Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong

DeLong Smackdown Watch: John Yoo's Torture Memo and Academic Freedom

David Levine writes:

The Torture Memo: The Torture Memo and Academic Freedom: Consider Professor Left, on leave at CEA, who went on national TV to argue that a rise in the minimum wage would not reduce employment, increase prices, or harm small business's profits. Professor Left knew that at least one of these effects was essentially certain to occur, but had a political job to do.

Consider Professor Right who, a few years later, went on national TV to argue that a cut in capital gains tax rates would raise tax revenues. He knew full well that the short-term boost in tax revenue will be overwhelmed by revenue cuts in later years. He hid that fact on TV, in Congressional testimony, and in memos to executive branch decision-makers.

Professor Center is more mainstream than his colleagues on the left and right. He goes on national TV to argue that a free trade pact will increase U.S. employment. In fact, Professor Center believes unemployment will be roughly unchanged as it is largely determined by the Federal Reserve. Employment will probably be lower, Prof. Center believes, because the free trade pact might increase employment with the trading partners and reduce immigration to the United States.

Assume that each policy in fact had (somewhat predictable) harmful consequences: job loss for minority teens, massive budget deficits, and a financial crisis in the southern trading partners that reduced their ability to purchase U.S. exports. Was it professional misconduct to push these policies while declining to mention (and sometimes implictly denying) the downsides? Do those recommendations disqualify the professors from teaching? Would it matter if the economists had line authority and made policy decisions, or were trusted advisors who were very influential with both parties, not just standard wonk advisors?

I mention these cases not to defend Professor Yoo or the despicable U.S. policy of torture. I mention these cases to suggest the issues of academics acting as political advisors and decision-makers are tough.

I agree that the questions are tough. I do think that:

• Left-wing economists should not say that minimum-wage increases would neither (a) decrease employment, (b) rise prices, nor (c) diminish profits.
• Right-wing economists should not say that capital gains tax rates would raise tax revenues--unless they in fact do believe that the short-term boost in tax revenues outweighs properly-discounted revenue losses in the out-years.
• Centrist economists should not say that free trade will boost U.S. employment--unless they believe that free trade will make the country richer and so actually boost labor supply and demand.

But neither left-wing, right-wing, nor centrist economists say such things in the classroom: in the classroom we all teach what we believe. At what point do violations of intellectual integrity by economists under message discipline become grave enough to warrant some kind of sanctions--that is not a question I know the answer to. I think that there is a line that should not be crossed, and that some form of responsibility for line-crossing would be a good thing, but I am not at all sure where the line is or what the sanctions should be.

Jonah Gelbach on McCain's "Economist" "Supporters"

Jonath makes the mistake of taking the McCain "economists" letter as an analytical statement, rather than as an expression of attitude written by spinmasters, and demands intellectual consistency:

Economists for Obama: McCain's Economist Supporters vs. Facts: Over at MarginalRevolution, Tyler Cowen has posted the text of an email... prominent, right-leaning economists [who] have endorsed John McCain's stated economic proposals... the usuals (e.g., Becker, Hassett, McCain chief economic adviser Doug Holtz-Eakin, Taylor, Harvey Rosen, Meltzer, etc.)... [NS] prominent economists who have earned their academic reputations.... I've previously discussed the enormous increase in deficits that would be caused by McCain's tax proposals, as scored by Len Burman and Greg Leiserson of the Tax Policy Center. So let me focus on the second paragraph [of the letter], which is uniformly contradicted by both facts and experience:

"His plan would control government spending by vetoing every bill with earmarks." Well, this one has already been repudiated by... John McCain's chief economic adviser, Doug Holtz-Eakin. I've already posted on this issue:

McCain has already had to change his "definition" of those nasty earmarks he'll eliminate (somehow, without a line-item veto). According to this story by the Politico's Ben Smith, Holtz-Eakin initially claimed that there were $100 billion in earmarks in the current budget, the idea presumably being that eliminating all of these earmarks would give McCain $100 billion to work with in paying for his tax cuts. After a former senior Democratic staffer, Scott Lilly, pointed out that many of these earmarks included stuff McCain supports, like money for Israel, Egypt and U.S. military construction, Holtz-Eakin stated that in fact the real amount of money associated with earmarks McCain would not fund (again, magically preventing them without a line-item veto) was only $16-18 billion.

"[I]mplementing a constitutionally valid line-item veto..." Clearly, this one is there to allow them to respond to criticisms, like the parenthetical reference in my earlier post, based on the fact that under current law, the President has no capacity to pick and choose which items to fund. President McCain will have to sign or veto actual statutes, not their components.... I am not a constitutional lawyer, but given my understanding of the Court's language in Justice Stevens's opinion for the Court, I find it very difficult to imagine that McCain and his lawyers (much less his economists) will be capable of "implementing a constitutionally valid line-item veto".

"[P]ausing non-military discretionary government spending programs for one year to stop their explosive growth..." Gee, I hardly know where to begin on this one. First off, a one-year pause would do nothing to stop "explosive growth". It would reduce the level of spending, to be sure, but then that "explosive growth" would go right on happening. This is a mathematical principle of which each of the economist-letter's signatories no doubt is aware.

That said, this post over at CBPP is worth a look [Update: I see that Mark Thoma posted much of the CBPP post, which I should have noted was written by Richard Kogan, back in March]. It shows the following:

Domestic discretionary spending fell from 18.4% of all non-interest federal spending in 2001 to (an estimated) 14.7% in 2008. By comparison, defense and security spending (in which the CBPP includes DHS and Veterans' spending) rose from 21.7% to 29.2%.

The real, i.e., inflation-adjusted, growth rate of domestic discretionary spending over this period was 1.3%. That's hardly an "explosive growth" path; by comparison, defense/security increased 9.1%, while SS/Medicare/Medicaid increased 3.8%.

As a share of GDP, domestic discretionary spending actually fell, from 3.1% to 2.8%. That means that this category of spending has been becoming less, not more, burdensome. Defense/security rose from 3.6% to 5.6% of GDP over this period, while SS/M/M rose from 7.7% to 8.4%.

I am frankly baffled as to what my colleagues on the right are talking about when they discuss "explosive growth" in "nonmilitary discretionary government spending". The real money on the spending side is in the military and entitlement categories....

[I]t is difficult for me to believe that people who promote John McCain's economic policies on the basis of the second paragraph of the letter above can simultaneously be aware of the facts and providing honest assessments. Perhaps I am wrong. I hope so.

I think that the disconnection of the letter from fiscal and economic reality is, from the point of view of the signatories, a feature and not a bug--because the McCain platform is so far out in the Gamma Quadrant, nobody will think that this is what the economists actually believe, and they will not have to spend any time defending it.

Why Oh Why Can't We Have a Better Press Corps? (Chris Wallace of Fox Department)

Outsourced to Ezra Klein:

EzraKlein Archive | The American Prospect: Martin asks, "This weekend, Chris Wallace on Fox interviewed Sens. Schumer and Durbin. He noted that Sen. Obama wants to raise the capital gains tax, but that 50% of the people who get taxed make $50,000 or less, therefore making this a middle class tax hike. Is this true? Are they playing with the numbers?"

