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Better Than Our Leaders Ask Us To Be

December 29th, 2011 . by economistmom

In my latest column in the Christian Science Monitor, I complain about how our politicians often take extreme positions and claim they’re just representing the best interests of their constituents.  Like when Republicans (egged on by anti-tax lobbyists) claim that tax increases on the rich will kill the economy, or when Democrats (threatened by organizations like AARP) claim that Social Security recipients oppose Social Security reform.  I end with a favorite quote from Concord Coalition co-founder Paul Tsongas:

[T]he budget battles in Washington seem more to do with the fictional scripts inside politicians’ minds than the actual opinions of the voters. When the late Sen. Paul Tsongas helped start The Concord Coalition in 1992, he explained its grass-roots mission this way: “We are better than what we are being asked to be by our leaders.” It’s clear we still need to keep telling our leaders to live up to their duties – and our ideals.

41 Responses to “Better Than Our Leaders Ask Us To Be”

  1. comment number 1 by: Solomon Kleinsmith

    This is a rare example where I’m going to disagree with you.

    The politicians know full well this is what the general public wants, but they also know that since neither side actually listens to the general public, they can get away with ignoring the will of the people because pandering to the base will get them what they want, without risking being primaried by a more pure liberal or conservative.

    A pox on both parties - both are moving farther from the center each year, with the dems and occupy movement types pushing to help the dems catch up with the republican extremism over the next few years. Both are far beyond saving, and neither are worth the effort. We need to start a party for the rest of us… if we’re lucky, Americans Elect might morph into that.

    Solomon Kleinsmith
    Rise of the Center

  2. comment number 2 by: AMTbuff

    I disagree, Diane. The government’s promised benefits are completely inconsistent with its revenues. Major changes are required. First and foremost, Americans must make a fundamental decision about the role and size of government. THE VOTERS HAVE NOT MADE THIS DECISION. Until they do, any efforts to close the gap are wasted.

    Other than Ron Paul, no politician has asked American voters to accept the necessary massive cuts in spending required to balance the budget. No politician has asked the voters to accept tax increases of 50% or more across the board, and even more in the future, to pay for promised benefits. Politicians of both parties speak as if the budget can be balanced mostly at the expense of the other party’s voters. That is a lie. The pain will be universal. The real debate has not even begun.

    Politicians on the right are perfectly reasonable in resisting tax increases which they know will only postpone the day of reckoning and make it even more painful when it arrives. (This is a reasonable argument against borrowing money for economic stimulus spending, too.)

    Politicians on the left are reasonable in resisting benefit cuts that they see as moving the starting line for the big cuts that will have to be negotiated when the borrowing window closes. Of even greater importance to politicians on the left is protecting the credibility of government promises of benefits. This credibility is the currency they spend to get elected. These politicians will accept destruction of the dollar before they will accept destruction of their political currency.

    In fact, to politicians on both sides winning the upcoming debate on the size and scope of government is much more important than avoiding economic collapse. Recovering from the latter takes only a few years. The former is an essentially permanent result.

    Ask any ideologue on either side whether a second Great Depression worse than the first one would be an acceptable price to achieve an 80-year reign for his vision of government. The answer will be that the Depression is an “investment” in the country’s future well-being.

    I blame our leaders for one thing only: failure to start an honest public debate on whether or how to avoid economic catastrophe. Obama had the best chance, but he’s not a leader. Instead he added even more impossible promises. The 2012 election has not produced an honest debate on the fiscal gap. It’s likely that only the bond market will be able to force the debate to occur.

    Under these circumstances, it makes complete sense for politicians of both parties to resist movement toward the other party’s fiscal priorities.

  3. comment number 3 by: Vivian Darkbloom

    I wonder on just what the idea that voters are “better” than politicians on the issue of the debt problem is based? It seems based solely on anecdotal evidence that a few AARP members wrote the Concord Coalition e-mails saying they may not be opposed to changes to social security. Sadly, Diane, I don’t think your informal survey is very representative. The majority of the voting public does not even admit there is a debt problem, and if they do, deny there is any need to undergo any personal sacrifice to do something about it. Politicians know better than most what those voters want. If voters held those views, politicians would quickly pander to them. Very few politicians have been willing to lead on the issue and, when someone like Paul Ryan tries to be responsible, he get’s hammered from folks like Krugman. Do you seriously think that any candidate is going to run on a platform that entails serious short-term sacrifice because that is what the public wants?

