Economist's View

'Our Top priority Should be Middle Class Jobs'

The President's weekly address:

Remarks of President Barack Obama As Prepared for Delivery The White House February 23, 2013: Hi, everybody. Our top priority as a country right now should be doing everything we can to grow our economy and create good, middle class jobs.

And yet, less than one week from now, Congress is poised to allow a series of arbitrary, automatic budget cuts that will do the exact opposite. They will slow our economy. They will eliminate good jobs. They will leave many families who are already stretched to the limit scrambling to figure out what to do.

But here’s the thing: these cuts don’t have to happen. Congress can turn them off anytime with just a little compromise. They can pass a balanced plan for deficit reduction. They can cut spending in a smart way, and close wasteful tax loopholes for the well-off and well-connected.

Unfortunately, it appears that Republicans in Congress have decided that instead of compromising – instead of asking anything of the wealthiest Americans – they would rather let these cuts fall squarely on the middle class. ...

Are Republicans in Congress really willing to let these cuts fall on our kids’ schools and mental health care just to protect tax loopholes for corporate jet owners? Are they really willing to slash military health care and the border patrol just because they refuse to eliminate tax breaks for big oil companies? Are they seriously prepared to inflict more pain on the middle class because they refuse to ask anything more of those at the very top?

These are the questions Republicans in Congress need to ask themselves. And I’m hopeful they’ll change their minds. Because the American people have worked too hard for too long to see everything they’ve built undone by partisan recklessness in Washington. ...

Making America a magnet for good jobs. Equipping our people with the skills required to fill those jobs. Making sure your hard work leads to a decent living. That’s what this city should be focused on like a laser. And I’m going to keep pushing folks here to remember that.

Thanks.

I suppose it's a sign that the president has compromised like he claims, but the compromise has gone too far already from my perspective and I am not enthralled with his deficit reduction plan (though at least Obama finally seems to be getting his priorities -- jobs first -- correct).

'No Longer'

Thomas Friedman:

... Mexico still has huge governance problems to fix, but ... after 15 years of political paralysis, Mexico’s three major political parties have just signed “a grand bargain ... to work together to fight the big energy, telecom and teacher monopolies that have held Mexico back. If they succeed, maybe Mexico will teach us something about democracy. Mexicans have started to wonder about America lately, said Bichara from the Center for Citizen Integration. “We always thought we should have our parties behave like the United States’ — no longer. We always thought we should have the government work like the United States’ — no longer.”

[The column is about "How Mexico Got Back in the Game," but Dean Baker disagrees with Friedman's optimistic view of Mexico's economic future.]

'Gambling with the Economy for Political Ends'

Change "George Osborne" to "the Republican Party," the "UK" to the "US," and this pretty much holds true. From Simon Wren-Lewis:

... As Paul Krugman has pointed out many times, the ‘debt problem’ is seen by many on the right as a useful cover to reduce the size of the state. Seen through this lens, the details of the austerity programme make much more sense. A focus on demand ‘rich’ items like investment, local authority spending and welfare, and avoiding temporary increases in taxes that have a much lighter demand impact? - because the aim is to permanently reduce the size of the state. George Osborne was prepared to take a gamble with the economy for political ends.

Of course all Chancellors are politicians. Most would take small liberties with the macoeconomics to gain political advantage: for example before 1997 by delaying raising interest rates until after the party conference, or after 1997 by being a little too optimistic about tax receipts to minimise unpopular tax increases. However in most cases these are the equivalent of minor indiscretions, which do not fundamentally alter the fortunes of the economy. The centrepiece of Osborne’s strategy was accelerated austerity for political ends, and it stopped the recovery dead.

So my final verdict on George Osborne? He is a political tactician, who time and again has put party political gain ahead of the economic interests of the economy. ... It is defined by both what he has not done (total inaction on monetary policy, when - unlike the US and Europe - he has considerable power), as well as what he has done (accelerated austerity). The politics may still come good for him, but the damage to the UK economy his action and inaction has caused is final.

When the recession hit, I expected politicians on both sides of the aisle to care deeply about the struggles of households dealing with unemployment, foreclosure, and other problems that were caused by events outside their control. Working class households didn't cause the problems, but they certainly felt the costs. But I feel kind of silly thinking that now, as it is clear that ideological goals, e.g. smaller government so that taxes on the wealthy can be lowered, are much more important to Republicans than the travails of middle class households. Even Democrats seemed to forget that the unemployed need to come first, and Democrats have not fought as hard -- win or lose -- to help those in need as I expected.

The fact that Republicns in particular have put "political gain ahead of the economic interests of the economy" ought to trigger outrage. Why isn't the public outraged (they kind of are, but the anger is, I think, misdirected)? One answer is that the media/pundits haven't been able to move from the center and point fingers at the true cause, Republican obstructionsism, hostage taking, and the like to get their way. But why not? Why has the media let us down? Why hasn't public pressure driven by media reports caused politicians on the right to change course? Paul Krugman tries to answer:

...they won’t change course; basically, they can’t, for careerist reasons. And that’s the story of a lot of what’s going on now.

Ralph Waldo Emerson understood this. The original version of his famous quote — I had forgotten this — reads:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

I don’t know about the divines bit, but the little statesmen thing is completely accurate. Suppose George Osborne were to admit that austerity isn’t working. What, then, would be left of his claim to be qualified to do, well, anything? He has to stick it out until something turns up, no matter how many lives it destroys.

Pretty much the same thing is going on among pundits now stuck in what Jonathan Chait memorably calls the “fever swamp of the center”. Suppose that some pundit who has spent his whole career calling for bipartisanship, a compromise between the extremes of left and right, were to admit the plain fact that Obama is very much a centrist, who is in particular proposing deficit reduction through exactly the kind of mix of tax hikes and spending cuts “centrist” pundits demand — and that the GOP, by contrast, is an extremist organization whose extremism is almost solely responsible for the bitterness of the partisan divide. A pundit making that admission would in effect be saying that everything he has said and done for the past several years was not just useless but harmful, actively misleading readers about the state of the debate. He just can’t do it.

The point is that a large part of the reason we’re locked into such a mess is careerism. And yes, that’s quite vile, if you think about it: politicians and pundits alike letting the world burn — probably unconsciously, but still — because their personal position would be hurt if they admitted to past mistakes.

And a pundit "making that admission" would be accused by Republicans as taking sides, something they can't seem to do while they are stuck in the “fever swamp of the center”. They might be viewed as partisan, and that would, in their minds, undermine their credentials as unbiased, very serious centrist observers. But when they refuse to take sides -- when they always put themselves in the middle and blame both Republicans and Democrats equally, or approximately so -- it makes it very easy for Republicans to pull the debate (the so-called Overton window) to the right and to keep the public in the dark about what is really interfering with progress in Congress that might actually help the majority of the people rather than the select few.

'David Brooks, Obama Plan Birther'

I was going to post this earlier today, but decided not to:

Jon Chait is unhappy with David Brooks:

David Brooks, Obama Plan Birther: ... David Brooks today ... lashes out at the obstinacy of the Republican Party and its refusal to compromise on the deficit. But he has to balance it out by asserting that President Obama, too, lacks any such plan...

This is demonstrably false. Whatever you think about the substantive merits of Obama’s plan, it does exist. ...

So is Steve Benen:

When false claims drive the debate: As best as I can tell, New York Times columnist David Brooks is a well-connected pundit. Powerful people return his phone calls, and when he wants information from top governmental offices, Brooks tends to get it.

And with this in mind, it's puzzling that Brooks based his entire column today on an easily-checked error. The conservative pundit insists President Obama "declines to come up with a proposal to address" next week's sequester mess, adding, "The president hasn't actually come up with a proposal to avert sequestration."

I'll never understand how conservative media personalities get factual claims like this so very wrong. If Brooks doesn't like Obama's sequester alternative, fine; he can write a column explaining his concerns. But why pretend the president's detailed, already published plan, built on mutual concessions from both sides, doesn't exist? ...

But this addition, via Brad DeLong, changes my mind -- this is worth echoing:

Ezra Klein Smacks Down David Brooks: "Centrism" Weblogging, by Brad DeLong: Unbelievable:

David Brooks: In my ideal world, the Obama administration would do something Clintonesque… a budget policy… like… Robert Rubin… and if the Republicans rejected that, moderates like me would say that’s awful…

Ezra Klein: I’ve read Robert Rubin’s tax plan. He wants $1.8 trillion in new revenues. The White House… is down to $1.2 trillion…. [T]he White House’s offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts…

At this point David Brooks has a choice: he can say "I am an idiot who does not know what I am talking about"; or he can change the subject.

Guess what he does?

David Brooks: My first reaction is I’m not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn’t do enough on entitlements…

If I were running the New York Times, I would look at this and immediately say: We need to get Brooks out of our pages yesterday if not before, and we need an Ezra Klein of our own very badly.

Why oh why can't we have a better press corps?

The context: Does Obama have a plan? A conversation with David Brooks: ...

A much longer take:

Ezra Klein: In the column, you said that the Obama administration doesn’t have a plan to replace the sequester. I feel like I’ve had to spend a substantial portion of my life reading their various budgets and plans to replace the sequester, and my sense is that you’ve had to do this, too. So, what am I missing?

David Brooks: First, the column was a bit of an over-the-top… I probably went a bit too far when saying the president didn’t have a response to the sequester…. I was unfair…. [But] there’s no scorable plan they’ve come up with, at least this time around… it would serve the country well if they put out something specific….

EK: CBO did score the president’s budget, and almost all of their proposals are drawn from that. I find, in general, that legislators often ask Elmendorf if he’s scored things from the White House and then crow about the fact that he hasn’t, when all that’s really going on is CBO doesn’t score everything the president does or says.

DB: If you look at the charts I’ve seen, they’re targets that, say, cut x from agriculture spending, and specifically how you do that is vague…. I think having something concrete and standalone is the way for the president to go… he's got a responsibility…. I don’t think he’s given us a document that would anchor the debate in a boring, managerial framework so we can have a debate over substance.

EK: On that point, one theme in your column, and in a lot of columns these days, is this idea that the president should, on the one hand, be putting forward centrist policies, and on the other hand, that if he’s putting forward policies that the Republican Party won’t agree to, those policies don’t count, as they’re nothing more than political ploys… it seems a bit dangerous and strange to say the boundaries of the discussion should be set by the agenda that lost the last election.

DB: In my ideal world, the Obama administration would do something Clintonesque: They’d govern from the center; they’d have a budget policy that looked a lot more like what Robert Rubin would describe, and if the Republicans rejected that, moderates like me would say that’s awful…

EK: But I’ve read Robert Rubin’s tax plan. He wants $1.8 trillion in new revenues. The White House, these days, is down to $1.2 trillion. I’m with Rubin on this one, but given our two political parties, the White House’s offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts….

DB: My first reaction is I’m not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn’t do enough on entitlements…. I agree with you [that Republicans] shouldn’t be given veto power over the debate, but I still think that if you look at what moderates want the administration to do, they have not gone far enough.

EK: What would be far enough, in your view? What would you like to see them offer?

DB: My fantasy package, and I’m not running for office, would include a progressive consumption tax, and it would have chained CPI, and it would have a pretty big means-test of Medicare. I’d direct you to Yuval Levin’s piece in the Times a few days ago, which seemed sensible.

EK: On the topic of deals Republicans should take, I’m completely confused by their stance on the sequester…. They want to reduce the deficit, cut entitlements, protect defense, simplify the tax code by cutting out various expenditures, and lower rates…. Republicans could get four of their five goals by striking a sequester deal, and they could always cut tax rates later, whenever they get into power. What am I missing?

DB: Here’s something I’m confused by: how much they still believe in top rate reductions. I would say in the conservative economist world I think I know almost nobody… super motivated by top rate reductions anymore. I don’t think that’s true with Republican members of Congress. I think there’s a lag between the wonks and the legislators. The second thing is, for them, the big issue is overall size of government. When they try to explain why growth is so slow, it’s because we’re saddled with this large, unproductive public sector, and they need to bring that down. And cutting tax expenditures would generate money for a bigger more unproductive public sector.

EK: So, then, what do you see as the White House’s motivating theory?

DB: If I were to capsulize their theory, it’s lets stabilize the debt over 10 years, maybe do some things that would make it better beyond the 10-year window, but let’s not try to take care of the long-term debt issue all at once. Achieve a floor and then focus on growth and equity. And I guess my response would be, as the [International Monetary Fund] and others have said, if you don’t lay the groundwork for a long-term debt solution now, it gets immeasurably harder every year you wait. I agree there are three big issues — equity, growth and debt — and it’s hard to address all three at the same time. But that’s what we need to do. ...

Paul Krugman: Sequester of Fools

 Take a sad song, and make it worse:

Sequester of Fools, by Paul Krugman, Commentary, NY Times: ... The ... “sequester” [is] one of the worst policy ideas in our nation’s history. Here’s how it happened: Republicans engaged in unprecedented hostage-taking, threatening to push America into default by refusing to raise the debt ceiling unless President Obama agreed to a grand bargain on their terms. Mr. Obama, alas, didn’t stand firm; instead, he tried to buy time. And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week. ...

