Shape-Shifting Deficit Hawks

By James Kwak

We appear to be a week way from an election that, while really about persistent high unemployment, on the talking-point level is largely about deficits, with the Republicans continuing their usual posturing about cutting deficits without raising taxes or explaining what spending programs they are going to cut. Robert Pollin has contributed an analysis of the deficit hawks’ argument that is valuable for pointing out that there actually four deficit hawk arguments. In his words:

“1. The traditional view. Large fiscal deficits will cause high interest rates, large government debts, and inflation.

“2. Declining business confidence is the real danger. Even if the current deficits have not caused high interest rates and inflation, they are eroding business confidence. When business confidence is low, the economy is highly vulnerable to small changes in conditions, what some economists call ‘non-linearities.’

“3. Fiscal stimulus policies never work. New Classical economists, Robert Barro most notably, have long argued that the multiplier for fiscal stimulus policies is zero or thereabouts.

“4. A long-term fiscal train-wreck is coming. Regardless of short-term considerations, we are courting disaster in the long-run with structural deficits that the recession has only worsened.

Pollin also has the grace to point out that, for the deficit hawks to be correct, only one of these arguments has to be correct.

Of course, they’re not, at least not the first three. To the first argument, Pollin largely follows the Krugman line, pointing out that interest rates and inflation remain stubbornly low, with the risk of deflation outweighing the risk of inflation. With excess capacity and high unemployment, it’s hard to see what private sector investment there is for the government to crowd out.

The second argument is the one popularized by Carmen and Vincent Reinhart and Ken Rogoff. Its appeal is that it bypasses the Krugman argument (interest rates are low, not high) by hypothesizing that at some point, investor sentiment tips and interest rates suddenly skyrocket. Now, this is certainly true at some point, and given the limited data (there just aren’t that many countries in the history of the world with our economic influence and control over the world’s reserve currency), there is no trustworthy empirical answer to the question of when confidence crumbles away. But I’m with Pollin on this one. Why panic over an unquantifiable risk of an unquantifiable tipping point when (a) there are no data saying we’re close to one and, more importantly, (b) we know there is a very real risk of economic stagnation? Not only is there a risk of stagnation, we have stagnation right now–just ask all the people without jobs. In the long term, confidence in the ability of the Treasury to pay off its debts is based on expectations about the future performance of the U.S. economy (since the economy is the tax base), and the bigger worry right now should be economic growth.

The third argument is the old one about multipliers, and the short answer is that the vast majority of the empirical work says that multipliers are positive, even for tax cuts, and multipliers for spending are often over one (see Blinder, Zandi, Chinn, et al.).

The fourth argument is the one where I think the deficit hawks might have a point, although their usual solutions (austerity now!) are wrongheaded. Pollin’s rebuttal is that the average fiscal deficit over the next decade is projected by the CBO at 5.2% of GDP (using the administration’s proposed budget, which includes extending most of the Bush tax cuts), and we can easily get that down to 2-3% of GDP through some combination of lower health care costs, lower military spending (e.g., just getting somewhere close to 2000 levels), and a financial transaction tax. I think he’s basically right as far as the next decade goes, but after 2020 the problems with Medicare start to take off, and those problems are largely outside the government’s control: Medicare is just an insurance plan to pay for privately delivered services, and those services are what is skyrocketing in price. So this gets into the debate about how much the recent health care reform bill actually reduced long-term health care costs, which is a messy and as yet unresolved debate.

But as I’ve said before, if you take argument #4 seriously, the answer has to be curbing the long-term growth of healthcare costs, not cutting government spending now, which is basically irrelevant to the “structural” deficit and, worse yet, will only worsen and prolong the recession.* And the answer has to be curbing healthcare costs in general, not just the government’s share of those costs, because otherwise you’re just shifting the risk onto people who cannot afford to bear it.

* From now on, I’m not going to bother pointing out that, according to the NBER, the recession ended a year ago. You know what I mean.

61 responses to “Shape-Shifting Deficit Hawks

  1. Your mistake is assuming the Republicans care about the truth of their arguments.

  2. “The second argument is the one popularized by Carmen and Vincent Reinhart and Ken Rogoff. Its appeal is that it bypasses the Krugman argument (interest rates are low, not high) by hypothesizing that at some point, investor sentiment tips and interest rates suddenly skyrocket.

    Now, this is certainly true at some point, and given the limited data…”

    November 21, 2002 – Governor Ben S. Bernanke

    Before the National Economists Club, Washington, D.C.

    Deflation: Making Sure “It” Doesn’t Happen Here

    “What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.

    But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

    By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

    We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

    http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

  3. Notorious P.A.T.

    I, for one, really and truly believe Republicans care about deficits. Just look at how hard they worked to cut the deficit the last time they were in charge.

  4. In Bond Frenzy, Investors Bet on Inflation

    October 25, 2010 – NY Times – excerpt

    At a time when savers complain that they are earning almost no interest from their bank accounts, some investors on Monday bought United States government bonds that effectively had a negative rate of return.

    Bizarre as it sounds, that is correct. In an auction of a special kind of five-year Treasury bond, investors paid $105.50 for every $100 of bonds the government sold — agreeing to pay the government for the privilege of lending it money.

