Supposedly Respectable Conservatives Going Over the Cliff

Pres Obama took office in 2009

Wow.  Someone sent me this piece from Peter Ferrara at Forbes magazine:

The record of President Obama’s first three years in office is in, and nothing that happens now can go back and change that. What that record shows is that President Obama, with his throwback, old-fashioned, 1970s Keynesian economics, has put America through the worst recovery from a recession since the Great Depression.

I told my correspondent who sent me this that I was planning to parse the piece on this blog, but reading it just exhausts me- it's so densely packed with poor reasoning, misleading arguments, and the like that I can barely face it.  But I'll give it a try, and see if I can slog through the whole thing.

Ferrara starts by noting that

What that history reveals is that before this last recession, since the Great Depression recessions in America have lasted an average of 10 months, with the longest previously lasting 16 months.

He then notes that Obama entered office when "the recession was in its 13th month", i.e. it was already over the average and only three months from the record before he was even in office.  In the end the recession lasted 18 months- i.e. it was over five months after Obama took office.  What could a president possibly do in his first five months in office that would improve that?  Ferrara goes on to take some gratuitous shots at Keynesian theory, which doesn't really merit a response from me- there aren't any facts to respond to.  But he also goes over lots of legitimate stats about how weak the recovery has been, and how unemployment continues to be at a very high level.

Ferrara notes that economists say that recessions resulting from financial crises are worse than other recessions, but then completely ignores that point when talking about how great Ronald Reagan's recovery was compared to Obama's.  But of course the recession of the late '70s was wholly a creation of the Federal Reserve Bank, intentionally inflicted to beat back inflation, and followed during the Reagan years by lowering interest rates.

What's needed when one criticizes the results of government policy, moreover, is to create a narrative explaining what should have been done.  Without explaining the mistakes, you don't have a credible argument and you're just left repeating the same thing- "look at the results!  Lalalalalalalala!"  I didn't see much of that until later in the piece.  But think about the issue with respect to the 1980s vs. the 2008 recession- tax rates are lower now than they were then.  Hell, Reagan increased taxes later in the decade!  Where's the explanation of what Reagan did right that BHO did wrong?  Instead we get this:

Indeed, exactly none of President Obama’s policies have been well designed to restore economic recovery and traditional American prosperity. They have consistently been the opposite of everything that Reagan did to end the American decline of the 1970s, and restore booming growth for 25 years.

Wow!  The opposite of Reagan!  That's serious!  I wonder what he means by that?  Sorry, the reader can keep wondering, because there's not a single example given.  The writer goes on to talk about the looming tax increases in 2013 and how they're going to really screw us up.  But of course that just points out again that taxes have been cut during the Obama years so far- the Magic Reagan Formula- and these are the results.

So next comes the Jeremiad against the tax rates scheduled to increase in 2013, tax rates that are essentially the same as existed during the Clinton years, which coincided with greater prosperity than was ever seen in the 2000s during the last conservative Golden Age.

Finally there's a screed about how "the Obama administration is in the process of imposing a blizzard of new regulatory costs and barriers that will be building to a crescendo by 2013 as well".  The examples given are Dodd-Frank (not yet implemented significantly) and the Health Care bill (also not yet implemented).  No examples of any expansion of regulation so far- so how is it that we've had this terrible recovery?  Taxes are lower, regulation hasn't changed.  The one thing that conservatives usually criticize, the exploding deficit, isn't mentioned here- I guess even a cynical hack like Ferrara can't bring himself to blame the lack of growth on a defict, which clearly has nothing to do with it.

And of course we know that the President is going to get the credit or blame for whatever happens in the economy, but supposed intellectuals writing for highbrow magazines ought to at least acknowledge that in fact presidents don't have absolute power and can't dictate policy- that's why it takes more than a view from 50,000 feet to explain why a recovery isn't taking hold.  Why not?  Would it be different if Congress had passed the jobs bill Obama proposed last year?  Did the Republicans propose something in particular that would have helped?  I guess Ferrara would say that we should have cut taxes more, but that argument is patently ridiculous given that the US currently has the lowest tax rates it's had since WW II, which didn't stop the recession from rocking us badly.

Anyway, what a piece of drivel.

UPDATE: This piece by Jon Chait makes some of these same points.

Econo-Thoughts

Some thoughts about the good economic news that came out this week.

Job numbers are really good.  The economy is creating jobs at a steady rate in the private sector.  Unemployment, while still high, is coming down.  We can't really say that the economy is booming, but we can say it's recovering.

• If things keep going like this through the year, Obama would be very likely to be re-elected.  Elections can usually be predicted by the economy, and when it's good the incumbent generally gets the credit.
• That doesn't mean that Obama deserves the credit for the economy, of course.  All recessions end, and recoveries always happen eventually, even when the government screws things up.  One fear I've had is that the economy would continue to stink through 2012, leading to a Republican sweep, and then things would improve right on schedule in 2013, just in time for the GOP to claim credit.  Of course, that would have meant that Obama had not succeeded in getting things moving fast enough, so in a sense he would have deserved it.
• In another sense, however, he wouldn't have deserved it, since he's been successfully stymied by Congress from implementing any jobs bills.
• On the other other hand, though, that's a good reason to say that the President doesn't really deserve credit now, since he's been stymied by Congress- one can argue that Washington's inaction has worked out a lot better than proposed actions would have.

Economics is frustrating this way, as good experiments are hard to come by in the real world.  So I return to the standard I've been talking about for a few years now- the one experiment we could identify.  That's the US vs. Europe.  Both went into recession at the same time for similar reasons.  The US did significant stimulus (though not enough according to liberal economists), while Europe did relatively much less stimulus.  Thus far, the US recovery has been quicker and better than just about anywhere in the Eurozone.  Now in fairness, they're dealing with a sovereign debt crisis there, which we don't have here, so it's not a perfect experiment, but nothing is.