    And, I’m much more pessimistic on this than AMTBuff. AMT rightly complains that neither side is willing to take the necessary steps to correct the problem. Worse than that, though, there is a growing chorus that there isn’t a problem at all. As we go into the presidential election year, the new progressive strategy is to deny there is a debt problem at all. That makes political sense–if they admitted there was a problem, they would have to take partial blame for it and would finally have to come up with credible ideas to alleviate it. That’s not a good political strategy, but it certainly helps explain why the general public is so ignorant on the subject.

    Like an alcoholic, the first step to recovery is admitting you’ve got a problem. But, the progressives are actually moving backwards on that. If you have not noticed, Paul Krugman has been taking up the argument in recent blog entries and op-ed columns that the debt problem really isn’t so bad–e.g., most of that debt is simply owed to our heirs (have we written the Chinese into our wills?) etc, etc . In other words, let’s just keep drinking. Of course, this is a complete reversal of the views he expressed when the other party was in office. Krugman is not an elected official; he’s the leader of a progressive movement to “re-educate” in advance of the election campaign a very large segment of those voters who EM claims are “better” than the politicians. If we don’t have a serious debt problem, there is no reason for anyone to come up with a remedy and, EM, there is no reason for the Concord Coalition to exist. I’m sure we are going to hear more of this as the election campaign heats up. But, will Economist Mom and the Concord Coalition stand up against that? No one on the left side of the political divide is willing to take Krugman on and call him out on this. Please, EM, explain to me why this is so? Is it because you believe that our debt isn’t a big problem, or is it because you are afraid of Paul Krugman?

  4. comment number 4 by: SteveinCH

    I likewise saw Dr. K’s latest on why we needn’t worry about debt because we’re going to pay interest to our kids, not leave them a burden. This of course presupposes some alternative universe where we’d pay debt off and Dr. K delightfully mixes public and private debt in the data he chooses to show.

    But Vivian is correct, nobody on the left calls him out. To the contrary, they delightfully link to him as the best form of appeal to authority argument.

  5. comment number 5 by: Arne

    What a willful misreading of what Krugman is saying. He does not say that debt is not important. He says thats unemployment is more important. He is very clear about why this is a temporary condition - where the temporary nature is extended by not dealing with it.

  6. comment number 6 by: Steveinch

    Arne,

    Why is unemployment more important? Why is renting jobs through deficit spending effective?

    Dr k’s premise is we shouldn’t worry about debt. He has lots of reasons for this. In this case, he tried to be factual and got tripped up by using the wrong data. An honest mistake or willful misrepresentation? You be the judge

  7. comment number 7 by: Vivian Darkbloom

    Arne,

    First, I guess I could legitimately ask whether the “temporary condition” you speak of and the fact that the “temporary nature is extended by not dealing with it” refers to unemployment or the national debt. But, OK, let’s assume that it is the former.

    I think you are quite mistaken on PK’s recent (and prior) missives on our debt problem. As far as mischaracterizing what people have written I did not write that PK is saying debt “is not important”, I wrote that the message he is now sending is that it is not a big problem. That is, of course, relative and PK is now, for political reasons I’m sure, understating the nature of that problem, unemployment or not. This is quite different from his line say, in 2003 when *debt* not just the deficits were a big, big problem. Please note the difference here between *deficits* and *debt*.

    PK’s most recent arguments are not that unemployment is a bigger problem than debt; his more recent meme is that people overstate the debt problem, period. We can certainly come up with other examples, but let’s take the most recent op-ed first:

    “But Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.”

    http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html

    Krugman’s most recent argument is that when the US government runs up deficits (regardless of the purpose) that debt is held by US persons. So, nothing happens to our national balance sheet! So, why worry? He also argues that, hey, by historical standards it is not that high (ignoring of course unfunded promises from the tally). He reminds me of that tooth-gapped freckle-faced kid on the cover of MAD magazine whose motto was, as I recall from my youth, “What, me worry,”?