    The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.

    “They are counting on the Fed to be successful in generating inflation.”

    http://www.nytimes.com/2010/10/26/business/26bond.html?src=tp

  5. It so happens they are also a hedge against deflation at a rate higher that 1% per year at the price.

  6. Oh and this is the not the first time that Inflation linked Treasuries sell at negative yields the article states:

    Inflation-protected Treasury securities have already been trading at negative yields on the open market for some time, as professional and institutional investors have sought to hedge their portfolios against the risk of inflation. But Monday was the first time since the government began selling these so-called Treasury Inflation-Protected Securities in the 1990s that new ones were sold at a negative yield.

  7. While healthcare costs will very likely become an even larger problem over time, can we not do something now about the deficit – like cutting defense spending to a more realistic level, a level where we spend at least as much on our domestic affairs as we do on our international affairs?

  8. A recovery is usually good medicine for a deficit.

    Medicare is part of an overall health care mess. Essentially, this country has not made the decision that anyone should get adequate health care regardless of ability to pay. It sounds counterintuitive, but the developed countries that have made that decision deliver health care to more people with better outcomes at lower cost.

    When a country makes that decision, it also decides to provide health care according to the needs of the overall population. Once that happens, opportunities for all kinds of efficiencies open up.

    Here, we’ve narrowly that we’ll provide whatever amount of health care that can be squeezed out of our political system on a partisan basis.

  9. I happen to have been researching the Scandinavian countries for a class project. Some numbers:

    Defense Spending as % of GDP
    USA 4.1%
    Denmark 1.3%
    Finland 2.0%
    Norway 1.9%
    Sweden 1.5%

    Public Debt as % of GDP
    USA 52.9%
    Denmark 41.6%
    Finland 44.0%
    Norway 43.4%
    Sweden 48.2%

    Tax Revenue as % of GDP
    USA 28.3%
    Denmark 48.9%
    Finland 43.0%
    Norway 43.4%
    Sweden 48.2%

    Health Care as % of GDP
    USA 15.3%
    Denmark 9.5%
    Finland 7.6%
    Norway 7.6%
    Sweden 7.7%

    Health Care as % of Govt Budget
    USA 19.5%
    Denmark 16.2%
    Finland 12.9%
    Norway 18.3%
    Sweden 14.1%

    Each of the Scandinavian countries ran a budget surplus prior to 2009.

    When you get right down to it, we spend too much and take in too little. We’ve managed the neat trick of being woefully inefficient at the same time that we’re undertaxed. Anyone who can come up with a politically realistic way out of this one that won’t force the onus onto the elderly and the poor deserves canonization.

  10. What has been systematically destroyed over the past 30-35 years is the local culture’s ability to create economic value. We had a federal banking system 40 years ago wherein federal banks could only set up shop in a particular county. The federal banks were the only banks in the counties that could offer a checking account. Operating cash created a float of money that pretty much had to be invested locally.

    I and others could borrow cash from these federally supervised banks, and the banks in turn could borrow from the fed. 60 and 90 day notes timely funds that supported a local commercial trade.

    When that system dried up in the late 1970s, the city banks that bought the local banks, took the float that had been used locally, and lent it to South America and generally lost that cash to defaulting South American big bank customers.

    From then we had one Ponzi Scheme after another as statewide bank went national. The voting issue next week is not unemployment. The locals are way smarter than the economists, the accountants, and the politicians who are running today’s mess. The voter frustration is that our local economies that support the nation has been raped, over and over.

    We sit here dumbfounded, having been robbed of every opportunity to go to work and create value that not only support our local culture, we support the nation as well.

    For get stimulus, and even the #4 as the next Ponzi Scheme. The cost of building culture is less expensive than free. Local culture pays dividends in the form of taxes and support of industrial products. Not only is the local culture’s ability to create value being ignored, the local culture is being treated as if it does not exist.

  11. Another blog, another article about stimulus. How stimulating!

    By catching some arguments others perforce need be excluded. For instance, central bank actions along w/ fiscal borrowings press down interest rates – supply and demand. Central bank actions etc. increase various kinds of risk such as maturity imbalances, Treasury cash flows, F/X volatility and effects on carries and capital controls. These are not being priced into yields – right now. Tomorrow?

    Another hazard is the rate argument is self- supporting up to a point. What about exogenous factors such as a systemic default (real estate, again)? Short rates would skyrocket and interbank lending freeze as it did in 2008. What next? The Fed has its butt in a sling and the Tea Party won’t be amenable to TARP 2.0.

    Then, the GOP arguments are more about denial and support for the almighty auto/sprawl industry and resource depletion which is at the center of the crisis, not banking or credit. High real energy prices have eroded business profits and driven high wage jobs overseas taking final demand with them. Cure the rest and we still have fatal problems with energy.

