Economist's View

Paul Krugman: Fight the Future

Why are we so worried about highly uncertain budget projections extending decades into the future when we have very real problems such as high levels of unemployment that need our immediate attention?

Fight the Future, by Paul Krugman, Commentary, NY Times: Last week the International Monetary Fund, whose normal role is that of stern disciplinarian to spendthrift governments,... argued that the sequester and other forms of fiscal contraction will cut this year’s U.S. growth rate by almost half, undermining what might otherwise have been a fairly vigorous recovery. And these spending cuts are both unwise and unnecessary.

Unfortunately, the fund apparently couldn’t bring itself to break completely with the austerity talk that is regarded as a badge of seriousness in the policy world. Even while urging us to run bigger deficits for the time being, Christine Lagarde, the fund’s head, called on us to “hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.”

So here’s my question: Why, exactly, do we need to hurry up? Is it urgent that we agree now on how we’ll deal with fiscal issues of the 2020s, the 2030s and beyond?

No, it isn’t. And in practice, focusing on “long-run fiscal sustainability” — which usually ends up being mainly about “entitlement reform,” a k a cuts to Social Security and other programs — isn’t a way of being responsible. On the contrary, it’s an excuse, a way to avoid dealing with the severe economic problems we face right now.

What’s the problem with focusing on the long run? Part of the answer ... is that the distant future is highly uncertain (surprise!)... In particular, projections of huge future deficits are to a large extent based on the assumption that health care costs will continue to rise substantially faster than national income — yet the growth in health costs has slowed dramatically in the last few years, and the long-run picture is already looking much less dire...

When will we be ready for a long-run fiscal deal? My answer is, once voters have spoken decisively in favor of one or the other of the rival visions driving our current political polarization. Maybe President Hillary Clinton, fresh off her upset victory in the 2018 midterms, will be able to broker a long-run budget compromise with chastened Republicans; or maybe demoralized Democrats will sign on to President Paul Ryan’s plan to privatize Medicare. Either way, the time for big decisions about the long run is not yet.

And because that time is not yet, influential people need to stop using the future as an excuse for inaction. The clear and present danger is mass unemployment, and we should deal with it, now.

'Is This (Still) The Age of the Superstar?'

Paul Krugman comments on the Alan Krueger speech (see the post below this one):

Is This (Still) The Age of the Superstar?: This will be a quick piece... Alan Krueger gave a fun talk at the Rock and Roll Hall of Fame, in which he used evidence of growing inequality among musical artists as a jumping off point for a discussion of broader inequality issues. As he notes, there is a widely known theory from Rosen actually called the superstar theory, which could explain the takeoff of the 1 percent, in rock and in life.

But I was struck by the fact that his chart of growing inequality in the music business cut off in 2003. A lot has happened in the decade since: basically, the music business has been hugely disrupted by the Internet. I’d be very curious to know whether that hasn’t changed the calculus...

And we also seem to be seeing a general shift in the sources of rising inequality, from inequality in compensation to good old-fashioned capital versus labor.

So I wonder if even Alan Krueger is now behind the curve here — and in any case I’d love to see how the trend for the music business looks since 2003.

A quick comment on this "quick piece". Inequality can arise for many reasons, e.g. differences in economic power that distort income shares, capture of the political system by the wealthy, skill-biased technical change, and so on, and the debate is often cast as one versus the other. But the causes are not mutually exclusive and may, in some cases, reinforce each other (e.g. economic inequality from skill-biased technical change leading to political inequality and a political bias against unions, or, changes in production techniques that make it harder to disrupt production with a strike can undermine union power). Endless debate on the one true cause of rising inequality is fruitless when there is, as I believe, evidence of multiple causes -- both sides can point to evidence favoring their position leading to a standoff that can forestall needed policy changes. Better to acknowledge that both sides have a point, and move on to the push for policies that are robust against the underlying cause (or separate policies to address each type of problem).

Alan Krueger: Rock and Roll, Economics, and Rebuilding the Middle Class

Transcript

'They Can’t Help Themselves'

Paul Krugman:

Insurance Tyranny: Many of us wish that Obamacare were a simpler system... Political reality, unfortunately, ensured that many people will receive coverage from private insurers, selling policies — often with subsidies — on the "exchanges". And naturally enough, the Obama administration is teaming up with the insurers... to help inform Americans of the benefits to which they will be legally entitled, starting Jan. 1.

And in the eyes of Republicans, Bloomberg reports, this makes Obama a “bully” — dragooning those private companies into helping sell a public program that will increase their profits. Why, it’s tyranny, I tell you!

Yes, it’s ridiculous. But they can’t help themselves. I suspect that the idea of helping lower-income Americans in any way would drive the GOP bonkers; but the idea that this help might come from Obama (implementing a program originally designed by Republicans, but never mind), and that Obama’s plan might actually work, drives them crazy.

Hacker: Reinvigorate the Center-Left through Predistribution

Jacob Hacker:

How to reinvigorate the centre-left? Predistributionm by Jacob Hacker, guardian.co.uk: ... Center-left progressives seem to have lost their ability to provide a clear alternative to either current conservative nostrums, or the "third way" many of them staked out before the fall.

The only way out is a new governing approach – one that I have infelicitously called "predistribution", but which can be more simply summed up as "making markets work again for the middle class". Third way jujitsu rested on two maxims: let markets be markets, and use redistribution to clean up afterward. For the left, this has proved fatal... [explains why, describes predistribution]...

Predistribution may not be a catchy slogan, but the left does not need more slogans. It needs to take a cold, hard look at the concessions made to the rhetorical and political triumphs of the right. Yes, inequality is a global trend. Yes, globalization places real limits on economic strategies. Yes, labor is weaker, and must be retooled and supplemented. And yes, the state cannot do everything. But there is a vital place for active governance in the 21st century economy, and not just in softening the sharp edges of capitalism. Now more than ever, governments need to step in with boldness and optimism to make markets work for the middle class.

I don't quite agree with the description of the "third way" -- let markets work and clean up afterwards. For me, markets only work if they are reasonable approximations of the classic textbook case of "pure competition." The first step for the third way then is to correct market failures that cause significant departures from this ideal (including how income is distributed). I wish the article had done more to emphasize this aspect of the problem since it's an essential element of his call for "making markets work again for the middle class" (it does so indirectly, e.g. the call for worker organizations recognizes unequal market/negotiating power over wages, and the call for public goods and a reduction in carbon emissions, but it does not recognize this as part of the "'third way' many [center-left progressives] staked out before the fall" and I'd like to see the general market failure problem receive more emphasis).

The second thing to realize is that market outcomes depend upon the initial distribution of income and wealth. If initial allocations are highly unequal, as they are presently, the market outcome will reflect that.

How to correct this? One way is to equalize opportunity, and I fully agree with all his recommendations that push in this direction (this seems to be the essence of predistribution -- but you'll need to read the article for the full description of what predistribution means). But some correction of past inequities through post-distribution may be necessary to sufficiently equalize opportunity. Otherwise, those inequities will be perpetuated even with reasonably competitive markets and reasonably equal opportunity.

For a long time I believed that equal opportunity, sufficiently competitive markets, and equitable initial allocations of wealth would be enough. Everyone has a fair chance, so there was no reason to worry about inequality of outcomes. But it may be that even under those conditions rising inequality will continue. For example, if technology continues to wipe out the middle class even after we've provided education, health, and so on to everyone, then some degree post-distribution may be necessary to prevent an ever widening income gap. That's a position -- a fair start may still produce inequities that will subsequently be perpetuated if we don't intervene -- I've come to reluctantly.

I'm fully on board with predistribution, but the article seems to deemphasize post-distribution, in part because the wealthy have the political power to resist it:

Redistribution itself is never popular. Citizens want a job and opportunities for upward mobility more than a public cheque. Meanwhile, the super-wealthy loudly resent the increased tax bite they face – and have enormous political influence to back up their complaints.

But he does add:

Taxation and redistribution are cornerstones of progressive governance

Again, let's work on instituting the ideas behind the label "predistribution." But I think it would be a big mistake to, at the same time,  deemphasize the need for post-distribution. That day may come, but we aren't there yet.

Paul Krugman: The Big Shrug

Why don't politicians care about the unemployed?:

The Big Shrug, by Paul Krugman, Commentary, NY Times: ...For more than three years some of us have fought the policy elite’s damaging obsession with budget deficits ... that led governments to cut investment when they should have been raising it, to destroy jobs when job creation should have been their priority. That fight seems largely won —... I don’t think I’ve ever seen anything quite like the sudden intellectual collapse of austerity economics as a policy doctrine.

But while insiders no longer seem determined to worry about the wrong things, that’s not enough; they also need to start worrying about the right things — namely, the plight of the jobless and the immense continuing waste from a depressed economy. And that’s not happening. Instead, policy makers both here and in Europe seem gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done. Call it the big shrug.

Even the people I consider the good guys ... aren’t showing much sense of urgency these days. For example,... the Federal Reserve’s ... talk of “tapering,” of letting up on its efforts, even though inflation is below target, the employment situation is still terrible and the pace of improvement is glacial at best. ...

Why isn’t reducing unemployment a major policy priority? One answer may be that inertia is a powerful force... As long as we’re adding jobs, not losing them, and unemployment is basically stable or falling ... policy makers don’t feel any urgent need to act.

Another answer is that the unemployed don’t have much of a political voice. ... A third answer is that while we aren’t hearing so much these days from the self-styled deficit hawks, the monetary hawks ... have, if anything, gotten even more vociferous. It doesn’t seem to matter that the monetary hawks, like the fiscal hawks, have an impressive record of being wrong about everything (where’s that runaway inflation they promised?). ...

The tragedy is that it’s all unnecessary. Yes, you hear talk about a “new normal”..., but all the reasons given for this ... fall apart when subjected to careful scrutiny. If Washington would reverse its destructive budget cuts, if the Fed would show the “Rooseveltian resolve” that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment.

So here’s my message to policy makers: Where we are is not O.K. Stop shrugging, and do your jobs.

'The Quiet Closing of Washington'

Haven't checked in with Robert Reich for awhile:

The Quiet Closing of Washington, by Robert Reich: Conservative Republicans in our nation’s capital have managed to accomplish something they only dreamed of when Tea Partiers streamed into Congress at the start of 2011: They’ve basically shut Congress down. Their refusal to compromise is working just as they hoped: No jobs agenda. No budget. No grand bargain on the deficit. No background checks on guns. Nothing on climate change. No tax reform. No hike in the minimum wage. Nothing so far on immigration reform. 

It’s as if an entire branch of the federal  government — the branch that’s supposed to deal directly with the nation’s problems, not just execute the law or interpret the law but make the law — has gone out of business...

But the nation’s work doesn’t stop even if Washington does. By default, more and more of it is shifting to the states, which are far less gridlocked than Washington. Last November’s elections resulted in one-party control of both the legislatures and governor’s offices in all but 13 states — the most single-party dominance in decades. 

This means many blue states are moving further left, while red states are heading rightward. In effect, America is splitting apart without going through all the trouble of a civil war. ... [gives several examples] ...

