Economist's View

Paul Krugman: Detroit, the New Greece

The deficit scolds have a new battle cry -- ignore them:

Detroit, the New Greece, by Paul Krugman, Commentary, NY Times: When Detroit declared bankruptcy, or at least tried to — the legal situation has gotten complicated — I know that I wasn’t the only economist to have a sinking feeling about the likely impact on our policy discourse. Was it going to be Greece all over again? ...

O.K., what am I talking about? As you may recall, a few years ago Greece plunged into fiscal crisis. ... Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem. Nonetheless, for a while policy discourse across the Western world was completely “Hellenized” — everyone was Greece, or was about to turn into Greece. And this intellectual wrong turn did huge damage to prospects for economic recovery.

So now the deficit scolds have a new case to misinterpret...; let’s obsess about municipal budgets and public pension obligations!

Or, actually, let’s not.

Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded,... Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal...

So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces. ...

True, in Detroit’s case matters seem to have been made worse by political and social dysfunction. ... So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.

The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn’t. For the most part, it’s just one of those things that happens now and then in an ever-changing economy.

The Long-Term Budget Picture

More here: Our New Look at the Long-Term Budget Picture, CBPP

Paul Krugman: Fight the Future

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

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

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

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

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

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

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

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

Paul Krugman: The Big Shrug

Why don't politicians care about the unemployed?:

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

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

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

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

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

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

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

'Welfare for the Wealthy'

Deficit reduction as a "sacred excuse for ... cruelty":

Welfare for the Wealthy, by Mark Bittman, Commentary, NY Times: The critically important Farm Bill is impenetrably arcane, yet as it worms its way through Congress, Americans who care about justice ... can parse enough of it to become outraged. The legislation costs around $100 billion annually, determining policies on matters that are strikingly diverse...

The current versions of the Farm Bill in ... the House ... is proposing $20 billion in cuts to SNAP — equivalent ... to “almost half of all the charitable food assistance that food banks and food charities provide to people in need.”

Deficit reduction is the sacred excuse for such cruelty, but the first could be achieved without the second. Two of the most expensive programs are food stamps, the cost of which has justifiably soared since the beginning of the Great Recession, and direct subsidy payments.

This pits the ability of poor people to eat — not well, but sort of enough — against the production of agricultural commodities. That would be a difficult choice if the subsidies were going to farmers who could be crushed by failure, but in reality most direct payments go to those who need them least.

Among them is Congressman Stephen Fincher, Republican of Tennessee, who justifies SNAP cuts by quoting 2 Thessalonians 3:10:  “For even when we were with you, we gave you this command: Anyone unwilling to work should not eat.”

Even if this quote were not taken out of context... [there is no need] to break a sweat countering his “argument”... 45 percent of food stamp recipients are children, and in 2010, the U.S.D.A. reported that as many as 41 percent are working poor. ... Fincher himself [is] a hypocrite.

For the God-fearing Fincher is one of the largest recipients of U.S.D.A. farm subsidies in Tennessee history; he raked in $3.48 million in taxpayer cash from 1999 to 2012, $70,574 last year alone. The average SNAP recipient in Tennessee gets $132.20 in food aid a month; Fincher received $193 a day. ...

Fincher is not alone in disgrace, even among his Congressional colleagues, but he makes a lovely poster boy for a policy that steals taxpayer money from the poor and so-called middle class to pay the rich...

Paul Krugman: From the Mouths of Babes

The "ugly, destructive war against food stamps":

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

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

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

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

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

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

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

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

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

 

'A Note on Debt, Growth and Causality'

Arin Dube (via email):

Spurred by renewed interest on the topic, especially as evidenced by the work by Kimball and Wang,  I decided to finally post this short working paper on my website that builds on my guest blog post from a month and half ago:

A Note on Debt, Growth and Causality: Abstract: This note documents the timing in the relationship between the debt-to-GDP ratio and real GDP growth in advanced economies during the post World War II period using the Reinhart and Rogoff dataset. I first show that the debt ratio is more clearly associated with the 5-year past average growth rate, rather than the 5-year forward average growth rate–indicating a problem of reverse causality. Indeed, there is little evidence of a lower growth rate above the 90 percent threshold when using the 5-year forward average growth rate. I use a number of simple tools to account for some of the reverse causality in the bivariate regression–such as using forward growth rate, instrumenting the current debt ratio with its lag, and controlling for lagged GDP growth rates. These simple methods of accounting for reverse causality diminish the size of the association by between 50 and 70 percent, with the linear regression estimate indistinguishable from zero. Finally non- and semi-parametric plots provide visual confirmation that the relationship between debt-to-GDP ratio and growth is essentially flat for debt ratios exceeding 30 percent when we (1) use forward growth rates, (2) control for past GDP growth, or both.