    Of course, he admits that, well some, (he doesn’t dare say how much) is owed to foreigners, but that’s not a problem, either because our foreign investment is big, too. As SteveinCH astutely pointed out, he’s mixing private overseas assets with public debt! It’s not a problem because GM can sell Adam Opel, its German sub, and perhaps Intel can sell its foreign operations, and so forth to pay the tab. So, why worry?

    I’m would be willing to take your defense of PK much more seriously if you could point out to mewhere PK has set out *his* plan for reducing even our *long-term* debt. He’s obviously not willing to reduce government spending. Please, please, fill in those blanks for me (and for him). If I were to guess, I’d say his plan is that taxes on the rich might cover 15 percent and inflation (a tax on everyone) will cover the rest. Tell me, does that mean it’s not a “problem”?

  8. comment number 8 by: Vivian Darkbloom

    “But Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.”

    Here’s another (comical and tragic) irony about that quote: PK seems to share Econ Mom’s view about Washington being confused, but for an entirely opposite reason. PK suggests that *Washington* is *overstating* the seriousness of the debt problem (nota bene, Arne, not the current deficit problem) and therefore exagerates what needs to be done about it—he’s trying to convince the public that Washington is wrong. EconMom suggests that the public understands the seriousness of the problem (and are willing therefore to do something about it) but that Washington *doesn’t* and is not willing to do *enough*.

  9. comment number 9 by: B Davis

    Solomon Kleinsmith wrote:

    A pox on both parties - both are moving farther from the center each year, with the dems and occupy movement types pushing to help the dems catch up with the republican extremism over the next few years. Both are far beyond saving, and neither are worth the effort. We need to start a party for the rest of us… if we’re lucky, Americans Elect might morph into that.

    I agree that it would help if we had a party for the rest of us. Unfortunately, the current political system is largely a duopoly, rigged against third parties. We need a system like Instant Runoff Voting to allow a qualified third party to steadily build support, something that is not currently possible. I blog about and provide links to sites that explain Instant Runoff Voting at http://instantrunoffvoting.blogspot.com/.

  10. comment number 10 by: Arne

    “for an entirely opposite reason”

    Not at all. It is an orthogonal reason.

    Diane’s overarching message is that we need to pay for what we want our government to do. This column indicates that voters are more willing than politicians to do so.

    PK’s overarching message is that we need to do something about unemployment. Monday’s column and the blog posts that preceeded it indicate that the current level of debt should not prevent us from doing something about unemployment (because when we are ready to pay for it it will not be overwhelming).

    You are right that “He’s obviously not willing to reduce government spending.” He believes hat the solution to healthcare spending is single payer. As a solution, it requires that healthcare be a smaller portion of the total economy, but a larger portion of government spending.

  11. comment number 11 by: Arne

    “I could legitimately ask …”
    Not really. That would require more willful misreading”

    “his more recent meme is that people overstate the debt problem, period.”
    No, people are saying that we can’t afford to do something about unemployment because we already have to much debt. PK is reacting by saying that they are wrong.

    “Please note the difference here between *deficits* and *debt*.”
    Again you have it backwards. In 2003 PK was reacting to deficits, not debt. Bush was taking action to increase the deficit. Deficit spending when the economy is not in a slump is not Keynesian.

  12. comment number 12 by: Arne

    “Why is renting jobs through deficit spending effective?”

    I think PK glosses over the need to pay later for stimulus now, but stimulus can be effective.

    If the discount rate is the same as the rate paid to borrow, the NPV on shifting costs over time is zero. Not negative, zero. With interest rates at historical lows the discount rate exceeds the interest rate, so it should be easy to find projects with positive NPVs.

    With excess capacity in the economy, “renting jobs” is a sound plan.

  13. comment number 13 by: Patrick R. Sullivan

    Arne, the unemployment problem is one of surplus (too many workers) or shortage (too few jobs available). The laws of supply and demand tell us that’s resolved by price (not by government spending).

    The minimum wage in Washington state is now over $9 per hour. Do you suppose Nobel laureate Krugman sees that as contributing to the problem of high unemployment?

    Or, paying people not to take jobs for 99 weeks? Or, artificially high wages on construction projects subject to Davis-Bacon?

    Maybe I missed all his columns about those.

  14. comment number 14 by: Arne

    Perhaps misinterpretation is part of blogging in an echo chamber world. Lefties understand lefties. Mark Thoma’s one sentence intro to Krugman’s column: “We should be doing more to help the unemployed”

  15. comment number 15 by: Arne

    Patrick,

    Businesses do not hire people to build things that cannot be sold.

