Archive for July, 2010

The other side of the question

Friday, July 30th, 2010

I previously showed that deficits are really far more a political problem than they are or ever were an economic problem. Certainly, they’re not something to try and achieve. In the long run, it’s better for the economy if income and payments roughly match, but deficits are not and never were the problem that conservatives have made them out to be.

How about the other side of the coin? What happens when governments fail to spend enough? Arizona  is the model Grover Norquist-inspired state, where those in charge of the government strive mightily to lower the tax burden on their citizens. How’s that workin’ out for them? Not well, actually. Not well at all.

Relative to the size of the Arizona economy, state government general fund revenue has fallen significantly since 1995, likely reaching a historical low in the near term. Expenditures also have declined relative to the size of the economy. Spending increases beyond the needs of a growing state are not a cause of the current deficit or the long-term structural deficit.

Okay, so Arizona must have made spending cuts to match their smaller resource base, right? Wel-l-l-…

These revenue cuts were not matched by spending cuts of a commensurate size because of the increasing population-driven demands for public services and infrastructure, such as education and public safety.

Oops!

“Could we cut our way out [of our budget crisis] mathematically? Anything is possible, but for practical purposes it can’t be done, unless you want to start releasing prisoners, shutting down universities, and eliminating extracurricular activities at schools. We’ve already has a $2 billion haircut over the past two years. Try another $2 billion and see what the state looks like.”

Even worse:

Hardest hit was the Department of Water Resources, whose budget and workforce was slashed by more than half. The statewide planning division, responsible for helping secure future water supplies, was reduced to just two people and funding was eliminated for remote sensors that can alert communities to flood threats.

This is what they call going beyond cutting the fat, this is cutting into the muscle, heck it’s cutting into the bone of the state. This is cutting a dire necessity that could very easily end up costing lives. And…

First, unlike much of the private sector, demand does not decline for most public-sector services during a recession. In some government programs, demand rises.

This is an extremely important point. The idea of “everyone tighten your belts” or “do more with less” is just wildly impractical. During a recession, it’s time for deficit spending, not for cutting expenditures. The Grover Norquist idea of shrinking government down smaller and smaller is a pleasant fantasy for those who think about government in entirely abstract terms. For those of us who live in the real world, the idea is completely insane.

Update: Further commentary on the cat food commission. Pete Peterson is such a charming fellow [/snark]

Progressive views on the economy

Wednesday, July 21st, 2010

Good piece from Salon shows how progressives think about the economy and goes into how conservatives think about it and the distinctions.

A few years ago, I think it was Ms. Magazine that said there is the private sector, there is the government and there are non-profits. Which one do you use for which task? Well, it depends. Some sectors are better at performing certain tasks than others are. Michael Lind adds in utilities. He defines a utility as something that operates more or less as a private enterprise does, but it’s regulated so that the public doesn’t have to deal with constant votality. Electric power is regulated because consumers and businesses simply don’t have the time and the energy to deal with constant price fluctuations and to bargain and haggle for the best electric rate of the day.  Sure, society as a whole might pay a bit less for electric power per year, but we have better uses for our time and energy than to squander it on such trivial savings.

He also brings up the same point about health care that I’ve heard many progressives bring up as well. A patient who is suffering from an immediate medical problem such as a heart attack is simply in no shape to go online and research which hospitals offer the best heart attack care. It’s simply not practical to leave that up to the free market. Regular check-ups are perhaps an exception, but regular check-ups are a positive social good that are well worth the extra expense of providing, so that doesn’t really fall under what’s best handled by free enterprise either.

James K. Galbraith & the cat food commission

Tuesday, July 20th, 2010

Statement to the Commission on Deficit Reduction

James K. Galbraith, Lloyd M. Bentsen, jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin
June 30, 2010

One of Galbraith’s early statements is:

Your proceedings are clouded by illegitimacy.

And it just gets better from there!  Galbraith delivers a very eloquent, learned and judicious lecture upon the illegitimacy of the “cat food commission” (They want to see your grandparents living on cat food). Worth reading in its’ entirety.

Why we’re in the state we’re in

Saturday, July 17th, 2010

New Yorker piece on Larry Summers tells us that the initial figure for the stimulus bill was $1.2 trillion. As we know, the Obama Administration “negotiated with itself“:

And then [White House Chief of Staff] Rahm Emanuel said to me, “Geez, do you really think we can afford to come in with a package that big, isn’t it going to scare people?” I said, “Rahm, you will need that shock value so that people understand just how serious this problem is.” They wanted to hold it to less than $1 trillion. Then [Pennsylvania Senator Arlen] Specter and the two crown princesses from Maine [Sens. Olympia Snowe and Susan Collins] took it down to less than $800 billion.

The final figure was $778 billion. As Atrios says:

 The stimulus ‘debate’ was so absurd, with dirty fucking hippies saying what needed to happen and Very Serious People objecting not because of any actual reason, but on basic aesthetic grounds. “OOoh, that just sounds so big, can’t we make it smaller?”

What are the political consequences of the failure to get a big enough stimulus package through?  The Democratic National Committee is assuring Democrats that this November won’t be as bad as the 1994 elections. Not exactly a confidence-builder and not something that was inevitable. It’s tempting to blame Rahm Emanuel, of course, but someone hired him and someone keeps him on the job. The buck stops with the President.