  12. I pulled up Pollin’s article. Four points jumped out. 1) He has an ideological bias that with all things being equal, a real private sector productive benefit is better than a real public sector productive benefit. 2) Public sector purchases must by definition draw down a private sector capacity to purchase some real productive benefit. 3) Public sector purchases must pass a social benefit test in order to justify the purchase. 4) An investor’s expectation of future tax benefits out weigh an investor’s need to sell products to customers with an ability to buy. He also didn’t provide background data on how he determined that wartime public sector expenditures yielded a 0.8 multiplier.

    Any prospective Pollin student may want to reconsider taking his macroeconomics class.

  13. Solid post.

    Not much to add here. Three of the four examples of deficit hawk arguments listed by Mr. Pollin are debatable. That doesn’t mean I agree with them, but three of the four are debatable. The #3 deficit hawk argument related to fiscal stimulus is absolute unpolished BULLCRAP.

  14. Wait, this this isn’t a post about waiver wire work for my fantasy team?

    Nice post…I actually feel this has slowed my fast decline into stupidity from being overloaded by political ads.

  15. The healthcare cost problem makes me crazy, because I see so little evidence that providers are doing anything to reduce costs even when they can. I am a healthy 65 year old woman, and I am scheduled for cataract surgery, both eyes, in November. I asked if we couldn’t do both procedures the same day, which will cost me one less co-pay & fewer days off work. The surgeon said “We don’t do it that way in America. Only in countries like Canada where there is a longer waiting list for cataract surgery.” I pressed for a better explanation–thinking that perhaps their was a poorer outcome for 2-eyes-same-day, but no– he waffled and his response was not persuasive. However, he is the guy holding the scalpel, and so I acquiesced. But I am pretty sure that my co-pay is only a fraction of the additional costs for the 2nd procedure, and it still seems stupid. Multiply the extra cost by the thousands of cataract surgeries every year. . . . AARRGGHHHH!!!!

  16. 2. Declining business confidence is the real danger.

    James, you’re at Yale, no? Its worth reading the commencement speaker in 1962, a functional finance Keynesian who was, as it happened, President of the United States.

    “There are three great areas of our domestic affairs in which, today, there is a danger that illusion may prevent effective action. They are, first, the question of the size and the shape of the government’s responsibilities; second, the question of public fiscal policy; and third, the matter of confidence, business confidence or public confidence, or simply confidence in America. I want to talk about all three, and I want to talk about them carefully and dispassionately–and I emphasize that I am concerned here not with political debate but with finding ways to separate false problems from real ones…

    “But there is also the false issue–and its simplest form is the assertion that any and all of the unfavorable turns of the speculative wheel–however temporary and however plainly speculative in character– are the result of, and I quote, “a lack of confidence in the national administration.” This I must tell you, while comforting, is not wholly true. Worse, it obscures the reality–which is also simple. The solid ground of mutual confidence is the necessary partnership of government with all of the sectors of our society in the steady quest for economic progress.

    “Corporate plans are not based on political confidence in party leaders but on an economic confidence in the Nation’s ability to invest and produce and consume. Business had full confidence in the administrations in power in 1929, 1954, 1958, and 1960–but this was not enough to prevent recession when business lacked full confidence in the economy. What matters is the capacity of the Nation as a whole to deal with its economic problems and its opportunities.”
    http://www.jfklibrary.org/Historical+Resources/Archives/Reference+Desk/Speeches/JFK/003POF03Yale06111962.htm

  17. Bayard Waterbury

    First, James, the analysis is spot on. Second, obviously, after this election cycle is complete, there will be no significant change in approach. As has been true since Clinton at least, the party in power makes no difference (in a plutocracy).

    The real beginning of a solution (but absolutely not the end), is to bring home all of our troops from everywhere (780 overseas bases, two war fronts with not actual meaningful discernable purpose, other than to infuriate the rest of the world), reduce (third rail) MIC spending by 70% and plough half the savings into infrastructure and education, and use the other half to reduce the deficit. Also, simultaneously, tax the crap out of those making a million or more a year (I say at least 70% of AGI), or just throw out the tax code and exempt the first $60K of individual income, and tax the rest at 30% to $500K and everything over that amount at 70%. Of course, neither party will do any of this because this would end their campaign finance trough, even if it is the actual solution or something like it.

    So long as the President and Congress are happy to dance around the bonfire and clink their champagne glasses over far less than half baked solutions, we will go on descending to the next level of Dante’s economic inferno.

  18. RayW,
    You don’t read too good do you??? Dyslexic??? Pollin clearly states that he gets the 0.8 multiplier from Robert Barro’s paper. I quote directly:

    “But theories aside, Barro also produced evidence supporting his theoretical conclusion that government spending multipliers would be zero, though only under peacetime conditions. Significantly, as he acknowledges, his own research finds that multipliers could be much larger during wartime, as high as 0.8, because, as he proposed, the temporary nature of much of military spending means that consumer demand would not fall significantly in this situation. Barro also adds that, during wars, conscription creates a forced increase in labor supply, which in turn expands output.”

    In the next paragraph of Pollin’s paper it cites an IMF paper that says the multiplier for the U.S. could be as high as 2.0

  19. In credit deflation it is so hard to cut spending. Literally. The economy is so weak, everything you do damages the economy. Cut out defense spending and it drags the economy into recession triggering a domino toward systematic failure. Cut out welfare and it drags the economy into recession and systematic failure. Why? Because the system is deflating and you don’t have the natural “fresh” capital to replace it. So deflation arrives in reduction of debt. Then bankruptcy blows across all class lines sending the economy into chaos, threatening the very capitalist system you worship.