I can't tell you exactly which number set Chris Wallace is working off of, so I'm not really in a position to say whether exactly 50 percent of those getting taxed make under 50 percent. But there's definitely some trickery going on here. Lots of ordinary Americans have money in the stock market through pension funds and the like. But they have very, very little of it. A share or two of stock, a bit of property. In 2005, the wealthiest one percent of Americans received almost 70 percent of long-term capital gains, and paid 72 percent of the capital gains taxes. What Wallace is trying to do is confuse the issues of eligibility and exposure. Lots of Americans might end up paying a minimal amount of the capital gains tax, but the real exposure is among the wealthy....

That group there in the middle? The so-called average taxpayers Wallace is so concerned about? They make, on average, $176 from capital gains in a given year. They will pay next to nothing. The Top 1 percent makes $232,000! The capital gains tax, in other words, is a tax on people with capital gains. Those people are overwhelmingly the rich, and the rich are overwhelmingly the ones who pay the tax. The fact that lots of Americans have nominal holdings is effectively meaningless here. Wallace is just using them to mislead as to the tax's true target.

Bruce Bartlett Prays for Fiscal Sanity from the GOP

He prays in vain: >The GOP's bait-and-switch tax strategy - Los Angeles Times: The rhetoric defies reality, when what the nation really needs is a permanent plan. It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history. >The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending. Although there were some good elements to the tax cuts, such as the reduction in marginal tax rates, they were fatally undermined by their temporary nature. >The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's penny-wise and pound-foolish policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. Most will expire automatically at the end of 2010. The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001, when the first tax cuts were implemented.... >Republicans respond that they had no choice; they didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.... >This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term...

Why Oh Why Can't We Have a Better Press Corps? (Don Gonyea of NPR Department)

Outsourced to James Fallows:

James Fallows: "Stupidest policy ever" contest update: Don Gonyea of NPR... traditional "one side claims, the other side responds" approach -- as if there were any identifiable economist or energy expert, from any political camp, who thought that the "tax holiday" proposal made sense. Maybe he missed the previous night's All Things Considered broadcast, which contained a very good segment about the pointlessness of the [gas tax holiday] plan? And he presented the whole issue as a matter of campaign tactics: the Hillary Clinton campaign had been hitting Obama hard with a crisp attack ad about his refusal to give American motorists "the help they need," while Obama had come back only with a woolier, more "complicated" reply about why the plan was mad. Yes, this episode shows us something about the two campaigns, but it's not mainly about their relative skill in attacking each other.

Brad DeLong Interviewed by Philippe Gohier

In Macleans magazine:

The Macleans.ca Interview: Brad DeLong | Macleans.ca - Canada - Features: Q: As a general rule, Republicans say the U.S. isn't in a recession, while Democrats say it is. In your opinion, is the U.S. in or headed for a recession?

A: We’re saying it looks like it’s the weakest possible not-recession. Come July, the Commerce Department is going to revise the GDP numbers and that’s going to change things. It could make things either look less recessionary, or it could push us into determining we’re in a recession. The odds are about 50/50.

Q: In simple terms, what does a recession mean for Americans?

A: It means it’s a lot harder to get jobs. A lot more people are unemployed and without income. People who are employed are scared and eager to settle for much lower increases in real wages, or even accept real wage cuts. It means a lot of people who could be doing something useful are unable to get themselves matched with firms that can use their talent. [A recession is] something you would definitely rather avoid, even if [avoiding it] does produce some costs. It's better to have some investment flowing into the wrong sectors than it is to have all your investment proportions exactly what they should be and a whole bunch of people who could be working and want to work sitting at home, feeling poor.

Q: The Bush administration has already dealt out a pretty expensive stimulus package.

A: I a $13-trillion economy, we’re at about $150-billion of fiscal stimulus this year. That’s only one per cent. Together with what the Federal Reserve has done, everyone hopes this is going to be enough to keep us near full employment without creating an inflation problem for the longer run. But that’s just a hope at the moment.

Q: Has the sputtering economy been properly managed?

A: One way to look at it is this all starts back in 1995, when Alan Greenspan said, ‘It looks like this new economy stuff may really be there. I’m going to ignore all my staff who’s telling me about limits to growth and likelihood of inflationary pressures. I’m not going to raise interest rates and see how much high-tech investment we can get going on the grounds that this might be an opportunity for a serious boom.' Indeed, there was a lot of irrational exuberance. A lot of the world's richest people invested in Internet startups and communications companies. They paid for an enormous amount of dark fibre out of which they never got any dividends, but which did give the rest of us very cheap phone calls and data for half a decade or so.

Then comes 2000 and 2001, and it becomes clear, not that the technology has been oversold, but that the ability to use the Internet to actually make huge profits has been oversold. The Federal Reserve’s response was, ‘We need another leading sector. How about if we drop interest rates and see if we can get a construction boom going?' So, Greenspan does this and it works. In fact, it works beyond his wildest dreams. Then, there’s the irrational exuberance that comes out of the financial bubble, as [some] mortgage companies stop checking people’s loan.

Right now, we have an interesting game going on. As the housing boom unwinds, it's become clear the U.S. built perhaps three million more houses than would be supportable at 2007 housing prices. Construction employment is collapsing and the hope is that, once again, you can replace a leading sector that’s had a boom and a bubble with another one. This time the sector that’s growing is exports and import-competing manufacturing, especially as the dollar falls, first against the Europeans and against the Canadians and hopefully soon against the Asians. But the U.S. economy is already, relative to trend labour force growth, down three-quarters of a million jobs relative to last December. So even if it’s not a recession, it feels like a recession.

Q: American economist Joseph Stiglitz has made the argument that the U.S. economic problems are in part due to the war in Iraq.

A: The war has certainly pushed up oil prices a bunch, directly and indirectly. And I think the war has made us significantly weaker. A trillion dollars that could have been spent doing something useful has been spent creating a situation that, for most Iraqis, has been worse than living under the cruel, semi-totalitarian dictatorship of Saddam Hussein. It still seems to be a much more minor contribution to the current macroeconomic puzzle. I think Joe’s letting his view about the future and the likely good course of U.S. foreign policy lead him to overstate the case a bit. The argument against our adventure in Iraq would still be there even if we were still in the housing boom.

Q: Economic figures for the month of February were recently released in Canada and they showed the country's economy shrank 0.2 per cent. There’s some worry we’re on the brink of recession here.

A: If U.S. demand for Canadian exports keep falling and the U.S. goes into a recession, it seems highly likely.

Q: The federal government in Canada has taken a laissez-faire approach and promoted aggressive tax cuts as a solution. Do you have any thoughts on that?

