequester, I'm going to take your your snit reaction to my non-snarky post as evidence that I brought you up short.Delete
Your argument is basically circular. A sequester program is good, because it reduces borrowing, and so long as we can weather it, we should; a stimulus program is bad, because it increases debt, and that's unsustainable.
You have absolutely nothing to say about the relative outcomes of the American stimulus program and the European sequester program, because it offers nothing to support the priorities you're not willing to modify or concede.
Even in the short term, we haven't "handled" it well at all--persistently high unemployment is terrible.Delete
And we'll probably be permanently poorer than we otherwise would have been. Those unemployed workers could have been building stuff that we could use for years and building some skills. Now, they're not just unemployed, they're unemployable.
Debt is no where near our largest problem. And austerity in times like these doesn't necessarily even work at reducing debt.
@Scott in the late 90s, when the economy was great, we did not raise taxes. I repeat, Late 90s. Not sure how the economy was doing in the 80s when we tweaked SS. Also, middle class incomes have slumped all over the first world. Can't blame it on Reagan.Delete
To all the commenters who think that the sequester hasn't been handled well, where is your evidence? Do we have higher unemployment than before it started? No. We have none of the downward spirals that would signal big trouble.Delete
As for the idea that the economy would be better without the sequester, a few economic measures would be better, but it would be financed by borrowing. We can't keep goosing our economy forever, as 2008 showed.
I was definitely a supporter of the stimulus in 2009. We were in an unemployment spiral, and the stimulus helped stop it. Again, a piece of clear evidence shows that the stimulus helped. But when I point to simple, clear evidence that the sequester has been tolerated, the doubters come out, though without evidence to support their contention.
@prefix, the sequester is hardly austerity. Net government spending hasn't even decreased. That's probably a big reason why it's been tolerated. As for the unemployment rate stagnating, what you do you propose and what are the numbers on it? We finally have a deficit that is significantly under $1 trillion. Are you recommending going back up to that level? What negative repercussions might occur that we should be watching for?
I have strong doubts that we can return to the rapid job growth we had in the 80's and 90's. The cost of US workers is high, and a lot of what it takes to sustain a US worker comes from overseas. It's not as though we can just agree to barter among ourselves and thus have a net benefit from everyone working.
@Scott, what is your evidence for believing that we aren't tolerating the sequester? What is the evidence that we're undermining our future economy? As for infrastructure spending, sometimes you get benefits and sometimes you get money-wasting boondoggles. How do you guard against the latter?
Morgan, we raised taxes in '90 and '93. By the late '90s, we had a budget surplus and the debt was being reduced. I'm not sure why you'd want to raise taxes again. The later budget problems were created by the Bush administration and by the Crash of '08, so they weren't part of the planning in the late '90s. Social Security would have been manageable with the added income, and probably still is. As for Medicare, its problems aren't inherent to the Medicare program, which (with the exception of Medicaid) is the most cost-effective health-insurance system we have. Any "reform," like Ryan's, that cuts Medicare and moves people to private insurance will cost society more overall. While there are aspects of it that can be reformed, the real problem there is to address the rising medical costs that Medicare (and all other insurance plans) have to cover.Delete
Can't blame it on Reagan. Sure I can.
MP, you're going to oppose building infrastructure for fear that it could be a money-wasting boondoggle? Isn't that a bit timid? It seems a little like never going to the doctor because you've heard that there are quacks out there. Besides, the boondoggles may be exaggerated, anyhow. Remember the "bridge to nowhere"? It was the poster child of money-wasting boondoggles. It was a meme that absolutely everyone picked up without question. It was a bridge that was going to an island that had virtually no people living on it. Absolutely indefensible, so indefensible that no one ever asked what the original rationale might have been. Funny, but it seems that an airport--the second-largest airport in the state of Alaska, if I'm not mistaken--was built on an island with the understanding that someone was going to build a bridge to it. But at the time, someone needed an argument for cutting off earmarks, as if earmarks were ever the core cause of our deficits. In any event, there must be ways to evaluate projects for worthiness.Delete
On the sequester, all I said was that I wasn't convinced that we were tolerating it. I think it's still too early to judge, and I say that because the most recent numbers aren't what I would have expected. Still, the basic problem with the economy is insufficient demand. Even without the sequester, the economy is still weak, the employment rate is still way too low, and the current rate of growth really is only enough for employment to tread water, given increases in the working-age labor force. We should be doing all we can to stimulate demand in order to put people back to work. Should we run deficits forever? No, but doing it in a half-hearted, ineffective way will probably mean doing it for longer. And, by the way, 2008 wasn't caused in any way by government deficits, it was caused primarily by banking deregulation. And, yes, the sequester is austerity. We were in austerity before the sequester; we've been cutting since 2011. It's not austerity at the level that the Europeans have taken on, but it's still the wrong direction. (Ironically, during the campaign, Romney kept saying that the rate of growth had been falling off for two years--i.e., ever since the GOP took over the House and stopped efforts to stimulate the economy.) Even without cuts, if the price of services goes up and/or the number of people requiring services goes up, then keeping spending at the same level is a cut in services. We're undermining the economy by not investing, not investing in infrastructure, in education, in keeping our workers active, in research and development, or in production for that matter, though that may be picking up. Also, from what I've been hearing lately, the relative cost of US labor has been falling (unfortunately for US laborers); wages haven't kept up with increases in productivity for 30 years. It's way cheaper than German labor, and Germany is an exporting powerhouse. (Of course, Germany also benefits from using the cheap euro, and the value of which has been pushed down by the crisis in other parts of the eurozone.)