Another way to look at it is to note that the Right has been forecasting Doom due to the huge budget deficit and loose money policy of the Fed.  It's clear that we haven't seen that come to pass.  I guess it could still be coming, but I don't think so.

Photo is of Panama Canal workers.  I'm reading the David McCullough book about the canal now, which I highly recommend!

Occupy Wall Street

OK, fans, I know you're all dying to read what I think about Occupy Wall Street, so here it is.

The rage that I share with the protesters can be summed up this way:

Once there was a healthy economy.  Then a few things happened, in this order:

1. The financial system was deregulated to a great degree, and what regulation there was was poorly enforced. 
2. Wall Street bankers used these rules to take enormous risks using irresponsible amounts of leverage, while everyone in the industry assured us they knew what they were doing.
3. The result was a huge real estate bubble that allowed the banks to make enormous profits, far greater than the industry had ever made before.
4. In spite of these profits, the general economy didn't benefit much at all.  There was virtually no wage or job growth for the middle class during the aughts.
5. When the bubble burst, the taxpayers were forced to step in and bail out the industry.  This was necessary to save us from another Great Depression, but was structured in a way that returned banks to profitability almost immediately.  They are already back to record profits, while the general economy continues to suffer.
6. The banking industry is now firmly opposed to any regulation of any kind, and has withdrawn support from the Democratic party for suggesting it.  The industry seems to have no particular plan to avoid a repeat of 2008, since they don't want anything to change.  This apparently means that their plan is to go back to the good old days, and when the next disaster happens, we get to bail them out again.  It's "heads I win, tails you lose".

So yeah, some of us are kind of angry with Bankers.  OWS is expressing that rage.  I'm hoping it builds into a movement that throws a scare into them and moves regulation of the banking industry along with progressive tax policy in the right (or left) direction.  It's easy enough to find nut cases in the crowd (as it certainly was with the Tea Party rallies), but here's hoping it develops into something constructive.

Obama and the "Failure of Liberalism"

It's very satisfying for a liberal to read the likes of David Frum, former Bush administration and down-the-line conservative who has been purged from the Right for pointing out that the Republican party was getting way too extreme.  I'm sure conservatives feel similar glee in reading liberals who have turned against the Democrats, like Joe Lieberman or Dennis Miller (I'm sure there are better examples- as you can probably guess, "liberals who have been mugged" isn't my favorite genre to read).

Anyway, Frum (who still identifies himself as a conservative) this week writes:

Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?

And in the second piece he responds to those who point out that the liberals haven't done much to help the economy recover:

My conservative friends argue that the policies of Barack Obama are responsible for the horrifying length and depth of the economic crisis.
Question: Which policies?
Obama’s only tax increases – those contained in the Affordable Care Act – do not go into effect until 2014. Personal income tax rates and corporate tax rates are no higher today than they have been for the past decade. The payroll tax has actually been cut by 2 points. Total federal tax collections have dropped by 4 points of GDP since 2007, from 18+% to 14+%, the lowest rate since the Truman administration.
If so minded, you could describe Barack Obama as the biggest tax cutter in American history.

We have not seen a major surge in federal regulation, at least by the usual rough metrics: the page count of the Federal Register has risen by less than 5% since George W. Bush’s last year in office. Trade remains as free as it was a decade ago.
While the Affordable Care Act itself will eventually have major economic consequences, most of its provisions remain only impending.
Energy prices have surged, but that’s hardly a response to administration policies. Conservatives complain about restrictions on drilling in the Gulf of Mexico, but on a planet that produces 63 million barrels of oil per day, a few thousand more or less from the Gulf will not much budge the price of oil. Rising oil prices are a story about Chinese and Indian consumption and Middle Eastern political instability, not about US drilling or lack thereof.
The Dodd-Frank bill does somewhat curtail the activities of some banks and investment firms. But is it seriously argued that this could be the cause?

Conservatives complain about excess government spending. Fine. But isn’t the evil of excess government spending supposed to be inflation rather than recession? And where’s the inflation?

There’s a strong case for condemning Barack Obama for the things he might have done, but did not do. He might have cut payroll taxes more and faster. He might have pushed for more expansionary Federal Reserve governors. He might have designed a better stimulus. All true. But the things he did do? Texas Gov. Rick Perry today urges us to believe that the economy is gripped by the worst slump since the Great Depression because Obama spoke disrespectfully of the owners of private jets. To which I can only say: Really? That’s the indictment? Really?

Well said.  Paul Krugman is constantly taunting the "Very Serious People" who keep predicting hyperinflation or rocketing interest rates if the US keeps borrowing, while all evidence continues to show neither happening, just as Keynesian economics predicts in a Liquidity Trap.

The biggest problem for liberals now, though, is that nobody in power is listening to us.  So a mainly Democratic government here is thoroughly on board with austerity, which economists predict will lead to a new recession.  Wall Street seems to agree this week.  And the failure of macroeconomic policy is laid on.... the liberals! Because they're the ones in power.  But since the administration is pursuing mainstream conservative policies, the Republicans have contrasted it by calling for a caricature of conservative policies that were way out on the fringes of political thought only a few short years ago.  And true liberals are left shouldering the blame for our liberal policies, which have never been implemented.

So that's Obama's real sin- no matter what policies he pursues, he must realize by now that he'll be painted as a far-out Leftist.  Yet he keeps clinging to the false notion that he can be acclaimed as a centrist.  And in the process of this futile effort he pulls the whole country way over to the Right.  Tip O'Neil wouldn't recognize the Democratic party.  There is no place for liberals to go.

