Posts Tagged ‘Economist’s View’
From an article in Fortune written by journalist Tim Lee that points out Friedman’s economics is not in line with today’s Republican Party, even though the party still considers Friedman their economics prophet. As evidence Lee quotes Friedman in his book Two Lucky People:
“The intellectual climate at Chicago had been wholly different. My teachers regarded the depression as largely the product of misguided policy—or at least as greatly intensified by such policies. They blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation—as J. Rennie Davis put it, “Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930′s for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times.”
Beezer here. So Friedman here sounds a lot like Keynes, who also recommended increased government spending in the face of a recession. My problem with the quote is that Friedman also wrote here that, according to his interpretation, Keynes would not have recommended the same approach? Or at least the quote seems to suggest that.
‘We were affected very differently by the Keynesian revolution—Lerner becoming an enthusiastic convert and one of the most effective expositors and interpreters of Keynes, I remaining largely unaffected and if anything somewhat hostile…
Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.
By contrast with this dismal picture, the news seeping out of Cambridge (England) about Keynes’s interpretation of the depression and of the right policy to cure it must have come like a flash of light on a dark night… It is easy to see how a young, vigorous, and generous mind would have been attracted to it…”
Beezer again. So you can see my confusion. It may be that I’m not correctly interpreting the paragraphs above. And the final graph does say ‘the news seeping out of Cambridge’ which suggests Friedman may not have had the whole picture at that time, because it certainly was incorrect. When it comes to deficit government spending, what Friedman the monetarist recommended is exactly what Keynes did too. The main difference is that Keynes went further and recommended direct hiring if purely monetary policies didn’t work fast enough. Anyway, the point of the Fortune article is that today’s GOP would not approve of Friedman’s prescription. Hat tip to Economist’s View which highlighted a Paul Krugman New York Times post calling attention to the Fortune article, which was written a year ago. Krugman also thanks economist Brad DeLong for recalling Lee’s article.
Oregon economist Mark Thoma, who also oversees the internet’s most read economics aggregator blogsite economist’s view, has a nice article in the Fiscal Times explaining that infrastructure spending now will reduce deficits and debt going forward.
The low costs and high benefits of infrastructure spending in the present economic environment give us an abundance of projects that would easily pass a cost-benefit test. Our failure to take advantage of these opportunities is, in essence, leaving money on the table. That wouldn’t happen in the private sector, and there’s no reason for government to do this either.
Beezer. It’s a simple analysis, really. Thoma doesn’t mention it because of article length limits, but failure to take advantage of the current circumstances means there will be further liquidation of productive assets as a result of inaction. And that means any upturn in the economy from these higher liquidation levels will create inflation pressures earlier. And that means we could end up with higher inflation at higher unemployment levels than would be the case if we invested now. That’s called stagflation. Our failure as a nation to ‘go to war’ so to speak against our infrastructure deficit, and against high unemployment, is an epic failure in fiscal management. Making jobs and infrastructure projects a national priority is necessary in order for us to reduce deficits and pay down debt. Austerity will only make deficits higher and debt more unmanageable going forward.
David Frum, a conservative, writes in the Daily Beast.
In National Review Online before New Year’s, Kevin Williamson explained that the Second Amendment guarantees the right of individual Americans to launch an insurrection against governments they believe tyrannical.
There is no legitimate exception to the Second Amendment for military-style weapons, because military-style weapons are precisely what the Second Amendment guarantees our right to keep and bear. The purpose of the Second Amendment is to secure our ability to oppose enemies foreign and domestic, a guarantee against disorder and tyranny.
To deliver the rebuttal, we welcome guest blogger Abraham Lincoln. In his first message to Congress, July 4, 1861, the sixteenth president explained:
Our popular government has often been called an experiment. Two points in it, our people have already settled,–the successful establishing and the successful administering of it. One still remains,–its successful maintenance against a formidable internal attempt to overthrow it. It is now for them to demonstrate to the world that those who can fairly carry an election can also suppress a rebellion; that ballots are the rightful and peaceful successors of bullets; and that when ballots have fairly and constitutionally decided, there can be no successful appeal back to bullets; that there can be no successful appeal, except to ballots themselves, at succeeding elections. Such will be a great lesson of peace; teaching men that what they cannot take by an election, neither can they take it by a war; teaching all the folly of being the beginners of a war.