But that’s water under the bridge. The question ... is who has a better plan for dealing with the aftermath of that shared mistake. ...

Unfortunately, neither party is proposing that we just call the whole thing off. But the proposal from Senate Democrats at least moves in the right direction, replacing the most destructive spending cuts — those that fall on the most vulnerable... — with tax increases on the wealthy, and delaying austerity in a way that would protect the economy.

House Republicans, on the other hand, want to take everything that’s bad about the sequester and make it worse: canceling cuts in the defense budget, which actually does contain a lot of waste and fraud, and replacing them with severe cuts in aid to America’s neediest. This would hit the nation with a double whammy, reducing growth while increasing injustice.

As always, many pundits want to portray the deadlock ... as a situation in which both sides are at fault, and in which both should give ground. But there’s really no symmetry here. A middle-of-the-road solution would presumably involve a mix of spending cuts and tax increases; well, that’s what Democrats are proposing, while Republicans are adamant that it should be cuts only. And given that the proposed Republican cuts would be even worse than ... under the sequester, it’s hard to see why Democrats should negotiate at all, as opposed to just letting the sequester happen.

So here we go. The good news is that compared with our last two self-inflicted crises, the sequester is relatively small potatoes. ... But the looming mess remains a monument to the power of truly bad ideas — ideas that the entire Washington establishment was somehow convinced represented deep wisdom.

'It's an Affinity Thing'

The other day I asked why anyone listens to Bowles/Simpson. After all:

Simpson is, demonstrably, grossly ignorant on precisely the subjects on which he is treated as a guru, not understanding the finances of Social Security, the truth about life expectancy, and much more. He is also a reliably terrible forecaster, having predicted an imminent fiscal crisis — within two years — um, two years ago.

In addition, he is:

cantankerous, potty-mouthed individual, who evidently feels not a bit of empathy for those less fortunate.

He's also partisan, and has a clear agenda. Yet "he’s lionized" by the media. Paul Krugman tries to explain the attraction, and what it says about those who hold him in such high regard.

Good News on Health Care Costs and the Budget

The biggest driver of the "we must cut the national debt now, now, now" is the expectation that the cost of medical services (and hence the cost of Medicare) will escalate rapidly. But that argument is being undercut by new estimates from the CBO:

Here’s some good news on the fiscal front: projected Medicare spending over the 2011-2020 period has fallen by more than $500 billion since late 2010 — based on a comparison of the latest Congressional Budget Office (CBO) projections with those of August 2010. ...

CBO has reduced its projections of Medicare spending in response to a pattern of very low spending growth in the past three years. ... Medicare spending growth has slowed even more than costs in private health insurance, according to Standard & Poor’s and Medicare’s actuary. Although some of the slowdown stems from the recession, CBO Director Douglas Elmendorf and other experts have concluded that a substantial part reflects structural changes in the health care system. Professional associations, hospitals, and doctors are taking steps to curb costly and ineffective procedures and treatment. ...

The deficit hawks want to hurry and cut spending now. Their goal, after all, is smaller government and lower taxes on the wealthy needed to support it. Thus, they need to get the cuts in place before people figure out that they've been misled about the immediacy of the problem -- the scary projections are down the road, not tomorrow -- and that the problem is not as big as we thought.

(And who the hell cares what Bowles and Simpson think? I certainly don't. But apparently someone cares, because even though they couldn't get the committee they headed to agree on their previous budget plan, the unofficial plan they released was treated as official by the media. Now they are back in the news again with a another plan -- sanctioned by nothing but their own egos -- that tries to move the budget discussions more in the direction of what the GOP desires. Please just go away.)

Scarborough and Friends 'Bug-Eyed, Table-Pounding Terror'

After two relatively wonky posts, let's turn to Jon Chait for a bit of (serious) fun:

Scarborough and Friends Trying to Make ‘Debt Deniers’ Happen, by Jonathan Chait: The deficit scold cause has suffered significant intellectual erosion... In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for bug-eyed, table-pounding terror is growing increasingly ridiculous.

But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough ... has a new op-ed in Politico brandishing the epithet. ... Let’s examine their case on the merits...

Analyzing the argument in a Joe Scarborough–authored op-ed is inherently challenging. (The written word in general is just a terrible medium for Scarborough, hiding his winning personality while exposing his inaptitude for analysis.) It mainly consists of using variations of “debt denier” repeatedly to describe his opponents. To his credit, Scarborough finally cites one actual economist... Unfortunately for Scarborough, the economist he cites, Alan Blinder, turns out to hold essentially the same view as Krugman. ... That Scarborough would support his claim that Krugman’s view is “extreme” and “indefensible” by citing Blinder is just a total failure of reading comprehension. ...

It is the belief of the debt scolds that their issue holds such overweening importance that it can only be considered in moralistic terms. To Joe Scarborough and the whole team of anti-debt television personalities, calibrating out the ideal terms of debt reduction is like calibrating out how much to spend fighting Hitler. The fiscal scolds have so successfully inculcated their moralistic urgency about debt, so thoroughly dominated the news agenda, that millions of people like Joe Scarborough think it is self-evidently insane and evil to in any way minimize the awesome scale of the crisis. Scarborough can't really explain why Krugman is wrong, because the nub of the issue is that Krugman's way of looking at the issue simply offends him.

We do have to make adjustments in the long-run, but as Jon Chait notes, "Not only do we not need to start reducing the budget deficit this year, it would actually be harmful to do so with unemployment still high." That's the most important problem we face right now, high levels of long-term unemployment (e.g. see here for how harmful it can be to individuals). If Scarborough and friends would use their "bug-eyed, table-pounding terror" when talking about long-term unemployment, we might get somewhere on addressing this problem. But somehow the struggles of real people in the real world are less important than imaginary problems in the future that, despite dire predictions from the deficit hawks, have not materialized.

We Need Better Budget Hawks

Jared Bernstein:

Why the Budget Hawks Should Retract Their Talons, by Jared Bernstein: The WaPo has another in a series of editorials warning against any complacency in our efforts to stabilize the debt. ... I disagree–here’s my view of the economics of the issue, which I think they have wrong...

But there’s another very important reason why the WaPo’s view is both dangerous and naive right now: the current Congress simply can’t be trusted to achieve deficit savings in a way that’s compatible with either growth or smart governance.

There are too many policy makers today who are driven by deep ideological opposition to government to approach this in a thoughtful way. To the contrary, they’re heavily invested in staying in deficit-freak-out mode so as to slash and burn social insurance, to push balanced budget amendments that would both rob the federal government of counter-cyclical policy and force massive sequesters, and to argue for spending caps that have no reference to the nation’s needs going forward. Arguments like the one in the WaPo simply throw fuel on their fire. ...

At such a time, with such dangerous, dysfunctional ideologues in power, we’re much better off with the modest goal of debt stabilization over the 10 year budget window (and, in fact, the spending cuts we’ve legislated already go too far...), a point that is only amplified by the recent slowing of health care costs, as this too provides us with a bit more breathing room in terms of thoughtfully addressing future budget pressures.

It’s just not smart at all to foment emergency–especially when there is none–without a lot more thought about who’s on the squad that’s supposed to respond to the problems for which you’re ringing the alarm bells. ...

We have the time to get this right, but Congress does have trouble on this issue and it's understandable that people -- who have been misled about the degree of immediate danger from the debt -- would look for a way to force progress on the long-term debt issue. But creating fake emergencies that force bad decisions, many of which will likely need to be undone later with all of the same political difficulty and controversy, is not the way to get this done. (I don't object so much to the ideology or the passion with which some people express their views, it's the means to this end that bother me. If people want a smaller government they have that right, let them make an honest argument and we'll go from there. But the "honest argument" part is far, far from being satisfied, and the press has played into the ability of the zealots to lead this charge based on false pretenses.)

'Has the Mainstream Media Finally Had Enough?'

Kevin Drum has a question:

Has the Mainstream Media Finally Had Enough?, by Kevin Drum: I'm curious. It seems to me that something has happened over the past three months: the nonpartisan media has finally started to internalize the idea that the modern Republican Party has gone off the rails. Their leaders can't control their backbenchers. They throw pointless temper tantrums about everything President Obama proposes. They have no serious ideas of their own aside from wanting to keep taxes low on the rich. They're serially obsessed with a few hobby horses — Fast & Furious! Obamacare! Benghazi! — that no one else cares about. Their fundraising is controlled by scam artists. They're rudderless and consumed with infighting. They're demographically doomed. ...

The framing of even straight new reports feels just a little bit jaded, as if veteran reporters just can't bring themselves to pretend one more time that climate change is a hoax, Benghazi is a scandal, and federal spending is spiraling out of control. It's getting harder and harder to pretend that the same old shrieking over the same old issues is really newsworthy.

Question: Am I just imagining this? Or has there really been a small but noticeable shift in the tone of recent reporting?

Paul Krugman says:

On both sides of the Atlantic, the austerians seem to be freaking out. And that has to be good news, an indication that they realize, at some level, that they’re losing the debate. ... Unfortunately, these people have already done immense damage, and still retain the power to do a lot more.

The last sentence is my answer to Kevin Drum's question. Even if there is a lull, I expect it to be temporary and I wonder if they've learned anything along the way.

Paul Krugman: Rubio and the Zombies

Marco Rubio is spouting revisionist, fallacious, scary, zombie-type ideas:

Rubio and the Zombies, by paul Krugman, Commentary, NY Times: The State of the Union address was not, I’m sorry to say, very interesting. ... On the other hand, the G.O.P. reply, delivered by Senator Marco Rubio of Florida, was both interesting and revelatory. ... Mr. Rubio is a rising star... What we learned Tuesday, however, was that zombie economic ideas have eaten his brain. ...

Start with the big question: How did we get into the mess we’re in?

The financial crisis of 2008 and its painful aftermath ... were a huge slap in the face for free-market fundamentalists. ... Instead of learning from this experience, however, many on the right have chosen to rewrite history. ... Every piece of this revisionist history has been refuted in detail. No, the government didn’t force banks to lend to Those People...; no, government-sponsored lenders weren’t responsible for the surge in risky mortgages...

But the zombie keeps shambling on — and here’s Mr. Rubio Tuesday night: “...In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.” Yep, it’s the full zombie.

What about responding to the crisis? Four years ago, right-wing economic analysts insisted that deficit spending would destroy jobs ...and ... send interest rates soaring. The right thing, they claimed, was to balance the budget, even in a depressed economy.

Now, this argument was obviously fallacious... Sure enough, interest rates, far from soaring, are at historic lows — and countries that slashed spending have also seen sharp job losses. You rarely get this clear a test of competing economic ideas, and the right’s ideas failed.

But the zombie still shambles on. And here’s Mr. Rubio: “Every dollar our government borrows is money that isn’t being invested to create jobs. And the uncertainty created by the debt is one reason why many businesses aren’t hiring.” Zombies 2, Reality 0.

In fairness to Mr. Rubio, what he’s saying isn’t any different from what everyone else in his party is saying. But that, of course, is what’s so scary.

For ... one of our two great political parties has seen its economic doctrine crash and burn twice: first in the run-up to crisis, then again in the aftermath. Yet that party has learned nothing; it apparently believes that all will be well if it just keeps repeating the old slogans, but louder.

It’s a disturbing picture, and one that bodes ill for our nation’s future.

The NRO is Against a Balance Budget Agreement. Can You Guess Why?

At first I thought wow, even the NRO has a sensible position on the balanced budget amendment -- it is opposed. But in the end it's mostly the same old stuff, the fear that it might interfere with tax cuts, spending cuts, etc:

Against a BBA, Again, by The Editors: Senate Republicans are again set to mount a fight for a balanced-budget amendment (BBA). ... The amendment would cap federal spending at 18 percent of GDP and require supermajorities for tax hikes and new borrowing.

First question. When income is growing and doubles every 30 years or so, as it does, wouldn't we want to spend more on social insurance? Who said 18 percent is the right amount at any time, let alone always and forever? Anyway, moving on:

Passage of a BBA is not just implausible; it also ... enshrines partisan policy priorities in the founding document of the republic, which was meant to structure the democratic process, not rig its outcome in advance.

I can agree with that, no reason to enshrine Republican dogma in the constitution, especially when it's this harmful. And I can agree with this too, the courts shouldn't be involved in setting fiscal policy:

It would invite a hyperactive judicial intervention in the budget-making process that would throw the separation of powers completely out of balance. ... This means the judiciary might well attempt to set specific levels for every category of spending or otherwise shape budget priorities in an effort to enforce the Constitution. Such a perversion of republican government would raise the stakes of inter-branch hostility and distrust to unprecedented levels.

And Congress would have strong incentives to evade the spirit of such a law. If you think the official scoring of budget proposals is torturously politicized now, wait until constitutionality is at stake. Be prepared for a radical reimagining of just what phrases such as “gross domestic product” and “taxes” mean. And though the amendment includes provisions for exception — waiving spending limits in the case of a declared war, for instance — they are all but certain to prove unequal to reality and subject to abuse (think wars of fiscal choice).