Where is the liberal equivalent of George W. Bush, a politician who unapologetically sticks to principles, doesn't care if the other side hates him, and gets his base energized and voting?  Republicans are loaded with pols like that, and we don't seem to have any.  So Republicans can rule effectively and make things happen- if only their policies were better it would be great!

Stimulus Fallacies

Paul Krugman has it right here.

Anyway, I don’t believe that it’s all political calculation. Watching Mr. Obama and listening to his recent statements, it’s hard not to get the impression that he is now turning for advice to people who really believe that the deficit, not unemployment, is the top issue facing America right now, and who also believe that the great bulk of deficit reduction should come from spending cuts. It’s worth noting that even Republicans weren’t suggesting cuts to Social Security; this is something Mr. Obama and those he listens to apparently want for its own sake.


Which raises the big question: If a debt deal does emerge, and it overwhelmingly reflects conservative priorities and ideology, should Democrats in Congress vote for it?

Mr. Obama’s people will no doubt argue that their fellow party members should trust him, that whatever deal emerges was the best he could get. But it’s hard to see why a president who has gone out of his way to echo Republican rhetoric and endorse false conservative views deserves that kind of trust.

Now it's clear that more stimulus spending is a hopeless cause.  But it didn't have to be that way- that's a product of choices, in both the policy and politics realms, that didn't have to be made. I blame Obama for not shooting high enough in the interest of being "moderate", and then coming out and telling everyone that the amount of stimulus he did was "just right". So now he's lost his chance, and the subsequent pathetic recovery is going to be blamed on him. Even if he got all the stimulus he could get, if he were saying "I want more of this, but conservatives won't let me have what I want- this will have to do", then it would be easier to argue a liberal point of view now.


Of course the unfortunate (for me) truth is that Obama just isn't a liberal. He's obsessed with being a centrist, as defined as the midpoint between liberals and conservatives. When conservatives went over the cliff, Obama decided to go halfway down the chasm to stay in the middle. And it hasn't helped him politically at all- conservatives still think he's a communist, it doesn't matter how close to their positions he goes.

So I'm madder at Republicans, who I think care more about their electoral victories than about the country's economic health, but I'm pissed at Obama and the Dems too, for not fighting at all for liberal values. If the economy tanks and Republicans sweep in 2012 it will be the Democrats' fault for having no guts.  Liberals can't seem to muster the courage of their convictions.

So as the economy continues to stagger, Republican chances in 2012 keep looking rosier.  And if they win, their Tea Party-dominated crackpot policies will make things even worse and Democrats will be back in 2016. But why should we have to put up with that?

Stimulus vs..... what exactly?

I think it's important to remember some things about the liberal and conservative proposed responses to our current economic doldrums. 

Liberals argue for Keynesian stimulus, i.e. government deficits through higher spending on infrastructure a la FDR and the New Deal.  The theory is that this will put people back to work by stimulating demand, since lack of demand is the key problem in the current recession. 

Conservatives argue that the above is wrong, that government spending can never replace private sector spending in efficiency, and therefore running up these huge deficits is a terrible burden on future generations. (Of course, deficits were seen by Republicans as no problem at all during the good times of the mid-'00s when conservatives were running things, but we'll leave that for another day).  Instead conservatives are arguing for lower taxes, balanced budgets, and fewer regulations on business.

The Liberal argument is that deficits are needed now, due to the unusual situation we're in, but in the long term liberals agree with conservatives that government should strive toward a balanced budget when things return to normal.  In other words, deficit spending is a temporary measure, not a philosophy for all times.  Conservatives, on the other hand, are proposing the same policies during the recession that they propose during booms- lower taxes and less regulation of business.  There is literally not a smidgeon of daylight between their proposed policies now and their proposed policies in 2004 when things seemed to be going well economically.

So Conservative philosophy seems to be that governments shouldn't do anything different during a recession and slow recovery than it should do during a boom- government is seen as getting in the way in both cases.  That means that in our recent crisis, government would have been best to leave everything alone and let the market work it out.  Like Herbert Hoover did in 1929.

Now maybe it's true that Keynesian stimulus, in spite of all the historical evidence in its favor, doesn't work. Maybe conservatives have a point in saying it will make things worse.  But what do conservatives have to propose that we do?  Every plan their politicians put out seems to rely on government doing less- but it's pretty clear that government doing less will doom us to many more years of glacially paced recovery, or a double dip recession.  Conservative plans basically concede that we're stuck with that, the markets have to fix it, and the People will just have to live with 9% unemployment for years until the Invisible Hand works it out.

Keep in mind that "getting out of the way" is a passive plan, and will yield very slow results.  There's just no way to picture the economy moving into overdrive quickly because taxes go down again (making our deficit worse, by the way).

It's amazing that an economic agenda that was completely ascendent from 2001 to 2007 and produced the worst period of growth during any expansion, followed by the worst recession in 70 years, still has a huge number of adherents after such complete factual discreditation.

Oh, one more thing: Barack Obama is now essentially endorsing the conservative plan of austerity.  Here's Krugman yesterday.  Yes, he favored stimulus in the worst days of the crisis, but now he's buying in to the need to cut back government spending in the face of 9% unemployment.  FDR did the same thing in 1936- pulled back on the stimulus too soon, leading to another recession.  I hope it doesn't take WW III to get us out of this mess.