Here's the Kimball and Wang work he mentions: After Crunching Reinhart and Rogoff’s Data, We Found No Evidence That High Debt Slows Growth.

'Stop Celebrating Our Falling Deficits'

Ezra Klein is correct:

Stop celebrating our falling deficits: It’s time to stop celebrating last week’s Congressional Budget Office report. Our deficits aren’t dropping because we’re doing something right. They’re dropping because we’re doing everything wrong. ...

The CBO is saying that the federal government will be pulling demand out of the economy in 2013, 2014 and 2015. It will then start adding demand back in again — meaning we’ll be increasing the deficit — from 2016 through 2023, and presumably beyond.

That is literally the opposite of what we should want. Textbook economics says the government should add demand when the economy is weak and pull back when the economy is strong. The economy — and particularly the labor market — will remain weaker than we’d like in 2013, 2014 and 2015. That’s when the government should be helping, or at least making sure not to hurt too fast. It should be much stronger from 2016 to 2023. That’s when the government should be backing off. ...

Ben Bernanke also made this point -- yet again -- in his testimony today.

'About That Debt Crisis? Never Mind'

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

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

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

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

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

Or maybe not even that. ...

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

Bad News for Deficit Hawks and Opponents of Obamacare

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risk of Debt?

Brad DeLong on when government debt is problematic, and when it's not -- a short excerpt from a much longer discussion:

Risks of Debt?: Extended Version, by Brad DeLong: ... The principal mistake Reinhart and Rogoff committed in their analysis and paper--indeed, the only significant mistake in the paper itself--was their use of the word "threshold".

It and the graph led very many astray. It led the usually-unreliable Washington Post editorial board to condemn the "new school of thought about the deficit…. 'Don’t worry, be happy. We’ve made a lot of progress', says an array of liberal pundits… [including] Martin Wolf of the Financial Times…" on the grounds that "their analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could… stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." (Admittedly, experience since the start of the millennium gives abundant evidence that the Washington Post needs no empirical backup from anybody in order to lie and mislead in whatever way the wind blows.)

It misled European Commissioner Olli Rehn to claim that "when [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy." Both of these--and a host of others--think that if debt-to-annual-GDP is less than 90% (or, in Rehn's case, 80%, and I have no idea where the 80% comes from) an economy is safe, and that only if it is above 90% is the economy's growth in danger.

And in their enthusiasm when they entered congressional briefing mode it led Reinhart and Rogoff themselves astray. ...

Matthew O'Brien relays Tim Fernholz of Quartz's flagging of the following passage from Senator Tom Coburn:

Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask [Reinhart and Rogoff] his question: "Do we need to act this year? Is it better to act quickly?"

"Absolutely," Rogoff said. "Not acting moves the risk closer," he explained, because every year of not acting adds another year of debt accumulation. "You have very few levers at this point," he warned us.

Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it is not risky to hit the 90 percent threshold, we would expect a higher incidence."

And O'Brien quotes Reinhart and Rogoff writing in Bloomberg View:

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP…. The biggest risk is that debt will accumulate until the overhang weighs on growth…

Yet the threshold at 90% is not there. In no sense is there empirical evidence that a 90% ratio of debt-to-annual-GDP is in any sense an "important marker", a red line. That it appears to be in Reinhart and Rogoff's paper is an artifact of Reinhart and Rogoff's non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%. ...

Our Lack of Skilled Policymakers

Dean Baker:

...the sequester is throwing around 600,000 people out of work according to the Congressional Budget Office. These are people who have the necessary skills to fill jobs in the economy but who will not be working because people in Washington lack the skills to design policies to keep the economy near full employment.

Paul Krugman: The Jobless Trap

We've been worried about the wrong thing:

The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.

For the overriding fear driving economic policy has been debt hysteria... After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.?

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. ... But while debt fears were and are misguided, there’s a real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. ...

Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found. ...

The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. ... And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak. ... So we are indeed creating a permanent class of jobless Americans.

And let’s be clear: this is a policy decision. The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.

It’s hard to overstate how self-destructive this policy is. Indeed, the shadow of long-term unemployment means that austerity policies are counterproductive even in purely fiscal terms. Workers, after all, are taxpayers too; if our debt obsession exiles millions of Americans from productive employment, it will cut into future revenues and raise future deficits.

Our exaggerated fear of debt is, in short, creating a slow-motion catastrophe. It’s ruining many lives, and at the same time making us poorer and weaker in every way. And the longer we persist in this folly, the greater the damage will be.

