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January 24 2010

Obama Supports Deficit Commission

Some news about the deficit commission:

... Also on Saturday, Mr. Obama endorsed a bill scheduled for a Senate vote on Tuesday which would create a bipartisan budget commission and require that its recommendations for slashing deficits would get a vote in Congress this year. But he remained ready to establish a panel by executive order if the vote falls short on Tuesday, despite his support. ...

Brad DeLong explains why he thinks a deficit commission is a bad idea if you want to actually do something about the long-term budget problem:

Let's pick ten Republican or near-Republican senators typically called "moderates" (some of whom have retired since 2003): Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, and Lincoln. Only two of them (Blanche Lincoln and Judd Gregg) opposed the unfunded Medicare Part D. Only one of them (Olympia Snowe) opposed the 2003 tax cut, even though it was very clear at the time that permanent (as opposed to temporary recession-fighting) tax cuts were the last thing that America needed. And none of them opposed the 2001 tax cut--even though Alan Greenspan was at the time wandering around Capitol Hill whispering that it was bad policy, and that we were very likely to rue the day it had passed.
So these aren't deficit hawks. These are something else--deficit chickens, deficit doves, deficit turkey-vultures.
Yet they are the kinds of senators who are the big boosters of the Commission. Senator Voinovich went to talk to Obama to urge him to support the Commission--very much like an arsonist pleading to be put in charge of the fire department. What did he say to the President? "Stop me before I legislate again!"?

The idea is that by voting for the deficit commission that they can insulate themselves against the charge of fiscal irresponsibility: "What do you mean I'm not fiscally responsible? I voted for the deficit commission!" And because the ability to vote for pointless deficit commissions exists, Collins, Domenici, Grassley, Gregg, Hatch, Snowe, Specter, Voinovich, Nelson, Lincoln, and all their ilk are under less pressure to actually do something to create an American government that lives within its means and has the means to live.

January 20 2010

Deal Reached on Deficit Commission

I don't see this as good news:

White House, Democratic lawmakers cut deal on deficit commission, by Lori Montgomery, Washington Post: Faced with growing alarm over the nation's soaring debt, the White House and congressional Democrats tentatively agreed Tuesday to create an independent budget commission and to put its recommendations for fiscal solvency to a vote in Congress by the end of this year. ...

Under the agreement, the commission would have 18 members, including six lawmakers appointed by congressional Democrats and six lawmakers appointed by congressional Republicans. Obama would appoint six others, only four of whom could be Democrats.

Fourteen commission members would have to agree on any deficit-reduction plan, a prospect that skeptics called a recipe for gridlock because action would depend on the support of at least two Republicans for a plan that is sure to include tax increases. ...

Has this worked in the past?:

The Bipartisan Panel: Did It Really Work?, by Jackie Calmes, NYT: The White House has joined some senators in a claim that upends an old saw. If there is no will among politicians to resolve budget problems, they argue, there is nonetheless a way — through a bipartisan commission. ...
Washington’s shelves are full of unheeded commission reports gathering dust. Yet after more than a quarter-century, the supposed success of the 1982-83 Greenspan Commission to save Social Security continues to inspire calls for bipartisan panels.
But just in time for the latest debate, the unpublished posthumous memoir of a central figure on the Greenspan panel, Robert M. Ball, a former Social Security commissioner, has emerged to challenge the conventional wisdom about its achievement.
In a sprightly account promoted by former staff members from both parties, Mr. Ball calls the Greenspan Commission a failure. As he tells it, only a willingness to compromise by the two principal antagonists of the time — Ronald Reagan, the Republican president, and Representative Thomas P. O’Neill, the Democratic House speaker — made it possible for Mr. Ball and a few others to salvage from the deadlocked panel a deal that raised payroll taxes and trimmed benefits enough to keep Social Security solvent.

“A commission is no substitute for principled commitment,” wrote Mr. Ball...