    It is why in credit inflation cycles, you need to spend less. Outside of the 1990’s, the US didn’t even really try. They just spent on tanks and buying off middle class votes(considering the amount of spending toward the middle class is great underestimated). Things that don’t leave a long term valuation. Of course the origins of the current malaise in US healthcare stared in the 1980’s as well. Matter of fact, I hated the 80’s in the 90’s and I still hate the decade now. Americans learned bad habits.

  20. First, I apologize to Dr. Pollin and any of his students. My comment was inappropriate. Second, I apologize to the blog for attributing Dr. Barro’s points to Dr. Pollin. Third, I thank TedK for his … forceful reply pointing out my error.

  21. From an email circular that has just arrived in my inbox sent out by Roubini Global Economics:

    “Under our baseline scenario, to which we assign a 60% probability, the November FOMC meeting statement will announce a large-scale asset-purchase program (LSAP) of roughly US$600 billion. Recent speeches by several of its regional presidents indicate the Fed will engage exclusively in the purchase of long-term Treasurys in QE2. We expect it to announce that these purchases will occur at a pace of around US$100 billion-150 billion every month for four to six months, into 2011. We also expect the Fed to change its language regarding the maintenance of zero policy rates to “a very long period” or “until economic indicators are in line with the Fed’s mandate,” from the current “for an extended period.” Toward the end of the stipulated purchase period, the Fed will consider whether the size of its balance sheet is consistent with its mandate and will decide upon the necessity of further action, then more QE may be announced if growth and inflation are still expected to be well below potential and target.”

  22. and he was riddled with bullets…go figure…

  23. @DonnaB

    I live in Canada. My mother had cataract surgery on both eyes. She was given the procedure for one eye. Then about six months later she had a second procedure for the other eye.

    In terms of cost she had two options. If I recall correctly, the first option was free. The second option cost her $300 per lens.

  24. Your doctor seems to be misinformed about how universal health care works in Canada.

  25. Excellent post. Our deficit hawks are only interested in protecting their tax, contracting and subsidy entitlements. Listen to their cry for more tax cuts and the extension of the Bush tax cuts. Ever hear them cry to limit government contracts, farm subsidies or guaranteed bonds, loans or health industry profits? Of course not, they want all of the taxpayers money they can get.

    I say you first, you give up your tax entitlements, contract entitlements and farm subsidy entitlements and guaranteed profits. Then we will wait a few years and see what the deficit looks like.

    Stop booking your American sales overseas to cheat on your taxes, stop crying that you must keep lower corp tax rates when you send our jobs overseas. STOP TRYING TO DESTROY OUR ECONOMY.

  26. More likely unread sarcasm, or American Medical Association propaganda. Probably afraid if it goes to a nationalized health care system he won’t be able to “refer” Donna to his golf buddy with the alcoholic tremors. Or get his free trip to Hawaii from the Drug Representatives for the “medical symposium” where he learns to body surf.

  27. When you only have two hammers in your toolbox, everything looks like a nail. Lowering interest rates was hammer #1, and increasing the money supply with Quanitative Easing part duh (or is it deux?) is next. But until, as was pointed out earlier, there is confidence in the ability of investment in actual business improvements to realize a good rate of return, the money will instead be plowed into speculative ventures in more fertile foreign markets.

    Similarly, the deficit hawks don’t understand that Keynes largely had it right in that the government has to step in when market forces (and confidence) fail to spur investment in productive (as opposed to extractive) businesses. Republicans and Democrats alike would do well to recall how much the automobile industry benefited from the Eisenhower Interstate Highways that were constructed started in the 1950s.

    I will spare you analysis of why this may have been a flawed choice in terms of energy policy, etc. and how light rail infrastructure improvement would have served us better in the long run…

  28. Does modern finance in any way, and the rise of computer generated trading, effect the speed of a hypothetical turnaround mentioned in the Carmen/Rogoff et al argument? Or does that misunderstand the the point (which I rate as highly likely on my part)?

  29. …that is could there be a tipping point that is locked and loaded that we can’t see because it could develop very, very quickly and policy is too clumsy (i.e. fishing in a river with a 2×4 to misquote DeLong)?

  30. How is argument #4 not disqualified for the same reasons you rejected argument #2?

    Second, can spending ever be cut fast enough to effect a stabilizing balance with physical reality pressuring revenue (i.e. economic collapse)?

    The physical economy’s shutdown over the past 30-40 years as a casino economy was erected in its place (this transforming risk perceptions in all areas of economy including employment) is THE issue legislators at all levels of government will be forced to address sooner rather than later. In so doing the massive subsidy presently being awarded to reckless criminals whose fraud apparently knows no bounds (judging by the hammer about to come down on RMBS) necessarily will be redirected into such pursuits as alone provide the framework upon which revenues can be set on a stable path — one not so vulnerable to outright scams like the one unraveling right now (globalization).