Paul Krugman: The Excel Depression

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

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

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

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

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

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

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

'The Rapidly Shrinking Federal Deficit'

Calculated Risk:

... It shocks people when I tell them the deficit as a percent of GDP is already close to being cut in half (this doesn't seem to ever make headlines). As Hatzius notes, the deficit is currently running under half the peak of the fiscal 2009 budget and will probably decline further over the next few years with no additional policy changes.

Paul Krugman: The Urge to Purge

We need to purge rotten economic policy out of our economic system:

The Urge to Purge, by Paul Krugman, Commentary, NY Times: When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”

Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?

How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and the odds are that you ... encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.

Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. ... But the Mellonites just keep coming. The latest example is David Stockman...

So what should we be doing? ... To deal with the crisis..., we need monetary and fiscal stimulus, to induce those who aren’t too deeply indebted to spend more while the debtors are cutting back.

But that prescription is, of course, anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. And that, in turn, tells you why liquidationism is such a destructive doctrine: by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump.

The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.

But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars are dead wrong today. Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.

'The True Measure of Imbalances in Spending and Income'

Antonio Fatás follows up on Paul Krugman's comments on government debt (and the false worries about it):

Gross Mistake, by Antonio Fatás: In a couple of recent posts Paul Krugman reminds us that interpreting data on debt as a sign of excessive spending and living beyond our means is incorrect. I have made this point before when looking at government debt.

The first flaw in the logic is that while it is correct to argue that if someone lives beyond his or her means we will see their debt increasing, it is not correct to argue that every time we see debt increasing it means that someone is living beyond his or her means. The reason is that we need to consider assets and not just liabilities. This argument becomes even more relevant when you go from an individual to a country as what is debt for a person is likely to be an asset for someone else. In other words, for an individual you want to look at the balance sheet (and not just debt), for a country we need to look at the consolidated balance sheets of all economic actors.

As Krugman argues in his blog post, the main reason why we see debt increasing in the US (and other advanced economies) during the years that preceded the global financial crisis was an increase in leverage and not overspending. I borrow to invest in someone else's business or idea who is borrowing from me to invest in someone else's asset, etc. In this scenario, the collective level of debt keeps increasing even if no one is living beyond their means; our balance sheets look fine with assets matching liabilities. It can, of course, be the case that we are creating a risk in the system by this increasing lending with leverage that could itself become an amplification mechanism to any future disturbance to the economy (so maybe increasing debt as a result of increasing leverage is bad after all) but this has nothing to do with the level of spending (no spending spree here). ...

There are indicators that aggregate all the balance sheets of all economic actors that give us the true measure of imbalances in spending and income. We can do it by sectors (the government, the private sector, households,..) or we can do it for the whole country. When we do it for the whole country what we measure is the Net International Investment Position (NIIP). This is the difference between all foreign assets and foreign liabilities. This is the true measure of how much the country is borrowing from the rest of the world (in net terms). How does it compare to measure of gross debt? For a start it is smaller for most countries but, more interestingly, it can give you a very different perspective on a country if you just compare it to a partial measure of indebtedness.

As an example, let's compare government debt with the NIIP for some selected countries.

The figure above shows the (gross) government debt as % of GDP and it compares it to the NIIP (also as a % of GDP). In the case of the US, gross government debt is around 100% but the NIIP position is much smaller (around 25%). In other words, some of the debt that the US government issues is held by US citizens, we owe money to ourselves and it is wrong to think that we are passing all the government debt to the next generation because we are also passing the asset that goes with it (a point made many times by Paul Krugman).

In the case of Japan or Germany, government debt is high (very high in the case of Japan). But that debt is more than compensated by the assets that both the government and the private sector hold so both countries have large net international investment positions.

We have other countries like Australia where the government debt is small relative to the NIIP. This is a sign that the private sector has been borrowing (in net terms).

There are lots of interesting questions about the meaning and risk of gross versus net debt but answering those questions requires an understanding of how gross positions create risk to the financial system and more generally to the macroeconomy. Simple and misleading statements that link debt to overspending are not helpful in understanding the potential risks and can be completely off when it comes to suggesting solutions for the economic crisis.

Why Does Marty Feldstein Wants Higher Interest Rates???