Federalism is as old as the Republic, but not since the real Civil War have we witnessed such a clear divide between the states on central issues affecting Americans.

Some might say this is a good thing. It allows more of us to live under governments and laws we approve of. And it permits experimentation: Better to learn that a policy doesn’t work at the state level, where it’s affected only a fraction of the population, than after it’s harmed the entire nation. As the jurist Louis Brandies once said, our states are “laboratories of democracy.”

But the trend raises three troubling issues.

First, it leads to a race to bottom. ...

Second, it doesn’t take account of spillovers — positive as well as negative. ..s.

Finally, it can reduce the power of minorities. ...

A great nation requires a great, or at least functional, national government. The Tea Partiers and other government-haters who have caused Washington to all but close because they refuse to compromise are threatening all that we aspire to be together. 

Paul Krugman: The Spite Club

Why are many Republican-dominated states opting out of Obamacare's federally financed expansion of Medicaid?:

The Spite Club, by Paul Krugman, Commentary, NY Times: House Republicans have voted 37 times to repeal ObamaRomneyCare... Nonetheless, almost all of the act will go fully into effect at the beginning of next year.

There is, however, one form of obstruction still available to the G.O.P. Last year’s Supreme Court decision upholding the law’s constitutionality also gave states the right to opt out of one piece of the plan, a federally financed expansion of Medicaid. Sure enough, a number of Republican-dominated states seem set to reject Medicaid expansion, at least at first.

And why would they do this? ... The ... only way to understand the refusal to expand Medicaid is as an act of sheer spite. And the cost of that spite won’t just come in the form of lost dollars; it will also come in the form of gratuitous hardship for some of our most vulnerable citizens. ...

A new study from the RAND Corporation ... examines the consequences if 14 states whose governors have declared their opposition to Medicaid expansion do, in fact, reject the expansion. The result ... would be a huge financial hit: the rejectionist states would lose more than $8 billion a year in federal aid, and would also find themselves on the hook for roughly $1 billion more to cover the losses hospitals incur when treating the uninsured.

Meanwhile, Medicaid rejectionism will deny health coverage to roughly 3.6 million Americans, with essentially all of the victims living near or below the poverty line. And since past experience shows that Medicaid expansion is associated with significant declines in mortality, this would mean a lot of avoidable deaths: about 19,000 a year, the study estimated.

Just think about this... It’s one thing when politicians refuse to spend money helping the poor and vulnerable; that’s just business as usual. But here we have a case in which politicians are, in effect, spending large sums, in the form of rejected aid, not to help the poor but to hurt them.

And ... it doesn’t even make sense as cynical politics. ... What it might do ... is drive home to lower-income voters — many of them nonwhite — just how little the G.O.P. cares about their well-being, and reinforce the already strong Democratic advantage among Latinos, in particular.

Rationally, in other words, Republicans should accept defeat on health care, at least for now, and move on. Instead, however, their spitefulness appears to override all other considerations. And millions of Americans will pay the price.

 

Paul Krugman: From the Mouths of Babes

The "ugly, destructive war against food stamps":

From the Mouths of Babes, by Paul Krugman, Commentary, NY Times: ...I usually read reports about political goings-on with a sort of weary cynicism. Every once in a while, however, politicians do something so wrong, substantively and morally, that cynicism just won’t cut it; it’s time to get really angry instead. So it is with the ugly, destructive war against food stamps. ...

Food stamps have played an especially useful — indeed, almost heroic — role in recent years. In fact, they have done triple duty. First, as millions of workers lost their jobs..., food stamps ... did significantly mitigate their misery. Food stamps were especially helpful to children...

But there’s more. ... We desperately needed (and still need) public policies to promote higher spending on a temporary basis — and the expansion of food stamps ... is just such a policy. Indeed, estimates from ... Moody’s Analytics suggest that each dollar spent on food stamps in a depressed economy raises G.D.P. by about $1.70...

Wait, we’re not done yet. Food stamps greatly reduce food insecurity among low-income children, which, in turn, greatly enhances their chances of ... growing up to be successful, productive adults. So food stamps are ... an investment in the nation’s future...

So what do Republicans want to do with this paragon of programs? First, shrink it; then, effectively kill it.

The shrinking part comes from the latest farm bill released by the House Agriculture Committee... That bill would push about two million people off the program. ...

These cuts are, however, just the beginning... Remember,... Paul Ryan’s budget is still the official G.O.P. position..., and that budget calls for converting food stamps into a block grant program with sharply reduced spending. If this proposal had been in effect when the Great Recession struck,... it ... would have meant vastly more hardship, including a lot of outright hunger, for millions of Americans, and for children in particular.

Look, I understand the supposed rationale: We’re becoming a nation of takers, and doing stuff like feeding poor children and giving them adequate health care are just creating a culture of dependency — and that culture of dependency, not runaway bankers, somehow caused our economic crisis.

But I wonder whether even Republicans really believe that story — or at least are confident enough in their diagnosis to justify policies that more or less literally take food from the mouths of hungry children. As I said, there are times when cynicism just doesn’t cut it; this is a time to get really, really angry.

 

'The Real IRS Scandal'

Linda Beale:

The Real IRS Scandal, ataxingmatter: ... It does not appear to be quite so clear that the IRS actions were either "outrageous" (as so many hopping on the IRS "scandal" bandwagon suggest) or even "inappropriate". ...

Most of the media--which is generally right of center--has foamed at the mouth over the "scandal", puffing it up to bigger and bigger proportions with each day. ... A great deal of that coverage (much of it from the right) involves super emphasis on the word "scandal" and not much emphasis on the underlying facts of the matter.

So kudos to the New York Times for a recent story on the issue that probes the question of politicking much more closely. Confessore & Luo, Groups Targeted by IRS Tested Rules on Politics, New York Times (May 26, 2013). See also Barker & Elliot, 6 things you need to know about dark money groups, Salon.com (May 27, 2013).

Here are the Times writers' descriptions of a few of the groups that applied for C-4 status and "cried foul" about the IRS's selection of them for closer scrutiny for politicking:

• CVFC: "its biggest expenditure [the year it applied for C-4 status] was several thousand dollars in radio ads backing a Republican candidate for Congress"
• Wetumpka Tea Party, Alabama: in the year it applied, it "sponsored training for a get-out-the-vote initiative dedicated to the 'defeat of President Barack Obama' "
• Ohio Liberty Coalition: its head "sent out e-mails to members about Mitt Romney campaign events and organized members to distribute Mr. Romney’s presidential campaign literature"

As noted in the report, "a close examination of these groups and others reveals an array of election activities that tax experts and former I.R.S. officials said would provide a legitimate basis for flagging them for closer review." That is what the IRS is supposed to do, suggesting that much of the scandal mongering that is going on is more about furthering the anti-tax/anti-government rightwing goal of "starving the beast" than it is about ensuring that the law is appropriately enforced. The stakes are high, since the ability of politicking groups to use C-4 status permits high-powered donors and strategists to cloak their campaign activities behind the veneer of social welfare activity.

Which is probably why of the right-wing bloviators are bloviating over this in Congress, calling for jail time for IRS employees, calling for a special prosecutor, insisting that this is a "scandal" along the lines of Watergate that goes to the heart of Obama's presidency. Hogwash, folks, pure and simple. This so-called "scandal" is just another instance of right-wing obstructionism that is willing to sacrifice good government for maintaining or increasing political power.

'The Left-Right Divide in U.S. Politics'

Dean Baker:

Krugman Misrepresents the Left-Right Divide in U.S. Politics: In his contribution to the debate over whether there is a group of open-minded "reformed" conservatives, Paul Krugman misrepresents the central focus of the left-right divide in national politics. He tells readers:

"Start with the proposition that there is a legitimate left-right divide in U.S. politics, built around a real issue: how extensive should be make our social safety net, and (hence) how much do we need to raise in taxes? This is ultimately a values issue, with no right answer."

This is not an accurate characterization of the left-right divide in U.S. politics since there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance. Polls consistently show that the overwhelming majority of people across the political spectrum strongly support keeping these programs at their current level or even expanding them. The main impulse for cutting back these programs comes from elites of both political parties who would like to pay less in taxes....

I think there is a distinction here after all. Republicans who support these programs do so because (often based upon a misunderstanding of how these programs are funded) they believe it is their money. Each month they contribute to Social Security, Medicare, and Unemployment Compensation, the government keeps it safe for them somewhere, and then at some future date they will spend the money they contributed. It's their money. They don't want the programs eliminated, but they do want to stop the "underserving" from spending the money they contributed. Democrats, on the other hand, are much more likely to support these programs as a means of lifting the unfortunate -- i.e. as a social insurance transfer from those who had good luck with where they were born, family wealth, education, health, and so on to those who had bad luck of one type or another. To put this another way, I don't think the elites in the Democratic Party mind paying higher taxes to support these programs even if it means that there are transfers from the fortunate to the not so fortunate (but they are naive with their "we need to save the programs through cuts now to avoid cuts later" arguments). Republicans mind quite a bit.

We can see this distinction more clearly through another point Dean makes:

There are much smaller programs that are designed primarily to help the poor or near poor where there is a clearer partisan divide (e.g. TANF, SSI, WIC). While it may be more accurate to describe the debate over these programs as a values issue (with a strong racial component), they amount to a relatively small portion of government budgets. These programs may be important to the people directly affected, but they are not central to debates over the budget.

It is plausible to argue that these anti-poverty programs have taken an outsize role in national debates, but this is largely because the electorate is poorly informed about their size. In that case the debate is not over values (I would be for cutting back TANF too if I thought it was one-third of the federal budget), but simple an issue of misinformation.

Another way to say this is that as soon as many conservatives think their money might go to someone else, the underserving poor in particular, they object.

I don't mean to imply that there are no Republicans using the ideological issue of smaller, less intrusive government as a cover for policies that serve special interests (businesses, the wealthy). Many do. I just don't think the statement that "there is actually little difference between Republicans and Democrats or self-described conservatives and liberals in their support of the key components of the social safety net: Social Security, Medicare, Medicaid, and even unemployment insurance" is fully accurate. There's an important distinction that underlies the concept of social insurance, the distinction between a society where risks that individuals cannot control are shared broadly or felt individually, and it's important to recognize this difference between the two political parties.

'The Climate Skeptics Have Already Won'

Martin Wolf:

Humanity has decided to yawn and let the real and present dangers of climate change mount. ... Judged by the world’s inaction, climate skeptics have won..., however rational it may be to seek to lower the risk of catastrophic outcomes, this is not what is happening now or seems likely to happen in the foreseeable future. ...

The attempt to shift our choices away from the ones now driving ever-rising emissions has failed. It will, for now, continue to fail. The reasons for this failure are deep-seated. Only the threat of more imminent disaster is likely to change this and, by then, it may well be too late. This is a depressing truth. It may also prove a damning failure.

As he says, it's not too late, "Unless the most apocalyptic scenario happens, humanity may be able to curb emissions and buy itself time," but the clock is running and it's hard to see how meaningful change will come about without substantial changes in the political environment. Gridlock favors the skeptics.