A: I learned my macroeconomics at the knee of Martin Feldstein, back when the Republican Party in the United States was still the party of sound money and fiscal surpluses. I was just running through my class the argument Marty made around 1980: that basic utilitarian calculations suggest the United States should be saving half again as much as it is and investing it into the future. Unfunded tax cuts take what would otherwise be national savings and divert them into government deficits. While I do see a very small and limited role for tax cuts in a recession to try to prevent mass unemployment, I’m still with Marty--or at least with the old, unmuzzled Marty. Developed countries ought to be running substantial government surpluses because the opportunities for saving and investment are great, because aging populations are going to require debt capacity in the future, and because the technological revolution in medical care is going to produce a huge future demand for governments to spend money keeping people healthy. I have this instinctive, allergic reaction to unfunded tax cuts, even in recessions. And we’re not quite in a recession, yet.

Q: The presidential candidates in the U.S. have had a lot to say on the economy. How would you rate their economic platform?

A: We were sitting around here in the lounge yesterday, all feeling sorry for Douglas Holtz-Eakin, McCain’s economic guy. He is a sensible guy who’s now saying extremely silly and stupid things. He seems to have lost an internal struggle about what the McCain economic policy for the campaign should be. Phil Gramm, another of McCain's economic advisers, is smart as a whip and is a serious person for whom we have to have respect--even if he is a right-wing hyena of a magnitude rarely seen. Our hope is that everything McCain is saying about the economy right now is for shoring up [his support on] the right, [is] for campaign purposes only. Paul Krugman, on the other hand, is out there saying all of us who have hopes for the McCain economic policy are deluding ourselves.

The candidates’ economic policy [proposals] on the Democratic side [pretty much all] looked like sensible attempts to approach very hard problems--or so I thought until Hillary Clinton came out in favour of [McCain's] temporary gas tax holiday. Global warming says you want to increase gas taxes rather than diminish them, and income distribution suggests you don’t want temporary holidays because they're quickly over and have no effect on supply. To boost gasoline supply takes a long time. The McCain gas tax holiday for the summer seems to simply be a ‘let’s transfer a lot of money from the government to the oil companies while doing something that sounds like it’ll help driving consumers but actually won’t.’ Clinton’s plan is to have a gas tax holiday and pay for it by a tax on refineries; as Paul Krugman wrote, this had the effect of making the proposal pointless rather than evil. Maybe you have to give Clinton’s economic policy people credit for coming up with something that sounds good and manages to turn an economic minus into an economic zero. But it wasn’t a terribly good sign...

CBO's Long-Term Spending Outlook

Improvements in medical technology + deficiencies in the medical-care financing system + the aging of America with increasing life expectancy + a belief that health care ought to be distributed according to need rather than wallet thickness:

Econ 101b: May 2: The Long-Run Fiscal Situation: Theory

May 2: The Long-Run Fiscal Situation: Theory

Notes: Lecture Audio

Readings:

• CBO, The Long-Run Fiscal Situation http://www.cbo.gov/doc.cfm?index=3521&type=0 http://delong.typepad.com/delongslides/2008/04/the-projected-r.html
• The "Golden Rule" and National Savings.
• How Fast Should an Economy Head for the “Golden Rule? Some Simple Math

• Macroeconomics, 14.2, 14.3

• Mock Applications Exam out

Paul Krugman Likes McCain Fiscal Policy Even Less than I Do

Paul writes:

Bush Made Permanent: [T]he perception, eagerly propagated by Mr. McCain’s many admirers in the news media, [is] that he’s very different from Mr. Bush — a responsible guy, a straight talker. But is this perception at all true? During the 2000 campaign people said much the same thing about Mr. Bush; those of us who looked hard at his policy proposals, especially on taxes, saw the shape of things to come. And a look at what Mr. McCain says about taxes shows the same combination of irresponsibility and double-talk that, back in 2000, foreshadowed the character of the Bush administration.

The McCain tax plan contains three main elements.

First, Mr. McCain proposes making almost all of the Bush tax cuts, which are currently scheduled to expire at the end of 2010, permanent.... Second, he wants to eliminate the alternative minimum tax.... Third, he wants to sharply reduce tax rates on corporate profits.... [T]he overall effect of the McCain tax plan would be to reduce federal revenue by more than $5 trillion over 10 years. That’s a lot of revenue loss — enough to pose big problems for the government’s solvency....

[L]et’s look at what I found truly revealing: the McCain campaign’s response to the Tax Policy Center’s assessment... written by Douglas Holtz-Eakin, the former head of the Congressional Budget Office, criticizes the center for adopting “unrealistic Congressional budgeting conventions.” What’s that about? Well, Congress... [compares] the McCain plan with what would happen if the Bush tax cuts expired on schedule. Mr. Holtz-Eakin wants the McCain plan compared, instead, with “current policy” — which he says means maintaining tax rates at today’s levels. But here’s the thing: the reason the Bush tax cuts are set to expire is that the Bush administration engaged in a game of deception. It put an expiration date on the tax cuts, which it never intended to honor, as a way to hide those tax cuts’ true cost. The McCain campaign wants us to accept the success of that deception as a fact of life. Mr. Holtz-Eakin is saying, in effect, “We’re not engaged in any new irresponsibility — we’re just perpetuating the Bush administration’s irresponsibility. That doesn’t count.”

It’s the sort of fiscal double-talk that has been a Bush administration hallmark.... Mr. McCain’s budget talk simply doesn’t make sense. So what are Mr. McCain’s real intentions?... [T]he McCain tax plan... [is] a giant exercise in pandering — an attempt to mollify the G.O.P.’s right wing, and never mind if it makes any sense.

The impression that Mr. McCain’s tax talk is all about pandering is reinforced by his proposal for a summer gas tax holiday — a measure that would, in fact, do little to help consumers, although it would boost oil industry profits.

More and more, Mr. McCain sounds like a man who will say anything to become president.

Short-Term Costs of Long-Run Fiscal Stupidity

I'm glad I'm not a Republican. Just saying.

---

J. Bradford DeLong: Project Syndicate: Back in 1981, America’s Republican Party gave up all belief that the government’s budget ought to be balanced. The idea took hold that tax cuts should be undertaken all the time, at every opportunity, because reducing taxes supposedly raised revenue.

Irving Kristol, sometime editor of the magazine The Public Interest and one of the intellectual midwives of this idea, later wrote that he was interested not in whether it was true, but in whether it was useful. Years later, he spoke of his “own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task...was to create a new...conservative... Republican majority – so political effectiveness was the priority, not the accounting deficiencies of government...” Now it has become clear that John McCain – who once criticised George W Bush’s tax cuts as imprudent and refused to vote for them – has succumbed to this potion. He appears to be proposing further tax cuts that promise to cost the US Treasury some $300bn a year, to “offset” them with cuts in earmarked spending accounted for at $3bn a year, and somehow to balance the budget.

We know the consequences: McCain’s fiscal policy is likely to be standard Republican fiscal policy – and since 1981, standard Republican fiscal policy has increased the ratio of gross federal debt to GDP by nearly 2% per year. By contrast, a typical post-WWII Democratic administration has reduced the debt-to-GDP ratio by more than 1% per year. This is one of the issues at stake in this year’s presidential election.

