Niall Ferguson Exposes Two Problems with Balanced Budget Amendments

Niall Ferguson intended to make the case for austerity measures including a balanced budget amendment. Dean Baker read this before going to bed last night and started the critique of this tiresome BBC op-ed:

Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth? In fairness, there are nutty projections that assume that per capita health care costs in the United States will be four or five times as high as in all other wealthy countries. If this proves true, over an infinite horizon we will have a very bad deficit problem. Of course, these health care costs would wreck our economy regardless of what we do with public sector health care programs. These projections would cause serious people to talk about the need to fix the health care system. But this is national economic policy that we are talking about. But this piece suggests an easy route for dealing with the deficit. Clearly there is a big market for deficit hawks.

Dean’s clever solution would be to spend money training college grads to write more gibberish like what the BBC should published. This would employ resources currently being left idle and hopefully generate more tax revenue via the traditional Keynesian mechanisms. Niall, however, suggests we pass a balanced budget amendment (which BTW does not tell us which tax rates we need to raise or which expenditures we need to reduce). As he does so, he does note:

The trouble is that the experience of the financial crisis has substantially strengthened the case for using the government deficit as a tool to stimulate the economy in times of recession.

Well – yea! Isn’t that the classic problem with balanced budget amendments – they turn fiscal policy into a pro-cyclical disaster. But let’s move onto the other problem by quoting Neill:

The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon in some countries. No legitimate business could possible carry on in this fashion.

In other words, the way we normally measure deficits – current spending minus current taxes – does not capture those allegedly large present value shortfalls. Here is where Dean’s call for a course and his quip about the date that the Martians will attack Earth comes in. Niall’s alleged $238 trillion shortfall relies on some discounted cash flow calculation that he doesn’t even specify. What is the discount rate? What are projected expenditures over an infinite horizon? What are projected taxes over an infinite horizon? Such calculations require a host of assumptions. We are supposed to put all of this into a Constitutional Amendment?

The Cost of Volcker’s Disinflation and 1978-Era Macroeconomics

Paul Krugman has an interesting post on two counts. One count is his link to an intriguing discussion of macroeconomics by Robert J. Gordon. Gordon traces through the development of DSGE models and compares to them to how Keynesian models had evolved (1978-era macro) before the modern macroeconomics started to just ignore them. Gordon argues that 1978-era macroeconomics have a lot to say about how current situation and how we got here. The second count was the main reason for Paul’s post:

And one of the things they tend to bring up is the hoary old myth that the 80s success in taming inflation was somehow a terrible shock and surprise to Keynesians, who had no explanation. This is, as it happens, completely wrong: what actually happened in the 80s was, quite literally, a confirmation of the validity of textbook Keynesian economics. OK, first the facts: the 80s were marked first by a simultaneous surge in unemployment and plunge in inflation. Then unemployment came down but inflation stayed low(ish) … Inflation rate = -α(u – NAIRU) + Lagged inflation rate where u was the unemployment rate and the NAIRU was the non-accelerating-inflation rate of unemployment. And what did this approach predict about disinflation? It said that if policy makers were willing to impose a period of very high unemployment, they could bring inflation down — and that even if unemployment then fell back to the NAIRU, inflation would stay down.

Paul’s graph shows the unemployment rate over the 1979 to 1988, while our graph shows the GDP gap (using the CBO definition of potential GDP) over the same period. Notice we had a sizeable gap during the last two years of the Carter Administration followed by an enormous gap right after Reagan took office. The gap narrowed over the next few years but was still around 1 percent of GDP as Reagan’s second term started. Much of the movement in the GDP gap both up and down should be attributed to Volcker’s monetary policy. I agree with Paul’s assertion that it required a sustained period of often significant excess supply to achieve this disinflation. Some critics of this view, however, note how quickly inflation fell during the second bout of Volcker’s tight monetary policy (1982 recession). Gordon’s paper, however, also includes the following:

Instead this paper revives the supply‐side invented in the mid‐1970s that recognizes the co‐existence of flexible auction‐market prices for commodities like oil and sticky prices for the remaining non‐oil economy. Adverse supply shocks coming not just from oil prices but also, as in the early 1970s from auction‐market price shocks in food and exchange rates, boosted the expenditure share of commodities and forced nominal spending on non‐shocked products to contract.

