EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

The Six’s Sense

July 23rd, 2011 . by economistmom

The Concord Coalition’s Board of Directors released this statement praising the new plan of the Senate’s “Gang of Six”–dubbing them the “Gang of Sense.”  What is so sensible about it?  They explain:

Now, the Gang of Six has returned with a bipartisan proposal to cut the deficit by nearly $4 trillion through 2021 and stabilize the growth of debt at a sustainable level. All parts of the budget, including domestic discretionary spending, defense, entitlements and taxes would be subject to scrutiny. Savings targets would be given to the appropriate congressional committees with across-the-board cuts in areas where committees fail to achieve their targets, while protecting those most in need.

The proposal is tough but politically viable because it calls for broad sacrifice. Indeed, it is the basic concession to political reality – that no one can get everything they want and all must accept some things they don’t want – that gives the Gang of Six proposal its breakthrough potential.

As former members of Congress, we recognize that filling in the details of this proposal through the legislative process will be difficult. However, we continue to believe that the cooperative approach taken by the senators’ group is the most promising route to enactment of legislation curbing the economically destructive and generationally inequitable explosion of debt that awaits if we don’t change course.

Seems that it’s time that congressional leaders and the President appeal to the six’s sense.  The other options don’t seem to be working out so well.

54 Responses to “The Six’s Sense”

  1. comment number 1 by: Patrick R. Sullivan

    ‘All parts of the budget…would be subject to scrutiny. ‘

    Really set in concrete, that.

    ‘Savings targets would be given to the appropriate congressional committees…’

    Ditto.

    How does an adult say these things with a straight face.

  2. comment number 2 by: AMTbuff

    Keith Hennessey has critiqued the Go6 plan, but my favorite summary is from a commenter at http://danshaviro.blogspot.com/2011/07/i-am-not-thrilled-by-gang-of-six-tax.html

    The plan gives the taxwriting committees six months to change the tax code so it will (a) raise more revenue, (b) let everybody pay less, (c) stimulate the economy, (d) be simpler, and (e) all of the above. Why not ask for a pony as well?

    It’s like the 3-step plan for organizing one’s life: 1) find pen and paper, 2) make a list,3) do things on list.

  3. comment number 3 by: Jim Glass

    Perspective on what *really* has to be done via all this “debt ceiling” business to *really* stabilize the debt. Ray Fair, last of the big-time academic modelers has his model produce the numbers

    [starting point]… net taxes defined to be personal income and social security taxes minus transfer payments to persons and state and local governments was negative: $0.36 trillion. The federal government thus paid more in transfers than it collected in personal income taxes and social security taxes in the first quarter of 2011…

    … raising net taxes by 4 percent of GDP was enough to stabilize the debt/GDP ratio.

    The deficit as a fraction of GDP at the end of 2020 is 4.03 percent versus 9.41 percent in the base run. The debt/GDP ratio stabilizes at 65.5 percent. (This is the good news.)

    The increase in net taxes is $651.5 billion. This is 45 percent of personal income taxes ($1461.0 billion), and so if all the increasein net taxes were an increase in personal income taxes, they would be $2112.5 billion in 2016:4. The increase in net taxes is 51 percent of social security taxes, 24 percent of transfer payments, 44 percent of purchases of goods and services, and 176 percent of corporate profit taxes. These are large percents.

    If in the end there is a compromise of half personal income tax increases and half transfer payment decreases, this would be a 22.5 percent increase in personal income taxes and a 12 percent decrease in transfer payments … Since transfer payments as used here include grants in aid to state and local governments, the 12 percent decrease would be for both federal transfer payments to persons and federal grants in aid to state and local governments.

    If one takes $650 billion as roughly the average amount needed per year over a ten year period once the phase in is completed, this is $6.5 trillion in 2011 dollars…

    The increase in net taxes is contractionary, as expected. As the fourth page of Table 1 notes, the sum of real GDP in 2011 dollars over the 9 years is $2.01 trillion lower than it is in the base run, which is 1.38 percent of the sum of real GDP in 2011 dollars over the 9 years in the base run.

    Does anybody think anybody in D.C. is putting together a plan with *all that* in mind? Or any of it?

    Does this cheer everybody up? :-)

  4. comment number 4 by: Vivian Darkbloom

    “Does anybody think anybody in D.C. is putting together a plan with *all that* in mind? Or any of it?”

    Of course not. The only thing real thing in mind is the next election and on that score I blame the D’s more than the R’s because the latter seem willing to commit suicide (if not genocide) over this issue. But, this begs the question: should they have everything Ray Fair has in mind, in mind?

    In an ideal world where economists are able to forecast the future (or even interpret the past) I suppose they should. Unfortunately, I don’t that is not the world we live in today. The numbers focused on in the current debate are derived from CBO forecasts which generally don’t include any macro economic feedback effects. On balance, I think that’s probably a good thing; otherwise, the debate just shifts to whose model is better and results in an unjustified reliance on numbers that simply are not that good (they are not much good as they are, but for different reasons, like counting a cool $1 trillion in “savings” for winding down two wars). Is that progress? In a half-serious remark about dynamic scoring, one critic suggested that we just roll a Yahtzee die to come up with an average growth rate (at that time the average was 3.5 percent and the die came up with a 3.43 percent average—not bad. I guess it is a bit like throwing darts to pick stocks. These methods do have the advantage that they don’t involve any politics to interfere with the randomness of the process).

    But, to be fair to Fair, I like the way that he has framed the issues, but then again that part of it doesn’t involve anything more than simple arithmetic.

    “Perspective on what *really* has to be done via all this “debt ceiling” business to *really* stabilize the debt. ”

    Two comments about this: First, “does this *really* have to be done?” I’m skeptical, at least as regards the dynamic modelling is concerned—see above.

