James Pethokoukis and Rudy Giuliani Must Think Lower Savings is the Key to Long-term Growth

With a hat tip to Cactus, let’s wonder the latest insanity from James Pethokoukis :

To a supply-sider, there is no worse tax than the capital gains tax. One big problem is that budgeteers surely would crunch the numbers and claim the plan would result in $2 trillion to $3 trillion in lost government revenue. Such "static scoring" that does not take into account the economic growth impact of lower taxes may well be bunk.

Ahem! The Reagan and Bush43 versions of “giving people their money back so they can consume” more sine any spending cuts lowers national savings. Abstracting from any Keynesian or short-term stimulus effect (after all, the supply-side school wants us to believe they are interested in long-term growth), lower savings translates into less investment and less long-term growth. But James Pethokoukis does not seem capable of writing something this basic and simple even if it is a key element of the debate. I have to wonder why U.S. News allows him to publish anything on economics at all.

Bush Says the Economy is Strong But Giuliani Say It is in Peril – But They Agree on Tax Policy

A new ad endorsed by Rudy Giuliani states:

With pundits and politicos handicapping the campaign like the Super Bowl, it's easy to lose sight of what's at stake. An economy in peril. A country at war. A future uncertain.

In the meantime, President Bush discussed the economy in Chicago:

We have a strong foundation in our economy, but we cannot take economic growth for granted. That's what I want to share with you. I understand that while there is a foundation that would be the envy of a lot of other nations, we cannot take growth for granted. We confront economic challenges, from the downturn of the housing sector to high energy prices to painful adjustments in some of the financial markets. Recent economic indicators have become increasingly mixed. Last Friday we learned that our economy has now had 52 months of uninterrupted job growth. That's a record. That's the longest period of job creation on record.Our entrepreneurs are taking risks. Our small businesses are expanding.

To be fair, the President did say there is some mixed news. But whether the economy is strong or the economy is in peril, Bush and Giuliani agree we need to keep taxes low even if they have no real intent on reducing government spending low. More on this theme from Paul Krugman.

New Hampshire

Have people seen Andrew Kohut's Times op-ed today? He argues that the polls were wrong on Obama/Clinton because a) lower income whites are less likely to answer surveys and b), in adjusting for this long-standing fact, pollsters failed to take into account the greater racism of those low-imcome whites who refused to answer compared to those who did.

If he's right, then it would seem there was no late break for Hillary, and all the business about Hilary's showing emotion had nothing to do with the result. What do you think?

A Robot Reads from Michael Perelman

Hear a robot reading from my book, The Invention of Capitalism

http://technorati.com/videos/youtube.com%2Fwatch%3Fv%3DNlwxZHWsiB0

Arnold Schwarzenegger Has a Brilliant Idea

Our governor is proposing again to automatically reduce spending every time a state has a deficit and in good times to put money away for a rainy day. This last part reminds me of the strategy of Jerry Brown, who put money away for a rainy day. The Republicans, seeing money piling up in state coffers, argued that the savings was proof that the government to need the money. Voilà, the infamous proposition 13.

As a result of the Brown precedent, I assume that the Schwarzenegger plan will effectively ratchet down government spending. During bad times, you will get spending cuts. During good times, you will get saving and then tax cuts, which will create budget deficits requiring less savings. Grover Norquist would be proud that our governor would have turned to state into a bathtub, into which he could shrink the state.

Do We Have to Cut Social Security Benefits?

I was going to pass on the latest from Robert (no relationship to Paul) Samuelson until Greg Mankiw offered the silly oped to his readers without critical comment. The most offensive line in my view was:

Lightening the burden on the young requires cutting retirement benefits for the old - raising eligibility ages, being less generous to richer retirees and making beneficiaries pay more for Medicare. Simply increasing taxes or cutting other programs won't work. The problem is not just closing the budget deficit.

