Obama Budget: Mankiw Rehashes Old Spin

Greg Mankiw calls President Obama a deficit dove who loves to spend. Mankiw also accuses the White House of economic optimism:

they expect their policies to bring the recession to a swift conclusion. For the next four years, they forecast an average growth rate of 4 percent. The unemployment rate is projected to fall to 5.2 percent in 2013.Not everyone is so sanguine. The administration forecast is “way too optimistic,” said Nariman Behravesh, chief economist at IHS Global Insight and author of the excellent primer “Spin-Free Economics.”

OK – if one expects the recession to be deeper and more prolonged than the White House, why would one be upset that the White House is pursuing fiscal stimulus? Mankiw’s economic pessimism and his call for a more deficit hawk position strikes me as inconsistent.

Mankiw also repeats this line:

In a second term for Mr. Obama, with the economy recovered and unemployment stabilized at 5 percent, federal outlays would be 22.2 percent of G.D.P. — well above the average of 20.2 percent over the last 50 years.

Didn’t we already address this claim with:

A New Era of Responsibility - Renewing America’s Promise does show that the projected Federal outlay to GDP ratio for 2019 under President Obama’s proposed changed in the budget will be 22.6% as Greg claims but what Greg did not tell us is that the baseline budget projected Federal outlays to be 23.2% of GDP by 2019.

Update: The deficit hawks at the Concord Coalition does not agree with Mankiw’s deficit dove characterization:

A further complication is that many of the budget’s main components are linked in an effort to control the net effect on the deficit. Maintaining this linkage is critical for fiscal responsibility. However, it will prove to be a formidable political hurtle because it challenges the free lunch mentality that has taken root in Washington. New initiatives, popular with many Congressional leaders, are paired with tax increases and spending cuts that are not as popular ... Nothing in the budget directly alters the drift toward fiscal unsustainability, which is primarily driven by the projected growth of the three largest entitlement programs -- Medicare, Medicaid and Social Security. Under the budget, spending on these programs declines by just $32 billion relative to baseline assumptions through 2019 ... As the president acknowledges, any effort to permanently improve the fiscal outlook beyond the 10-year budget window will require more fundamentally addressing the structural causes of the long-term imbalance -- demographic changes and rising health care costs. While there is plenty of room to debate the priorities, assumptions, and details, it cannot be said that the Obama administration has taken a timid approach in its first budget. It confronts a broad array of challenges and does not pretend that we can have something for nothing.

While the Concord Coalition goes onto to note several factors that might work against President’s goal of long-term fiscal restraint, it is much more informative and balanced than Mankiw’s spin.

Grasping Reality with Both Hands Bound to the Standard Model

by the Sandwichman

Brad DeLong meanders out to the edge of the abyss of knowing but at the last minute pulls back in horror, clutching his standard model teddy bear to his breast...

The 1929-1950 period saw the last sharp decline in the American workweek--a decline that does not mean that the economy was depressed and performing poorly in 1959 or 1949 (or 1939) relative to 1929, but instead that Americans had decided to take a substantial part of their increased technological wealth and use it to buy increased leisure.

Can you say A-N-A-C-H-R-O-N-I-S-M? The 1929-1950 period did indeed see the last sharp decline in the American workweek. But in what sense did Americans choose to buy increased leisure? They were, first of all, compelled by hardship to reduce their hours of work. They only chose shorter hours through work-sharing as an alternative to even greater unemployment. Secondly, Americans chose to legislatively impose shorter hours through the Fair Labor Standards Act. And if it wasn't for the strident objection of business they would have chosen the even shorter 30-hour workweek of the Black Connery bill. But the income/leisure choice standard model that Brad invokes doesn't approve of the imposition of shorter hours by legislation.

A second anomaly in Brad's historical interpretation that Americans decided to take increased wealth as leisure is that this choice mysteriously stopped occurring after the 1950s even though wealth continued to increase vigorously. Funny (peculiar) Americans somehow choose to take more of their "increased wealth" as leisure precisely at the time their wealth is decreasing precipitously and then choose not to take it as leisure when their wealth is actually increasing.

Wait a minute! Did I say Americans chose to take their increased wealth as leisure when their wealth was actually decreasing? But the standard model says... Can somebody help me out here? If wealth is decreasing, in what sense is it "increasing"? Brad?