    So, put away any thought that, status quo measures will resolve fiscal deficits we face. The party of “no” is about to meet its test revealing whether its leadership is from the same school of jellyfish as those fascists currently leading the Democratic party.

  31. Jeff wrote:

    “When you only have two hammers in your toolbox, everything looks like a nail. ”

    What’s Ahead For The Fed?

    QE2, QE3, QE4……

    Oct 27, 2010 – Nouriel Roubini – excerpt

    “We also ponder the possibility that the Fed will have to extend the program and announce QE3 (and eventually even QE4).

    Under our baseline scenario, to which we assign a 60% probability, the November FOMC meeting statement will announce a large-scale asset-purchase program (LSAP) of roughly US$600 billion. Recent speeches by several of its regional presidents indicate the Fed will engage exclusively in the purchase of long-term Treasurys in QE2. We expect it to announce that these purchases will occur at a pace of around US$100 billion-150 billion every month for four to six months, into 2011. We also expect the Fed to change its language regarding the maintenance of zero policy rates to “a very long period” or “until economic indicators are in line with the Fed’s mandate,” from the current “for an extended period.” Toward the end of the stipulated purchase period, the Fed will consider whether the size of its balance sheet is consistent with its mandate and will decide upon the necessity of further action, then more QE may be announced if growth and inflation are still expected to be well below potential and target. “

  32. What is the sound of one hand clapping? On the assumption that this highly leveraged bit of logic makes sense, can you have inflation without consumers buying the higher priced goods?

    Because that’s what’s missing right now. The consumer economy isn’t and it won’t be for the foreseeable future. There’s little additional financial support for small business coming from the big banks and that’s where most jobs come from. No jobs, no money. No money, no spending. That’s a very simple logical chain.

    Chris Whelan, in this talk at AEI makes this abundantly clear (fast forward to 1:07:30 of the presentations). By his estimate, the efficiency of the banking sector is approaching one. They don’t have the people or the chops to manage the flood of bad mortgage paper they’re seeing. Furthermore, he bluntly states that B of A and Wells Fargo will have to restructured in the near future.

    http://www.ustream.tv/flash/video/10034228?v3=1

    Simon and James pointed out in their book that one option for the megabanks, one that should have been seriously considered, was breaking them up. That, apparently, is going to happen anyway. It may be considerably messier this time around. Stay tuned. This wave of disaster has yet to crest.

  33. Cutting defense spending is often mentioned as a way to cut government spending, and I would prefer at least a 50 percent cut in defense spending – $300 billion or so. However, that alone would increase the unemployment rate by, what, 3% alone? The sad truth is we depend on defense spending as a public works program to keep unemployment in check. Too bad we aren’t getting nicer bridges and roads and new sewers instead of bombs for the size of that Keynesian stimulus.

  34. Agreed.

  35. Re: @ tippygolden press___Spot on! I have a unorthodox request TP…could you find it in your (I’m really computer illiterate regarding certain tools) heart to post the link: Gnarles Barkley-Crazy…”Lyrics and Song” on James “Beyond Crazy” post above,… Thanks mr. earle :-) PS. Love reading while listening, it’s a “Blink” thing? ( author, Malcolm Gladwell)

  36. Norm Cimon wrote:

    “What is the sound of one hand clapping? ….can you have inflation without consumers buying the higher priced goods?”

    http://en.wikipedia.org/wiki/Zimbabwe

  37. Oct. 27, 2010 4:18PM EDT

    “Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further.”

    http://tinyurl.com/2dokxmk

  38. Walt Hutchens

    It never ceases to amaze me that people try to apply conventional economic thinking to this UNconventional — actually, unique — real problem. Fiscal and monetary policy are two levers on the control panel of our economy that in the current situation have almost no effect on whether businesses and consumers think they want to take risks by hiring, buying more stuff, and so on.

    Why? Because NOBODY HAS A CLUE what’s coming next. In the last two years a whole lot of new law and regulation has been flung at our economy and the analysis of what it all means is a lot less than rosy.
    Our standing in the world and our preparation for war — excuse me, man made disasters — are both worse than was the case two years ago. Our monumental deficits are part of that uncertainty because many of
    us understand that at some point our Chinese daddy is going to get fussy about how we use our national credit card. When? We have no clue.

    The administration that got us here is still in power, evidently still determined to remake the U.S. in some other image — how ’bout ‘Cuba North’? You could bleeping deliver a free truckload of gold coins to my front door and what I WOULD NOT do is either found a business or spend them on more stuff.

    My wife and I would move those gold coins to the safest corner of the cellar and leave them there, because it’s perfectly clear to us (although evidently not to most economists) that some very hard times
    could lie just ahead.

    I’ll spare you the list of other shoes yet to drop. Presumably most folks here can recite that inventory without help.

    When more than a very few people feel that way, then the conventional levers of economic policy aren’t hooked to the gears that need to be shifted. And such is the level of uncertainty that we don’t even have
    a good clue about when the uncertainty will start to clear. To take one example of many, Obama is about to lose the power to ram through unpopular new laws. What do we hear? He’ll shift to using executive orders and the regulatory machinery to make the changes he wants. Is there any reason that Obama trying to make Washington into Havana via regulations should make us feel more confident than when he was doing it through new laws?