Adverse supply shocks were partially for the run-up in inflation that the Volcker FED inherited. I would add that the U.S. economy had a series of favorable supply shocks, which were part of the reason why inflation fell so quickly. The oil price hikes during OPEC II were partially offset by oil price decreases while the dollar appreciation (due to the tug of war between Reagan’s fiscal stimulus and Volcker’s second bout of monetary contraction) lowered the dollar price of imports. This dollar appreciation had to later be reversed, which is why inflation stopped declining even as the GDP gap remained positive. Viewed over the entire 1979 to 1988 period, we did have to endure an awful lot of cumulative pain to get the inflation rate down to the lower levels enjoyed during the Great Moderation.

First Stab at a New Book: The Matrix: The Conjunction of War, Economic Theory, and the Economy

Vincent Portillo, a colleague, will join me in putting a new book


together. We only have 10 paragraphs to show for our effort, but any

comments will be very much appreciated. Getting an introduction down

is important, not only for communicating with readers, but for sorting

out our own ideas. Thanks.



This book is an exploration of the complex and fascinating

interactions between war, the economy, and economic thinking. Whether

you realize it or not, a complex Matrix resulting from the

interactions of war, economics, and economic thinking creates a

powerful force field that affects almost everything you do. This

force field, not unlike gravity, is both pervasive and invisible.

However, the effects of the Matrix are unpredictable. In a world

vulnerable to the possibility of serious destruction as the result of

both military and economic miscalculations, taking account of this

Matrix is imperative.



The effects of the Matrix are far more complex than those of gravity.

Obviously, an engineer designing an airplane must take into account

the force of gravity to avoid future calamities. Complete command of

the necessary scientific knowledge and care in the building of the

plane is insufficient to guarantee future safety. The human interface

creates an ever-present risk once pilots, mechanics, and air traffic

controllers take over responsibilities for the plane.

A far more intricate network of human behaviors interacting with the

Matrix leads to pervasive uncertainty, making the challenges of

responding to the Matrix are far more daunting than the

straightforward responsibilities of those who are responsible for the

plane's safety. The Matrix presents another dimension of

complications. If a pilot flies into a mountain, the immediacy of the

consequences makes interpretation of the event fairly simple.



In the case of the Matrix, choices today may set off a chain of events

that may have important consequences years or decades in the future.

Looking back to identify a single -- or even a small set of events as

the cause is very difficult. After all, events occurring in previous

millennia still remain the subject of ongoing debates among

historians. To make matters even more complex, the Matrix can cause

contradictory outcomes.



Here again, the human element comes into play. Any attempt at

identifying causality comes up again the tendency to understand the

sequence of events in light of pre-existing ideas or ideology.

Consequently, one must exercise extreme caution in any attempt to

manipulate the Matrix. Nonetheless, the risks of doing nothing are

even more dangerous, considering the potential dangers or perhaps even

likelihood of environmental, economic, or military disaster. Actions

to prevent cataclysmic outcomes require great care, backed up with a

relatively holistic perspective.



Economics occupies a special place in this intricate Matrix with

economics serving as a bridge between the other two principals of the

Matrix: war and the economy. Almost unintentionally, in the

seventeenth century, modern economics developed to a large extent in

response to questions raised by the needs and the consequences of

warfare.



More at



http://michaelperelman.wordpress.com/2012/06/15/first-stab-at-a-new-book-the-matrix-the-conjunction-of-war-economic-theory-and-the-economy/

Equity Participation as an Alternative to Student Loans

Luigi Zingales is critical of government subsidized student loans:

Nearly eight million students received Pell grants in 2010, costing $28 billion. In addition, the federal direct loan program, which allows nonaffluent students to get government-guaranteed loans at low interest rates, cost taxpayers $13 billion in 2010-11. Total subsidies to university education amount to $43 billion a year, including around $2 billion in Congressional earmarks — and that does not even include tax subsidies (for college funds); tax breaks (for university endowments, for example); and subsidies dedicated to research. Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college. Between 1977 and 2009 the real average cost of university tuition more than doubled. These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan. The stock of student loans has reached $1 trillion, while the percentage of borrowers in default jumped to 8.8 percent in 2009 from 6.7 percent in 2007. Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.