"...Americans had decided to take a substantial part of their increased technological wealth and use it to buy increased leisure..."

I'm sure the math explains it double-plus good, though.

I do agree with Brad, however, that the sharp decline in the workweek, 1929-1950 was a good thing, at least in retrospect. Sometimes bad circumstances can impose necessities that turn out to be blessings. In this case, I would like to see an economist take on the proposition that the sharp decline in the workweek during the 1929-1950 period established a strong foundation upon which the post-war economy was built. I would love to see Brad DeLong or Paul Krugman take it on.

That hypothesis, by the way, is consistent with Keynes's view of the long-term problem of full employment and with Chapman's theory of the hours of labour.

If a sharp decline in the workweek can be (part of) the foundation of one exceptional period of prosperity, who is to say that another sharp decline in the workweek couldn't be part of the solution to the current crisis? For example, see Dean Baker's proposal for work time reduction as stimulus.

Please discuss.

Nice Blogs

Blogroll has been updated and expanded. If you have suggestions for good BLOGS with a concentration on economics, post them in the comments. They don't have to be on the left.

X-Efficiency and Economic Dogma

I just added a draft -- quickly composed today -- of section to put in my new book. It will go into a section showing the lengths to which economists would go to avoid dealing with work, workers, and working conditions. This is one of the episodes where economists risked dealing with the subject. Any comments would be very much appreciated.

Thank you very much

I cannot load pdf files here. Maybe someone can figure out how I can do so. I have to point you to another site.

http://michaelperelman.wordpress.com/2009/03/14/x-efficiency-and-economic-dogma/

The Evil Asians and their Savings Glut

Alan Greenspan has a self-serving piece in the Wall Street Journal.

Those evil Asians with their savings glut did us in & poor Alan was powerless.

He should read

Auerbach, Robert D. 2008. Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan's Bank (Austin, TX: University of Texas Press).

Some very interesting stuff there, Alan.

Washington Times on Long-term Growth Rates

The Washington Times tries to ridicule Paul Krugman:

Harvard economics Professor Greg Mankiw thinks that Mr. Obama's growth forecasts are overly optimistic and that the federal deficit will be a lot larger than Mr. Obama thinks. He was chastised by Princeton's Paul Krugman, a Nobel Prize winner in economics, who on his New York Times blog claims that Mankiw can only make the predictions that he does because of "more than a bit of deliberate obtuseness." He titled his post on Mankiw, "Roots of Evil." Last Wednesday, Mankiw responded to Krugman's attacks by suggesting: "Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?" Krugman has still not responded. It seems even a Nobel Prize winner isn't willing to lay money on Mr. Obama's rosy projections.

I’m not sure why one would be waging a bet against the US economy in the first place but I don’t blame Professor Krugman for ignoring this silliness. Speaking of silliness, the Washington Times lead this pathetic op-ed with:

The Obama administration is basing its budget forecasts on the economy growing an eyebrow-raising 15.6 percent above inflation between 2008 and 2013 - a drop of 1.2 percent this year followed by an average of 4 percent growth over the following four years. That's very impressive growth for any period of time.

So for the first five years, the Obama administration is forecasting a growth rate less than 3 percent – which would mean that its forecast for a 9-year interval would have average annual growth that is less than 3.5 percent. Did the author of this op-ed not realize that the average annual growth rate for the last half of the 20th century was about 3.5 percent?

Finish the Sentence

by the Sandwichman

What a delusion, to think that by spending twenty-six years digging, with a sliver of broken reason, a tunnel whose starting point is your mattress you would finally…

Louis Aragon, Paris Peasant, p. 47

Health Care Costs for Employers: Amity Shlaes v. Greg Mankiw

Steve Benen has a little fun with the latest nonsense from Amity Shlaes:

I'm a big science-fiction fan, so when I heard that conservative writer and FDR critic Amity Shlaes had compared contemporary politics to "The Matrix," I was anxious to see what she'd come up with.

But it was this claim that caught my eye:

Take one of the biggest problems in the U.S. economy today: jobs. Long before “subprime” or “cram down” became routine components of our language, we understood that employers need incentives to create new jobs to replace ones that are disappearing. We knew too that health-care costs are a growing deterrent to hiring or rehiring. Between 1996 and 2005 health care costs for employers rose by 34 percent relative to payrolls.