Today's what were you thinking when you wrote that award goes to Martin Feldstein:

Department of "Huh?!": I Don't Understand Why Marty Feldstein Wants Higher Interest Rates Right Now Weblogging, by Brad DeLong: I confess that I am having a hard time understanding Marty Feldstein's latest column…

Bond Bubble Brouhaha, by Paul Krugman: Brad DeLong is puzzled by Martin Feldstein’s mental contortions as he tries to come up with a reason to raise interest rates in a depressed economy. So am I. But I’m also puzzled by Feldstein’s underlying economic analysis, in which he treats it as totally obvious that we have a massive bond bubble.

Now, maybe we do have a bond bubble. But the arguments Feldstein uses are one that I thought every sensible economist — a group I thought included Feldstein — had dismissed as bogus years ago. ...

Financing the Deficit (More Feldstein), by Paul Krugman: OK, a bit more on the puzzle of people who think there’s an interest rate puzzle. Here’s the picture of what has happened to saving and investment in America in recent years...

So there isn’t any puzzle here, except the puzzle of people who are puzzled. I really don’t understand how Marty Feldstein can look at these facts and conclude that the only way to explain low interest rates is to imagine that the Fed is imposing massive market distortions. ...

'Reactions to Mankiw on the Long Run Budget Path'

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

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

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

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

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

PGL comments:

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

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

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

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

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

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

Paul Krugman: Cheating Our Children

The deficit scolds have a new argument, but it's no better than the old one:

Cheating Our Children, by Paul Krugman, Commentary, NY Times: So, about that fiscal crisis — the one that would, any day now, turn us into Greece. Greece, I tell you: Never mind.

Over the past few weeks, there has been a remarkable change of position among the deficit scolds.... It’s as if someone sent out a memo saying that the Chicken Little act, with its repeated warnings of a U.S. debt crisis that keeps not happening, has outlived its usefulness. Suddenly, the argument has changed: It’s not about the crisis next month; it’s about the long run, about not cheating our children. ...

There’s just one problem: The new argument is as bad as the old one. ... What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.

Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. ...

Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs. ... And right now — with vast numbers of unemployed construction workers and vast amounts of cash sitting idle — would be a great time to rebuild our infrastructure. Yet public investment has actually plunged since the slump began.

Or what about investing in our young? We’re cutting back there, too, having laid off hundreds of thousands of schoolteachers and slashed the aid that used to make college affordable for children of less-affluent families.

Last but not least, think of the waste of human potential caused by high unemployment among younger Americans — for example, among recent college graduates who can’t start their careers and will probably never make up the lost ground.

And why are we shortchanging the future so dramatically and inexcusably? Blame the deficit scolds,... whose constant inveighing against the risks of government borrowing, by undercutting political support for public investment and job creation, has done far more to cheat our children than deficits ever did.

Fiscal policy is, indeed, a moral issue, and we should be ashamed of what we’re doing to the next generation’s economic prospects. But our sin involves investing too little, not borrowing too much — and the deficit scolds, for all their claims to have our children’s interests at heart, are actually the bad guys in this story.

'Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda'

Dean Baker is upset with Fred Hiatt of the Washington Post:

Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda: Nope, I'm not kidding. In his column today, Hiatt complained that no one seems to be moving forward on his deficit reduction agenda. He then told readers:

"What could shake them out of their own devices? One possibility, a fiscal hawk in the Obama administration told me almost wistfully, would be a 'minor market event.' A stock market plunge, an interest rate spike, a race to the exits by America’s foreign lenders — just enough to spook Congress.

Are you surprised to hear that there are fiscal hawks in the Obama administration? No? Anyway:

"But as long as the Federal Reserve is gobbling up U.S. debt to keep interest rates low, such a mishap seems unlikely."

Yes, it must be awful when you have a view of the economy that the economy refuses to corroborate. (In fairness, Hiatt, does add that such a market event could spin out of control, so "it is not really to be wished for.")

As usual, Hiatt is upset that President Obama is not pushing hard enough for cuts to Social Security and Medicare. While he does give Obama credit for proposing some cuts to Medicare (what happened to the chained CPI?), what really has him upset is that President Obama doesn't talk about inflicting pain... if Hiatt had access to economic data he would know that President Obama's policies are already causing the middle class to feel plenty of pain. ...

Of course the needed change in policy is the opposite of what Hiatt is pushing. We need larger deficits to generate the demand needed to boost the economy. ...

The fiscal hawks and scolds will never admit it, but they've harmed our ability to respond effectively to the unemployment crisis.

The Sequester Game

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

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

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

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

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

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

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

'Cogan, Taylor, and the Confidence Fairy'

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

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

But this is fairly standard; why the ugh?

