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.

In an interview today, Republican presidential nominee Mitt Romney said he wouldn’t do away with Obamacare features like insuring young people and insuring those with previous medical conditions.  Previously Romney said he would repeal Obamacare entirely, including an estimated $716 billion in health care savings the act would produce over the first 10 years–savings his Vice Presidential nominee Paul Ryan included in the 2012 House Budget crafted by the House Budget Committee which Ryan chairs.   From an MSNBC news report on Romney’s statement on Meet The Press.

Romney, who faces Obama in the November 6 election, has vowed throughout the campaign to repeal and replace the Obama healthcare law. But asked about the Obama healthcare law on NBC’s “Meet the Press” program, Romney said, “Well, I’m not getting rid of all of healthcare reform.”

“Of course, there are a number of things that I like in healthcare reform that I’m going to put in place,” Romney added. “One is to make sure that those with pre-existing conditions can get coverage. Two is to assure that the marketplace allows for individuals to have policies that cover their family up to whatever age they might like.”

The Obama healthcare law, among other provisions, prevents insurance companies from denying medical coverage to people who already are suffering from a medical condition. It also allows parents to keep their young-adult children on their health insurance plans until age 26.

The law is Obama’s signature domestic policy achievement.

Elements of the state healthcare reform plan that Romney put in place as governor of Massachusetts served as a model for the federal law passed by the U.S. Congress and signed by Obama in 2010 despite unified Republican opposition.

Beezer here.  Etch a sketch is back in true form.  Now if he’ll only sketch in the gaps of his ideas of how to cover $5 trillion in proposed tax cuts, primarily benefiting the wealthy.  Or any details at all how he intends to boost hiring–other than state blithely that tax cuts always boost private job creation–despite hard evidence to the contrary during the two terms of George W. Bush.  Economics professor Bradford DeLong is not impressed.

ObamaCare allows parents to keep their young-adult children on their insurance, requires insurers to offer guaranteed issue and community rates, and imposes an individual mandate to purchase insurance on individuals.

Now comes Mitt Romney:

Romney says he won’t repeal all of Obamacare: Mitt Romney says his pledge to repeal President Barack Obama’s health law doesn’t mean that young adults and those with medical conditions would no longer be guaranteed health care.

So there we have it: Romney will keep the parts of ObamaCare that are young-adult coverage, and guaranteed issue and community rates.

It continues:

The Republican presidential nominee says he’ll replace the law with his own plan. He tells NBC’s “Meet the Press” that the plan he worked to pass while governor of Massachusetts…

So there we have it: Romney will keep the parts of ObamaCare thatimposes on individual mandate to purchase insurance.

So what’s left?

Romney says he doesn’t plan to repeal of all of Obama’s signature health care plan. He says there are a number of initiatives he likes in the Affordable Care Act that he would keep in place if elected president…

Like: the whole thing. Duh.

There is something very wrong with anybody working for, contributing to, or arguing for Ryan-Romney right now.

Beezer here.  The professor expects too much of the public at large.  People have prejudices.  They have inertia built up over decades of voting for Republicans.  Lots of people believe wealthy people always know the right thing to do, otherwise they wouldn’t be wealthy.  And most importantly a lot of employed people have not received a raise in a long while so they will vote against the incumbent, no matter what alternative offered.    That’s life.  And national politics ain’t bean bag.  So there’s no real good reason to tell anyone anything but what they want to hear.  Romney knows that and will do and say anything to win the election–even if it means being the human equivalent of a political windvane.   And then Krugman, in customary fashion, boils it all down to the basics.

 Another day, another Romney whopper. Now he says that he’ll keep the good parts of Obamacare, in particular coverage for people with pre-existing conditions, while scrapping the rest.

You can’t do that – and Romney knows very well that you can’t do that, because the logic that went into Romneycare in Massachusetts is the same as the logic behind Obamacare.

Suppose you want to guarantee that insurance is available to people with pre-existing conditions. Well, you can establish community rating, requiring that insurance companies make the same policies available to everyone. But if you stop there, you know what will happen: healthy people will opt out, leaving behind a high-risk, high-cost pool.

So you have to also have a mandate, requiring that people buy insurance. And you can’t do that without subsidies, so that lower-income people can afford their policies.

The inexorable logic of the situation, then, leads to a three-legged stool of community rating + mandate + subsidies = ObamaRomneycare.

So, does Romney think we’re stupid? Hey, he also thinks we’ll buy into his promises to slash taxes by $5 trillion but make up the revenue by closing unspecified loopholes in a way that doesn’t raise taxes on the middle class – which turns out to be arithmetically impossible. So the answer is, yes, he thinks we’re stupid.