I'm sorry, MP, I don't mean to sound dismissive because I don't believe you deserve to be dismissed (or Conrad either), but I think you're headed down the wrong path, a path toward complacency, stagnation, and long-term decline. (Look, now I sound like I'm blaming you for the economy!) Well, anyhow, my apologies for the rant, but I think recovery requires a positive effort.
On the employment rate (labor-force participation):Delete
@Scott, I don't feel like you're being dismissive of me, so no need to worry about that.Delete
However, I don't know on what basis you think the government can get us out of this stagnant period. For all the deficit spending in 2010 - 2012, the economy is only marginally better than at the end of 2009. If we had cut substantially in 2010, we probably would have shocked the economy back into recession, but we didn't do that.
I'm not sure how you can call spending $3.7 trillion austerity. It's not that we've ever had much higher spending. The decrease from our peak spending is less than 2% and is probably offset by states not needing the grants to pay workers that they received in 2009.
I'm not against all infrastructure spending, but I saw the waste in the stimulus, and I think we need to guard against that again. By the way, your long spiel about the bridge to nowhere isn't meaningful to the big picture.
If you want to advocate for higher deficit spending, how much and how long? What are the signs that it's working, that it's not working? At least I point to those signs. I wish you would do something like that if you expect me (or others) to support your ideas.
As for cuts in services being austerity, I have to draw your attention to the idea that we can't afford to keep everything at the levels we had in previous years. There's no guarantee that we can keep living at the standard we had--in fact, it looks highly doubtful. People may have to get used to less, or at least much slower growth in the goods we consume. The fiscal issue is whether we can pay for it, and we shouldn't make the assumption we MUST pay for everything we've had before. If we can't afford it, we need to pay attention to that.
@Scott the reason to raise taxes would be to do what you said was correct policy (with which I agree): to get longer term budget issues under control while times are good. Where I disagree is that this won't work in the real world, cause nobody possibly has the fiscal acumen will do this. Just like you say, when times are good why raise taxes? Instead we raised taxes during the recession in the early 90s, NOT during the boom.ReplyDelete
I don't understand this whole line of reasoning. By the late 1990s, there was no reason to further raise taxes, because the 1990 and 1993 tax increases and spending decisions had eliminated any structural deficit at all.
The one thing I'd push back against Scott a bit is that the idea of running deficits in bad times and running surpluses during good times is, as I understand it, a good first stab but overly simplified in a couple of ways.
One is that not all good times and not all bad times are the same. I think deficit reduction was (probably) a good plan during the relatively early stages of the recovery in 1993 because there really was pressure from the markets to do so at that point -- something very, very different from today.
And, second: unless there's otherwise a good reason to do so, I'm skeptical that running significant surpluses is ever a good idea. If the government runs deficits during bad times and small deficits or balanced budgets during good times, that should be a fine long-term goal, as far as the debt itself is concerned.
I can imagine circumstances where surpluses would be good to cool off an overheated, full-employment, economy, but I believe that most economists actually prefer monetary policy, not fiscal policy, to do that.