'Liberty for Whom?'

James Kwak:

Liberty for Whom?, by James Kwak: ...Corey Robin's fascinating article on nineteenth-century European culture, Nietzsche, and the economic philosophy of Friedrich Hayek..., in very simplified form, goes like this. For Nietzsche, and for other cultural elitists of late-nineteenth-century Europe, both the rise of the bourgeoisie and the specter of the working class were bad things—the former for its mindless materialism, the latter  for its egalitarian ideals, which threatened to drown the exceptional man among the masses. One set of Nietzsche’s descendants..., which Robin focuses on in this article, is the “Austrian” school of economics led by Friedrich Hayek.

People often like to think of the Austrians as advocates of liberty, both for its Economics 101 properties (free choice in free markets, under certain assumptions, maximizes societal welfare) and its moral properties. Robin ties Hayek’s conception of liberty, however, back to Nietzche’s. Hayek cared about liberty for ultimately elitist reasons: liberty is not an end in itself, but a condition that enables the select few to make the world a better place... And those select few are likely to be the rich, for only they have the requisite time and freedom from material concerns...

This idea is obviously echoed in Ayn Rand’s novels... It has also trickled into the contemporary conservative worship of the ultra-rich. The phrase today is “job creators” (whatever that means), but it has the same moralistic overtones as in Nietzsche and Hayek—a class of people who are better than the rest of us, on whom we depend for our salvation and prosperity, and whom we should not presume to question or constrain through, say, safety regulation or higher taxes (“penalizing success,” in the jargon).

I used to say that most Americans voted against their class interests because they thought they would one day be in the upper class... But today, five years after the financial crisis, with median income below where it was fifteen years ago and social mobility at developing-world levels, I can’t imagine many people really believe that vast riches are in their future. An alternative explanation is that many Americans just think the rich are better than they are and that it’s wrong to question your betters. ...

I think we sometimes forget that voting is multidimensional -- it depends upon more than economic interests (e.g. it's partly about choosing an identity and the other non-economic factors can dominate). In any case, not sure I buy that people "just think the rich are better than they are" argument. It didn't, for example, propel Romney to the presidency.

Vintage Krugman: Stating the Obvious

Don't say you weren't warned. This is Paul Krugman, just a few days under 10 years ago:

Stating the Obvious, by Paul Krugman, Commentary, NY Times, May 27, 2003: "The lunatics are now in charge of the asylum." So wrote the normally staid Financial Times, traditionally the voice of solid British business opinion, when surveying last week's tax bill. Indeed, the legislation is doubly absurd: the gimmicks used to make an $800-billion-plus tax cut carry an official price tag of only $320 billion are a joke, yet the cost without the gimmicks is so large that the nation can't possibly afford it while keeping its other promises.

But then maybe that's the point. The Financial Times suggests that "more extreme Republicans" actually want a fiscal train wreck: "Proposing to slash federal spending, particularly on social programs, is a tricky electoral proposition, but a fiscal crisis offers the tantalizing prospect of forcing such cuts through the back door."

Good for The Financial Times. It seems that stating the obvious has now, finally, become respectable.

It's no secret that right-wing ideologues want to abolish programs Americans take for granted. But not long ago, to suggest that the Bush administration's policies might actually be driven by those ideologues — that the administration was deliberately setting the country up for a fiscal crisis in which popular social programs could be sharply cut — was to be accused of spouting conspiracy theories.

Yet by pushing through another huge tax cut in the face of record deficits, the administration clearly demonstrates either that it is completely feckless, or that it actually wants a fiscal crisis. (Or maybe both.)

Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.)

The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control.

At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security.

The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent.

The Financial Times suggests this is deliberate (and I agree): "For them," it says of those extreme Republicans, "undermining the multilateral international order is not enough; long-held views on income distribution also require radical revision."

How can this be happening? Most people, even most liberals, are complacent. They don't realize how dire the fiscal outlook really is, and they don't read what the ideologues write. They imagine that the Bush administration, like the Reagan administration, will modify our system only at the edges, that it won't destroy the social safety net built up over the past 70 years.

But the people now running America aren't conservatives: they're radicals who want to do away with the social and economic system we have, and the fiscal crisis they are concocting may give them the excuse they need. The Financial Times, it seems, now understands what's going on, but when will the public wake up?

'About That Debt Crisis? Never Mind'

Paul Krugman on the recent news that the deficit is falling:

About That Debt Crisis? Never Mind, by Paul Krugman: OK, another toe dipped in reality. The new CBO numbers are out, and they scream “debt crisis? What debt crisis?” ...

Yes, debt rose substantially in the face of economic crisis — which is what is supposed to happen. But runaway deficits? Not a hint.

Yes, there are longer-term issues of health costs and demographics. As always, however, these have no relevance to what we should be doing now...

Meanwhile, our policy discourse has been dominated for years by what turns out to be a false alarm. To the millions of Americans who are out of work and may never get another job thanks to premature fiscal austerity, the VSPs would like to say, “oopsies!”

Or maybe not even that. ...

It's a good scam if your goal is to reduce the size and influence of government: implement spending cuts that slow the economy, never mind the unemployed, then call loudly for tax cuts and deregulation to spur economic growth. Repeat as needed.

Bad News for Deficit Hawks and Opponents of Obamacare

Jon Chait notes some bad news for deficit hawks and opponents of Obamacare:

Give Back that Pulitzer, Wall Street Journal Editorial Page: The recent slowdown in health-care costs is one of those facts, like climate change or the rapid growth after Bill Clinton raised taxes, that flummoxes American conservatism. The slowdown of health-care costs is one of the most important developments in American politics. The long-term deficit crisis — those scary charts Paul Ryan likes to hold up, with federal spending soaring to absurd levels in a grim socialist dystopian future — all assume the cost of health care will continue to rise faster than the cost of other things. If that changes, the entire premise of the American debate changes. And there’s a lot of evidence to suggest it is changing — health-care costs have slowed dramatically, and experts believe it’s happening for non-temporary reasons.

The general conservative response to date has involved ignoring the trend, or perhaps dismissing it as a temporary, recession-induced dip... Yesterday, the Wall Street Journal editorial page offered up what may be the new conservative fallback position: Okay, health-care costs are slowing down, but it has absolutely nothing to do with the huge new health-care reform law. “It increasingly looks as if ObamaCare passed amid a national correction in the health markets,” the Journal now asserts, “that no one in Congress or the White House understood.” It’s another one of those huge, crazy coincidences!

Of course, it’s not just that the Journal didn’t predict the health-care cost slowdown. The Journal insisted ... that Obamacare would ... necessarily lead to a massive increase in health-care inflation. In a series of hysterical, freedom-at-dusk editorials which were, unbelievably, awarded a Pulitzer Prize for commentary, the Journal expounded extensively on this belief. ...

The ... fact that the right is being forced to fall back from predicting a staggering rise in health-care costs to explaining away the staggering decline in health-care costs represents real progress...

More bad news for deficit hawks from the CBO. Ezra Klein explains:

CBO says deficit problem is solved for the next 10 years: ...according to the Congressional Budget Office, the debt disaster that has obsessed the political class for the last three years is pretty much solved, at least for the next 10 years or so.

The last time the CBO estimated our future deficits was February– just four short months ago. Back then, the CBO thought deficits were falling and health-care costs were slowing. Today, the CBO thinks deficits are falling even faster and health-care costs are slowing by even more.

Here’s the short version: Washington’s most powerful budget nerds have cut their prediction for 2013 deficits by more than $200 billion. They’ve cut their projections for our deficits over the next decade by more than $600 billion. Add it all up and our 10-year deficits are looking downright manageable. ...

'Why Should Any Of These Groups Have Tax-Exempt Status?'

Jared Bernstein:

Why Should Any Of These Groups Have Tax-Exempt Status?: Nope, I’m not going to defend the IRS, which appears to have acted in ways wholly inconsistent with their mandate for unbiased investigations into, in this case, whether certain political groups should receive tax-exempt status. It is unclear how high up the chain of command these untoward actions went, but this morning’s news suggests it wasn’t just a few rogue auditors in Cincinnati. ...

Republicans will of course try to pin this on the President, despite the fact that since Nixon used the IRS to target his enemies, the president’s been barred from even discussing this kind of thing with the agency.

No, the problem here isn’t the president. It’s the Supreme Court’s Citizen United decision and subsequent tax law written by Congress that gives these groups tax exempt status (under rule 501(c)(4)) as long as most of their activities are primarily on educating the public about policy issues, not direct campaigning.

Of course, the ambiguities therein are insurmountable. Many of these groups, especially the big ones, spend millions on campaign ads mildly disguised as “issue ads,” and under current law they can do so limitlessly and with impunity. ...

Weirdly, the IRS hasn’t seemed particularly interested in going after the big fish here, like Rove’s Crossroads GPS on the right or Priorities USA on the left. Instead, they appear to have systematically targeted small fry on the far right. If so, not only is that clearly biased and unacceptable—it’s also ridiculous given the magnitude of the violations of tax exempt status by these small groups relative to the big ones.

At the end of the day, we should really ask ourselves what societal purpose is being served here by carving out special tax status for any of these groups. If anyone can show me any evidence that the revenue forgone is well spent, that these groups are making our political system and our country better off, please do so. If not, then no one’s saying shut them down—they’ve got a right to speak their minds. But not tax free.

'Economists See Deficit Emphasis as Impeding Recovery

Another travel day quickie:

Economists See Deficit Emphasis as Impeding Recovery, by Jackie Calmes and Jonathan Weisman: The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government

After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.

Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve. ...

In all this time, the president has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like infrastructure, manufacturing, research and education. That is a formula closer to what the economists propose. But Republicans have insisted on spending cuts alone and smaller government as the key to economic growth. ...

And they keep insisting this is true despite the evidence to the contrary because it supports their ideological goals, and there is little political price for taking this position.

'This is Self-Evidently Absurd'

Jon Chait:

Why Left and Right Economics Can’t Just Agree, by Jonathan Chait: Adam Davidson writes a joint profile of Democratic economist Lawrence Summers and Republican economist Glenn Hubbard for The New York Times Magazine. ...

Hubbard tells Davidson he came to his interest in economics by reading Hayek’s Road to Serfdom. That book warned that centrally planned economies would lead to tyranny. In fact, western governments abandoned central planning after World War II, but conservatives, including Hayek himself, simply transposed the generalized fear of government from central planning onto other forms of government intervention. According to Davidson, Hubbard’s current fear centers around rising federal debt...

But this is self-evidently absurd, given Hubbard’s role in crafting Bush administration policies that transformed a budget that ran a surplus of 2.4 percent of GDP at its peak to one that ran a deficit of 1.2 percent of GDP at its peak. Debt is simply the current way Hubbard expresses his philosophical preference for smaller government. He argues that low taxes are vital for fast economic growth, but twenty years of recent experiences strongly suggest otherwise. ...