In other words, we must cut Social Security benefits according to Mr. Samuelson. Part of my objection to this silliness has been outsourced to Dean Baker:

Robert Samuelson has yet another diatribe talking about the budget breaking cost of "Social Security, Medicare and Medicaid." As CBO director Peter Orszag has tried to teach those willing to learn, the problem is health care, not aging.

Simply put – the expected future payments to Social Security recipients do not exceed the expected future payroll taxes dedicated to this program by all that much with the really big ticket items coming from things like expected future health care costs and expected future Defense Department costs relative to expected future income taxes under what those in the Republican Party (including that current President that Greg used to work for) wish to have as permanent policy. So when Samuelson makes claim that members of both parties are making false promises, then he must think George W. Bush is a Democrat.

We have all sorts of means for closing the fiscal gap including raising income taxes, cutting defense spending, and yes finding some means for providing for health care at lower costs. While Samuelson may be correct that we cannot simultaneously keep tax rates low, defense and health care spending high AND maintain the current level of Social Security benefits, his oped becomes yet “another diatribe” as Dean puts it when he limits his choice of policy options to slashing Social Security benefits. Now we know Samuelson and the Washington Post have had a slew of such silly opeds in the past, but why can’t Greg Mankiw point out even the obvious to the readers of his blog?

"Where's the Beef?" and the Three Roles of Democratic Presidential Candidates

The line thrown by Walter Mondale at Gary Hart during his comeback in the 1984 presidential race was echoed in recent days, supposedly coming from Hillarians at Obama. This shows their filling the same roles from that era: Hillary as Establishment Dem and Obama as New Centrist Dem. The third role is Leftist Insurgent, now being played by Edwards, with Jesse Jackson playing it in 1984, after George McGovern dropped out. These roles frequently pop up in races for the Dem nomination for president, and I think can be traced back to at least 1960.

Labor's role in this has changed. They used to always be part of the Establishment candidate's support. But, ending of the Cold War, more youth in labor, and greater inequality, have pushed labor left, with it now split itself and also among the candidates. Another oddity is that the Clintons collectively have played in all three roles: supporters of a leftist insurgent with McGovern in 1972, Bill the New Centrist in 1992, and now Hillary as the Establishment candidate.

The Wall Street Journal Becomes Underconsumptionist

Hayashi, Yuka. 2008. "Growing Reliance on Temps Holds Back Japan's Rebound." Wall Street Journal (7 January): p. A 1.

"One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits."

"More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987."

"Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years."

"In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996."

"The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S."

"Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies."

Preventable Deaths

Reuters reports on more evidence that our health care system is far from the best:

France, Japan and Australia rated best and the United States worst in new rankings focusing on preventable deaths due to treatable conditions in 19 leading industrialized nations, researchers said on Tuesday. If the U.S. health care system performed as well as those of those top three countries, there would be 101,000 fewer deaths in the United States per year, according to researchers writing in the journal Health Affairs. Researchers Ellen Nolte and Martin McKee of the London School of Hygiene and Tropical Medicine tracked deaths that they deemed could have been prevented by access to timely and effective health care, and ranked nations on how they did. They called such deaths an important way to gauge the performance of a country’s health care system. Nolte said the large number of Americans who lack any type of health insurance - about 47 million people in a country of about 300 million, according to U.S. government estimates - probably was a key factor in the poor showing of the United States compared to other industrialized nations in the study.

The Economy is Great But Let’s Cut Taxes Anyway?

Has Paul Krugman turned to forecasting NRO opeds by Lawrence Kudlow? Paul writes:

But the opponents of change, those who want to keep the Bush legacy intact, are not without resources. In fact, they’ve already made their standard pivot when things turn bad - the pivot from hype to fear. And in case you haven’t noticed, they’re very, very good at the fear thing ... When the economy is doing reasonably well, the debate is dominated by hype - by the claim that America’s prosperity is truly wondrous, and that conservative economic policies deserve all the credit. But when things turn down, there is a seamless transition from “It’s morning in America! Hurray for tax cuts!” to “The economy is slumping! Raising taxes would be a disaster!” Thus, until just the other day Bush administration officials were in denial about the economy’s problems. They were still insisting that the economy was strong, and touting the “Bush boom” - the improvement in the job situation that took place between the summer of 2003 and the end of 2006 - as proof of the efficacy of tax cuts. But now, without ever acknowledging that maybe things weren’t that great after all, President Bush is warning that given the economy’s problems, “the worst thing the Congress could do is raise taxes on the American people and on American businesses.”