Scott said we should "pay down deficits" when times are good. Nobody does that. If, hypothetically, in the late 90s, when times were good, we had further raised taxes and cut spending, that would pay down deficits, and at a time when the economy could easily afford the extra strain. Maybe we would have survived Bush 2 better. :-). Instead, we did nothing cause times were good and neither party had much fiscal discipline.Delete
1. "Did nothing": No, the US ran four years of balanced budgets. That's not nothing. I'm disagreeing that it's smart to "pay down deficits" just for the sake of having a smaller debt.
(Indeed, technically, it was four years of surpluses. They happened. Nobody does that? The US did).
2. No! Nothing about late 1990s policy had anything to do with large deficits under Bush; that was mainly about big tax cuts during the Bush years (supplemented by increased spending, and then eventually the recession).
3. But, again, neither the structural deficits created by the Bush tax cuts nor the overall national debt had anything at all to do with the 2007-2009 recession.
@jonathan I'm not arguing on how the govt. spending etc. affected the economic cycle. I'm arguing that we never do enough to save in good times, and thus our debt will explode.ReplyDelete
When times are tough, both parties are happy to have deficits, either via increased spending (D) or tax cuts (R). But when times are good, neither side is out clamoring to lower spending or raise taxes, or adjust entitlements. Because, well, times are good, what could possibly go wrong? :-)
The few Republicans who are actually serious about the debt may accept that temp. deficits are needed in a weak economy, but they cannot trust the Democrats to ever agree to serious spending cuts. Re: your attitude that it is not smart to pay down the debt. It was wonderful that we had balanced budgets for a couple of years out of, oh what, the last 50 (or so?). We need to have many many more of them when times return to "good".
And likewise, I'm sure many Demos feel likewise about "temporary" tax cuts and breaks favored by Repubs. They are hard to undo, even when times are good.
This is a fascinating conversation, in particular the exchange between MP and Scott. Fascinating because while they are in disagreement, both are (I believe) exactly correct, with the reconciliation being a phenomenon that each has, at least indirectly, discussed elsewhere in this forum.ReplyDelete
Scott is no doubt correct that we have a terrible problem with slack demand for labor in the economy. The Keynesian solution of the helicopters dumping money on the populace should, ceteris paribus, help with that. But MP says that our efforts down those roads haven't helped, and while those efforts may have been insufficient, they arguably haven't done anything vs. the status quo (that is, any economy that lost several million jobs would add back 100K/month, just out of inertia alone).
What's the reconciler? The ceteris are far from paribus. Do the Keynesian helicopter drop, and where will the hoi polloi spend the dough? Wal-Mart. Will that influx of new revenues cause Wal-Mart to change its plans for constantly squeezing its labor force?
Not a chance.
If you want to talk about stimulus that would be effective in contemporary America, there's no point in appealing to philosophical Keynesianism - that has had diminishing returns for at least a generation. The problem that labor has had in America for the last generation is a direct result of increasing dominance of fewer, larger entities.
Pretending that the moose is not on the table, and throwing more debt at it, seems eminently foolish to me. How about a new generation of trust busting instead? How about taking on those big entities?
That would be money well-spent. While no one has a good road map for how to do so, that's the issue, nevertheless.
CSH, I'm not saying we should dump money on the populace and see where they spend it, I'm saying we should invest in infrastructure, education, and research and development, which are things the economy desperately needs anyway. Also, the labor force would be in a much better bargaining position in a full-employment economy, as happened in the 90s. Their position isn't going to improve as long as there are millions of unemployed sitting around waiting to take their place.ReplyDelete
JB, I take your point about the deficit; it's sustainable for the long term as long as its rate of growth remains below that of the growth rate for the economy. But if we had paid it down earlier (or if Bush and Reagan hadn't run it up so much), we would have been in a better position to address this downturn when it occurred and deficit spending became appropriate (although the very same arguments against it would have been made). Jared Bernstein and, I believe, Krugman take this position. Jared Bernstein calls it "structural hawk and cyclical dove." In normal ups and downs, yes, monetary policy is more appropriate, but its usefulness is limited when interest rates are stuck at or near zero, as can be seen in the apparently limited impact of quantitative easing. Bernanke points this out and subtly admonishes Congress for not its parts (i.e., spending more) every time he appears before a committee.
