Mitt Romney Does Not Understand Ricardian Equivalence Either

I guess CNN felt compelled to allow Mitt Romney words to be aired because Romney was once a Presidential contender but the following is really stupid:

These are extraordinary times, and like a lot of Republicans I believe that a well-crafted stimulus plan is needed to put people back to work. But the Obama spending bill would stimulate the government, not the economy … We're on an economic tightrope. The package that passed the House is a huge increase in the amount of government borrowing. And we've borrowed so much already that if we add too much more debt, or spend foolishly, we could invite an even bigger crisis … First, there are two ways you can put money into the economy, by spending more or by taxing less. But if it's stimulus you want, taxing less works best. That's why permanent tax cuts should be the centerpiece of the economic stimulus.

Maybe Romney is thinking along the lines of the Friedman permanent income hypothesis when he calls for permanent tax cuts but he also noted we have a huge deficit. Paul Krugman understands how to put the Friedman permanent income hypothesis together with the long-run government budget constraint and apply it to increases in government spending as well as tax “cuts” which are actually only tax deferrals:

a temporary increase in government spending should have a larger impact on demand than a permanent increase, not a smaller impact. And that’s actually an important point: one way to explain why government spending is better than tax cuts as a stimulus is to say that temporary tax cuts aren’t effective at increasing demand, but temporary spending increases are. Here’s the logic (which follows directly from Milton Friedman’s permanent income hypothesis, by the way): suppose that the government introduces a new program that will cause it to spend $100 billion a year every year from now on. To pay for this, it will have to raise taxes by $100 billion a year, permanently — and if consumers take this into account, they might well cut their spending enough to offset the increase in government purchases. But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.) So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.

The same logic falls under the heading of Ricardian Equivalence - a topic that Robert Barro understands. Yet- Mitt Romney gets this all completely backwards. I guess when he was running for President, he never quite grasped these basic topics even though Greg Mankiw was one of his economic advisors!

Australia’s catastrophic Summer of 2009

The image on the right is of a koala in South Australia that sought refuge from the extreme heat this last fortnight by climbing into a tub of water in a resident's back porch.

This week 60 percent of the northern Australian state of Queensland is subject to flooding while the Southern state of Victoria is scorched with unprecedented record temperatures of 43 degrees Celsius. Tomorrow’s temperature is expected to reach 44 degrees in Melbourne and 46 degrees in rural Victoria, making it the hottest place on the planet. This extraordinary and unprecedented heat, combined with strong dry winds, is expected to worsen the fires in industrial tree plantation and native bush already raging in this state. The high temperature is also expected to lead to yet more large power blackouts so there’s a question mark tomorrow as to whether residents will be able to relieve their heat-stress by switching on their fans or air conditioners…or even their fridges? [1] Last Friday “half a million homes and businesses were blacked out, and patients were turned away from hospitals.” [2] The number of bodies being stored at the city’s morgue is witness to the fact that over three times as many people are dying at this time. [3]

The Melbourne heat has also caused an electricity substation to explode. That shut down the city's entire train service, trapped people in lifts, and blocked roads as traffic lights failed. [2] Further severe disruptions to the city’s train system is expected tomorrow as well and this is exacerbated by railway lines warping and becoming unusable as a result.

Victorian farmers have lost many crops this summer as vegetables died from the heat and fruit crops stewed on the trees. The situation for them was already bad. Last October it was reported that “a combination of high temperatures and close to no rainfall” had meant that “hundreds of farmers had then reached the point of no return.” The Mallee, Wimmera and north-east wheat crops were destroyed by a combination of the heat and dry winds and low irrigation allocations were then placing a question mark over continued production in the Victorian horticulture and dairy industries this summer. [4]

Even in my normally mild Tasmania the state suffered its second-hottest day in a row, as temperatures reached 42.2C in some areas. “Two days before, Adelaide hit a staggering 45.6C. After a weekend respite, more records are expected to be broken this week.” [2] Fish populations are under stress in the Murray-Darling Basin of Victoria, New South Wales, South Australian and Queensland. Low water levels and hot temperatures have resulted in fish kills in parts of the system. Water shortages also pose risks of algal blooms and severe damage to the ecosystems. [5]