Policies that ignore the level of government debt lead to the currency’s collapse, depression (due to the resulting disruption of the sectoral division of labour), and high inflation – perhaps hyperinflation. Often, the guilty blame the economic catastrophe on the sinister manipulations of foreigners like the “gnomes of Zurich” or the IMF. The US is far from that point. But even in the shorter run – over the next two presidential terms, say – the costs of a high deficit and rapid debt growth would be substantial.

A growing debt-to-GDP ratio would, in the first instance, crowd out investment, as resources that would otherwise go to fund productive investment instead support private or public consumption. Since 1981, the US has been lucky in that inflows of capital from abroad financed the growth of government debt. At some point, this will stop, and increases in deficits will trigger capital flight from the US. Suppose that over the next eight years larger deficits trigger neither extra capital inflows nor capital outflows, and suppose that a lower-investment America is a poorer America, with a gross social return on investment of 15% per year. By 2016, America’s productive potential would be smaller by an amount that would reduce real GDP by 3.6% – $500bn real dollars, or roughly $3,000 per worker. In a poorer America, fewer businesses would find it worthwhile to entice secondary workers from families into the labor force, and perhaps 500,000 net jobs would disappear.

In getting from here to there over the next eight years, a higher-debt America would see productivity growth slow by perhaps a third of a percentage point per year. Average unemployment would then have to rise in order to keep workers’ demands for real wage increases at a level warranted by productivity growth. The gross correlations between productivity growth and average unemployment found in the 1970’s, 1980’s, 1990’s, and 2000’s would increase the economy’s natural rate of unemployment by about one-fifth of a percentage point, costing an additional 500,000 jobs.

And a higher-debt America is one in which savers and lenders would have a justified greater fear that the government would resort to inflation in order to repudiate part of its outstanding debt. The Federal Reserve would then have to fight inflation – putting upward pressure on unemployment – in order to reassure savers and lenders of its willingness to guard price stability. There are not even crude gross correlation-based estimates of the size of this effect, but economists believe that it is very real. Would it cost a negligible number of jobs? A quarter-million? A million?

Add it all up, and you can reckon on an America that in 2016 that will be much poorer if McCain rather than Barack Obama or Hillary Rodham Clinton is elected president. Other countries that are counting on exporting to America would be affected by slower growth and lower employment in the US.

However, under McCain, the wedge between public spending and taxes would be larger, Americans would feel richer, and they would spend more at the expense of “posterity” eight years down the road. Ronald Reagan might have approved. After all, as he put it: “Why should I do anything for posterity? What has posterity ever done for me?” Or was that Groucho Marx?

Andrew Samwick on Spend-and-Borrow

He writes:

Taxing Our Way Out of a Problem: Greg Mankiw directs us to David Leonhardt's article on John McCain's chief economic advisor, Doug Holtz-Eakin.  I've known Doug for a number of years and admired his scholarship and his policy work.  It's got to be frustrating to be pushing the McCain economic agenda.  From the article, here's the crux of the problem:

In all, federal taxes now equal about 19 percent of the nation’s economic output, which is in line with the historical average. But the costs of Medicare and Medicaid, on their current path, would require that number to rise to an unmanageable 30 percent, and beyond, in coming decades.

“We as a nation cannot tax our way out of this problem,” Mr. Holtz-Eakin says. “It’s just not an option.” It is true that we cannot tax our way out of all of this problem.  But we could untax ourselves today into a bigger problem tomorrow.  As I've said before in the context of entitlement reform, all dollars matter:

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

If I were a Republican, McCain's flunking the fiscal responsibility test is one of the many things that would make me a Democrat.

Jonathan Weisman Strikes Again!

Ah. Page A1 of the Post. The death spiral continues:

McCain Offers Tax Policies He Once Opposed: Now that he is the presumptive Republican presidential nominee, however, McCain is marching straight down the party line. The economic package he has laid out embraces many of the tax policies he once decried: extending Bush's tax cuts he voted against, offering investment tax breaks he once believed would have little economic benefit and granting the long-held wishes of tax lobbyists he has often mocked....

To supporters, McCain has simply seen the light and now understands the power that business tax relief has to spur economic growth and innovation. Said J.D. Foster, a former Bush White House and Treasury tax policy expert, now at the Heritage Foundation: "It's logical that he wouldn't be repeating the arguments he made then. We all learn from experience."

To critics, it is political pandering. "It's just part of the new John McCain that's taking on the conventional wisdom that in tight races, you have to energize the base and win by 50.000001 percent," Chafee said. "I was frankly surprised that he's kept it up after securing the nomination. I thought he'd move to the center, and I haven't seen it"...

First time I have ever seen anybody describe J.D. Foster as a tax policy "expert." Lobbyist, yes. Apparatchik, yes. Ideologue, yes. But expert? Never seen that before...

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

A Pox on All the Candidates' Houses, But the Largest Pox on McCain's

John Berry is--rightfully--unhappy: >April 21 (Bloomberg) -- The three major presidential candidates, ignoring the tenuous outlook for federal finances, are making foolish, untenable promises not to raise taxes... are pretending the next president isn't going to have to make some politically painful choices about cutting popular programs, raising taxes or, most likely, both.... "Under any plausible scenario, the federal budget is on an unsustainable path -- that is, federal debt will grow much faster than the economy over the long run," CBO said in December in its most-recent assessment of the long-term budget outlook. That's the elephant in the room the candidates are ignoring, just as President George W. Bush has done year after year. >McCain's pledges are the more egregious because he wants major tax reductions in addition to extension of all the expiring cuts enacted during Bush's two terms. McCain is offering one really good idea: elimination of the alternative minimum tax, or AMT, though without saying how he would offset the revenue loss. He also wants to double the personal exemption from $3,500 to $7,000, cut the corporate income-tax rate to 25 percent from 35 percent and allow immediate expensing of business investment in new equipment.... McCain's proposals, which would lead to a big increase in debt service due to larger budget deficits, make that [fiscal] future worse by many trillions of dollars. His ideas for offsetting spending cuts are trivial in comparison, though he nevertheless also promises to balance the budget.... >[B]udget experts say his numbers don't add up, and they are right.... >The Democratic candidates, Clinton and Obama, didn't go that far in their April 16 debate in Philadelphia. Rather, they promised not to raise taxes on the middle class. That group was absurdly defined by Clinton as households with incomes of less than $250,000. Obama put the upper limit at between $200,000 and $250,000.... [T]here were 4.1 million income tax returns filed in 2006 with adjusted gross incomes of $200,000 or more. That was just over 3 percent.... Increasing tax rates for upper-bracket taxpayers won't raise a lot of revenue. The 2006 IRS tax data attributed about half of that year's total $1.07 trillion income-tax liability to taxpayers with $200,000 or more in adjusted gross income. The increase in payments from reimposing the higher tax rates probably would yield initially only an additional $60 billion or $70 billion annually. Clinton and Obama also have proposed new tax cuts that would reduce revenue by more than that each year.... >At the same time the two Democrats are promising no tax increases for all but a handful of Americans, they also want to establish some type of universal health insurance that would add significantly to federal spending.... >Of course, maybe being honest about the future is no way to get elected, and that's really sad. One quibble: eliminating the AMT with a plan to offset the revenue loss is a good idea. Eliminating the AMT with no such plan is an act of utter stupidity. John McCain's AMT plan falls into the second, not the first category.