    Second, “does this *really* have to be done *via all this debt ceiling business…*”

    I would like to first re-phrase the question as to whether it *should* be done via all this debt ceiling business and the answer to that is an emphatic *no*. Although, because of his naive rah, rah, rah’inig, he usually reminds me of an undergraduate male cheerleader, Tom Friedman actually got this right in a recent NYT editorial–this is not the appropriate mechanism to map out a long-term tax and spending policy.

    Does it *have* to be done via all this debt ceiling business? That’s a more difficult question. It seems that we need some crisis to get something done and this is probably better than a bond market crisis (although what is being discussed now won’t avert that). On balance, it’s probably good to have the crisis now than later, even though that might entail a few uncomfortable weeks for the markets. Nevertheless, it is disappointing that the best even the R’s can come up with is $850 billion in spending cuts. Compare that with the $6.5 trillion that Fair says is needed to stabilize debt to GDP at 6.5 percent (those are 2011 $’s, by the way). The R’s need to come to their senses—this can’t *all* come from (direct) spending reductions and the D’s have to put Medicare on the table and O needs to think about something other than his re-election.

    Does that cheer me up?

    No, it makes me want to shoot myself.

  5. comment number 5 by: Vivian Darkbloom

    That was 65.5 percent and not 6.5 percent, of course.

  6. comment number 6 by: Steveinch

    I think his analysis is fatally flawed. It takes growth rates of all programs as constants that cannot be moved. Reframe the problem. Absent recessions, let’s put government on a COLA. Hold spending growthnto the rate of increase of inflation plus population. If you did this for a decade, spending would end at 19.4 percent of OMB forecasted GDP. Revenues under current policy at that point would be about 18.4 percent per the CBO. Personally, I would take out an insurance policy by eliminating a few of the big loopholes (state and local taxes come to mind)

    In my view, the fundamental problem is how we have defined the baseline. The baseline in this country is that the government gets as much as it wants to keep doing everything it wants the way it wants to. Reframe the President’s budget submission as a nearly $5 trillion spending increase over the baseline which it is using the COLA baseline using 2010 as the base and it would never be submitted

  7. comment number 7 by: AMTbuff

    Steve, your formula-based approach won’t succeed. We need to lock in long-term savings now. Promising to adhere to a cap later, where adherence will require politically difficult votes, has never worked and will not work this time.

    What we need are explicit benefit cuts. They need to be announced in full detail now. They may be delayed or phased in, but the vote to break the promises must occur now, not later. That way the default (pardon the expression) path is to implement the benefit cuts.

    I oppose any plan which does not include specific benefit cuts, such as means testing, allowing affected individuals to identify the amounts and adjust their expectations accordingly. Plans that vaguely promise cuts in the future are more of the same avoidance behavior we call kicking the can down the road.

  8. comment number 8 by: Brooks

    AMT makes a good point. The default path is important, given the often divided government and the de facto 60 votes needed in the Senate. It’s certainly no guarantee, since any future Congress can change whatever they want (absent a constitutional amendment, which so far I still oppose), but it could make an important difference whether a more fiscally responsible course is the default vs. requiring new legislation.

    And as for phasing in, I see both political and fairness reasons for phasing in reductions in entitlements eligibility/benefits, but I’d like to see at least a small token amount initiated fairly soon just so the message is clear that the electricity in the “third rails” has been turned off (or at least made less than fatal) and we are on the path of reductions.

    That said, I favor “strong” statutory “controls”, despite their inherent weaknesses, because at their best they can possibly raise the political cost (or reduce the net political benefit) of fiscal irresponsibility.

  9. comment number 9 by: SteveinCH

    AMT,

    Short of a BBA, I have given up on any other approach. Your notion of cuts now as somehow mattering later is simply wrong. I agree with cuts now but I don’t think they influence cuts later.

    We need to change the conversation. Just look at the discussion we are having right now. A trillion dollars in cuts doesn’t even drive the growth in cost of government down to inflation plus population plus 1% and yet it is still call a trillion dollar cut. Most people are not equipped to deal with the details so they deal with the headlines.

    The least informed will interpret a trillion dollar cut as a reduction in spending of a trillion dollars. The somewhat more informed might interpret it as a reduction in spending of a trillion dollars in inflation-adjusted terms. I can guarantee you that less than 5% of Americans would understand that a $1 trillion cut is a reduction of about 40 basis points in the rate of growth of government spending.

  10. comment number 10 by: Brooks

    Steve,

    You make a valid and important point re: the selling and misunderstanding of “cuts” removing needed pressure on politicians to do something substantive, but I don’t think we should jump to BBA, which I see as very problematic on Keynesian grounds* (or Hooverist grounds, if you will).

    I think AMT’s point is simply that we need explicit policy changes now (even if implementation is phased in or does not start immediately) rather than just legislating overall (or even program level) caps as targets, with the tough policy changes to abide by those caps left to the future, counting on politicians to be more responsible later than they are willing to be now.

    But if you think nothing short of a BBA will work to save us from fiscal disaster, and if the BBA would make it impossible or nearly impossible for Congress to override the provisions, then I can see why you’d consider BBA both necessary and sufficient.

    * although perhaps some sort of graduated and more sophisticated BBA could be a good version on balance — tying in the context of projected debt-to-GDP, factoring in recessionary conditions (albeit with the lag problem), and requiring different sizes of majority votes to authorize deficits above progressive ranges.

  11. comment number 11 by: SteveinCH

    Brooks,

    I think phased in implementation is meaningless. SGR anyone? Congress will do what it wants to do when it wants to do it. We need to change the notion of what the baseline is. The baseline should be spending growing at inflation plus population and receipts growing at the growth rate of personal income.

    As to the BBA, I agree there need to be exceptions for declared wars and recessions and different majorities authorizing breaking the rules. I disagree with focusing on debt/GDP. Politically too complex. I really do think that nothing less (other than a bond crisis) could avoid fiscal disaster at this point. It saddens me to reach that conclusion but I see no other logical conclusion to reach.