MP, the Republicans keep saying we can't afford to live the way we did, but if it's so, it's because they keep slashing revenues for no reason and stand by watching while the economy declines. What did the Bush tax cuts of 2001 and 2003 get us? The economy was fairly decent starting in 2005, went into recession in 2007, and collapsed in 2008. In the Bush years--just the good years, 2001-2007, not including the disaster year of 2008--job growth was 0.9% per annum, not only the lowest on record but less than half the previous low. (Including 2008, of course, it went negative for the decade.) Job growth has been better under Obama. The stimulus spending was in 2009 and 2010. Since 2010, we've been cutting back. The deficit has been falling at the fastest pace on record, save only the post-WWII demobilization. That's austerity. We've been muddling along the way Japan did, and it got Japan 20 years of stagnation. This spring Japan started a stimulus program, and their growth rate immediately went to 4%. Can it be sustained? Let's see.
Sorry about the "bridge to nowhere" rant, but for me it symbolizes how easily the boondoggle argument can be demagogued.
Scott, I take your point that Keynesianism isn't just dumping cash on the riff-raff; however, I don't think any of the proposed alternatives will make headway without first addressing the increasingly oligarchic nature of the economy. First, education.ReplyDelete
And a question: did the WalMartification of the American economy occur because folks just weren't educated enough? And a follow: could the problem you note of internecine labor disputes in an environment of slack demand partly be the fault of the Academy? If the flawed labor market is epitomized by the increased prevalence of the "MBA waiting tables at Applebee's", that problem would be less serious if those waiters didn't have MBAs, no?
But suppose a more educated workforce could fight back against the labor-suppressing efforts of giant firms. We shall borrow a bunch of money to pay more professors for that goal. Where will the professors spend that money? Will they be boutique shoppers? If I catch one of 'em at WalMart, can I take that money back?
Or infrastructure. Better roads are a good thing. They employ people and leave, well, better roads. Which, you know, just magnifies the logistical competitive advantage of big-box retail vs. up-and-comers. R&D is good too. Course, in a tech environment, R&D ends up getting routinely swallowed up by entities like Amazon and Google and the like.
No matter how you cut it, whatever Keynesian flavor you prefer, it seems to me you still bump into the problem of an oligarchical economy inevitably suppressing labor. If you can't solve the structural flaws in the economy, you're just throwing that stimulus money down a dry black well.
And not one of those Keynesian wells, where enterprising folks later dig the money up, either.
When FDR did stimulus we got infrastructure: things like the TVA, CCC, Hoover Dam. When Obama did stimukus we got, er, what? Where's the results for Americans to see? Even a bridge to nowhere might look good right now. :-). I agree that more stimulus and infrastructure would be a good thing, but the bungled ( or so it seems to me) Obama stimulus 1 makes further stimuli difficult to sell.Delete
I agree with Morgan and I love the 'straight-talk' way he expressed it.Delete
From the International Monetary Fund:ReplyDelete
"The large fiscal legacies of the global financial crisis have reignited the debate around the impact of fiscal policy onto economic activity during fiscal consolidations. The analysis
in this paper shows that withdrawing fiscal stimuli too quickly in economies where output is already contracting can prolong
their recessions without generating the expected fiscal
saving. This is particularly true if the consolidation is centred
around cuts to public expenditure—likely reflecting the fact that reductions in public spending have powerful effects on the consumption of financially-constrained agents in the economy—and if the size of the consolidation is large. Large consolidations make recessions more likely even when made at an expansion time. From a policy perspective this is especially relevant for periods of positive, though low growth. Accordingly, frontloading consolidations during a recession
seems to aggravate the costs of fiscal adjustment in terms of output loss, while it seems to greatly delay the reduction in the debt-to-GDP ratio—which, in turn, can exacerbate market
sentiment in a sovereign at times of low confidence, defying fiscal austerity efforts altogether. Again this is even truer in the case of consolidations based prominently on cuts to public spending.
Thus, a gradual fiscal adjustment, with a balanced composition of cuts to expenditure and tax increases boosts the chances that the consolidation will successfully (and rapidly) translate into lower debt-to-GDP ratios. Monetary policy can likely help alleviate further the pain of fiscal withdrawal if it is used proactively via reduction in the real interest rate."
I agree with the quote. I think we got it right in the US. We had a large enough stimulus (maybe could have been a bit larger or a bit smaller). And we've backed off of it not too early.Delete
Why do I believe we got it right? Because I look at the employment numbers. We stopped the huge surge in unemployment, but our continued stimulus isn't bringing employment back up. I don't know how huge a stimulus we would need to do that, but it would be huge.