From  the Social Science Research Center a nice speech explaining some history of economic thought by economist Erik Reinert.  Thanks to Mark Thoma at economist’w view for highlighting Reinert’s speech.

What we’re undergoing today has happened before; in 1848, the 1890s, the 1930s, and again today.  In each period economic thought became dominated by classical economics.  Other, often complementary, economic approaches were pushed aside.  In each instance it became apparent that classical economics failed to avoid  or explain, subsequent economic collapses.   In each case other more practical theories came to the rescue.  Call it common sense or applied economics–whatever–classical theories turned out to be just that, theories.  And in each period classical economics were, at minimum, salted with other economic ideas that worked better in reality.

Today we’re back in the soup, again.  And just as occured the last couple centuries those classical theories, resurrected and now formalised in elegant mathematics, have produced mal-investments and extreme economic underperformance.  From the speech:

In the case of financial crisis, long periods of economic stability produce easy credit, which with time creates instability and systemic risk, even with a small economic downturn. In the case of economics, long periods of economic stability create a belief that a Physiocratic (today’s laissez faire) approach of deregulated market – which may work well for a while – will forever solve all problems. Both the French Revolution and the European Revolutions of 1848 were results of an overdose of Physiocratic thinking, and both cases produced a return to Anti-Physiocratic – active – economic policies. The present financial crisis falls in the same category of an overdose of Physiocratic de-regulation, the famous “flaw” that Alan Greenspan discovered was a typical Physiocratic flaw: the market, if left alone, did not produce automatic harmony, but financial collapse. It remains to be seen if – and how fast – Anti-Physiocratic regulatory measures can be put back. Strong vested interests wish to prevent it….

A key problem of mathematized neo-classical economics that came into fashion during the Cold War was that it only came with one very high level of abstraction: the tools used automatically disregarded any and all real-life nuances and differences. By disregarding all differences between economic activities, between human beings, and between cultures, economics became a science depicting markets as producing automatic harmony. Economists proved, not very surprisingly, that a standardized humanity in a world where all economic activities were identical, would produce equality. When communism promised “from each according to ability and to each according needs,” this became an unnecessary complication of things: the market would also produce equality. That the apparent equality of outcome that the models produced was simply a result of the assumptions on which the theory was based – how could a model where everything is identical and equal produce anything but equality as an outcome? – was simply not listened to. The West sorely needed models supporting the perfection of the market system, and we got it…..

When Margaret Thatcher famously said “there is no such thing as society” she was merely stating a fundamental assumption of ruling economic theory. Assuming no difference between economic activities and a frictionless economy, economists modeled a world where a coordinating nation-state was no longer needed. So Ronald Reagan’s statement that “government is not the solution to our problem; government is the problem”[41] was completely in line with ruling economic theory at the time. The society modeled in neo-classical economics did not need governments, only centuries of experience would contrast what had become the mathematically obvious fact expressed by Reagan. Economic theory modeled a world with no voluntary unemployment, and it therefore became legitimate to label all the unemployed of the world as “lazy.” Neo-classical economic modeling produced that blend of wishful thinking, ignorance, and intolerance which we call neoliberalism….

That by abstracting from key agents and key phenomena economics had also abdicated from studying reality only became evident much later. Under a guise that the magic of the market would create factor-prize equalization, the opposite movement – towards a polarization of incomes – is taking place. In the meantime vested interests took over increasingly larger slices of the economy. Under the assumption that the financial sector can be treated as any other sector in the economy, and under the assumption that no regulation of the financial sector was necessary (the abandonment of the Glass-Steagall Act), individuals and nations are increasingly becoming debt slaves to the financial sector. Under the assumption of perfect competition, what used to be called natural monopolies – the opposite of perfect competition – have been privatized, and long-lasting monopolies and quasi-monopolies have been created. All in all, the economics profession became a useful tool (and fool) for the vested interests of a ‘plutocracy’. Under the assumption that markets would create automatic harmony, the West – particularly the United States – is embarking on a process of Darwinian survival of the fittest, a movement that previously had been stopped starting in the 1890s and again in the 1930s. The distribution of wealth and income is moving in the direction of a post-industrial feudalism, but a new type of feudalism, where power is not narrowly based on land ownership but on financial ownership in general…..

What needs to be reconstructed is a science of practice:a theory based on human observations of facts. This contrasts with today’s standard economics, where observations of reality tend to be filtered through a set of arbitrary and – from the point of view of observable reality – mostly totally inappropriate assumptions. This theory produces accuracy, but at the expense of relevance.