  16. comment number 16 by: Vivian Darkbloom

    “Perhaps misinterpretation is part of blogging in an echo chamber world. Lefties understand lefties. Mark Thoma’s one sentence intro to Krugman’s column: “We should be doing more to help the unemployed””

    No, you should have written that “lefites want to believe lefties” and “righties want to believe righties”. This is a classic example.

    What Krugman has argued in his last op-ed and blog posts related to that has nothing to do with the need for temporary deficit spending to alleviate unemployment. That is a complete fabrication of your’s and Marc Thoma’s. That is what you *want* to believe, perhaps to get Krugman out of a very dubious argument.

    In Krugman’s last op-ed (see the quote above which is not taken out of context) he argues that the debt problem is overstated, *full stop*. This is completely unrelated to whether deficit spending (and therefore additionald debt) is a good policy choice. His argument rests primarily on the idea that our public debt is offset by assets owned by US residents (and their heirs). This, of course, is factually incorrect because almost half of net US public debt is now owned by foreigners and very soon that percentage will be more than half. That aside, it makes *no* difference to his argument whether that debt was incurred to finance a war against aliens, to pay for extended unemployment benefits, or to pay interest on the debt, etc , nor did Krugman make any such claim that it is. Debt is debt. US persons own that debt, or they don’t. It matters not one iota what that debt was incurred for because it does not alter those basic facts.

  17. comment number 17 by: SteveinCH

    Arne,

    Your statement about NPV would be true if we rented jobs at the price of the jobs. Given that in the last stimulus we rented jobs at somewhere between 3 and 10 times the cost of a job, the NPV of renting jobs through the government is starkly negative.

  18. comment number 18 by: Arne

    “In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

    So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.”
    Krugman’s first and lst paragraphs.

    I do not see how you can say that what PK is saying is not in the context of unemployment (other than from the idea I put forward and you, ironically, suggest that I reword).

  19. comment number 19 by: Arne

    Steve,

    The average job in our economy supports over $100K of GDP, very close to the same as the cost of renting jobs in the last stimulus. Which is not to say that politics did not degrade the stimulus compared to what it could have been.

  20. comment number 20 by: SteveinCH

    Arne, there’s no way the stimulus jobs cost $100K per. Let’s take the nicest possible estimate…$860 billion in cost, 2.5 million jobs rented for 2 years, that’s about $170K per job per year.

    Please show me the calculus that comes up with that.

    As to your point on the conversation in Washington, it’s nothing more than that, it’s a conversation. We’ve had stimulus (aka deficit spending) of more than $1 trillion per year for the last 3 years. Where is this deficit reduction you reference?

    No what PK wants is deficit expansion and he’s unhappy he can’t get it. The rest is rhetoric and using data to misinform.

  21. comment number 21 by: SteveinCH

    Arne, one more thing…a more realistic estimate of stimulus is closer to $1 trillion per year (average deficit spending post 2008 versus pre). 2 million jobs for $1 trillion works out to $500K per job year. A really bad deal imo.

    To argue that the ideally planned stimulus would do better is irrelevant because that stimulus will never emerge from Washington DC

  22. comment number 22 by: Arne

    Using the Washington Posts annual figures of $236B, http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html, and your range of 2 to 2.5 million jobs gives $94K to $120K per job.

    It does not take an ideally planned stimulus to get a positive NPV.

  23. comment number 23 by: Vivian Darkbloom

    Arne,

    And the first and last paragraphs are completely irrelevant to his main argument that the debt problem is not as big as people say it is. He can tack whatever he wants onto the first and last paragraphs but that does not mean that it is relevant to his argument. So, again, please tell me what on earth the fact that our debt is supposedly inherited by our heirs so it is not that big a problem has to do with unemployment.

  24. comment number 24 by: Vivian Darkbloom

    Arne,

    If PK (and you) wanted to make an honest argument about debt and unemployment, it would go like this:

    “We have a big debt problem and it’s getting much worse. I’ve warned you about that before when the debt was much smaller, both in nominal terms and in terms of a percentage of our GDP. But, we also have a big unemployment problem. People are suffering. What we propose, primarily for humanitarian reasons, is to spend a lot more money now to alleviate the latter problem. Sure, that will make the debt much bigger, not only in the short-term, but also in the long-term. It will increase the cost of servicing that debt in the future and this will place a larger burden on the economy and workers in the future, as well as the next generation. However, alleviating current unemployment is more important than increasing the deb and this is a price we should payt”.