I feel somewhat exasperated that people ignore the information from the employment numbers. Yes, you want employment to go up, so do I! But all the extra spending hasn't done it! Look at the graph in this article: http://www.huffingtonpost.com/harlan-green/did-bernanke-change-his-t_b_3472632.html
So my question is why you don't think the current course fits what is recommended ("a gradual fiscal adjustment')? It may not be fair on my part, but I guess that it's bias toward certain policies, specifically spending policies. Can you honestly say you're not biased that way, Scott?
I'm not free of biases, and I'll admit that people will disagree in picking the right moment to pull back. The stimulus stopped the downfall but was insufficient to spur the recovery. Krugman predicted that back in 2009. He said it was too small and too geared toward tax breaks instead of spending, and that the impact would peter out in the second half of 2010. The tax breaks, to be sure, were beneficial to people paying down private debts, but that doesn't stimulate the economy. Since then, we've discovered that the degree of decline in the winter of 2008-09 was twice as bad as we thought at the time, justifying an even larger stimulus. That could have been done, say, in 2011, but the Republicans rejected it. Backing off when we did has left us stagnant.Delete
By the way, the debt under Obama has grown by about 70%. Under Reagan it tripled (quadrupled if you include Bush I) and under Bush II it doubled again. Spending patterns under Obama overall represent less stimulus (relative to the initial level of government spending) than occurred under either of those presidents in their respective (smaller) recessions, and they continued deficit spending throughout their terms.
Hey, I'm not a Republican, so you don't have to run down GOP ex-presidents to open my eyes to their flaws. My eyes are wide open.Delete
One thing Krugman doesn't consider is that the size of stimulus needed to have a strong recovery is ridiculously large. Basically you'd have to replace some 2 trillion dollars of private demand with government spending (that's my guess). Then you get a hell of a backlash when you take that stimulus away, even if you do it over 10 years. Didn't Krugman mention that? (Sorry, I'm no Krugman worshipper either.)
But did you answer my question? Are you biased toward government spending?
You can give a straight answer or decline, but diversions about who raised the deficit more don't really deflect me. I already know who raised the deficits, and by how much. I don't have trouble talking about facts and I'm not trying to score points for the Dems or the GOP because that's a useless exercise. I guess I'm trying to say that you can skip that stuff with me and just make your point. But don't forget to say whether you're biased toward government spending because it will save a lot of back-and-forth.
I think government spending is necessary at a time like this. (I thought that came through.) I assume you mean deficit spending. Then, as I said above, the debt can be paid down when the economy is stronger. It won't all be paid off, of course. You can't have monetary policy without debt to buy and sell. But it could be brought to a more manageable level that would leave room for expansion if deficit spending is needed again in the future. The negative impact of paying it down can be mitigated through monetary policy. Krugman and others often say that the only argument a lot of people have against deficit spending at the current time is that it involves "a lot of money." They respond that it's a big economy and a big recession, so it will require a lot of money. What can I say?Delete
Didn't mean any insult, by the way. Some of my best friends are Republicans. (Well, a few.) My point was only that the spending Obama wants to do is not out of line with what has been done before (scaled to the task at hand) by people admired by his most frequent critics. Now, those predecessors may have been more generally irresponsible, engaging in deficit spending in good times and bad, but that doesn't mean that deficit spending isn't appropriate and necessary in specific circumstances.
Correct me If I'm wrong, but I thought our disagreement was whether we should have more stimulus now (I thought you wanted this) or slightly more deficit cutting now (my position).Delete
I'm not for zeroing out our deficit (not even close), so you don't have tell me that it's important to have treasury notes to trade.
As for deficit spending not being out of line, well let's just look at a graph of deficit vs GDP and also debt vs GDP and see whether it still looks like it's not out of line. Let's look at our debt service and what happens if and when interest rates return to a ten-year mean, must less a 30-year mean. I hope you're following me on this data because data is important. Look up that stuff and then put some numbers on what kind of spending you want.
By the way, does Krugman give numbers or discuss any of the questions I'm raising? If he doesn't, why the hell not? I ask you because you've used Krugman as a source, so hopefully you're familiar with what he writes. I don't follow him because I don't want to have to filter out so much weasel talk to get at the substance, which is what I had to do here. I get tired of that and I wish people were just up front about what they want and why. And of course, bring on the data in the clearest format possible. Did you like that graph of employment that I linked to?