  12. comment number 12 by: Brooks

    Steve,

    Well, my sense is that the only politically feasible (and perhaps the only fair) way to implement the scale of needed reductions of seniors’ entitlements eligibility/benefit levels is to phase it in. But I guess your point is that nothing substantial will end up actually phased in without the kind of BBA you seek. And if you believe firmly that BBA is the only thing that can save us from fiscal and economic disaster, then of course BBA is the policy implication. As skeptical and cynical as I am re: politicians and fiscal responsibility I’m not there yet, and I’m too concerned about the loss of fiscal policy flexibility (particularly amid recessions, but also in general) to want to jump to BBA at this point.

    To be clear though, I’m not belittling your premise that some form of BBA is necessary or at least net desirable. It’s possible you are right. I just haven’t drawn that conclusion (yet) so at least for now I have enough hope for other means that I don’t want to accept the likely drawbacks of BBA.

  13. comment number 13 by: Brooks

    Steve,

    Also, I’d add that the process and effort to get some BBA could become a big distraction and political cover for delay of fiscal responsibility. So even if you think it’s a good idea, you should consider the likelihood of success before supporting such an effort. I don’t know what that likelihood is; just saying it should be a consideration.

  14. comment number 14 by: Brooks

    On the lighter side, just saw this ad on CNN:
    http://www.youtube.com/watch?v=dBoYYc1APr8

    Points for wit. Points deleted for misleading idiocy (e.g., stimulus that didn’t create jobs).

  15. comment number 15 by: AMTbuff

    Steve, consider the 1983 SS changes as an example. Tax increase coupled with phased increase in retirement age. That increase occurred and continues today. There was never an effort to reverse it.

    I believe that means testing and phased increases in eligibility ages, enacted this year, would be permanent. They have a much greater chance of success than a promise to hit a spending target via cuts to be named later.

    I believe the bond market would soar if specific future benefit cuts were enacted.

  16. comment number 16 by: Steveinch

    AMT

    No offense but we are in a different world today. First off, the notion the one program, like social security is the cause of our budget issues has been disproven. Remember that in 83 there was a sense that social security was the problem and that has proven to be false. No single program change, not even Medicare, is sufficient to address the budget deficit.

    Furthermore, the notion of fixing individual existing programs when government has shown the willingness to add entirely new programs (Medicare pt D and the ACA) makes the notion of a program oriented fix relatively uncompelling.

    Finally, there is the timeline. The benefit changes in ss took place well in the future…indeed they are still taking place today and even these changes have left ss with a $5 trillion actuarial hole, not at all what was foreseen in 1983.

    In other words, the only credible reform is one that forces government to live with a hard budget constraint. You should of course also keep in mind that the ss crisis in 1983 was smaller than the entitlement crisis is today and that seniors were a much smaller group and not so much of the I,me,me, mine mindset.

  17. comment number 17 by: Steveinch

    Two more things AMT. According to the trustees, the actuarial balance of SS is worse today than it was in 1983 because costs have grown far faster than anticipated. The “fix” for social security is a fix that made it worse off financially than it was before the fix was put in

  18. comment number 18 by: Steveinch

    Guess that was one more thing ; )

  19. comment number 19 by: Vivian Darkbloom

    Brooks,

    I thought the ad was pretty weak on wit and I also think you overstate the idiocy. The ad claimed that the stimulus didn’t create *any* jobs. In the strictest literal sense, that is hyperbole. But, whether it is true in a real sense depends on the time frame one is talking about. Is the net effect over, say, a ten year period to “create jobs”? In this sense, the ad got it right–the spending created a few temporary jobs with equal or greater offsetting costs—”makes you feel good now, but leaves our kids to pay for it”.

    Questions for you in regard to this idiocy:

    1. Do you think the stimulus will actually have the effect of creating net jobs over the longer term?

    2. Was the money effectively spent?

    I can imagine a stimulus package focused on investment would be worth the money both in the short term and the long term and might even create, net, net, a few jobs. However, as structured, that stimulus was a failure. Am I being idiotic?

  20. comment number 20 by: Steveinch

    Brooks,

    Thanks for the reply. I agree about the implementation and distraction issues associated with a BBA but, as you noted, I have arrived at the conclusion that a bad solution is better than no solution.

    I suppose there’s a parallel universe where we could just place stark limits on what the federal government is permitted to do instead but that’s a lot less likely (and more restrictive) than a BBA

  21. comment number 21 by: Brooks

    Vivian,

    I think you are over-analyzing their perspective in a way that is charitable to them. The moronic talking point from some on the right is that the stimulus has not created any jobs as evidenced by the fact that unemployment is not lower now than pre-stimulus (however one defines the timing of stimulus). It’s the same simple-minded pseudo-analysis that leads many to conclude that if revenues increased after a tax cut, the tax cut must have had a net positive effect on revenues (never mind the notion that revenues could be higher despite the net negative effect of the tax cut). It’s just idiocy, or perhaps in the case of this organization (which may know better) and their ad, the exploitation of idiocy for political gain.

    Re: your questions, my answer is “I don’t know” to both. And per the preceding paragraph, I consider both questions irrelevant to my critique of the ad.

  22. comment number 22 by: Vivian Darkbloom

    You know Brooks, as to the question of whether the stimulus created any jobs, I would have to answer the same—”I don’t know”.

    Given that, wouldn’t you say that those on the left who claim the stimulus created millions of jobs are at least as moronic as those who claimed it didn’t create any?

  23. comment number 23 by: Brooks

    Vivian,

    I don’t know what magnitude (how many jobs created) is a reasonable guess/estimate, so I don’t know re: “millions”.