Climate Change Minister Penny Wong said the record heat is yet another sign of global climate change scientists have forecasted."Eleven of the hottest years in history have been in the last 12, and we also note, particularly in the southern part of Australia, we're seeing less rainfall," Wong told reporters."All of this is consistent with climate change, and all of this is consistent with what scientists told us would happen." [6]

Many people around me are trying to change the way they live. They have a creeping conviction that they will not survive unless quick change occurs and have stopped waiting for government to take the lead. I pray that it’s not too late?

"Despite the very serious nature of the threat to environmental preservation, the inherent inertia of our system will probably block effective action at least until public concern is galvanised by some catastrophic disaster."

'Citizens' Action - Vital Force for Change', Wm. Michael Kitzmiller and Richard Ottinger, Center for a Voluntary Society 1971.

[1] Power switched off in heat wave
30th January 2009
http://www.abc.net.au/rn/breakfast/stories/2009/2477962.htm

[2] Parched: Australia faces collapse as climate change kicks in
Geoffrey Lean and Kathy Marks report on the worst heatwave in the country's history
Sunday, 1 February 2009
http://www.independent.co.uk/news/world/australasia/parched-australia-faces-collapse-as-climate-change-kicks-in-1522529.html

[3] Heat behind a crush at the mortuary
Erdem Koch, February 7, 2009
http://www.theage.com.au/national/heat-behind-a-crush-at-the-mortuary-20090206-7zzk.html

[4] Record heat destroys Victorian wheat crops
Wires, October 02, 2008 09:28am
http://www.news.com.au/heraldsun/story/0,21985,24434725-5017353,00.html

[5] Murray-Darling needs quick action: environmental group
Ξ February 5th, 2009
http://watersanity.com/?m=200902

[6] Australian Heat Wave To Last Six Days, Signaling Global Warming
Posted on: Thursday, 29 January 2009, 16:58 CST
http://www.redorbit.com/news/science/1631148/australian_heat_wave_to_last_six_days_signaling_global_warming/

The Rise in the Unemployment Rate Understates the Weakness in the Labor Market

BLS leads with some bad news in its January 2009 Employment Situation Summary:

Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors.

The news further down paints an even darker picture:

The civilian labor force participation rate, at 65.5 percent in January, has edged down in recent months. The employment-population ratio declined by 0.5 percentage point to 60.5 percent over the month, and by 2.4 percentage points over the year.

The civilian labor force participation rate was 65.7% as of December 2008 and had been as high as 66.4% as of December 2006, which means the rise in the unemployment rate actually understates the fall in the employment-population ratio, which fell from 61% as of December 2008 to 60.5% last month. The employment-population ratio had been 63.4% as of December 2006. While some of us were unimpressed with the employment-population ratio being only 63.4% given that this ratio was at or above 64% for much of Clinton’s second term in office, I’d be incredibly happy if we could see the employment-population ratio approach this level in the next couple of years. Of course, this is not likely to happen unless Congress pass a stimulus bill over the objections of the Herbert Hoover faction.

We’re All Keynesians Now

Remember when Richard Nixon said this line. Daniel Gross does too:

There are three options government can pursue when the economy goes south. First, the Fed can cut interest rates, buy up assets, and extend credit, all of which the central bank has already done. Second, Congress can cut taxes on businesses and consumers in the hope they will spend more. The first effort—last year's tax rebates—didn't have the intended effect since consumers used much of the windfall to pay down debt or save … The third option is for the government to directly purchase goods and services, to substitute the demand that consumers and businesses aren't providing. The Washington remnant of the Republican Party—40 senators and 178 representatives—is all for Options 1 and 2, cheap money and tax cuts. But they're having great difficulty with Option 3. They have forgotten Richard Nixon's famous line that "we're all Keynesians now." To them, spending government funds to goose the economy is unacceptable, not just because of the possibility of poor execution—i.e., pork. No, many are rejecting it as a matter of principle. Even though several Republican governors are pleading for assistance in the form of federal spending, Washington Republicans are saying no.