The deficit hawks on the right have their sights set on Medicare and Social Security, and the administration seems far too willing to allow these programs to be used as bargaining chips in negotiations (and to give into the right's insistence that spending cuts - except for the military - take precedence over tax increases). Unless the administration takes a turn away from the tendencies it has shown in the past, this seems to be headed in that direction.

January 10 2010

January 05 2010

The Cost of Military Outsourcing

Reversing the outsourcing of military services will save billions (ending the wars would save even more):

Our view: Warfare, outsourced, adn.com: Congress has finally begun to reconsider the nation's heavy reliance on private contractors to fight our wars in Iraq and Afghanistan. Measured by personnel numbers, the country has outsourced almost half of our war-fighting effort. As of September, 242,000 contractors supported 280,000 military in the two war zones, according to the Congressional Research Service. In Afghanistan, contractors actually outnumber troops by 40,000.
That outsourcing was supposed to help save money and liberate soldiers from doing routine, safe tasks behind the battle lines, so they could concentrate on fighting.
Congress is realizing it hasn't always worked out that way. In fighting an insurgency, there are no battle lines, and no secure rear areas for contractors to work in.
In that dangerous environment, it takes a lot of money to compensate for the risk of death on the job. U.S. civilians driving supply trucks through hostile territory, for example, could earn triple or more the pay of the GI grunts riding in the seat beside them.
Last year, Congress concluded that each military contract worker cost $250,000 a year. As the Washington Post noted this month, Congress expects to save $44,000 per worker in the defense budget by "in-sourcing" about $5 billion worth of work now handled by contractors. ...
There will always be a role for private contractors in helping supply the country's military on the field of battle. As the Congressional Research Service noted, contractors have carried part of the nation's war effort dating as far back as the Revolutionary War.
But contracting out doesn't automatically guarantee the military will save money. When there are savings, they may come from cutting quality, rather than improving efficiency, so proper oversight is critical. Some jobs - like interrogating enemy suspects or pulling the trigger to kill people -- are just too important to outsource.
It's good to see Congress realize that when the nation is fighting to protect itself; only carefully limited functions are properly handed over to private business. ... Hiring contractors to handle some military logistics can help, but hiring them to wield weapons is asking for trouble.

But was it really about saving money? Or was it a way to ramp up the effective size of the fighting force without having to institute a draft or some other means of increase the size of the military (e.g. increasing pay substantially)? And perhaps sending a few, more than a few actually, bucks in certain directions?

Instituting a draft would not have been popular, at all, and would have undermined support for the war the Bush administration wanted to carry out. And increasing pay as much as would have been required was far too costly and had its own political problems. So while outsourcing was sold to the public as a means of saving money, the real intent was to use the private contractors for support services thereby freeing all of the military personnel previously involved in services to be used on the front lines. This effectively increased the size of the fighting force without increasing the size of the military (in terms of personnel). It wasn't about saving money. If the Bush administration wanted to avoid a substantial public backlash from using a draft or other means to increase personnel levels as much as planned, they had little choice but to obscure the expansion from the public by outsourcing many services previously carried out by military personnel.

December 26 2009

Shiller: A Way to Share in a Nation's Growth

Robert Shiller wants people to be able to take stock in America:

A Way to Share in a Nation’s Growth, by Robert J. Shiller, Commentary, NY Times: Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product. ... Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated... In a recent pair of papers, my Canadian colleague Mark Kamstra ... and I have proposed a solution. We’d like our countries to issue securities that we call “trills,” short for trillionths. ...

Each trill would ... pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P. If substantial markets could be established..., trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. ... The market price of trills would fluctuate, reflecting the changing prospects for future G.D.P. growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.

There are indications that officials in China are starting to worry about threats to their huge investment in United States debt from a possible outbreak of high inflation. The trills, tied to nominal G.D.P., would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields... Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.
The United States government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government’s dividend burden would automatically decline in tough times, when G.D.P. declined. ...
In fact, issuing shares in G.D.P. might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its G.D.P., creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances. ...
Someday, China might issue shares in its G.D.P..., and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China’s standard of living.
Proposals for securities like trills have been aired many times over the years. ... So far, these proposals have gone unheeded. But the current environment may be more suitable for them.

This shifts risk around a bit, etc., but I can't say I'm convinced this is some sort of magic means of financing government activities.

December 22 2009

How Should the Government Debt be Financed?

Andy Harless joins Rajiv Sethi in calling for more discussion about how the government debt is financed:

The Treasury’s Monetary Policy, by Andy Harless: ...Treasury ... is now ... financing more of its debt long-term. If you’re worried (as I am) about the persistence of a weak and potentially deflationary economic environment, then you should be critical of the Treasury’s policy. By increasing its maturities the Treasury is essentially following a tight-money policy exactly when a loose-money policy is needed.
The Treasury, of course, has its reasons. Officials expect interest rates to rise over the next several years and would like to lock in today’s low rates, to limit how much it will cost to service the national debt over a longer horizon. I’m skeptical, however, of the assumptions underlying these reasons.

You might argue that it’s a matter of risk. When the Treasury locks in today’s low interest rates, it may not end up paying less (since it gives up even lower short-term rates), but it makes the payments more predictable. Even if the Treasury is likely to end up paying more, the hedge is worth the price, because the Treasury receives some insurance for the worst case, where rates rise more than expected.

But are rising interest rates really the worst case?
Interest rates will rise when and if the economic recovery gains enough speed and traction to give the Fed and bond markets reasonable confidence in its eventual convergence toward our potential growth path. As an ordinary citizen, that’s not an outcome against which I would feel a need to hedge. I don’t want to buy insurance against good news. I’d rather hedge against the opposite outcome, where the recovery peters out and interest rates fall.

The US economy has been knocked far off its potential growth path, and it will take fairly rapid growth, for a fairly long period of time, to get back to it. (Either that, or we’ll remain so far off the path for so long that potential will be significantly reduced, in which case we likely have many of years of low interest rates ahead of us before we get to that point.) With rapid and persistent growth, federal revenues will rise, government “bailout” investments will perform well, benefit payments will decline, and the primary federal deficit will fall. Because of higher interest rates, the government will be paying more to service its outstanding debt, but because of an improving economy the government will be accumulating less new debt, compared to the alternative case. So it’s not clear to me that rising rates would be a “worst case” even for Treasury finances, let alone for the general national interest.

It is also argued that, by increasing the maturity of its debt, the Treasury is reducing the risk of default, thereby improving its credit profile and allowing it to finance at lower interest rates than otherwise. If that’s true, I’m not sure it’s a good thing. When the private sector is having such difficulties as it has now, wouldn’t it be better to make Treasury securities more risky and thereby encourage people to put their money in private sector assets instead?

In any case, I’m not sure it’s even true. For Treasury investors, inflation risk is much more important than credit risk. By refusing to be kept on a short leash, the Treasury is increasing the future incentive for the US to “inflate away” its debts. That might make Treasury securities less attractive rather than more so. Of course, as I said, making Treasury securities less attractive wouldn’t necessarily be a bad thing, since it would help the private sector: but if the Treasury does so by issuing more long-term securities, the benefit gets lost, because the Treasury is then also competing with the private sector for funds.

Be that as it may, I know I’m not going to convince everyone about the specific policy that I think the Treasury should follow. I hope, however, that I have at least convinced some readers that, in today’s environment, the decision is a macroeconomically important one that deserves a great deal more attention than it has gotten. I second Rajiv Sethi..., who finds it “a bit surprising that while the size of the deficit is a topic of endless controversy, there is such little debate about the manner in which the deficit is financed.”

December 17 2009

"President Obama Largely Inherited Today’s Huge Deficits"

What is the cause of large and continuing budget deficits? The Bush tax cuts, the wars in Iraq and Afghanistan, and the economic downturn explain "explain virtually the entire deficit over the next ten years." 

Deficit

Notice the tiny contribution of Tarp, Fannie, and Freddie (shaded red) and the stimulus package (shaded yellow, just below the red area) to the deficit from 2012 onward. These are not the source of our long-term budget problems.

For more, see the source of the graph: President Obama Largely Inherited Today’s Huge Deficits, CBPP.

December 14 2009

"We Project a $242 Billion Surplus for Medicare by 2020, Not a Deficit"

Does health care spending pay for itself, at least in part, by increasing economic growth? When older people are healthier, they work longer and contribute more to taxes, and they consume less health care. According to this research, both of these effects are missing from standard estimates of the growth in health care costs such as those produced by the CBO, and including them -- essentially doing dynamic scoring -- makes a big difference:

Study shows health care spending spurs economic growth, EurekAlert: As the national discussion of health care focuses on costs, a new study from North Carolina State University shows that it might be more accurate to think of health care spending as an investment that can spur economic growth. The study also shows that government projections of health care costs and financing may be unduly pessimistic.
"Health care spending should be viewed as an investment in future capital, contributing to a productive workforce, rather than merely as an expenditure," says Dr. Al Headen, associate professor of economics at NC State and a co-author of a paper appearing in the Dec. 15 issue of Proceedings of the National Academy of Sciences. The paper was co-authored by researchers from Duke University, Brigham Young University and the National Council of Spinal Cord Injury Association.
People are living longer, Headen says, and are retaining their ability to be productive members of society – they are able to work, pay taxes, consume goods and go on vacation. "But a lot of projections by the government of the future work force are not accounting for improved health and productivity of older Americans. People will be paying into government programs, such as Medicare, for a longer time – while simultaneously delaying the point where they need to draw on those programs. Our research suggests that if the government's projections had accounted for this improved productivity, those projections would have been less pessimistic."
For example, the researchers found the Congressional Budget Office's (CBO) projected costs for Medicare and Medicaid from 1994-2004 to be substantially overestimated. In 1994, CBO projections of Medicare expenditures for 2004 for persons 65 and older were $361 billion, but the actual 2004 expenditure was only $268 billion – an error of 35 percent.
"Our projections adjust for improved quality of health and functioning, indicated by declines in disability among the 65 and older age group from 1994 to 2004 in data from the National Long Term Care Surveys linked to Medicare files," Headen says. "Our health quality adjusted Medicare expenditures projection over the same decade covered by the CBO projections is $253 billion, an error of 5.6 percent. Thus, the projection error rate for the CBO, which did not adjust for improvement in the quality of health and functioning among elders, was over six times larger than the projection error rate that explicitly adjusted for improvement in the quality of health and functioning among elders."
One implication of the study's findings, Headen says, is that "some programs that the government has said will be in deficit in the near future may actually have a surplus, once you account for improved health and productivity. For example, we project a $242 billion surplus for Medicare by 2020, not a deficit.
"Spending on health care productivity, biomedical research and universal health care should be considered an investment that will eventually lead to increased economic growth," Headen says. "Improvements in human capital related to health are important, and need to be accounted for when doing projections of costs and benefits related to health care."

December 08 2009

The Relationship Between Budget Deficits, Fed Independence, and Inflation

At MoneyWatch, some of the pressures the Fed might come under in the future if the government debt continues to rise, and the important role that Fed independence plays in making sure that the debt is not inflated away:

Budget Deficits, Fed Independence, and Inflation, by Mark Thoma: I have been critical of both Alan Greenspan and Ben Bernanke for giving recommendations concerning fiscal policy during their testimony before congress. In Greenspan's case, it was his comments about tax cuts that I found problematic, while for Bernanke it was his comments on entitlements.
But monetary and fiscal policy are connected, and the Fed chair should talk about the impact that a growing debt level might have monetary policy. That is, while I don't think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. ...[...continue...]...

December 06 2009

Will Deficits Bankrupt Our Grandchildren?

Robert Frank says complaints that running deficits to offset downturns will bankrupt our grandchildren are "absurd":

How to Run Up a Deficit, Without Fear, by Robert H. Frank, Commentary, NY Times: Few subjects rival the federal budget deficit in its power to provoke muddled thinking.
It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices. ...
The first proposition comes from ... Keynes, who argued that when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way... And most businesses won’t invest... Only government ... has both the motive and opportunity to increase spending significantly during deep downturns.
Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.”
It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That ... would mean ... reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity...
Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. ...
But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. ... When government undertakes such investments, our grandchildren become richer, not poorer. ...
To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by ... tax[ing] activities that cause harm to others. Called Pigovian taxes ... such levies create a burden that is more than offset by the reductions they cause in costly side effects of everyday activities. ...

When producers emit sulfur dioxide into the atmosphere,... the resulting acid rain harms others. As the ... Clean Air Act demonstrated, the most efficient ... remedy was to tax sulfur dioxide emissions. ... Similarly, when motorists enter congested roadways, they impose additional delays on others. Here, too, taxation is the best remedy...

When the transactions of financial speculators fuel asset bubbles, they increase the risk of financial meltdowns. A small tax on those transactions would reduce this risk. ... Carbon dioxide emissions contribute to global warming. Here as well, taxation offers the most efficient and least intrusive remedy.
Anti-tax zealots denounce all taxation as ... depriving citizens of their right to spend their hard-earned incomes as they see fit. Yet nowhere does the Constitution ... does it grant us the right to harm others with impunity. No one is permitted to steal our cars or vandalize our homes. Why should opponents of taxation be allowed to harm us in less direct ways?
Taxes on harmful activities would be justified quite apart from any need to balance government budgets. But such taxes would also generate ample revenue for the public services we demand, quieting the ill-considered commentary about deficits. ...

[See also: "Bogus Arguments about the Burden of the Debt"]

December 04 2009

Paul Krugman: Reform or Else

Anyone who is concerned about the national debt should support health care reform:

Reform or Else, by Paul Krugman, Commentary, NY Times: Health care reform hangs in the balance. Its fate rests with a handful of “centrist” senators — senators who claim to be mainly worried about whether the proposed legislation is fiscally responsible.
But if they’re really concerned with fiscal responsibility, they shouldn’t be worried about what would happen if health reform passes. They should, instead, be worried about what would happen if it doesn’t pass. For America can’t get control of its budget without controlling health care costs...
Some background: Long-term fiscal projections for the United States paint a grim picture. Unless there are major policy changes, expenditure will consistently grow faster than revenue, eventually leading to a debt crisis.
What’s behind these projections? An aging population, which will raise the cost of Social Security, is part of the story. But the main driver ... is the ever-rising cost of Medicare and Medicaid. ...
You might think ... that extending coverage to those who would otherwise be uninsured would exacerbate the problem. But you’d be wrong, for two reasons.
First, the uninsured in America are, on average, relatively young and healthy; covering them wouldn’t raise overall health care costs very much.
Second, the proposed health care reform links the expansion of coverage to serious cost-control measures for Medicare. Think of it as a grand bargain: coverage for (almost) everyone, tied to an effort to ensure that health care dollars are well spent.
Are we talking about real savings, or just window dressing? Well, the health care economists I respect are seriously impressed by the cost-control measures in the Senate bill, which include efforts to improve incentives for cost-effective care, the use of medical research to guide doctors toward treatments that actually work, and more. ...
Over the next decade, the Congressional Budget Office has concluded, the proposed legislation would reduce, not increase, the budget deficit. And ... it would greatly improve our long-run fiscal prospects.
But there’s another reason failure to pass reform would be devastating — namely, the nature of the opposition.
The Republican campaign against health care reform has rested in part on ... arguments that go back to the days when Ronald Reagan was trying to scare Americans into opposing Medicare — denunciations of “socialized medicine,” claims that universal health coverage is the road to tyranny, etc.
But in the closing rounds of the health care fight, the G.O.P. has focused more and more on an effort to demonize cost-control efforts. The Senate bill would impose “draconian cuts” on Medicare, says Senator John McCain, who proposed much deeper cuts ... as part of his presidential campaign. “If you’re a senior and you’re on Medicare, you better be afraid of this bill,” says Senator Tom Coburn.
If these tactics work, and health reform fails, think of the message this would convey: It would signal that any effort to deal with the biggest budget problem we face will be successfully played by political opponents as an attack on older Americans. It would be a long time before anyone was willing to take on the challenge again; remember that after the failure of the Clinton effort, it was 16 years before the next try at health reform.
That’s why anyone who is truly concerned about fiscal policy should be anxious to see health reform succeed. If it fails, the demagogues will have won, and we probably won’t deal with our biggest fiscal problem until we’re forced into action by a nasty debt crisis.
So to the centrists still sitting on the fence over health reform: If you care about fiscal responsibility, you better be afraid of what will happen if reform fails.

December 02 2009

"The Wrong Jobs Summit"

Brad DeLong says the wrong people are meeting at the jobs forum:

The wrong jobs summit, by Brad DeLong, Commentary, The Week: The White House is hosting a jobs summit this week. I, however, cannot but think that ... it will be the wrong people talking about the wrong things.

Let me back up. Ever since the 1930s, economists trying to analyze the determinants of spending have focused on two of the economy’s markets: the market for liquidity and the market for savings. ...
For the government to boost jobs, it must to do something to change the balance of supply and demand in either the market for liquidity or the market for savings. In general, the ... Federal Reserve ... acts to tweak supply and demand in the market for liquidity. The president and Congress act to tweak supply and demand in the market for savings. ...

Right now, if you ask the decisive members of congress—by which I mean the Blue Dog Democrats in the House, or the most conservative Democrats and most liberal Republicans in the Senate —why the president and the Congress are not doing more to reduce unemployment and boost spending and income, the answer you’ll get is ... well, you probably wouldn't get an intelligible answer.

But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to ... boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity..., indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks ... in ... liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

Both of these arguments are comprehensible... But they cannot both be true at the same time. Either the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending—in which case additional spending by the government won’t generate any substantial rise in interest rates. Or additional government spending will crowd out investment...—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.

It appears that what we have here is a failure to communicate. ...

Thus we need a jobs summit right now. We need the White House's National Economic Council and key congressional “centrists” on one side and the Federal Reserve Open Market Committee on the other to meet. Those two groups seem to have very inconsistent views of the economic situation. ... Something has to give. If they could reach agreement on whose view ... is likely correct, then a rescue plan—entailing either more government spending or greater liquidity—would become obvious.

Until that “jobs summit” is convened, others are moot.

November 27 2009

DeLong: Time to Give Thanks for the Bailouts

Brad DeLong says those who argue that fiscal stimulus policies can't work and are too costly "rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious":

Why Are Good Policies Bad Politics?, by J. Bradford DeLong, Commentary, Project Syndicate: From the day after the collapse of Lehman Brothers last year, the policies followed by the United States Treasury, the US Federal Reserve, and the administrations of Presidents George W. Bush and Barack Obama have been sound and helpful. The alternative – standing back and letting the markets handle things – would have brought ... higher unemployment than now exists. Credit easing and support of the banking system helped significantly...
The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue. Every extra percentage point of unemployment lasting for two years costs $400 billion. A recession twice as deep as the one we have had would have cost the US roughly $2 trillion – and cost the world as a whole four times as much. In comparison, the bonuses at Goldman Sachs are a rounding error. ...
The Obama administration’s fiscal stimulus has also significantly helped the economy. Though the jury is still out on the effect of the tax cuts in the stimulus, aid to states has been a job-saving success, and the flow of government spending on a whole variety of relatively useful projects is set to boost production and employment in the same way that consumer spending boosts production and employment.
And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes ... at current interest rates. For that price, American taxpayers will get an extra $1 trillion of goods and services, and employment will be higher by about ten million job-years.
The valid complaints about fiscal policy ... are not that it has run up the national debt..., but rather that ... we ought to have done more. Yet these policies are political losers now: nobody is proposing more stimulus. This is strange... Good policies that are boosting production and employment without causing inflation ought to be politically popular, right?
With respect to Obama’s stimulus package, it seems to me that there has been extraordinary intellectual and political dishonesty on the American right, which the press refuses to see. For two and a half centuries, economists have believed that the flow of spending in an economy goes up whenever groups of people decide to spend more... – and government decisions to spend more are as good as anybody else’s. ...
Obama’s Republican opponents, who claim that fiscal stimulus cannot work, rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious. Remember that back in 1993, when the Clinton administration’s analyses led it to seek to spend less and reduce the deficit, the Republicans said that that would destroy the economy, too. Such claims were as wrong then as they are now. But how many media reports make even a cursory effort to evaluate them?
A stronger argument, though not by much, is that the fiscal stimulus is boosting employment and production, but at too great a long-run cost because it has produced too large a boost in America's national debt. If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree... But interest rates on US Treasury securities are very low...
Those who claim that America has a debt problem, and that a debt problem cannot be cured with more debt, ignore (sometimes deliberately) that private debt and US Treasury debt have been very different animals – moving in different directions and behaving in different ways – since the start of the financial crisis. /blockquote>

What the market is saying is not that the economy has too much debt, but that it has too much private debt, which is why prices of corporate bonds are low and firms find financing expensive. The market is also saying – clearly and repeatedly – that the economy has too little public US government debt, which is why everyone wants to hold it.

Just one comment: Brad's right.

November 25 2009

Worries about Budget Deficits and Inflation: Let’s Avoid Repeating Our Mistakes

At MoneyWatch:

Worries about Budget Deficits and Inflation: Let’s Avoid Repeating Our Mistakes, by Mark Thoma: There is a lot of concern about the future course of the economy, and there are two separate worries that are getting confused. The purpose of this post is to distinguish between the two sets of worries, and to discuss whether the worries are justified. ...

November 23 2009

Paul Krugman: The Phantom Menace

Why is the administration so fearful of doing more to help employment recover?:

The Phantom Menace, by Paul Krugman, Commentary, NY Times: A funny thing happened on the way to a new New Deal. ... Consider the contrast between what Mr. Obama’s advisers were saying on the eve of his inauguration, and what he himself is saying now.
In December 2008 Lawrence Summers ... called for decisive action. “Many experts,” he warned, “believe that unemployment could reach 10 percent by the end of next year.” In the face of that prospect, he continued, “doing too little poses a greater threat than doing too much.”
Ten months later unemployment reached 10.2 percent, suggesting that despite his warning the administration hadn’t done enough to create jobs. You might have expected, then, a determination to do more.
But in a recent interview..., the president sounded diffident and nervous about his economic policy. He spoke vaguely about possible tax incentives for job creation. But “it is important though to recognize,” he went on, “that if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.”
What? Huh?
Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts: the stimulus was too small, and it will fade out next year, while high unemployment is undermining both consumer and business confidence.
Now, it’s politically difficult for the Obama administration to enact a full-scale second stimulus. Still, he should be trying to push through as much aid to the economy as possible. ...
Instead, however, Mr. Obama is lending his voice to those who say that we can’t create more jobs. And a report on Politico.com suggests that deficit reduction, not job creation, will be the centerpiece of his first State of the Union address. What happened?
It took me a while to puzzle this out. But the concerns Mr. Obama expressed become comprehensible if you suppose that he’s getting his views, directly or indirectly, from Wall Street.
Ever since the Great Recession began ... some (not all) major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils. In particular, they say, never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates — any day now, budget deficits will lead to a collapse in investor confidence, and rates will soar.
And it’s this latter claim that Mr. Obama echoed in that ... interview. Is he right to be worried? ... A ... model ... is Japan in the 1990s, which ran persistent large budget deficits, but also had a persistently depressed economy — and saw long-term interest rates fall almost steadily. ...
And shouldn’t we consider the source? As far as I can tell, the analysts now warning about soaring interest rates tend to be the same people who insisted, months after the Great Recession began, that the biggest threat facing the economy was inflation. ...
Still, let’s grant that there is some risk that doing more about double-digit unemployment would undermine confidence in the bond markets. This risk must be set against the certainty of mass suffering if we don’t do more — and the possibility, as I said, of a collapse of confidence among ordinary workers and businesses.
And Mr. Summers was right the first time: in the face of the greatest economic catastrophe since the Great Depression, it’s much riskier to do too little than it is to do too much. It’s sad, and unfortunate, that the administration appears to have lost sight of that truth.

November 18 2009

Obama's Wrong-Headed Thinking on the Deficit

Edward Harrison catches this quote from Obama:

The president is in Beijing as part of his tour through several Asian countries to address economic challenges. He spoke candidly about the precarious balancing act his administration is trying to perform. He wants to spend money to kick-start the economy, but at the same time is in danger of creating too much red ink.
Obama warned the United States' climbing national debt could drag the country into a "double-dip recession," though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate.
"There may be some tax provisions that can encourage businesses to hire sooner rather than sitting on the sidelines. So we're taking a look at those," Obama told Fox News' Major Garrett.
"I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

I hope his economic advisers set him straight, though I suppose there's a chance that this nonsense is coming from them. We needed a larger stimulus package to begin with, and the economy could still use more help, labor markets in particular.

Let's hope that this doesn't turn into a call to actually start balancing the budget before the economy has fully recovered as that would increase the chances of the double dip recession that he is so worried about (something we should have learned from the 1937-38 experience where an attempt to balance the budget prematurely plunged the economy back into recession).

These comments also make it sound like any jobs program, if we get one at all, will be limited to (right-wing approved) tax cuts which is, in my opinion, inferior to direct job creation strategies. Tax cuts can be part of the mix, but by themselves are unlikely to do enough to solve the employment problem.

November 04 2009

"Tax Cuts and Recoveries"

Do tax cuts spur economic growth?

Tax Cuts and Recoveries, by David Leonhardt, Economix: One big question about the 1983-84 economic boom (a boom I mention in my Wednesday column) is: Was it the tax cut?
Ronald Reagan signed a large tax cut in the summer of 1981, while the economy was in recession. Within a year and a half, the economy was booming. Conservatives, understandably, like to argue that the tax cut helped cause the boom.
I’m open to that argument. ... What’s unclear is how big an effect tax rates have.
In 1982, with the economy in the second part of its double-dip recession, Reagan signed a tax increase, meant to reduce the deficit. Here’s Bruce Bartlett, writing at Forbes.com:
According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) ... took effect on Jan. 1, 1983.
During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. ... Said Rep. Newt Gingrich, “I think it will make the economy sicker.” The Chamber of Commerce ... said it had “no doubt that it will curb the economic recovery everyone wants.”
Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth.
A little more than a decade later, Mr. Gingrich made the same argument about Bill Clinton’s tax increase. But ... the ... late 1990s expansion was the fastest of any in the past forty years.
Mr. Clinton’s successor, George W. Bush, signed a large tax cut during his first year in office — as Mr. Reagan did. But Mr. Bush never signed a tax increase to reduce the deficit. And growth in the Bush years was slower than in the Reagan years or the Clinton years, even before the financial crisis hit.
The history seems to suggest that tax cuts are not the most reliable strategy for spurring growth, at least in the United States, where top income-tax rates are not sky high.
But maybe readers can offer an analysis that explains this history and still makes the case for tax cuts as the main engine of economic recoveries. ...

Just one quick note - for those anxious about the deficit and eager to do something about it, the Reagan experience shouldn't be used as an excuse to start raising taxes too soon. The time will come when deficit spending is no longer needed to spur the economy and at that point we should reverse course, but we shouldn't make the mistake of 1937-38 when an attempt to balance the budget too soon in the recovery caused the economy to fall back into recession.

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