    Re: if any jobs were created — meaning employment being at least a bit higher than it would have been without the stimulus — I think economists would generally agree that it is safe to assume at least some such effect. Perhaps stimulus wouldn’t have that effect under other economic conditions — e.g., high employment, high growth, low excess capacity, high interest rates made higher by higher deficits and “crowding out” — but those haven’t been the conditions under stimulus. And I don’t think most economists concur with a strong version of Ricardian Equivalence. What is it that you think might fully offset the employment effect of a large infusion of aggregate demand (spending)? And have you come across any credible economists claiming no effect on employment or even expressing skepticism re: any positive effect on employment (i.e, employment greater than it would have otherwise been)?

  24. comment number 24 by: Vivian Darkbloom

    Brooks,

    Again, I think the issue needs to be framed with respect to the time period one is talking about. Also, we are talking here about the stimulus as it was administered, which was not ideal. With respect to the negative effects, Robert Barro, Harvard economics professor, has indicated that the effects over a 5 year period were negative (and probably more negative the further out you go). That is, the negative effects of the debt burden exceeded any positive effects of the short-term stimulus.

    http://online.wsj.com/article/SB10001424052748704751304575079260144504040.html

    You can disagree, but I don’t think that makes him idiotic.

  25. comment number 25 by: Brooks

    Vivian,

    We seem to be going in circles. Again, the people who claim NO jobs have been created are referring to jobs under the stimulus to-date, not net of any future negative effect on employment. And I assume that’s the same reference point of those who claim that a great many jobs have been created by the stimulus.

    Please don’t keep mixing them up and please don’t misrepresent what I was calling idiotic. I clearly stated, in response to you, that what I was calling moronic is the claim of no jobs created to-date, and I clearly said I do not know if there will end up being a net positive effect on employment over the longer term. Like most people, I find it annoying to have my comments, particularly a harsh criticism I’ve expressed, to be so blatantly, fundamentally misrepresented despite clear evidence to the contrary, so please pay attention.

  26. comment number 26 by: Brooks

    I should add even more precisely that what I’m calling moronic in particular is the claim of no net jobs to date on the basis of no drop in unemployment. Although I would call any claim of no net jobs to-date very dubious, I know the basis on which those who make that claim do so, having heard the talking point over and over again.

  27. comment number 27 by: SteveinCH

    Brooks,

    Is the claim of no net jobs (which I agree is moronic) any less moronic than the claim of 2.5 million jobs created or saved?

  28. comment number 28 by: Brooks

    Steve,

    I already answered that question. Again, I don’t know. I’ve never considered or read expert opinions on the validity of claims of any particular magnitude.

  29. comment number 29 by: Arne

    2.5 million jobs saved seems quite reasonable - that would be in the neighborhood of 100K per job, which is about the median for a jobs share of GDP.

    My question is saved for how long. If it is going to take 4 or 5 years to get back to where spending is “normal”, then how much good did it do to save a job for 1 year?

  30. comment number 30 by: Arne

    “According to the trustees, the actuarial balance of SS is worse today than it was in 1983 because costs have grown far faster than anticipated”

    Actually, at 4.3 percent of GDP in 2007, it was right about where they predicted. It is higher today because we have not recovered from the recession.

  31. comment number 31 by: Steveinch

    Arne, it is worse than it was in 1983 when they saved it. That is an odd form of saving

  32. comment number 32 by: Steveinch

    860 billion divided by 2.5 million is $100,000?

    My calculator must be broken

  33. comment number 33 by: Arne

    The amount spent as stimulus was not $860B annually. The rest is left as an exercise for your calculator.

  34. comment number 34 by: Arne

    “it is worse than it was in 1983 when they saved it”

    You have an odd set of blinders on if you believe that.

  35. comment number 35 by: Jim Glass

    1. Do you think the stimulus will actually have the effect of creating net jobs over the longer term?

    The latest CEA report on the results of the stimulus says the $666* billion spent so far has increased employment by 3.9 million job years.

    As to the *long-term* benefits of that, if it is so, I can imagine some.

    2. Was the money effectively spent?

    Nope. No, no, no, no. For instance…

    1) That $666 billion divided by 3.9 million is $170,700 per job year, when the BLS says the average job pays $45,000. Assuming that jobs as well-payinjg as the average were the ones saved — very doubtful, as those haven’t been the ones lost — spending $170,700 per $45,000 of return is, let us say, not such a great deal.

    2) Moodys just did an analysis of stimulus spending and found the *most effective* of all the many various kinds was that on food stamps — producing $1.73 of economic activity for every dollar spent.

    Assuming, generously, that 20% of that economic activity is recaptured via federal taxes, this means that *at best* every $1 of stimulus spending for temporary short-term benefit adds 65 cents to the permanent national debt, to be serviced forever, and accelerate any future crisis that much closer to today. And the bulk of the spending was a whole lot less efficient than that.

    Now, if the USA had a solid set of financial books with no debt problems in sight, then we could afford some inefficient stimulus to whip up some jobs at high cost, why not? People first.

    But as we all know we have *big* financial problems hurtling down the track at us, this is another classic example of mitigating a little pain today by adding much more to the long run. Sacrificing tomorrow for today. Until today is gone tomorrow is on top of us.

    3) And this is a *major* point, but mostly unmentioned in popular discussions:

    Even the inefficient stimulus of $170k spending for each $45k job year created, and an inefficient top 1.73 multiplier, may be an illusion — the true effect of the stimulus may be as low as *zero* — because “The Fed acts last”.

    The Fed runs *monetary* stimulus, and when a central bank does so targeting a level of economic activity, inflation, or whatever, the multiplier for fiscal stimulus is known to be *zero*.

    That is, to the extent fiscal stimulus gets the economy to where the CB wants it to be, then the CB *doesn’t* use monetary stimulus that it would have otherwise. So the economy gets to where it would have been with *no* fiscal stimulus, but instead the extra monetary stimulus that the CB would have applied.