Fisking Thomas Sowell

I don't know who Thomas Sowell is, but someone sent me this article.  Here's my commentary in blue:

Dependency and Votes



By Thomas Sowell
http://www.JewishWorldReview.com


Those who regard government "entitlement" programs as sacrosanct, and regard those who want to cut them back as calloused or cruel, picture a world very different from the world of reality.
To listen to some of the defenders of entitlement programs, which are at the heart of the present financial crisis, you might think that anything the government fails to provide is something that people will be deprived of. "entitlement programs" are not at the heart of the current deficit- that's the Bush tax cuts- that's what caused the current deficit. Entitlements are the issue for the long-term deficit.
In other words, if you cut spending on school lunches, children will go hungry. If you fail to subsidize housing, people will be homeless. If you fail to subsidize prescription drugs, old people will have to eat dog food in order to be able to afford their meds. Well, I hate to break it to people, but that's all true. What's ridiculous is to claim that cutting food spending on poor children will result in anything else but some children going hungry, or that cutting subsidized housing will result in anything else but an increase in homelessness. Of course that will be the result! To argue otherwise is dishonest. Now maybe it's worth it to allow those things to happen, maybe we can't afford to subsidize those things, but even so real people will certainly be affected.

This is the vision promoted by many politicians and much of the media. But, in the world of reality, it is not even true for most people who are living below the official poverty line. Straw man. I don't know what percentage of poor people will be affected by such cuts- it may be less than half, but it's certainly more than zero. I'd like to see this author quote some statistics if he's saying that the number is negligible.
Most Americans living below the official poverty line own a car or truck-- and government entitlement programs seldom provide cars and trucks. Most people living below the official poverty line also have air conditioning, color television and a microwave oven--and these too are not usually handed out by government entitlement programs. No doubt. Some people among the working poor will no longer be able to afford their truck since they'll have to spend more on food or housing, and so they won't be able to get to work, and they'll be even poorer.

Cell phones and other electronic devices are by no means unheard of in low-income neighborhoods, where children would supposedly go hungry if there were no school lunch programs. So poor people shouldn't be allowed to have phones? In reality, low-income people are overweight even more often than other Americans. What's that supposed to mean? That poor people are fat so they don't deserve support? Might it be relevant that healthy food costs more than crappy food?
As for housing and homelessness, housing prices are higher and homelessness a bigger problem in places where there has been massive government intervention, such as liberal bastions like New York City and San Francisco. That implies some sort of causation, which is unproven, and frankly ridiculous. Housing costs more on the liberal coasts because there's more demand for housing there. For this point to make any sense, one would have to describe a plausible way in which specific policies have caused homelessness in those places. As for the elderly, 80 percent are homeowners. whose monthly housing costs are less than $400, including property taxes, utilities, and maintenance. Good thing the elderly have social security supporting their housing costs.

The desperately poor elderly conjured up in political and media rhetoric are-- in the world of reality-- the wealthiest segment of the American population. The average wealth of older households is nearly three times the wealth of households headed by people in the 35 to 44-year-old bracket, and more than 15 times the wealth of households headed by someone under 35 years of age. Some elderly people are poor. Nobody said all elderly people were poor. Why are the elderly not poor? Because of social security and Medicare!!!!

If the wealthiest segment of the population cannot pay their own medical bills, who can? The country as a whole is not any richer because the government pays our medical bills-- with money that it takes from us. Before Medicare was passed in 1965, many elderly people couldn't pay their medical bills, and costs have only gone up. How can anyone argue with a straight face that the elderly will be able to afford private health insurance without government intervention considering how expensive medical care is today for people over 65?
What about the truly poor, in whatever age brackets? First of all, even in low-income and high-crime neighborhoods, people are not stealing bread to feed their children. The fraction of the people in such neighborhoods who commit most of the crimes are far more likely to steal luxury products that they can either use or sell to get money to support their parasitic lifestyle.
As for the rest of the poor, Professor Walter Williams of George Mason University long ago showed that you could give the poor enough money to lift them all above the official poverty line for a fraction of what it costs to support a massive welfare state bureaucracy. So is this arguing that we should start giving bags of money to poor people instead? I don't think that would go over too well.
We don't need to send the country into bankruptcy, in the name of the poor, by spending trillions of dollars on people who are not poor, and who could take care of themselves. The poor have been used as human shields behind which the expanding welfare state can advance.
The goal is not to keep the poor from starving but to create dependency, because dependency translates into votes for politicians who play Santa Claus. Before the modern welfare state existed, in the 19th and early 20th century, we had the Utopia of non-dependency. How did that work out? There were lots of desperately poor people all over the place. In capitalist societies there are always going to be winners and losers. Some of the losers are lazy. Some are drug-addicted. Some are unlucky. Some are mentally ill or mentally retarded. Some are not very bright. There is a right wing fantasy out there that if we stop coddling the losers, they'll all become winners. But that's not how it's ever worked- there's just no evidence of that sort of social policy working.
We have all heard the old saying about how giving a man a fish feeds him for a day, while teaching him to fish feeds him for a lifetime. Independence makes for a healthier society, but dependency is what gets votes for politicians.
For politicians, giving a man a fish every day of his life is the way to keep getting his vote

"Entitlement" is just a fancy word for dependency. As for the scary stories politicians tell, in order to keep the entitlement programs going, as long as we keep buying it, they will keep selling it. So the answer here is to return to the 1920s in our social policy. Think of all the things our society has accomplished since the modern welfare state was created starting in the 1930s. While building that state we won WW II, vaulted to the top of the nations in the world economically, won the Cold War, and emerged as the world's only super-power. Seems like we're doing OK to me.