He offers the following solution:

The best way to fix this inefficiency is to address the root of the problem: most bright students do not have any collateral and cannot easily pledge their future income. Yet the venture-capital industry has shown that the private sector can do a good job at financing new ventures with no collateral. So why can’t they finance bright students? Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance.

He correctly notes that this is akin to a system of voluntary taxation where the beneficiaries of a college education are the ones paying into the funding system. An interesting idea with the following caveat we often here from supply-side types. If the funding system were to receive a portion of one’s future income, would that be a disincentive for those “highly compensated superstars” to work as hard? Perhaps but it does seem to be a decent idea even if it does so as to bring greater opportunities to those who wish to pursue a college education on the hope of becoming a future superstar.

After 5 years, The Confiscation of American Prosperity is in Paperback

The young editor is enthusiastic about the sales after such a short period of availability.


Here is an Amazon ad, but it may be available locally.

http://www.amazon.com/The-Confiscation-American-Prosperity-Right-Wing/dp/1137009373/ref=sr_1_1?ie=UTF8&qid=1338911378&sr=8-1

RIP: Elinor Ostrom

I have just learned that Elinor Ostrom died this morning of cancer.  The first woman to win the Nobel Prize in Economics (I know, I know, the Swedish Bank Prize, blah blah), she was officially a political scientist, and there were some who complained about her receiving the award because of that and because she had "never published in a top 5 economics journal," although she did so after receiving the prize.  Also many fussed about not having heard of her, including people as prominent as Paul Krugman.  As it is, her most famous work, her seminal 1990 book, Governing the Commons, has been cited more than 13,000 times, more alone than the entire citations received by more than half of the other economics Nobelists.

Although the basic insight had been made earlier, particularly by Siegfried von Ciriacy-Wantrup and his student, Richard Bishop in a 1975 paper in the fairly obscure Natural Resources Journal (now more or less run by lawyers), she was the one who really developed the point, working with multidisciplinary teams using a broad array of methods, including in-depth field studies, game theory, lab experiments, and a variety of other approaches, building up a massive institutional and historical knowledge and data base, she confirmed that the management system of a natural resource commons is what matters more than its official ownership.  In a sense this is a rediscovery in a different context of the old ownership versus control argument that was initiated in the 1930s by Gardiner and Means, and was also a focus of the early behavioral economists as well who immediately followed Herbert Simon. 

It remains the case even now in many textbooks that the issue is posed as "the tragedy of the commons," a phrase coined by Garret Hardin in the 1960s, with the idea being that there were two choices, either badly managed open access commons such as the encroached commons pastures of England, or private ownership of these resources.  Ostrom and her associates argued that what mattered was the ability to control access, whatever the formal ownership scheme, and that privately owned properties that cannot control access, such as the homesteaded farmlands of the US Great Plains prior to the invention of barbed wire to keep the cattle out, were worse than many common properties that managed themselves.  Much of this insight came from observing traditional management schemes of forests, and fisheriers, and irrigation systems, and pastures that worked, with the Alpine ones in Switzerland dating from the 1200s a classic example.

This ties with a broader story, that systems organized by the people who use the resources work better than ones imposed by outsiders.  The classic case involves the forests of Nepal since WW II, a case emphasized by Ostrom.  The forests ended up in basically three different kinds of systems.  Some of them owned by corporations, influence from the British Raj, some of them were in state-owned and controlled systems from various socialist governments, and about a third remained in the hands of local groups managed in traditional ways.  Today, most of the first two are gone, over-harvested and deforested.  What is left of the forests of Nepal are those where the local traditional managers were able to keep on keeping on.

I can also attest that Lin Ostrom was a warm and engaging person, friendly to one and all and totally open-minded.  She is a great loss to the broader intellectual and policy community of this world.  May she rest in peace.

Does Romney Not Understand That States Face Balanced Budget Constraints?