Didn’t Greg Mankiw and Doug Elmendorf suggest that this cost is fully passed onto workers in the form of lower wages? While I suggested that this may be an extreme assumption as to the lack of elasticity of the labor supply curve (see this post), Shlaes is arguing that none of these costs are passed onto workers in the form of lower wages. Maybe she should have read her own source:

Most economists believe that health insurance premium costs are ultimately passed back to employees in the form of reduced wages, so long-run compensation costs for employers are not affected by rising health care prices.

What is the Crisis About? Fictitious Capital or the Destruction of Wealth?

This short essay briefly describes the financial side of my interpretation that the crash reflected a disconnect between the underlying investment in the economy and its financial representation -- what Marx called fictitious capital. The stock market people call this realignment, "destruction of wealth," even though what is destroyed is the illusion of wealth. The illusion may have been capable of purchasing valuable things so long as other people accept that illusion.

Long ago people accepted the illusion as an illusion and went on with their business. Here is what a former governor of Illinois wrote:

Ford, Thomas. 1854. History of Illinois (Chicago: S. C. Griggs and Co.).

227: "Our Whig friends contended that the continual and violent opposition of the democrats to the banks destroyed confidence; which, by-the-bye, could only exist when the bulk of the people were under a delusion. According to their views, if the banks owed five times as much as they were able to pay and yet if the whole people could be persuaded to believe this incredible falsehood that all were able to pay, this was 'confidence'."

Ordinary people understood what was happening. Here is an incident from Chicago about the same time:



Peyton, John L. 1869. Over the Alleghenies; extracted in Warren S. Tryon, ed. A Mirror for Americans, 3 vols. (Chicago: University of Chicago Press, 1952): III, pp. 589-607.

605: Visiting Chicago in 1848, Peyton objects to taking wildcat notes from an obscure Atlanta bank [meaning that the unregulated bank probably had little or nothing backing up its money]. The hotelkeeper responds, is discussing notes:

"Why, sir, ... this hotel was built with that kind of stuff .... I will take "wild cats" for your bill, my butcher takes them of me, and the farmer from him, and so we go, making it pleasant all around. I only take care ... to invest what I may have at the end of a given time in corner lots .... On this kind of worthless currency, based on Mr. Smith's [the issuer's] supposed wealth and our wants, we are creating a great city, building up all kind of industrial establishments, and covering the lake with vessels -- so that suffer who may when the inevitable hour of reckoning arrives, the country will be the gainer, Jack Rossiter [the speaker] will try, when this day of reckoning comes, to have "clean hands" and a fair record .... A man who meddles, my dear sir, with wild-cat banks is on a slippery spot, and that spot the edge of a precipice."

A few years earlier, a Philadelphia banker wrote about this arrangement to the famous economist, David Ricardo:

Raguet, Condy. 1821. "Letter to David Ricardo, 19 April." In David Ricardo. Minor Papers on the Currency Question, 1809-1823, Jacob Harry Hollander, ed. (Baltimore: The Johns Hopkins Press, 1932): pp. 201-3.

202: "The circulating medium is there [in interior of the country] principally depreciated and inconvertible paper, and so far is the delusion still kept up, that in Kentucky and Tennessee new banks without a specie capital or [any] obligation to pay their notes and gold or silver, have lately been established."


202: "You state in your letter that you find it difficult to comprehend why persons who have a right to demand coin from the Banks in payment of their notes, so long forbore to exercise it. This no doubt appears paradoxical to one who resides in the country were an act of Parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our populations are either stockholders of banks, or in debt to them. It was not in the interest of the first to press the banks and the rest were afraid. This is the whole secret. Any independent man who is neither a stockholder nor a debtor, who would have ventured to compel the banks to justice, would have been persecuted as an enemy of society, and during the whole period of suspension of specie payments, not an instance occurred in this City of a suit being brought before a court of Justice. A friend of mine in New York was however bold enough to attempt it toward the close of the scene ... The Banks became alarmed, and began to call in their loans -- the local currency of New York became 5 percent better than it was -- millions of dollars worth of goods ordered from Europe were countermanded."