    I assume we’re all registered and will vote, come next Tuesday.

  39. Re: @ beowulf____We’ve all heard of “Group Think” made famous by MacNamara during the Kennedy Administration and prior/former administrations similarities. There is a interesting correlation of our United States Presidents that somewhat parallels “Group Think”…that being “Mind Set”? Ironically there have been eleven (11) of the past, and present forty-four (44) U.S. Presidents – 1:4 (quarter) ratio graduating from Harvard or Yale. I’ll begin with Harvard, which has the lion’s share…seven (7): John Adams (#2 /1755); John quincy Adams (#6 /1787): Rutherford B. Hayes (#19 /1845); Theodore Roosevelt (#26 /1880); Franklin D Roosevelt (#32 /1903); John F. Kennedy (#35 /1940); *George W. Bush (#43 /*1975 recieved MBA* – dual?); and Barack H. Obama (#44 /1961)…Yale: has four (4)___George H.W. Bush (#41 /1948 **”Amherst College”, briefly – Premier, “CIA Recruiting School?” **); George W. Bush (#43 /1968 *dual Harvard & Yale*); William J Clinton (#42 /1973); and lastly…William H. Taft (#27 /1878) – Fini! Please note that Harvard was first known as Cambridge, and Yale was founded by all Harvard men, which was first known as the “Collegiate School of Connecticut” but whoe name was subsequently changed too honor its founding donar “Elihu Yale”. Finally to complete the circle of “Who’s Who” in the financial world of America? Standard and Poor’s (S & P’s) did a corporations survey in 1976, and found that thirty per cent (30%) of all executives came from twelve (12) colleges (universities), again Harvard, and Yale gaining the lion’s share followed by NY University; University of Pennsylvania; University of Michigan; Columbia; Northwestern; City College of N.Y.; Princeton; University of Wisconsin; MIT; and University of Illinois. Please take note of the geography/indutrial belt via the braintrust Northeast! Thankyou James and Simon :-)

  40. Bruce E. Woych

    Shape Shifting is not the only “shifty” business going on among Deficit Hawks. Here’s some “BASE SHIFTING”… (and you thought that the mountain really can’t come to you?). Incidently, back in 2008 your own post expressed surprise at the stance made by
    the one and only Martin Feldstein. Is it ok to be irreverent now?

    (1)
    “Creative Destruction” and Fascism
    Take Martin Feldstein, who’s probably the most prominent serious deficit hawk at Harvard University. He’s been against Social Security for his whole career. …
    therealnews.com/idirect.php?i=5648

    And in total contradiction with his life long teachings and stance he advocated maximum bailout money in 2008…seemingly for infrastructure but of course know it never took that route:

    (2) see:
    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102903198.html

  41. Bruce E. Woych

    Once again I apologize for the link to the “Creative Destruction…” “realnews” item. I assure you it is really worth it and the ending (ironically and coincidentally) literally raises the questions that lead into the second link.

    If you go here first that will work (direct link=):
    (1)
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5648

    (2)
    AFTERWARD: THIS LINK FITS PERFECTLY AS I MENTIONED:
    http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR2008102903198.html

  42. Bruce E. Woych

    Also of direct interest (and look for Simon Johnson being singled out as the only exception to negligent economic positions by this author):

    http://www.creditwritedowns.com/2010/05/deficit-hawk-hypocrisy.html

  43. Bruce E. Woych

    I think it is time that the Hawks come face to face with the American Eagle. Hawking and stalking is for the birds!

  44. OK earle.florida. Honoured by your request.

  45. I was wondering where we were headed and now I know, right?

  46. “Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels.”

    Bill Gross on QE2

    http://tinyurl.com/2dokxmk

  47. And they continue to mention that all options are on the table…

    So let’s be logical – a “hoax” document drafted at the beginning of the 20th century in Russia has – in operation – replaced both the Declaration of Independence and the Constitution of the USA.

    The “hoax”ers have created – for lack of a better term – a “shadow” government that employs more hooligans and sociopaths and killing machine mercenaries than ever before through the passage of The Patriot Act – an act of war, itself, against DECENT USA born and bred people, that sprung fully “alive” from 911 wreckage

    trash the planet – it’s SERIOUS how bad the ecologically damage is worldwide and no end in sight to the MATH formula – “more misery for others = more money for ME ME ME

    and with all that DATA in your face day in and day out

    (granted it IS impressive how long people tread the waters in the River of DENIAL, pulled in the wake of the rationalizers)

    I’m supposed to give a flying fig about Yale and Harvard “students”?

    They are NOT the “smartest people on the planet”, are they?

    And what MORAL OBLIGATION does anyone have to worship at their altar of self-love and psychotic irrational hatred of any HISTORICALLY SUPERIOR people, ie CIVILIZATION creators?

    What moral obligation does one have to their PROTOCOLS which state that covering people in FILTH through “art” and all other channels of human expression in regards to beauty – HOMES, architecture, FOOD, etc. – is to be enforced by a gun in your face?