Margaret Thatcher famously said “there is no alternative,” and in this tradition capitalism is often presented as one solid block of theory to which there is no alternative. Hyman Minsky, on the other hand, argued that there are fifty-seven varieties of capitalism.[43] To explore and reconstruct the many alternative versions of capitalism, we need to resurrect the methodology of the historical schools: creating new knowledge by connecting previously unconnected facts. Present mainstream theory cannot for ever explain away important phenomena as “market failure” rather than recognize them for what they really are: theory failure.

Beezer here.  We’ve had a series of ‘market failures’ the past 22 years in particular: The Orange County (CA) bankruptcy in 1989, the S&L collapse of 1990-92; the Long Term Capital Management (LTCM) collapse of the late 1990s, the North Atlantic banking collapse of 2007–08 and the European Union banking crisis of today.   Neo-classical economics got blindsided by all of them, yet those theories simply won’t die even though they’re obviously seriously flawed.  These cannot be simply wished away as ‘market failures.’  These are theory failures. We need to get back to a less formalized economics approach, one that’s flexible, facts based and empirical.  That which makes the patient better is what is used.  Today we desperately need jobs.  The private economy is still struggling and cannot profitably hire new employees fast enough.  Tax cuts piled on top of tax cuts plus super low interest rates and dramatic Federal Bank intervention in markets have not turned the trick.  The one tool we haven’t used is the tool that guarantees jobs:  Direct hiring to rebuild America’s infrastructure.    

In an interview that appeared in a German economics blog (translated version) James Galbraith explains why he believes widening income inequality is a sign of growing economic instability.  He doesn’t assert there is a provable causal relationship, but he does give several reasons indicating there may be one.

RS: One thing that stood out and sort of surprised me was that inequality seems to follow the stock market.

JG: In the United States it certainly does, and there’s a very straightforward reason for that, which is that we measure inequality from tax records. Tax records are records of taxable income. Taxable income at the top of the scale is very closely correlated, it’s essentially determined by capital gains and stock options realizations and salary payments that come out of venture capital initial public offerings, things of that nature, and are very closely correlated to the level of asset prices in the stock market…

RS: How does this type of inequality really affect the well-being of people in general, given that pay inequality hasn’t changed much?

JG: Well, generally, it improves their well-being in the short run, because a stock boom is associated with higher rates of investment,  job     creation and more overtime pay throughout the workforce, and so if you separate out incomes of working people from the capital incomes, that sort of inequality actually goes down in the stock boom. A prime example of this is in the late 1990′s when overall income inequality goes up enormously as the result of a NASDAQ information technology boom, but inequality in the working population declines, the poverty levels decline because of the effect of that on economic activity. So this is not mysterious. It is why I think the emphasis should not be on the welfare effects of inequality, but on the instability.

RS: Do you suspect a causal relationship?

JG: Again, what I find in the data is that very rapidly rising inequality, which is something that one can measure, is associated with credit booms, and credit booms are followed by credit busts. This is part of a dialog that, well I’ll leave it at that and come back to how it fits into the discussion in economics. There’s a reason for stressing this particular point….

Beezer here.  So in the late 1990s with the dot.com boom, although income inequality grew, the economic activity created causes poverty rates to decline.  OK.  So the ensuing dot.com bust was relatively minor compared to the Great Recession bust of 2008.  Galbraith stresses credit growth as the culprit of causing economic instability.

JG: The money associated with a credit boom is largely created in the process of credit extension, it’s not something that comes out of the pockets of poorer people, there’s not a fixed sum of money, this is the mechanism of an unstable credit economy.

RS: The fact that the money is essentially, well it’s not really virtual, either, or is it?

JG: Money is a spreadsheet operation, all of it is virtual in that sense. Your bank does not maintain a large stack of notes with your name on it.

RS: What’s the link between inequality and poverty? Is there a link between inequality and poverty, or are these just two very different things? We think about poverty when we think about inequality. But is that really the same thing? Do they go together?

JG: I think one has to be careful about cases. In the U.S. case, where, as I say, we have been for thirty years, our moments of prosperity were of this highly unstable credit-driven type. The poverty rates went down in the booms and go up in the slumps, so they’re really quite different from the inequality numbers as measured in the tax records. On the other hand, they do reflect the strength of demand for labor in the bottom half of the wage structure because the numbers which one can measure separately for wage inequality are very closely correlated to the hours worked by people in low-paid jobs. The number of jobs they hold, the number of hours they work in each of them, all of that translates very directly into their weekly earnings, and in the booms, of course, that goes up.