How else can one explain this:

Mitt Romney finds the Obama campaign’s accusations that the public sector would lose jobs under his leadership “completely absurd,” he said on “Fox & Friends” Tuesday morning. After Romney said last Friday that the president’s proposals to put more teachers, firefighters and policemen back to work was a bad idea, the Obama campaign countered in the last few days that Romney would cut these jobs. “That’s a very strange accusation,” Romney said. “Of course, teachers and firemen and policemen are hired at the local level and also by states. The federal government doesn’t pay for teachers, firefighters or policemen. So obviously that’s completely absurd.” But Romney also stood by his opposition to the federal government facilitating more hiring public sector hiring. “He’s got a new idea, though, and that is to have another stimulus and to have the federal government send money to try and bail out cities and states,” Romney said of President Obama. “It didn’t work the first time. It certainly wouldn’t work the second time.”

Hey – I understand that Fox & Friends prides itself on absolute stupidity but Mr. Romney aspires to be President. So we should expect a more intelligent discussion. During economic downturns, state and local governments face declining tax revenues and would be forced by their balanced budget constraints to cut spending even though such public austerity is destabilizing from a macroeconomic perspective. This is entire rationale for Federal revenue sharing, which is something that Republican Party has chosen to not only oppose but also to block in the Senate via the filibuster process. Is it working well now? Of course not - because we are not even trying to make it work thanks to this Republican opposition. When Mr. Romney protests in this fashion, he is exhibiting either stupidity of mendacity (to coin Brad DeLong’s phase). If he is really this stupid – he does not deserve to be our next President. But something tells me he is brighter than this – which means he is once again engaging in an incredibly dishonest campaign. But in case Mr. Romney is indeed this clueless, might I recommend something Robert Shiller wrote back in 2010?

Gramm-Hubbard: So Many Misconceptions, So Little Time

Glenn Hubbard appears to be getting drunk on GOP Kool-Aid again with an assist from Phil Gramm. As they try to argue that Mitt Romney will be the saving grace for our economy, they also contrast the current recession/recovery with what happened in the early 1980’s making so many ridiculous arguments, it is hard to keep track. But let’s start with their explanation for the most recent recession:

The more recent recession resulted from excessive government intervention to increase homeownership by expanding subprime housing loans, on which substantial leverage was built. The resulting wave of defaults damaged the base of the banking system.

Two points here. The first is that Glenn served as economic advisor to that President who kept bragging about rising home ownership. Secondly, the problem was more too little government regulation of the banking system – not excessive regulation. But that line of reasoning is not nearly as bizarre as the following:

The superior job creation and income growth following the 1981-82 recession are all the more striking as they occurred against the backdrop of restrictive monetary policy … By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, Reagan sought to make it profitable to invest in America again. He clearly succeeded. President Obama's polices would, by contrast, make permanent a significant surge in federal spending and raise marginal tax rates on earnings and entrepreneurial returns.

Paul Krugman partially addresses my problem with this aspect of Gramm-Hubbard:

Because recessions like those of 1990-91, 2001, and 2007-2009 have very different origins from recessions like 1974-75 or the double-dip recession of 1979-82. The old recessions were more or less deliberately created by the Fed via tight money to control inflation, which meant that you had a V-shaped recovery once the Fed decided that we had suffered enough and loosened the reins.

Gramm-Hubbard admitted earlier that it was Volcker’s tight monetary policies that lead to the double-dip recession of 1979-82. One would think these two economists understand our macroeconomic history enough to realize the Volcker reversed his monetary restraint. One would also hope that they understood – as most economists do – that Reagan’s fiscal stimulus wasn’t necessary and ended up leading to less investment not more. Paul’s point is that under the current liquidity trap situation, we need fiscal stimulus to restore full employment. Gramm-Hubbard also paint current U.S. fiscal policy as being very expansionary, which is not even remotely true. They also play the card that our current woes could be cured by less regulation. President Reagan did preside over the deregulation of the banking sector but note early in the Gramm-Hubbard op-ed their recognition of the savings-and-loan crisis. They blame the Volcker FED for this crisis but most economists blame what John Kareken dubbed putting the cart before the horse. Luigi Zingales appears to now support Glass-Steagall because of concerns similar to those that Kareken had with the financial deregulation during the early 1980’s. Somehow – all of this seems to have been missed by Phil Gramm and Glenn Hubbard.