    Can you REALLY believe that GOSSIPING about “them” as if it’s entertainment

    and counting on the stupidity of everyone to NEVER rise up because “we” are just as morally bankrupt as they are and will do anything to become as “rich” as them

    is REAL? May be “virtual” power, but REAL?

    Granted, this site has accumulated a “higher” gang of gossipers about “the FILTHY rich”

    and the craven desire to get some for ME ME ME

    but don’t keep heading to your thesaurus to elevate their incessant shooting down at us.

    Constitutional Convention and burn the Patriot Act to “set the tone”.

    The person who first translated the Protocols into English became physically sick in the process because of how craven and degenerate the psycho authors were as “human beings”. Those “religious” nut jobs with their holy book references lied and killed their way behind the banner of their fevered-mind, made-up “isms” – each “ism” more insane than the other and the next

    until here we are…

    Stop CARING about them and their stinking FIAT paper $$$ – they will KILL you for the privilege of standing behind a bullet proof podium in front of a million faces in the “public space” beneath them and LIE.

    My 62 year old friend from Czechoslovakia who walked across the mountains to the west with only her school knapsack when she was 16 to come to USA

    wishes she was younger because she said she would walk back east because of what the USA has become…

    you have ANY clue what people are REALLY talking about?

  48. Approaching one quarter of America’s workforce is unemployed because capital and jobs have been exported to countries with a 10, 20, 30 to one wage advantage over America.

    However, America’s unemployed have not been consigned to gas chambers as useless eaters. They’re using up their 99 weeks of unemployment pay, collecting food stamps and otherwise surviving on welfare and charity.

    So what additional cost would there be to putting these people back to work?

    Very little. All that is needed is the elimination of minimum wage laws and the institution of some form of negative income tax (rates possibly dependent on age, experience and education), allowing wages to fall without limit until they achieve international competitiveness.

    The cost of such a wage subsidy will not likely greatly exceed the cost of existing welfare programs, and it would avoid the cost of both crime and mental illness due to boredom and disaffection and the loss of, or non-acquisition of, workplace skills.

    Under this regime, entrepreneurs could have wage parity or a wage advantage over the Asian competitors, and thus the incentive to rebuild America’s domestic manufacturing and service industries.

  49. Alfred wrote, “All that is needed is the elimination of minimum wage laws and the institution of some form of negative income tax (rates possibly dependent on age, experience and education), allowing wages to fall without limit until they achieve international competitiveness.”

    Sir, you KILLED the golden goose.

    Global slave labor to the tune of 7 billion dumps a day directly into a river,

    that no one will soon be intelligent enough to know how to clean up

    (generation of kids who are about 5 years old today, as a matter of fact, won’t be given that knowledge – look at cholera in Haiti)

    and you come on this blog with a SOLUTION that is to make every even more poor in spirit,

    more poor in knowledge about cooperative relationships as THE key to survival,

    and more poor in “entrepreneurship” skills that do not RAPE the few resources left….????!!!!

    That’s “international competitiveness” – have everyone live on a penny a day?

    Who ARE you people?

  50. Robert Waldmann

    Minor editing suggestion.
    This is absolutely true
    “New Classical economists, Robert Barro most notably, have long argued that the multiplier for fiscal stimulus policies is zero or thereabouts.”

    But this should be expanded as I suggest *betwee asterixes*

    the empirical work says that multipliers are positive, even for tax cuts, and multipliers for spending are often over one (see Blinder, Zandi, Chinn, *Barro* et al.).

    Barro estimated a multiplier of 0.7 . He concluded that it was best “to start with” models where the multiplier is 0, but 0.7 is not zero or therabouts. Krugman notes that much of this was finding that rationing can reduce consumption (WWII) and C. Romer noted that the rest of it was an estimate of the balanced budget multiplier since the war in Korea was financed out of current revenues.

    Yes there is a heated debate between Barro and Barro or, more exactly, between Barro and Barro’s data. Dog bites man.

  51. Robert Waldmann

    Sorry for long comment. I meant 0.7>0 even if Barro says 0.7=0 is a good approximation to start with.

  52. Umm. If the *multiplier* is zero for some government spending, then the money had to have disappeared into a black hole with no consequences at all. Are you sure you don’t mean that the argument is about whether the multiplier is bigger or smaller than one, rather than zero?

  53. “We sit here dumbfounded, having been robbed of every opportunity to go to work and create value that not only support our local culture, we support the nation as well.”

    Next time you take a drive out past the strip malls and big box stores, take a look at how many businesses are owned by one franchise or another versus local ownership. Ask yourself where a substantial amount of the profits from those franchise ownerships are going and if they are being plowed back into the local economy.

    The local culture and economy is being treated not as if it doesn’t exist, but as a source of nutrients for enterprises that operate on a national and international basis. This can’t go on forever because the local economies are slowly being starved of investment and re-investment that flows out of the communities and does not return in sufficient volume to actually create independent local wealth.

  54. “The administration that got us here is still in power…”

    Oh, please. As long as you continue to believe that somehow everything was just fine before 2008 (or 2006, depending on what unqualified blowhard your AM radio buttons are set to) then you are doomed to keep barking at the shadows while the burglars loot the house. I defer to David Stockman’s “The Four Deformations of the Apocalypse” in the July 31 NY Times. Plenty of blame to go around here, Walt.