If you think this was a bit unfair to the Bush cheerleaders, read Larry’s latest:

the Goldilocks economy remains alive and well. It’s still the greatest story never told ... And the reality is that today’s economic weakness is coming from the business side, not the sub-prime/housing/consumer side. We’re witnessing high energy and raw-material prices cause unit costs for businesses to rise faster than prices. That spells weakening profits … Right now the single best thing President Bush and Congress can do is slash the corporate tax rate for large and small businesses. Bush must reach out to Charlie Rangel and move the corporate tax to 25 percent from 35 percent. Then, instead of taxing successful capitalists as an offset, Congress can entirely abolish corporate-tax subsidy loopholes, special provisions, and other corruption-inducing K-Street earmarks. A middle-class tax cut to help families and small businesses would also work wonders.

Times are good? Give everyone a tax cut. Times are not so good? Give everyone a tax cut. In Larry’s world – there is no long-run government But the suggestion that today’s weakness is coming from the business investment side and not the housing investment side sort of ignores the fact that business investment has increased by more than 5 percent in real terms since last year, while residential investment has declined by more than 16 percent in real terms. Does anyone at NRO fact check Larry’s fluff before publication?

New Orleans & My Own Mini-Katrina

Late last week, while attending the American Economic Association meetings in New Orleans and talking to people about hurricane Katrina, we got word of an extraordinary storm hitting Chico. Because we have a huge tree right on top of our house and the reports were that trees were toppling all over -- some almond orchards must have their trees -- we figured that our house was a goner.

We called and neighbors told us that our house was the only one that did not suffer external damage. We were especially relieved driving home last night to see that electricity had been restored almost everywhere as we approached our house. Suddenly, the last two houses were dark. So we are left without electricity, water, or the ability to use our gas stove.

Sadly, until power is restored, I will not be very active here. See you soon.

US Wasting Money on Health Care

At the ASSA/AEA meetings my wife and I picked up the latest UNDP Human Development Report 2007/08. The numbers are really for 2005, but interesting nevertheless. So, the US was then second in real per capita income (has since slipped behind Norway to third), and was first in per capita spending on health, at over $6,000 per person. Only three other countries over $4,000, with highest income Luxembourg a bit over $5,000, and Norway and Switzerland each barely over $4,000. However, more striking is that the US is top in the world in percent of GDP spent on health care (from both public and private sources), at 15.4%. Second is "Occupied Palestinian Territories" at 13.0%, followed by Malawi at 12.9%. There are several other poor countries above 10%, with only two high income ones so, Germany at 10.6% and France at 10.5%.

You all know where this is going. So, US life expectancy, 77.9 years, is now tied for 29th in the world, with places like Costa Rica doing better. Last time I saw these figures, the US was tied for 17th, not so hot, but a lot better than 29th. The US is tied for for 30th on infant mortality at 6 per thousand and tied for 34th on maternal mortality at 11 per thousand. I think that is plenty for this post.

Progressive Fiscal Stimulus and the Fair Tax

Brenda has argued in comments here that any fiscal stimulus should target the poor. Lawrence Summers appears to agree:

fiscal stimulus only works if it is spent so it must be targeted . Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.

And now Pat Regnier wants us to believe that Mike Huckabee and other Fair Tax fanatics are progressives.