Does Mitt Romney Believe Downsizing Public Education is Good for Growth?

Pema Levy reports on what appears to be a real difference of opinion between President Obama and Mitt Romney (unless Romney flip flops on this issue too). First up this quote from Romney:

He wants another stimulus, he wants to hire more government workers. He says we need more firemen, more policemen, more teachers. Did he not get the message of Wisconsin? The American people did. It’s time for us to cut back on government and help the American people.

It has been widely reported that the fiscal contraction by our state and local governments is holding back our feeble recovery from the Great Recession. And yet the Republican Party is calling for even more austerity. I guess they are taking their cues from those European austerians. How well is that working out? Both parties agree in principle that we need to improve our education system as part of a strategy for long-term growth. But this is where Team Romney seems to have extremely bizarre reasoning:

The ex-governor has said smaller class sizes don’t necessarily improve education. On Sunday, now-surrogate Rick Santorum defended Romney’s opposition to hiring more teachers. “Teachers are great, we love teachers,” Santorum said on ABC’s “This Week.” “But if anybody believes that hiring more teachers as we did over the many, many years in this country, under President Clinton, even President Bush and under the early part of President Obama’s administration, if that’s dramatically improved the quality of education, you got to show me the numbers because it’s not. … What we need to do is have education reform, not throw more money at teachers. And Mitt Romney understands that.”

Less spending on education and fewer teachers does not strike me as a recipe for improving education. But this has become a theme among Republicans of late. Update: The Romney Camp is saying President Obama is bragging about those reductions in government employment even though the facts are that the President has made proposals to reverse this trend with Congressional Republicans blocking these proposals. Not quite a blatant flip-flop but Romney’s dishonesty is certainly designed to muddy this issue.

Michael Gerson Messes Up On Wisconsin Election Analysis

In the Washington Post today, tendentious moralist Michael Gerson opines that labor unions are driving a wedge into the Democratic Party. He bases this on the Wisconsin recall election, where Governor Walker trounced Milwaukee Mayor Tom Barrett.  He argues that this was all about public sector unions getting too much money into their pension funds and wages, which in a recessionary period conflicts with various progressive spending agendas.  He points to local Dem mayors such as Reed in San Jose, CA, who have pushed for reductions in pensions for local public workers against union wishes and won strongly in referenda supporting their efforts, to excoriate Barrett and call for dismantling collective bargaining for public sector unions.

Now, whatever one thinks of public sector unions, Gerson's account is seriously misleading and lacking in facts on several fronts.  First is that while Barrett certainly became associated with the position of the public sector unions in the final race, as mayor he had done exactly as Reed in San Jose and had angered the public sector unions in Milwaukee for doing so.  They had supported his main rival in the primary, Kathleen Falk of liberal Dane County over him, with this intra-party fight being pointed to by many as one of the reasons for Barrett's loss, along with the blunder of holding the recall election in the summer after students had all gone home, who are more inclined to support the Dems than the GOP.  This is on top of Gerson's conveniently ignoring that many of those voting for Walker apparently did so out of simply disapproving of holding the recall election at all.

The other issue is that he completely ignores the fact that the public sector unions in Wisconsin had completely agreed to virtually all of Walker's financial demands regarding pay and pensions and so on.  This was not about the deficit or other financial matters.  It was all about public sector union-busting, which in fact Gerson does support.  But part of what got so many people angry was that Walker never said anything about this when he was running.  He certainly spoke about limiting public worker pensions and so on, but never whispered a hint about his plan to severely limit collective bargaining.

What is curious is that on the same page, the generally obnoxious Charles Krauthammer got most of this right, although Krauthammer was probably even more gloating and mocking than Gerson regarding the impact of all this on the union movement, which does look pretty severe.

The Long-Term Budget Outlook

Ethan Pollack presents some interesting projections of the projected public debt to GDP ratio through 2087 arguing that our long-term budget outlook has improved dramatically. I’m sure this contention will be controversial in some circles – especially among those Republicans who insist we need austerity now despite the fact that we still have a severe underemployment situation. He places some appropriate caveats to these CBO projections including this at the end of his blog post:

this report clearly shows that the path toward fiscal sustainability includes allowing some—if not all—of the Bush-era tax cuts to expire and fully implementing and protecting the Affordable Care Act.

