Ten Economics Pieces Worth Reading: February 7, 2010
1) Jonathan Chait: Rehabilitating Bush:
Former George W. Bush economic advisor Keith Hennessey is tired of the Obama administration dragging its predecessor's name through the mud. So rather than simply imply or assert that President Obama's fiscal record is worse than George W. Bush's, like most conservatives do, Hennessey actually tries to make the argument that Obama's policies are more profligate than Bush's. I remember Bush's fiscal policies, and the political environment that surrounded them, pretty well. In the wake of the Bush administration's collapse, its defenders have been mostly laying low, trying to make their man look good by taking passive-aggressive shots at his successor. I've been waiting for Bush's loyalists to try to rewrite the past. So consider this fisking the beatdown that was nine years in the making...
2) Alec MacGillis: Brown's victory in Mass. senate race hardly a repudiation of health reform:
Scott Brown, the Republican state senator who won a stunning upset in Tuesday's election, voted for the state's health-care legislation, which was signed by then-Gov. Mitt Romney (R) and has covered all but 3 percent of Massachusetts residents. That legislation became the basic model for national health-care legislation. Brown has not disavowed his support for the state's law, which retains majority backing in Massachusetts. Instead, he argued on the campaign trail that Massachusetts had taken care of its own uninsured, and it would not be in the state's interest to contribute to an effort to cover the uninsured nationwide. "We have insurance here in Massachusetts," he said in a campaign debate. "I'm not going to be subsidizing for the next three, five years, pick a number, subsidizing what other states have failed to do."
In a news conference Wednesday, he said, "There are some very good things in the national plan that's being proposed, but if you look at -- and really almost in a parochial manner -- we need to look out for Massachusetts first. . . . The thing I'm hearing all throughout the state is, 'What about us?' " Brown's message underscores a little-noticed political dynamic in a country where rates of the uninsured vary widely, from Massachusetts to Texas, where 25 percent are uninsured. Seeking national universal coverage means sending money from states that have tried hard to expand coverage, mostly in the Northeast and Midwest, to states that have not, mostly in the South and West...
3) Steve Benen: McCain Advisor Touts Stimulus:
It's impossible to characterize economist Mark Zandi as some kind of liberal partisan -- he was an adviser to the McCain/Palin campaign in 2008. With that in mind, it should carry a little more weight than usual when he credits Democratic recovery efforts with creating strong economic growth. Here was Zandi yesterday:
I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. And the decline in government spending would have been measurably greater without the money from the stimulus. So the stimulus was very, very important in the 4th quarter.
This isn't exactly new. Last November, Zandi was saying the same thing, arguing that "the stimulus is doing what it was supposed to do -- it is contributing to ending the recession." He added, "In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent."
Maybe someone ought to let Tim Pawlenty know.
4) Paul Krugman: Alesina et al. On Stimulus:
[T]he whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound. Everything is different if the central bank is busy adjusting rates in response to conditions, and may well raise rates to offset the effects of any fiscal expansion. Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high. Second, they use a statistical method to identify fiscal expansions.... But how well does that technique work?... Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.
So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.
Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.
5) The New York Times Editorial Board: The Truth About the Deficit:
[H]ere are some basic facts about the deficit that Americans need to consider: HOW DID WE GET HERE? When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come. By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 — two weeks before Mr. Obama was inaugurated — the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion. About half of today’s huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit — all of which Republicans supported, virtually in lockstep. The other half of recent deficits is due to the recession and the financial crisis....
Were it not for those multiple calamities, budget deficits today would be negligible. That does not mean we would be off the hook. An aging population and relentlessly rising health care costs will hit the country with even deeper deficits as the baby boomers retire. Politicians need to pass health care reform now and start thinking seriously about Social Security and tax reform.
So what are the immediate fiscal lessons... spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse.
WHAT CAN BE DONE NOW? Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness....
[I]n the Senate, Republicans are balking at the prospect of a big bill, saying they need to hold down the deficit. They have spooked the Democrats, who are now trying to negotiate what appears to be a far too modest bill in hopes of winning Republican support. What they should be saying — and what the White House should be saying a lot louder — is that a prolonged downturn or a renewed recession would do far more damage to the budget than upfront deficit spending. In fact, a clear lesson from the Depression of the 1930s is that reducing deficits at a time of economic fragility undercuts recovery.
SO DO WE JUST LIVE WITH THE DEFICIT? The problem must be addressed.... If the government must keep borrowing to make up the difference, it could drive up interest rates and force private companies to compete with the government for investors. That, in turn, would reduce economic growth and, by extension, the potential earnings — and standard of living — of everyone. The process is generally gradual. But it could be wrenching if creditors lose confidence that the government will ever put its fiscal house in order and suddenly decide to put their money elsewhere. That could lead to a fiscal crisis, with sharp spikes in interest rates and a rapidly depreciating currency....