    The difference of course is that the cost of fiscal stimulus gets added to the national debt and must be serviced with taxes, while monetary stimulus doesn’t. So the debt/tax cost of the fiscal stimulus is wasted.

    To the extent one believes that if the fiscal stimulus had been smaller the Fed would have acted more assertively, then the efficiency of fiscal stimulus has to be deemed reduced that much more.

    Recognizing all this, for 40 years, since the 1970s, *all* the economics textbooks have said:

    “Do *not* use fiscal stimulus. Use monetary stimulus! Fiscal stimulus is …

    “[] A permanent budgetary cost, added to the national debt — monetary stimulus isn’t.

    “[] Slow, it has to go through the political system — monetary stimulus can be done in a day.

    “[] Wasteful, it is distorted as the politicians twist it to pay off their partisans and supporters while monetary stimulus is distributed by the market.

    [Here in NYC $300 million of stimulus funds were sent to the MTA to pay for construction of the infamous Second Avenue Subway, a political money hole since the 1920s.

    But money is fungible, so the subway workers' union got itself an 11% raise(!) -- as unemployment went over 10% and the MTA literally went broke, having to impose a regional tax as well as raise fares -- financed by taking $300 million from the MTA's construction budget, which funds were replaced with the stimulus money.]

    “[] Fiscal stimulus is always more or less offset by monetary stimulus anyhow, often entirely — making it even more costly, or a total waste.”

    Even Krugman’s textbook(!) says fiscal stimulus is inefficient, use monetary.

    But somehow, all at once, everybody forgot what all the textbooks have said for 40 years. A lot of people didn’t take their economics education very seriously.

    So was the fiscal stimulus money spent efficiently No, no, no, no, no, in every way: no.

    * While I am no fan of fiscal stimulus, I don’t go so far as to join those who say it is actually the work of Satan.

  36. comment number 36 by: Vivian Darkbloom

    A technical point: the ad did not state the stimulus did not create *any jobs* *to date*; it said the stimulus *did not create jobs or fix the economy* (I watched it again and my original insertion of *any* before jobs was in error and the subsequent insertion of *to date* was Brooks’ error). I’m not defending the ad on this point; I use it merely to indicate again that economic models (like fiscal multipliers) are almost always manipulated to emphasize short- term advantages over long-term disadvantages. I’m convinced one of the biggest reasons we’re now in this debt mess is because we continuously use 5 to 10 year models that demonstrate the short-term advantages and ignore long-term costs, and we’ve continuously repeated this cycle like a Ponzi scheme. Those are political models, not economic ones (even though I have little faith in the latter). This is quite possibly also a result of the bastardization of Keynes’ famous remark “in the long run we are all dead”. And, I don’t care which policy is being pushed by these models, be it tax cuts or spending increases (in case you were wondering, Brooks). In this sense, the ad got it pretty much right, and communicated that in an effective manner: “Spenditol, makes you feel good now and pushes off the bad stuff till later”. (Perhaps we’ll have a counter-ad pushing “Taxitless”)

    Whether fiscal stimulus is effective likely depends on what type of stimulus is used and under what conditions. A truly counter-cyclical fiscal policy where powder is stored during good times and spent during bad is quite prudent and is essentially Keynesian (even though I agree monetary policy is the better mechanism). In this respect, the last stimulus was not Keynesian and, although it was not the work of Satan, it might have been the work of one of his second cousins, who truly was a moron.

    I should have added a third question to that list: was that $800 billion stimulus good policy? In this most important sense the ad got it right. Of course, if I (or presumably anyone else posting here) were to do that ad, we’d probably do it differently. But, this recalls an earlier conversation here: how do you deliver a message on this type of subject to the general population that is both effective and accurate?

    I suspect the ad was effective and we can certainly quibble as Brooks has done over its choice of words and therefore its factual accuracy. How much can one explain and how accurately can you do it in a one-minute ad? Is it inevitable and unavoidable that this type of communication distill itself to propaganda? Is the blogosphere much better in this regard? Can you effectively communicate to the general public in this type of medium (or any other) that monetary stimulus is better policy than fiscal stimulus? To the last question, I very much doubt it, though maybe Jim Glass could give it a crack. At the end of the day, the ad perhaps could have been constructed to assert that the stimulus was poorly designed and inefficient, that it did not create many jobs in the short-term and likely had larger long-term costs. I don’t care how you voice an opinion on economic policy; you are always going to be subject to criticism that your claim is factually wrong—or even moronic. When it comes to economic policy debate, real facts are in pretty short supply.

  37. comment number 37 by: Brooks

    Vivian,

    Re: the subsequent insertion of *to date* was Brooks’ error

    You really should be more considerate. I just asked you to pay attention and stop misrepresenting my assertions, having shown you that you had just obviously, blatantly, fundamentally misrepresented a criticism of mine despite my clear explanation to the contrary. And in your very next comment you attribute an error to me that I did not make. I never said the ad stated explicitly “to-date”. I asserted that I know that such is their reference point. First, there is grammar: past tense of “did” in “did not create any jobs”, which precludes your construct of net jobs over the long term. Second, as I explained, I (and others) have heard this talking point a million times now, and it is always based on to-date (or perhaps even a period ending earlier), and when any supporting argument is provided it is always (perhaps with rare exceptions I haven’t heard) the argument that unemployment is not lower than pre-stimulus.

    I ask you again: please pay attention so you don’t blatantly misrepresent others’ assertions or arguments, let alone falsely attribute error (when I make some actual error, I really am happy to be corrected).

  38. comment number 38 by: Brooks

    Jim,

    I share your general preference of monetary policy over fiscal stimulus to combat recessions, for all the reasons you cite (and which I’ve mentioned here in the past), but, leaving aside the actual motivations of the politicians who produced the stimulus, isn’t there a reasonable/strong argument that the Fed was starting to run out of tools in this particular case (with interest rates so low and other actions the Fed had already taken) and that there was therefore a positive role for fiscal policy?