More on Austerity and Keynes

It's tough to parse all the evidence in order to determine what the best course of economic policy is during a bad recession.  I've tried to present some evidence showing that stimulus measures and deficit spending works better than austerity.  That link focuses on the problems in Ireland and England, who have tried austerity and found it wanting.  Now here's Matt Yglesias with some results from Baltic countries, which also went with balancing their budgets instead of spending and have found themselves in a terrible near-depression.

But a correspondent of mine points out that the US, with its huge Keynesian spending, hasn't done so hot either.  But the point is to compare the results of different systems across time and country. Every country has done poorly during this period in history, but it's still useful to point out which countries have done relatively better and which have done relatively worse. So with the Baltics we have one data point, looking good for Keynes.
One thing I've been thinking after watching this great video is the point made by the Keynes character when he notes that Hayek's position during economic hardship is basically that government can't do anything useful and should essentially just let things play out, remove any regulation and taxation that is getting in the way, and then let the Invisible Hand do the work.

Well, that's kind of what Ireland and the UK and the Baltics are doing, at least in comparison to the Keynesian stimulus in the US. In the short term that has led to worse performance in those places in the US, though of course there could be other factors at play too. And maybe the conservative argument is that in the longer term this pain in the Baltics will be worth it, as the surviving institutions will be stronger and the moral hazard stuff will have been dealt with.

If one wants to successfully argue for austerity budgets in times of serious recessions, I think one needs to come up with some data that shows them working. I've been laying out data that supports stimulus such as the above links and of course my favorite historical example of the US in the 1930s and 1940s. I'd like to see some real-world examples of austerity working during a bad economic downturn.

Misleading Stats from the WSJ

Infuriating article here from Steven Moore at the Wall Street Journal.  For your blog-reading pleasure I've decided to break it down.  Here's the whole thing, with my comments in red:

Stephen Moore: We've Become a Nation of Takers, Not Makers - WSJ.com


If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government. There are fewer people working in manufacturing for many reasons, most of them good. The US manufactures more stuff than it did in 1960, but we're so much more productive and automated that it requires fewer people to do it. And of course lots of manufacturing has moved overseas, because poor countries can pay people pennies an hour, with which we can never compete (thank God)
It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills? So this number presumably includes soldiers, police, firemen, teachers, postal workers, child protective service workers, etc etc. And it singles out town and city workers? Our voices are most easily heard in localities- I don't think my town is loaded with extra employees- is yours?

Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. Consider California, which has the highest budget deficit in the history of the states. The not-so Golden State now has an incredible 2.4 million government employees—twice as many as people at work in manufacturing. New Jersey has just under two-and-a-half as many government employees as manufacturers. Florida's ratio is more than 3 to 1. So is New York's. This is completely meaningless- the US is not a manufacturing country any more, most jobs are now in the services and high tech sectors. It's like complaining about how few jobs there are in the newspaper business now- the economy is changing, which doesn't imply that anything bad is happening at all. Jobs have moved from manufacturing to other things, because we're a rich country.
Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things. The leaders in government hiring are Wyoming and New Mexico, which have hired more than six government workers for every manufacturing worker. Again, absolutely pointless statistics. What would be valuable to know is the growth of government workers per citizen compared to the past, or government workers compared to GDP. Instead he's comparing apples to chairs.
Now it is certainly true that many states have not typically been home to traditional manufacturing operations. Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. Because farm technology has reduced the number of farmers needed to farm the same amount of land West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners Same thing. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That's less than half of the state's 1.48 million government employees. Oh, that's what we need! More workers on Wall Street!


Don't expect a reversal of this trend anytime soon. Surveys of college graduates are finding that more and more of our top minds want to work for the government. I'd like a source here- I doubt this is true- do you know college students who dream about being bureaucrats? Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. First of all I dispute that grads are dying to work in government. But of course they need jobs somewhere. In 2009 nobody in the private sector was hiring, and government through stimulus was filling the gap. It was government or nothing. When 23-year-olds aren't willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles. No, we end up with people taking jobs where they can get them. When the private sector generates jobs, they won't have any trouble finding workers thanks to the huge number of people not working right now. What a ridiculous statement- do you know anyone who wants to work in the DMV?  College grads work where they have to to make ends meet.
The employment trends described here are explained in part by hugely beneficial productivity improvements in such traditional industries as farming, manufacturing, financial services and telecommunications. These produce far more output per worker than in the past. The typical farmer, for example, is today at least three times more productive than in 1950. EXACTLY! That's why all those statistics you just went through are the way they are!
Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.
But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn't pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores. Give me a break! How can you teach kids in a classroom setting in a way that is more productive? You can use technology to increase class sizes I guess, with interactive systems. Anyone think that would be better? Manufacturing is totally different from education, or policing.
The same is true of almost all other government services. Mass transit spends more and more every year and yet a much smaller share of Americans use trains and buses today than in past decades. I don't believe it's true that mass transit spending is higher now than it used to be. No citation here I notice. One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we've gotten.
Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services. Well, yeah.  Unions allow workers to bind together to get better wages or working conditions.  Understandably, workers want that.  If they can't unionize then their wages will certainly fall.  Can you blame them? The biggest problem with this is that public employees perform tasks that aren't easily measured. Sure, we could contract out firefighting services, but then we're not sure the fire truck will be there when we need it- what if it's not profitable to keep the local fire station open?

President Obama says we have to retool our economy to "win the future." The only way to do that is to grow the economy that makes things, not the sector that takes things.

But I'm not completely done.  I kept thinking: is it true that government has been growing at some crazy pace?  What about this graph:
 
The graph is inverse of what I want- it shows citizens per government employee, not government employees per citizen, so lower means more government workers.  It looks like state government has grown while federal government has shrunk, for a net wash in rough terms.  I guess government isn't really growing in the US after all.  Of course the agenda of the Right isn't too stop growth, it's to cut to unprecedented levels.