Beezer here. At the time, of course, Lincoln was facing a Civil War with the south. Some in the South have never really gotten over that defeat and the farther away from that horrific war we get, for these folks the more romanticized becomes the South of those times. Families fighting families to the death–more than 55,000 dead–it was possibly the lowest point in America’s history. I’m with Lincoln. Stick with the voters, or at least the majority of voters, and wait to fight another day at the ballot box if you lost. But the second amendment is no excuse to take up arms to overthrow the majority decision and fantasies that it allows the unfettered arming of any portion of the disaffected public is pure stupidity. Hat tip to Economist’s View and economist Bradford DeLong for highlighting Frum’s piece.
Kevin Drum, a political columnist for Mother Jones, writes a brief explanation why Republicans are demanding Social Security be ‘on the table’ for spending cuts. Essentially, Drum explains, Social Security payroll taxes, which are paid primarily by labor and the middle class, went into surplus under Clinton and that allowed for lower income taxes on the wealthy. Going forward income taxes will need to be raised to continue making Social Security solvent because Social Security surpluses were drained by the Bush Tax cuts. So the wealthy now want to renege on replenishing the Social Security trust funds.
Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn’t add to the deficit:
This is absurd. In 2012, Social Security adds $165 billion to the deficit. Democrats pretend that Social Security is covered through 2033 by its trust fund. Except that the trust fund is a fiction, a mere “bookkeeping” device, as the Office of Management and Budget itself has written. The trust fund’s IOUs “do not consist of real economic assets that can be drawn down in the future to fund benefits.” Future benefits “will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.”
What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit.
That much is true. But the idea that the trust fund is a “fiction” is absolutely wrong. And since this zombie notion is bound to come up repeatedly over the next few weeks, it’s worth explaining why it’s wrong. So here it is.
Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.
Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren’t. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. Long story short, for the past 30 years, the poor and the middle class overpaid and the rich benefited. For the next 30 years or so, the rich will overpay and the poor and the middle class will benefit.
The trust fund is the physical embodiment of that deal. It’s no surprise that the rich, who didn’t object to this arrangement when it was first made, are now having second thoughts. But make no mistake. When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they’re trying to renege on a deal halfway through because they don’t want to pay back the loans they got.
As it happens, I think this was a dumb deal. But that doesn’t matter. It’s the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it’s time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It’s as real as taxes.
Beezer here. Starting in 1983 payroll taxes were deliberately set higher than they needed to be. Just another legacy from the Reagan era when the philosophy of gaming the tax system became a legitimate practice. Hat tip to economist’s view for spotlighting Drum’s piece.
Tim Duy, who writes a popular website focused on the Federal Reserve called Tim Duy’s Fed Watch, has a new post featured in economist’s view asking why anyone in their right mind would counsel immediate cuts of size in federal spending right now. Austerity, Duy points out, in our current predicament of high unemployment and zero interest rates, will only make matters much worse–including most of all our ability to reduce deficits and debt.
What is it about fiscal policy that brings out the crazy? Because it all seems pretty simple. Joe Weisenthal hits the nail on the head:
The U.S. recovery has been remarkable on a comparative basis precisely for one reason: Because despite all of the rhetoric, the U.S. has completely avoided the austerity madness that’s gripped much of the world.
Weisenthal points us to Ryan Avent and Josh Lehner, both showing in different ways the better post-recession outcomes experienced by the US compared to other economies. Paul Krugmanextends the argument by comparing the divergent path of Eurozone and US unemployment rates. The key difference in policy – the US pursued a more aggressive fiscal policy and didn’t pull back too quickly. I don’t think you can emphasize this point enough.
Which brings us to the fiscal cliff (or slope, which is more accurate and avoids creating the false impression that all is lost come January 1). The tax increases and spending cuts in place promise to repeat the mistakes of the UK and the Eurozone by pivoting too fast and too hard into the realm of fiscal austerity. A solution to the fiscal cliff means smoothing the path to fiscal consolidation (optimally, with no austerity in the near term, but I don’t see that as an outcome). The proximate cause of Weisenthal’s ire is former Federal Reserve Chairman Alan Greenspan, who says:
ll of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate…I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem.