It also absurd because the call for lower taxes is inconsistent with the call to reduce the debt (but reducing spending and then "starving the beast" through reduced taxes both work toward the goal of a smaller government). Too few people realize that calls to reduce the debt are really about a "philosophical preference for smaller government" rather than the fear of debt itself. Similarly for lower taxes and claims about economic growth.

Debt and the Deficit: What's Really on the Table?

I have a feeling this session is going to be a bit irritating:

Debt and the Deficit: What's Really on the Table?
Monday, April 29, 2013 2:15 PM - 3:15 PM

• Speakers:
• Bob Corker, U.S. Senator
• David Cote, Chairman and CEO, Honeywell; Steering Committee Member, Campaign to Fix the Debt
• Maya MacGuineas, Head, Campaign to Fix the Debt; President, Committee for a Responsible Federal Budget
• Peter Orszag, Vice Chairman, Corporate and Investment Banking, Citigroup; former Director, Office of Management and Budget

Moderator: Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury

With outsize debt putting the stability of credit markets and the pace of economic growth at risk, will Americans embrace shared sacrifice to set the country on a path toward fiscal health? Or is the problem essentially the result of gridlock in Washington? And what does "shared sacrifice" actually mean? Who will bear the heavier burden: the rich, the elderly, the middle class? Are Simpson and Bowles still relevant? Our panel will examine the economics and politics around our accumulating public debt and annual deficit, with an eye toward palatable and realistic solutions. Can we grow our way out of the mess? How will we cope with the twin hazards of graying demographics and healthcare inflation? Back to the credit markets: Are Treasuries as safe as they seem?

There was remarkably little discussion of increasing revenues through tax rate increases. There was some discussion of increasing revenue, but it was mainly about eliminating deductions like home interest rather than increasing tax rates. Instead, most of the focus was on, surprise, "entitlement reform" with only Orszag being careful to point to health care costs as the main problem to solve.

The most entertaining moment was when the business guy on the panel, David Cote, said that unlike in business where what you think, say, and do must align, for Congress these are different decisions. Senator Corker said he was offended by that comment and went on to defend Congress (e.g. saying many people in business don't understand that politicians have to represent a diverse constituency). Ha. A Republican fighting with a business rep, then defending government. Too bad he wants to cut the crap out of it.

Other than that, the degree of hawkery and the implicit assumption that the only way to solve problems with our long-run budget picture is to cut social insurance programs the working class relies upon was, in fact, irritating. The continued discussion about deficit reduction as the key to spurring private sector growth was similarly irritating. It's exactly what we heard about the Bush tax cuts, and we know how that turned out. A huge increase in the debt load with little (if any) increased growth to show for it.

Finally, as far as I recall, the word "unemployment" did not come up. In the short-run, deficit hawkery is what's standing in the way of doing more to help with the unemployment problem. The key question -- whether the concern in the short-run with the debt rather than the unemployed is justified in the short-run (it isn't in my view) -- was not even discussed.

'The Great Degrader'

Paul Krugman says the biggest problem with George Bush wasn't the things he did, it was how he did them:

The Great Degrader: ...I sort of missed the big push to rehabilitate Bush’s image; also..., I’m kind of worn out on the subject. But it does need to be said: he was a terrible president, arguably the worst ever, and not just for the reasons many others are pointing out.

From what I’ve read, most of the pushback against revisionism focuses on just how bad Bush’s policies were, from the disaster in Iraq to the way he destroyed FEMA, from the way he squandered a budget surplus to the way he drove up Medicare’s costs. And all of that is fair.

But I think there was something even bigger, in some ways, than his policy failures: Bush brought an unprecedented level of systematic dishonesty to American political life, and we may never recover.

Think about his two main “achievements”, if you want to call them that: the tax cuts and the Iraq war, both of which continue to cast long shadows over our nation’s destiny. The key thing to remember is that both were sold with lies. ... Basically, every time the Bushies came out with a report, you knew that it was going to involve some kind of fraud, and the only question was which kind and where.

And no, this wasn’t standard practice before. ... There was a time when Americans expected their leaders to be more or less truthful. Nobody expected them to be saints, but we thought we could trust them not to lie about fundamental matters. That time is now behind us — and it was Bush who did it.

The media also echoed the Bush talking points on tax cuts and the war without giving them the scrutiny and skeptical eye they deserved (I got so tired of hearing the false claim that the Bush tax cuts would pay for themselves). There has been an admission that, well, maybe a few mistakes were made, but has the media learned its lesson? The ability of Republicans to use the same tactics in recent political debates suggests the answer is no.

Paul Krugman: The 1 Percent’s Solution

Does evidence matter?:

The 1 Percent’s Solution, by Paul Krugman, Commentary, NY Times: Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close... At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?

On the first question:... the two main studies providing the alleged intellectual justification for austerity ... did not hold up under scrutiny. ... Meanwhile, real-world events ... quickly made nonsense of austerian predictions.

Yet austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play... We lived beyond our means ... and now we’re paying the inevitable price. ... But... You can’t understand the influence of austerity doctrine without talking about class and inequality,... a point documented in a recent research paper... The ... average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. ... The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. ...

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

I hope not; I’d like to believe that ideas and evidence matter... Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

'Evidence and Economic Policy'

Paul Krugman:

Evidence and Economic Policy: Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted.

But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave.

The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it — they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.

But maybe I’m wrong; maybe truth will prevail. Here’s hoping

On "the VSPs will be right back at it," Robert Samuelson to the rescue:

Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing, they do not alter one of its main conclusions: High debt and low economic growth often go together.

Paul Krugman responds here, Dean Baker here. Krugman makes a key point:

And anyway, the important story isn’t about the sins of the economists; it’s about our warped economic discourse, in which important people seize on academic work that fits their preconceptions.

Dani Rodrik thinks we should police ourselves:

Experts, knowledge and advocacy: This is so absolutely brilliant and important:

“One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.”

It comes from Kaushik Basu, currently chief economist at the World Bank and one of the world’s most thoughtful expert-economists.

Economists would be so much more honest (with themselves and the world) if they acted accordingly – letting their audience know that their results and prescriptions come with a large margin of uncertainty. Public intellectuals would do so much less damage if they did likewise. And if experts are not aware of the limits of their knowledge – well, they do not deserve to be called experts or intellectuals.

The real point, though, is that the other side – journalists, politicians, the general public -- always has a tendency to attribute greater authority and precision to what the experts say than the experts should really feel comfortable with. That is what calls for compensating action on the part of the experts.

So if you are an expert hang this gem from Basu prominently on your wall. And next time you talk to a journalist, advise a politician, or take to the stage in a public event, repeat it to yourself beforehand a few times.

This is asking a lot. My experience is that researchers really, really believe their own results so a call to temper enthusiasm will not work. They don't think they are overselling. So the cautions will have to come from people other than the authors of the work. That could help, but Krugman's point is, I think, more relevant. People have an interest in selling certain pieces of research that promote their political goals. For example, Reinhart and Rogoff played very well with those who wanted a smaller government and they helped to sell these results. Even if Reinhart and Rogoff had been quite humble about their findings, the correlations they found still would have likely been seized upon by those with an interest in using them to make progress toward ideological goals. Not sure how to solve this problem, but asking whether somebody has an interest in promoting a particular piece of research is a place to start.

Paul Krugman: The Excel Depression

Will the "Reinhart-Rogoff fiasco" change "the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs"?:

The Excel Depression, by Paul Krugman, Commentary, NY Times: ... At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper ... that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper ... was, and is, surely the most influential economic analysis of recent years.

In fact,... Reinhart-Rogoff faced substantial criticism from the start... As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. ...

Over time, another problem emerged: Other researchers ... couldn’t replicate the Reinhart-Rogoff results. ... Finally,... the mystery of the irreproducible results was solved. First, they omitted some data; second, they used unusual and highly questionable statistical procedures; and finally, yes, they made an Excel coding error. Correct these oddities and errors, and you get what other researchers have found: some correlation between high debt and slow growth, with no indication of which is causing which, but no sign at all of that 90 percent “threshold.” ...

The ... Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs. ... For three years,... austerity advocates insisted ... that terrible things happen once debt exceeds 90 percent of G.D.P. But “economic research” showed no such thing; a couple of economists made that assertion, while many others disagreed. Policy makers abandoned the unemployed and turned to austerity because they wanted to, not because they had to.

So will toppling Reinhart-Rogoff from its pedestal change anything? I’d like to think so. But I predict that the usual suspects will just find another dubious piece of economic analysis to canonize, and the depression will go on and on.

'This is Bad Economics ... But it is Excellent Preaching'

James Surowiecki:

It’s been a great couple of weeks for David Stockman. Granted, he’s been called “unhinged,” “nonsensical,” and “a cranky old man,” after arguing in the Times that the current bull market is a huge bubble, and that America’s economic woes stem from the Federal Reserve’s profligacy and from F.D.R.’s taking us off the gold standard. But the controversy has made his new book, “The Great Deformation,” a best-seller...

 He’s an ideologue, but he’s an honest one. Still, honesty gets you only so far, and Stockman’s ... thesis is unconvincing. He thinks that, when bad times hit, the government should just let events play out, rather than use discretionary fiscal or monetary policy to combat them. In part, this is because he thinks that the government can’t do much to help a weak economy. Indeed, he believes that intervening after a crash makes the next one worse. ...

The simplicity of this idea gives it a certain visceral appeal. ... For him, pain is the way we learn discipline, and, the more closely you read “The Great Deformation,” the more you sense that the impulse behind it isn’t so much economic as moral. Stockman, who studied at Harvard Divinity School, favors language that is explicitly theological: Keynesian “sin,” the “demon” of debt, the “devil’s workshop” of the New Deal. “The Great Deformation” looks like monetary history, but it’s really a classic example of the American jeremiad—a twenty-first-century counterpart to Jonathan Edwards’s famous sermon “Sinners in the Hands of an Angry God.” Stockman laments our fall from the path of righteousness and foretells destruction if we do not repent. This is bad economics—the economy is not a morality play—but it is excellent preaching, which explains why this is Stockman’s moment. In times of crisis, as the Puritans knew, Americans never tire of hearing how we’ve lost our way.

"For him, pain is the way we learn discipline." Let me just add a point I tried to make recently. Even if you buy into the "we need pain to learn discipline" idea, punishing people who had nothing to do with our problems, e.g. throwing workers into unemployment even though they did nothing to cause the crisis, does not provide the discipline he wants. If we punished those at the top of the financial industry -- the individuals whose decisions drove the bubble -- maybe some learning would occur, but that's not what happened. In fact, punishing the innocent rather than the guilty leads to bad incentives, not the good ones he is after. For that reason the innocent -- the workers who did their jobs day after day to support their families who suddenly found themselves unemployed through not fault of their own -- should be protected through fiscal and monetary policy, and as much as possible, this should come at the expense of those responsible for their problems. 

Why are Republicans Suddenly So Worried about the Elderly and the Working Class?

When conservatives face a choice of cutting Social Security -- something they have long sought -- in return for an increase in taxes, they suddenly become friends of the elderly and the working class. But what is really behind their newfound fondness for the vulnerable?