Austerity Budgets & the Confidence Fairy

Paul Krugman's op-ed today is a good read.  Among other points:

Just ask the Irish, whose government — having taken on an unsustainable debt burden by trying to bail out runaway banks — tried to reassure markets by imposing savage austerity measures on ordinary citizens. The same people urging spending cuts on America cheered. “Ireland offers an admirable lesson in fiscal responsibility,” declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.

That was in June 2009. Since then, the interest rate on Irish debt has doubled; Ireland’s unemployment rate now stands at 13.5 percent.
And then there’s the British experience. Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.
But she hasn’t: British growth has stalled, and the government has marked up its deficit projections as a result.

A quite conservative friend asked me a couple of years ago "what would it take for you to give up your belief in Keynesian economics?".  I responded that we were getting a little test case at that time: the US was doing signficant (though still not enough according to economists) stimulus spending, while much of Europe was pulling back and trying to balance their budgets.  Now of course everything is multi-factorial, and this doesn't constitute ironclad proof, but it's a data point anyway, and one I identified years ago. 

Current trends are pretty clear.  Ireland is a disaster, the UK isn't doing very well, and Germany hasn't recovered as much as we have.  It's not going great in the US, but it's going better than in places where there was less stimulus.

So until I see some pretty good evidence, I'm still a Keynesian.

Over the Cliff Politics

I was thinking today about our current political climate and trying to think back to 2008 and what I thought then about the Republican party.  After McCain's defeat, it seemed that the GOP was going completely crazy in a hard turn to the Right.  Many of us on the Left were gloating about how the next decade would belong to us because independents couldn't possibly follow the Republican party over the cliff into total Supply Side economics, neocon foreign policy, extremist anti-abortion and anti-gay policies, etc.

Wrong again I guess.  It seems that the Right turn has worked out pretty well for them (I try not to stab myself in the eye while thinking about how the Republicans can create the worst recession in recent history, get voted out of office for it, and then come back only two years later to clean up the mess, but I digress).  So I have to change my position- the Republican party is going to be in full power again some day, perhaps as soon as 2012, even though their policy positions would make Ronald Reagan and Milton Friedman turn over (to the Left) in their graves.

So what next?  I believe that a few years of bringing the Full Crazy to the economy ought to make things bad enough in a hurry and bring the Left back around to victory.  That's a pretty hollow win, though- they get to screw everything up, and we have to clean up the mess, which they somehow get to keep blaming on us.  And around we go.....

The Return of Depression Economics

That's the title of Paul Krugman's book that I just read (thanks bro!).  Obviously, I'm a huge Krugman fan, in good measure because he writes about economics in a way that's very accessible to the Great Unwashed like me.  His blog is an important daily read.

 

And the book is great.  Some important points from it (and from his blog's regular reading- I can't separate them):

• Many of us want to see bank runs, currency messes, and sinking economies as a morality lesson every time it happens.  And sometimes that's justified- it's pretty clear that Greece's mess was largely created by politicians' refusal there to make any hard choices.  But in other places the lesson just doesn't fit.  The Asian financial crisis of the 1990s started because of a currency run in Thailand, and then jumped from country to country there for no good reason other than they were all in the same geographic region.  Indonesia and South Korea did nothing wrong in their planning, but they were hammered by a contagious run on Asian currency and experienced bad recessions as a result. 
• All data points to the fact that the current worldwide recession was set off by the US real estate bubble, and has resulted in the freezing of credit markets as panic spread.  The problem now is that there's not enough demand for goods, so companies aren't hiring.  Government needs to step in to start spending during such times.  While excessive government borrowing in normal times hurts the economy by driving up interest rates, that's sort of a ridiculous problem to think about now, with interest rates extraordinarily low.  It's just not crowding out private borrowing.
• Other countries have it really bad when their currencies come under pressure.  Speculation in the currencies markets cause perceptions of problems to become self-fulfilling.  Figuring out when to devalue, when to peg currencies to the dollar or euro, or when to allow currency to float without intervention is really hard to figure out, and sometimes there is just no solution to the problem.  We're lucky in the US not to have this problem, anyway.
• It seems like the same movie plays over and over again when it comes to the banking sector: 
• Banks fail because they're leveraged too riskily
• Government has to bail them out to stop the economy from going into Depression
• Regulations are passed to force banks to leverage less so it won't happen again
• New institutions arise that perform similar functions, but aren't technically the same, so they're not under the same rules as the old banks
• The new institutions start leveraging more, resulting in fabulous profits when times are good.
• Wall Street assures us that it's a New Age, we've finally figured this out, and big profits are here to stay
• Something goes wrong, because ultimately if you leverage a lot and something happens, your bank fails.  And something always happens at some point.
• The new, bank-like institutions fail, and the cycle starts again

Anyway, I highly recommend the book.

Inequality

I came across this graph in my web-surfing today:

(from http://lanekenworthy.net/2010/07/20/the-best-inequality-graph-updated/)

Since 1979 the really wealthy have seen their income soar like never before.  Meanwhile, the rest of us have been stuck in the mud.  Another way to put this is to say that virtually all of the income growth since the Reagan years has accrued to the wealthy.
Doesn't that bother anyone else? 

Income Inequality (posted by DT)

So I read that the rich are comparitively richer compared to the middle class than ever before:

The richest 1% of U.S. households had a net worth 225 times greater than
that of the average American household in 2009, according to analysis conducted
by the Economic Policy Institute, a liberal think tank. That's up from the
previous record of 190 times greater, which was set in 2004.