Argentina: We Have Seen This Movie Before

Dani Rodrik says that Argentina's future is bright--if only they could get their fiscal balance in order. Strangely, he doesn't seem to recognize that he is echoing every single Argentina-optimist for more than a century:

Dani Rodrik's weblog: Will Argentina waste a historic opportunity? Rarely do you see a country where the mood among business people tells such a different story than the statistics. Now, in Argentina there are statistics are then there are damn lies--inflation figures are made up--but the broad contours of the economic performance of the last few years are not in dispute. Argentina has been growing at Asian rates, its investment rate has risen to levels not seen in decades, national saving is at record levels, and TFP growth has been stellar. By their own admission, Argentine businessmen are making more money now than they ever have in recent memory.

Yet business people are somber, bitter, and angry at the government. The general sense, even among those that supported Nestor Kirchner's policies, is that the government is frittering away a golden opportunity. Worse, the government has authoritarian--some would say thuggish--tendencies that portend ill for the future of Argentina's democracy.

What is going on?

First, the good news. Recent economic growth, unlike that of the 1990s, is of the good kind and it not just the result of high commodity prices. The investment boom of the last few years is supported by high saving.... [R]ecent growth has been fueled by a competitive currency, which increased the relative profitability and output of a wide range of tradables.... Unemployment and poverty rates have come down.... The weak currency has stimulated the right kind of structural change--from lower productivity activities to higher-productivity tradables--which is the source of the economy-wide increases in TFP we have seen. This is a textbook illustration of the magic of sustained currency undervaluation....

Now the bad news. In a growing economy, the tendency for the real exchange rate is to appreciate.... While the peso is stable against the dollar in nominal terms, the overheated economy has generated inflationary pressures (over 20% annually at present) which are being grossly mismanaged.... [T]he government has been resorting to ad hoc and temporary measures: price controls, export taxes, and intervention in currency markets. It has no coherent plan to deal with inflation and no strategy for sustaining competitiveness in the face of the real appreciation that will take place even in the best of circumstances.

Even worse is the growing disconnect between the government and the business community. In its approach to the private sector, the government is developing a reputation for being abusive, threatening, and intimidating. The Kirchners' strategy seems to be to play to their main political power base while assuming that growth will continue. But in the current environment it is difficult to imagine that the private sector will continue to invest as strongly as it has.

In the early 1990s, after years of mismanagement and hyperinflation, the binding constraint on Argentinean growth was lack of confidence in macroeconomic policies. The Convertibility Law was an ingenious short-cut for overcoming this constraint. But as circumstances changed and the binding constraint became lack of competitiveness instead, the Convertibility Law turned into a liability.... The post-2002 policies were in turn successful because they removed the competitiveness constraint. But the growing gulf between the private and public sectors has put lack of confidence and credibility once again front and center--now as the binding constraint on sustaining Argentina's growth.

And that is a pity, because there is a lot that is going right with the Argentine economy today. The underlying model is much more sound than anything in memory. There is nothing wrong with it that a larger fiscal surplus and a bit of dialog between the public and private sectors would not cure.

Mark Kleiman on McCain's Lack of Character (Economic Policy)

Mark Kleiman writes:

Voodoo economics 3.0: Bloomberg does a job on McCain's Voodoo Economics 3.0. Again, it's couched in "objectivese":

Some economists and analysts say his numbers don't add up.

But they've got the numbers, and they catch McCain's economic guru, Douglas Holtz-Eakin, with his analytical pants down, making him look like both a fool and a liar:

Two Washington research groups said McCain's plan would cost more. The Center on Budget and Policy Priorities estimated his tax cuts would cost $5 trillion over a two-term presidency. The Tax Policy Center, run jointly by the Brookings Institution and Urban Institute, said they would cost $5.7 trillion.

McCain senior economic adviser Douglas Holtz-Eakin dismissed such estimates as "fantasy-land budgeting." McCain's proposals, Holtz-Eakin said, would balance tax and spending cuts to meet his balanced-budget goals.

In an interview yesterday on Bloomberg Television's Political Capital With Al Hunt, McCain said budget slashing is essential because "we Republicans presided over the largest increase in the size of government since the Great Society," referring to a series of government entitlements, including Medicare, enacted in the 1960s.

To help pay for the tax cuts, Holtz-Eakin said, McCain would save $30 billion a year by eliminating so-called rifle shot provisions. Those include items such as tax breaks for small insurance companies.

But a Treasury Department report Holtz-Eakin cited as the source of his estimate states that $27 billion could be raised by eliminating narrowly used tax preferences spread over a decade, not a single year.

When asked about the discrepancy, Holtz-Eakin said that McCain would start with those provisions and target others like them to recover $30 billion annually.

The voters got fooled by this stuff when Reagan was pushing it, and again when Bush the Second was pushing it. Let's hope that the third time is the charm. And let's not forget that attacking McCain's ideas is only half the battle. The key is to attack his character: it's not just that the plan is bad, it's that no competent and straight-talking person would even think of offering it. Robert Bixby of the Concord Coalition shows how it's done:

Once, McCain was a deficit hawk, Bixby said, but "strange things happen when people run for president."

To say that $3 billion a year of savings will pay for $600 billion a year of tax cuts is indeed a strange thing.

McCain Doesn't Seem to Have the Character to Be a Good President

Dean Baker on John McCain's economic policies:

The Meltdown Lowdown | The American Prospect: 1. Confusing Tax Day and April Fools' Day 1: McCain's Tax Breaks: Some politicians have trouble distinguishing between tax day and April Fools' Day. After all, they both come in April -- it's so confusing. This year, Senator McCain pulled the best prank -- he proposed a huge tax break for Exxon and the other big oil companies. With a straight face he announced that he wanted to eliminate the gas tax during the summer driving season to save drivers money....

[P]rice is determined by demand, because supply is constrained by the refinery capacity of Exxon and the other big oil companies.... [With] fixed... supply, so the price will go as high as is necessary to eliminate any shortages. If the price of gas is determined by demand, then what happens to the price when we eliminate the gas tax? That's right, absolutely nothing. The price will stay exactly the same, drivers will pay as much for gas during the summer driving season as they would have paid if the tax was left in place. The difference is that instead of 18.4 cents a gallon going to the government to pay for maintaining roads and bridges, this money will go to Exxon to keep CEO pay high, and make Exxon shareholders happier.

Senator McCain had more too. In addition to extending President Bush's tax cuts, he wants to cut the corporate tax rate from 35 percent to 25 percent, eliminate the alternative minimum tax, [and] double the dependent exemption from $3,500 to $7,000.... These tax cuts will cost in the range of $400 billion to $500 billion a year (13 percent to 16 percent of the budget), and Senator McCain has no way to pay for them, other than a one-year freeze on domestic discretionary spending. That can maybe get you $10 to $15 billion, but where is the rest of the money?...