Yes, I can think of a Party that says it doesn't believe in fiscal (Keynesian) policy, but every time there's a recession that same Party argues that we need to cut taxes to cure it. A balanced budget amendment might interfere with this game of lowering taxes to fight recessions, refusing to ever allow them to go up again, and then using the resulting deficit to claim spending is out of control.

But now we get to the real reason for the opposition, it might make it harder to reduce spending and cut taxes:

Moreover, the amendment’s very strictness in pushing for conservative priorities in 2013 could make it harder to realize conservative priorities in the future. Tax rates are lower today than they were in 1980, but could Reagan have slashed Carter-era rates under a constitutional regime that demanded such tight coordination between revenue and spending and erected massive hurdles to their decoupling?

There is no constitutional shortcut to the arduous task of reining in spending. ...

And there is also no constitutional shortcut to "the arduous task" raising taxes to support the programs we want to have either. Glad the editors at the NRO are against the amendment, even if it is for a lot of wrong reasons.

Holtz-Eakin Tries to Scare You. Don't Let Him

Doglas Holtz-Eakin has learned nothing from his own failed predictions, nothing from the failed predictions of his cronies, and nothing from the experience in Europe (which makes the appearance of this op-ed in British rather than a US newspaper all the more odd):

We have to get US government spending under control, by Douglas Holtz-Eakin, Commentary, guardian.co.uk: ...Spend more, perhaps much more. Could this really be the best for America? As incredible as it may sound, this has become the new pundit orthodoxy. Confronted with over $16tn in federal debt, a half-decade of roughly $1tn annual deficits, and a Congressional Budget Office projection of $7tn in deficits over the next 10 years, their advice ranges from stand pat to (as Dean Baker argued for the Guardian last week) "double down".

The sad truth is that while the debt is as plain as day, there's still a long way to go in convincing some people of the problem. I'm happy to give it a shot.

The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth...

Waiting to fix the debt is risky. ... The bad news scenario involves a financial crisis and severe recession. After the suffering, the US would face – you guessed it – an even worse debt problem than it had originally. ...

Debt reduction produces jobs and better economic growth.

Again, reading that last line, he has learned nothing from the failure of the confidence fairy to appear. Waiting ot fix the debt -- a problem driven mainly by health care cost escalation that won't become severe for many years -- is not risky, but his advice certainly is. Continuing:

The orthodoxists will trot out the usual fears of austerity and the need to spend to prop up the economy. Just remember that the intellectual foundation for this view is rooted firmly in an alternate universe. We listened to this advice in the 1960s and 1970s, and the political class translated it into chronically high unemployment and chronically high inflation. Economists learned nothing and continue to peddle the same backboard-based remedies.

Down with the orthodoxy. It is time to get the deficit under control.

The notion that we are responding in the same way as in the 60s and 70s, and that we faced the same type of shock (that require the same types of policies) -- an oil price shock and other large supply-side disturbances from demography that we faced then -- is wrong and he ought to know that (added note: plus, it was monetary, not fiscal policy that was the main problem back then).

The headline today for Europe -- where countries have followed the advice of the Holtz-Eakin types, is (remember his claim above about austerity and growth?):

Eurozone economy falls short of forecasts, FT: Europe’s brittle economies shrank at their fastest rate since the collapse of Lehman Brothers four years ago, official data for the fourth quarter of 2012 showed on Thursday, with both strong and weak countries falling short of expectations....

The "pundit orthodoxy" his disses is from Paul Krugman. Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman (and Dean Baker too), but Krugman can speak for himself, and has, on how wrong the "we're about to become Greece!!!" crowd has been. There is, however, one thing he is correct about. Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way.

'The Blame Someone Else Crowd'

Paul Krugman explains why the false charge that government housing policy caused the financial crisis and recession is harmful:

...No, the CRA wasn’t responsible for the epidemic of bad lending; no, Fannie and Freddie didn’t cause the housing bubble; no, the “high-risk” loans of the GSEs weren’t remotely as risky as subprime.

This really isn’t about the GSEs, it’s about the BSEs — the Blame Someone Else crowd. Faced with overwhelming, catastrophic evidence that their faith in unregulated financial markets was wrong, they have responded by rewriting history to defend their prejudices.

This strikes me as a bigger deal than whether Rubio slurped his water; he and his party are now committed to the belief that their pre-crisis doctrine was perfect, that there are no lessons from the worst financial crisis in three generations except that we should have even less regulation. And given another shot at power, they’ll test that thesis by giving the bankers a chance to do it all over again.

I've taken this myth on more times than I can remember, and the evidence against the claim that housing policy caused our problems is very clear. But the myth isn't going away. First, it's a convenient story for the Republican view that trying to help poor people is bad for them, and bad for everyone else too. Social insurance such as unemployment compensation makes them lazy, raising the minimum wage actually hurts them overall, attempts to help lower income households purchase a house crash the economy, and so on. It's all at odds with the evidence but it gives them, as Krugman notes, a shield against tax increases, regulations, and so on that are needed to deal with these problems. The second reason is just as important, there's no political cost to making these claims. One of the most prominent members of the Republican Party can give an address to the nation in response to the State of the Union that makes false claims, and nothing happens. Telling easily rebutted falsehoods brings little media response from traditional media outlets, but take a drink of water...

SOTU

In case you want to talk about it (full text).

Per Capita Government Spending by President

This graph in this post showing real per capita growth in government expenditures under recent presidents got more attention than I expected (e.g.), probably because for many people the growth under Obama was unexpectedly low. Here's the updated version of the graph (as before, this came to me via email):

Here are the notes that came with the older version of the graph:

Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms? In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?

To compare presidencies, I did the calculation two ways. One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1). (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). ...

Paul Krugman: The Ignorance Caucus

The "partisan divide runs much deeper than even pessimists are usually willing to admit":

The Ignorance Caucus, by Paul Krugman, Commentary, NY Times: Last week Eric Cantor, the House majority leader,... tried to sound interested in serious policy discussion. But he didn’t succeed — and that was no accident. For these days his party dislikes the whole idea of applying critical thinking and evidence to policy questions. And no, that’s not a caricature: Last year the Texas G.O.P. explicitly condemned efforts to teach “critical thinking skills,” because, it said, such efforts “have the purpose of challenging the student’s fixed beliefs and undermining parental authority.” ...

Want other examples of the ignorance caucus at work? Start with health care...

Still, the desire to perpetuate ignorance on matters medical is nothing compared with the desire to kill climate research, where Mr. Cantor’s colleagues ... have engaged in furious witch hunts against scientists who find evidence they don’t like. ...

And there are many other examples... Do actions like this have important effects? Well, consider the agonized discussions of gun policy that followed the Newtown massacre. It would be helpful to these discussions if we had a good grasp of the facts about firearms and violence. But we don’t, because back in the 1990s conservative politicians, acting on behalf of the National Rifle Association, bullied federal agencies into ceasing just about all research into the issue. Willful ignorance matters.

O.K., at this point the conventions of punditry call for saying something to demonstrate my evenhandedness, something along the lines of “Democrats do it too.” But while Democrats, being human, often read evidence selectively and choose to believe things that make them comfortable, there really isn’t anything equivalent to Republicans’ active hostility to collecting evidence in the first place.

The truth is that America’s partisan divide runs much deeper than even pessimists are usually willing to admit; the parties aren’t just divided on values and policy views, they’re divided over epistemology. One side believes, at least in principle, in letting its policy views be shaped by facts; the other believes in suppressing the facts if they contradict its fixed beliefs.

In her parting shot on leaving the State Department, Hillary Clinton said of her Republican critics, “They just will not live in an evidence-based world.” She was referring specifically to the Benghazi controversy, but her point applies much more generally. And for all the talk of reforming and reinventing the G.O.P., the ignorance caucus retains a firm grip on the party’s heart and mind.

Paul Krugman: Friends of Fraud

Will Senate Republicans be able to kill, or at least defang, the Consumer Financial Protection Bureau?:

Friends of Fraud, by Paul Krugman, Commentary, NY Times: Like many advocates of financial reform, I was a bit disappointed in the bill that finally emerged. Dodd-Frank gave regulators the power to rein in many financial excesses; but ... the financial industry’s wealth and influence can all too easily turn those who are supposed to serve as watchdogs into lap dogs instead.

There was, however, one piece of the reform that was a shining example of how to do it right: the creation of a Consumer Financial Protection Bureau... And sure enough, Senate Republicans are going all out in an attempt to kill that bureau. ...

Now, you might be tempted to say that while we need protection against financial fraud, there’s no need to create another bureaucracy. Why not leave it up to the regulators we already have? The answer is that existing regulatory agencies are basically concerned with bolstering the banks; as a practical, cultural matter they will always put consumer protection on the back burner...

So the consumer protection bureau serves a vital function. But as I said, Senate Republicans are trying to kill it. ...

What Republicans are demanding, basically, is that the protection bureau lose its independence. They want its actions subjected to a veto by other, bank-centered financial regulators, ensuring that consumers will once again be neglected, and they also want to take away its guaranteed funding, opening it to interest-group pressure. These changes would make the agency more or less worthless — but that, of course, is the point. ...

And as always, you should follow the money. Historically, the financial sector has given a lot of money to both parties, with only a modest Republican lean. In the last election, however, it went all in for Republicans, giving them more than twice as much as it gave to Democrats (and favoring Mitt Romney over the president almost three to one). All this money wasn’t enough to buy an election — but it was, arguably, enough to buy a major political party.

Right now, all the media focus is on the obvious hot issues — immigration, guns, the sequester, and so on. But let’s try not to let this one fall through the cracks: just four years after runaway bankers brought the world economy to its knees, Senate Republicans are using every means at their disposal, violating all the usual norms of politics in the process, in an attempt to give the bankers a chance to do it all over again.

'America’s First Progressive Revolution'

Idealist and dreamer Robert Reich:

Today, an Anniversary of America’s First Progressive Revolution, by Robert Reich: Exactly a century ago, on February 3, 1913, the 16th Amendment to the Constitution was ratified, authorizing a federal income tax. Congress turned it into a graduated tax, based on “capacity to pay.”

It was among the signal victories of the progressive movement ... reflecting a great political transformation in America. The 1880s and 1890s had been the Gilded Age, the time of robber barons ... when it looked as though the country was destined to become a moneyed aristocracy.

But almost without warning, progressives reversed the tide. ...

A progressive backlash against concentrated wealth and power occurred a century ago in America. In the 1880s and 1890s such a movement seemed improbable if not impossible. Only idealists and dreamers thought the nation had the political will to reform itself...

But it did happen. And it will happen again.

Overlooking $2.3 Trillion in Debt Reduction

We have already cut around $1.5 trillion of spending from the budget. Yet Tyler Cowen says:

I would view the sequestration as a kind of referendum on whether we are ever capable of cutting or restraining spending and I fear not.  

He also says defense is untouchable becasue:

When it comes to the defense budget, “gdp fetishism” suddenly makes a comeback.

But:

Two-fifths of the $1.5 trillion in savings from cutting and capping funding for discretionary programs comes from defense.

I'm all for more cuts to defense too, but it's only fair to note that some cuts have been made there already.

Also, why are only spending cuts mentioned when the discussion is the budget? Please don't tell me that if it's not spending cuts, i.e. if it's a tax increase, it doesn't count for budget discussions (and Keynesian economics, which is part of his discussion, does not make this distinction). Thus, note also that the American Taxpayer Relief Act (ATRA) added another half trillion in deficit reduction. Together, the $1.5 trillion in appropriations cuts, plus the $.5 trillion in tax increases in the ATRA, plus the $300 billion in interest savings amount to around a bit over $2.3 trillion in deficit reduction (see table 1 here). Once the economy can handle it, we need a bit more (though not everyone agrees) to stabilize the long-run picture, but to say we've made no progress at all is wrong and misleads about the urgency of finding further cuts. If people want more spending cuts, fine, we can debate that along with a debate over tax increases, and maybe even agree on cuts to defense and a few other areas. But in making the argument for an ideological position that government ought to be smaller, don't present the case as though nothing at all has been done to cut spending (and please don't hide the ideological call for a smaller government in a discussion about reducing debt). I was going to say that misleading people about the cuts we've made so far -- asking whether we'll ever be able to cut spending when we already have -- is no way to win an argument, but actually it is, and that's the problem.

Here's Tyler Cowen with more discussion of his column.

Here's Dean Baker with comments.

The Employment Situation: Needs Improvement

The Employment Situation:

Total nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent, the U.S. Bureau of Labor Statistics reported today. Retail trade, construction, health care, and wholesale trade added jobs over the month.

I agree with Calculated Risk:

This was another sluggish growth employment report, but with strong upward revisions to prior months.

And "another sluggish report" ought to bring some soul-searching in Congress, followed by action to try to help with job creation (even with the prior revisions recovery is far too slow to be acceptable). But somehow a deficit problem years in the future is more important than people struggling today.

More from CR:

The headline number was below expectations of 185,000. However employment for November and December were revised up sharply. ... The unemployment rate increased slightly to 7.9% from 7.8% in December. The unemployment rate is from the household report and the household report showed only a small increase in employment. ... The Labor Force Participation Rate was unchanged at 63.6% in January.. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio was also unchanged at 58.6% in January...