SO HOW DO WE FIX IT?... To truly tame deficits will require serious health care reform, the sooner the better.... Contrary to popular belief, there are many well-thought-out ideas for such reforms. Where technical questions are difficult, particularly on health care costs, reformers have advocated demonstration projects that can be tested over time. Where the real difficulty lies is summoning the political will to do what must be done, even though it will be unpopular...
6) GRAPH OF THE DAY:
7) SECOND BEST NON-ECONOMICS THING I HAVE READ TODAY: Mitch Wagner: Something that really bugs me about the recent Star Trek movie:
There’s a scene at the end of the movie—and I don’t think this is a spoiler, the movie has been building to this point the whole time—where Kirk has the bad guy on the main bridge viewscreen. The bad guy is defeated, his ship crippled, and Kirk offers amnesty. The bad guy proudly refuses, and instead dies with his ship. Spock approaches Kirk afterward and asks if Kirk was really going to help the bad guy out. And Kirk smirks and says, no, of course not. Spock is happy about that.
It seems to me that one scene spits in the face of one of the greatest things about the original Trek. The show was primarily an action-adventure program, with plenty of fistfights and stirring ship-to-ship battle. But in the end, Gene Roddenberry and the rest of the people who created Trek were espousing a philosophy of peace and forgiveness. Kirk and the crew of the Enterprise extended forgiveness to enemies many times, including the very first time they encountered the Romulans, in a sequence that the movie echoes. The message of Trek: It’s better to talk than to fight. It’s better to forgive your enemies. When I was in my teens and 20s I thought that was sappy, but now that we’re a decade into the Never-Ending War On Terror, I think it’s lovely. It’s even more lovely because the original creators of Trek were themselves warriors, in real life. The older ones, at least, were part of the generation that served in World War II.
Gene Roddenberry was a decorated bomber pilot who flew 89 missions. He crashed one of them. He later became a cop. James Doohan fought at Normandy on D-Day. He shot two snipers, led his men to higher ground through a field of land mines, and got hit with friendly fire and lost a finger, an injury which he tried to conceal as an actor. A bullet to his chest was stopped by a silver cigarette case. Doohan also trained as a pilot. Leonard Nimoy served as a sergeant in the U.S. Army 1953-55. DeForest Kelley served as an enlisted man during World War II. These men who knew war, evangelized peace, a message which the creators of the current Trek movie laugh at...
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: James Fallows: Do we need another Turnip Day?:
This is further on the question of what Barack Obama and the Democrats can do about an opposition that is disciplined to vote No on all major issues, and that thwarts "bipartisan compromise" because there is no plausible item that could be added to a stimulus or health reform bill that will swing one of those votes to Yes. A reader writes:
I have been waiting for someone somewhere to relate the current Congressional impasse to the 'Turnip Day' special session that Truman called in his acceptance speech at the 1948 Democratic Convention. Some Republicans believed they should complete some unobjectionable legislation in the session, but Leader Robert Taft was adamant that they would yield nothing to 'that son of a bitch the President'. Taft succeeded in making the session an utter failure, but Truman succeeded in demonstrating that the Republicans were obstructionist and he won the campaign meme of the 'Do-Nothing Congress'. This experience of the American electorate punishing rabid partisanship seems too poignant to disappear into history, don't you agree?
Agree! The official US Senate history of Turnip Day is here; the text of Truman's Democratic Convention speech is here, courtesy of the Miller Center's excellent presidential archives. As the Senate history says about the moment:
At 1:45 in the morning, speaking only from an outline, Truman quickly electrified the soggy delegates. In announcing the special session, he challenged the Republican majority to live up to the pledges of their own recently concluded convention to pass laws to ensure civil rights, extend Social Security coverage, and establish a national health-care program. "They can do this job in 15 days, if they want to do it." he challenged. That two-week session would begin on "what we in Missouri call 'Turnip Day,'" taken from the old Missouri saying, "On the twenty-fifth of July, sow your turnips, wet or dry."
Republican senators reacted scornfully. To Michigan's Arthur Vandenberg, it sounded like "a last hysterical gasp of an expiring administration." Yet, Vandenberg and other senior Senate Republicans urged action on a few measures to solidify certain vital voting blocs. "No!" exclaimed Republican Policy Committee chairman Robert Taft of Ohio. "We're not going to give that fellow anything." Charging Truman with abuse of a presidential prerogative, Taft blocked all legislative action during the futile session. By doing this, Taft amplified Truman's case against the "Do-nothing Eightieth Congress" and contributed to his astounding November come-from-behind victory.