    That is *not* the argument he made, it was a reference. He tacked on two irrelevant references to unemployment at the beginning and end of the op-ed to sandwich an argument in between that had nothing to do with it.

    The only way your rationale makes any sense at all is to make an argument PK did *not* make because he cannot make it. The argument he cannot make is that deficit spending pays for itself. He cannot make this anymore than he could argule that defict-financed tax cuts do,. Neither argument can be made particularly when those deficits are piled on top of net public debt of 70 percent of GDP, gross public debt of 100 percent of GDP and total debt several times that.

    If you want to make that argument, come back here and make it.

  25. comment number 25 by: Vivian Darkbloom

    Another point, Arne. Neither you, nor the CBO, nor the Washington Post are making “net present value” calculations. You can easily make a misleading NPV calculation by claiming that the “NPV” return on stimulus is positive because we are going out 1 year or 5 years or some other arbitrary cut off date that suits your needs and pretending the debt has been fully serviced and repaid. People who want to argue tax cuts pay for themselves on an NPV basis use the same trick. A net present value calculation means that you run the cost of the investment out until such time as the cost of that investment has been fully amortized *and paid* for. So, please re-run your NPV calculation with the revised assumption that the debt has been fully serviced, interest and principal. Then, come back and tell me the NPV is positive.

  26. comment number 26 by: SteveinCH

    Arne,

    Stimulus as defined by Keynes is increase in deficit spending. $238 billion is nowhere near the increase in our deficit spending from the pre-2008 baseline. Even the thing labeled stimulus was 3 times the size of the number you cited.

    No offense, but you’re making a PK-like argument, twisting numbers to make a point as opposed to letting the analysis lead you to your conclusions.

  27. comment number 27 by: Vivian Darkbloom

    Bruce Bartlett had a very good column in the Economix blog yesterday about the “True Federal Debt” (I may need to keep a more open mind about him). His read on the debt problem is basically that it is *understated*, not *overstated*.

    http://economix.blogs.nytimes.com/2012/01/03/the-true-federal-debt/

    On several occasions here I’ve advocated that the federal government officially keep its books on the accrual basis, just like business is required to do. Bartlett pointed out that the Treasury Department makes an annual Financial Report that does just that (or at least tries to). He also correctly points out that this document gets no attention in the media, including the NYT for which he now writes (and to my knowledge has never been mentioned here or by the Concord Coalition, although I may be wrong). I’ve got some technical issues with Bartlett’s summary, but his contribution is a very valuable one for it raises the publics’ and our political “leaders” understanding as to what the “real” debt is. The link to the Treasury Financial Statement is here:

    http://www.fms.treas.gov/fr/index.html

    Arne, Barlett also mentions, in passing, and very likely as a conscious reference to Krugman, that some of that public debt is inherited by US residents. He also fails to say that currently more than $5 trillion of net public debt is owned by foreigners but, unlike Krugman, Bartlett gives a much more comprehensive and balanced picture of the debt problem and one which, in my view, is much closer to reality than the one Krugman is currently portraying. He does not, for example, try to argue that because of the “inheritance factor”, (and omitting all other factors), our debt is not understood by Washington and that problem is therefore not as big as they’ve been portraying it to be.

  28. comment number 28 by: Arne

    “Stimulus as defined by Keynes is increase in deficit spending”
    No. It is increase in spending. Increase in deficit caused by loss of revenue is not stimulus.

    The jobs saved numbers used are estimates associated with the program, so the dollars used need to be for the program as well. As you can see from the chart accompanying the Washington Post, the spending is highly variable over time, so it is reasonable to question whether the dollars and jobs can be compared by division, but it is more accurate than your method.

  29. comment number 29 by: SteveinCH

    Arne,

    You are quite wrong. There is no difference between deficits caused by increases in spending or those caused by decreases in taxes. It’s quite fundamental to Keynesian theory and, if you like, I’m happy to point you to academic papers that make exactly this point.