Beezer again.  Although the dot.com boom and bust were derived from equity prices, not debt, Galbraith still puts it in the too much credit category.

JG: We have many ways of measuring poverty, but there’s no question that in the booms, poverty rates fell. No question about that. By the end of the 1990′s, poverty rates for minorities in the United States were at all-time lows. That’s a direct consequence of the fact that you had three years of unemployment rates that were below four percent. The problem with that time – one can argue about the allocation of resources, could you have done better than spending all those hundreds of billions of dollars on internet start-ups that were going to go bust – but the problem of that time was not a poverty question, the problem of that time was that prosperity was built on a very unstable foundation.

RS: So essentially it’s the credit that makes the whole thing unstable, that credit is excessive…

JG: Yes, yes, yes, that’s exactly the point.

Beezer here again.  OK so what about the effect of lower, or higher, marginal tax rates?  Interestingly, before he gets to marginal tax rates, Galbraith asserts getting pre-tax distribution of income right is more effective than after-tax methods ie tax rates.  Why?  Because once you allow people to grab a huge share of income, there’s Hell to pay trying to raise top marginal rates in an effort to get some of it back. 

JG: This has always been an interesting debate amongst economists for whom the professional credo has been that you should allow whatever distribution emerges before tax, and then redistribute through the tax system, and I’ve never thought that was very persuasive. I think what actually happens is that the distribution before tax is substantially a regulatory outcome, it’s an artifact of ex ante social decisions. It has to do with, among other things, minimum wages and the structure of trade unions and a great many other things in society, and that having an accepted pretax distribution that is fair is much more stable than trying to change things through the tax code, because you get an enormously powerful political resistance to doing that once you’ve allowed people to have the attribution of income to them pretax.

Beezer again.  OK, having strong trade unions does have this kind of pre-tax distribution effect.  But as we’ve seen in recent times, strengthening trade unions has not been the trend, weakening them has.  And this weakening has, according to Galbraith, been a dynamic widening the income gap on the front end of income distribution.  That said, Galbraith does go into the back end stuff, the tax rates issue.

the point of the ’86 act was to reduce the rates at the top, but to expand the base such as to be revenue-neutral, which it largely was. I think the long-term implications of the ’86 act are only now being recognized in the economics profession. A major thing that it did was to – and that’s true also of the earlier Reagan cuts – was to create a strong incentive for corporations to shift income directly to their chief executives. I think the CEO boom was partly an artifact of the reduction of marginal tax rates, and that had very pernicious effects on corporate governance in the United States. I wrote about this in a previous book, in The Predator State, and I’m now beginning to see some commentary. I know that Thomas Piketty has come to the same conclusion.

RS: How did that happen? I don’t quite understand.

JG: Well, if you have a high marginal rate, then you have an incentive to retain earnings in the corporation and pay the corporate tax rate and then to use the retained earnings in ways that add indirectly to the consumption of your top executives. You build a skyscraper with lovely penthouses in it, you have corporate aircraft, you have the whole aspect of this that characterized the way the big corporations presented themselves in the 50′s and 60′s in the United States. And they stopped building skyscrapers – when was the last time one was built? Probably the World Trade Center in 1970. There was very, very little after that, and corporations started building basically campuses, which are much cheaper, and instead funneling the money directly into the pockets of their chief executives.

RS: Okay, that makes sense.

JG: That’s what happened. I don’t know that that was entirely anticipated by the authors of the tax cuts in the 80′s.

Beezer again.  So the back end effect of lowering top marginal rates on personal income, even if by closing loopholes it’s revenue neutral, has had some unanticipated consequences, including one of reducing retained earnings and company investment.

What do you think the effect is of the CEO boom on the economy? Does it set the wrong incentives?

JG: The main thing is that it creates a kind of very small class of, let’s say, of “personally empowered corporate executives” who are detached from the technical operations of their own enterprises by and large – that is to say, they are primarily financial people – and I think that has had a very significant effect on the way in which large American corporations operate. It has made them much more vulnerable to being downsized, having their physical operations manipulated for the sake of financial results.

RS: To put a value on that, that’s a pretty negative result.

Beezer here.  Oh well, I suppose I’ll have to read the book in order to get all this digested.  It should be stressed Galbraith is doing empirical research here.  He’s not arguing causality, only highlighting correlations that seem to re-occur in recent history.  We wrote in an earlier post about the mistake of omitted variable bias, where something ignored ends up skewing your conclusions away from the truth.  Galbraith is going to great pains avoiding conclusions.  He’s just hinting.  I don’t have that problem of course.  I want strong unions and I want higher top marginal tax rates on all income.