  39. comment number 39 by: Brooks

    Jim,

    I forgot to mention, thanks for that very informative and well-constructed (as usual) comment.

  40. comment number 40 by: Vivian Darkbloom

    Brooks,

    I was actually paying attention.

    You wrote at comment 25:

    “I clearly stated, in response to you, that what I was calling moronic is the claim of no jobs created to-date..”

    You didn’t specify that this was based on your knowledge of what was in the ad makers’ minds, or that it referred to something or someone other than the ad or the content of the ad, or that it was based on your own grammatical interpretation of what they meant, but did not say.

    And at comment 26:

    “I should add even more precisely that what I’m calling moronic in particular is the claim of no net jobs to date on the basis of no drop in unemployment. Although I would call any claim of no net jobs to-date very dubious, I know the basis on which those who make that claim do so, having heard the talking point over and over again.”

    The subject, which you brought up in the first place, was the specific language employed in that ad which you opined was “moronic”, not what other unidentified persons may or may not have said. So, I hope you can understand the confusion.

    For what it is worth, I’ll accept your current explanation.

  41. comment number 41 by: Brooks

    Vivian,

    You are simply confused. It isn’t my “grammatical interpretation” to say that the word “did” is in the past tense and thus refers to to-date (or even perhaps ending at some earlier point), not the future to which you referred*.

    Again, the ad didn’t explicitly use the exact words “to-date” and I never said that it did, but “to-date” (or ending even earlier) is implicit in “did” as past tense. Are you seriously contending that this is unclear?? You can’t be serious. Enough of this silliness. First you totally misrepresent my criticism of the ad by implying that I was calling “idiotic” anyone’s assertion of no net jobs over the long term, even though I was as clear as humanly possible that this was not what I was criticizing, then in response to my pointing out your misrepresentation, rather than acknowledging your error (assuming it was accidental), you respond with this silliness that I made some error in “interpreting” the past tense as referring to the past. Yeesh.
    * Nor is it less than obvious to anyone who has been paying attention that this talking point claim is based on the observation that unemployment is not lower.

  42. comment number 42 by: Jim Glass

    isn’t there a reasonable/strong argument that the Fed was starting to run out of tools in this particular case

    No, no, no, no, no.

    Bernanke himself said in his last appearance before Congress that the Fed has plenty of ammunition left and plenty it could do — *if the need arises* — it just doesn’t see the need now.

    The Fed has run out of will to do anything more — it is responding to the inflation hawks, including among its own members …. though inflation fear with 9+% unemployment and GDP 12% under capacity sure seems loopy to me.

    Nonetheless, competing headlines from yesterday and few days before:

    WSJ: “Fed’s Bullard: Rising Inflation Makes New Stimulus Unlikely”

    FRB: “The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.83 percent.”

    Bullard’s the head of the St Louis Fed. Apparently St. Louis and Cleveland don’t talk to each other.

    The blog of monetary economist Scott Sumner is all over this, it’s now my favorite of all blogs written by a man, and has become quite influential in the area.

    http://www.themoneyillusion.com/

    It’s well worth reading all the way back through the archives. I’ve learned a lot more from it than from any other, written by a man.

    Bonus: He’s had a couple very entertaining rounds with MMTers lately. He and his commenters got some enlightening statements out of them. :-)

    And Brooks, thanks for the kind words.

  43. comment number 43 by: Brooks

    Jim,

    Thanks for the info and links.

    Re: inflation fear with 9+% unemployment and GDP 12% under capacity sure seems loopy to me.

    Would the presumption be that the Fed could appropriately time an effective winding down whatever stimulative action it took now such that it wouldn’t be inflationary upon/after substantial recovery, or would it be somewhat likely / more likely that Fed stimulative action now would have lasting effects upon/post-recover that would spark problematic inflation (or the need for tightening we’d prefer to avoid)?

  44. comment number 44 by: Brooks

    Jim,

    Re: MMTers, my assumption from the my limited reading of their comments is that their apparent theory (using that term loosely) is nothing that any serious person would adopt or even conceive of unless perhaps he licked the back of one of those hallucinogenic frogs. Is there anything at all plausible in their point, and is their bottom line that all we have to do is essentially print all the money we need, so we need not worry about deficits and debt, nor worry about any ill effects (most notably inflation) of such an approach?

  45. comment number 45 by: Jim Glass

    Would the presumption be that the Fed could appropriately time an effective winding down …

    If I could really answer questions about the capabilities of the Fed I’d have tenure somewhere, instead of doing what I’m doing. I am a mere lowly amateur blog reader. Reading Sumner will give you a good feel for such things though.

    And he replies to pretty much every single blog comment personally — how many bloggers do that? — so if you have a question you can ask him … and get an answer!

    Really the two *nicest* bloggers I know are Economistmom and Scott Sumner. In fact, among all the Interweb’s snarkyness and vitriol, they are the ONLY two pleasant bloggers I know (including me when I was blogging). By supply-demand ratio, a duo to be highly valued!

  46. comment number 46 by: Jim Glass

    Re: MMTers, my assumption from the my limited reading of their comments is that their apparent theory (using that term loosely) is nothing that any serious person would adopt or even conceive of unless perhaps he licked the back of one of those hallucinogenic frogs

    :-)

    Is there anything at all plausible in their point

    Hey, MMT is something I *do* more about than most professional economists!

    I knew the prophet of the cult and its first disciples and had plenty of exchanges with them personally from almost their beginning, back in the 1990s on Usenet in sci.econ. (Patrick Sullivan, who visits here occassionally, did too. He can tell some stories of his own about them, I’m very sure.)