We shouldn't simply accept this as the inevitable consequence of a financial recession. Policy matters, and policymakers in Congress have not done their jobs. If the politics of big money didn't protect them -- if members of Congress faced the unemployment line when they failed -- maybe things would be different. That's why the political empowerment of the working class is the key to better employment policy.

The Unemployment Problem is Cyclical

John Taylor argues, indirectly, that the unemployment problem is mostly cyclical, not structural:

... I like to tell the story about what Senator Hubert Humphrey said when President Ford’s Council of Economic Advisers, where I worked with Alan Greenspan, reported to the Joint Economic Committee (JEC) that it was raising the definition of the normal unemployment rate from 4.0% to 4.9%.  Humphrey, who chaired the JEC, was outraged and told us in the JEC hearing that “if the country was suffering a plague and you economists were doctors your solution would be to raise the definition of normal body temperature above 98.6 degrees”   

So I am worried when people stop talking about today’s very high unemployment rates as if they were normal. ...

He goes on to try to blame Obama for the slow recovery of labor markets ("It is not a good sign that the inaugural address was silent on the subject..."), as though the Republicans -- his party -- and its obstructionist ways has nothing to do with the fact that Obama couldn't get his jobs program passed, or any further stimulus measures put in place. But it's nice to see Taylor acknowledge that the problem is cyclical not structural, and that fiscal policy can make a difference (Obama can hardly be blamed for the Fed's actions, so when he complains that Obama isn't talking about this problem, he must have fiscal policy in mind -- probably tax cuts for the wealthy rather than, say, spending on infrastructure, but it's a start.)

Paul Krugman: Makers, Takers, Fakers

Republicans are trying to improve their image and appear less extreme, but their actual policies are moving in the opposite direction:

Makers, Takers, Fakers, by Paul Krugman, Commentary, NY Times: Republicans have a problem. ... In the 2012 election,... the picture of the G.O.P. as the party of sneering plutocrats stuck, even as Democrats became more openly populist than they have been in decades.

As a result, prominent Republicans have begun acknowledging that their party needs to improve its image. But here’s the thing: Their proposals for a makeover all involve changing the sales pitch rather than the product. When it comes to substance, the G.O.P. is more committed than ever to policies that take from most Americans and give to a wealthy handful. ...

Why is this happening ... now, just after an election in which the G.O.P. paid a price for its anti-populist stand?

Well, I don’t have a full answer, but I think it’s important to understand the extent to which leading Republicans live in an intellectual bubble. They get their news from Fox and other captive media, they get their policy analysis from billionaire-financed right-wing think tanks, and they’re often blissfully unaware both of contrary evidence and of how their positions sound to outsiders.

So when Mr. Romney made his infamous “47 percent” remarks, he wasn’t, in his own mind, saying anything outrageous or even controversial. He was just repeating a view that has become increasingly dominant inside the right-wing bubble, namely that a large and ever-growing proportion of Americans won’t take responsibility for their own lives and are mooching off the hard-working wealthy. Rising unemployment claims demonstrate laziness, not lack of jobs; rising disability claims represent malingering, not the real health problems of an aging work force.

And given that worldview, Republicans see it as entirely appropriate to cut taxes on the rich while making everyone else pay more.

Now, national politicians learned last year that this kind of talk plays badly with the public, so they’re trying to obscure their positions. Paul Ryan, for example, has lately made a transparently dishonest attempt to claim that when he spoke about “takers” living off the efforts of the “makers”...

But in deep red states like Louisiana or Kansas, Republicans are much freer to act on their beliefs — which means moving strongly to comfort the comfortable while afflicting the afflicted.

Which brings me ... to Mr. Jindal, who declared ... “we are a populist party.” No, you aren’t. You’re a party that holds a large proportion of Americans in contempt. And the public may have figured that out.

Climate Policy in Obama's Second Term

I think of Robert Stavins as being on the optimistic side when it comes to action on climate change, but even he seems discouraged despite Obama's mention of this issue in his inaugural address:

The Second Term of the Obama Administration, by Robert Stavins: In his inaugural address on January 21^st, President Obama surprised many people – including me – by the intensity and the length of his comments on global climate change.  Since then, there has been a great deal of discussion in the press and in the blogosphere about what climate policy initiatives will be forthcoming from the administration in its second term. ...

Although I was certainly surprised by the strength and length of what the President said in his address, I confess that it did not change my thinking about what we should expect from the second term.  Indeed, I will stand by an interview that was published by the Harvard Kennedy School on its website five days before the inauguration (plus something I wrote in a previous essay at this blog in December, 2012).  Here it is, with a bit of editing to clarify things, and some hyperlinks inserted to help readers. ...

Q: In the Obama administration’s second term, are there openings/possibilities for compromises...?

A: It is conceivable – but in my view, unlikely – that there may be an opening for implicit (not explicit) “climate policy” through a carbon tax. At a minimum, we should ask whether the defeat of cap-and-trade in the U.S. Congress, the virtual unwillingness over the past 18 months of the Obama White House to utter the phrase “cap-and-trade” in public, and the defeat of Republican Presidential candidate Mitt Romney indicate that there is a new opening for serious consideration of a carbon-tax approach to meaningful CO₂ emissions reductions in the United States.

First of all, there surely is such an opening in the policy wonk world. Economists and others in academia, including important Republican economists such as Harvard’s Greg Mankiw and Columbia’s Glenn Hubbard, remain enthusiastic supporters of a national carbon tax. And a much-publicized meeting in July, 2012, at the American Enterprise Institute in Washington, D.C. brought together a broad spectrum of Washington groups – ranging from Public Citizen to the R Street Institute – to talk about alternative paths forward for national climate policy. Reportedly, much of the discussion focused on carbon taxes.

Clearly, this “opening” is being embraced with enthusiasm in the policy wonk world. But what about in the real political world? The good news is that a carbon tax is not “cap-and-trade.” That presumably helps with the political messaging! But if conservatives were able to tarnish cap-and-trade as “cap-and-tax,” it surely will be considerably easier to label a tax – as a tax! Also, note that President Obama’s silence extends beyond disdain for cap-and-trade per se. Rather, it covers all carbon-pricing regimes.

So as a possible new front in the climate policy wars, I remain very skeptical that an explicit carbon tax proposal will gain favor in Washington. ...

A more promising possibility – though still unlikely – is that if Republicans and Democrats join to cooperate with the Obama White House to work constructively to address the short-term and long-term budgetary deficits the U.S. government faces,... then there could be a political opening for new energy taxes, even a carbon tax. ...

Those who recall the 1993 failure of the Clinton administration’s BTU-tax proposal – with a less polarized and more cooperative Congress than today’s – will not be optimistic. ... The key group to bring on board will presumably be conservative Republicans, and it is difficult to picture them being more willing to break their Grover Norquist pledges because it’s for a carbon tax.

Here's the surprising part (to me anyway), some optimism after all:

What remains most likely to happen is what I’ve been saying for several years, namely that despite the apparent inaction by the Federal government, the official U.S. international commitment — a 17 percent reduction of CO₂ emissions below 2005 levels by the year 2020 – is nevertheless likely to be achieved!  The reason is the combination of CO₂ regulations which are now in place because of the Supreme Court decision [freeing the EPA to treat CO₂ like other pollutants under the Clean Air Act], together with five other regulations or rules on SOX [sulfur compounds], NOX [nitrogen compounds], coal fly ash, particulates, and cooling water withdrawals. All of these will have profound effects on retirement of existing coal-fired electrical generation capacity, investment in new coal, and dispatch of such electricity.

Combined with that is Assembly Bill 32 (AB 32) in the state of California, which includes a CO₂ cap-and-trade system that is more ambitious in percentage terms than Waxman-Markey was in the U.S. Congress, and which became binding on January 1, 2013. ...  In other words, there will be actions having significant implications for climate, but most will not be called “climate policy,” and all will be within the regulatory and executive order domain, not new legislation. ...

Paul Krugman: Deficit Hawks Down

Deficit hawks are losing their clout:

Deficit Hawks Down, by Paul Krugman, Commentary, NY Times: President Obama’s second Inaugural Address offered a lot for progressives to like. ... But arguably the most encouraging thing of all was what he didn’t say: He barely mentioned the budget deficit..., the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing.

Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

First, they ... spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece... But that crisis keeps not happening ... So the credibility of the scolds has taken a ... well-deserved, hit.

Second, both deficits and public spending as a share of G.D.P. have started to decline..., and reasonable forecasts ... suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015.

And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging..., the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression. Which brings me to the third reason the deficit scolds have lost influence: the ... claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice. Consider ... the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies,... the sudden, severe medicine ... threw the nation back into recession.

At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But ... there was also ... a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout. ... Prominent deficit scolds can no longer count on being treated as if their wisdom, probity and public-spiritedness were beyond question. But what difference will that make?

Sad to say, G.O.P. control of the House means that we won’t do what we should be doing: spend more, not less, until the recovery is complete. But the fading of deficit hysteria means that the president can turn his focus to real problems. And that’s a move in the right direction.

Higher Marginal Taxes Reduce Economic and Political Power

Richard Green:

... Higher marginal taxes reduce the ability of high income people to accumulate power, which may mean they work/play less.  I don't know that this is entirely a bad thing.

(The post is: Do higher marginal tax rates lead superstar athletes to play less often? See also Barry Ritholtz who asks Who the Hell Are Phil Mickelson’s Financial Advisers?)

Summers: End the Obsession with the Deficit

After saying:

the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken beyond those in the 2011 budget deal and the recent “fiscal cliff” agreement. So even without the risk of self-inflicted catastrophes — the possibility of default or a potential government shutdown this spring — it is appropriate for policy to focus on reducing prospective deficits. Those who argue against a further focus on prospective deficits on the grounds that the ratio of debt to gross domestic product may stabilize for a decade contingent on a forecast that assumes no recessions counsel irresponsibly. Given all the uncertainties and current U.S. debt levels, we should be planning to reduce debt ratios if the next decade goes well economically.

Larry Summers then says:

Reducing prospective deficits should be a key priority but should not take over economic policy.

But I don't get the very next sentence at all. How does a tax cut reduce the deficit?

Such an obsession risks the enactment of measures like pseudo-temporary tax cuts that produce cosmetic improvements in deficits at the cost of extra uncertainty and long-run fiscal burdens.

It's late, and it's been a long day -- I must be missing something. Anyway, I agree with this:

Surely even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections.

Infrastructure represents only the most salient of the deficits facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.

By all means, let’s address the budget deficit. But let’s not obsess over it in ways that are counterproductive, nor should we lose sight of the jobs and growth deficits that ultimately will have the greatest impact on how this generation of Americans lives and what they bequeath to the next generation

The obsession with the deficit in Washington is not going to end, and the deficit has received far too much attention relative to other issues like unemployment (which really ought to take precedence in the short-run). There is no need, at all, to remind policymakers of that the deficit needs attention.

The intent is different, but my fear is that phrases such as "the great likelihood is that over the next 15 years debts will rise relative to incomes in an unsustainable way if no actions are taken" and "it is appropriate for policy to focus on reducing prospective deficits" is the only message that Republicans and centrist Democrats will hear in this column.

Update: Paul Krugman comments.

Paul Krugman: The Big Deal

Progressives should cheer up:

The Big Deal, by Paul Krugman, Commentary, NY Times: On the day President Obama signed the Affordable Care Act into law, an exuberant Vice President Biden famously pronounced the reform a “big something deal” — except that he didn’t use the word “something.” And he was right..., if progressives look at where we are as the second term begins, they’ll find grounds for a lot of (qualified) satisfaction.

Consider, in particular, three areas: health care, inequality and financial reform.

Health reform is, as Mr. Biden suggested, the centerpiece of the Big Deal. Progressives have been trying to get some form of universal health insurance since the days of Harry Truman; they’ve finally succeeded. …

What about inequality? ... Like F.D.R., Mr. Obama took office in a nation marked by huge disparities in income and wealth. But where the New Deal had a revolutionary impact, empowering workers and creating a middle-class society that lasted for 40 years, the Big Deal has been limited to equalizing policies at the margin.

That said,... through new taxes ... 1-percenters will see their after-tax income fall around 6 percent... This will reverse only a fraction of the huge upward redistribution that has taken place since 1980, but it’s not trivial.

Finally, there’s financial reform. The Dodd-Frank reform bill is ... not the kind of dramatic regime change one might have hoped for… Still, if plutocratic rage is any indication, the reform isn’t as toothless as all that. …

All in all, then, the Big Deal has been, well, a pretty big deal. But will its achievements last? ... I ... think so. For one thing, the Big Deal’s main policy initiatives are already law. ... And ... the Big Deal agenda is, in fact, fairly popular — and will become more popular once Obamacare goes into effect...

Finally, progressives have the demographic and cultural wind at their backs. Right-wingers flourished for decades by exploiting racial and social divisions — but that strategy has now turned against them...

Now, none of what I’ve just said should be taken as grounds for progressive complacency. The plutocrats may have lost a round, but their wealth and the influence it gives them in a money-driven political system remain. Meanwhile, the deficit scolds (largely financed by those same plutocrats) are still trying to bully Mr. Obama into slashing social programs. ...