So this is what I don't understand: why are the wealthy and their conservative shills so upset about the tax code and what Democrats are doing to them? They're winning the policy war! And they act like they're losing it.

The right wing machine is so good at politics and so focused, that they can keep liberals on the defensive even in the face of every fact. How do they do it???

(source: http://money.cnn.com/2010/12/23/pf/rich_wealth_gap/index.htm)

The Argument for Keynes and Deficit Spending (posted by DT)

I had some exciting email correspondence with my conservative group on the topic of Keynes and whether recent events have proved him wrong or right. Here's an edited version of my argument. I'm not very good with the layout on this site, so the graphs are at the top instead of where I want them- sorry!

I keep hearing how Keynesian economics is dead from those who don't seem to understand it. But the history of the last 80 years is great evidence that Keynes was right, that governments should run deficits during recessions and stimulate the economy. Let's start with the Great Depression. See the second graph above, with GDP charted during the period.

As you can see, FDR took office in 1933 when the Depression was at its nadir. He started Keynesian deficit spending and voila!, the economy started recovering. But there was a second recession in 1937-38; did government overspending cause it? Let's look at the federal deficit during the depression- see the top chart for when the feds were using deficit spending.

Notice that the deficit goes way up starting in 1932 (I guess Hoover gets some credit too! I didn't know that), and then dips severely starting in 1936, just in time for the next recession. Then it goes through the roof for WW II (in fact that peak is WAY higher than the current deficit), and yet the economy came roaring back.

So the Depression is a perfect example of how deficit spending helps an economy in recession.

How about since then? Well, recessions after 1945 have been much shorter in duration (on average) than recessions were before that time- recessions starting in 1900 lasted 23, 13, 24, 23, 7, 18, 14, 13, and 43 months. The recessions after 1945 lasted 8, 11, 10, 8, 10, 11, 16, 6, 16, and 8 months (the last listed here is the early 1990s one). Why is that? Because of Keynesian spending- we learned how to deal with deficits, and so now we spend our way out of them.

I've yet to hear any other convincing explanation for these numbers. Can we please stop arguing about whether Keynes was right?

Extension of the Bush Tax Cuts (posted by DT)

I've been having and listening to a lot of arguments about the extension of the Bush tax cuts lately, and it occurs to me that to a great extent we're arguing around each other. Last night, for example, I was talking with some family members, and the argument went something like this:

Liberal: These lower tax rates for the rich are unnecessary- they
don't need it and will hardly notice an increase
Conservative: The way to create jobs is to make sure the Rich have
money, since they're the ones who create jobs.

I strikes me that these arguments could theoretically both be correct. It could be that, while the Rich don't really need a tax break, having lower taxes would still create jobs and it would therefore be worth it to keep taxes low. In fact, if both these arguments are right, then the conservative wins the argument because the goal is to get the economy moving. If both arguments are wrong, then the liberal wins, because while the Rich might be unhappy and harmed by the increase, the economy as a whole would be benefiting (or at least not be harmed) and the federal deficit would be reduced.

So let's look at the facts. What's going on now in the economy? It seems that what's happening now is that the Rich (including rich corporations and banks) have mountains of capital in hand. Corporate profits have been stratospheric this year, and companies are sitting on large amounts of cash that they're not investing. Why not? Because there's not enough demand for products, and companies are not confident that this will change soon so they don't want to risk their cash.

So would a 4% tax hike on high earners change this dynamic? I don't really see how. If the argument is that the Rich need to take home more of their money to create jobs, then that assumes that some don't have quite enough cash in hand to create them now, or that they'd invest less money if more taxes were taken. But they're not investing right now, with these historically low rates! We've now gone through nearly a decade of these lower tax rates, which coincidentally has seen the least growth of any decade in modern history.

I think that if conservatives want to make the argument that the Bush tax rates create jobs, they should at least be required to point out some evidence showing that they've done so in the past.

So what are we left with? Everyone wants his/her own taxes lowered. Conservatives are left with a moral argument that this is "my money", not "the government's", and that the government doesn't know how to spend this money as well as the magic of the Invisible Hand. Except the Invisible Hand just created a huge recession, which would have been a second Depression but for federal government spending and policies.

So I know this isn't much of a shock to read on this blog, but liberals are right and conservatives are wrong. Marginal tax rates on high earners should go back up at least to Clinton-era levels. If conservatives want to make the case for lower taxes than that, they need to show it working, and the last 10 years have proven just the opposite.

Income Inequality (posted by DT)

This graph says a lot about what happens to income when Democrats are in charge and when Republicans are in charge (from: http://www.slate.com/id/2266174/slideshow/2266174/fs/0//entry/2266218/ )



Notice that, while the poor do much better under Democrats, the rich do better too! It's just better all around when people with lower incomes are allowed to increase their quality of life- because they buy stuff, which benefits the rich too.

Summing up the 2000s (posted by DT)

From Ezra Klein's blog at the Washington Post. (sorry it's tough to read- the graph shows the decline (!) in real wages from 2000 to 2007-that end point is before the Crash, mind you). I wish more people would think about this before restoring the wage-deadening GOP to power.

Stimulus one year later (posted by DT)

Here's some correspondence with a conservative email buddy. I asked him what he thought of stimulus spending, now that the CBO has declared that it worked to keep us out of a much deeper hole. He is unconvinced:

This is classic economics, in that it is impossible to know definitively what the null hypothesis result is. What would the state be if everything else were held constant? What if a different policy were followed? I personally can't answer these questions. I have generally found that economists that supported the stimulus think that it worked, while those who did not support it think that it failed.