    I don’t want to go into a longish off-topic comment about them and what I consider their *real* point here — so I’ll point to a longish on-topic comment about them and their real point, IMHO, that I just put on the MMT thread at Sumner’s, when asked my opinion about same. FWIW. (You’ll see from the snarkiness that I completely fail to meet the rare standard set by my host both there and here.)

    and is their bottom line that all we have to do is essentially print all the money we need, so we need not worry about deficits and debt, nor worry about any ill effects (most notably inflation) of such an approach?

    Their main “theoretical insight”, ahem, as explained to me way back in the 1990s, is “the horizontal demand curve for momey”. That is, whatever amount of money the real economy wants to function is created automatically through the banking system.

    (This was deduced by the founder banker who noticed in his own personal experience that his bank *never* turned down a loan application due to “tight money” by the Fed, but only due to the creditworthiness of loan applicants. Credit-worthy applicants can always get loans, non-credit worthy ones can’t. Credit worthiness is determined by the real economy, not the Fed. The rest follows. MMT lloudly and proudly proclaims itself “real world banking based” — refuting the bizarre abstract ideas of economists who have no clue how any bank *actually* works … and thus obviously are incompetent to have opinions about how the whole banking system works!)

    OK, the Fed *cannot* create money in any real sense — because the real economy already has all it wants and won’t take anymore. Thus, the Fed cannot create inflation with excess money creation. Also the Fed cannot stimulate the economy, depress it, whatever, with money policy. Thus, what really regulates the economy is taxes and spending by the government. Which is why deficit spending is so good.

    The reason the Fed can’t create inflation is that it doesn’t literally print new money and push it out like Mugabe did, it just “presses a button” (they are really big on how important this is) to merely acquire T-bonds or whatever in exchange for bank reserves, which is merely *swap* of assets with no net effect on financial asset totals. The new reserves aren’t lent out by the banking system because it’s already made all the loans it wants without them. It’s not going to start making loans to *uncreditworthy* borrowers just because the Fed swapped this for that! So the new reserves just sit unused funding no more loans than the bonds did. No difference.

    But of course the Fed *can* buy all the T-bonds it wants by issuing such reserves. So it could retire the entire national debt by buying it up! In fact, we don’t even need debt, bonds, to finance a deficit. The Fed can just spend money to buy everthing the govt needs. If it spends a lot more than taxes collected, so what? It’s not inflationary because any excess money “unwanted” by the economy will just pile up in unused reserves. Who needs any national debt at all?

    OTOH, inflation *can* arise by overheating the real economy by spending too much, exceeding real capacity, bidding up prices. Then you can cut back spending or increase taxes to keep things in balance, whichever is more optimal on the facts.

    It’s all sort of a bizarre Post-Keynesianism on hallucinogenic frogs. :-)

    Am I being fair to them? Probably not … but c’mon!

    But all this is not their REAL point, IMHO. What I believe is their real, driving point I put in the comment on Sumner’s blog.

  47. comment number 47 by: Jim Glass

    Their main “theoretical insight”, ahem, as explained to me way back in the 1990s, is “the horizontal demand curve for momey”. That is, whatever amount of money the real economy wants to function is created automatically through the banking system.

    Ooops, sorry, that is horizontal **supply curve** for money.

    May Mosler forgive me!

  48. comment number 48 by: Vivian Darkbloom

    “Moodys just did an analysis of stimulus spending and found the *most effective* of all the many various kinds was that on food stamps — producing $1.73 of economic activity for every dollar spent.”

    That may well be so, but was this spending part of the stimulus program, or was it simply due to increased (automatic stabilizer) spending under that program?

    Do these estimates of job “creation” include this type of spending? Even if not, how do we know that those jobs “created” were the result of *that* spending rather than the official stimulus spending?

    On the language nitpicking front, I would add that proponents of that stimulus are themselves very careful to say “jobs created *or saved*. (The ad in question did not include the latter.) What does it actually mean to *create* a job and, in the real economic sense, how often and to what extent does the government actually *ever* do that?

  49. comment number 49 by: Brooks

    Jim,

    Thanks for the explanation and link (and lol re: your L. Ron Hubbard line there).

    If I understand correctly, their point is that no matter how much/cheaply the Fed provides money to banks, a bank is still not going to make the same lending choices (either they think a given loan is a good investment for them or not), so money supply is not affected and thus inflation is not affected. All that happens with more/cheap money is that banks’ reserves grow.

    The first question that pops into my head is: If the bank can get incremental funds more cheaply due to Fed action (i.e., if essentially their variable cost of goods has just decreased), wouldn’t that increase NPV on any given loan and thus make some worthwhile for the bank that otherwise would have been rejected?

    The second question I’d have would be: Even if we accept the premise that the banks would not lend more, if cash reserves were piling up at a bank (or any company) for no worthwhile purpose, in theory the company would distribute those idle funds to shareholders via dividends (and by “idle” I mean even considering possible worthwhile future uses).

    I may be overthinking what amounts to nothing more than nonsense, and I don’t even know if my questions above are even really relevant to (or are answered by) “MMT”, but unless I’m misunderstanding it (or misunderstanding the banking aspect), their “theory” seems to beg those questions.

  50. comment number 50 by: Brooks

    Jim,

    I meant to say:
    “a bank is still going to make the same lending choices…”

  51. comment number 51 by: Jim Glass

    … unless I’m misunderstanding it (or misunderstanding the banking aspect), their “theory” seems to beg those questions.

    Brooks, yup, you’re right. Like you said, they’re on frogs, mushrooms, toads, something.

    It’s tough to rigorously critique them because they don’t have a consistent line. They don’t have a textbook or bible or single authority, so everybody makes up their own version of the general story. Your arguments are right, others are right. But what they say varies, so one has to improvise one’s answers to them by the occassion.

    I just got through a long many-way exchange with them, so maybe while it’s fresh in my mind (and since you’ve asked) I can note some of their more common thinking here — so when they return to the comments here, people here can understand them better to either answer them or ignore them.