Gross notes that those Republicans who are responsible for run state and local governments support the Obama stimulus but the current crop of Washingtonian Republicans support the Hoover approach. Speaking of Hoover - Dick Cheney got it right:

Administration officials have been warning for weeks that failure to pass the bill could lead to an even deeper recession. That was the message Vice President Dick Cheney brought to a closed-door Senate GOP lunch Wednesday, reportedly warning that it’ll be “Herbert Hoover” time if aid to the industry was rejected, according to a senator familiar with the remarks.

How come the only Washingtonian Republicans who seem to get this issue are also two of the most evil people ever to be allowed in the White House?

How to Set Up a Right Wing Think Tank

With the economy tanking and people having to scramble for good jobs -- here is an opportunity too good to be missed: How to set up a right wing think tank.

Read this & enjoy.

http://www.archive.org/details/HowToStartARightWingThinkTank

Stimulus Porn: Commonsense Observations

I do not pretend to be an expert on stimulus plan, but it seems to be too little, misdirected, too much infected with tax cuts, and filled with special interest nonsense.

The Republican speak authoritatively as if tax cuts are the best way to get investment going, but real investment, the kind that results in the production of goods has been terribly anemic in spite of decades of tax cuts.

I do note that one of the most direct ways during the recession is to eliminate costs, including debts, that hold the economy back. Letting assets falling value raises the rate of profit, once the realization sets in that the asset prices have hit bottom.

Leaving banks fail and writing off debts will cause some dislocation, but they will leave both the economy and society stronger.

In terms of getting money spent, putting it in the hands of the poor and the unemployed seems far more reasonable likely to create spending than to give to the rich, who may just pump up asset prices once they feel confident, undoing some of the stimulus.

In terms of public works, Gray Brechin, has been doing remarkable research showing how much the public works of the New Deal have contributed to the country to this present day. The government has the opportunity to sell bonds at less than 3%. Interest costs of public works represent a significant part of the total costs. Taking advantage of the bargain basement cost of credit now represents a major savings, increased jobs, plus the opportunity to make a significant contribution to both the economy and society.

Fiscal Stimulus: Are the Senate Moderates Consulting with Martin Feldstein?

The close of Martin Feldstein’s An $800 Billion Mistake had the right tone:

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:

Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? ... The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the "Medicaid matching rate," a technique for reducing states' Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for "state fiscal relief." ... If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting.

Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):

it's not at all clear what kind of concessions were necessary to cross the 60-vote threshold. TPM, for example, obtained a staff paper circulated today with nearly $78 billion in cuts, with a lot less money for states, healthcare, and education. Did the Democratic leadership sign off on these cuts? (Maybe.)

Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:

Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?

I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!

Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.

Was last September's bailout dishonest?

"There was no credit crisis. What was happening was much more arcane: A few big institutions that had made bad bets were at risk of going bust, and that’s it. And if they had gone bankrupt, it wouldn’t have been the end of the world. In fact, there is huge excess capacity in financial services and there’s a need to focus on the healthy ones and let others fail. Meanwhile, business lending and consumer lending were still strong in September and October, and it’s still okay." [1]

"Maybe Bernanke and Paulson had information that they were not making public, but the available data simply did not support what they were saying....This was a lot like the run-up to the Iraq invasion in 2003. You had people in government saying: `We’re smart guys, trust us.’ But they were either wrong or they were lying." [2]

"Normally, when you’re going to spend a lot of money, you present the data and the economic theory to support it, yet here’s the biggest non-military government intervention in history since the Great Depression, and there was no evidence presented to support it, and no detailed economic argument made about what market failures this $700 billion was going to fix.....“If what we’re experiencing is a generic recession, all that money spent investing in the banks would be wasted, and that may be what this is: a generic recession.”" [3]

"With all the money that’s already been committed, it is going to be hard to get the stimulus money that is needed now,” she says. “Deficits are already so massive that at some point interest rates on long bonds are going to jump from 3% to 5%, and that will be good-bye mortgage markets." [4]