Here is the way a modern capitalist sees the same situation. Steve Palmer posted this on Lou Proyect's Marxism list:

Davies, Megan and Walden Siew. 2009. "45 Percent of World's Wealth Destroyed: Blackstone CEO." Reuters (10 March).
http://www.reuters.com/article/wtUSInvestingNews/idUSTRE52966Z20090310
Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis. "Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime"."

Even Sam Malone Has Been Laid Off

While Sam Malone and the Boston bar called Cheers were only make believe, Eddie Doyle tended bar at the Bull & Finch since 1974. One has to love the tag “Senior Liquor Dispersement Engineer”. Alas, Eddie has been laid off:

a few weeks ago he was told by Tom Kershaw, owner of the Cheers bar, that the recession had hit his industry and he was being laid off. Doyle, who is in his late 60s, said he's surprised but not bitter. "I'm a casualty of the economic situation that we're in," said Doyle, who spent part of this week cleaning out his office. Kershaw acknowledged that it was a difficult decision. "Business is way off," he said, adding that he would continue to send Doyle a weekly paycheck until the end of the year. "It was very tough. Personally, for me, it was a disaster. Eddie and I have been friends for 40 years."

Defending The Fed

Now that everybody is all over the Fed for all of our problems, I guess I shall be idiosyncratic and defend the institution. I think that they are struggling mightily, as well as the can, against an overwhelming tide that is now engulfing the entire world economy. They saw it coming, and at an early point engaged in very innovative wave of policymaking, including taking on the role of world central banker this past fall after the Minsky Moment of mid-September. It is easy to say, "well look how bad things are," but I think this is one of those situations where things would be far worse if they had not done what they had, and I am hard pressed to think of an alternative set of policies they could have done that would have made things better.

Now, I am not defending the Fed under Greenspan. Clearly there was an overly loose policy in 2003-2004 that aggravated the housing bubble. While Bernanke and others justified this on "complexity" grounds of worrying about asymmetries associated with a possible Japanese-style deflation (which we are now facing much more seriously), my cynical side says it was Greenspan wanting to help W. get reelected so that he, Greenspan, would not be on the receiving end of the sort of whining he got from W.'s dad after he supposedly was responsible for Clinton beating him in 1992 on an "It's the economy, stupid!" campaign. However, I think that in the last two and a half years, the leaders of the Fed have been aware that trouble was coming and were preparing for it, with their immediately rolling out alternative lending bodies and policy approaches immediately upon the eruption of troubles in the subprime markets in August, 2007.

A further piece of evidence is the speech that then New York Fed president, Timothy Geithner, gave in Hong Kong on September 15, 2006, "Hedge funds and derivatives and their implications for the financial system". While the opening part of the speech was pretty pollyannaish, the latter half of it was pretty scary, given the nature of Fedspeak, never wanting to spook the markets and trigger a crash that might be avoided. I shall close by simply quoting from it.

Understanding and evaluating “tail events”—low probability, high severity instances of stress—is a principal, and extraordinarily difficult, aspect of risk management. These challenges have likely increased with the complexity of financial instruments, the opacity of some counterparties, the rapidity with which large positions can change, and the potential feedback effects associated with leveraged positions.

Yes, folks, the Fed knew.

Laurence S. Moss Dies

The History of Economics Society has announced that Larry Moss died on February 24, cause unknown, although he had suffered from various illnesses for several years. Larry had served as editor of the American Journal of Economics and Sociology (AJES) for a number of years, and did an admirable job in my view, even though I did not see eye to eye with him on a variety of topics. That journal has long had a link with "Georgist" economics, although Larry's own interestes tended towards the libertarian and Austrian, having written books on both Joseph Schumpeter and Ludwig von Mises, and having coauthored with Israel Kirzner more than once.

Nevertheless, Larry always was open-minded and published papers that he clearly disagreed with. Thus, he was the editor who accepted the paper, "Keynesian Comparative Economics: The Iconoclastic Vision of Lynn Turgeon (1920-1999)," published in AJES in 2003 62(3), 491-508, Tim Canova, Ric Holt, Bob Horn, me, and Marina Rosser as coauthors. Turgeon, who died a decade ago tomorrow (and Canova has just issued a revised version of the paper on SSRN) held dramatically idiosyncratic views, but there is no way that they could be described as either libertarian, Austrian, or conservative. In any case, I guess this post is in memory and respect for both of these individuals, neither with us anymore.