    Anyone not interested in this should ignore the rest of the comment and get on to celebrating the good news about national default not happening! (Yet.)

    The “Paleo” MMT types say that even literal mega-printing of money can’t create inflation — Mugabe *didn’t* create the hyperinflation by printing billion-dollar bills. Zimbabwe unfortunately “suffered a supply interruption” that increased nominal demand by 231 million percent in 2008 (somehow), so all those billion dollar bills *had* to be printed as “a consquence”. Coulda happened to anybody! Don’t ask me how they can believe that even in fantasy, I have no clue. Total kooks: ignore.

    The more “reasonable” types say a Mugabe printing currency into circulation like that does cause inflation — but the Fed doesn’t do that, literally print money like Mugabe, because it works through the banking system, and while it may make loanable reserves available the banks won’t loan them.

    Meta MMT problem: The Fed *does* do that — literally print money. To move the money supply the Fed adjusts the monetary base. And the money base has always been about 90% printed currency, until the 2008 crisis when it started paying interest on reserves.

    (This in spite of an MMTer telling me at Sumner’s, as you may have noticed, “I bet you don’t even know the Fed doesn’t even actually own a printing press!” :-) As if the green paper in his wallet was printed at Kinko’s. Never take MMTers seriously, you’ll miss all the entertainment they provide!)

    Beyond that, other various explanations for why the Fed can’t change the money supply, cause inflation, etc:

    1) “Banks don’t loan out new reserves created by the Fed (for reasons discussed before) — hey, just look at all the excess unloaned reserves piling up in this recession due to lack of demand for loans and lack of credit-worthy borrowers!”

    MMT problem: Look at that line on the graph. “Excess reserves” through all history have always been *zero* as banks have always loaned them out totally, because doing so earns *some* interest on them while not earns none. What changed in 2008 was the Fed started paying interest on reserves to *prevent* banks from lending them, because it created such huge amounts to deal with the financial crisis they would’ve been highly inflationary. The change is just what the Fed wants — it directed that change.

    2) “The Fed may double the money supply, but if that doesn’t create any more credit-worthy borrowers how can it increase lending?”

    MMT problem: By supply-and-demand, if the Fed increases the quantity of loanable funds, then *even if* the level of demand for loans remains unchanged the price of them — the interest rate — will fall, so the quantity of loans demanded will rise. (MMTers have a tough time seeing the difference between level of demand and quantity demanded at that level.) Moreover, falling interest rates increase wealth (increasing the value of bonds, homes, streams of income, etc.) and this wealth effect increases spending and borrowing too. So if the Fed can reduce interest rates, it absolutely can increase lending.

    Thus this MMT argument reduces to: the Fed *can’t* reduce interest rates, either because it can’t increase the quantity of loanable funds (Why?) or the law of supply and demand doesn’t apply to them (Why????).

    3) “Bonds (and almost everything else) effectively *are* money, thus the Fed can’t change the quantity of money, it can only re-shuffle assets without changing their amount.”

    The sensible end of this, rooted in truth, is that today with near-0% interest on short-term T-bills there’s little difference between T-bills and currency. That’s why the Fed increases the money supply today by buying long-term bonds, mortage securities, etc, that still pay real interest. There’s a big difference between currency paying 0% and a bond paying 4% maturing 20 years from now. And of course in normal times there’s a big difference between bonds and T-bills.

    But MMTers say bonds *are* money because they are quickly *convertible* into money. But then so is everything else in a brokerage account: stocks, corporate bonds, junk bonds, penny stocks, options, puts, calls. I have a home equity line of credit — is my house money? I have an old car on blocks in my back yard. I could sell it for scrap tomorrow. Does that make it “money”?

    If so, then indeed the Fed can’t change the quanity of money! And can’t cause inflation either!

    BUT … that boils down an empirical question of factual reality. An no MMTer has ever been able to give an explanation to me for these obvious, important, recent real-world events:

    In 2008 Q3 and Q4, deflation hit at an 8% annual rate, not seen since the Great Depression. In 2008 Q4 the Fed said is was going to stop the deflation, reverse it to inflation, and rocketed up the money base to do so. In 2009 Q1 the price-level plunge reversed and deflation turned to inflation. All as per any standard monetary textbook.

    If the Fed can’t affect the money supply or inflation … how’d it do that? No MMTer has ever even tried to answer this question for me, no matter how many times I’ve asked.

    I’ve probably gone on too long about this, but MMTers have been here before, doubtless will be again, and are popping up all over the place — how to answer them?

    It helps to know what the thin, frayed, thread of logic *is* that holds their thinking together, instead of just taking them as totally incoherent kooks. Then one can better decide whether to simply ingore them … or have the fun of playing with them!

    When they come back here, maybe this will be a useful reference. But now on to more cogent matters.

  52. comment number 52 by: Brooks

    Thanks Jim.

    I guess it would be fun to observe a “debate” between MMTers and hard-core Ron Paul “kill the Fed” types who blame the Fed for everything.

  53. comment number 53 by: Jim Glass

    I guess it would be fun to observe a “debate” between MMTers and hard-core Ron Paul “kill the Fed” types who blame the Fed for everything.

    Ha! I stumbled into the Reddit.com economics forum a little while back and it is full of Ron Paul libertarians. I’ve *tried* to lure them and the MMTers into fisticuffs, but no luck so far.

    Back in sci.econ days the real crazed fanatics were the Georgists. If WWE were to get the MMTers, Paleo-Libertarians and Georgists into a steel cage death match … that’s be a show I’d pay good money to watch.

  54. comment number 54 by: Brooks

    Jim,

    Re: I’ve *tried* to lure them and the MMTers into fisticuffs

    When I hear of (or on rare occasion engage in) such attempts at instigation for one’s gratuitous amusement I’m reminded of the scene starting at 2:22 of this video http://www.youtube.com/watch?v=2X6dOhSuQ_8