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

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

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

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

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

And, in a follow-up post

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

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

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

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

Paul Krugman: Marches of Folly

When will we ever learn?:

Marches of Folly, by Paul Krugman, Commentary, NY Times: Ten years ago, America invaded Iraq... Some voices warned that we were making a terrible mistake... And those warnings were, of course, right. ... So did our political elite and our news media learn from this experience? It sure doesn’t look like it.

The really striking thing during the run-up to the war was the illusion of consensus. To this day, pundits who got it wrong excuse themselves on the grounds that “everyone” thought that there was a solid case for war. Of course, they acknowledge, there were war opponents — but they were out of the mainstream.

The trouble with this argument is that it was and is circular: support for the war became part of the definition of what it meant to hold a mainstream opinion. Anyone who dissented, no matter how qualified, was ipso facto labeled as unworthy of consideration. ...

All in all, it was an object lesson in the dangers of groupthink... But as I said, it’s a lesson that doesn’t seem to have been learned. Consider, as evidence, the deficit obsession that has dominated our political scene for the past three years.

Now, I don’t want to push the analogy too far. Bad economic policy isn’t the moral equivalent of a war fought on false pretenses...

But now as then we have the illusion of consensus, an illusion based on a process in which anyone questioning the preferred narrative is immediately marginalized, no matter how strong his or her credentials. And now as then the press often seems to have taken sides. ... How many times, for example, have you seen news articles simply asserting that the United States has a “debt crisis,” even though many economists would argue that it faces no such thing?

In fact, in some ways the line between news and opinion has been even more blurred on fiscal issues than it was in the march to war. ...

What we should have learned from the Iraq debacle was that you should always be skeptical and that you should never rely on supposed authority. If you hear that “everyone” supports a policy,... you should ask whether “everyone” has been defined to exclude anyone expressing a different opinion. And policy arguments should be evaluated on the merits, not by who expresses them; remember when Colin Powell assured us about those Iraqi W.M.D.’s?

Unfortunately, as I said, we don’t seem to have learned those lessons. Will we ever?

Paul Krugman: After the Flimflam

Is the tide turning?:

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

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

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

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

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

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

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

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

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

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

Goalposts on Wheels

James Kwak:

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

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

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

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

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

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

Fed Watch: The Importance of Printing Your Own Currency

Tim Duy:

The Importance of Printing Your Own Currency, by Tim Duy: Quick post - running to the final classes of the term....

Jim Hamilton is defending his recent work calling into question the sustainability of the US debt load. Brad DeLong takes a first shot at Hamilton's post here. I take issue with this paragraph:

Whether a country is able to borrow in its own currency is completely irrelevant for the above calculation. Yes, it means the country likely won't technically default on the debt, and could always create new money to pay off the creditors. But as Reis (2013) and Leeper (2013) have recently explained, printing money does not generate any magical resources with which to resolve a real fiscal shortfall. The central bank could create some more inflation, but anticipated inflation does nothing to alter the above determination of the limits on government debt. Anticipated inflation would just cause the nominal interest rate R and the nominal growth rate g to both increase by the same amount, and therefore would do nothing to change the net growth rate r = R - g which is the key parameter in our equation for sustainability (see for example equation (2) in Econbrowser March 6 or equation (8) in our paper).

This ignores the possibility of financial repression - meaning that the government can force yields on its own debt lower, thereby ensuring that inflation, even anticipated inflation, decreases real interest rates. Back to another post by DeLong:

...and (e) even if we start to tip over into an unsustainable debt-path scenario, we can handle it, because that is why God made financial repression.

Let me spell (e) out a little bit. If investors start to fear that the U.S. debt trajectory is truly unstable, the immediate consequence is a fall in the dollar and an export boom, with somewhat higher domestic inflation. Because the U.S. government regulates the financial system, it can set reserve requirements where it likes--it can thus use its reserve requirements to force banks to hold Treasuries, and if it doesn't like the interest rate at which banks are holding Treasuries, it can up reserve requirements some more.

No, financial repression is not ideal. But it is not a disaster like a collapse of confidence in the debt and the currency....

Arguably, we are currently witnessing a real-time example in Japan's Abenomics policy mix. The Yen has depreciated significantly, consistent with expectations of inflation. And there is even growing evidence that wages are responding as well. From FT Alphaville:

One of the big determinants of whether ‘Abenomics’ manages to pull Japan from its deflationary spiral is through wage growth. Inflation can’t really kick off or arguably even begin without rising wages. One can argue about how important wage growth is, or where it fits in causality-wise — and we’ll come to that later. But it is — or will be — an important signal as to whether this three-pronged approach of the new-ish Japanese government is working.

And actually, it might be catching on. The FT’s Ben McLannahan wrote in early February that the decision by convenience store chain Lawson Inc to raise wages of two-thirds of its staff by 3 per cent could be quite significant..