Still, maybe progressives — an ever-worried group — might want to take a brief break from anxiety and savor their real, if limited, victories.

Shiller: Obama Needs a New Deal

Robert Shiller says Obama needs a new metaphor expressing his vision and policies for the economy. He doesn't like the 2008 slogan "Change we can believe in," or the 2012 slogan "Forward." Same for "Hope" or "Yes we can!":

Obama Needs a New Deal, by Robert Shiller: ...Obama’s slogans are examples of “dead metaphors”: They are not part of an overall conceptual scheme. By contrast, in the 1930s, President Franklin Roosevelt used a metaphor that remains very much alive today. The idea of a “new deal”... Apparently, Roosevelt, or his speechwriters, borrowed it from A New Deal, a book by Stuart Chase that was published in 1932 and adapted the same year into a cover story for the New Republic. ...

Formulating a good metaphor for Obama’s second term ... might embody the idea of an “inclusive economy.”... Opinion polls show that, above all, what Americans want are jobs— the beginning of inclusion.

The parallel to Chase’s book today is the 2012 bestseller Why Nations Fail by ... Daron Acemoglu and ... James Robinson. Acemoglu and Robinson argue that in the broad sweep of history, political orders that include everyone in the economic process are more likely to succeed in the long term. The time seems ripe for that idea, and it fits with the triumph of inclusiveness symbolized by Obama himself. But another step in metaphor-building is needed to encapsulate the idea of economic inclusion.

The biggest successes of Obama’s first term concerned economic inclusion. The Affordable Care Act (“Obamacare”) is providing more people with access to health care ... than ever before... The Dodd-Frank financial reforms created the Consumer Financial Protection Bureau... And he signed the JOBS Act,... which aims to create crowdfunding Web sites that allow small investors to participate in start-up ventures. ...

The right metaphor would spin some of these ideas, or others like them, into a vision for America’s future that, like the New Deal, would gain coherence as it is transformed into reality. On January 29, Obama will give the ... State of the Union address... He should be thinking about how to express—vividly and compellingly—the principles that have guided his choices so far, and that set a path for America’s future.

This is a pretty good window into Shiller's thinking. He talks about the ACA, Dodd-Frank, and crowdfunding for small investors -- what else does he mean by inclusion?:

We have not reached the pinnacle of economic inclusion. There are hundreds of other possibilities, including improved investor education and financial advice, more flexible mortgages, better kinds of securitization, more insurance for a broader array of life’s risks, and better management of career risks. Much more progress toward comprehensive public futures and derivatives markets would help, as would policies to encourage the emerging world to participate more in the US economy.

Pretty heavily weighted toward financial markets, and not exactly what I think of as "inclusion." Where are the steps, for example, to increase opportunity, a necessary condition for broader inclusion? As he says, people want decent jobs. How does all this talk about inclusion in financial markets, investor education and the like, help with that? (Then again, maybe all of this concern with financial markets does, in fact, expose the "principles that have guided [Obama's] choices so far.")

'It Appears That the Strategy has Worked'

Brad DeLong:

Jake Sherman:

House Republicans plan debt ceiling vote: House Republicans will vote next week on a bill that would raise the nation’s debt ceiling for three months and stop pay for members of Congress if the Senate doesn’t pass a budget, GOP officials said Friday…. It’s also a shift from House Speaker John Boehner…. But Boehner isn’t retreating on the debt ceiling without conditions; He’s framing this as a way to force Senate Democrats to lay out a budget…

Twenty-seventh Amendment to the United States Constitution:

No law, varying the compensation for the services of the Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.

Everybody in the House and Senate now knows that this Charles Krauthammer-John Boehner "no pay for the Senate unless it passes a Budget Resolution" condition is unconstitutional.

But Jake Sherman does not tell the readers of Politico. Why not?

Why oh why can't we have a better press corps?

Paul Krugman:

Not With A Bang But With A Whimper: When you’re wrong, you’re wrong. I thought that by ruling out any way to bypass the debt limit, the White House was setting itself up, at least potentially, for an ignominious cave-in. But it appears that the strategy has worked, and it’s the Republicans giving up. I’m happy to concede that the president and team called this one right.

And it’s a big deal. Yes, the GOP could come back on the debt ceiling, but that seems unlikely. It could try to make a big deal of the sequester, but that’s ... not good, but not potentially catastrophic, and therefore poor terrain for the “we’re crazier than you are” strategy. And while Republicans could shut down the government, my guess is that Democrats would actually be gleeful at that prospect: the PR would be overwhelmingly favorable for Obama...

The key point to remember here is that Obama achieves his main goals simply by surviving. Above all, health reform gets implemented, and probably becomes irreversible.

A good day for sanity, all around.

I'm finding it hard to convince myself that this ends the era of the manufactured crisis, it's difficult to believe that Republicans won't regroup and strike again when they get the chance. But that's the thing, short of creative steps not yet on the radar, it's hard to see when a chance will come that isn't likely to backfire in the ways described above (or here).

'The Right’s Resistance to Regulation'

Peter Dizikes of MIT News:

The right’s resistance to regulation, by Peter Dizikes, MIT News Office: James Watt, who served as Secretary of the Interior from 1981 to 1983, is remembered primarily for a short, business-friendly tenure that ended with his resignation soon after an ill-judged remark about women, minorities and the disabled. And yet, as MIT professor Judith Layzer observes in her new book about environmental politics, “Open for Business,” there is good reason to regard Watt’s impact differently.

For one thing, Watt, among others on the political right, managed to cut government funding for conservation efforts. For another, he installed staff members who emphasized the development of natural resources, rather than just the protection of land. In so doing, Watt was one of many Republicans who instituted fundamental changes in U.S. environmental policy.

“I will build an institutional memory that will be here for decades,” Watt once said of his department, as Layzer recounts.

These kinds of under-the-radar changes, Layzer argues, are one of two ways conservatives have dramatically altered environmental politics since the 1970s, when environmentalists probably reached the high point of their political influence.

The other, says Layzer, an associate professor of environmental policy at MIT, is ideological and rhetorical: Conservatives have gained enormous traction by touting “the virtues of the market system and the horrors of regulation,” thus limiting public backing for stricter government-imposed controls on natural resources. By arguing that the market economy, when left alone, is effectively self-policing and morally sound, conservatives have put environmentalists on the defensive, making them tentative about arguing for environmental protections as a good in themselves. So whereas President Richard Nixon once green-lighted the Environmental Protection Agency, today’s political debates often touch on the necessity of opening further federal lands for oil exploration.

“The set of conservative ideas has really pushed the framing of issues to the point where many people today aren’t even aware of the [older] alternatives,” Layzer says. “Only if you’d been involved or lived through this history would you know it hasn’t always been thus.” ...[continue]...

The one thing I'll note is that "free market rhetoric," which is said to have played a key role in winning (or at least shifting) the battle of ideas, was the vehicle for defending other interests, e.g. business interests in having as few environmental regulations as possible. It (free markets) was not the goal in and of itself.

As to what should be done, for this reason I'm not so sure that “It really was about ideas." And you have to fight ideas with ideas.” It was also about having the political power to make the ideas heard, and to turn them into actual legislation that served the interests of the of those supporting the politicians financially. So I'd say, "It was really about using ideas to serve the interests of those who held the reins of power." Or something like that.

European Labor Markets: Six Key Lessons

Jonathan Portes (he also provides discussion of each of these points):

European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"...

The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:

1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...

2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...

3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...

4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...

..and even in recession, minimum wages at a sensible level do more good than harm. ...

5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...

...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...

6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different. ...

Too bad fiscal policymakers didn't do their homework and learn these lessons about austerity, social insurance, automatic stabilizers, and so on before putting harmful or ineffective policy in place (or failing to implement policy when action is called for, e.g. to reduce unemployment). Wish I thought they were doing their homework now.

'I’m Open to Making Modest Adjustments to Programs Like Medicare'

President Obama today in his press conference:

... Now, the other congressionally imposed deadline coming up is the so-called debt ceiling... So I want to be clear about this: The debt ceiling is not a question of authorizing more spending. Raising the debt ceiling does not authorize more spending. It simply allows the country to pay for spending that Congress has already committed to.

These are bills that have already been racked up, and we need to pay them. ... So ... Republicans in Congress have two choices here: They can act responsibly and pay America’s bills or they can act irresponsibly and put America through another economic crisis.

But they will not collect a ransom in exchange for not crashing the American economy. The financial well-being of the American people is not leverage to be used. The full faith and credit of the United States of America is not a bargaining chip.

And they’d better choose quickly because time is running short. The last time Republicans in Congress even flirted with this idea, our triple-A credit rating was downgraded for the first time in our history, our businesses created the fewest jobs of any month in nearly the past three years, and ironically, the whole fiasco actually added to the deficit. ...

What I will not do is to have that negotiation with a gun at the head of the American people; the threat that unless we get our way, unless you gut Medicare or Medicaid or, you know, otherwise slash things that the American people don’t believe should be slashed, that we’re going to threaten to wreck the entire economy. ... That’s not how we’re going to do it this time. ...

Q: ...I want to come back to the debt ceiling, because in the summer of 2011, you said that you wouldn’t negotiate on the debt ceiling, and you did. Last year you said that you wouldn’t extend any of the Bush tax cuts for the wealthy, and you did. So as you say now that you’re not going to negotiate on the debt ceiling this year, why should House Republicans take that seriously and think that if we get to the one-minute-to-midnight scenario that you’re not going to back down? ...

PRESIDENT OBAMA: No, no, look, what I’ve said is is that I’m happy to have a conversation about deficit reduction.

Q: So you technically are willing to negotiate.

PRESIDENT OBAMA: Nope. ...

He also says:

I’m open to making modest adjustments to programs like Medicare to protect them for future generations.

The old we'll save Medicare and Social Security from benefit cuts by cutting benefits. I wonder how he defines "modest"?

'The White House Insists That it is Absolutely, Positively Not Going to Cave or Indeed even Negotiate over the Debt Ceiling'

Paul Krugman:

... I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP. Truth or famous last words? I guess we’ll find out.

The problem is that the White House's definition of what it means to cave may be quite different from my own. If the White House believes entitlements need to be cut, and agrees to "strengthen" programs in this way, is that a cave? Maybe the "or even negotiate" clause covers this, but I'm wary.

Fed Watch: On The Disruptiveness of the Platinum Coin

Tim Duy:

On The Disruptiveness of the Platinum Coin, by Tim Duy: Apparently fiscal and monetary cooperation is alive and well - the US Treasury and the Federal Reserve conspired to kill the platnium coin idea. In retrospect, we should have seen this coming. As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington.

This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?

Indeed, the lack of any difference explains how Japan can sustain massive fiscal deficits year after year. At the zero bound, cash and government debt are the same thing. We would assume that as long as inflation was not a concern (which it wouldn't be at the zero bound), the fiscal authority could issue as much cash as it wants, so why couldn't it issue as many bonds as it wants? After all, at the zero bound the two are equivalent. Hence Japan continues to defy predictions of doom despite ongoing debt issuance.

Carrying the argument further, the illusion of a difference between cash and debt at the zero bound is counterproductive because it prevents the full application of fiscal policy. Fears about the magnitude of the government debt prevent sufficient fiscal policy, but such fears are not rational if debt and cash are perfect substitutes. If cash and debt are the same, the fiscal authority should prefer to issue cash if debt concerns create a false barrier to fiscal policy. Still, I would argue that this is best done in cooperation with the monetary authority. Note that this is not really a new idea, as then Governor Ben Bernanke drew a similar conclusion with regards to Japan:

However, besides possibly inconsistent application of fiscal stimulus, another reason for weak fiscal effects in Japan may be the well-publicized size of the government debt...In addition to making policymakers more reluctant to use expansionary fiscal policies in the first place, Japan's large national debt may dilute the effect of fiscal policies in those instances when they are used....My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation.

And then we come to the platinum coin, which threatened to expose the illusion that cash and debt are different at the zero bound. By extension, the platinum coin threatened to expose as folly any near-term deficit reduction plan. If you could issue a coin to support near term spending without inflationary consequences, what exactly is the rational for tighter policy now? There is none - but that would run directly contrary to the conventional wisdom among Very Serious People on both sides of the aisle that the debt needs to be addressed right now.

And just think about what it would mean for the Fed if it became evident that, even if only temporarily at the zero bound, deficit spending could be monetized with no impact on inflation. The lines between monetary and fiscal policy would blur further, threatening the existing state of affairs in Washington. Monetary policymakers would face an increasingly hard time defending their need for independence as akin to an Eleventh Commandment.

Ultimately, I don't believe deficit spending should be directly monetized as I believe that Paul Krugman is correct - at some point in the future, the US economy will hopefully exit the zero bound, and at that point cash and government debt will not longer be perfect substitutes. Note that Greg Ip disagreed with this point:

I disagree. The Fed does not have to sell its bonds, or the $1 trillion coin, to control inflation (though it may do so anyway). It only needs to retain control of interest rates, and that does not depend on the size of its balance sheet.