I am going to have to revise my (preliminary previous) judgment that economic policy in the McCain camp was under control and not-insane. I was clearly wrong.

Tax Day

Tom S. the Rustbelt Intellectual has a thought for tax day:

Tax Policy Center Briefing Book

An excellent resource from Len Burman et al."

Tax Policy Center Briefing Book: The Tax Policy Briefing Book: A Citizens' Guide for the 2008 Election, and Beyond is the result of a collaboration among many people. Of course, the authors credited in each entry provided the book's content, but some people deserve special credit for the roles they played. Leonard Burman conceived the briefing book and laid out its basic structure. The design was created by Matthew Hirschmann, Mark Hill, and Warner Witt of Lisa Carey Design and implemented by Urban Institute webmasters Amy Gill and Dana Campbell with IT support from Doug Murray. Michael Treadway edited every entry. Renee Hendley coordinated the project and created all of the graphs and tables. Julianna Koch posted every entry, set up the web links, and dealt with the many changes a new project demands. Roberton Williams reviewed the economics of each entry and oversaw the book's content and organization.

Funding for development of The Tax Policy Briefing Book came from a generous consortium of donors who support the Tax Policy Center's general operations. They include the Annie E. Casey Foundation, Brodie Price Fund at the Jewish Community Foundation of San Diego, Charles Stewart Mott Foundation, Ford Foundation, George Gund Foundation, John D. and Catherine T. MacArthur Foundation, Sandler Family Foundation, Stoneman Family Foundation, and a number of private donors.

New York Times Death Spiral Watch (David Brooks Cannot Add Department)

Why oh why can't we have a better press corps? Outsourced to Matthew Yglesias:

The Price of Reform (Domestic Policy): I thought there were plenty of congenial ideas in David Brook's latest stab at formulating a reformist conservative agenda, but I wonder a bit about his math. Brooks writes that "Income taxes are not going to be coming down, but they need to stay where they are."

Things being what they are in the modern conservative movement, Brooks might as well admit that he worships a shrine of Karl Marx as offer this oblique criticism of the Supply Side Gospel. After all, if lower tax rates bring more revenue, why not cut cut cut forever? Meanwhile, what Brooks is offering is inadequate to the scale of his agenda. He wants:

• "a new working class tax credit applied against the payroll tax"
• "a larger child tax credit" "increases in the Earned Income Tax Credit"
• "nurse-home visits for children in chaotic homes"
• "Preschool should be radically expanded"
• "copy the models -- like KIPP Academies -- that actually work"

This is all fine, but it would cost a lot of money. Brooks sort of elides this with the observation that "per-pupil expenditures [. . .] are not sufficient to produce superb information-economy workers" which is true. But it's also true that KIPP teachers "typically earn 15 to 20 percent more in salary than traditional public school teachers." These reform proposals are good idea, but they're not an alternative to the traditional liberal notion that if you want better outcomes for kids you're going to have to spend more money on kids. But higher taxes are off the table. So where does that leave us? You'd need to pare entitlements pretty severely just to stop the costs from rising. Are we cutting the defense budget instead of continuing on the path of large annual increases? I don't want to dismiss the possibility out of hand; I'd certainly favor something like that. But does Brooks?

Everybody like me has a big problem with Brooks. He is certainly intelligent. But has he just not done his homework, and does he not know that his program doesn't add up--is he just lazy? Or does he know very well that his proposals are b---s--- and not care because he is not in the informing-the-public business but is instead playing some deep political game to try to get White House mess privileges for his friends? Or both?

And everybody like me has a big problem with an organization--like the New York Times--that gives a platform to Brooks. Don't they have any ethics? Don't they think they ought to be in the inform-the-public business? Yet there is not even a single phone call from an editor saying, "David, it's your column, but this just doesn't add up..."

More on the Stimulus Package

On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:

• The big arguments against the stimulus package are two:
  • It will become a destructive lobbyist Christmas tree
  • It will increase the deficit and yet fail to stimulate the economy
• We appear to have dodged the bullet on the first argument
• The second argument is incoherent because:
  • The U.S. government is not going to go bankrupt
  • Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
  • But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe:
    • Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving--in which case it is a zero.
    • Or that it will be effective as a stimulus--in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
    • But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent

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The Bush Budget Clown Show

Roger Runningen and Brian Faler of Bloomberg report on the Bushies' proposed budget for fiscal 2009:

Bloomberg.com.S.: President George W. Bush sent Congress a $3.1 trillion federal budget that trims Medicare and health care programs, boosts military spending and projects the deficit this year and next will hit near-record levels. The spending blueprint for fiscal 2009... would slow the rate of growth in spending for entitlement programs such as Medicare for savings of $208 billion over five years. Pentagon spending would rise 7.5 percent to $515 billion, the 11th consecutive year of increases....

Bush's spending plan stands little chance of being adopted. Criticism came today from Republicans as well as Democrats. "There's a lot of games, smoke, mirrors, incomplete numbers, basically there's not much realism" in the budget, Senator Judd Gregg, the top Republican on the Budget Committee, said in an interview. "They're playing the usual games."... The budget deficit is projected to reach $410 billion this year. That is up from $162 billion in 2007, reflecting a slower economy generating fewer corporate tax receipts, the cost of a $146 billion economic stimulus measure and spending on the wars in Iraq and Afghanistan. The deficit is forecast at $407 billion in 2009... 2.9 percent of the $13.2 trillion U.S. economy....

Bush, after meeting with his Cabinet this morning at the White House, called it a "good, solid budget" that puts a priority on national security and keeps spending in check. "Congress needs to pass it," he said. Lawmakers took a different view. House Budget Committee Chairman John Spratt, a South Carolina Democrat, said it "bears all the hallmarks of the Bush legacy -- it leads to more deficits, more debt, more tax cuts, more cutbacks in critical services"...

Their reference to "near-record levels" of the deficit doesn't give a full and fair account of the magnitude of what can only be called a clown show. The headline deficit number ought to be $738 billion--we have a $331 billion Social Security surplus for 2009, and an honest and honorable administration would be using that surplus to pay down the government debt in order to get ready for the challenges that our aging population will pose for the federal budget over the next two generations. The headline number shouldn't be 2.7% of GDP; it should be 4.8% of GDP. That is how far Bush fiscal policy is from what a prudent and responsible fiscal policy should be.

Now that we have an actual Bush administration proposal in print--one that Republican senator Judd Gregg doesn't think much of--it is time for an accountability moment. The Bush administration and its flacks and flunkies have long promised that the administration was going to "cut the deficit in half" by the time in left office in fisal 2009. The press by and large reported this straight--not pointing out that the "cut in half" was from a highballed projected peak deficit number that was artificially inflated in order to set the bar artificially low, not pointing out that such a deficit still left fiscal policy far from where it ought to be, and not pointing out that the Bushies' policies would produce such a reduction only if everything broke right and we had four uninterrupted years of macroeconomic good news. Republican economists who cared more about pleasing White House communications than in informing their audience chimed in--why, I get 100 hits on Google for Greg Mankiw saying both when he was under and since he came out from under message discipline that George W. Bush's proposals were projected to reduce the deficit by half by 2009 http://www.google.com/search?num=100&hl=en&client=safari&rls=en-us&q=mankiw+%22the+deficit+in+half%22&btnG=Search. Not under any projection that I would recognize as straight.