[1] Octavio Marenzi, founder of financial technology research and consulting firm Celent. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx

[2] V.V. Charri, an economist at the Minneapolis Fed. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx

[3] Patrick Kehoe, co-author of an article entitled: 'Facts and Myths About the Financial Crisis of 2008'. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx

[4] Yves Smith from the Naked Capitalism blog. As quoted in 'Follow the Money'
From the 2/1/2009 Issue of Treasury and Risk
By * Dave Lindorff
http://www.treasuryandrisk.com/Issues/2009/February%202009/Pages/Follow-the-Money.aspx

CBO Does Not Agree With Brian Riedl

I normally do not cite the Washington Times as a good source for economics but in this case it does seem they are getting what the CBO has to say correct in the following sense:

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term ... CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.

It is true that the Washington Times also talked a lot about long-term crowding-out. Douglas Elmendorf writing for the CBO also notes long-term crowding-out:

Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity … In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy. The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.

This admission that a long-term fiscal stimulus that concentrated on government consumption rather than government investment would lead to long-term crowding-out follows what Elmendorf writes about the short-term effects:

CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.

As we noted, Brian Riedl tried to argue short-term crowding-out, which the CBO quite clearly says will not be the case. Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.

I guess we should thank the author of this Angrybear post for bringing to our attention the Washington Times somewhat misleading account of what CBO said – even if Sammy refuses to recognize the critical distinction between short-term Keynesian effects versus long-term classical effects.

Revoke Krugman's Nobel Prize!

Yes, I know, not only has no Nobel Prize ever been revoked for anything, but they certainly do not do so for idiotic statements made by winners after they have won. However, as the first winner of the prize for international trade in 31 years, I find it appalling that Paul Krugman has come out for the "buy American" provision in the fiscal stimulus package now under consideration in the US Senate, a provision not supported by President Obama, and roundly denounced by pretty much everybody outside the US, a provision that would violate promises made in November in Washington not to engage in protectionist actions for "at least a year," with at its worst the nightmare possibility of a rerun of the trade war of the 1930s following the US Smoot-Hawley tariff that exacerbated the Great Depression. While some may dismiss such a possibility now, the standing of the US in the world on economic policy may have never been worse, given the role of the collapse of our sub-prime market in the current troubles, and with world merchandise trade dropping at an annualized rate of nearly 45% in November. This is not the time to be playing with such irresponsible fire.


I did agree that Krugman was deserving of the prize as the person who applied an innovative idea to both trade and to regional economics (aka "economic geography"), as the last winner for trade did also, Bertil Ohlin. However, I was unhappy that it was not shared, and this unhappiness appears to be spreading, with a recent posting at voxeu by Jota Ishikawa on the matter. He named a number of others, but had the two I think most deserved to share it upfront. One is Avinash Dixit, given that the model that Krugman applied is the Dixit-Stiglitz model of industrial organization. The other is Masahisa Fujita, who was the first to apply the Dixit-Stiglitz model to urban and regional economics in a not widely read journal, Regional Science and Urban Economics in 1988, three years before Krugman's paper in 1991 in the Journal of Political Economy the Nobel committee recognized (and in which Krugman failed to cite Fujita). Frankly, in this area Fujita's work has been far more innovative and of far higher intellectual quality than that of Krugman, and I also note that nobody east of India has ever received the prize.

I close by also whining again that Krugman has long gotten away with seriously misrepresenting the state of affairs in economic geography and urban and regional economics, claiming that until he came along the discussion of agglomeration was all verbal and non-rigorous. He has to this day never admitted the existence of or cited the work of such individuals as Peter Allen, Roger White, Gunter Haag, or Wolfgang Weidlich, who were doing mathematically rigorous such models, some of them with close resemblance to later work of Krugman's, thoughout the 1980s, even before Fujita's work, who is an economist. These people were even easier to ignore as they are mostly physicists with an occasional geographer thrown in (White) and published their work in such places as Environment and Planning A, Geographical Analysis, and the Journal of Regional Science, easy to ignore for a publicity hound like Krugman, and easy for a sloppy Nobel Committee to miss that clearly did not do its homework very well.