According to Hamilton, if we have higher anticipated inflation, we should see higher nominal interest rates on government debt, thereby debt sustainability is deteriorating. But alas:

Time and time again, Japan sticks out like a sore thumb that those preaching the unsustainability of government debt want to sweep under the rug with the "Japan is a special case" story (a country fixed effect). But it seems more likely that Japan's economy is behaving exactly as you might expect given that it issues debt in its own currency. In other words, Japan is just a normal case pushed to the extreme.

'When Will It Be 'Crunch Time' for U.S. Debt Accumulation?'

One of those days, so quickly:

• Jim Hamilton responds to Paul Krugman
• Brad DeLong responds to Jim Hamilton

Update: Tim Duy also responds.

'Flimflam Forever'

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

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

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

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

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

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

'When Will Glenn Kessler Question the Counterfactuals of the Deficit Hawks?'

Budget hawks and those playing the role of budget hawk in order to make ideological gains tells us that if we don't cut the budget now, something terrible will happen in the future. Dean Baker wonders why fact-checkers don't address this claim:

When Will Glenn Kessler Question the Counterfactuals of the Deficit Hawks?, by Dean Baker: Glenn Kessler has been doing a good job scrutinizing the claims of horrors of sequester in his job as the Washington Post fact checker. ... These are reasonable points to raise. They imply that steps can be taken to prevent the sequester from being as harmful as simple across the board cuts may first appear.

In fact this is a reasonable way to assess any claim about budgets. Unfortunately this critical approach does not get applied to standard framework in which Washington budget debates are taking place.

This framework holds that we must commit the country to now to achieving some debt target (e.g. 73 percent of GDP) as of 2023, with the country then on a stable path of a debt to GDP ratio, or something really bad will happen. The implicit counter-factual in this framework is that even as the budget situation deteriorates later in this decade and early in the next decade, and financial markets get ever more antsy demanding ever higher interest rates, Congress does nothing.

This has never happened in U.S. history. There has never been a prolonged stretch in which the budget situation has deteriorated with a response from Congress. Nor have the financial markets ever panicked to the point where the government had any difficulty selling its debt.

In other words, the horror stories of exploding deficits and debt and resulting financial market panic have no historical precedent. They assume that future congresses will be far more irresponsible that any we have seen in the past.

This is of course possible, but it is a very strong assumption. It certainly would be worth pointing out to readers. ... This confusion is far more important to current policy debates than the exact number of vaccines that will not be given due to the sequester.

The point is, we don't have to engage in immediate, harmful austerity that will slow the recovery, make it harder for people to find jobs when millions are still unemployed, and so on. We have time to wait until the economy is on better footing (and some of the temporary effects of the recession that are being used to bang the drum for deficit reduction go away) before taking steps to address the long-run budget imbalance. The "now or never" argument is convenient for the hawks and ideologues, but there is little reason to think this is the case.

Paul Krugman: Dwindling Deficit Disorder

The deficit was never our biggest problem, that title goes to unemployment, and it's even less of a problem today:

Dwindling Deficit Disorder, by Paul Krugman, Commentary, NY Times: For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far — where are the soaring interest rates we were promised? — protests that we are having the wrong conversation have consistently fallen on deaf ears.

What’s really remarkable at this point, however, is the persistence of the deficit fixation in the face of rapidly changing facts. People still talk as if the deficit were exploding...; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy. ...

There are, of course, longer-term fiscal issues: rising health costs and an aging population will put the budget under growing pressure over the course of the 2020s. But I have yet to see any coherent explanation of why these longer-run concerns should determine budget policy right now. And as I said, given the needs of the economy, the deficit is currently too small. ...

Yes, we’ll want to reduce deficits once the economy recovers... But unemployment, especially long-term unemployment, is still unacceptably high. “The boom, not the slump, is the time for austerity,” John Maynard Keynes declared many years ago. He was right — all you have to do is look at Europe to see the disastrous effects of austerity on weak economies. And this is still nothing like a boom.

Now, I’m aware that the facts about our dwindling deficit are unwelcome in many quarters. Fiscal fearmongering is a major industry inside the Beltway, especially among those looking for excuses to do what they really want, namely dismantle Medicare, Medicaid and Social Security. People whose careers are heavily invested in the deficit-scold industry don’t want to let evidence undermine their scare tactics; as the deficit dwindles, we’re sure to encounter a blizzard of bogus numbers purporting to show that we’re still in some kind of fiscal crisis.