  55. Are there no workhouses?

    Trying to undercut the Chinese on wages is a fool’s errand. Let’s have some realistic suggestions here that result in something other than economic cannibalism.

    Or maybe we should all just hope for a job in the Big Folks’ yard?

  56. Bruce E. Woych

    “The local culture and economy is being treated not as if it doesn’t exist, but as a source of nutrients for enterprises that operate on a national and international basis. This can’t go on forever because the local economies are slowly being starved of investment and re-investment that flows out of the communities and does not return in sufficient volume to actually create independent local wealth”

    So true Ward Silver…and we saw and heard about the demise of the corner Mom & POP Store for many years now.

    Today we hear big supermarkets complaining about how WalMart (internal contradictions aside) are knockingout the corner supermarkets in much the same manner.

    As we speak “contingency workers” have become the decades new processing of individuals who might work an independent life into “individuated” market pegs. Robots to zombies…! And why? Because they have no power and by law can be stripped of any benefits & entitlements that the “holding” company has for themselves. In other words …employment “at will” just like a renter without a lease or contract. The contract itself is simply temporary and is about as secure as a per diam- hand to mouth- lifeline that the employer holds as a bond over your life!
    Check it out and start to google “Contingent Worker” and “contingency work force”

    As we speak Blackstone affiliated money (dare I mention Dubai – Based ) has financed and registered “Team Health” out of Knowville Tenn which intends to provide “contingency staffing” to hospitals all across the country. Talk about excessive consolidation of financial controls at the Executive “Capture” level? This will give hospital CEOs and administrative big shots total control over the lives of Doctors and Nurses who are dependent upon a transient connection with their own livelihood. It has already begun at scale, only scope is in question right now.
    Massive abuse of this system exists in the Pacific NorthWest already especially in exploiting immigrant and uneducated workers. It destroys benefits and unions. It destroys the home base of community. Everyone becomes a “DRIFTER” in a Mafia style market of no holds barred (de-regulation at its core / privitization is just a neutral term for lineage formation and mini tyrants over corporate chiefdoms).
    As we speak…Peter G. Peterson Foundation (tax free haven of complaints against entitlements) seeks to finance a false “grassroots” movement (another wealthy financed front group) that blames the average working American for the debt that financial services and his empire of private equity helped create and has fortress-ed all the proceeds (Cayman Islands and Dubai are not just convenient store supermarket intrusions on American lifestyle). It appears they are going after the Pension Plan money which they didn’t rip off through the “Financial Services” fraud of these last decade.
    So while you lament about “honest work” and the old Made in America” pride in country- “know how”…consider this,…it is a land of opportunity…made into a land of economic Darwinism and La Costra Nostra style free market enterprise.

    I can see by some of your other posts that you are probably more of a moderate conservative. You are, therefore, the decisive lifeblood of this countries future. The order of the day is confusion and delusion. Information is unsettling when it doesn’t fit into the mold of expectations. But this is no joke. The mom & pop “stores of yesterday” are practically obsolete. The current trend is not to displace the store but the very security of “MOM & POP” in community based society and turn them int market chattel. We ARE talking about our own descendants…NOT PGPF entitlements and all the regulartory and/of control fraud. The “moral Hazard” of other peoples money takes on a more dire dimension when it is a moral hazard with other peoples lives!

  57. Bruce E. Woych

    Please take a look at this article; reference support to the Team Health & contingent worker format of the oligarchic (ownership society) feudal future.

    http://seekingalpha.com/article/165156-blackstone-s-team-health-holdings-ipo-a-play-on-the-financial-oligarchy

  58. Roubini: Bond Shock Only Way Out For U.S. Economy

    OCTOBER 29, 2010, 1:40 PM ET – Barrons – excerpt

    “The only thing that might get things moving is a “bond market shock”: a state government goes into crisis, the realization of total liabilities for Medicaid, etc., equal several times U.S. GDP — something like that, writes Roubini.

    That crisis is the only light at the end of the tunnel, Roubini argues, a grim prospect for whoever’s president in 2013, he believes.”

    http://tinyurl.com/33v575f

  59. Not to mention worthless screenings and drugs foisted on healthy aging adults in order to increase earnings. As long as we retain the current model, in which doctors have an incentive to maximize the number of visits (and procedures performed) health care costs will continue to rise.

  60. We have universal health care where I live. I asked my mother this morning about the details of her cataract surgeries on both eyes.

    – the wait list was about one month
    – she has surgery on one eye
    – 3 months later she had her second surgery
    – she had two cost options, free, or $350 per lens
    – she chose the second option
    – she no longer needs to wear glasses
    – her vision now is somewhat akin to the vision of her grandchildren (maybe even better)

    IE, for double cataract surgery in British Columbia:

    – wait time one month
    – surgeries were done separately, 3 months apart
    – total cost $700
    – no complications following surgery

  61. You guys are a real hoot! You’d feel better if you understood fiat currency and how to move forward.

    http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf