Defense Spending Increases or Cuts – the Role of Nominal Confusion

Brian Beutler thinks much of the press is confused about what Defense Secretary Gates and President Obama want to do with the Defense Department budget:

The big news from yesterday (still settling in across Washington) is that President Obama and Defense Secretary Robert Gates teamed up to propose a sweeping overhaul of the defense budget--calling for the elimination of unnecessary systems and spending the savings on special forces, intelligence equipment, and other tools of counterinsurgent warfare. In other words, by retooling the Pentagon, Obama and Gates plan to move a lot of money around, but they also plan to increase the overall defense budget. In the final year of the Bush administration (and excluding the costs of the wars in Iraq and Afghanistan) the defense budget was $513 billion. In FY 2010, if Gates and Obama get their way, it will be $534 billion--$534 billion that will be spent much differently than last year's outlays were. But you'd never know that from the news coverage.

Brian says the Wall Street Journal gets it right with this:

Mr. Gates's proposed baseline 2010 Defense Department budget of $534 billion is up 4% from last year.

That would be a 4% nominal increase so the natural question would be what is the expected increase in the price-level over the same period? OK, I suspect expected inflation is so low that we are still talking about a real increase even after the adjustment from nominal to real increases. For example, this source notes that the nominal interest rate on 5-year government bonds is 1.65%, while the interest rate on indexed bonds of the same maturity is 0.93% so we are likely talking expected inflation that is less than 1%.

My real complaint is with this reporting, which got a lot of liberal blog attention yesterday:

Obama assigned Gates to rein in spending for the 2010 fiscal year that begins in October. U.S. defense spending is set to reach $654.1 billion for the current budget year, including war costs, a 72 percent gain since 2000.

How do we interpret a 72 percent nominal increase since 2000 in terms of a real increase? Table 1.1.4 from this source provides various price indices both for 2000 and for 2008. While the GDP deflator increased by 22.5% over this period, the deflator for defense purchases increased 36.57%. Interestingly, table 1.1.5 reports a 98.46% increase in national defense spending but in real terms, that translates into only 62% in real spending if we use the GDP deflator. The reported increase according to table 1.1.6, however, is only 45% as BEA uses the specific deflator for defense purchases. While it is clear that reporters should be using inflation-adjusted figures when reporting defense spending increases over time, it is not clear which deflator should be used in their reporting especially when the relative price of defense related spending has increased.

No argument on what we do about climate change

Another industrial burn of native forest. The South Esk catchment in Tasmania this month. Picture taken by Rob Blakers.

Last week Barkley Rosser gave a very brief description on the nature of a debate that occurred at James Madison University campus after a talk given by Pat Michaels from the Cato Institute as well as an economist from the 1970s ‘new right’ Heritage Foundation of the name David Kreutzer.

Barkley mentioned discussion about the possibility of ‘fat tails’ and, what Michaels referred to as the ‘non-trivial possibility’ of a combination of nonlinear effects [in climate change] that would lead to a sharp rise in temperature.

This discussion, as described, is what should rightfully be labeled as ‘academic’. The real debate about climate change is over. Climate change has occurred and no one, apart from business lobby groups and their funded organisations, disagrees about what should be done to address our crisis.

Whether or not global temperatures rise by 2C or 14C in the foreseeable future is quite irrelevant to our immediate challenge. We need to move to clean and renewable forms of energy and other forms of technology and practice as quickly as we possibly can.

"Not even Mills, or Chomsky in his New Mandarins essay, could have anticipated the world of the Heritage Foundation, of "Kissinger Associates," of numberless power-worshipping, power-seeking magazines and institutes interlocking across the dissemination of culture, priority, information, and opinion. But Mills did write, in 1942:

When events move very fast and possible worlds swing around them, something happens to the quality of thinking. Some men repeat formulae; some men become reporters. To time observation with thought so as to mate a decent level of abstraction with crucial happenings is a difficult problem."

The Chorus and Cassandra, Christopher Hitchens. 1985
http://www.vho.org/aaargh/fran/chomsky/cassandra.html

More Larry Summers

"During his senior year of college, Summers was considering graduate school in both theoretical physics and economics. For weeks, he anguished over whether to pursue his passion (physics) or the family business (in addition to his economist parents, Summers has two uncles -- Paul Samuelson and Kenneth Arrow -- who won Nobel prizes in the field). After he finally decided on the latter, he explained his thinking to Rollins: "What does a bad theoretical physicist do for a living? He walks into an office, sits at a desk, and stares at a plain white sheet of paper." "But," Summers added, "there's a lot of work in the world for a bad economist"."

Scheiber, Noam. 2009. "Free Larry Summers." The New Republic (1 April).
http://www.tnr.com/story_print.html?id=aaa57c05-d73e-4321-8893-70d5b45577d1

Summers and the Street

The New York Times has a follow-on story that tracks Larry’s career in exile, when he was a celebrity part-timer at the Shaw hedge fund. Reading between the lines, the piece is eager to do two things: explain how someone with limited investment experience could be worth $5 million for less than 50 days of work per year, and persuade us that Larry’s stint on the street has increased his qualifications to run US economic policy.

Here are a few items missing from the story.

1. Summers’ false confidence in the Street’s risk models surfaced during his presidency at Harvard. According to this story in the Boston Globe, Summers funneled a large chunk of Harvard’s endowment into derivatives and ran a ship intolerant of dissent. This was before his time at Shaw, so perhaps you could excuse the careless investing as the result of being too far down on the learning curve. In any case, the endowment has been hit hard, and the university has been forced to retrench.

2. The Times article repeats the common error of attributing Summers’ foreshortened reign at Harvard to his one ill-considered (but diagnostic) comment about women and science. In fact, there were several contributing factors, and perhaps the decisive one was his unbending support of Andrei Schleifer. For those who don’t know, Schleifer, a star economist and close friend of Summers, was awarded a contract from the US Agency for International Development to advise in setting up financial markets in post-Soviet Russia. To make a long story short, Schleifer and his wife used the occasion to enrich themselves through rigged contracts and insider trading, the Russian economy was damaged, US-Russia relations were ruptured, and Harvard was forced to pay back $26 million to USAID in response to a finding of fraud. In response, Summers not only defended Schleifer, he gave him an endowed chair. This destroyed Summers’ credibility in the eyes of many on the faculty. For more details, see this account by David Warsh and follow the link to the article by David McClintick in Institutional Investor.

3. The deep question underlying US economic policy at this moment is whether the goal is to restore the status quo prior to the meltdown—the players, the institutions, the paradigm—or whether to let the older order collapse and build a different kind of system to replace it. Everything about Larry’s experience on the Street predisposes him to take the first course.

4. At the heart of the matter is an interesting paradox about Summers himself. He has a reputation for ferocious brilliance, largely on the basis of face-to-face interactions. Economists value quickness in understanding complicated models, and Larry is very, very quick. My first-person experience was minimal (we shared a single AEA panel), but enough to see that he must be difficult to keep up with. Despite his reputation, however, he hasn’t really planted his flag in the economic literature. He has coauthored several influential papers, mainly empirical, mainly important because they identified significant patterns in the data before others saw them. In a sense, they constitute a written version of his verbal skills. His name is not associated, however, with any substantive advance in economic theory or method.

For me, the most telling line in the Times story is this:

It was at that time [after his demotion from president to professor at Harvard], to the surprise of some colleagues, that Mr. Summers seriously contemplated his options on Wall Street in part because he believed his chances to return to a prominent position in Washington had dimmed, friends say.

Summers apparently never considered the option of simply remaining a professor of economics and making a more indelible mark on the discipline. There are many ways to interpret this. It could be that a simple professorship felt too “small” after more than a decade spent on larger stages. Perhaps he did not like the academic life—the round of lectures, seminars, writing and reading. Or perhaps he realized that his gifts for quickness and intensity would never yield the highest payoffs in the world of intellectual production, where persistence and depth are ultimately more valuable.

Could Someone Let Robert Lucas Know That The Balanced Budget Multiplier Is Not Zero?

I thought Robert Lucas had a very strong grasp of macroeconomics – maybe not:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that.

Hat tip to Brad DeLong who is worried that Chicago-School economists believe certain falsehoods such as:

deficit-financed spending increases have no short-term stimulative effects on nominal spending

Since Kevin Quinn noted that Wikipedia’s discussion of Ricardian Equivalence had the same error, let’s see how Wikipedia describes the balanced budget multiplier:

Since only part of the money taken away from households would have actually been used in the economy, the change in consumption expenditure will be smaller than the change in taxes. Therefore the money which would have been saved by households is instead injected into the economy, itself becoming part of the multiplier process. In general, a change in the balanced budget will change aggregate demand by an amount equal to the change in spending.

Not only does this sound much more logical than what Professor Lucas claimed, it is also what is typically described in most economic textbooks. As long as the marginal propensity to consume is less than unity, there is something to apply a multiplier to. So might Professor Lucas explain to us why he thinks the marginal propensity to consume is equal to unity – especially when we are talking about temporary increases in government purchases and their implications for taxation over the long-run?

"On Luxury, Idleness and Industry"

by the Sandwichman

Having proposed the counter-narrative to Economic Man, I will now undertake to test it rigorously and exhaustively by examining it's presence in numerous and various texts. I begin with Benjamin Franklin because he is indelibly associated with the work ethic and Economic Man's incarnation as "self-made".


In addition to his star performance on the U.S. one-hundred dollar bill, for Max Weber, Franklin personified the "spirit of capitalism". One might say the myth of Franklin (if not the man himself) personified Economic Man. The Weber connection is crucial because it was Weber who argued, in "Marginal Utility Theory and 'the Fundamental Law of Psychophysics'," for the methodological canonization of Economic Man, an argument subsequently pursued by Lionel Robbins in his Essay on the Nature and Significance of Economic Science.

In a letter to Benjamin Vaughn, dated July 1784, Franklin wrote:

It has been computed by some political arithmetician, that, if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life: want and misery would be banished out of the world, and the rest of the twenty-four hours might be leisure and pleasure.

What occasions then so much want and misery? It is the employment of men and women in works that produce neither the necessaries nor conveniences of life, who, with those who do nothing, consume necessaries raised by the laborious...

Look round the world, and see the millions employed in doing nothing, or in something that amounts to nothing, when the necessaries and conveniences of life are in question. What is the bulk of commerce, for which we fight and destroy each other but the toil of millions for superfluities, to the great hazard and loss of many lives by the constant dangers of the sea?...

A question may be asked; Could all these people now employed in raising, making, or carrying superfluities, be subsisted by raising necessaries? I think they might....

It is, however, some comfort to reflect that, upon the whole, the quantity of industry and prudence among mankind exceeds the quantity of idleness and folly....

One reflection more, and I will end this long rambling letter... Our eyes, though exceeding useful, ask, when reasonable, only the cheap assistance of spectacles, which could not much impair our finances. But the eyes of other people are the eyes that ruin us. If all but myself were blind, I should want neither fine clothes, fine houses, nor fine furniture.

This is easy! In the counter-narrative post, I wrote, "Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation."

In the passage cited above, Franklin distinguished between two kinds of wants or preferences -- for the "necessaries and conveniences of life" and for "superfluities" the desire for which arises from "the eyes of other people", that is to say from the desire for social distinction and emulation. With regard to physical and social limits, Franklin is optimistic. He speculates that people could be converted from producing superfluities to producing necessaries and conveniences and he is reassured that there is more industry and prudence among mankind than there is idleness and folly. Note that for Franklin "leisure and pleasure" contrast with "idleness and folly", which constitute the "toil of millions for superfluities".

Economic Man -- complete set of preferences, rationality, utility maximization and all -- might feel some ambivalence toward Franklin's scenario. One the one hand, the "toil of millions for superfluities" offers untold opportunities for profit. On the other hand, such idle toil occasions "so much want and misery," surely not the ideal picture of utility maximization for the population as a whole. Would that there were yet some other other hand -- invisible, perchance? -- to reconcile the desire for gain with the general well being!

The Genius of Larry Summers

Casual readers of the press might be put off by the fact that Larry Summers received $2.7 million last year just for giving speeches, including a $135,000 appearance at Goldman Sachs. Maybe they think he was being buttered up by companies whose business plan now consists of siphoning off taxpayer money by the tanker load. They shouldn’t jump to conclusions though.

I have it from a confidential source that Summers’ performance was worth every penny, and then some. What does a speaker have to do to earn four times the median full-time wage in a single night? You name it, Summers did it. “He was awesome, just awesome”, says Monique (not her real name). “You think you’re just getting an economist, but he was so much more than that—an artist, an entertainer and one of the greatest minds of the last 500 years.”



The first thing to realize is that Summers doesn’t just walk onto the stage like any other former college professor turned policy czar. Sure, he has a flashy PowerPoint, but “Inconvenient Truth” doesn’t begin to touch it. “It was like a stadium rock concert,” explained Monique, “with a light show and incredible special effects. I thought I would never be able to actually see the world economy, but there it was. In fact, with the 3-D glasses he handed out, you would swear you were actually in the world economy.” Unfortunately, near the end of the talk the complex circuitry behind the stage shorted out, and the world economy spectacle came to a sudden end. Cleanup crews had to work long into the night to gather up countries that had literally melted down as a result of a series of electrical fires. But the audience loved it, and even the crash-and-burn finale worked brilliantly as theater.

But lets talk about Larry himself. First of all, remember that he is not only an economist, but was president of Harvard University, often walking into classes with a bewildering array of subject matter—physics, archaeology, literary theory—and wowing students with his ability to lead a cutting-edge discussion that their professors could only envy. So don’t assume that Summers simply gave a speech about the economy. “I would call it performance art,” offered Monique. “He gave us poetry, music and insight into emerging economic trends. The highlight came when Larry, who had worked himself into a very funky rap groove, began rapping in tongues so that dozens of languages, some maybe going back to the stone age, were bouncing off the walls. People were going wild. And the amazing thing is that all of it had something to do with managing complexity in a flat world framework.”

For an encore, Summers fielded questions from the audience. Here he demonstrated his legendary capacity for passing quick judgment: he devised innovative business strategies on the fly, identified market niches that no one had noticed before in fifteen emerging economies and successfully predicted the contours of future government bailouts of the financial sector, right down to the tiniest loophole. “He changed my life,” Monique concluded. “It was his entertainment that opened me up and made me receptive, but the economic vision was irreplaceable. I thought I was maximizing wealth before I heard Larry, but I didn’t know the half of it.”

So the bottom line is that, at $135,000 for two hours, Larry was doing Goldman Sachs a big favor. He doesn’t owe them, they owe him.

Unemployment – Worse Than Reported

BLS reports:

Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent

Sandwichman observes:

The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions.

While the rise in the unemployment rate since September 2008 (6.2% to 8.5%) sounds bad, the fall in the employment to population ratio from 61.9% to 59.9% paints a worse picture. I’ve always been bothered by how BLS reports the unemployment rate in its first sentence leaving the reader to only learn that the participation rate also fell – as in from 66.0% as of September 2008 to the March 2009 level of 65.5%. This participation rate was 66.1% as of November 2007, so as BLS reports that the unemployment rate increased from 4.7% to 8.5%, what this really means is that the employment-population ratio fell from 63.0% to 59.9%.

For those of you who might be following the neo-Hooverite nonsense from the governor of South Carolina, it is interesting (or was that tragic) to know that the unemployment rate for this state reached 11.0% as February 2009.

The Counter-Narrative

by the Sandwichman

The problem with 'critique', as Emery Roe pointed out, is that in practice critique serves to intensify uncertainty because it doesn't offer a clear alternative. Thus critique may inadvertently increase pressure to hold onto familiar scenarios, no matter how discredited they may be. A counter-narrative conceives of a rival hypothesis and policy options.

The case I have been essaying in a pair of recent posts -- Not Working is Another Subject and Is Economic Man Parsimonious? -- is that the working time literature constitutes a counter-narrative to the standard 'story' that dominates economics. That standard story is not an analysis per se, a methodology or even a set of assumptions. It is more like a disposition -- an arrangement of scenic, character and action elements that renders the subsequent argument familiar and believable. The framing narrative determines whether a specific argument will seem reasonable or not. Thus it functions as effectively to exclude non-conforming arguments as to certify respectable ones.

The construct of Economic Man has been defended on grounds of 'simplicity' (or parsimony), even though it is only superficially simple. It has been critiqued to death... but to little avail. HESCI, or Persona parsimoniae, is at least as parsimonious as Economic Man.

Economic Man has a complete set of preferences and chooses rationally the most efficient means to maximize utility. Persona parsimoniae has two different kinds of preferences -- organic needs and aspirations for social distinction. The means for satisfying those desires are limited absolutely, not just transiently, by physical laws and/or social institutions. And utility is mostly a function of habit [and emulation] rather than calculation.

There you have it. The counter-narrative. Did the earth move for you? Or are you asking, "is that all there is?" Just in case it's the latter, I continue...

The characteristics I have just now ascribed to Persona parsimoniae are neither deductive nor arbitrary. They were transmitted culturally in a discourse tradition. That is to say they were told and retold from generation to generation. That doesn't make them 'true' any more than the telling and retelling of the features of Economic Man validates the truth of the latter's features. It does, however, suggest that they are both comprehensible and believable, at least to some audiences.

There are important corollaries to the main features of Persona p. that are specific to the issue of working time. For example, better rested workers are able to be more productive and also both wiser and more expansive in their consumption behaviors. That observation might suggest that Economic Man is more like a sub-species of Persona parsimoniae whose hours of labor have already optimized. Or to put it more panoramically, Economic Man is that lucky duck for whom the basic economic problem of subsistence is "no problem".

The narrative paths taken by Economic Man and Persona parsimoniae, respectively, differ in interesting ways. Each can be represented by a circular flow diagram relating the elements of accumulation/investment, production, income/consumption and leisure/disposable time. The standard story assigns priority to accumulation and investment, which enhances productivity leading to increased incomes and the potential choice of leisure. The counter-narrative posits leisure as the foundation for increased income and consumption, which thus drives productivity gains and, consequently, accumulation and investment.

Each path incorporates its own version of a digression from the circuit. In the standard story, leisure represents a sort of exit from the economic circuit. In the counter-narrative, accumulation beyond some natural limit leads to superfluity: waste, a crisis of over-production or the destruction of value through war or the proliferation of luxury consumption for parasitic functionaries and the idle rich.

Revisionists

by the Sandwichman

March unemployment wasn't as bad as the BLS reported. It was worse. The 663,000 job losses reported comes on top of a 86,000 downward revision in the January number, making the net loss 749,000. Moreover, the average monthly revision since September 2008 has been 158,000 jobs. There have been no upward revisions. So it would come as no surprise if the revised number for March alone (that is excluding revisions of previous months) was closer to that 749,000 figure than to 663,000.

A Package for Labor

Behind the debate over whether GM and Chrysler should be bailed out or dispatched into bankruptcy is the curious history of the US labor movement. Unlike most other industrialized countries, where unions fought for and achieved a role in economy-wide institutions, the US fashioned its labor movement employer-by-employer and occasionally industry-by-industry. The result was, even in its heyday during the 1950s, a lopsided unionism that had great clout in a few sectors and regions and was virtually absent everywhere else. During the long decades of decline, the remaining union redoubts, like the top tier of auto manufacturing (final assembly and the top rung of suppliers), became islands in a sea of unbridled employer power. This is why the demand that the UAW run up the white flag as part of an auto bailout challenges what is left of the labor movement as a whole.

In fact, autos present us with a paradox. America desperately needs a revitalized labor movement, and smashing the union that has been at the heart of labor’s struggle ever since the sit-downs of the last depression is hardly the way to begin. The retiree benefits that have emerged as the main item of dispute—should the assets that fund them be converted into the funny money of common stock?—are the legacy of this struggle, guarantees that all workers should have but only a few were able to win. At the same time, it makes no economic sense at all for the auto industry to serve as a funding mechanism for a small piece of an otherwise absent welfare state. The sector needs to shrink, and it needs a clean financial slate that only big concessions from bondholders and workers can provide. So how to reconcile these two perspectives?



The only solution is for labor to be able to break out of its bunker mentality and gain a broad presence throughout the economy. There are two parts to this. First, a large portion of the legacy obligations of the auto producers and other unionized manufacturers should be socialized as part of a general reform of social insurance in the US. As Jamie Galbraith has eloquently argued, this is a time for expanding Social Security, not cutting it. And some form of universal health insurance, kickstarted by a fund like the one Obama has proposed, would address the health aspects of auto’s retiree overhang. In fact, this is what UAW pioneers like Walter Reuther wanted all along, but they had to fall back on collective bargaining when the political channel was shut down by resurgent Republicanism after WWII.

The second part has to do with active workers. The tragedy of UAW givebacks is that any other job these workers might find will be so much worse. This points us toward the solution: quick passage of the Employee Free Choice Act and a commitment to worker representation as a central feature of the next economy. The truth is, we are going to see a lot of restructuring once the economy recovers; this is a dreadful economic episode, but it is also a period of creative destruction. To speed up the recovery and accelerate the shift to an economically and environmentally sustainable future, we will need rapid disinvestment in some industries and the creation of new capacity in others. This will also have a geographical side; the new world is always built at some distance from the old. The only way to do this in a labor-friendly way is for workers to have a say everywhere, and this means systematic labor law reform. (The EFCA is just a beginning; there is a much larger agenda that reaches beyond the single mechanism of collective bargaining.)

Politically, we need a package deal: substantial abrogation of the UAW contract benefits combined with pro-labor reforms in labor law and the social safety net. I know this is tricky: you put it all on the table and run the risk that the benefits are eviscerated while none of the reforms go through. Nevertheless, this seems to me to be the only coherent way to think about the situation.

Ward Churchill and Alfred Chandler

How is that for a mixed pair? And what’s the connection?

Ward Churchill has been suing the University of Colorado, claiming that the academic misconduct for which he was fired was a dishonest pretext, and the real reason was to get rid of someone whose political views made the university’s top brass uncomfortable. The central criticism made of Churchill is that he ghost-wrote articles for other academics and then cited them/himself in his own work. The university said such practice is unconscionable, but Churchill says it’s done all the time.

I don’t know about all the time, but I do know about one very significant time. One of classics of business history, My Years at General Motors, supposedly written by long-time CEO Alfred Sloan, was actually ghost-written by journalist John McDonald. McDonald’s research assistant was Alfred Chandler, then a young (but very well-connected) business historian. Chandler, of course, knew all about the ghosting process, and as the team member with serious academic expertise, he probably had a major impact on the final product.

Chandler went on to write under his own name, becoming the pre-eminent scholar in his field, very well worth reading by anyone who cares about the role large productive organizations in our moment in history. Beginning with Strategy and Structure (1962), Chandler made GM one of his key case studies, drawing on the (unmentionable) research he had done for the Sloan book. Interestingly, his first book was published even before Sloan’s, suggesting that his theoretical work may have influenced the content of the published “evidence” for it, in the form of the Sloan memoir. In any case, Chandler continued to cite “Sloan” in several more pathbreaking works, with never a hint that there was something circular about this.

It’s a good thing for his career that Chandler stayed away from smallpox blankets and “little Eichmann’s”.

Paul Ryan on the Borrow-and-Spend Philosophy

If you expected a GOP budget today, Steve Benen says they have played an April’s Fool joke on us as all we seem to have so far is this WSJ op-ed:

The plan works to accomplish four main goals: 1) fulfill the mission of health and retirement security; 2) control our nation's debts; 3) put the economy on a path of growth and leadership in the global economy; and 4) preserve the American legacy of leaving the next generation better off. Under the president's plan, spending will top $4 trillion this year alone, and consume 28.5% of our nation's economy ... Instead of doubling the debt in five years, and tripling it in 10, the Republican budget curbs the explosion in spending called for by the president and his party. Our plan halts the borrow-and-spend philosophy that brought about today's economic problems.

Ryan provides a chart that claims that the spending to GDP ratio will exceed 40% in 50 years under “Democratic Budgets” while this ratio will fall below 20% under the “Republican Alternative”. Steve response to this op-ed included:

In reality, the "borrow-and-spend philosophy" did not create the crisis, so Ryan's prescription is automatically based on a misdiagnosis. But even if we put that aside, the alternative budget reflects a political party that embraced a breathtakingly radical worldview. In a nutshell, Ryan proposes a massive tax cut, totaling, by some estimates, around $4 trillion -- on top of the Bush/Cheney cuts, which would remain place. The Republicans plan would voucherize Medicare, and, best of all, impose a five-year spending freeze on non-defense discretionary spending

In my view, Steve is getting Congressman Ryan and the Republicans too much credit. I say this for a couple of reasons. This so-called borrow-and-spend philosophy was the actual fiscal stance of President Reagan and Bush43. Both of these Administrations promised us permanent tax cuts by claiming that they would reduce the ratio of Federal spending to GDP. Under Reagan, this ratio did not fall. Under Bush43, it rose.

We can also take a look at an analysis from the Center on Budget and Policy Priorities entitled Obama Budget Reduces Deficit by $900 Billion Compared to Current Budget Policies:

Contrary to some claims, President Obama’s 2010 budget would reduce federal deficits by about $900 billion over the next ten years compared to current budget policies. The $900 billion is the difference between deficits over the next decade under the President’s budget, as estimated by the Congressional Budget Office (CBO), and projected deficits under a realistic assessment of current budget policies … Some critics charge that Obama’s budget is fiscally irresponsible, and they cite CBO’s estimate that, under it, deficits would total $9.3 trillion over the next decade. They fail to note, however, that these future deficits result from the existing budget policies that Obama inherited — not those that he is proposing … Budget experts have been saying for a number of years that the official baseline departs sharply from reality.

While CBPP rightfully complains about how the official baseline departs from reality, I suspect it is closer to reality that the numbers that Congressman Ryan is using to draw his graphs. But I guess we’ll need to wait until the GOP actually bother to provide us with some actual numbers for their “budget”.

Will Deferring Social Security Taxes Encourage More Current Consumption?

One of the proposals to encourage aggregate demand is to reduce payroll taxes. One might ask – how would one cover the lost revenue from such a proposal. Greg Mankiw has one answer:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

Amitai Etzioni proposes another:

The government should not collect Social Security taxes for one month — as long as the Obama administration commits the government to collect it for a 13th month once the economy is growing again at a fair pace … Last but not least, the Social Security tax is famously regressive. Hence, cutting it would put proportionally more money into the pockets of people most likely to spend it all in short order, a key goal for any stimulus.

Both proposals have no effect on after-tax lifetime income so if one is a proponent of Friedman’s permanent income hypothesis or the Ando-Modigliani lifecycle view of consumption or the Barro reformulation of Ricardian Equivalence – then deferring taxation would not be seen as encouraging more current consumption according to this theory. Then again - Mark Thoma reminds us that this theory may not work so well in practice.

Misleading Cato Petition Ad On Climate

In today's Washington Post (and I think some other papers) a paid ad appeared from the Cato Institute that has a bunch of signatures by various climate scientists, directed at President Obama "with all due respect" questioning that global warming is happening and asserting that after accounting for population and property value growth, there has been no increase in damage due to climate disasters over time. Citations are provided for some of these assertions.

I shall only note that this last one is rather problematic. A source is claimed to be an article from 2005 in the Bulletin of the American Meteorological Society by Pielke et al. I googled and found no such article, but did find some statement by him addressed to "Stern Review." In that he says that while climate is a factor in rising disasters, they could not necessarily be tied to global warming, and that in the future they might be offset by rising population and property values, hardly what is claimed the petition/ad.

I did some further checking and found a figure showing natural hydro-meterological disasters over time. While 2008 is back down to about 350, about the same as 1998, that is still more than any year prior to then, with such numbers being below 200 mostly in the past, although getting over 500 in 2000 and 2002 and equaling 500 in 2005. In any case, not at all supporting the reported claims by Pielke. This figure is from a chapter by D. Guha-Sapir and F. Vos in a book out from Springer this year, and it can be found down a ways on the right with the full citation on a blog post by Andrew C. Revkin of the New York Times.