Odd – the Republican nominee for the Presidency wants to repeal the Affordable Care Act and extend if not magnify those Bush tax cuts. He is also calling for increases in defense spending as he pretends to be for fiscal responsibility. Is there some alternative arithmetic where this all adds up?

Might Romney Prove To Be A "Better Keynesian" Than Obama?

This was suggested in yesterday's Washington Post by Ezra Klein.  The argument goes as follows.  The effectively GOP-controlled Congress is currently blocking all fiscal stim efforts by Obama, along with making fusses over raising the debt ceiling, even though in reality fed spending has risen much more slowly in his presidency than under most other presidents, and unprecedentedly state and local spending and employment have been in a near free fall.

So, enter Romney, who claims to want "smaller government" like all GOP candidates, but who somehow in reality end up increasing it more than their Dem rivals.  He is in fact running on the old Reagan "voodoo economics" platform of cut taxes, increase defense spending, while supposedly balancing the budget.  It is famously bizarre that somehow at the end of his presidency Reagan expressed regret that somehow he had increased the deficit rather than balanced the budget.  Of course, quite a few self-proclaimed Keynesian economists praised what Reagan did, even though he and most of his advisers convinced themselves that what they were up to was supply-side economics, even though those darned revenues just never did quite come in sufficiently to cover all that wonderful increased defense spending without any other substantial cuts.

So, it is true that Romney claims to support the Ryan budget proposal, which does have all sorts of cuts in social safety net programs in it, along with those tax cuts for the rich and increased defense spending.  However, most of it is asterisks, as has been pointed out by many.  The reality is, of course, that when it comes down to it, Repubs in the Congress will not be keen on cutting either Medicare or Social Security noticeably anymore than they were under W.  And if they repeal Obamneycare, well, it had a cost control mechanism in it that will get ditched.  But, one can certainly count on those tax cuts for the rich going through and defense spending increases going through as well (I with Ezra am assuming that if Romney wins, the Senate will go GOP as well).  So, heck, deficits will explode, but now that it will be GOPster in the WH rather than the reviled Obama, the GOPsters in the Congress will suddenly discover that it is in the national interest to raise that pesky debt ceiling with minimal muss and fuss to let it all rip.  So, could happen.

BTW, I personally am more of a "balance the budget over the business cycle" kind of Keynesian, but I must admit that this scenario is highly likely if Romney wins, with a greater fiscal stim likely under him than under Obama if he wins, given that the GOP will probably still control at least the House, and quite possibly the Senate, or at least have enough there to cause trouble with filibusters as they have shown no compunction about using for anything and everything without anybody apparently inclined to punish them for doing so.  At least some "Keynesians" might well be more pleased with the Romney outcome than the likely Obama one for fiscal policy.

Is Lack of Worker Skills Responsible for High Unemployment?

David Wessel had an interesting article about the effect of one area of corporate cutbacks -- human relations. HR departments adjust by relying on electronic services to evaluate applications. The process is so rigid that virtually no applications are suitable.




One company drew 25,000 applicants for a standard engineering position only to have the HR department say not one was qualified.



One interesting implication is that the corporate types who complain about having trouble finding workers may not all be lying. Some may have been shooting themselves in the foot. Maybe it is not so much a lack of skills as corporate short-sightedness.

The article is here:



http://michaelperelman.wordpress.com/2012/06/05/is-lack-of-worker-skills-responsible-for-high-unemployment/

Which Spending Is Easier To Cut And By What Level Of Government?

Back from his break, our former co-blogger, Dean Baker at Beat the Press, takes down WaPo ed page editor, Fred Hiatt, for his pushing yet again for cutting Social Security because it is supposedly "easy to do" in contrast to medical spending, with Hiatt pinning the blame on Dems for not supporting cutting either.  Baker notes that putting med costs in line with those in other countries would alone completely eliminate the federal budget deficit, and that Dems are not the ones opposing cuts to drug companies or "overpaid medical specialists." http://www.cepr.net/index.php/beat-the-press/why-does-Fred-Hiatt-say-the-democrats-are-opposed-to-giving-less-money-to-drug-companies-and-overpaid-medical-specialists? .  Hiatt barely nods at GOP opposition to tax increases and the possibility of cutting defense spending, even though the US is winding down some of its current active wars.