Critics, including conservative commentator Bruce Bartlett, have argued that people generally think of sales taxes in terms of mark-ups - that's how state sales taxes are expressed - and that FairTaxers are just trying to come up with the lowest possible number to make their idea easier to sell. A 30% tax on food and medicine would be hard on the poor, wouldn't it? If that's all there was to the plan, yes. On its own, a national sales tax would be extremely regressive - that is, it would tax everyone who spent everything they earned (and that's a lot of us) at 23% of their income, while those who made enough money to set some aside would, in effect, pay a lower overall rate. But the sales tax plan would partly offset this effect by sending every household in America, from the family of a poor single mother to Warren Buffett, a check to cover the taxes on their spending up to the poverty level. Factor in that cash from the government, and each family's net tax burden goes down, so that the Fair Tax looks more progressive.

Bruce Bartlett and others have argued that the 30% tax would fall short of covering even current government spending even if these checks were never sent out. And yet Mr. Regnier fails to miss the massive fiscal stimulus (or was that irresponsibility) of the Fair Tax replacement plus more transfer payments. As progressive as the Fair tax crowd wish to dress this pig up, this is not a serious policy proposal.

Hat tip to Mark Thoma for his coverage of the latest from Lawrence Summers.

Mark Thoma Slams Edward Lazear “Growth Policies”

Lazear takes note of the dismal job performance news with:

"We have pushed economic growth policies throughout this administration and we're not going to stop doing that now," Lazear said in a Bloomberg Television interview in Washington. "If there are necessary steps that need to be taken, the president will be considering those over the next few weeks."

Now what good Keynesian could object?



Well I might have one objection but let me outsource this one to Mark Thoma:

Unfortunately, it's stabilization policy, not growth policy, that's needed to combat a recession, and Lazear ought to know the difference. The two are not necessarily the same. The administration has pulled this trick before - using stabilization arguments to justify permanent reductions in tax rates

OK, Mark was outsourcing his reporting of the BLS bad news to my Angrybear post, but his update is so well put that it should be front and center on the eventual debate over stabilization policy this year.

Interpreting Iowa

The good news is that Obama campaigned on cooperation and won. The bad news is the same as the good. The Huckabee Moment demonstrates that evangelicals, even though they haven’t paid for it, still own the Republican Party. That makes me nervous. But let’s talk about Obama.



The conventional wisdom, which is probably correct, is that Democrats are more likely to favor cooperative solutions to problems, and cooperation itself as an ethical ideal, while Republicans come down on the side of authority and force. Of course, since a two-party electoral system pushes both parties toward the median voter, those tendencies are often muted in practice. During the past eight years, however, we have lived under a regime whose voting strength came from its base and not the uncommitted middle, and the ideology of force has flourished. Obama proposes the mirror opposite: enthusing the Democratic base under the banner of caring-and-sharing.

There is an aspect of this which is exactly what we need. For me, the political and economic world is, more than anything else, a vast array of collective action problems. From climate change to ending global poverty to human rights to public health, we have to find ways to work together for the common good. This applies even, and perhaps especially, to “national security”, which is really the security of ordinary people to live their lives without fear of being attacked by soldiers, private militias or suicide bombers. I would like to think that the big turnout for Obama reflects a widespread desire to build a more cooperative world.

The mistake, as Paul Krugman has been repeatedly arguing, is to think that we can get to cooperation by being cooperative. On this point Edwards is right: there are powerful interests, corporate and political, who will sabotage the cooperative impulse every step of the way. We have to fight tooth and nail for the right to care and share. Obama wants to lie down with the lions as an opening strategy, and he has signaled his desire to split the difference with the hard right on issues like health care and social security.

To be fair to the guy, his ability to run as a black man for president of a white-run country depends entirely on his being non-threatening. If he adopted even a smidgeon of Edwards’ rhetoric he would sink like a stone. This isn’t his fault; chalk it up to lingering racism. But that doesn’t change the political reality, which is that, to get the friendlier world the Obama voters thought they were voting for, we need the confrontational chutzpah that Edwards pushed.