Ip argues that interest on reserves gives the Fed the power to control interest rates, and consequently the power to control inflation, regardless of the size of the balance sheet. If you follow Ip's analysis through to its logical conclusion, then why should the Treasury issue debt at all? Why not just issue platinum coins? Could cash and government debt combine to serve the same functions together that they serve separately? Consider the disruptiveness of that outcome to the status quo.

Bottom Line: The platinum coin idea was ultimately doomed to failure because neither the Federal Reserve nor the Treasury could allow for even the remote possibility it might be successful. Its success would not just alter the political dynamic by removing the the debt ceiling as a threat. The success of a platinum coin would fundamentally alter the conventional wisdom about the proper separation of fiscal and monetary policy and the need to control the debt immediately.

'Treasury: We won’t Mint a Platinum Coin'

Ezra Klein:

Treasury: We won’t mint a platinum coin to sidestep the debt ceiling: The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said. ...

Republicans are now free to take the economy hostage if they so desire. The question is whether Obama can make them pay for it politically if they decide to invoke this threat.

But maybe they've kept a card up their sleeve? Paul Krugman:

So What Will You Do, Mr. President?: If I’d spent the past five years living in a monastery or something, I would take the Treasury Department’s declaration that the coin option is out as a sign that there’s some other plan ready to go. Maybe 14th Amendment, maybe moral obligation coupons or some other form of scrip, something.

And maybe there is a plan.

But as we all know, the last debt ceiling confrontation crept up on the White House because Obama refused to believe that Republicans would actually threaten to provoke default. Is the WH being realistic this time, or does it still rely on the sanity of crazies? ...[D]efault ... would risk a huge collapse of confidence.

So is there a plan, or will it just be another case of tough talk followed by a tail-between-the-legs retreat?

As I said, if we didn’t have some history here I might be confident that the administration knows what it’s doing. But we do have that history, and you have to fear the worst.

Yep -- hard to be confident that "there's some other plan ready to go," and it's also hard to be confident that Obama can win the battle politically -- make the political cost so high that Republicans back off on any threats. So here we are again.

Paul Krugman: Coins Against Crazies

Republican threats over the debt-ceiling can and should be defused:

Coins Against Crazies, by Paul Krugman, Commentary, NY Times: So, have you heard the one about the trillion-dollar coin? It may sound like a joke. But if we aren’t ready to mint that coin or take some equivalent action, the joke will be on us — and a very sick joke it will be, too.

Let’s talk ... about the ... debt-ceiling confrontation. ... It’s crucial to understand ... the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world. Yet Republicans are threatening to trigger this disaster unless they get spending cuts that they weren’t able to enact through normal, Constitutional means. ...

This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.

Which brings us to the coin.

As it happens, an obscure legal clause grants the secretary of the Treasury the right to mint and issue platinum coins in any quantity or denomination... — and it offers a simple if strange way out of the crisis.

Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion... This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt. ...

But wouldn’t the coin trick be undignified? Yes, it would — but better to look slightly silly than to let a financial and Constitutional crisis explode.

Now, the platinum coin may not be the only option. Maybe the president can simply declare that as he understands the Constitution, his duty to carry out Congressional mandates on taxes and spending takes priority over the debt ceiling. Or he might be able to finance government operations by issuing coupons that look like debt ... but that, he insists, aren’t debt and, therefore, don’t count against the ceiling.

Or, best of all, there might be enough sane Republicans that the party will blink and stop making destructive threats.

Unless this last possibility materializes, however, it’s the president’s duty to do whatever it takes, no matter how offbeat or silly it may sound, to defuse this hostage situation. Mint that coin!

'Talk of Shirkers Echoes Victorian Past'

What causes poverty?:

Talk of ‘shirkers’ echoes Victorian past, by Tristram Hunt: ...the debate about how to cut back Britain’s spiraling social security system is ... replete with echoes of the past. The language of “workers” versus “shirkers” is a straight lift from the mid-Victorian moralism of deserving and undeserving poor. Yet the most unfortunate rhetoric involves the return of “character” as the critical determinant of poverty. ...

This was the prejudice that first spurred Charles Booth, the Liverpool shipping magnate, to investigate the causes of poverty in 1880s London. Dismissive of socialist claims of mass unemployment, he established a network of researchers to pick over the lives of the poor.

It was a pioneering sociological investigation designed to prove Booth right: that poverty was limited and the poor were poor because of their alcoholism, lust or dislike of work. ... In fact, Booth’s study revealed that circumstance not character dictated poverty. ...

Booth’s study formed an important part of that New Liberal moment when Victorian laisser faire was exchanged for an interventionist state. In its wake came national insurance and the old-age pension. ...

From a post in November, 2007 on this topic:

 ...During 1817 ... a group of prominent New York merchants and professionals (many of them having formerly been the principle supports of such institutions as the New York Hospital and a variety of other worthy causes) officially and quite publicly began to rethink their habit of giving. Such previously generous philanthropists as DeWitt Clinton, Thomas Eddy, and John Griscom took their cue in this from British reactionaries. In so doing, they succumbed to the rhetoric of several hard-nosed British social thinkers, most notably Thomas Robert Malthus, Jeremy Bentham, and the Scottish conservative Patrick Colquhoun.

Twenty years earlier, all three of those gentleman had been instrumental in the founding of the London Society for Bettering the Condition and Increasing the Comforts of the Poor. Despite the burden of its long-winded name, the London Society specialized in the cutting off of funds for social welfare rather than the distribution of charity. Men like Malthus, Bentham and Colquhoun believed that a distinct line must be drawn between the "deserving poor" (those hit with hard times resulting from unfortunate histories) and "undeserving paupers," the latter being the drunk, lazy and whorish of society, to whom the provision of any form of aid was a reprehensible act of facilitation.

Another key concept underpinning the logic of the London Society was the presumption (for lack of a more accurate term) that paupers outnumbered the deserving poor by a factor of about 9 to 1. In reform meetings and from church pulpits, politicians and clerics again and again cited this astonishing though unverifiable statistic, which soon became accepted as fact. In time, the public mind became convinced that a mere ten percent of London's poor were the crippled and the orphaned, while 90 percent were degenerates. For every one individual in London's slums who genuinely needed aid, popular wisdom held that there were nine who required something else entirely: intolerance, punishment and correction. As a corollary to this line of thinking, logic dictated that 90% of the charitable aid previously offered was superfluous. In turn, wallets closed, and checks stopped being written.

The London Society remained a venerable body and dominant force in British life for decades: influential in the development of such institutions as workhouses and debtors prisons. It was likewise influential, through its example, in New York and other American cities. By the end of 1817, Clinton, Eddy, and Griscom, joined by hundreds of other New Yorkers, had formed a clone organization on the banks of the Hudson: the Society for the Prevention of Pauperism (SPP).

Several months before the founding of the SPP, New York's Humane Society (which at that time specialized in helping humans rather than dogs and cats) announced rather forlornly the result of recent research revealing a startling fact: no less than 15,000 men, women and children - the equivalent of one-seventh of the city's total population - had been "supported by public or private bounty and munificence" the previous winter.

In their book Gotham, historians Edwin Burrows and Mike Wallace have eloquently described the SPP's point of view, expressed in response to the above data. In the grand tradition of the London Society, the SPP said it believed that "willy-nilly benevolence" only made things worse. "Giving alms to the undeserving poor not only undermined their independence but also drove up taxes and sapped the prosperity of the entire community." Thus, "for their good as well as everyone else's … the SPP recommended that all paupers in the city be cut off from all public assistance forthwith." Soon the Humane Society itself announced its intention to disband, in the wake of its realization that the very act of giving charity had "a direct tendency to beget, among [the citizenry] habits of imprudence, indolence, dissipation and consequent pauperism."

"Tough love" was in. Cruelty equaled kindness. Frugality equality generosity. And all three were not only cheap, but easy. A few ministers sang out against the reverse-logic of the SPP, but far more praised the organization than damned it. God himself, it seemed was on the side of self-reliance. A generation later, Social Darwinists would express a similar point of view: that the strong must be allowed to flourish, and not be hamstrung by the needs of the clawing weak. Charles Darwin's The Origin of Species would not see print until 1859. Indeed, Darwin himself was but eight years old in 1817, and would not depart on the voyage of HMS Beagle until 1831. Nevertheless, the seeds of what was to become the philosophy of Herbert Spencer (born 1820), not to mention the nearly identical philosophy of the 20th century's Objectivist saint of selfishness, Ayn Rand, were quite evident in the grand pronouncements of the London Society and its New York equivalent, the SPP. ...

I'm always amazed at how little the debate, generated in large part by ideology and the belief in false facts about the poor, has changed since the 1800s.

This is from a post in June, 2007. It's an earlier history the deserving/undeserving distinction:

... In the early mercantilist period there was an ideological continuity between the intellectual defenses of mercantilist policies and the earlier ideologies that supported the medieval economic order. The latter relied on a Christian paternalist ethic that justified extreme inequalities of wealth on the assumption that God had selected the wealthy to be the benevolent stewards of the material welfare of the masses.[4] The Catholic church had been the institution through which this paternalism was effectuated. As capitalism developed, the church grew weaker and the governments of the emerging nation-states grew stronger. In the early mercantilist period, economic writers increasingly came to substitute the state for the medieval church as the institution that should oversee the public welfare. ...

The people could no longer look to the Catholic church for relief from widespread unemployment and poverty. Destruction of the power of the church had eliminated the organized system of charity, and the state attempted to assume responsibility for the general welfare of society. ...

Poor laws passed in 1531 and 1536 attempted to deal with the problems of unemployment, poverty, and misery then widespread in England. The first sought to distinguish between "deserving" and "undeserving" poor; only the deserving poor were allowed to beg. The second decreed that each individual parish throughout England was responsible for its poor and that the parish should, through voluntary contributions, maintain a poor fund. This proved completely inadequate, and the pauper problem grew increasingly severe.

Finally, in 1572 the state accepted the principle that the poor would have to be supported by tax funds and enacted a compulsory "poor rate." And in 1576 "houses of correction" for "incorrigible vagrants" were authorized and provisions made for the parish to purchase raw materials to be processed by the more tractable paupers and vagrants. Between that time and the close of the sixteenth century, several other poor-law statutes were passed.

The Poor Law of 1601 was the Tudor attempt to integrate these laws into one consistent framework. Its main provisions included formal recognition of the right of the poor to receive relief, imposition of compulsory poor rates at the parish level, and provision for differential treatment for various classes of the poor. The aged and the sick could receive help in their homes; pauper children who were too young to be apprenticed in a trade were to be boarded out; the deserving poor and unemployed were to be given work as provided for in the act of 1576; and incorrigible vagrants were to be sent to houses of correction and prisons.[8]

From the preceding discussion it is possible to conclude that the period of English mercantilism was characterized by acceptance, in the spirit of the Christian paternalist ethic, of the idea that "the state had an obligation to serve society by accepting and discharging the responsibility for the general welfare.”[9] The various statutes passed during this period "were predicated upon the idea that poverty, instead of being a personal sin, was a function of the economic system.[10] They acknowledged that those who were the victims of the deficiencies of the economic system should be cared for by those who benefited from it. ...

However, as noted above, the view that the poor "were the victims of the deficiencies of the economic system" died out, and was replaced by the idea the character problems are the main reason people are poor. This variation in attitudes about the poor -- it's the system, it's the individual -- goes back and forth over time, and we are currently seeing an attempt from the right to re-impose older Victorian attitudes -- and with some success (I recently wrote about the blame the individual versus blame the system distinction and how it has changed during the recession, see the end of this post).

'The Debt Reduction That's Already Happened'

Something to remember:

The debt reduction that's already happened, by Steve Benen: When it comes to most of the major political disputes in Washington, congressional Republicans insist Democrats focus on reducing the debt Republicans built up during the Bush/Cheney era. It underpins everything from the budget fight to the debt ceiling to efforts to expand public investments.

What the debate tends to ignore is the debt reduction that's already happened. Michael Linden and Michael Ettlinger reported yesterday that since the start of 2011 fiscal year, President Barack Obama "has signed into law approximately $2.4 trillion of deficit reduction" over the next decade. ...

Roughly three-quarters of the deficit reduction has come is in the form of spending cuts, which should further make Republicans happy. ... To be sure, it would be my strong preference that policymakers not make this a priority at all. What the nation needs is jobs and economic growth, and the most sensible course of action would be to delay fiscal concerns for a later day. ...

But... The conventional wisdom suggests nothing is being done to address a perceived debt "crisis," and that somehow Republicans have the high ground in demanding more and more cuts. It seems spectacularly insane to me to think the GOP has credibility on the subject given that it was Republicans who created the budget shortfall in the first place, but establishment assumptions are hard to shake.

But that's what makes the Linden/Ettlinger report so worthwhile: something is being done, whether this deserves to be a priority or not. ... What's more, let's also not forget cost-saving measures Obama proposed -- cap and trade, Dream Act -- and the GOP killed. ...

Postscript: Just as an aside, let's also take a moment to compare administrations. Obama, in just the last two years, has accepted $2.4 trillion in debt reduction through multiple proposals. How many debt-reduction proposals did Republicans approve during the Bush/Cheney era? None. Even when there was a Republican-led House, Republican-led Senate, and Republican-led White House? Yep, even then.