This is from an article from Andrew Biggs, "resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration," appearing at the NRO:

The Chained CPI: A Bad Deal All Around, by Andrew Biggs, NRO: The Chain-Weighted Consumer Price Index (or chained CPI, for short), which President Obama included as part of his formal budget proposal, seems like a no-brainer for any White House–GOP grand bargain on the budget deficit. After all, the chained CPI ... would reduce entitlement spending and increase tax revenues by a combined $340 billion over ten years, providing something for both sides to like and dislike. Yet ... the chained CPI is bad policy that both liberals and conservatives may come to regret. ...

In Social Security, the chained CPI would replace the CPI-W (intended for urban wage-earners and clerical workers) in calculating annual cost-of-living adjustments (COLAs). Once fully implemented, lower COLAs would reduce a retiree’s average lifetime benefits by around 4 percent, cutting Social Security’s long-term shortfall by around one quarter.

Yet while Social Security does need to be fixed, and lower benefits for middle and high earners should be a part of the equation, smaller COLAs weaken a feature of Social Security that actually works: The program’s generous inflation adjustment counteracts the absence of inflation adjustment in private pensions. And unlike most reforms, which reduce benefits progressively ... COLA reductions fall hardest on the oldest beneficiaries, who are most at risk of poverty. An 85-year-old is 66 percent more likely to be in poverty than a 65-year-old, but the chained CPI will cut the 65-year-old’s by only 1 percent and the 85-year-old’s benefits by 8 percent... Moreover, the chained CPI, like CPI-W, doesn’t account for the fact that older retirees spend disproportionately on health care, a sector in which inflation is particularly high.

[Note: The article and supporters of this policy say the chained CPI is a better measure of inflation, and that may be true for some groups, but the last sentence shows that it is not a better measure of inflation for the elderly.] I don't disagree with the arguments above about who would be hurt, and that we should protect the most vulnerable -- I think we should raise the payroll tax cap rather than cutting benefits -- it's just strange to see them made at the NRO (the Obama administration's proposal includes a call to protect older retirees from the changes noted above, and it's not surprising to see this omitted from the discussion -- it undercuts the GOP's attempt to position itself as defending older retirees against a Democratic proposal). Continuing:

A better policy would peg COLAs to wage growth, which is around 1 percentage point faster than inflation, coupled with a lower initial retirement-benefit level to keep lifetime receipts the same. The lower starting benefit would dissuade workers from retiring too early. Higher benefits later in life would focus resources where the danger of poverty is greatest, as well as compensating for the fact that most non–Social Security sources of retirement income aren’t inflation-indexed at all. ...

Again, I'd raise the payroll tax cap first, but let's move on to the tax argument. As you read this, remember all the complaints from Republicans during the presidential election about middle and lower income households not paying their share of federal taxes, about how they take too much and give too little relative to the "burdens" on the wealthy:

If adopting the chained CPI for Social Security would be misguided, applying it to the income-tax code would be even worse. ...

Republicans would surely oppose such an increase if they understood it. Making matters worse, the largest rate increases will be on low- and middle-income households. The Congressional Joint Committee on Taxation projects that in 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, though they pay only 28 percent of total income taxes. Individuals in the highest income brackets would be left essentially untouched... Conservative reformers such as National Review’s Ramesh Ponnuru are pushing for a tax code that’s friendlier to families and middle-income earners. The chained CPI is hard to fit into that narrative. ...

It’s hard to see how chained CPI can be a win for conservatives..., why should Republicans take the rap for a measure that weakens Social Security for the least well-off and institutes a large and regressive tax increase? ...

I don't find it hard at all to imagine Republicans supporting regressive tax changes (see their past policies) and weakening Social Security (ditto). The real goal for Republicans, of course, is to prevent tax increases of any type. If they give in anywhere, it might help with arguments that taxes on the wealthy must go up, and that cannot happen. The puzzle is why Obama would put forth a measure that allows Republicans to position themselves as defending the elderly and the working class as they pursue their real goal of keeping taxes from increasing. I guess he thought it wouldn't really happen, that Republicans would end up looking like unreasonable obstructionists on the tax issue, and that the press would all of a sudden turn on them as a result of their intransigence, but it wasn't hard to see this coming:

So what’s this about? The answer, I fear, is that Obama is still trying to win over the Serious People, by showing that he’s willing to do what they consider Serious — which just about always means sticking it to the poor and the middle class. The idea is that they will finally drop the false equivalence, and admit that he’s reasonable while the GOP is mean-spirited and crazy.

But it won’t happen. ... Oh, and wanna bet that Republicans soon start running ads saying that Obama wants to cut your Social Security?

Anyone else getting tired of relying upon Republican intransigence to defend Social Security and Medicare from Obama's Grand Bargains that are intended to appease the "Serious People" that cannot be appeased?

Paul Krugman: Lust for Gold

What explains "goldbuggism"?:

Lust for Gold, by Paul Krugman, Commentary, NY Times: News flash: Recent declines in the price of gold, which is off about 17 percent from its peak, show that this price can go down as well as up. You may consider this an obvious point, but ... it has come as a rude shock to many small gold investors, who imagined that they were buying the safest of all assets.

And thereby hangs a tale. One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.

What do I mean by goldbuggism? Not the notion that buying gold sometimes makes sense..., gold is like a very long-term bond that’s protected from inflation...

No, being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard... And both forms of goldbuggism soared after ... the financial crisis of 2008... (although that surge has abated a bit since 2011). But why..., how can we rationalize the modern goldbug position? Basically, it depends on the claim that runaway inflation is just around the corner. ...

Conservative-minded people tend to support a gold standard — and to buy gold — because they’re very easily persuaded that “fiat money” ... created ... to stabilize the economy is really just part of the larger plot to take away their hard-earned wealth and give it to you-know-who.

But the runaway inflation that was supposed to follow reckless money-printing — inflation that the usual suspects have been declaring imminent for four years and more — keeps not happening. For a while, rising gold prices helped create some credibility for the goldbugs even as their predictions about everything else proved wrong, but now gold as an investment has turned sour, too. So will we be seeing prominent goldbugs change their views, or at least lose a lot of their followers?

I wouldn’t bet on it. In modern America, as I suggested at the beginning, everything is political; and goldbuggism, which fits so perfectly with common political prejudices, will probably continue to flourish no matter how wrong it proves.

'There Are No Grownups'

Paul Krugman:

Imaginary Grownups: So the Obama budget is out, Social Security cuts and all. Why is this happening?

Well, it’s all about the positioning. Ezra Klein gets at what I hear from the WH too (and what’s obvious in any case):

Today’s budget is the White House’s effort to reach the bedrock of the fiscal debate. Half of its purpose is showing what they’re willing to do. They want a budget compromise, and this budget proves it. There are now liberals protesting on the White House lawn. But the other half is revealing what the GOP is — or, more to the point, isn’t — willing to do. Republicans don’t want a budget compromise, and this budget is likely to prove that, too.

The question is, to whom are these things being “proved”?

Since the beginning, the Obama administration has seemed eager to gain the approval of the grownups — the sensible people who will reward efforts to be Serious, and eventually turn on those nasty, intransigent Republicans as long as Obama and co. don’t cater too much to the hippies. This is the latest, biggest version of that strategy. Unfortunately, it will almost surely fail. Why? Because there are no grownups..., the truth is that the “centrists” aren’t sincere. Calls for centrism and bipartisanship aren’t actual demands for specific policies — they’re an act, a posture these people take to make themselves seem noble and superior. And that posture requires blaming both parties equally, no matter what they do or propose. Obama’s budget will garner faint praise at best, quickly followed by denunciations of the president for not supplying the Leadership (TM) to make Republicans compromise — which means that he’s just as much at fault as they are, see? ... No, seriously (but not Seriously): who do you think could possibly be persuaded by this budget who hasn’t already been persuaded?

One quibble about "blaming both parties equally, no matter what they do or propose." I don't think the blame is equal. The (ahem) grownups begin with the assumption that they know what needs to be done. Deficits are bad, austerity is good, Social Security if bankrupt, disaster is just around the corner (unless we make good people suffer for the sins of others), and so on, and so on. They know all of these things despite the considerable evidence saying they are wrong, and this means they begin with a bias that causes them to lean toward the GOP's positions on many issues (which contributes to a rightward drift).

'Blind to the Obvious' in Europe

Bill McBride at Calculated Risk is puzzled (for good reason). Maybe puzzled is the wrong word. He sees what's going on, but others appear "blind to the obvious" (or they're serving some other purpose):

This is an actual quote today from the German Finance Minister Wolfgang Schauble:

"Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” Schauble said. “We have a growth-friendly process of consolidation, and we have sustainable growth, however you want to word it.”

Obviously there is a contradiction between "fiscal policy consolidation and growth". And not everyone is blind to the obvious - some people in Europe see the obvious contradiction (just look at the data).

And a "growth friendly process"? "Sustainable growth"?  Nonsense. Maybe Schauble should look at the data (here is the eurostat data on GDP and unemployment.

Comment: Obviously Schauble is the worst kind of policymaker. He believes in "austerity über alles" and can't be swayed by the results. Very sad. ...

'Scrap the Cap'

Nancy Folbre:

The People’s Choice for the People’s Pension, by Nancy Folbre: Social Security, the most transparently self-financed program of the federal government, is not increasing our budget deficit. The most recent trustees’ report shows sufficient funds to pay full benefits until 2033.

No one is making out like a bandit: Social Security beneficiaries who retired in 2010 are expected to get back approximately what they paid in.

If we wanted to adopt a cautious policy measure that would eliminate the shortfalls predicted 20 years down the road, we could eliminate the cap on earned income subject to Social Security taxes, currently set at $113,700. Such a measure would lead to increased payments by about the top 5.2 percent of wage earners.

Legislation designed to “scrap the cap” has been introduced in Congress. ... But as Thomas B. Edsall pointed out in a recent commentary, “scrap the cap” has apparently been taken off the table, despite evidence of considerable public support for it. ...

It's not hard to guess why, but as she goes on to explain, "lobbying efforts and misinformation campaigns aimed at bringing the program down" are a big part of the "history of class warfare over social insurance."

Paul Krugman: Insurance and Freedom

Social insurance does not undermine free societies:

Insurance and Freedom, by Paul Krugman, Commentary, NY Times: ...How many Americans will be denied essential health care in the name of freedom?

I’m referring, of course, to the question of how many Republican governors will reject the Medicaid expansion that is a key part of Obamacare. What does that have to do with freedom? In reality, nothing. But when it comes to politics, it’s a different story. ... From the enthusiastic reception American conservatives gave Friedrich Hayek’s “Road to Serfdom,” to Reagan, to the governors now standing in the way of Medicaid expansion, the U.S. right has sought to portray its position not as a matter of comforting the comfortable while afflicting the afflicted, but as a courageous defense of freedom. ...