But we aren’t. The deficit is indeed dwindling, and the case for making the deficit a central policy concern, which was never very strong given low borrowing costs and high unemployment, has now completely vanished.

'Public Support for Education in Real Terms'

pgl follows up on the post about education costs:

Public Support for Education in Real Terms, EconoSpeak: Travis Waldron is rightfully worried about the cost of a college education and the diminishing support from the government:

Only 12 states now spend more on higher education than they did before the recession. The decrease in funding has contributed to the six-fold increase in college tuition over the last 30 years.

A six-fold increase? Let’s be fair – consumer prices today are about 2.5 times what they were 30 years ago – so in real terms, college tuition is up by a factor of 2.5 or so. But OK – this is a staggering increase. Mark Thoma highlighted this as well and is getting some comments doubting that government support for education has declined. This table labeled “Table 3.15.6. Real Government Consumption Expenditures and Gross Investment by Function, Chained Dollars” shows that in real terms (2005$), total government spending on education was $690 billion in 2009 but was only $648 billion in 2011. I know that the austerity freaks in the Republican Party want to claim reducing government spending is good for growth but they are wrong on two fronts. Any fiscal restraint now prolongs this Great Recession. And this kind of austerity impairs the creation of human capital needed for long-term growth. It is not just the cutbacks in higher education that concern me but the general tendency for state and local governments to layoff teachers in order to balance their budgets.

How Much Should We Worry About Debt, Inflation, and Unemployment?

Here are the slides from a talk I gave last night:

How Much Should We Worry About Debt, Inflation, and Unemployment? (ppt ) (pdf)

The last slide concludes with:

We face a tradeoff. Attempts to lower unemployment can increase the risk of inflation and increase the debt . The reverse is true as well. Attempts to lower the debt and reduce the risk of inflation can increase unemployment.

In my view, presently we are too worried about inflation and debt, and not worried enough about unemployment.

'Why Politicians Ignore Economists on Austerity'

Simon Wren-Lewis:

... So why are politicians, in the Netherlands and elsewhere, pursuing a policy that most economists regard as an elementary error? This was a question raised by Coen Teulings, who is the director of the CPB, the Dutch fiscal council. He was commenting on an IMF sponsored conference in Sweden, at which most economists argued against short run austerity when the economy was weak, and instead advocated dealing with budgetary problems through long term structural reform. The politicians in the audience, led by the Swedish finance minister Anders Borg, disagreed. He summarizes their view as follows: “Politicians lack the ability to commit today to austerity measures to be implemented tomorrow. Hence, the only option is to take action straightaway.” ...

Tuelings does not take this argument seriously, for good reasons. Instead he provides three suggestions as to why politicians are ignoring the economists. The first is a memory of the 1970s, when Keynesian policies were pursued because many failed to see the structural impact of the oil crisis. Politicians do not want to make the same mistake again. The second is that economists neglected countercyclical fiscal policy for too long, and therefore have failed to provide politicians with a clear guide to what policy should be, like perhaps an equivalent to the Taylor rule for monetary policy. Third, while both structural reform and short term austerity have political costs, politicians can sell the latter more easily, and success can be demonstrated more quickly. ...

Why do politicians ignore economists? It's a chance to implement ideological goals. Make an argument that sounds good -- if we don't get the debt under control bad things will happen! -- and use it to argue for spending cuts, smaller government, and ultimately lower taxes on wealthy contributors to reelection campaigns.

In good times or bad, conservatives will find a way to argue that tax cuts for the wealthy are the key to economic success.

Economics Professor Mark Thoma Makes Me Wonder about the Other Nuts that are Teaching our Kids...

I was on the radio with conservative radio host Lars Larson earlier this week. Here's a link to the interview:

Economics Professor Mark Thoma makes me wonder about the other nuts that are teaching our kids...

(I haven't listened to it, and won't...)

Our Real Worry Isn’t the Debt, It’s Our Politicians

We are, as they say, live:

Our Real Worry Isn’t the Debt, It’s Our Politicians

The political environment, particularly today's Republican Party, is the biggest threat to future economic growth.

'Fix the Economy, Not the Deficit'

Dean Baker:

Fix the Economy, Not the Deficit, by Dean Baker, The American Prospect: It’s hard to be happy about the prospect of the sequester ... going into effect at the end of the week. Not only will it will mean substantial cuts to important programs; it will be a further drag on an already weak economy, shaving 0.6 percentage points off our growth rate. ...

Of course, it could be worse. Half of the cuts are on the military side. This will help to bring our bloated military sector closer to its pre-September 11 share of the economy, and going forward, the principle that domestic cuts be matched by cuts in defense spending is certainly better than the idea of attacking domestic spending alone. In addition, the most important programs in the budget—Social Security, Medicare, and Medicaid—have been largely spared the ax—an important victory in the 2011 negotiations. ...