Update: Vice President Joe Biden argues that the stimulus package was as big as it realistically could have been and that the Administration simply couldn’t have gotten any more. Not so sure about that. President Obama might have been able to exert some pressure by calling out Republican obstructionists and by making it clear to the American people just who was standing in the way of the economic health of America. Of course, that would have put the kibosh on any pretense of bipartisanship, as though that would have been any sort of loss!

Further update: Booman sez “Aw, quit yer bitchin’! The Obama team did the best they could under very por circumstances.” Booman makes some good points, but I’m still not convinced that’s all they could have done. 

Hmmm…

Thursday, July 8th, 2010

I generally don’t have much use for the WaPo columnist David Broder, but I like these two paragraphs:

The terrible irony in all this? More and more people are seeing that what this agonizing situation requires is a limited and temporary measure to pump more life into the economy and create jobs, along with a serious commitment to impose real spending discipline and hold down deficits in the long term — exactly what a five-year budget resolution could provide.

Gregg and Conrad agree that such a resolution could “unleash huge energy back into the economy,” because corporations are hoarding $1.8 trillion in their treasuries and consumers are sitting on billions more.

 I would have worded this differently. I would have said “We need to get our economy out of the ditch NOW and worry about deficits later.” But this is a very good start and I especially appreciate Broder’s pointing out the $1.8 trillion sitting around in money markets and not being put to productive use. That big bundle of money sitting around gathering dust is important because it means that givig money to already-wealthy people (i.e., “Return the Money to the People!”) will do absolutely nothing but build up those idle accounts still further.

David Brooks does liberal economists a favor

Wednesday, July 7th, 2010

Conservative NY Times columnist David Brooks does a favor for what he terms “Demand Side theorists” by setting out a clear argument (Personally, I rather like his term of “Demand Side theorists” because progressive arguments against conservative drug and immigration policies have long focused on the demand side of the equation). Someone recently got me all flummoxed by making the argument that John M. Keynes came out against high wages as a stimulus. That made no sense to me at all, but as I had no idea where that statement came from or was based on, I couldn’t really argue against it. So what Brooks did was to provide an antidote to the following problem:

Not long ago, Brad DeLong was wondering how is it we have lost the debate between stimulus to deal with a stalled economy and 15 million unemployed versus deficit hysteria and advocates of inflicting further pain on the jobless and budget strangled states.

The first screaming, blaring, blatant problem with Brooks’ column is:

But all schools of economic thought have taken their lumps over the past few years.

Incorrect. There were indeed many economists who failed to see an $8 trillion housing bubble, but the Demand Side theorists (Paul Krugman, Dean Baker, the afore-mentioned Brad DeLong and many others) got it entirely right and have absolutely nothing to apologize for or to be humble about.

The Demand Siders don’t have a good explanation for the past two years.

Dean Baker responds:

Hmmm, is that right? Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand.

Brooks again:

But it is certainly true that the fiscal spigots have been wide open. The U.S. and most other countries have run up huge, historic deficits. And while this has helped save public-sector jobs, we certainly haven’t seen much private-sector job growth.

Essentially, Baker’s argument is that the stimulus has worked precisely as the demand side theorists predicted it would, there just hasn’t been enough of it. Brooks then argues that the current deficit is historically burdensome and unsustainable. Erm, not so much (Baker again):

Even after a decade of accumulating debt at a rapid pace, the U.S. would still face a lower debt burden than countries like Italy do today. Italy is currently able to borrow in financial markets at very low interest rates. Projections for 2020 show that the debt burden of the United States would still be less than half of the current debt burden of Japan, which still pays less than 2.0 percent interest on its long-term debt.

Brooks then argues:

Higher deficits will make them [entrepreneurs in Racine and Yakima] more insecure and more risk-averse, not less.

This is an old argument and it’s never been a very good one. Problem is, the deficit has always been a very highly fuzzy, abstract argument. President Reagan constantly talked about the bad, evil, awful, no good deficit, but he had absolutely zero qualms about pushing it up through the roof when he thought that a gold-plated hunk of useless junk like SDI/Missile Defense needed to be built. No conservatives or Republicans objected, just as there were no discernible objections to G.W. Bush’s extravagant spending on things like Medicare Part D and massive tax cuts for the wealthy because deficits are just too vague and abstract a problem for anyone to really grasp. A Purdue University study of budgetary deficits and Turkey’s economic situation shows that the connection is actually quite weak, suggesting that deficits are a far greater political problem than they ever were an economic one.

Finally Brooks asks:

Are you sure your theorists are right and theirs are wrong?

To which Krugman responds:

Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

Krugman has still further thoughts on economic stimulus involving the enormous amounts of cash that businesses are saving in money markets ($1.84 trillion), but not investing in ventures that would create employment. As someone commented: “Poor David is not just confused, he’s way out of his weight class.”

Very, very bad news

Friday, July 2nd, 2010

Speaker Pelosi has produced a budget resolution that endorses a cut of $7 billion from the Obama Administration’s plans, without specifying any way of doing that. Far worse is that they’ve delegated the job of detailing the cuts to the catfood commission. The plan was approved by all of the Republican Congresspeople and 38 Democrats. Their major motivation?

The enforcement resolution is being used instead of a full-fledged budget resolution because rank-and-file Democrats did not want to vote for a budget resolution that would show large deficits, particularly in an election year marked by worries about the nation’s fiscal solvency. [emphasis added]

And cowardice wins out again, meaning with the latest employment figures and the refusal of Congress to spend appropriately, we seem to be on the way to a double-dip recession.