These days, conservatives make very similar arguments against Obamacare. For example, Senator Ron Johnson of Wisconsin has called it the “greatest assault on freedom in our lifetime.” And this kind of rhetoric matters, because when it comes to the main obstacle now remaining to more or less universal health coverage — the reluctance of Republican governors to allow the Medicaid expansion that is a key part of reform — it’s pretty much all the right has. ...

[However], Medicaid enjoys remarkably strong public support. And now that health reform is the law of the land, the economic and fiscal case for individual states to accept Medicaid expansion is overwhelming. ... But such practical concerns can be set aside if you can successfully argue that insurance is slavery.

Of course, it isn’t. In fact, it’s hard to think of a proposition that has been more thoroughly refuted by history than the notion that social insurance undermines a free society. ...

In fact, the real, lived experience of Obamacare is likely to be one of significantly increased individual freedom. For all our talk of being the land of liberty, those holding one of the dwindling number of jobs that carry decent health benefits often feel anything but free, knowing that if they leave or lose their job, for whatever reason, they may not be able to regain the coverage they need. Over time, as people come to realize that affordable coverage is now guaranteed, it will have a powerful liberating effect.

But what we still don’t know is how many Americans will be denied that kind of liberation — a denial all the crueler because it will be imposed in the name of freedom.

Paul Krugman: Lessons From a Comeback

Is the the "era of hamstrung government" coming to an end?:

Lessons From a Comeback, by Paul Krugman, Commentary, NY Times: Modern movement conservatism, which transformed the G.O.P. from the moderate party of Dwight Eisenhower into the radical right-wing organization we see today, was largely born in California. The Golden State, even more than the South, created today’s religious conservatism; it elected Ronald Reagan governor; it’s where the tax revolt of the 1970s began. But that was then. In the decades since, the state has grown ever more liberal, thanks in large part to an ever-growing nonwhite share of the electorate.As a result, the reign of the Governator aside, California has been solidly Democratic since the late 1990s.

And ever since the political balance shifted, conservatives have declared the state doomed. Their specifics keep changing, but the moral is always the same: liberal do-gooders are bringing California to its knees...; however, reports of the state’s demise proved premature... Far from presiding over a Greek-style crisis, Gov. Jerry Brown is proclaiming a comeback. Needless to say, the usual suspects are still predicting doom...

So what do we learn from this history of doom deferred?

I’m not suggesting everything in California is just fine. ... The point, however, is that these problems bear no resemblance to the death-by-liberalism story line the California-bashers keep peddling. California isn’t a state in which liberals have run wild; it’s a state where a liberal majority has been effectively hamstrung by a fanatical conservative minority that, thanks to supermajority rules, has been able to block effective policy-making.

And that’s where things get really interesting — because the era of hamstrung government seems to be coming to an end...., at this point the state’s G.O.P. has fallen below critical mass, losing even its power to obstruct — and this has left Mr. Brown free to push an agenda of tax hikes and infrastructure spending that sounds remarkably like the kind of thing California used to do before the rise of the radical right.

And if this agenda is successful, it will have national implications. After all, California’s political story — in which a radicalized G.O.P. fell increasingly out of touch with an increasingly diverse and socially liberal electorate, and eventually found itself marginalized — is arguably playing out with a lag on the national scene too.

So is California still the place where the future happens first? Stay tuned.

'David Stockman Goes Way, Way Over the Top'

The wingnut of the day award is easy to pick, it's David Stockman:

Cranky Old Men, by Paul Krugman: ... Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.

David Stockman Goes Way, Way Over the Top, by Jared Bernstein:  He has a featured piece in today’s NYT which, while about 11.8% absolutely and totally on target, is mostly a horrific screed, an ahistorical, dystopic, Hunger-Games vision of America based on debt obsession and willful ignorance of macroeconomics and the impact of market failure. ...

David Stockman wants to pee in your cornflakes, Kids Prefer Cheese: Wow. David Stockman confuses cause and effect, goes all gold-buggy, slanders Milton Friedman, and just generally comes unhinged in a massive hissy fit in today's NYT. ...

Update: See also David Henderson's "David Stockman Screeches."

'Reactions to Mankiw on the Long Run Budget Path'

Greg Mankiw says the goal for the budget should not be a stable debt-to-GDP ratio as the president has called for, instead the ratio should be falling. But there are a few important qualifiers to this statement that are easy to miss.

Even if you agree with Mankiw that the debt to GDP ratio should be falling rather than stable, he never answers falling to what? (Does it fall forever until it hits zero, then a surplus which gets larger and larger until spending is zero and taxes take everything? I doubt that's what he has in mind.) How fast it should fall? (Do we balance the budget this year or over 100 years?). Should the debt to GDP ratio vary over the business cycle (i.e. can we do countercyclical fiscal policy?). On the latter point, Owen Zidar:

Reactions to Mankiw on the Long Run Budget Path: I agree with most of Greg Mankiw NYTimes piece on long-term debt to GDP but can’t overlook a fairly glaring omission –  he seems to ignore the fact that we are currently experiencing a major economic catastrophe. ...

While I completely agree that we should save in good times (i.e. have a falling debt to GDP ratio), we are not in good times and it’s quite likely that trying to save too much in bad times will be counterproductive. A primary reason why we want to be creditworthy is to have the ability to borrow for times like this. I simply have a hard time understanding why preparing for the next crisis should supersede adequately dealing with the current one.

It's easy to miss, but Mankiw actually covers this when he says " In normal times, when we are lucky enough to enjoy peace and prosperity, the debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling." Notice the key words "normal" and "prosperity". That's what Owen is saying too, we should a surplus in good (normal, prosperous) times. But we should also run deficits in bad times so that on balance the debt load is stable (or hits some target). Mankiw slips in the part about a surplus in good times, though the qualifiers are easy to miss, but fails to address what to do in a recession (these are not the normal, prosperous times he cites as a condition for a falling ratio). That's a big omission because many people are going to conclude he is pushing austerity, i.e. reducing the debt during a severe recession. If he's really saying that (and I don't think he is), he should make it clear. If he's not saying that, if he believes in countercyclical fiscal policy, he should say that as well. Leaving it vague, as he does, is not helpful at all.

PGL comments:

Mankiw’s Mistakes on the Long-Run Debt Issue: Greg Mankiw wants to lecture the President on fiscal sustainability. Alas, his op-ed is full of errors starting with:

Representative Paul D. Ryan, chairman of the House Budget Committee, has a plan to balance the federal budget in 10 years.

Should we just fall out of our chairs laughing at such an incredibly absurd statement? Ryan wants to cut tax rates but assume a level of tax revenues that is over $500 billion a year above what many analysts suggest. And I have a plan to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6 inches. And then we get these canards:

With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years.

Internet bubble? Mankiw really seems to hate that the Clinton years, which started with the 1993 tax rates increases, had better economic performance that either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being positive for all these other years, he should read what both Milton Friedman and Robert Barro were writing on the deficit back in 1979 and 1980 – that the debt in inflation adjusted terms was falling. Hey – I don’t mind a conservative economists lecturing the President on fiscal policy if he gets the facts right. This op-ed, however, fails to get a few key facts right.

Confused Americans want to know: Does Greg Mankiw believe in countercyclical fiscal policy in deep, prolonged recessions or not?

'GOP's Future Lies in Heeding Women's Concerns'

My daughter Amy in the SF Chronicle "on how the GOP can better talk to women":

GOP's future lies in heeding women's concerns, by Amy Thoma (open link): The Republican Party needs help. That might be the understatement of the past two election cycles. It seems that we're hemorrhaging voters - especially young women. Registration numbers released this month only underscore the party's need to expand its base. We're not giving women my age enough reasons to stay or join.

As a 30-ish young professional, I don't see much coming out of the party that resonates with me. We didn't lose twentysomething and thirtysomething women in the last election because our digital efforts lagged (though they did) or because some crazy white guys said ridiculous things about rape (though they did), but rather because no one bothered to ask what we think or care about. I don't see any women on the national scene I relate to, and I don't hear any politicians addressing issues I care about.

I want the Republican Party to succeed. A successful two-party system is necessary to enact reasonable public policy, and I still believe that entrepreneurship, personal responsibility and freedom make the United States great. And Republicans are best positioned to promote these ideas. ...

Crying Wolf, Bear, Lion -- Whatever It Takes

For conservatives, there is always a crisis just around the corner that just so happens to support and compel the policies they advocate. But like tomorrow, the crisis never comes:

Liz Cheney Is Even More Bonkers Than We Suspected, by Jon Chait: Liz Cheney’s op-ed in today’s Wall Street Journal is an important and alarming document. She is not a marginal figure... And she ... is obviously stark raving mad.

Even after four years of bug-eyed right-wing paranoia, Cheney’s op-ed stands out for its utter dearth of the slightest whiff of perspective or factual grounding. President Obama, she tells us,... does not want the economy to grow. (“He believes in greater redistribution of a much smaller pie.”) Obama “seems unaware that the free-enterprise system has lifted more people out of poverty than any other economic system devised by man” — which is odd, because Obama is always saying things like “business, and not government, will always be the primary generator of good jobs...” The best approximations of America’s future under Obama are tiny European nations that lack control of their own currency. (“If you're unsure of what this America would look like, Google ‘Cyprus’ or ‘Greece.’”) ...

The most telling piece of Cheney’s rant may be a quote she uses, from Ronald Reagan in 1961... In that speech, Reagan argued that establishing Medicare would inevitably lead ... inevitably ... to full government control over the entire economy...

Conservatives still quote this speech a lot, strangely considering it a prescient warning rather than evidence that their fears of Big Government are usually totally wrong. The paranoia is simply transferred from one event to the next. ... Reagan, speaking a quarter-century later, assured his audience that he loved Social Security but that Medicare would surely fulfill those same warnings. Republicans now pledge their love for Medicare but see Obamacare as the death knell for freedom.

Cheney, typically, draws the usual lesson. “President Reagan's words, spoken 52 years ago this weekend, still ring true, with one modification,” she writes, “If we don't defend our freedoms now against the onslaught of President Obama's policies, we won't have to wait until our sunset years for American freedom to be a distant memory.” The destruction of freedom keeps happening in America, and yet, somehow, not happening. It perpetually lies just over the horizon, close enough to keep refreshing the supply of right-wing paranoia.

Inflation will soar, interest rates will spike, blah, blah, blah. When people start to catch on to the 'cry wolf to make ideological gains' strategy, conservatives shift to a new warning about a dismal future. It's always sunset in America unless we follow their policies.

Speaking of sunset in America and destroying the economy, we should perhaps remember that Obama inherited an economy that was already destroyed. Let's see, who was president before Obama (hint: the same clowns were defending him even though they now hardly speak his name)?

Why Don’t Politicians Care about the Working Class?

We are live:

Why Don’t Politicians Care about the Working Class?, by Mark Thoma: If we want to ensure that our children and grandchildren have the brightest possible future, the national debt is not the most important problem to address. Reversing the polarization of the labor market – the hollowing out of the middle class and the associated rise in inequality over the last thirty years or so – is much more important. But money driven politics and a political class that has all but forgotten about the working class – Democrats in particular have forgotten who they are supposed to represent – stand in the way of progress on this important problem. ...

'For 'Faster Growth,' Soak the Poor?'

Glad to see someone (Josh Barro) trying to counter the latest nonsense from George Shultz, Gary Becker, Michael Boskin, John Cogan, Allan Meltzer, and John Taylor:

For 'Faster Growth,' Soak the Poor?, by By Josh Barro: This weekend, the Wall Street Journal assembled a redoubtable list of conservative heavies in economics (George Schulz! Gary Becker! John Taylor!) to produce a completely insane account of what is wrong with America's economy and how to fix it. The upshot of the piece is that the U.S. economy is in the tank because the government gives too much money to poor people, and so it should stop. ...

The article is another great example of conservatives' empathy gap on economic issues. The authors emphasize that entitlement cuts must be done in a "humane" way. But they do not stop and think about whether a one-third reduction in Social Security benefits would seem humane to a middle-class person who depends on Social Security as his largest source of income in retirement, as most do. They don't reckon with the possibility that capping the federal commitment to Medicaid would have not just fiscal effects but also human ones: denying health care to people who need it and cannot afford it. ...

So why respond to the poverty-trap problem by calling for big cuts to benefits? The answer, of course, is that every economic ill must be shoehorned into an argument for lower taxes and less government spending. If a proposed solution to an economic problem doesn't involve taking benefits away from poor people, then it's not a solution at all -- at least by the logic that prevails on the Wall Street Journal editorial page.

The Sequester Game

A few thoughts about the sequester and the political battle surrounding it.

First, recall how it came about. When Democrats and Republicans in Congress couldn't agree on how to cut the budget deficit -- budget cuts or tax increases, and who bears the burden -- they decided to connect a "ticking clock" to a "bomb" of budget cuts that both sides would find loathsome. The cuts would hack away at favorite programs of both sides and be so terrible that the two sides would certainly come to an agreement rather than let the bomb go off.

But suppose one side believes the cuts they object to, the cuts to defense for example, will be easy to reinstate down the road by whipping up public pressure, while the other side's programs will be much harder to bring back. Then the right strategy is to let the cuts happen, then do your best to get your programs reinstated while at the same time blocking the other side (and there's probably some bias on both sides about how much the public values the programs they support, and this bias makes it more likely that the thinking above will take hold -- let the cuts happen, the public will support my side, the programs my side likes will return, and the other side's programs will be gone).

The reinstatement of programs (or tax increases) will surely involve compromise to some extent, agreeing to support programs or taxes the other side likes in return for their support of your programs. But given the lack of compromise to date I have to laugh at myself for saying that, and it's more the game will be to try to force reinstatement without any compromise by creating public backlashes against cuts (to say defense). In fact, we've seen some of this already.

The sequester was supposed to make it too costly for the two political parties to fail to come to an agreement. Each side would put up programs it really likes and the threat of losing them would motivate compromise. But the programs one side really likes are also generally the programs the other side really hates, and so long as it is believed that your programs have broad public support and are likely to be reinstated, the best strategy is to do exactly what was done, let the cuts happen and then have the political fight over what to bring back.

Republicans don't believe that, in the long-run, support for defense will be eroded. Future budgets (and fear-mongering) will take care of that. They do believe they can block tax increases, mostly anyway, and block lots of programs Democrats support from returning.

And they may be correct. Obama's attempt to generate public support by warning about all the bad things that will happen fell flat, so far anyway (it could change as the impact begins to be felt), and I think that Republicans are winning this battle. Unfortunately, that victory comes at a cost, the recovery of output and employment will be slower because of this ideological battle over the size and role of government. But that's a price Republicans are willing to pay in order to deliver this ideological victory to key constituents (most of whom are employed and doing quite well).

'Economists and the Theory of Politics'

Henry Farrell at Crooked Timber (I shortened the excerpt):

Economists and the theory of politics: It’s been interesting to follow the progress of Daron Acemoglu and James Robinson over the last few years ... to a set of vigorous arguments about the pernicious consequences of inequality. ... Now, via JW Mason on Twitter, I see they have a new paper arguing that economists need what some of us would call a theory of politics, and that if they developed one, they’d see why unions were often well worth any deadweight cost.

In this essay, we argue ... that economic advice will ignore politics at its peril... Our basic argument is simple: the extant political equilibrium may not be independent of the market failure; indeed it may critically rest upon it. Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in Western Europe; they have founded, funded and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large impacts on public policy and on the extent of taxation and income redistribution, often balancing the political power of established business interests and political elites. ... This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its impact on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy: it is not sufficient to just focus on the economic costs and benefits.

It would be nice to see more economists starting to think about the world in this way. It would be even nicer to see this paper having some influence on the numerous technocratic pundits who have unconsciously absorbed economists’ way of thinking about policy problems.

No disagreement here. The interaction between economic policy and the institutional/political environment it operates in doesn't get enough attention.

'Cogan, Taylor, and the Confidence Fairy'

More on John Taylor (and John Cogan, this was briefly mentioned at the end of an earlier post along with a link to a rebuttal from Noah Smith):

Cogan, Taylor, and the Confidence Fairy, by Paul Krugman: Ugh. And I say that advisedly. John Cogan and John Taylor have a piece in the WSJ (where else) arguing that the latest Ryan budget would actually be expansionary, because confidence! It’s as if all the experience of recent years, in which the confidence fairy has yet to make an appearance, hasn’t happened.

But this is fairly standard; why the ugh?

Partly because the Ryan budget is so obviously ludicrous; it’s distressing to see credentialed economists lending support to the thing.

But also because Cogan and Taylor make a basically dishonest claim about the state of research. Reading them, you’d think that anyone who believes that contractionary policy is contractionary is just a simpleton who doesn’t know about expectations...

Actually,... the notion that Keynesians don’t believe that expectations of future conditions affect decisions today is … strange. Both old Keynesian and new Keynesian models — like Mike Woodford, whom they appear never to have read — are very much about expectations.

In fact, the only interesting question here is why their results are so different from Woodford’s. ...

Anyway, sad stuff to see, and a disservice to readers.

And, in a follow-up post

Demystifying Taylor’s Confidence Fairy (Wonkish): I was wondering, but Noah Smith does the work. ...

Of course, none of this matters to most WSJ readers; this stuff confirms their prejudices, and that’s all they care about. Still, they should know that what they’re getting isn’t what “modern macroeconomics” says; it’s just what a couple of guys who are actually very much at odds with many other modern macroeconomists say.

They claim that if we restrain government spending, "the economy would start to grow right away." But we have already restrained spending considerably, and the promised growth hasn't appeared.

It reminds me of the growth we were promised after the Bush tax cuts. We're still waiting for that.

The Freedom to Exert Economic and Political Power

I agree with some of this, and I definitely agree with the last sentence of the following "explanation" of inequality from John Taylor -- a "poor diagnosis of the [inequality] problem will lead us in the wrong direction":

Economic Freedom For All, by John Taylor: In talks..., I argue that shifts toward and away from the principles of economic freedom have had profound effects on economic performance. From the mid-1960s through the 1970s, deviations away from economic freedom were large, economic policy was bad, and economic performance was poor with rising unemployment and inflation and falling economic growth. During the 1980s, 1990s, and until recently, deviations were smaller, policy was better, and economic performance improved; unemployment and inflation declined and growth picked up. In recent years policy has been poor and so has economic performance with high unemployment and low economic growth.

Many ask about how changes in the distribution of income fit into this story...

A large body of research documents that returns to education started increasing in the 1980s as evidenced by the growing college and high school wage premium. ... The source of the income distribution problem is thus related to a poor education system. We are restricting educational opportunities, especially for those who are disadvantaged.

In other words the explanation for the widening inequality is the restriction of economic freedom rather than the promotion of economic freedom. Economic freedom did not mean economic freedom for all. ...

Not extending economic freedom to all in the area of education is only one example of how deviations from economic freedom can adversely affect the distribution of income. ...

Ironically some argue that moving further away from the principles of economic freedom—with higher marginal tax rates or more regulations on firms or more discretion for regulators or more interventionist macro policy—is the way to improve the economy and the distribution of income. That would be a great tragedy since history shows that over the long haul it has been more economic freedom that has pulled people out of poverty. The point is not that income distribution isn’t a problem; it is that a poor diagnosis of the problem will lead us in the wrong direction.

The increase in inequality occurred during an era of deregulation, so I can't agree with his basic premise. In any case, I am all for increasing opportunity, and for improving access to education. But the story that inequality is a result of education (and the freedom thing) doesn't hold up to closer scrutiny. It's a "poor diagnosis of the problem":

OK, I see that some people are doubling down on the claim that rising inequality is all about education — when what the CBO report drives home is that this is all wrong, the big increase has come from gains at the very top. ...

Yes, college grads have done better than non; but inequality in America is mainly a story about a small elite pulling away from everyone else, including ordinary college grads. And we’ve know this for a long time! There is no excuse for getting it wrong.

The "Regulatory capture by large firms, crony capitalism, deviations from the rule of law, [and] bailouts of the creditors of large financial firms" certainly contributed to inequality (though his comments about the Fed seem more like sour grapes than analysis). But the problems he describes such as regulatory capture, crony capitalism, etc. are largely about the economic and political power enjoyed by the wealthy. It's hard to see how having government step even further out of the way than it has since the 1970s -- less oversight, less regulation, lower taxes at the top, etc., etc. -- will solve these problems.

[Taylor also has an op-ed in the WSJ. Noah Smith responds.]

'How Did Once-Respectable Conservative Economists Get Swept Up in Moocher Class Mania?'

Brad DeLong: reviews Nicholas Eberstadt's "A Nation of Takers":

... If there was a single moment when Mitt Romney lost the 2012 presidential election, it was in May when he stood in front of the $50,000-a-plate audience at Sun Capital honcho Marc Leder’s home in Boca Raton and spoke his soon-to-be-infamous words:

There are 47 percent of the people who will vote for the President no matter what…. There are 47 percent who are with him, who are dependent upon government…who believe that government has a responsibility to care for them, who believe that they’re entitled to health care, to food, to housing, you name it…. These are people who pay no income tax…. My job is not to worry about those people—I’ll never convince them that they should take personal responsibility and care for their lives…

This is what Mark Schmitt of the Roosevelt Institute calls “the theory of the moocher class.” And Romney is all in with it. ...

Those of us who know the numbers, or who simply live in America and look around, know that the 47 percent who aren’t paying federal income taxes this year are by and large not “moochers.” About a fifth are elderly retired. About two-thirds are in households with incomes of less than $20,000 a year—definitely not living high. And nearly one-third owe no income taxes because of the earned-income and child tax credits, which both became law with bipartisan support.

As a group, the 47 percent who pay no income taxes do not lack work ethic. They do take personal responsibility for their lives. They may not pay federal income taxes this year, but they pay plenty of sales, property, and payroll taxes. For the most part, they do not constitute the Democratic base. More than half of the 47 percent are the elderly white and Southern white voters who voted for Romney by substantial margins.

So how does someone like Romney, along with his peers and all their staffs and everyone else in that Boca Raton room, become convinced that 47 percent of Americans are the moochers, the takers, dependent on “free gifts” from the government, lacking work ethic, lacking personal responsibility?

Enter Nicholas Eberstadt of the American Enterprise Institute (AEI), with his contribution to the think tank’s “New Threats to Freedom” series. We need venture no further into A Nation of Takers than the bottom of the second page…

As I noted yesterday, conservatives are still blaming their loss in the presidential election on the idea that Democrats are "giving away free stuff" to their constituents. I think this passage highlights the mistake they are making:

The truth is that the American government spends much of its money transferring resources from some members of the broad middle class to others in the same class: unemployment insurance, Social Security, Medicare, and increasingly Medicaid (which every day shifts more from a program focused on the nonelderly poor to one spending a greater share on the disabled and on the elderly who can no longer make their Medicare co-payments). The recipients of these social-insurance benefits do not think of themselves as moochers. They paid into these systems. They believe that they earned those benefits—and in large part they did.

Eberstadt sees things differently...

The good thing -- for Democrats -- is that the more that conservatives are criticized over this, the more they seem to dig in their heels.

Clawing Back 'Free Stuff for the Wealthy'

Conservatives are still blaming their loss in the presidential election on "giving away free stuff":

Today on CNN, president of the American Conservative Union Al Cardenas offered an explanation for conservatives’ defeat in November: They weren’t giving away free stuff. He said, “plenty of people have asked me what happened after the 2012 election. . . . Well, look, we were selling broccoli to 70 percent of the American electorate, and they were giving away cheesecake to 100 percent of the electorate.”

They call most everyone who isn't white and rich moochers, and then whine about losing.

But who are the real recipients of income they did not earn? Over the last several decades, almost all of the gains from economic growth have gone to the top. Income flowing to lower income levels has not kept up with changes in worker productivity, and that means members of some group -- guess which one -- received income that exceeds their productivity growth, i.e. in excess of their contribution to national output.

Clawing some of that income back through taxes or other means is far from mooching. In fact, it supports a core conservative idea, making sure that people receive the income that they've earned (or, the flip-side which is being pitched above -- please excuse the double negative -- the conservative obsession with making sure that people don't get income they do not deserve).

Paul Krugman: After the Flimflam

Is the tide turning?:

After the Flimflam, by Paul Krugman, Commentary, NYTimes: It has been a big week for budget documents. In fact, members of Congress have presented not one but two full-fledged, serious proposals... Before I get to that, however, let me talk briefly about the third proposal presented this week — the one that isn’t serious, that’s essentially a cruel joke.

Way back in 2010, when everybody in Washington seemed determined to anoint Representative Paul Ryan as the ultimate Serious, Honest Conservative, I pronounced him a flimflam man. Even then, his proposals were obviously fraudulent... Since then, his budgets have gotten even flimflammier. ...

The good news is that Mr. Ryan’s thoroughly unconvincing policy-wonk act seems, finally, to have worn out its welcome. ... This time..., quite a few pundits and reporters have greeted his release with the derision it deserves.

And, with that, let’s turn to the serious proposals.

Unless you’re a very careful news reader, you’ve probably heard about only one of these proposals, the one released by Senate Democrats. And let’s be clear: By comparison with the Ryan plan,... this is a very reasonable plan... It is, however, an extremely cautious proposal... the plan really should be calling for substantial though temporary spending increases. It doesn’t.

But there’s a plan that does: the proposal from the Congressional Progressive Caucus ... which calls for substantial new spending now ... offset by major deficit reduction later in the next decade, largely though not entirely through higher taxes on the wealthy, corporations and pollution. ...

There are no Ryan-style magic asterisks,... this honest proposal ... rests on solid macroeconomic analysis, not the fantasy “expansionary austerity” economics ... that Mr. Ryan continues to espouse despite the doctrine’s total failure in Europe. ...

And it’s refreshing to see someone break with the usual Washington notion that political “courage” means proposing that we hurt the poor while sparing the rich. No doubt the caucus plan is too audacious to have any chance...; but the same can be said of the Ryan plan.

So where is this all going? Realistically, we aren’t likely to get a Grand Bargain any time soon. Nonetheless, my sense is that there is some real movement here, and it’s in a direction conservatives won’t like.

As I said, Mr. Ryan’s efforts are finally starting to get the derision they deserve, while progressives seem, at long last, to be finding their voice. Little by little, Washington’s fog of fiscal flimflam seems to be lifting.

Why Does Anyone Listen to Paul Ryan?

Paul Krugman has questions for the fans of austerity in recessions:

Night of the Living Alesina, Continued: So, while I was dealing with real life yesterday ... Paul Ryan weighed in. ... Like almost everyone on his side (and many centrists), Ryan pretends that Keynesians are for fiscal stimulus always and everywhere — as opposed to the reality, that it’s about doing something in a liquidity trap, when monetary policy can’t cure mass unemployment. But what really struck me was his assertion that the notion that spending is expansionary and austerity contractionary has been debunked by “lots of studies”. Which studies, exactly?

I think it all comes back to Alesina and Ardagna — which, to repeat has been more thoroughly refuted by both academic criticism and real-world experience than any other popular doctrine I can think of. If Ryan’s faith is unshaken, that says everything about him and nothing about the evidence.

And let me ask a broader question: what, exactly, have Ryan and the economists he likes to cite gotten right these past, oh, five years? ...

Some of them were actually right about the impact of spending. They warned that spending cuts would hurt the economy and lower employment -- if they were military cuts -- not seeming to care that it contradicted their claims about austerity and spending in other areas. But why should they care if it works?

To answer the question, the mistake is to think their goal is to help the economy rather than use the recession as a blunt weapon to attain political goals. From that perspective, there have been gains. They've effectively blocked policies that go against their ideological beliefs (smaller government to allow lower taxes on the wealthy), they've seriously clouded the public debate on fiscal policy in a way that favors their long-run goals, and they've moved the center of the debate (the so-called Overton window) far, far to the right. Looking through an ideological filter, it's much easier to see what they have "gotten right these past, oh, five years".

Goalposts on Wheels

James Kwak:

Moving the Goalposts, by James Kwak: Ezra Klein yesterday highlighted one of the underlying problems with even apparently informed discussions of deficits and the national debt: the CBO’s “alternative fiscal scenario.” As opposed to the (extended) baseline scenario, which simply projects the future based on existing law, the alternative scenario is supposed to be more realistic. And it is more realistic in some ways: for example, it assumes that spending on Afghanistan will follow current drawdown plans, not a simple extrapolation of the current year’s spending. But the problem is that it has become excessively conservative in recent years—to the point where, as Klein says, “Policy makers, pundits and others almost exclusively use this model to stoke Washington’s deficit anxieties.”

The basic problem is that the alternative fiscal scenario simply assumes, without further support, that laws will mysteriously change in ways that reduce tax revenue and increase spending (relative to current law). As I put it a while ago,

“ The definitive report on our long-term budget gap implicitly assumes that we do nothing about that budget gap — that we keep cutting taxes and blocking spending cuts at every opportunity.”

Or, in other words, it assumes that Republicans win every fight over taxes and Democrats win every fight over spending.

Things weren’t always this way. ... I didn’t realize until reading Klein’s blog post that the CBO changed its spending assumption just last year. ...

It’s almost as if, as Congress does things that reduce the long-term national debt (like the Budget Control Act of 2011, which may be a stupid bill, but did reduce the debt under current law), the CBO moves the goalposts further away so the problem remains the same size. ...

'Flimflam Forever'

I haven't had a chance to say anything about the Ryan budget plan that was released today, but Paul Krugman has:

Flimflam Forever: I took Paul Ryan’s measure two and a half years ago. All the Very Serious People were very angry with me — Ryan was the Serious, Honest Conservative, the guy centrists demonstrated their centrism by praising. But he was an obvious phony. His “plan” was all smoke (I couldn’t even find any mirrors), with all the alleged deficit reduction coming from closing tax loopholes he refused to specify plus projected reductions in discretionary spending that he also refused to specify. Meanwhile, he was pursuing radical redistribution away from the needy to the wealthy.

Nothing has changed, except that the plan has gotten even crueler.

So while I may do some analysis later today, the only really interesting question is how the VSPs will react. Have they had enough of the Flimflam Man? Or does hype spring eternal?

Reminds me of his "Nutty Views on Monetary Policy," his "Imaginary Expertise in Economic Policy," and his previous effort, "The Most Fraudulent Proposal in American History":

If you think the middle class has it too good, too much security, taxes aren't high enough, not enough fear of unemployment, too much help for education, and so on, while the wealthy haven't been coddled enough in recent years, not enough tax cuts, too little upward redistribution of income, not enough bank bailouts, etc., etc., then [this proposal] should make you happy.

Can the Fed Burst the Next Bubble Before It’s Too Late?

The Fed is trying to figure out how to respond to asset price bubbles:

Can the Fed Burst the Next Bubble Before It’s Too Late?

The "Geenspan doctrine" is dead, but will it be replaced by the "Bernanke doctrine" or the "Stein doctrine"? I argue that both of these approaches miss an essential element for successful anti-bubble policy.

'The Monetary Union has Always been about Forging Peace'

Spiegel interviews Luxembourg prime minister and former Euro Group chief Jean-Claude Juncker:

... SPIEGEL: For eight years, you were a kind of informal president of the monetary union. When you take stock of your accomplishments during this period, don't you have to admit that Europe has tended to drift apart rather than become more close-knit?

Juncker: For my generation, the monetary union has always been about forging peace. Today, I notice with a certain sense of regret that far too many Europeans are returning to a regional and national mindset.

SPIEGEL: What do you mean by that?

Juncker: The way some German politicians have lashed out at Greece when the country fell into the crisis has left deep wounds there. I was just as shocked by the banners of protesters in Athens that showed the German chancellor in a Nazi uniform. Sentiments suddenly surfaced that we thought had been finally relegated to the past. The Italian election was also excessively anti-German and thus un-European.

SPIEGEL: You're exaggerating. No one today seriously doubts peace and friendship in Europe.

Juncker: That's true. But anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven't been banished; they are merely sleeping, as the wars in Bosnia and Kosovo have shown us. I am chilled by the realization of how similar circumstances in Europe in 2013 are to those of 100 years ago. ...

SPIEGEL: The young generation tends to tune out when Brussels politicians lecture them again about the trenches of Verdun.

Juncker: Indeed, we can't completely rely on the aberrations of history to explain today's European necessities. Future-related issues are no less pressing. By the middle of this century, Europe will comprise only a good 7 percent of the world's population. Already today, over 80 percent of economic growth comes from other regions of the globe. A united Europe is our Continent's only chance to avoid falling off the world's radar. The heads of government of Germany, France and the United Kingdom also know that their voice is only heard internationally because they speak through the megaphone of the European Union. ...

Do the heads of these countries know that "their voice is only heard internationally because they speak through the megaphone of the European Union"? I'm not so sure that they do. As for the sleeping demons, comments on this? Are they a real threat?