MP, I found your employment chart to be much like the one I linked to above. It shows us falling into a hole and staying there.ReplyDelete
Krugman's set of concerns isn't the same as yours. He's not particularly concerned about future interest rates, and he doesn't expect them to go up anytime soon. He is concerned about stagnation (which the employment chart hints at). If interest rates go up, I should think we'd want a robust economy generating revenues so that we're in a position to pay them. He occasionally points out that Japan was complacent about stagnation for 20 years and as a consequence its debt-to-GDP ration is currently about 300%. To paraphrase Ronald Reagan, stagnation isn't the solution, it's the problem. (No, I'm not saying you're a fan of Ronald Reagan.)
By the way, I hope this doesn't constitute weasel talk, but the current debt held by the public as a percentage of GDP is roughly comparable to that of the early 1990s. (See Figure 1)
I have strong doubts that we can escape stagnation with big spending programs. That's another artificial bubble (financed how?) which we can hope will lead to sustained growth, but I don't see any reason for believing that. When we start withdrawing the spending, what happens then? Why belief the economy will be able to support it?Delete
I'd rather see organic growth, small but created by private investors who figure out promising ways of creating wealth. After the bubbles we've had, I don't see reason to trust anything else. I certainly don't trust tax cuts to work, as the Bush years showed.
No, it's not weasel talk to take two lines and one link to make a point about data. Of course it helps that the Federal Reserve bought so much of our debt--they will probably roll it over instead of taking the money and running. What I mean by weasel talk to saying the Fed could be doing so many different things to help the economy, when the actual suggestions amount to one (1) additional action. It's also weasel talk to take lots of column inches to do so, and to be using such a superior tone through most of it.
You keep referring to Krugman. What is your opinion? Have you developed your own viewpoint? Not that it's easy to sort through this monetary stuff, but it's odd for me to presenting arguments, but you never seem to say "You're missing the point here" or "you've made such-and-such blunder" "that's a strong point." It's all reference to Krugman. I think ideas should stand on their own, and an intelligent person should aim for sharp analysis of those ideas. I care less what Krugman has to say than what you, the other intelligent person engaged in this conversation, has to say.
One other question--are you the Scott Monje who writes for Foreign Policy? Not that I'm concerned with credentials, but I'm curious.
Oh, about the employment chart. It shows employment falling steeply, then stopping and staying steady. We can assume we're at the bottom of the hole, because the bottom could have been much lower if not for TARP and the stimulus. It's an important distinction--we aren't at the bottom of well--that's a lot further down.Delete
Oops, we *can't* assume we're at the bottom of the hole.Delete
Well, I think we can do more to generate growth. I guess that's where we differ. Again, I'm not talking about simply pumping money into the system to create a bubble. I'm taking about generating real demand building things we need anyhow. The increase in economic activity should create opportunities for your private investors to build on; spending has a multiplier effect. But investors aren't simply going to invest for the sake of investing in the absence of rising demand. That's why quantitative easing has such a modest effect. My concern is that the market, left to its own devices, will simply look for opportunities elsewhere.Delete
I agree that the bottom of the hole could have been much deeper.
I write for the Foreign Policy Association at ForeignPolicyBlogs.com, not to be confused with ForeignPolicy.com. I occasionally comment at the latter site, but I find their comments section frustrating, too large and too filled with people who don't really have anything to say. For the most part, if you see a Scott Monje or a Scott C. Monje out there, that's me. (There is a Michael Scott Monje, Jr., who writes kids' books. That's someone else.)
@scott, thanks for speaking for yourself. Yes, demand is definitely a problem right now, but I don't think it's a temporary problem. If government is going to take up the slack and create more demand, it's going to run major deficits, which will effect our debt service (crowding out other spending). And there's the strong possibility of not being able to back off that stimulus, which has happened this time already.Delete
So, I see lots of problems with government providing the demand. I rather that it grew naturally. Now, it's certainly possible to make infrastructure work part of the level load of demand. In that case, we want to guard from cutting back in back times and splurging in good times--another one of these discipline things. How to do that--long-term commitments that aren't part of the yearly discretionary budget. That's just a guess, and I don't really know how legislatures set that kind of thing up.
I'm aware that spending has a multiplier effect, but at the base you need solid production of something of value. That usually means something that you can make a profit on, which means not government, but the profit-making center (and not retail either).
As for quantitative easing have a modest effect, I'm not sure that's true. It has kept the markets liquid through a lot of uncertainty. I think it's prevented runs and defaults and that kind of panic.
Really, I think we were teetering on another Great Depression, and the actions here and in other countries prevented it. So I didn't have high expectations for bouncing back--back into what? Another bubble if the recovery was swift. No, this is going to be slow because investors are so cautious, and rightly so.