JG: Yes, I think that’s a pernicious result, for sure.

Beezer finally.  For sure they are pernicious.  We need to do both front end and back end reform in order to get the economic ship of state back on a sustainable even keel.  As per usual thanks to Mark Thoma’s economist’s view blogsite for highlighting this German interview.

The more you learn about how an economy actually works, or doesn’t work as was recently the case, the more you realize some supposed leadership types have no idea what they are talking about.  Literally no idea.

Take for example Republican presidential candidate Rick Santorum’s scolding of Americans for their ‘immoral’ lifestyles and their tolerance of alternative lifestyles.  Professor Robert Reich makes a legitimate point that Santorum may be scolding the wrong folks.

There is moral rot in America but it’s not found in the private behavior of ordinary people. It’s located in the public behavior of people who control our economy and are turning our democracy into a financial slush pump. It’s found in Wall Street fraud, exorbitant pay of top executives, financial conflicts of interest, insider trading, and the outright bribery of public officials through unlimited campaign “donations.”

Meanwhile, Paul Krugman claims applying austerity policies in our current slump not only doesn’t work, but makes things worse.   And of course Krugman supplies a link to a new academic paper about to be published that provides a factual based argument against austerity.  Krugman says it’s the equivalent of the ancient medical treatment of bloodletting:  A purge that instead of helping, makes the patient sicker.

Brad DeLong and Larry Summers have a paper in progress about fiscal policy in a liquidity trap; some of the analytics here. The bottom line, fleshed out with a lot of evidence, is one that others — including me and Christy Romer — have been arguing for a while: expansionary fiscal policy under these conditions doesn’t just aid the economy in the short run, it may well even improve the long-run fiscal prospect. And austerity may be self-defeating even in fiscal terms.

If this is right (and I think it is), austerity-loving pundits and policy makers really are like medieval doctors who believed in treating illness by bleeding their patients, making the patients even sicker, leading to more bleeding.

Meanwhile, over at Economist’s View, professor Mark Thoma highlights some recent work by economist Peter Diamond who, along with economist Emmanuel, believes the optimal maximum tax rate on income is somewhere between 50% and 70%.

…Diamond also pointed to some of his own recent research, with economist  Emmanuel Saez of the University of California at Berkeley, which found that the  optimal marginal income tax rate on the highest earners — those making $400,000  or more per year — is well above the current 36 percent, or even the 39 percent  level that existed during the 1990s.

“The Washington debate right now is between the Bush and Clinton tax rates on  the top,” Diamond said. But his work with Saez shows that a more efficient rate  for raising revenue — without significantly deterring the wealthy from trying to  earn more — is “somewhere between the tax rate at the top in Reagan’s first  administration, which was 50 percent, and the tax rate at the top from the  Johnson years up to the Reagan change, which was 70 percent.” …

And from a related article published from an MIT economics forum:

To be sure, the basic numbers on economic inequality in the United States are striking, as detailed at the event. In 1980, the top 1 percent of U.S. households earned about 10 percent of the nation’s income; today that top percentile receives about 25 percent of income. The top 10 percent of households accounted for a bit more than 30 percent of income from World War II until about 1980, but now receives 50 percent of all income

Beezer here. As Krugman always does, Thoma provides a link to the original article.  Funny how these academics insist on linking to the underlying papers instead of making statements without proper research to back them up.  Of course, if you don’t have any research to support your opinions it’s impossible to provide any.  Austerity is exactly the wrong policy.  We are not overtaxed, or at least the wealthy certainly are not overtaxed.  And if anyone has displayed anti-social or immoral behaviour it’s been coming from the top down, not the bottom up.  But none of this is about truth anyway.  It’s all about power and suppressing competition.  Not capitalistic, and not Democratic either.

We’re having a BBQ Sunday, so if Capt. or Advisor or the Cucci want to drop by it starts at 2pm.  We’ll have some Bakula marinated lamb, so it’s a treat.  Starts at 2pm.

Anyway, if you can’t come, here’s some links to articles I think are worth reading.

If suppliers to the federal government would obey wage rate laws we’d save money.

The labor market isn’t getting better, and a whole bunch of economists/rich investors, including Martin Wolf , Mark Thoma , Larry Summers, Traxis Partners Hedge Fund Millionaire,  Barton Biggs, and Laura Tyson are clamoring for more stimulus.

If you want a quick look at the Fed’s balance sheet, rjs has already done it for you over at The Global Glass Onion.

If you give tax cheats a break, will they just cheat more?  No doubt. 

Note to Obama.  Call HR.  Please.