Gun Nuts Roll the Virginia Senate

As I predicted, Democrats are now kowtowing in fear to the jackboots of the National Rifle Association. While Democrats control the Virginia Senate, 21-19, yesterday that body passed a bill, 23-17. to allow people to carry concealed weapons into restaurants serving alcohol, although its backers say it is reasonable because they are not allowed to consume alcohol themselves and must inform somebody in the restaurant that they are packing heat. Goody. There is a bill still alive to close the "gun show loophole" that made it out of a committee, but everybody is forecasting it will not pass the whole Senate. As it is, this new bill will easily pass the GOP-controlled Assembly, although I do not know what Governor Kaine will do with it. In any case, all the hysterical gun rights advocates freaking out that everybody is out to take away their rights are way off base here in Virginia, as I forecast in an earlier posting on this subject. The gun nuts have won another one.

Defense Spending in 2010: Rightwingers Portray Increase as a Cut

Josh Rogin has an irony for us:

The Obama administration has given the Pentagon a $527 billion limit, excluding war costs, for its fiscal 2010 Defense budget, an Office of Management and Budget official said Monday. If enacted, that would be about $14 billion more than the $513 billion allocated for fiscal 2009 (PL 110-329), including military construction funds, and it would match what the Bush administration estimated last year for the Pentagon in fiscal 2010. But it sets up a potential conflict between the new administration and the Defense Department’s entrenched bureaucracy, which has remained largely intact through the presidential transition. Some Pentagon officials and congressional conservatives are already trying to portray the OMB number as a cut by comparing it with a $584 billion draft budget request compiled last fall by the Joint Chiefs of Staff for fiscal 2010.

I’ll concede that a 2.7 percent nominal increase is not a large increase. Whether this represents a real increase greater than 2.7 percent or less than 2.7 percent depends on whether we have deflation or inflation over the year. But what the Joint Chiefs of Staff had requested represented a 13.6 percent nominal increase.

Robert Kagan tried to argue:

Pentagon officials have leaked word that the Office of Management and Budget has ordered a 10 percent cut in defense spending for the coming fiscal year, giving Defense Secretary Robert Gates a substantially smaller budget than he requested.

The rest of Kagan’s op-ed claimed that President Obama wants to cut defense spending. I hear my boss wants to increase my pay by only 3 percent this year so maybe I should go into his office and request a 13 percent increase. That way – I can tell everyone he wants to cut my pay by 10 percent (as compared to my wish list).

If this had been a domestic spending program that got a 3 percent increase rather than a 13 percent increase and some liberal screamed “spending cuts”, one would think Tony Blankley would mock the liberal:

I have been told by sources at the Pentagon that they have been told to not expect full funding of all existing programs. And there is evidence that Obama has apparently been planning to force cuts on our military for some time.

Tony trusts his Pentagon sources? I guess he did not read Spencer Ackerman who first wrote:

Late last week, the White House Office of Management and Budget told the Pentagon to “substantial[ly]” restrain its planned fiscal 2010 budget, which the Bush administration beefed up by $60 billion over the 2009 budget before leaving office.

Spencer added:

Here’s where it helps to have Defense Secretary Bob Gates impose some discipline. Getting eight percent more, outside the costs of the wars (!), during a time of global economic distress is, you know, really generous. An OMB official told Rogin that the Bush-drafted request was a “wish list” for conceivable defense spending — a classy little sayonara to the incoming Obama team — not a realistic budget. Gates has been telling anyone who will listen that the budget is coming down, hard choices are going to have to be made, and people are going to have to stop whining and reconcile themselves to this new reality. So it’ll be interesting to see if he starts with this budgetary gem. But! I hear that he may send OMB a letter objecting to the $527 billion (outside of the wars!) ceiling.

Note that Spencer wrote this two days ago – and yet Kagan misrepresented the story yesterday, while Blankley misrepresented it today.