    Stimulus is basically excess spending over what the economy delivers. If I have an economy in balance and I increase spending but not taxes, spending (demand) is increased. If I decrease taxes but leave spending unchanged, the same thing happens because more money is left in the private economy and government spending stays constant.

    The Washington Post chart is useless because it applies the same fallacy you are applying that only if we call it stimulus, is it stimulus.

    But, for the sake of argument, let’s assume that only increased spending is “stimulus”. Spending in 2008 according to the CBO historical tables was 20.7 percent of GDP. In 2009, it was 25% and in 2010, it was 23.8% of GDP. That’s an increase of 4.3% of GDP in 2009 and 2.9% of GDP in 2010. Using $15 trillion as a round number for GDP, it’s more than $1 trillion over 2 years.

    Both you and the Post are using a fallacious definition of stimulus to make the argument rather than the classical Keynesian definition.

  30. comment number 30 by: Jim Glass

    [Bartlett's] read on the debt problem is basically that it is *understated*, not *overstated*.

    Oh, for sure — this is a major theme of Rogoff/Reinhart “This Time is Different” survey. When a crunch comes, the national debt always turns out to be a heck of a lot larger than it was officially.

    (I may need to keep a more open mind about him).

    Bartlett was great before he became so personally embittered in that episode. I was a big fan of his, once upon a time.

    I’ve advocated that the federal government officially keep its books on the accrual basis, just like business is required to do. Bartlett pointed out that the Treasury Department makes an annual Financial Report that does just that (or at least tries to). He also correctly points out that this document gets no attention in the media, including the NYT for which he now writes … The link to the Treasury Financial Statement is here: http://www.fms.treas.gov/fr/index.html

    Back in my blogging days I went over that every year. The comments were generally centered around incredulous. The voters do not understand … do not come anywhere close to having the faintest glimpse of comprehending (and that includes the right-wing govt/tax cutters). So there is nothing to stop Congress from running its current course.

    The worlds central bankers at one of their annual meetings a few years ago said that putting governments on accrual accounting — the same rules the private sector uses — would be the single most effective step towards promoting responsible govt. Of course, that went nowhere.

    More recently, a couple years ago, the GASB recommended accruing entitlement laibilities be counted on the govt’s books. It went to the appropriate policy committee where all the academic and private sector members voted for it, but the Congressional and Executive Branch representatives vetoed it.

    Their rationale was: Accruing govt liabilities aren’t *really* accruing because the govt can always change the law to eliminate them, so they aren’t truly accrued. My reaction to them is (1) *after* you change the the law to eliminate them you can take them off the books, but as long as the current law says they are accruing they are; and (2) go to an AARP convention and tell them “our liabilities to you really aren’t liabilities because we can always not pay you.” Ha! ;-) But we all know what this is about.

    The open-ended unfunded liability is now north of $100 trillion at present value, 7 x GDP. Try this back-of-the-envelope exercise: Amortize that down to say 0.5 of GDP over 40 years. How much do taxes have to go up and/or promised spending go down? Try a 50-50 split, half each.

    And back to Rogoff/Reinhart and how the *real* debt is still much larger yet. The govt always implicitly backs/guarantees major amounts off its books. We got a taste of this in the US the last few years. Fannie and Freddie weren’t issuing govt bonds, and yet it turns out they were, costing a couple hundred billion. Who knew that General Motors and the UAW were guaranteed against bankruptcy by the US taxpayer? R&R report that when a *real* crisis hits the govt’s liabilities explode.

    We’re a long way from that but heading in that direction, and with the little sampler of the phenonemon we’ve experienced we should be considering it and taking steps accordingly. Which we aren’t. Instead, the FHA is *still* promoting sub-prime loans!

  31. comment number 31 by: Jim Glass

    “Please note the difference here between *deficits* and *debt*.”

    Again you have it backwards. In 2003 PK was reacting to deficits, not debt.

    Nope. Krugman said continuting deficit spending would lead to *debt* costs which combined with the *unsustainable cost of entitlements* would lead to a fiscal crisis *in the future* — by the end of his mortgage’s term.

    Thus, he smartly paid the cost to switch from a variable rate mortgage to a fixed rate one — to save himself from the inevitable rise in interest costs later, in the future. Quoting:

    But what’s really scary, what makes a fixed-rate mortgage seem like such a good idea, is the looming threat to the federal government’s solvency.