9) STUPIDEST THING I HAVE READ TODAY: Wall Street Journal Editorial Board. Outsourced to Media Matters: WSJ falsely claims Romer's research showed "superiority" of tax cuts over spending for stimulus:
A Wall Street Journal editorial claimed that "current White House chief economist Christina Romer has done economic research showing the superiority of tax cutting over spending as fiscal stimulus," presumably referring to a March 2007 paper by Christina and David Romer, who found that "tax changes have very large effects on output." However, contrary to the Journal's claim, the Romers' paper did not compare the impact of tax changes on output to the impact of spending...
10) HOISTED FROM THE ARCHIVES: DeLong (June 2002): Philip Habib and Ariel Sharon:
My friend John Boykin has just finished a book [John Boykin (2002), Cursed Is the Peacemaker (Belmont, CA: Applegate Press: 0971943206)] about American diplomat Philip Habib, and his (successful) attempt to stop the 1982 Beirut Massacre.... John says (p. xv) that he "neither knew nor cared about [Ariel] Sharon" when he started the book, and "simply followed the most interesting vein of the story wherever it led." In this context it is interesting that the person who comes off worst of all in the book is Alexander Haig....
In the months leading up to Sharon's invasion, Sharon had repeatedly told Haig that the PLO's armed presence in Lebanon was intolerable, that the security of Israel required that it be ended, and that he--Sharon--was going to do the job. Sharon interpreted what Haig told him back as a green light for the invasion--that Haig understood Israel's problems and requirements, and that such an operation would be acceptable to the United States if it was carried out in response to a sufficiently bloody and brutal provocation. Sharon and his Prime Minister Menachem Begin took the attempted assassination of Israel's Ambassador to Great Britain as such a provocation.... But Haig had, apparently, not told Ronald Reagan or anyone else in the White House about his conversations with Sharon, or failed to understand how Sharon would interpret them. When the Israeli invasion of Lebanon began, the White House's first reaction was to summon Special Presidential Envoy Philip Habib to meet with Reagan, and to send him off to the Middle East to stop the war--to find an acceptable political solution.... Habib found it "...very strange, like having two different mandates." Reagan's instructions had been, "Go over there and get this thing settled." Haig's had been, "Go over there"and, as Boykin tells it, more or less go through some motions. Habib was Reagan's representative, but reported to Reagan through Haig, who had "in fact blessed this [invasion] without telling anybody.... [T]hat put [Habib] in a very strange situation."
Reagan's instructions had been based on Reagan's... view.... As Boykin tells the story (pp. 57-58), "Habib always knew what Reagan wanted: for him to keep people from killing one another and to get them talking. That wasn't terribly sophisticated guidance, but it was clear. It suited Habib fine.... Reagan had complete confidence in Phil Habib because he liked him and because Habib came highly recommended and seemed to know what he was doing.... The disadvantage... was that [Reagan] had little understanding of the problems Habib was trying to solve.... He thought Syria's missiles in Lebanon were aimed at the heart of Israel, that the troubles of Lebanon were stirred up by the Soviets, and that the PLO was an instrument of the Soviets.... Habib found Reagan... a man 'who couldn't remember detail from one minute to the next'."...
Haig's view of what should happen was very different (see pp. 84-5). Haig thought that a good outcome would see the Israel Defense Force--the IDF--smash the PLO's military capability, send its political leadership running for whatever safety they could find, and in the process destroy whatever of Hafez Assad's Syrian military got in the way. This would, he thought, gut Soviet influence in the Middle East. If it were demonstrated that the U.S. client (Israel) could easily whip the Soviet client (Syria), then more countries would want to be U.S. clients and the U.S. would have won a victory. It was almost as if Haig saw the U.S. and the U.S.S.R. as the fans of rival sports teams, each taking pride and joy in its team's victory.
But it was far from clear that a full-scale military clash between Israel and Syria accompanied by Syria's decisive defeat and withdrawal would "gut Soviet influence" in the Middle East.... A Brezhnev anxious to demonstrate the Soviet Union's commitment to its allies might have been willing to base a Soviet Motorized Rifle Army in Syria. A Hafez Assad terrified of what Israel might do might well be willing to accept such a basing--even if it did mean that his independence from Soviet control thereafter would have been... rather limited. It seems to me (and seemed to almost everyone at the time save Alexander Haig) that a major clash between Israel and Syria would increase the Soviet Union's influence in the Middle East, not decrease it...