Heritage and the National Review Adopt the Treasury View

David Freddoso of the National Review interviews Brian Riedl of Heritage (not Cato - my apologies) in the The Case for No Stimulus:

The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another. If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar. If they borrow the money from foreigners, say from China, then net exports drop dollar for dollar, because the balance of payments must adjust. Therefore, again, there is no net increase in aggregate demand ... There is this notion that the redistribution of money from savers to spenders creates new spending. But that assumes that people store their savings in their mattresses. That may have been true in the 1930s, but today, people use their savings to pay down debts or invest. Or they put it into the bank, who in turn lends it to others to spend. Therefore, savings circulate through the investment side of the economy, which counts just as much in the GDP as the consumption side of the economy ... The government is going to have to raise interest rates in order to convince people to lend them the full amount they need. We’re already facing a deficit of $1.2 trillion this year, and 700 billion next year. We borrowed $700 billion for TARP, and now we’re going to borrow $800 billion for this stimulus package.

Hang on a second – Riedl notes that Keynesian insufficiency of aggregate demand may have existed in the 1930’s so that an increase in national savings does not automatically become investment demand but he argues for complete crowding-out ala the classical full employment model is the only relevant view for today’s economy. Has he been asleep for the past couple of years? Does he not know how far the employment-population ratio has declined or how low Treasury bill interest rates are? I know we should expect incredible stupidity from the National Review but this one really takes the cake!

Footnote: Thanks for Tom Bozzo for noting that Riedl is with Heritage and not Cato (I do get these two confused at time). It also seems that Tom's Angrybear colleague Sammy recognized Riedl's appropriate association even if Sammy did not realize (at first) that Riedl's argument was the discredited Treasury view.

Update: While I should thank Tom Bozzo for linking to this over at Angrybear, I am appalled by the critical comments from folks who have not been following this discussion of how Eugene Fama stumbled in his revival of the Treasury view. Apparently, my former colleagues at Angrybear do not read Brad DeLong who has even written a paper on this.

Iraq Update

Now that W. is out and a moderately calm set of provincial elections have been held in Iraq (although none in Kurdistan) that apparently will strengthen the hand of the current, pro-central-authority government, with declining, if not gone, violence more generally, it may well be that there will be little need to post much in the future on Iraq, and hopefully President Obama will be able to proceed with his plans to withdraw US troops over the next 16 months without a major catastrophe happening. While there continue to be loose ends, especially regarding the relationship between Kurdistan and the rest of Iraq and the matter of the distribution and control of oil revenues (see on this the ever informative Ben Lando at http://www.iraqioilreport.com), in many ways the situation may be finally reverting to what it looked like it might be when I wrote a column on the war on the day that Tikrit fell in April 2003, which was before all the unforeseeable screwups by the US from disbanding the Iraqi military to torturing prisoners at Abu Ghraib had happened to make truly royal mess of things. So, in this update at this time of transition, I shall go back to that moment when the war looked at its best to see how things stand. I forecasted three likely positives and three likely negatives of the war, with the latter outweighing the former in my view then and now, all of them having come true.


Positives:

1. The most important was to end the massive human rights violations by Saddam Hussein. This was followed by serious violations by others, although hopefully this is now subsiding, and this positive may finally be more seriously in place. on net after a lot of horrors.

2. Reduction of US military presence in Saudi Arabia, which had been sore point for al Qaeda. This was relatively trivial, but was achieved a long time ago.

2. Ending of international economic sanctions against Iraq. Also achieved a long time ago, but this was for a long time overshadowed by the general economic catastrophe that has engulfed Iraq since, now easing, although the recent fall in oil prices is not helping.

Negatives:

1. I forecast that the Christian population of Iraq would suffer discrimination and persecution by governments dominated by sectarian Shi'a. This happened, and today the Christian population of Iraq is about half what it was before 2003. Keep in mind that this has been one of the oldest Christian populations in the world, many of them speaking Aramaic, the language of Jesus himself, although one never hears about this from the Christian Right wingnut crowd.

2. I forecast that for the same reason the Christians would suffer, so would women generally. This does not seem to have occurred in Kurdistan, but there have been many problems in the rest of the country, with most observers saying that the status of women is generally worse off than before the war. Two sources are an older more detailed one, a report by the US ABA accessible at http://www.abanet.org/rol/publications/Iraq_status_of_women_update.2006.pdf, and a more recent but less detailed on by Women for Women International issued last year on International Womens' Day describing the status of women in Iraq as a "national crisis." A comment on that report is at http://www.womensmedia.cener.com/ex/030608.html.

3. And the worst was that I forecast that the US would lose support around the world and especially among Muslims as we would get bogged down and do bad things. I do not think I need to detail how accurate that forecast became.

Before ending this I want to address the matter of the "surge," which so many commentators have claimed was a "success" and how Obama and others should give credit to Bush for pushing it. I am sorry, but I do not buy it. The alternative was the in-place DOD plan to start drawing down troops back in 2006 that Bush turned around to increase troops there. As near as I can tell there were three bases for the claim of the surge bringing success.

The first was the turn of tribal sheikhs in al Anbar province against Al Qaeda in Iraq. However, this happened before the surge and was independent of it, other than the US giving the sheikhs arms. But this could have been done without the surge.

The second was the increase in rule by the central government in Basra in the South. The US role in this mostly involved bombing and little in the way of troops. Again, this could have been done without the surge.

Finally, there is the decline in violence in Baghdad. However, this was due to the ending of the neighborhood ethnic cleansing that had gone on for a long time, with the Shi'a-Sunni population ratio going from 2 to 1 to 3 to 1. The one area the surge might have helped slightly here was that to enforce this walls have been built between the neighborhoods, which damage the economy, but do help keep violence down. Apparently US troops helped with that, so maybe there we have one minor positive to be credited to the surge.

Retaliation – the Problem with Expenditure-Switching Policies

As I tried to present the discussion so far as to the Buy American provisions floating around Congress in their hotly debate ideas as to how to stimulate U.S. aggregate demand, Barkley reminds us that foreign governments might retaliate with their own expenditure-switching policies:

In 1930, the US passed the Smoot-Hawley tariff in order to preserve US jobs. This was a fixed exchange rate world under the gold standard. There was full bore reaction by other countries, most significantly the British Commonwealth ones, but others as well, and world trade declined sharply, certainly exacerbating the plunge into the Great Depression, although the degree of its role remains a matter of debate. However, I am unaware of any economist anywhere who argues that American jobs were saved by this catastrophic policy. Now there is a hard international political economic reality here that is being ignored. The just-ended Davos conference included fiercesome denunciations of the US for having triggered what is now the most widespread global recession ever. Merchandise trade declined in November at an annualized rate of 45%, while the big conference in Washington supposedly agreed on avoiding protectionism for at least a year, and in mid-January the US put a bunch of trade sanctions on the EU (no more Roquefort cheese to be had in the US anytime soon). Without doubt, such a stupid move by the US would this time also trigger massive reactions and the very serious danger of a full-blown trade war. No way this is going to help the world economy, much less the US one, although certain sectors might do better in the short run (Krugman's argument).

To be fair, Paul Krugman is hoping for more expenditure-adjusting policies:

Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise.

Whether or not such a global scale movement towards autarky would induce more global fiscal stimulus is an issue I’ll leave to those smarter about these things than me, but I thought it was interesting that even Mitch McConnell understands what Barkley is saying:

I don't think we ought to use a measure that is supposed to be timely, temporary, and targeted to set off trade wars when the entire world is experiencing a downturn in the economy

While we are experiencing some improvement in our net exports, the reason has more to do with our falling demand for imports than it does with rising exports. Real exports fell during 2008QIV and it is not surprising to see why if one reviews the information in table 1.1 of the IMF’s World Economic Outlook. World output slowed in 2008 – particularly among the advanced economies. This slowdown is projected to continue during 2009. The growth in world imports/exports also slowed – particularly among the advanced economies.

Any attempt by the U.S. to increase its aggregate demand via expenditure-switching policies will reduce the net exports of our trading partners. Given that our trading partners are also likely to face insufficient aggregate demand during 2009, Senator McConnell’s concern about setting off a trade war appears to be a legitimate one.