    That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 , make that 3, O.K., maybe 4 percent of G.D.P.

    But that misses the point … because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

    … the conclusion is inescapable. Without the Bush tax cuts, it would have been difficult to cope with the fiscal implications of an aging population. With those tax cuts, the task is simply impossible. The accident, the fiscal train wreck, is already under way.

    How will the train wreck play itself out? … my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

    … investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.

    Observations:

    1) “Inflate away debt” is what’s done when the problem is debt. There was no “looming threat” to the govt’s solvency in 2003, that was coming in the future after the debt piled up. Insolvency is caused by debt.

    2) Krugman did a 180 on all this immediately upon the Demorcats becoming the ones benefitting by running up the deficits and debt. Not only are immensely larger deficits now no danger for the future, but the “simply impossible” task of “coping with the fiscal implications of an aging population”, suddenly are … no sweat. The *future* is no concern at all.

    Just, you know, contain entitlement costs without cutting anything, while keeping everyone happy. They’ve already created a committee to do it for Medicare, later, on the watch of other politicians, who surely won’t object. So let’s count those budget savings now. Hey, we have! See, what was “simply impossible” about that?

    3) He really made a mistake with that mortgage! He paid a fee to lock in a higher fixed rate and missed the drop to the lowest rates in history.

    Beware of all who claim to forecast the future.

  32. comment number 32 by: Jim Glass

    Vivian, regarding your “honest argument” Krugman could make, you are exactly right.

    As far as the stimulus paying for itself, the Obama Administration itself puts the cost of creating one job for one year at $116,000 of stimulus. BLS puts the average job as paying $42,000. Judge the efficiency of that for yourself. (The degree to which that pays for itself is the amount of tax collected on the $42,000 of wages, assuming the average stimulus-created job pays that much.)

    If the govt collects 20% of economic growth in taxes (optimistically), then stimulus spending would need a multiplier of 5x to pay for itself. There is no estimate anywhere of it having a multiplier anywhere near that high.

    CBO itself says the effect of the debt added by the stimulus will reduce the long-term growth rate as the cost of the short-term boost to it. This is the honest argument to be made: “To make things better today we should make them worse in the long run, it’s worth it”.

    But that’s not the argument many make. Well, it would be a lot more persuasive if the public debt were 35% of GDP and the long-term fiscal situation solid, than it is with the debt at 100% of GDP and trillion-dollar deficits projected all the way to national bankruptcy in 15 or 20 years. Making things worse in the long run for a short-term benefit from *this* position is not so persuasive, for very good reason.

    This is all assuming fiscal stimulus would be the way to go at all, even if the fiscal situation was rosy. A few years ago Krugman wrote that “the future unemployment rate will be what the Fed wants it to be”. He was on the mark with that. It is still true right now.

    Bernanke keeps saying: “We have plenty of ammunition left and we can do more when we want to. Unemployment is above our target. Inflation is below our target. But we don’t want to do any more.”

    Fed stimulus doesn’t add anything to the debt, is much faster than spending stimulus because it doesn’t have to run through politics and Congress, and is much less distorted (and corrupt) for the same reason. It is all benefit, no long-term cost. It is superior in every way. Just as every textbook (including Krugman’s!) has said since the 1980s.

    Want stimulus? Tell the Fed to do more! That’s the answer.

  33. comment number 33 by: Arne

    “I’m happy to point you to academic papers”

    Please.

  34. comment number 34 by: Vivian Darkbloom

    Jim,

    Thanks for saying many things more clearly than I did.

    I should not be so ungracious as to quibble about a couple of points, but I will.

    First, and this is not so much a quibble, as an elaboration:

    “If the govt collects 20% of economic growth in taxes (optimistically), then stimulus spending would need a multiplier of 5x to pay for itself. There is no estimate anywhere of it having a multiplier anywhere near that high.”

    I thought about expressing it that way, but ruled against it. I think this manner of expressing the issue is essentially correct, but convenient shorthand.