Among Republican economists Andrew Samwick has sounded the alarm about Bush administration fiscal policy. Bruce Bartlett has sounded the alarm. Damned few others. Among center and center-right commentators Stan Collender has told the story straight, and in context. Damn few others. Those three deserve to have their reputations and authority substantially boosted--because they have shown that they are more in the information than in the pleasing-White-House-communications business.

We want to run a budget that is in surplus during boom, in deficit during recession, that borrows in order to fund investments that benefit the future, and that runs surpluses and pays down debt in order to fund future expenditures that benefit today's taxpayers. The Bushies have not done that.

---

Morning Coffee: The Bush Budget Clown Show

Matthew Yglesias Watches the New York Times Death Spiral

Why oh why can't we have a better press corps? Outsourced to Matthew Yglesias:

The Difference?: David Leonhardt previews Barack Obama's approach to economic policy. He notes that "Indeed, Mr. Obama and Mrs. Clinton hold similar or identical positions on a host of economic issues, and Democratic economists not aligned with either campaign often speak positively about both." Quite true, I think. He tries to sex things up by observing that "the two candidates offer strikingly different strategies for achieving their economic agendas." To me, though, the argument on that score is pretty unconvincing.

When you control for the fact that it would sound silly for the candidates to just agree that they don't really have clear disagreements on the main issues, I mostly see two campaigns trying to make mountains out of molehills for the sake of having something to talk about. What's more, in practice there's only so much that "strategies for achieving" your legislative agenda can actually do. What matters most is not the strategy but the outcome of the congressional elections.

Paul Krugman on Federal Spending Mythology

Bush increase in spending = Defense + Medicare + Medicaid:

Federal spending mythology: One thing I’ve written about a number of times, but becomes especially worth emphasizing now that John McCain is the presumptive Republican nominee, is the myth of runaway federal spending under the Bush administration. McCain has said on a number of occasions that he doesn’t know much about economics — although, straight-talker that he is, he has also denied having ever said such a thing. But one thing he thinks he knows is that the Bush administration has been spending like a drunken sailor. Has it?

Consider the actual record of spending. Never mind dollar figures, which grow because of inflation, population growth, and other normal factors. A better guide is spending as a percentage of GDP. And this has increased, from 18.5% in fiscal 2001 to 20% in fiscal 2007.

But where did that increase come from? Three words: defense, Medicare, Medicaid. That’s the whole story. Defense up from 3 to 4% of GDP; Medicare and Medicaid up from 3.4% to 4.6%, partially offset by increased payments for Part B and stuff. Aside from that, there’s been no major movement.

Behind these increases are the obvious things: the war McCain wants to fight for the next century, the general issue of excess cost growth in health care, and the prescription drug benefit.

So the next time Mr. McCain or anyone else promises to rein in runaway spending, they should be asked which of these things they intend to reverse. Are they talking about pulling out of Iraq? Denying seniors the latest medical treatments? Canceling the drug benefit? If not, what are they talking about?

John Gruber: Covering the Uninsured in the U.S.

John Gruber (2008), "Covering the Uninsured in the U.S.:.. He writes:

One of the major social policy issues facing the U.S. in the first decade of the 21st century is the large number of Americans lacking health insurance. This article surveys the major economic issues around covering the uninsured. I review the facts on insurance coverage and the nature of the uninsured; focus on explanations for why the U.S. has such a large, and growing, uninsured population; and discuss why we should care if individuals are uninsured. I then focus on policy options to address the problem of the uninsured, beginning with a discussion of the key issues and available evidence, and then turning to estimates from a micro-simulation model of the impact of alternative interventions to increase insurance coverage

Tyler Cowen says:

Marginal Revolution: What would it cost to cover the uninsured?: Jonathan Gruber has just written a very useful and comprehensive paper on health insurance (I don't yet see ungated versions).  He estimates that without a universal mandate, but using subsidies, a typical plan for covering the uninsured would cost $4500-$5000 a year per person, and that is cost in the narrow budgetary sense.  With a mandate the fiscal cost of the government (again, not social cost, which includes the cost of paternalistically forcing people to buy health insurance) is estimated at $2732 per person per year.  Of course it is cheaper to tell people what to do, comparing to paying them to do it.  That cost estimate is assuming that the mandate is effectively enforced, which I do not expect. I would have preferred the primary estimates to be in terms of social cost.  And I would have liked a discussion of how mandates and minimum benefit requirements distort the price of health insurance and limit competition.  Read Shikha Dalmia.  Nonetheless this remains is one of the best papers on health care economics to be had. Gruber also poses an interesting philosophical question for the paternalists: would you rather be uninsured in today's America or obese?  And if you, like I, answer "uninsured," why not first direct paternalistic interventions toward obesity?  And I'm not talking about subsidies to olive oil, I mean real mandates.  After all, they will lower health care costs, no?

Menzie Chinn on the Stimulus Package

He writes:

Econbrowser: How Much Stimulus? Dollar Amounts versus Efficacy: I think a fiscal stimulus of 1 percentage point of GDP to soften the slowdown makes sense -- as long as we get the maximum "bang for the buck" of deficit spending, and the stimulus is not open-ended. In other words, I share Andy Samwick's (and Jim Hamilton's) queasiness about letting the Bush-ian deficit spending/debt building tendencies persist (plenty of documentation here, here and here). In addition, the deficit spending should be aimed at increasing aggregate demand, as opposed to providing a windfall to households and businesses that will only enhance wealth or profits.

In this latter respect, my views are in congruence with Krugman's views that the package agreed to between the Administration and the House (description here) leaves something (okay, a lot) to be desired. The main idea should have been to enhance the automatic stabilizers in the system. One has to ask: Where is the extension of unemployment benefits (as apparently mooted by Senate leaders)? Where is the increase in food stamp payments? (These are two of the four points I mentioned as ideal components in this post.) What is the point of the 1/3 of the package ($50 billion) that will be devoted to accelerating capital depreciation expenses (critiqued here)?

So, I think some serious thought has to be done -- do we want a flawed stimulus package, or should we forego the stimulus if we think that most of the resulting deficit spending will not actually do any stimulating of aggregate demand? At the moment, I think we can -- and should -- try to do better...

Washington Post Death Spiral Watch

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

Jared Bernstein points us to what I think is the stupidest thing published by the Washington Post so far this year: Steven Landsburg arguing:

• The government cannot stimulate the economy because Say's Law guarantees that aggregate demand is determined by aggregate supply and not by government policies: "The idea, we're told, is to stave off an all-out recession by stimulating both investment... and consumption.... But hold it right there. Investment and consumption are natural rivals... more of one means less of the other.... The idea... is to give people tax cuts so they'll feel richer and spend more. But government can't make people richer on average; all it can do is shuffle wealth around.... Now maybe you can time things so Peter goes on a spending spree today but Paul doesn't tighten his belt until next month. (Then again, maybe you can't...). [E]ven if you manage to pull this trick off, sooner or later you must tax Paul. So today's fiscal stimulus comes at the expense of tomorrow's fiscal drag..."