Making Government Efficient

The Sacramento Bee reports that California's Employment Development Department spent $1.1 million to Verizon, which played a recorded message for jobless people who couldn't reach operators at the organization's call center, charging five cents for each call. The brain-dead assembly decided something has to be done. Naïvely I expected that they would recognize that the call centers were understaffed. Instead, they offered three options: reducing the number of hours that the message is available; offering other targeted toll-free numbers for specific inquiries; or just using a standard busy message.

Rogoff on Government Deficits and Interest Rates

Kenneth Rogoff is worried about how rising government debt will lead to higher interest rates:

No one yet has any real idea about when the global financial crisis will end, but one thing is certain: Government budget deficits are headed into the stratosphere. In the coming years, investors will need to be persuaded to hold mountains of new debt. Although governments may try to cram public debt down the throats of local savers (by using, for example, rising influence over banks to force them to hold a disproportionate quantity of government paper), they eventually will find themselves having to pay much higher interest rates as well. Within a couple of years, interest rates on long-term U.S. Treasury notes could easily rise 3 per cent to 4 per cent, with interest rates on other governments' paper rising as much, or more ... In research that Carmen Reinhart and I have done on the history of financial crises, we find that public debt typically doubles, even adjusting for inflation, in the three years following a crisis. Many nations, large and small, now are well on the way to meeting this projection.

As of March 5, the interest rate on 30-year Treasury notes was only 3.5%. Unless the market is unaware of this fiscal forecast, one would think that the market has priced in its view on these matters and apparently does not share Rogoff’s pessimism.

Mark Thoma is not so full of “gloom and doom”:

So I want to emphasize one more time that stabilization policy does not have to change the size of government in the long-run (and see pgl for a debunking of some of the claims about the size of government. i.e. he notess that "Federal spending as a share of GDP was about as high in 1985 as it is projected to be for 2019"). Fiscal policy can increase the size of government, but it can also shrink the size of government (lower taxes in the downturn, then cut spending when things are better to eliminate the deficit and government will shrink). So the criticism is not about the use of stabilization policy to help people during the downturn and to give the economy a boost, instead it's a claim about the long-term political aims of the administration with respect to the size of government. However, according to pgl's calculations, the projections are that the size won't exceed what we had under that well known socialist sympathizer Ronald Reagan.

While Mark was kind enough to mention this post, all I noted was the White House’s own projections of Federal spending, which do not indicate that President Obama has some big government agenda (as Greg Mankiw tried to suggest).

Rogoff is worried that Federal debt may double. It will certainly rise relative to GDP over the next few years. We have seen a doubling of the Federal debt to GDP ratio before. This chart shows the gross Federal debt to GDP ratio from 1792 to today and projected through the end of 2010. From 1913 to 1921, the ratio rose from less than 7.5% to more than 32.5% - but then fell to 16.3% by 1929. Then we had the Great Depression followed by World War II and this ratio skyrocketed to more than 120% by 1946. U.S. fiscal policy had a period of long-run fiscal responsibility, which lowered this ratio to less than 32% by 1981. Alas, we had an era of fiscal irresponsibility that saw this ratio to more than double by 1995. The Clinton era fortunately was a return to fiscal responsibility which allowed this ratio to decline to 57.34%. Alas, this was short-lived as the fiscal irresponsibility of George W. Bush tenure in office allowed this ratio to rise to almost 70%.

Our chart shows the interest rate on AAA long-term corporate bonds from January 1919 to February 2009. Interest rates did not skyrocket after World War I or World War II. One reason is that long-term fiscal policy turned to retiring the Federal debts generated by these two wars. It is true that the Reagan fiscal fiasco led to higher real interest rates – even as supply-side worshipers of St. Ronnie love to talk about what happened to nominal rates. Long-term interest rates have been relatively low in recent years even in the face of Bush43’s fiscal irresponsibility. I would suspect that if the Obama Administration delivers on its promise of long-term fiscal responsibility, we can avoid Rogoff’s pessimistic forecast.

The Case for Working Less

by the Sandwichman

The Sandwichman steps out and guest posts at the Relentlessly Progressive Economics Blog.