    If the government finances the stimulus spending through (current) tax revenue, then the quote makes absolute sense and is much easier to understand because the calculation is simple. And, in a way, it clearly points out the fallacy of stimulus spending (or defict financed tax cuts): if it is currently financed, it is not really stimulative, but re-distributive. If I collect, on average, 20 cents per dollar of GDP, it requires that money generate 5x more in GDP for the tax revenues expended to just break even in terms of tax revenues coming back. But, the stimulus here is financed by debt, not current taxes. It will therefore be repaid (or not) through through *future* revenues. Thus, there is a need for an NPV calculation (i.e. an honest one).

    The problem as it see it, is when we speak of deficit stimulus spending having a multiplier of 1.5, or whatever, this does not have anything to do with whether we’ve made a good investment. But, I think that is how most folks (particularly the general public) view it. They think, “gee, what a great deal: we borrow $1 put it into the economy and GDP (not tax revenues!) increase by 1.5. It’s like a company CFO arguing “I’ve got a great deal. If we borrow $100 and invest it our *gross income* will increase by $150 ignoring the fact that *net income* will decrease by $50. That’s not any way to run a business (or a country).

    There is no way to get around this but to do an NPV calculation. The problem is that that calculation requires a longer-term and more sophisticated calculation than current policy gives it. If you look, for example, at any estimate of the “fiscal multiplier” arising from deficit-financed stimulus, what you see is a few years of positive GDP effect and that last year shown before the calculation is cut off is minus 0.2 or something like that. This trend is never carried past that stage, and so the official estimates *never* quantify the long-term costs. Those costs are buried in the narrative caveats that no one pays attention to. It is difficult to do an NPV calculation from infinity, or until the “hard landing” occurs, because no on knows when, exactly, that will happen.

    In essence, this is really just the Ponzi phenomenon. I’m holding back from calling it a “scheme” so that someone does not come back and say, well, it’s not a “scheme” because a “scheme” requires general, if not specific intent to defraud. But, aside from scienter, the *effect* is the same. Short-term rewards are highlighted and long-term consequences ignored.

    Second,

    “Fed stimulus doesn’t add anything to the debt, is much faster than spending stimulus because it doesn’t have to run through politics and Congress, and is much less distorted (and corrupt) for the same reason. It is all benefit, no long-term cost. It is superior in every way. Just as every textbook (including Krugman’s!) has said since the 1980s.

    Want stimulus? Tell the Fed to do more! That’s the answer.”

    I’m an agnostic on this, largely because I am ill-informed and, given the state of current knowledge as I understand it, I’m not comfortable anyone really is.

    But, to demonstrate my ignorance, let me say that it appears the one effect of monetary stimulus is that any stimulus effect is “paid for” by taxing savers through negative real interest rates and redistributing that tax to debtors and perhaps through future inflation (also a tax) as well. I’m painfully aware of this by looking at recent money market account statements. I would be concerned about the long-term incentive effects of that sort of policy and it strikes me that the NPV calculation as to whether this tool is worthwhile in the long run is even more complicated and convulated than that for fiscal policy. I do follow Sumners blog and am trying to learn more about the subject, but so far I’m not willing to take a leap of faith from my current agnosticism.

  35. comment number 35 by: SteveinCH

    Here you go Arne,

    http://www.oecd.org/dataoecd/3/62/42421337.pdf

    There are more if you need to see them.

  36. comment number 36 by: Arne

    Steve,

    “Keynes” does not exist within the 50+ page document you linked. Perhaps you could be more specific with your reference to “stimulus as defined by Keynes”.

  37. comment number 37 by: SteveinCH

    Nice wimp out Arne. Thanks.

  38. comment number 38 by: Arne

    Steve,

    I was serious. How about quoting a section? I do not see that the paper supports you, but perhaps I skimmed it too fast.

  39. comment number 39 by: SteveinCH

    The paper supports the notion that both reductions in tax receipts and increases in spending count as “stimulus.” You can see this from any figure in the paper where they calculate stimulus spending by country and part of the spending is decreases in receipts.

  40. comment number 40 by: Arne

    You can also see that they calculate multipliers for different forms of stimulus whereby the statement “There is no difference between deficits caused by increases in spending or those caused by decreases in taxes” is clearly contradicted.

  41. comment number 41 by: SteveinCH

    LOL. Arne, I didn’t say anything about difference in effect. I said both should properly be considered stimulus. Remember, we were arguing about the size of stimulus. I took the net effect in jobs as articulated by the administration.