I remember asking you a long while back what you would take as proof that the stimulus did not work. You said that probably you would look at a country who followed a different policy to compare results. So, I think you should take a look at Germany, or at Canada. Both of these countries followed policies that involved controlling government spending - they are doing much better than we are. There are of course lots of variables that are different, so if you want to believe the stimulus worked, you'll discount these examples.

I think you should also look at what the President and his economists were saying prior to the stimulus. Without the stimulus, unemployment would rise to 9%, with the stimulus, unemployment would stay at 8% and then drop. Obama established he exact criteria by which he should be measured.

Me? I think that the overall policies following by the current administration - massive government spending, anti-business rhetoric, tax increases or the threat of tax increases, increased regulation, etc. have created a climate that is damaging the economy in a big way. This is the worst recovery from a recession ever. Unemployment is the highest in our lifetimes, with no sign that it will go down in a meaningful way for a long time. Obama owns these results, even if the recession started before he took office.

Oviously I disagree:

Of course counterfactuals are impossible in economics; but we have to go on the data we have. I've read some commentators who say that because we can't scientifically measure the effects, we should therefore not do stimulus, but of course that's absurd since any course of action can be criticized on that count, including inaction.

I think there are a few stances one could take on the stimulus:
It was a complete failure, the "multiplier" effect is 1, and we've gotten nothing from it except debt
Stimulus worked to boost production and increased GDP, but the effect wasn't enough to justify the debt incurred (i.e. it accepts Keynes theoretically but still isn't convinced). This argument could also encapsulate the Moral Hazard issue- moral hazard problem is too big to justify the temporary economic benefit.
Stimulus was a success, and without it things would have been much worse. It was worth the debt incurred.
Germany is an interesting comparison, but I don't think it can be looked at without seeing it as a part of the larger European Union, which makes economic decisions as a whole. I would see Germany as analogous to the Northeast Corridor, as the most educated and advanced part of the European economy. Like us here in the northeast, Germany has lower unemployment than southern Europe, which also didn't do much stimulus (as part of the same EU). Like the less developed parts of the US, southern Europe was hurt badly by this recession and isn't recovering well at all.

But I accept your point that we're all set in our preconceptions.

The President's economic team blundered badly in predicting an 8% top unemployment rate, but that speaks to their poor crystal-ball reading, and doesn't say anything about effects of stimulus. After all, unemployment went past 8% long before significant stimulus was in place.

As for your final point, it's true that the Democrats own the recovery (though not the Crash). I think they blundered in not doing enough stimulus (many on the economic team argued for stimulus well north of $1 trillion, and it ended up being $700 billion), but of course now we're into more counterfactuals.

The continued poor economy will hurt Dems at the polls, as it should. You think it's because they're pursuing the wrong policies, and I think it's because they didn't have the courage of their convictions. Either way it's their fault though.

The nice thing about an undivided government (like 2009-2010, and of course 2001-2007) is that we can hold the majority responsible for their record. If the GOP takes one or both houses of congress, things get much murkier.

Worship of the Captains of Industry (posted by DT)

I'm a social worker, and proud of the work I do with people who are in psychiatric distress. I've worked a great deal with people at the bottom of the food chain during my career. Now when I used to tell people what I did, the most common response from those not in the field was something like "Oh, that's so noble!". It can feel a bit patronizing, actually, but it feels good too that people appreciate and value the work I do.

But in the past few years I think something has changed in America. It used to be that social workers, teachers, and police were, if not high-status in most ways, at least seen as people who sacrificed something of themselves for the good of society. Meanwhile, those in the business world were seen as people more out for themselves- not greedy bastards or anything, but also not noble do-gooders.

But now, as the works of Ayn Rand have swept the Right, the new Heroes are the captains of industry. They provide the jobs for the rest of us. They pay the taxes that support society (at least for now, until the Right gets its way on tax reform). They take the rest of us, the meek and helpless proletarians, on their shoulders and bequeath in their magnanimity the jobs that will allow us to maintain our bare existence.

Now I always thought that the executives and the successful enterpreneurs were pretty well compensated for their hard work and risk-taking. Our capitalist system rewards these winners with mountains of money; in fact the mountains have grown considerably over the past 10 years in comparison to the rest of us. The Center on Budget and Policy Priorities reports that "two-thirds of the nation's total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928..."

So I don't think one can argue that the winners are being disrespected by the market. But on top of the fact that the rules of the game are continuing to tilt further and further in the direction of the Haves, I also have to endure pundits telling me that I should be thanking the Captains on bended knee for allowing me to eat their scraps. And this after 2007-2008, when the creme de la creme of the Overclass at Goldman Sachs and AIG destroyed the economy along with five million jobs that look like they're not coming back for many years. I'm supposed to thank these thieves?

Look, I believe in capitalism. To paraphrase Churchill, capitalism is a terrible way to run an economy, and the only thing worse is Everything Else. We do need the Captains of Industry. But they need us too. And they're not sacrificing themselves for us- they're just doing what they've always done, which is try to make as much money as they can, however they can.

You don't get brownie points for that in my book. Your bank statement will just have to be enough.

UPDATE: Here's a Youtube of Sarah Pailin talking with a woman who is criticizing her for quitting the governorship of Alaska. The part that strikes me and many others is the look she gives her daughter when the woman they are talking with tells them that she is a teacher:

http://www.youtube.com/watch?v=uKflKzmfRCw&feature=player_embedded

Maybe my faithful readers think I'm reading too much into a look, but look for yourselves and decide (at the 1:10 mark)

UPDATE 2: My friend the Gun Toting Liberal has a related post up here: http://guntotingliberal.blogspot.com/2010/08/capitalism-say-it-soft-and-its-almost.html with which I totally agree. I thought I'd bring my massive traffic his way.