The next step at that point is unclear. President Obama has explicitly offered cuts in Social Security and Medicare if the Republicans will go along with higher taxes. For those who oppose cuts to these programs, the generous view of this maneuver is that he knows that the Republicans won’t budge on taxes; by offering a compromise, he is simply making them look unreasonable. The less  generous view is that he is actually willing to make cuts in these programs, sharing the view of Washington Post-centrist types that seniors are living too high on the hog. 

While the odds are against a “grand bargain” that couples tax increases with cuts to Medicare, Medicaid, and Social Security, it remains a possibility. However, it’s more likely that President Obama and Congress will agree to some scaled-down version of the sequester... This will have the deficit hawks yelling and screaming, but that would be the best plausible outcome from the standpoint of the economy. ...

My view is of the less generous variety. I think Obama is quite willing to make these cuts.

'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).

'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.

How Do BS Tax Cuts Help With Deficit Reduction?

Via Steve Benen, if Bowles and Simpson are so serious about reducing the deficit, why does their deficit reduction plan include tax cuts?:

We talked in some detail yesterday about the flaws in the latest debt-reduction plan from former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles (D-N.C.), the folks celebrated by the political/media establishment as sage voices on fiscal issues for reasons I've never been able to identify. The Simpson-Bowles 2.0 plan probably isn't going anywhere, but before we move on, Tim Noah flags a detail I'd overlooked.

It turns out, in their drive to reduce deficits, Simpson and Bowles want to lower tax rates, replacing the revenue with scaling back "most" tax expenditures. It's not unreasonable to wonder why in the world the so-called deficit hawks would do this. ... Worse, they make this recommendation without explanation. Perhaps they think it's obvious that tax cuts are a good idea.

And if they want to make that case, fine, we can have the debate and point to the flaws in their assumption. But let's not keep up the charade that Simpson-Bowles is purely about fiscal responsibility, when there's also clearly a conservative ideological goal underpinning parts of the outline.

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.)

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 Austerity is Real'

Ryan Avent:

The austerity is real, by Ryan Avent: Tyler Cowen is quick to link to pieces calling into question the extent to which austerity plans have been austere. Here is the latest example. He quotes a Washington Post story...

But if this is so, then why is a bank like Goldman Sachs, which has little incentive as far as I can tell to stumble dumbly into rah-rah Keynesianism, warning of an ongoing, significant decline in federal government spending? ...... [T]he ... "austerity" of 2011-2012 wasn't "austerity" but austerity. Federal government spending fell by a meaningful share of GDP over that period. So did federal government employment, which dropped by 31,000 jobs in 2011 and 45,000 jobs in 2012. What's more, we have good reason to believe that these cuts entailed positive multipliers above those we'd observe in normal times. You don't have to take the IMF's word for it; even stimulus skeptics like Valerie Ramey find that multipliers may sometimes be above normal, and above one, during periods of economic slack.

The cuts may amount to less than initial rhetoric suggested (and who is surprised!). They may not "hurt" in the way small-government types would wish them to hurt, in that meaningful reductions in the resources available to state interests or state-dependent interests have not come to much. But that does not mean that spending hasn't fallen, by a significant amount, with clear impacts for the macroeconomy and those within it who would like to be working but aren't.

I wish I could cheer -- yahoo!!!, the government didn't enact policies that slow the recovery and result in higher unemployment after all. But I just don't think that's true. We do need to tame the debt in the long-run (mainly health care costs!), but the zeal to solve this problem now, when it hurts the economy much more than it would if we were closer to full employment, is puzzling. I get where some people are coming from on this issue, but I don't understand how they can be so indifferent to the struggles of people who just want a decent job but can't find one no matter how hard they try. Jobs, and the long-run harm that comes from high unemployment ought to be our main concern right now.

Paul Krugman: Kick That Can

Now is NOT the time for austerity:

Kick That Can, by Paul Krugman, Commentary, NY Times: John Boehner, the speaker of the House, claims to be exasperated. “At some point, Washington has to deal with its spending problem,” ... “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.” ...

While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.

Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn’t a debatable proposition... Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. ...

Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity.

One way to see this is to compare today’s economic situation with ... the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs... At the national level, however, the effects were softened by monetary policy...

Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts...

The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered...

But aren’t we facing a fiscal crisis? No,... medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. ...

Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen... Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.

So we should avoid that damage by kicking the can down the road. It’s the responsible thing to do.

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.