As Weisenthal notes, this is a completely backwards analysis. Let’s make this clear: If you think fiscal policy is out of control, you should welcome the fiscal cliff. From the CBO:
If markets are shaky, they are shaky because participants recognize the recessionary impact of this level of fiscal austerity and they don’t like it. Market participants want Congress and the President to do exactly what Greenspan claims is impossible, minimize the impact of spending cuts.
It is truly time for Greenspan to simply fade away; he no longer has anything useful to add to the discussion. Of anything. Who should join him is Dallas Federal Reserve President Richard Fisher. Fisher laid further claim to the title of “Worst Monetary Policymaker Ever” in a speech last week, first by describing Congress as “parasitic wastrels.” It should be obvious that this is not exactly speech conducive to maintaining an independent central bank. He continues with this tirade:
The jig is up. Our fiscal authorities have mortgaged the material assets of our grandchildren to the nth degree. We are at risk of losing our political heritage of reaching across the aisle to work for the common good. In the minds of many, our government’s fiscal misfeasance threatens the world’s respect for America as the beacon of democracy…So my only comment today regarding the recent federal elections is this: Pray that the president and the Congress will at last tackle the fiscal imbroglio they and their predecessors created and only they can undo.
The rise in neo-Nazi’s in Greece is a democratic outcome of austerity? Again, Fisher just doesn’t get it. He seems to believe that the challenge upon us is to radically cut spending. Again, this is absolutely not the challenge upon us. In the middle of this tirade he launched into another:
Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot. The Federal Reserve has been carrying the ball for the fiscal authorities by holding down interest rates in an attempt to stoke the recovery while the fiscal authorities wrestle themselves off the mat. But there are limits to what a monetary authority can do. For the central bank also plays a fiduciary role for the American people and, given our franchise as the globe’s premier reserve currency, the world. We dare not become the central bank counterpart to Congress by adopting a Buzz Lightyear approach of “To infinity and beyond!” by endlessly purchasing U.S. Treasuries and agency debt so as to encumber future generations of central bankers with Hobson’s choices when it comes to undoing what seems contemporarily appropriate.
Fisher appears to be under the delusion that the economy is suffering from the effects of large deficits (which require “fiscal authorities to wrestle themselves off the mat”), and the Federal Reserve is the sole support of those deficits. He continues to look at the world as if the US economy was operating well above potential, and that only the Fed stands in the way of 10% interest rates. Of course, if this were true, unemployment would not by near 8%, wage growth would not be scraping the floor, and inflation would not be hovering below the Fed’s 2% target. Fisher is not dissuaded by these little facts.
And, by the way, despite Fisher’s argument to the contrary, being the counterpart to Congress is exactly what the Fed will do as long as the economy is unable to exit the zero bound in the absence of fiscal stimulus.
Why are Greenspan and Fisher so horribly wrong? Because they belong to a group that has worried incessantly that large deficits would bring economically ruinous high interest rates and, unless held at bay by the Federal Reserve, runaway inflation. Such worries have been repeatedly proved unfounded, but Greenspan and Fisher have no other intellectual framework to fall back on. When you only have a hammer, everything is a nail. For them, any question of fiscal policy always needs to be twisted into their version of the world, even when the opposite is so completely obvious to just about everyone else at this point…
Bottom Line: We need to find a cure for the crazy that some fall into whenever the topic is fiscal policy.
Beezer here. Most sovereign defaults come about because the public is convinced by its leadership that they are unable to pay the bills. This obsession over government spending into a deep recession when it’s exactly more such spending that can lift the economy out of the recession comes about from absolute ignorance coupled with an unwillingness to raise taxes in order to help pay the bills. If there is a ‘grand bargain’ that includes deep cuts in spending right now, worsening a problem that already exists from a lack of demand (spending), it will likely cripple the recovery we now have. And that is just ‘crazy,’ as Duy writes. You enact austerity during economic booms, not during economic busts. During economic weakness you inject spending like there is no tomorrow, because if you don’t there won’t be a tomorrow. At least not an economic one.