Brad DeLong: The Democrats' Line in the Sand

Brad DeLong says it might be correct that the only way for Democrats "to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it." If so, then there's a line that Democrats cannot cross:

The Democrats' line in the Sand, by J. Bradford DeLong, Project Syndicate: ...[I]f an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. This is why most economists are deficit hawks.

Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment. Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment. ...

But the rule is that governments should run surpluses and not deficits, so various American presidents’ economic advisers have been advocates of aiming for budget surpluses except in times of slack demand and threatening depression. This was certainly true of Eisenhower’s, Nixon’s, and Ford’s economic advisors, and of George H.W. Bush’s and Bill Clinton’s economic advisers.

It was true of Reagan’s economic advisers as well. Some of Reagan’s advisers sincerely did not believe that the tax cuts of the early 1980’s would generate the large deficits that they did (Beryl Sprinkel and Lawrence Kudlow come to mind). Others, like Martin Feldstein and Murray Weidenbaum, understood the consequences of the Reagan tax cuts and were bitter bureaucratic opponents, even if they did not speak out publicly.

In fact, since WWII, only George W. Bush’s economic advisers have broken with this consensus. A few have done so because they are making careers as party-line Republicans, so their priority is to tell Republican politicians what they want to hear (Josh Bolton and Mitch Daniels come to mind here). As for the rest, their reasons for supporting the Bush administration’s savings-draining policies remain mysterious. It is not as though they were angling for lifetime White House cafeteria privileges, or that having said “yes” to George W. Bush will open any doors for them in the future.

But their failings do pose a dilemma for Democratic deficit-hawk economists trying to determine ... economic policies ... should Barack Obama become president. Those of us who served in the Clinton administration and worked hard to ... turn deficits into surpluses are keenly aware that, after eight years of the George W. Bush administration, things look worse than when we started back in 1993. All of our work was undone by our successors in their quest to win the class war by making America’s income distribution more unequal.

A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal advice when the Republican links are not just weak but absent. Political advisers to future Democratic administrations may argue that the only way to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it.

They might be right. The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor. But what is the right fiscal policy for a future Democratic administration to follow when there is no guarantee that any Republican successors will ever be “normal” again? That’s a hard question, and I don’t know the answer.

There is, however, one fiscal principle that must be respected. Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster. A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations. Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed.

Comments

[Winslow R.]

BD wrote: " The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor."

Still can't admit he helped create perhaps the biggest disaster since the Great Depression.

BD wrote"Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed. "

Brad's desire to keep deficits at zero made no sense as tsy secs, which people desire to save, would not exist.

It is good for him to change his mind. Not sure I like the way he did it. I'd rather he fess up.

[Fred]

>Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster.

Didn't cause a disaster in Japan. Anyway, there is no such thing as a deficit that cannot later be reduced by tax increases, spending cuts, inflation or repudiation. So there is no such thing as an explosive upward trend that can't be later reversed into an equally rapid downward trend, should that be necessary.

Otherwise, the argument right on the mark. The Democrats should absolutely go for broke with deficits, especially tax cuts on the poor and middle class, as in $2 trillion deficits. Deficits big enought that the Fed is forced to respond with higher interest rates, which will pull down housing and the stock market, thereby finally setting the stage for an intelligent discussion of economic policy in this country. Rising asset prices is NOT the recipe for long-term prosperity, and the faster the people of this country accept that truth, the better off we are.

[ndd]

I happen to think there is an intermediate approach, that I have pitched once before. Here it is again, humbly offered for your consideration:

I propose that Democrats in Congress and the next Democratic president adopt a "1 for 1" approach, namely:

for every dollar saved on deficit reduction, one new dollar must be allocated to a needed social program.
Similarly,
for every new dollar allocated to a social program, one dollar must be saved on deficit reduction.

Not only is this an effective compromise, it sends the following message to Republicans who would borrow and squander: We're upping the ante: for every $1 you squander on giveaways to the wealthy, we're going to take $2 back -- $1 to erase your deficit, and an additional $1 taken from programs favoring you (like federally funded disaster insurance on megamillion dollar seashore estates) and redirected to programs helping the lower middle class, working blue collar class, and the poor.

By hammering home two points:

(1) the more you "borrow and squander" now, the more social spending we'll force you to fund in the future; and
(2) we are never, ever going to sacrifice winning social programs like Social Security

not only do we escape the dilemma they have designed for us, but we lock them even moreso in that selfsame dilemma.

[paine]

this is neo glib at its nadir
" If an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses "

brad what if all productive investments seem to get funded??
and the bulk of the household dis saving
is thru the global usury transfer system ????

"...(government ought) not make it worse by running deficits that drain the pool of private savings available to fund investment.."

if the system isn't running at capacity .....
and it never has since 1945

"Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment"

oh ... so what level of slack does this emergency alarm
phase change require doc delongeurs ??

"'various American presidents’ economic advisers have been advocates of aiming for budget surpluses
except in times of slack demand ..."
oh now slack matters...
hmmm to reconcil these dashed off lines...
guess its expected super slack that matters though
proof :
"....and threatening depression"
that" and "

--- btw deployed
by the likes of brad
self described as dc's former
top prep school math mind
is a precision logical instument
meaning union ie both not and or
not a flabby vulgate inclusive

"Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster"

the only revenge on these neo glibs
is the fear they might live to see
their beloved and mighty metropole itself
morphed by their corporate friends
in an act of unchecked depravity
into a banana republic

alas its a fantasy

uncle hegemonic will never fall save as the central satan of a giant fall of all

but i stray off...

notice te meme here was save to get the higher cap to output ratio

but in order to be able to save tomorrow
destroy savings today

leson
never trust any one who talks of savings
national ....and or ...household
as if the more they rise
the more productive capacity gets built

pretending in this swiften mode to toy
with hyper deficits to cow the party of wealth creation

[Bruce Wilder]

The right answer to Bush's doubling of the national debt is a one-time wealth tax large enough to halve it in a single year. Ricardian equivalence, like it meant something.

Don't hold your breath, though, waiting for such a fine idea to gain common currency.

[paine]

may i rob your fine phrase
for an epitome
of your halving uncle's debt
one time wealth levy

Ricardian equivalence..
now it means something.

[paine]

man
and to think

just when the pricks started really hope-in '
the death tax was ..dead

bam...

"attention plutocrats
mr wealth tax has just entered the building "

[Richard H. Serlin]

It's very important to point out here that just because Republicans more than un-did all of the good of Clinton in turning their record deficits into record surpluses, in just 8 years, doesn't mean that Clinton didn't do a very good thing, with lasting benefits.

He gave a stunning demonstration of how much better Democrats were in this important regard, that was glaringly obvious to almost all voters. If Obama again turns record Republican deficits into record surpluses and a booming economy, just like Clinton did, will it all have been for nothing if a successive Republican administration just turns them right back again into record deficits? No way.

The first time that happened it severely discredited Republican brain dead economics. If it happened yet again, it would rightly devastate the credibility of Republican alchemy economics with the voting public. This learning would be very valuable to protect us in the future against the massive economic inefficiency and costs of their ideology.

However, the biggest and most important thing Democrats can do is to pass universal health care. This would be like when the Democrats pushed through, over the Republicans, old age Social Security and Medicaid. The programs were enormously popular once they were enacted and people got a chance to see the truth of how good they were, rather than the Republican lies. They greatly improved our quality of life and now can (probably) never be taken away.

The same would be true of universal health care. Once it was enacted people would see just how much better, and less expensive it was, due to vast free market imperfections in this area, such as externalities, asymmetric information, great economies of scale and monopoly power, inability to price discriminate well (an extremely important market inefficiency especially for idea products that doesn't get enough attention), and more.

The political capital Democrats would get from bringing this to the American people, greatly increasing their security, wealth, and quality of life would be vast. It would greatly increase their ability to do good in any area. Global Warming may be the most important issue, but the best way to fight it is to pass universal health care. That would give Democrats the political capital necessary to pass far more ambitious projects to combat it, maybe even a Manhattan Project, or Moon race, to replace fossil fuels with alternative energy and nuclear.

There's nothing more important for Democrats than passing universal health care, and it's very doable...Stay tuned for my next post.

[paine]

folks
bruce be wild has given us mortals
a keen lesson in popular gubmint
our federal gub
the one that serves the majority
can rewrite in a single action
the balance sheets of every household in america
no matter how long abuilding and a sinking
and it can do so
any time the sovereign will of the people so directs

all this chatter about trust funds and citizen held
public debt
mere string
if he follows a few founding father niceties
uncle and his swift sword
can reweave the social web works
of who owes who what
any way we want him to

[paine]

serlin plows in like an ice braker steered by a lunatic

the clinton prosperity was largely the result of deficit reduction ?????

btw mr s
are u talking single payer here ???

are u planning on price controls ??

or some hmo mandate
to lash us all to ixions wheel
some flavor of universal premium paying purgatory
where prices and fees
rise right on up and out of sight
like low happy hour spirits
in a martini bar

[paine]

fred why level asset values
with a high real deal rate of interest

a ground rent tax and a wealth tax
will do just fine
and we thru uncle would capture most of the squeezins
not the interest feeding wall street mcducks

[paine]

"Rising asset prices is NOT the recipe for long-term prosperity, and the faster the people of this country accept that truth, the better off we are"

okay so we got differences on how to render the pig
but we agree on th goal...

rising wages and falling stocks ..i love it fred i love it

[paine]

'"it is good for him (brad)
to change his mind. Not sure I like the way he did it.
I'd rather he fess up "

nice win nice

[mrrunangun]

The Democratic constituencies have been starving for 40 years now, the Clinton administration having accomplished next to nothing on their behalf, and have very high expectations of an Obama administration. The current administration's incompetence in the economic sphere has caused a near-panic in the financial world, rising currency inflation, and deflating asset values and so the Fed and Treasury are bargaining with the devil in hope of averting a lengthy business depression, happy talk from the Wall Street Journal notwithstanding.
Many Democrats argue that an Obama administration ought to run deficits as big or bigger than those of the Bush administration in order to satisfy the hunger of Democratic constituencies. While entirely understandable and largely laudable as a political program, as an economic program it may aggravate an already unpromising business and economic environment. The health plan alone would require providing a ten percent increase in service volume in the health care sector over what is currently available. There is very little slack in that system as far as I can tell. Where is the added ten percent capacity in hospitals, clinics, and trained personnel to come from? If we are to do it with small additions to current personnel, why would the current personnel work harder if we propose to tax away 70% of their additional earnings from such effort? We are already seeing an increasing rate of price rise with the current deficit, isn't it reasonable to suppose that greater deficits will result in higher interest rates or still higher inflation rates or both? Don't econcomists recognize and account for tradeoffs?

[anne]

"A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations. Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed."

Bye, bye, universal health care insurance.

[Bruce Wilder]

Richard H. Serlin: "The first time that happened it severely discredited Republican brain dead economics. If it happened yet again . . . "

The first time it happened, Nixon was President. The second time, Reagan. We're on Round 3, and if you are waiting for the American electorate to learn the lessons of history . . .

[anne]

"The Democratic constituencies have been starving for 40 years now, the Clinton administration having accomplished next to nothing on their behalf...."

Lie on, lie on, lie on.

What is absolutely essential is to show how rotten a President Bill Clinton was, because we know that a Presidency that generated 250,000 jobs a month for 96 months, that added to workers well-being from salaries to benefits, not only lessened the budget deficit but produced an important surplus, that generated important gains in productivity, allowed for a strong dollar, resolved several currency crises in Latin America, produced low interest rates and fine investment returns, dramatically eased increases in health care costs, we know what a rotten Presidency this was.

[anne]

http://krugman.blogs.nytimes.com/2008/06/18/baselines-shmaselines/

June 18, 2008

Baselines, Shmaselines
By Paul Krugman

Wise words from the Tax Policy Center: *

"There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

"TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down."

The key point, again: because of all those middle-class tax cuts in the Obama plan, he collects only 0.4% of GDP more in taxes than McCain. The tax collection comes from different people: lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?

* http://taxvox.taxpolicycenter.org/blog/_archives/2008/6/17/3749641.html

"Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed."

Bye, bye, universal health care insurance.

[anne]

"There's nothing more important for Democrats than passing universal health care, and it's very doable..."

http://krugman.blogs.nytimes.com/2007/12/24/obama-goes-harry-and-louise/

December 24, 2007

Obama Goes Harry and Louise
By Paul Krugman

A friend sends me this:

"Have you seen or heard about the radio ad that Obama is running in Iowa about health care?

"It has a man and a woman talking, with the man leading off saying that health care mandates 'force those who cannot afford health care insurance to buy it, punishing those who don't fall in line.' "

This is what I've been complaining about. I was willing to cut Obama slack on the lack of mandates in his plan, even though the economics says they're necessary; I figured that in practice, if elected, he'd end up doing the right thing. *

I started ramping up the criticism when he started attacking his opponents from the right, making the lack of mandates a principle rather than a compromise — because that was poisoning the well, making it much harder for any future Democratic president to implement a plan that will work.

And whaddya know, now he's running an ad that bears a striking resemblance to the infamous "Harry and Louise" ads, run by the insurance industry, that helped block health care reform in 1993.

Call it the audacity of cynicism.

* Let me repeat the argument: "The point of a mandate isn't to dictate how people should live their lives — it's to prevent some people from gaming the system. Under the Obama plan, healthy people could choose not to buy insurance, then sign up for it if they developed health problems later. This would lead to higher premiums for everyone else. It would reward the irresponsible, while punishing those who did the right thing and bought insurance while they were healthy." **

** http://www.nytimes.com/2007/12/07/opinion/07krugman.html

[Patricia Shannon]

Brad De Long sounds like a man I met who would argue for ridiculous ideas, because he believed that if he could persuade someone he was right, it would prove his superiority.

[JV]

Yep, Bush's fault. Case closed. End of discussion.

Democrats will restore everything and more. Case closed. End of discussion.

Clinton God, Bush Devil. Case closed. End of discussion.

(I just can't wait until Obama is in. The good times will roll. Case closed. End of discussion.)

Spengler today was much more interesting than this partisan drivel.

http://www.atimes.com/atimes/Global_Economy/JG01Dj07.html

[Patricia Shannon]

JV, too bad the Democrats can't be fair and honest like the Republicans. (sarcasm alert)

[Dennis]

Boomers start turning 65 in 2011. Sometime after that we will actually find out what an "explosive upward spending trend" really is. Entitlements are tens of trillions of dollars underfunded. So we will see trillion dollar deficits. But it is not going to be pleasant for anyone. Sending more money to Washington is no solution to our problems. The money just disappears there. Government has become totally incompetent at solving problems important to the public. We need to send people to congress that stop the spending. We need to concentrate at solving problems in our own states and counties. More community, less bureaucracy, that may give us a shot at success.

[Debt]

"Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster."

A drag on long term growth, and the very real possibility of imminent disaster. The two parties seem to hate each other so much that they are willing to harm the country just to spite the other party. It might be a good idea to keep the passport up to date...

[ken melvin]

Seems the only the thing to do is to drive a silver stake thru Bill's heart

[Fred]

Paine: a wealth tax is totally and completely politically unrealistic. But there are easy ways to prevent Wall Street from profiting from a rise in interest rates.

1. Go on a demogogic rampage blaming Wall Street speculators, hedge-fund operators and foreign devils for high food and gas prices, unemployment and every other economic ailment. The press has already set the stage for this. Witness the recent activity on this blog about oil speculators.

2. Abandon the present system of t-bills and bonds in favor of 2 types of accounts. An inflation-protected account paying 2% real, but limited to $1 million or $5 million or whatever per US citizen. An inflation-protected account paying 0% real for everyone else. The retirees and Austrians who are getting frantic about low rates on CD's and money-market funds will finally get some relief, while Central banks which really need to keep dollar accounts can do so, neither gaining nor losing in real terms.

3. Liberalize bankruptcy law so as to unburden the household sector of excess debt.

4. More demagoguery about Arab oil sheiks buying up all the farmland, which results in a special 5% property tax on real-estate owned by corporations, non-US citzens, or by US citizens with more than $10 million in real-estate.

The result of the above measures is to push the rich and the foreigners out of treasuries and real-estate, and into either private sector debt or stocks, thereby creating a glut of capital available to the corporate sector for investing. It probably won't be possible to push the rates on private debt below the 2% real offered to US citizens (up to that $1 million or $5 million limit), but it should be possible to push rates near this 2% real floor. 2% real is not high enough to severely reduce investment, while it is high enough to impose some costs on speculators and thereby prevent asset bubbles. The cost of slightly reduced investment is probably outweighed by the benefit of reduced asset bubbles.

[mrrunangun]

Anne Dear,

My criticism of Clinton was not that he accomplished nothing, only that he accomplished nothing on behalf of Democratic constituencies. He did a lot for other constituencies, just not for the ones that were counting on him to improve the lot of the working people and very poor. He supported the left on the cultural issues, but not on bread and butter. He was great for banking, college professors, big business, and other educated mostly independent or Republican constituencies. No wonder he remains the darling of the well-to-do left-wing intelligentsia. He did nothing to discourage sending manufacturing jobs to China. He limited welfare for the very poor. He enlarged educational loan programs so that colleges could raise tuitions, but that did not make college more affordable for the children of working people, it added to their after-grad debt. It raised the salaries of the tenured. Clinton governed as a main street Republican.
Bushes were old line New England country club Republicans and did for that narrow group all they could, the rest of the country be damned. Killed the inheritance tax, an important benefit to almost no one but their own social group.

[Lord]

I do think they should not allow the debt to shrink as a percentage of gdp. Deficits that maintain this are of no consequence, and that would not provide a bonus to be squandered by a future administration.

[Winslow R.]

Serlin wrote: "the good of Clinton in turning their record deficits into record surpluses, in just 8 years, doesn't mean that Clinton didn't do a very good thing, with lasting benefits."

Like getting Bush II elected twice? Like tax cuts for the wealthy? Like Iraq war? Like Iran invasion?

Serlin, I second Paine, your framework is in need of a major overhaul.

Gore didn't lose just because he was 'wooden', Delong was the architect to sink that boat.

Ask yourself what lever Greenspan would tweak to control short-term interest rates once Brad made all the Tsy Secs disappear?

Ask yourself how first quarter 2001 downturn impacted Nov 2000 election?

http://en.wikipedia.org/wiki/Early_2000s_recession

Please rethink your economics from an accounting perspective.

[Winslow R.]

Lord wrote: "I do think they should not allow the debt to shrink as a percentage of gdp."

Brad wrote: "Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed."

My guess is Brad is still standing on the otherside of that line.

[Richard H. Serlin]

Winslow R.,

I don't think Clinton turning record deficits into record surpluses helped W. to get elected and do all of the harm he's done. I think it lessened the odds of W. getting elected, a lot. He squeaked by with less than the barest of margins, undemocratic help, and the aid of Ralph Nader in spite of that.

[JV]

Even when Obama is elected and the Democrats bring real change we can believe in, these things will still be true -- George got a lot of it right . . . .

Announcer: Good Evening ladies and gentlemen, it’s time for the secret news. Ssshhh. Here’s the secret news:

All people are afraid.
No one knows what they’re doing.
Everything is getting worse.
Some people deserve to die.
Your money is worthless.
No one is properly dressed.
At least one of your children will disappoint you.
The system is rigged.
Your house will never be completely clean.
All teachers are incompetent.
There are people who really dislike you.
Nothing is as good as it seems.
Things don’t last.
No one is paying attention.
The country is dying.
God doesn’t care.
Ssshhh.

[Winslow R.]

"I think it lessened the odds of W. getting elected, a lot."

Only because you haven't answered the questions.

Ask yourself what lever Greenspan would tweak to control short-term interest rates once Brad made all the Tsy Secs disappear?

You don't seem to understand how the transmission mechanism of fiscal and monetary policy works. Brad doesn't either.

[Bruce Wilder]

More Brad DeLong Today:

Reagan's conservative achievements were remarkably limited:

• A tilting of the tax code to redistribute income to the rich

And were more than offset, IMHO at least, by his major liberal achievements:
. . .
• To cement the government's entitlement-spending role as provider of a mind-bobbling amount of primarily middle-class social insurance . . .

And then there were Reagan's "achievements" that were simply stupidities:

. . .
• Wasting a fortune on a military buildup just as the Red Army was atrophying
• Slowing American economic growth via the drag put on the economy by his huge budget deficits.
. . .

The true history of the U.S. since 1980, IMHO at least, is not Sean Wilentz's "Age of Reagan" but is instead composed of a half dozen or so deeper and broader tides, like:

1.) The end of the Cold War
2.) Other winner-take-all factors that have, in combination with education, pushed American income polarization back to Gilded Age levels.
3.) The failure of American taxpayers to support their state and local governments in expanding funding for public education--and the impact of reduced public education effort in sharpening the distinction between rich and poor.
4.) The computer revolution in productivity growth.
5.) The rise of China (and soon, we hope, India) as industrial powers.
6.) The extraordinary social liberalization of America

The above passages are remarkably revealing of the filters Brad DeLong applies to arrive at his neo-liberal point of view. Especially obnoxious to me is the combination of his piety about education and his insistence that Reagan's contribution to the creation of the New Gilded Age was limited to tweaking the tax code a bit.

Redistributing income upward has been the sole goal of conservative politics for 35 years; that it was Reagan's sole achievement is a point of pride, as well as design.

But, Brad DeLong cannot see that, even though it has been the one, the only theme, and the object of policy-making in all areas of governmental interest.

Brad DeLong can barely recall a little tilt of the ol' tax code, though he'll concede some author-less "winner-take-all factors" might be implicated. No connection is made between the size of the Deficit and the coincident Volcker Squeeze. No mention is made of the investment tax credit that created a tax-subsidized boom in building commercial structures, which would be later followed by a boom in capital gains.

No mention, of course, is made of the all-out assault on labor unions by the President, who fired the Air Traffic Controllers. No mention is made of the S&L regulatory "reform" that destroyed a whole sector of banking, and the attendant transfers of wealth involved in the later "rescue". No mention is made of a decade without an increase in the minimum wage. No mention is made of the President, who made the Welfare Queen famous. And speaking of the Welfare Queen, the President, who made lies and fables in Presidential speechifying routine, expected and acceptable.

When one reads about the lines in the sand Brad DeLong would have Democrats draw, it is worthwhile to remember that, in his social conscience, he's a near-sighted, half-blind son-of-a-bitch trust-fund historian with a bad memory and a so-called Democrat, who can't quite grasp what Republicans are all about. Otherwise, a lovely person, I'm sure.

[a]

"surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration "

Since you shouldn't count the Social Security trust fund, there never was a surplus during the Clinton administration.

By the way, let's take BDL at face value: surpluses (real surpluses) in good times, deficits in bad. Look at the real world: we've never had surpluses in good times for the past forty years. So shouldn't that change what economists recommend to do in bad times? Sure, I can understand the policy, "given surpluses in good times, have deficits in bad." But what is the policy, "given we don't have surpluses in good times"? Is it really still run deficits in bad??

[hari]

GOP grand fiscal strategy - *Starve The Beast*.

Dems - (ditto) - (All Chemie of Anarchy).

Note: At some point you've to take a serious pov and decide which way you want to tilt the boat - before it sinks.

[eh?]

a

The US has had a pretty crappy economy the last 40 years compared to all the other countries in the world so, yeah, the deficit's been a big problem.

All Keynesian economics requires is that the deficit/surplus down/up in good times, and the opposite in bad. There's nothing that says it has to fluctuate around zero to work. You are confusing growth, the worry in the article, with cycles. It's good to keep those little details straight.

[a]

"There's nothing that says it has to fluctuate around zero to work. You are confusing growth, the worry in the article, with cycles."

Sorry, I don't believe I'm confusing anything.

""There's nothing that says it has to fluctuate around zero to work."

Well that we shall see...

[anne]

Mrrunangun:

"My criticism of Clinton was not that he accomplished nothing, only that he accomplished nothing on behalf of Democratic constituencies. He did a lot for other constituencies, just not for the ones that were counting on him to improve the lot of the working people and very poor. He supported the left on the cultural issues, but not on bread and butter...."

"My criticism of Clinton was not that he accomplished nothing, only that he accomplished nothing [too little] on behalf of Democratic constituencies. He did a lot for other constituencies, just not [enough] for the ones that were counting on him to improve the lot of the working people and very poor. He supported the left on the cultural issues, but not [well enough] on bread and butter...."

Fairer; for the effort was always there, and much was done.

[Winslow R.]

a wrote: "Since you shouldn't count the Social Security trust fund, there never was a surplus during the Clinton administration."

More misunderstanding of the current monetary mechanism.

A social security surplus removes tsy secs from the private sector just as a general budget surplus. In either case you destroy the current monetary mechanism.

[Winslow R.]

I wish mainstream economists would start to recognize optimal wage growth is a requirement for a healthy economy, globally and nationally.

Brad's solution of higher deficits just masks the lack of national wage growth. I say go ahead and mask until optimal wage growth is made a part of economic policy. I don't think deficits get us there optimally as they have this bad habit of being used for things like war.

[piglet]

The first two paragraphs directly contradict each other. Does he really mean to say that in times of underinvestment, government should cut back its infrastructure investments?

"But the rule is that governments should run surpluses and not deficits"

This is a joke, right? Or is he talking about Canada now?

[piglet]

"Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed."

Join the Maastricht treaty.

[James Kroeger]

This idea has also given rise to a very strong presumption that if an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment. This is why most economists are deficit hawks.Paine is so right. Why is it that 'most economists' like DeLong have been so easily persuaded by Republican economists to believe that the old crowding-out effect could ever be a legitimate concern in any economy that isn't running at capacity? As Paine points out, that hasn't happened since 1945.

It is true that an economy is under-investing as long as there is any slack (unemployment) in the economy. It is flat out wrong, however, to assume that an economy that is under-investing must also necessarily be an economy that is under-saving. There is not a one-to-one correspondence between the economic variables Savings and Investment.

In order to believe that inadequate investment levels also necessarily implies inadequate savings levels, one must also believe that:Firms always have economic efficiency projects they would invest in if only there were enough loanable funds available at an affordable price.All money borrowed by firms is used for economic investments.All economic investments by firms are financed by borrowed money and therefore by savings.All saved money is borrowed by firms.All money borrowed by firms comes from saved money.

Unfortunately, nearly all of these assumptions are flawed. Empirical evidence reveals that:

1) Between 1988 & 1997, an average of nearly 85% of the money that corporations spent on investment came from retained earnings or other internally generated funds. This empirical fact would seem to strongly refute the assumption that firms are desperately dependent upon borrowed money (and therefore upon savings) when they want to make investments. What is the ultimate source of the internally generated funds? It would be the expenditures of consumers and firms and government, not savings.

2) Between 1998 & 2001 (years that included cyclically high levels of business investment) the combined borrowing of non-financial corporations and all non-corporate businesses varied between 20-34% of total borrowing nationwide. During the same period, the household sector of the economy accounted for 20-30% of total borrowing. These statistics tell us that only a fraction of total savings is directed, ultimately, to the noble purpose of improving economic efficiency. Much of the money that is saved is ultimately spent on consumption (e.g., credit card and installment purchases). If firms find that interest rates are too high, is it necessarily because there is a shortage of savings, or is it perhaps because lending institutions are quite happy to starve the supply-side of the economy if they can get higher yields by lending to people for their consumption desires?

3) Savings are not the only source of loanable funds. The ultimate determinant of the supply of loanable funds in the U.S. economy is the Federal Open Market Committee of the Federal Reserve System. Whenever The Fed buys securities in the open market, it pays for them with money that it creates out of thin air with a keystroke. It does not draw the money from some reserve account that is limited in size. It is “new money” that did not exist prior to the keystroke that created it. With any of its purchases of securities, The Fed provides loanable funds to banks that were not saved by any saver.

There is no limit to the amount of money The Fed can inject into the loanable funds market. If savers were to suddenly pull most of their money out of banks and put it under their mattresses instead (equivalent to a dramatic reduction in savings), The Fed would still be able to easily maintain the supply of loanable funds or even increase it by simply buying every sort of debt instrument offered in the credit markets. Even if The Fed bought up all of the nation’s debt---something that would never happen---and there was still a shortage of loanable funds, it could maintain/increase the money supply by buying buildings or land or anything else it fancies.

Given the above facts, it makes no sense to assert that savings levels are inadequate at any time when the economy is not operating at its capacity, just because some 'measurements' of savings rates are at historical lows. It must necessarily be that those measurements are flawed in their construction. The only time that additional savings need to be encouraged is when the economy is booming at its cyclical peak, there is zero unemployment, and hyperinflation is threatening. That is when additional savings are needed in order to reduce aggregate spending. Again, that is the only time when it makes sense to entertain concerns about the so-called Crowding Out Effect.

Please, Brad DeLong, start talking up some of these important facts instead of just accepting traditional Republican economic mythology...

[dilbert dogbert]

Any of you read Bill Gross' comments over at Pimco?

[piglet]

"But the rule is that governments should run surpluses and not deficits"

Let me expand a bit on that. The "rule" that mainstream economic intelligentsia has lived by during the past decades is simple, fair and balanced: "Deficits by left wing governments bad, deficits by right wing governments good" (or at least not that bad, not really a problem, nothing to be concerned about, etc.)

[Patricia Shannon]

Sigh. Bush didn't get elected in 2000. It's not sure that he got elected in 2004. Repeating a lie can cause people to believe it (according to studies), but it doesn't make it true.

[Adam]

For better or worse, no President will have to do a freakin' thing to increase deficits to scary levels in the next two decades - our current obligations under Medicare and Social Security will take care of that without any policy changes.

[Lord]

Actually, while entitlements will put some pressure on the budget as their surplus declines, it will still be positive for many years yet. They are something to look forward to though.

[paine]

"What is absolutely essential is to show how rotten a President Bill Clinton was"

yes