Dean kindly avoids noting that Hiatt is part of a group of established media mavens in Washington who long ago convinced themselves that somehow not only is Social Security "in crisis," but that somehow it is the easiest program to cut (future) spending on politically, although that will do nearly nothing to limit near-term deficits and that there is nearly zero support among the public of both parties for such an action, and that efforts by various politicians of both parties in recent years to do this have ended up as embarrassing failures.  But this gang does not give up easily, including Hiatt, back at it yet again.

Unfortunately, the alternative appears to be a trick buried in Paul Ryan's budget proposal: send certain social safety net programs down to the states, with the leading candidate being Medicaid, which is already partly funded by the states.  As much as any program, this is one that should be solely funded by the feds as that would help even the playing field across states, given that the states that need it the most are the states with the most poor people and thus least able to support their poor people.  But no, Ryan thinks that Medicaid should be sent fully to the states, and some movement in this direction has already happened.

This hypocritical trend of Grover Norquist "no higher taxes" politicians sending important programs to lower levels of government so they can claim "savings" without tax increases is going on more widely, also reflecting Norquist's influence at even state levels.  So, in Virginia where I live, this most recent legislature, newly run fully by the GOP with our GOP governor, has in an effort to balance the state budget without raising taxes or appearing to cut programs, sent an unfunded mandate to the local governments, removing the funding but requiring that they contribute more to teacher pension funds.

This has led to a fairly astounding result, although the mayor or Harrisonburg, where I live, tells me that a lot of these legislators somehow convinced themselves it would not happen.  Nearly every local government in the state, including the vast majority of ones run by Republicans, has raised local taxes, mostly property taxes, but also others as well.  They have been cutting and cutting their budgets for the last several years, something manifesting itself nationally in the steady stream of layoffs at both state and local government levels.  The expectations by citizens for continuing to have basic local public services of some sort simply overrode this idiocy of no new taxes in the face of this unfunded mandate from the state, which in turn at least partly reflects the ongoing rise of Medicaid costs, exacerbated by the feds pushing even more of those down to the states.

As it is, here in Harrisonburg, property taxes are going up, along with a small increase in the rate on restaurant meals.  The alternative to the meals tax rise (much opposed by local restauranteurs) was to raise personal property taxes.  Around the state, different combinations of such increases have been implemented, and it will be interesting to see whether local voters punish their leaders for doing this or will figure it out that they have been pushed to this by the irresponsibility of state politicians.  This problem may well be worse for local Republican leaders than for Dems, given that in general the latter have not hobbled themselves so tightly with all these inane pledges about taxes, although so far, Grover Norquist has not gotten down to the local level guys with making them sign pledges and holding them publicly to them.  There are just too many of them for him to keep track of all of them.

Austerity in booms and now also in times of bust

Paul Krugman at the New York Times has an article entitled 'The Austerity Agenda' published on 31st May.  He quotes the economist John Maynard Keynes who said 75 years ago: “The boom, not the slump, is the right time for austerity.”  Krugman then poses the question as to why certain governments are pursuing an austerity agenda in this time of 'slump' rather than waiting to cut public spending and jobs when their economies are in better shape.

Krugman's basic assumption is that our economies will recover; that economic growth will resume as we've always known it to.  But is this correct?

In 2005 something of a very fundamental nature changed in the world economy.  World energy supply stopped growing.  It was no coincidence that, in that same year, Wall Street began to bundle mortgages together into investment parcels, and then offloaded them as quickly as they possibly could by any means feasible.  This appears to be related to the fact that when the annual supply of world oil stabilised at a time of unprecedented and climbing demand the price of this vital commodity started to skyrocket.  Thus, sharply exacerbating a global liquidity glut (capitalism under 'limits to growth' = great financial profits for a select few and austerity for everyone else).

The US Federal Reserve then decided (also in 2005) to raise interest rates.  Families hit with rising oil prices then had to begin paying higher interest rates on their mortgages....

A period of conscious self-reflection on the results of our economic model is long overdue.

Brenda J Rosser.  Monday 4th June 2012.