• If the government could boost aggregate demand, it could only boost aggregate demand in Asia: "[Y]ou'll put Asians to work producing goods for the U.S. market.... [O]nly marginal tax cuts put people to work. Non-marginal tax cuts... [that make] people feel richer... [make them] less eager to work. An unemployed laborer with a tax rebate in his pocket might well feel less urgency about getting retrained or finding a new job..."

• A recession is a healthy thing that should be encouraged--not prevented: "To say it again: The more I consume, the poorer your grandchildren will be; the resources I use won't be available to build machines that make your grandchildren more productive. It's all well and good to worry about the people who are struggling today, but let's also remember the people who will be struggling in the future.... [I]t's no more painful to be unemployed for five weeks in the middle of a recession than it is to be unemployed for five weeks at the height of a boom. In fact, it's arguably less painful: Isn't it better to be unemployed at a time when unemployment carries less stigma and when you've got unemployed friends to hang around with?... [T]he only solution to unemployment is for displaced workers to get retrained and find their way back into the workforce. The new stimulus package only delays that process by propping up dying industries for a while and postponing the day of reckoning..."

From a historian of economic thought's perspective, the piece is a confused and incoherent mishmash of Say's Law, Hayekian over-investment theory--plus a strange and rarely seen doctrine going back to Nassau Senior on the handloom weavers about how only the spur of immediate poverty and privation could get the lower classes to move to new industries--that they needed to be pushed out of declining because (for some reason neither Senior nor Landsburg ever explained) they could not be pulled into expanding industries.

But let me turn the mike over to James K. Galbraith:

Landsburg is incoherent on so many fronts it's hard to know which to cover, but I'll rest on two points. First, the idea that the stimulus will be totally offset by increased private saving is nutty, but it's high nuttiness....

Second, the idea that my consumption benefits only me, while my saving benefits everyone, implies an obvious market failure which Landsburg cannot quite get his head around. If markets worked perfectly, the entire return to my saving would come to me, and there would be no benefit to anyone else. (They understood this in the 19th century, it was called the Iron Law of Wages.)

High academic conservatives routinely assert that saving is a public good, without thinking about the consequences. If it is, then of course government should provide it directly, to make up the difference between the marginal public and the marginal private benefit.

In other words, Landsburg should be arguing for the Edwards/EPI/Galbraith growth package. But he's not...

And to Mark Thoma:

Economist's View: [T]he idea that deficit spending now means we will have to raise taxes and lower GDP in the future is exactly right - that's [not an argument against but instead] the point of stabilization policy, to shave the peaks and fill the troughs. When the economy is having trouble, we deficit spend to bring up GDP, then when things are so good that the economy is beginning to overheat we run a surplus (raise taxes) to bring GDP down closer to trend. Since deviations from the long-run trend rate of growth are costly whether you are above or below trend, this type of stabilization raises economic welfare...

[...]

Yeah, I'm pretty sure giving people a few hundred extra bucks is going to stop them from looking for a job, they can live for months on that. Never mind that most of the people receiving the benefit are already employed. Now if we had extended the length of time for unemployment compensation, we'd have something to talk about - there is evidence on this point, lots and lots of it, but we didn't. Republicans would not allow one of the best means of stimulating the economy (e.g. see the rankings of programs at the CBO) to be part of the bill...

[...]

[I]t takes longer to get a job in a recession... extending the time period covered by unemployment benefits, increasing the resources available to programs that help to reemploy workers, hiring some of the excess workers into temporary government employment, using tax rebates to stimulate the economy and employment, and so on to compensate for the lowered probability of finding a job during a recession--i.e. implementing policies that make it equally likely that unemployed workers in recessions and unemployed workers during boom times will find a job--is not preferential treatment...

Andrew Samwick on Stimulus Packages

A nicely-argued point of view:

A Better Way to Deal With Downturns: [This] stimulus package is unjustified in the short run and harmful in the longer term.... The $150 billion agreement calls for tax rebates to low- and middle-income households as well as business incentives. Doubtless, this will boost economic activity. If you pull levers, you get movement. Personal consumption and business investment will increase relative to what they might otherwise have been. But there is no discussion of repaying the money through higher taxes in the near term. Let's drop the euphemism of "stimulus package" and call this agreement by its proper name: "deficit spending."...

[P]olicymakers' fear that unless "something" is done, a temporary economic downturn could become more protracted. This fear, to the extent that it is justified, is better addressed by the Federal Reserve lowering short-term interest rates, which would stimulate the economy more quickly and comprehensively than would fiscal policy. The Fed did just this on Tuesday. Yet the fiscal-policy lever has been yanked before any data have indicated whether the Fed's stimulus has had its intended effect....

[S]ome households will bear a disproportionate burden of an economic downturn, combined with a belief that "something" should be done to help them. Government has a choice in whom it taxes to finance this relief -- other taxpayers today or all taxpayers in the future. That the agreement holds the former group harmless was also praised by Bush. This "stimulus bill" is really $150 billion worth of some future generation's resources appropriated to finance our own consumption....

The imperative to do "something" is all the entitlement politicians need. In political arguments, you can't beat something with nothing. But we can learn from this experience to have a better menu of fiscal policy options the next time around. Two changes to our budget policy would go a long way toward that goal.

First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle.... [W]e must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.

Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year....

With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.

Washington Post Death Spiral Watch

Why oh why can't we have a better press corps? Peter Baker and Jonathan Weisman put on the floppy shoes and the big rubber noses and misinform the American public once again, this time about the stimulus package.

Outsourced to Matthew Yglesias:

Matthew Yglesias: Bipartisanship!: There's something hilarious about the tone of this Washington Post "analysis" article on the stimulus package. Basically, the theme of the piece is that bipartisanship is good, that passing legislation is good, and that bipartisanship is good because it makes it easier to pass legislation, which is good. Lost in the fog somewhere is the point that it's better to pass good bills than bad ones and that this stimulus package is a pretty bad one.

Indeed, the CBO estimated that the most effective stimulus idea would be a temporary boost in food stamps. They concluded that the second most effective stimulus idea would be an increase in the duration of unemployment benefits. Democrats proposed both of those things. But Republicans wouldn't go along with either. So in order to make the bill bipartisan, the best idea was stripped out. And so was the second best idea. I don't necessarily blame the Democrats for making the compromises necessary to get a bill passed, but the fact of the matter is that bipartisanship made this bill worse than a one-party bill would have been...

My friend Daniel Froomkin tells me that Peter Baker is an honorable reporter trying the best he can to inform the American people from the absurdly difficult position and under the extremely painful constraints of being a White House beat reporter. I reject that.

New York Times Death Spiral Watch: David Leonhardt Needs His Own Weblog

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

My bottom line: David Leonhardt needs a weblog.

This morning, David Leonhardt gets a story about John McCain on page A1--and buries the lea