One of the most astonishing things about the Great Recession is how it has exposed to what degree the public gets lied to.  It’s no wonder we thrash about.

The most recent example of this comes from Mitch McConnell, US Senate Republican leader from Kentucky.  He recently stated:

“The last year of the Bush administration, the deficit as a percentage of gross domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent.”

The point McConnell wished to make was that it was all Obama’s fault the deficit soared.

To which New York Times columnist and Princeton economist, Paul Krugman, replied:

“They really do think that we’re idiots.

So, that 3.2 percent number comes from here (pdf). Where’s the bamboozle? Let me count the ways.

First, they’re hoping that you won’t know that standard budget data is presented for fiscal years, which start on October 1 of the previous calendar year. So this isn’t the “last year of the Bush administration” — they’ve conveniently lopped off everything that happened post-Lehman — TARP and all.

Second, they’re hoping you won’t look at what was happening quarter by quarter. Here’s net federal borrowing as a percentage of GDP, quarter by quarter, since 2007:

BEA

Source

Can we agree that the deficit in the first quarter of 2009 — Obama didn’t even take office until Jan. 20, the ARRA wasn’t even passed until Feb. 17, and essentially no stimulus funds had been spent — had nothing to do with Obama’s polices, and was entirely a Bush legacy? Yet the deficit had already surged to almost 9 percent of GDP. Even in 2009 II, Obama’s policies had barely begun to take effect, and the deficit was already over 10 percent of GDP.

What this chart really tells us is what you should have known already: the deficit is overwhelmingly the result of the economic slump, not Obama policies. But the usual suspects want to fool you.

I’d like to think that the raw dishonesty of this latest Bush defense would be obvious to everyone. But after the past decade, I’ve stopped believing such things. They think we’re idiots — and they may be right.”

Beezer here.  I’m not as depressed about this as is Krugman, but the bald faced lying is a real problem.  And it is a real problem not because some people will knowlingly lie, but because the watchdogs we depend upon in a Democracy, the media, are completely clueless.  It appears they don’t know enough to spot a lie, and as a result the lie goes unchallenged.  What’s the old saying?  “A lie travels around the world before the truth gets out of bed.”

McConnell knowingly lied.  Shame on him.

But sometimes it’s not so much a lie, as it is someone just not understanding the underlying facts.  Even well know authors and economists (well, in this case economic historian) can be uninformed.

In this case it’s Harvard Professor Niall Ferguson.  Ferguson maintains that the real stimulus spending that made a difference for the Great Depression wasn’t from the 1930s, but came about because of the World War II spending.  This has been an argument all along from conservatives who maintain stimulus spending by FDR in the 1930s wasn’t all that great and had little or no positive effect on unemployment or boosting the staggering economy.

Here, it’s economist Brad DeLong who points out Ferguson makes a very rudimentary mathematical mistake.

“Niall Ferguson writes:

Today’s Keynesians have learnt nothing: When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden [in the United States] rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war…

Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn’t rise? Debt more than doubled from $22.5 billion to $49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to $127 billion in 1941.

And could we please have some acknowledgement that our 9.4% of GDP deficit in fiscal 2010 pales in comparison to the 30.8% of GDP deficit of 1943, or the 23.3% and 22.0% deficits of 1944 and 1945?

Niall Ferguson should not do this. The Financial Times should not enable Niall Ferguson to do this.”

And then Krugman follows up on DeLong’s observations.  As per usual, Krugman offers further explanation, and charts, to make sure the reader understands Ferguson’s errors.  (even the math challenged like Beezer)

“Brad DeLong does the necessary on Niall Ferguson; no need for me to pile on. But I think there’s more to be said about Depression-era debt. To get the full picture, you need to go all the way back to 1929.

If you were ignorant of basic facts about the Depression — or if you didn’t know that movements in a ratio can reflect changes in the denominator as well as the numerator — you might think that it’s possible to summarize fiscal policy by looking at the federal debt-GDP ratio, which looks like this from 1929-41:

Clearly, then, Herbert Hoover was a wild deficit spender, while FDR was much more cautious. Right?

OK, we know that’s wrong. Here’s what nominal debt, the numerator in the debt ratio, looks like:

So Hoover ran up very little debt — only about 6 percent of 1929 GDP. FDR, on the other hand, ran up a lot of debt, about 47 percent of 1933 GDP. But Hoover presided over a shrinking, deflationary economy, while FDR presided over a rapidly growing (from a low base) economy with rising prices.

I’ve been careful to use the term “presided over”: you don’t want to attribute all the differences in the two sub-eras to policy, let alone fiscal policy. Nonetheless, the fact that virtually all the deterioration in the US debt position from 1929 to 1939 took place under the tight-fisted Hoover rather than under FDR is an object lesson in the crucial importance of growth in dealing with debt. And the Hoover experience also provides a nice illustration of self-defeating austerity — not only didn’t austerity produce economic recovery, it didn’t even improve the fiscal position.

It’s too bad that people who don’t understand any of that seem to have the upper hand in policy.”

Beezer again.  It’s no wonder the public at large cannot figure out what’s really going on.  Even an economist can get it wrong.  McConnell’s statements were intentionally mis-leading.  His is a worst case example of what’s wrong with our leadership.

We must have a better educated and better informed media.  The average citizen simply doesn’t have the time to sift the chaff from the wheat.  Particularly when there’s as much chaff as wheat being blasted out over the airways.

In an article published for Financial Times, Harvard professor Niall Ferguson quickly and cleanly describes the incredible debt and leverage worldwide that’s subsuming developed economies.  Interestingly he starts the article pointing out that, in ancient times, debt forgiveness was used to reduce the burden of debt.  In fact, he notes, that’s what a “jubilee” was: A periodic absolution of debt.

“Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.” Ferguson writes.

Read the article here.

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