What can Washington do to Boost the Recovery?

The editors at MoneyWatch asked me to answer the question:

What can Washington do to Boost the Recovery?: As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment.

Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government. ...[continue reading]...

Policymakers are unlikely to do more to help the economy recover, the question is whether fear of deficits and fear of inflation will cause them to adopt policies that make it worse.

Mint the Platinum Coin?

I haven't said anything about the platinum coin option, until now, because I am of two minds about it. One part of me says this is a very bad idea. We all understand the intent of the law that would allow this, to permit commemorative coins to be minted. Do we really want leaders who are willing to take advantage of any loophole to do things that are contrary to the intent of a law just because it suits their purposes? How can the public trust Democrats to be responsible if they are willing to do things like this? What other stunts might they pull? If they want to go to war, attack Iran for example, does this mean they will take a Bushian approach and 'just do it' no matter what the intent of the constitution is on these matters? I don't want those kinds of leaders.

But what do you do if the other side refuses to play by the traditional rules? What if they are already using tactics that push far beyond the intent of congressional rules to impose their will? If one side is ignoring the traditional rules of engagement and hiding behind trees rather than marching in straight battle lines, is it okay to do so yourself? If the other side tortures, does that mean you should?

For torture, the answer is no, but in this case I think the answer is different. The Republicans will not play by fair rules of engagement, and worse they have taken members of the public hostage as a way to win/influence the battle (Saddam's human umbrellas come to mind). If we don't get our way, we'll crash the economy and hurt people -- the threat is clear. Obama, in his role of leader of all, not just Democrats, has chosen to, in effect, pay the ransom by giving in on key issues. But if the hostages can be freed another way, one that avoids giving in to the hostage-takers, it ought to be considered.

So perhaps it's okay to match ridiculous tactics with ridiculous responses. Mint the coin, but make absolutely sure the public knows that it is only being done because the other side refuses to play fair, refuses to play by the explicit and implicit rules of political engagement. That's key to winning the battle for public. Putting John Boehner's face on the coin, as Paul Krugman suggested this morning, would certainly be a step in that direction.

'Why Paul Krugman should be President Obama's Pick for US Treasury Secretary'

I took three days to drive down the coast of Oregon and California on the way to the ASSA meetings in San Diego -- sort of a needed break that seemed to only put me further behind -- but I only have one day to get back, today. It's going to be a long, long day, so just a few quick posts before hitting the road:

Apparently, there's a petition circulating in support of this:

Why Paul Krugman should be President Obama's pick for US treasury secretary, by Mark Weisbrot: President Obama hasn't picked a treasury secretary yet for his second term, so he has a chance to do something different.

He could ignore what Wall Street and conservative media interests want and pick somebody who would represent what the electorate voted for. ... I know what you are thinking: this is impossible. There is too much money and power on the other side of this idea. Well, maybe.

But Obama has surprised us before. Last June, he picked Jim Kim to run the World Bank. ... So, for the post of treasury secretary, to replace the outgoing Tim Geithner, Obama could afford to make another bold choice: Paul Krugman.

Krugman would be tough to oppose on any substantive grounds. He has a Nobel Prize in economics (also the John Bates Clark award for best economist under 40). The New York Times columnist is probably the best-known living economist in the United States, and perhaps the world.

Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. ... Most importantly, Krugman is on the side of the majority of Americans. ... After all, why should the secretary of the treasury have to prioritize the interests of Wall Street and the "criminal enterprise" of big finance...

The US treasury secretary also has an important influence on the rest of the world, as the most powerful force within the IMF, G20, and G7 groupings. Krugman has written extensively about the stupidity of the last few years of economic policy in Europe...

Imagine a treasury secretary who favored employment, poverty reduction and development, rather than unnecessary austerity...

It would be great to have a treasury secretary who can cut through all that crap. ...

The renowned actor and human rights activist Danny Glover has launched a petition to the president for him to nominate Paul Krugman for secretary of the treasury. It's worth signing.

When Paul Krugman hears about this (I predict) he will tell us all the reasons why he'd be lousy at this job (as he's done before with similar suggestions).

Paul Krugman: Battles of the Budget

Did Democrats win:?

Battles of the Budget, by Paul Krugman, Commentary, NY Times: ...our two major political parties are engaged in a fierce struggle... Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war.

The fight over the fiscal cliff was just one battle in that war. It ended, arguably, in a tactical victory for Democrats. The question is whether it was a Pyrrhic victory that set the stage for a larger defeat.

Why do I say that it was a tactical victory? Mainly because of what didn’t happen: There were no benefit cuts. This was by no means a foregone conclusion...

There were also some actual positives from a progressive point of view. Expanded unemployment benefits were given another year... Other benefits to lower-income families were given another five years... Oh, and not only did Republicans vote for a tax increase for the first time in decades, the overall result of the tax changes ... will be a significant reduction in income inequality...

So why are many progressives — myself included — feeling very apprehensive? Because ... the G.O.P. retains the power to destroy, in particular by refusing to raise the debt limit — which could cause a financial crisis. And Republicans have made it clear that they plan to use their destructive power to extract major policy concessions.

Now, the president has said that he won’t negotiate on that basis, and rightly so. Threatening to hurt tens of millions of innocent victims unless you get your way ... shouldn’t be treated as a legitimate political tactic.

But will Mr. Obama stick to his anti-blackmail position as the moment of truth approaches? He blinked during the 2011 debt limit confrontation. And the last few days of the fiscal cliff negotiations were also marked by a clear unwillingness on his part to let the deadline expire. Since the consequences of a missed deadline on the debt limit would potentially be much worse, this bodes ill for administration resolve in the clinch.

So, as I said, in a tactical sense the fiscal cliff ended in a modest victory for the White House. But that victory could all too easily turn into defeat in just a few weeks.

'So Who Won the Fiscal Cliff Fight?'

Dartmouth's Andrew Samwick (he was the chief economist for the President's Council of Economic Advisors in 2003):

So Who Won the Fiscal Cliff Fight?: Obviously, former President George W. Bush. Despite how much he has been vilified in the years since his departure from office, the Congress and the President yesterday decided to ratify almost all of his tax policy agenda. As Joe Wiesenthal of Business Insider noted, "The difference between the Obama Tax Cuts and the Bush Tax Cuts?  Obama's are permanent*." Joe also pointed out, quite astutely, that even if top marginal tax rates are not lower than in the Clinton years, taxpayers with the highest incomes are still paying lower taxes because all the tax rates below the top are lower. Who's laughing now?

Not me. In over eight years of blogging, you won't find a single word of praise for the Bush-Obama tax cuts. As a matter of revenue, we now permanently have a tax system that will not raise enough revenue to cover our expenditures. As a matter of policy, we continued to constrain our choices based on whether some portion of legislation that wasn't popular enough to pass initially without explicit sunsets should be continued or not. The proper course of action for President Obama was to allow all the sunsets to occur and then to force the Republicans to propose legislation to achieve their political objectives. Instead, he surrendered his political advantages and handed it to them without a fight. What an abject failure of leadership. I am reminded this year, as I was last, of a statement by Paul Tsongas in his Call to Economic Arms, "It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be."

Maybe the next step is as Brad DeLong suggests -- they are now Obama's tax cuts, so he has to find a way to fund them. A large carbon tax to recover much of the revenue would complete the "Green Tax Swap" that I have long wanted to see. An economist can hope, can't he?

Fed Watch: Thoughts on the Fiscal Deal

One more from Tim Duy:

Thoughts on the Fiscal Deal, by Tim Duy: Mark collected some reactions to the fiscal deal. Brad DeLong doesn't understand the Obama Administration:

The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession.

But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be.

I completely agree with DeLong's policy recommendation; there is no reason to abandon near-term stimulus in the context of long-run fiscal consolidation. Indeed, I believe that any austerity at this point is foolhardy, and only serves to prolong the exit from the zero-bound.

But DeLong's recommendation was never on the table to begin with. From day one this has been a debate about the extent of the austerity, not a debate about austerity itself. Does anyone have the sense that President Obama does not fundamentally believe in the pursuit of deficit reduction sooner than later? I keep coming back to this observation from Bruce Bartlett:

In a little-noticed comment on Spanish-language television on December 14, Obama himself confirmed this typology of today's political spectrum. Said Obama, "The truth of the matter is that my policies are so mainstream that if I had set the same policies that I had back in the 1980s, I would be considered a moderate Republican."

I think this is correct and explains a great deal about why Obama refuses to use his leverage to pursue liberal policies and keeps inviting Republicans back to the negotiating table again and again on the budget. He wants a deal, he wants to cut spending and balance the budget if possible. This may or may not be a wise course for a Democratic president to follow, but that is who Obama is.

I frequently see commentators saying that Obama is terrible at the bargaining table, but I can't help thinking that he is getting pretty much what he wanted. Despite all the hate heaped upon him by the right, Obama just isn't a progressive, and we shouldn't expect him to seek a deal as if he was one. After all, what progressive ensures a tax hike on the lower and middle classes (the expiration of the payroll tax cut with no offsetting cut elsewhere)? Obama seems to believe the best deal is the one no one likes.

After concluding that the deal isn't so bad, Krugman takes the forward looking view:

So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.

My guess is that Obama already knows that the outcome of that debate will be one in which he looks like he retreated over time. But I also believe that the place he retreats to will be where he wanted to go in the first place; indeed, I suspect he never believed he would get 100% of the Bush tax cuts reversed in the fiscal cliff negotiations. Note too that, to DeLong's complaint, the next debate will again be an issue of how much austerity. And expect that Obama will allow the negotiations to drag out to the eleventh hour, thereby forcing both Republicans and Democrats to choke down a meal - some combination of tax hikes and entitlement cuts - they both find distasteful.

'I Do Not Understand the Obama Administration...'

Some reactions to the fiscal deal (which has yet to pass the House, or not, as I write this).

Brad DeLong:

I Do Not Understand the Obama Administration...: The big reason to make a deal before January 1, 2013 was that detonating the "austerity bomb" would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal--sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP--in order to avoid renewed recession.

But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be.

That isn't enough to make it worthwhile to make a deal before the new congress. After Boehner's reelection as Speaker and after the expiration of the Bush tax cuts eliminates the U.S.'s structural deficit, the politics become very different...

Paul Krugman:

Perspective on the Deal: To make sense of what just happened, we need to ask what ... are the two sides really fighting about? Surely the answer is, the future of the welfare state. ... The right wants to roll the clock back to 1930, if not to the 19th century.

There are two ways progressives can lose this fight. One is direct defeat on the question of social insurance, with Congress actually voting to privatize and eventually phase out key programs — or with Democratic politicians themselves giving away their political birthright in the name of a mess of pottage Grand Bargain. The other is for conservatives to successfully starve the beast — to drive revenue so low through tax cuts that the social insurance programs can’t be sustained.

The good news for progressives is that danger #1 has been averted, at least so far... The bad news is that the deal falls short on making up for the revenue lost due to the Bush tax cuts. ... Getting all of those ended would have yielded something like $800 billion; he actually got around $600 billion. How big a difference does that make? ... That’s not crucial, to say the least.

And on the principle of the thing, you could say that Democrats held their ground on the essentials — no cuts in benefits — while Republicans have just voted for a tax increase for the first time in decades.

So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.

If Obama stands his ground in that confrontation, this deal won’t look bad in retrospect. If he doesn’t, yesterday will be seen as the day he began throwing away his presidency and the hopes of everyone who supported him.

Jeff Sachs says reject the deal -- he wants taxes to go up for everyone:

Reject the Deal: The White House and Senate have agreed to make the Bush tax cuts permanent for 99 percent of households, starving the federal government of funds. Even Mitt Romney could never have accomplished for the Republicans what Obama has just done for them. The Democrats in the Senate would have soundly rejected the plan if the Republicans had put it forward. ...

Obama has insisted that his top aim is to protect Bush's tax cuts for 98 percent of Americans. In the process he has lost sight of the even more basic need to protect the long-term finances of the federal government. ... The public has not been told that yesterday's agreement threatens the financing of crucial programs for education, job training, infrastructure, environment, energy, science and technology, health care, nutrition, and the poor for years to come. ...

Allowing the Bush tax cuts to expire today would have raised tax collections by around 2.5 percent of GDP, to around 21 percent of GDP by the end of the decade, thereby allowing the government to pay its bills assuming that the useless wars are ended and the bloated Pentagon budget is brought under control. ...

Many people will say, "Yes, but why tax the middle class to collect more revenues? Why not tax the rich even more to get to 21 percent of GDP?" There are two answers. First, the pre-Bush tax schedule was in fact adequate. It was the schedule of the Clinton years that supported balanced budgets and a reasonably healthy macro-economy.

Second, yesterday's deal if approved by the House will make it impossible to get to 21 percent of GDP under any alternative scenario, and perhaps even to 19 percent. The Republicans will now block any attempt to raise revenues as a share of GDP and the White House will have no leverage. ...

The White House should have put forward its own tax plan with adequate overall revenues. It could have told Congress to adopt the alternative plan or simply accept the expiration of the Bush tax cuts. That was the time for negotiating leverage. Instead, the White House gave up the revenues permanently and without a fight.

With a revenue baseline of around 18 percent of GDP, there will be years of harsh spending cuts ahead. What will they be? Medicaid? Food Stamps? Roads? Water? Renewable energy? Education? Pre-School? Environment? It will probably be "All of the above." ...

There is still time to resist this lousy deal. The House Democrats should try to vote it down today. ... The Federal Government is being dangerously weakened in its capacity to help America address the economic, environmental, and social challenges of the 21st century.

Finally, Greg Mankiw is upset that we didn't gut social insurance programs to protect the wealthy from tax increases to where they were before the Bush administration (where Mankiw played a big role):

President rejects his bipartisan commission: The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to rein in spending and that increased tax revenue should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would like like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.

Mankiw must know that there was not actual report from this commission (because the votes weren't there - the commission never formally agreed on how to proceed). The chairs put out a document, but it wasn't an official report. So when Mankiw references "the commission" and what it said, what the heck is he talking about and why is he trying to mislead on this point? [And if he is including himself among the "bipartisan policy wonks," that's the best laugh I've had so far today, very few of the games he's been playing on his site lately are bipartisan].

Let me add one more thing. If people like Mankiw wanted cuts to social insurance so badly, why didn't they speak up and make this absolutely clear before the election? When Republicans accused Democrats of, for example, wanting to cut Medicare, why didn't Mankiw say yes, that's exactly what President Romney should do! I'm one of his advisors, I've made that clear, and here's his plan for cuts to Medicare, Social Security, Medicaid, and the like. Why pretend you are the defenders instead of the cutters? The answer is, of course, is that it's not what the public wants. The bipartisan budget wonks in Washington may have their own plan to cut social insurance, but guess what? We live in a Democracy, and the Romney/Mankiw view was rejected (so now Republicans try to get it through the back door by gumming up the legislative works and holding the economy hostage). It's not what people want. Acting like it is what they want through a misleading suggestion that it's in some bipartsan commission report that doesn't actually exist is contrary to the message the election delivered.

Now if we can only get Obama to understand what his base was trying to tell him.

The 'Great Scam'

Following up the post below this one, Paul Krugman explains why it's important to realize that deficit reduction is not the true goal of Republicans, it's just a means to bring about tax cuts for the wealthy and pay for them with cuts to social services such as Medicare and Social Security:

...Remember, George W. Bush campaigned on the basis that the surplus of the late Clinton years meant that we needed to cut taxes — and Alan Greenspan provided crucial support, telling Congress that the biggest danger we faced was that we might pay off our debt too fast. Now Greenspan is helping groups like Fix the Debt.

And as Duncan Black points out, the Bush experience tells us something important about fiscal policy: namely, that when Democrats get obsessed with deficit reduction, all they do is provide a pot of money that Republicans will squander on more tax breaks for the wealthy as soon as they get a chance. Suppose Romney had won; do you have even a bit of doubt that all the supposed deficit hawks of the GOP would suddenly have discovered that unfunded tax cuts and military spending are perfectly fine?

The point is that the whole focus of budget discussion is based on a combination of bad economics and bad (and fundamentally dishonest) politics. We’re looking not so much at a Grand Bargain as at a Great Scam.

The Republican's 'Biggest Priority'

Is Obama finally figuring it out?:

“They [Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said.

“That seems to be their only overriding, unifying theme.”

Seems to be?

Why Next to No Political Reaction to the Second Gilded Age?

Brad Delong:

Why Next to No Political Reaction to the Second Gilded Age?, by Brad DeLong: ...During the Gilded Age of the 1890s and 1900s you had strong political movements saying "something is going remarkably wrong with this, this isn’t the country we thought we were going to live in"...

Brad DeLong: ...As a result in the First Gilded Age you had two political movements. The Democratic, left, farmer, labor, semi-socialist, Populist Movement on the one hand. The mixed bipartisan Democratic and Republican, urban, Progressive Movement on the other. Both of them were desperately eager to change America, to repair the flaws of the Gilded Age, to reduce inequality, to make the economy work for everybody--or at least for every white guy--and even to grant women the vote.

They wanted this so much so that someone like Republican President Theodore Roosevelt--as aggressively a partisan an animal as you would ever see--would place his loyalty to the Republican cause second to his loyalty to his progressive principles for American reform. He was happy denouncing Democrats as communist anarchists, but equally happy denouncing rich republicans as "malefactors of great wealth" who desperately needed to be controlled.

Theodore Roosevelt wove his political career out of being head of the Republican party and head of the Progressive Movement. And at the end non-Progressive Republican President Taft simply offended him one time too many, and Roosevelt decided to blow up the Republican Party and hand the presidency to Woodrow Wilson from 1912-1920.

That was the history of America from 1880-1920 or so. After 1920 you do get a Republican Gilded Age resurgence under Harding, Coolidge, Hoover--very corrupt, especially under Harding. But by the late 1920s Progressivism is rising again--even Hoover is running as a Progressive. Then when the Great Depression comes Franklin Roosevelt comes in and he takes the entire progressive agenda off the shelf and promptly begins to implement it.

We haven’t had anything like that over the past thirty years.

And here I’m simply going to throw up my hands and say that I don't know why.

It’s in a great mystery to me. As an economic historian I like to look at political economic patterns from the past and to say we should learn from these and generalize them and take them as providing some insight into the present and the future. In general, we economic historians are extraordinarily successful. There are lots of lessons to be drawn from the first age of globalization for the second. There are lots of lessons to be drawn from the high school-ization of America for the college-ization of America and for education elsewhere in the world. There are lots and lots of lessons to be drawn from the Great Depression for today.

But the political economy of Gilded Ages? Why the first Gilded age produces a Populist and a Progressive reaction and the second, so far, does not? There I throw up my hands and say that my economic historian training betrays me. I have no clue as to what is going on here.

(This is speculative, but I'll give it a shot) I would certainly start by noting the different levels of initial national wealth -- we started from a much higher base this time -- and the presence of social insurance. If we didn't have food stamps, unemployment compensation, and other private and public social backstops to help people through tough times, and a relatively high level of initial wealth to rely upon, the effects would have been much more severe and the response to the Great Recession might have been more like the response to the Great Depression. But as Brad notes, it wasn't just the reaction to the Great Depression that produced a populist movement, it existed before the Great Depression hit. I think you can see elements of a populist movement in recent decades, but it's nowhere as strong as prior to the Great Depression. Again, I think part of this is different levels of initial wealth and the existence of a large middle class, but maybe there is something else too.

I think it matters a lot whether we think of inequality as arising from a problem in the system as a whole, or as the result of individual failures. When people think it's the system as a whole -- the rich and powerful are scheming to hold everyone else down (e.g. robber barons) -- mass movements are more likely than when it is viewed as simply the failings of individuals. I think many people viewed the last few decades as a time of great opportunity. If you weren't rich, or at least doing very well, it was because you hadn't tried hard enough. Anyone who wanted a decent job could get one if they were willing to put out the requisite effort. The Great Recession changed that somewhat, but even now many people want to blame our problems on the poor decisions of individuals, some even try to cast blame for the recession on the decisions of low income households to try to buy houses, rather than some inherent failure within the capitalist system.

Let me back up. Prior to the Great Depression, there was a battle between those who believed the system was at fault (and hence pushed populist remedies) versus those who thought some people were simply less capable and destined to be poor no matter what we did to help them -- it was the duty of the head of the household to provide for their family, and those who didn't were looked down upon. They must not be trying hard enough, they were lazy, etc. But the Great Depression made it clear that trying hard wasn't always sufficient. People who had been able to support their families their whole lives, and were determined to do so during the depression no matter what it took, couldn't. It wasn't a matter of individual effort, or how hard one tried, these was simply no work to be found for great numbers of "upstanding" citizens.

If the people who were known to be willing to do whatever it took to provide for their families could not, then it must be the system, not the individual that was a fault and this was a key idea that allowed social insurance to be passed after the Great Depression. The money wasn't going to no good, lazy people who didn't deserve it, it was going to people who deserved to be helped when the capitalist system, which was known to cycle ruthlessly through booms and busts, let them down. People needed insurance against events that were out of their individual control.

This time around, it came as a bit of a shock that they system could still let us down. Many people thought we were beyond Great Depressions/Recessions -- hence the claim above that most failings prior to our recent troubles were viewed as individual rather than the fault of the system. But even though people began to realize it wasn't always a matter of individual effort and ability, since we already have many social insurance protections in place the outcry this time isn't to produce a bunch of new social insurance programs to protect the vulnerable as it was after the Great Depression. Instead, it led to a renewed realization of the value of social insurance (at least I hope this is true) and the fight presently is to maintain or expand what we already have versus scaling back our social protections. I think that, without the Great Recession, our social insurance programs would be even more vulnerable than they are presently. Thus, unlike Brad, I think there have been noticeable effects in shoring up "populist" support for these types of programs. But where I agree, and what I see as puzzling, is why the reaction from those who depend upon these programs hasn't been even stronger. Why are these programs vulnerable at all?

'Is Academic Macroeconomics Flourishing?'

Simon Wren-Lewis continues the conversation on the state of academic macroeconomics:

Is academic macroeconomics flourishing?, by Simon Wren-Lewis: How do you judge the health of an academic discipline? Is macroeconomics rotten or flourishing? ...[A]cademic macroeconomics appears all over the place, with strong disputes between alternative schools.

Is this because the evidence in macroeconomics is so unclear that it becomes very difficult to judge different theories? I think the inexact nature of economics is a necessary condition for the lack of an academic consensus in macro, but it is not sufficient. (Mark Thoma has a recent post on this.) Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years. One important reason for that progress is the existence of a group that is often neglected - macroeconomists working in central banks.

Unlike their academic counterparts, the primary goal of these economists is not to innovate, but to examine the evidence and see what ideas work. The framework that most of these economists find most helpful is the New NeoClassical Synthesis, or equivalently New Keynesian theory. As a result, it has become the dominant paradigm in analyzing monetary policy.

That does not mean that every macroeconomist looking at monetary policy has to be a New Keynesian, or that central banks ignore other approaches. It is important that this policy consensus should be continually questioned, and part of a healthy academic discipline is that the received wisdom is challenged. However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out' on whether prices are sticky is wrong. The relevant jury came to a verdict long ago.

It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilization there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive. From one perspective this contrast is deeply puzzling. The science of fiscal policy is not inherently more complicated. ...

What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides. This group does not exist because the need to use fiscal policy for short term macroeconomic stabilization is occasional either in terms of time (when the Zero Lower Bound applies) or space (countries within the Eurozone). As a result, when fiscal policy was required to perform a stabilization role, policymakers had to rely on the academic community for advice, and here macroeconomics clearly failed. Pretty well any outside observer would describe its performance as rotten.

The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology, and the importance of what I have called the anti-Keynesian school that is a legacy of the New Classical revolution. The reasons why these influences are particularly strong when it comes to fiscal policy are fairly straightforward.

Two issues remain unclear for me. The first is how extensive this ideological bias is. Is the over dominance of the microfoundations approach related to the fact that different takes on the evidence have an unfortunate Keynesian bias? Second, is the degree of ideological bias in macro generic, or is it in part contingent on the particular historical circumstances of the New Classical revolution? These questions are important in thinking how this bias can be overcome.

When people ask if evidence matters in economics, I often point to the debate over the New Classical model's prediction that only unexpected changes in monetary policy matter for economic activity. These models, with their prediction that expected changes in monetary policy are neutral, cleverly allowed New Classical economists to explain the correlations between money, output, and prices in the data without admitting that systematic policy mattered. Thus, these models supported the ideological convictions of many on the right -- government intervention can make things worse, but not better. (Unexpected policy shocks push the economy away from the optimal outcome, so the key was to minimize unexpected policy shocks. This led to things like the push for transparency so that people would anticipate, as much as possible, actual policy moves.)

At first, the evidence seemed to support these models (e.g. Barro's empirical work), but as the evidence accumulated it eventually became clear that this prediction was wrong. Mishkin provided key evidence against these models through his academic work (see, for example, his book A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models), so I am not as convinced as Simon Wren-Lewis that the difference between monetary and fiscal policy is due solely to the existence of technocratic, mostly non-ideological central bank economists letting the evidence take them where it may. That certainly mattered, but is seems there was more to it than this.

The evidence that Mishkin and others provided was a key reason these models were rejected (it was also difficult to simultaneously explain the magnitude and duration of business cycles with unexpected monetary shocks as the sole driving force), but when it comes to fiscal policy, as noted above, evidence has not trumped ideology to the same degree. One of the reasons for this, I think, is that it's difficult to find clear fiscal policy experiments in the data to evaluate. And when we do (e.g. wars), it's difficult to know if the results will hold at other times. But I can't really disagree with the hypothesis that if an institution like the Fed existed for fiscal policy, there would be a much bigger demand for this information, and that demand would have produced a much larger supply of evidence.

But I am not so sure the difference is "central bank economists whose job depends on taking an objective view of the evidence" so much as it is that these institutions produce a demand for this type of research, and academics respond by supplying the information that central banks need. So the question for me is whether it's the lack of ideology of central bank economists (many of whom are academics), or the fact that their existence creates a large demand for this type of information. Maybe it's both.