Paul Krugman Puzzles Greg Mankiw

When I read the latest from Greg Mankiw, my initial reaction was to think he was being argumentative:

I often disagree with Paul Krugman, but I usually understand him. Lately, however, I have been puzzled about his view of the bond market. In a recent post, he takes President Obama to task for believing that the failure to deal with our long-term fiscal imbalance might cause a spike in interest rates

Greg contrasts Paul’s latest on this topic to something Paul wrote back in 2003 when Paul was worried that financial markets might quickly lose faith that the U.S. government would ever be serious about addressing its long-term fiscal balance:

I am having trouble reconciling these points of views. Has Paul changed his mind since 2003 about how the bond market works? Or are circumstances different now? If anything, I would have thought that the fiscal situation is more dire now and so the logic from 2003 would apply with more force. I am puzzled.

Paul has addressed his 2003 post before and I’ll invite him to remind Greg of what he has said about that. But yes – the circumstances now are clearly different from what they were as of March 11, 2003. First of all – we are currently further below full employment to the point where the Federal Reserve has clearly announced it would not initiate monetary restraint until the labor market significantly improves. Does Greg remember that the Federal Reserve started raising interest rates a little over a year after Paul wrote his piece back in 2003? But I guess the key portion of Paul’s 2003 post that troubled Greg was this:

How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

Greg is emphasizing the fact that the debt/GDP ratio is higher than it was 9 years ago and the deficit is also quite high. But let me protest by arguing that the long-run fiscal situation depends more on what markets expect future fiscal policy will be. Paul was likely worried that the Grover Norquist pledge imposed on most Republicans never to raise taxes combined with their willingness to load up defense spending (after all – Paul wrote on the eve of the Iraq invasion) would tell financial markets that our fiscal folly was doomed to continue forever. Note, however, that the Obama Administration is much more willing to both raise taxes and cut spending than the Administration that Greg served in. Then again – the Grover Norquist crowd still has a strangle hold over Congress so maybe Greg is right to be puzzled.

Norquist and LaPierre: Emperors Losing Their Clothes?

Two figures have held near-dictatorial sway over a majority of members of Congress for several decades: Grover Norquist and Wayne LaPierre.  However, both may be losing their grip to some extent at this time, although it is too soon to count them out yet.  Both may yet get their ways to some extent despite appearances to the contrary.

Norquist's schtick has been the pledge he has foisted on largely Republican members of Congress never to raise taxes in any way, shape, or form.  This effort dates to the Reagan presidency and has only gradually gained the nearly universal submission that it currently has among Republican politicians at both the state and national levels.  In the face of the current huge deficit and the oncoming "fiscal cliff" (curb, slope, whatever), some are now making noises about abandoning ship on this.  Indeed, this past Thursday saw House Speaker John Boehner proposing to raise income taxes on those earning more than $1 million per year.  While this was a cutoff higher than the $400,000 President Obama was demanding (which is in turn higher than the $250,000 he successfully campaigned on this year), it was a significant break for Speaker Boehner.  However, in the end he was unable to convince his caucus to support him.  The rank and file of Republicans in the House are simply not yet willing to go against their pledges to the will of Norquist.  Norquist's clothing may be getting pulled at and a bit messy, but he continues to seem pretty fully dressed.

Wayne LaPierre has not made Congressional members sign a specific pledge, but he has demanded that those the NRA supports do exactly as it requests on pain of facing primary or other opposition backed by strong funding and advertising.  Whereas Norquist's group largely focuses just on Republicans, LaPierre has worked his ways on polticians of both parties, although increasingly his focus has been on Republicans as Democrats have begun to thumb their noses at him.  This movement has accelerated since the massacre at Sandy Hook Elementary School in Newtown, CT just over a week ago, and the reaction to LaPierre's speech a week after it calling for armed guards at schools has been ridiculed widely.  Nevertheless, despite a lot of discomfiture, at least Republicans continue to appear to be completely obedient with not a single GOP member of Congress expressing support for any movement to control guns in any way.  One can expect my own representative, Bob Goodlatte, to prove to be the ultimate blocker of any efforts to change gun laws in his new position as House Judiciary Committee Chairman, as he has strongly stated opposition to any changes in gun laws.  So, LaPierre also  appears to be keeping most of his clothing on as well for the near term.

A curious details is that this authoritarian pair has a curious mutual connection.  Norquist is on the board of the NRA, and both are closely connected to John R. Lott, Jr.  Lott has most recently coauthored a book with Norquist, and he has long been the most prominent pro-gun rights advocate in the nation, much relied on and praised by LaPierre.  His book, _More Guns, Less Crime_ has been cited repeatedly by those pushing to loosen gun laws in many states and also at the national level, such as when the NRA succeeded in blocking a renewal of the assault weapons ban in 2004.  Curiously, Lott's effort to step forward to defend gun rights at this time has brought much focus on his long record of data manipulation and outright fraud, most notoriously in his creating a sock puppet named "Mary Rosh" to praise himself on the internet over a decade ago.  His studies have come under strong criticism on multiple grounds by many, such as Mark Duggan in his "More Guns, More Crime," Journal of Political Economy, 2001.  His recent claims that mass murders happen only in gun free zones, except for the Gabby Giffords tragedy last year, appear to be false, with at least three this year happening in non-gun free zones: the Clackamas OR shopping mall attack, the Sikh Temple attack in Oak Creek WI, and the Accent Signage attack in Minneapoli, MNs.  For more detailed discussions of the various fraudulent activities Lott has engaged in see http://www.tnr.com/blog/plank/111063/meet-john-lott-the-man-who-wants-teachers-carry-guns  and http://mediamatters.org/research/2012/12/17/who-is-gun-advocate-john-lott/191855 .  Ironically, while Norquist and LaPierre may just barely be able to keep their clothes on, it looks like it may end up being Lott, who may finally lose his. 

We’ve Been Falling Off That Fiscal Cliff

Brad DeLong is unhappy with how President Obama is negotiating with the Republicans on the wrong fiscal issue as he cites reporting from Suzy Khimm:

President Obama’s concessions to Republicans on taxes and Social Security have grabbed the headlines, but there’s another big area where the White House has shifted considerably in the GOP’s direction: direct stimulus to revive the short-term economy. In his original offer, Obama asked for $425 billion in stimulus through jobs measures and tax extenders, according to the Committee for a Responsible Federal Budget, including $50 billion in infrastructure spending and other stimulus measures; mass mortgage refinancing to boost the housing market; $30 billion in unemployment extension; a $115 billion extension of the payroll tax holiday; and the extension of a host of business tax breaks known as extenders. The stimulus measures are intended to counteract the impact of a fiscal cliff that would put major austerity into effect immediately. But they’re also meant to counter the fiscal tightening in a fiscal cliff deal, which both Democrats and Republicans have agreed should promote major austerity in the longer term through deficit reduction. Republicans, however, have argued that more explicit stimulus right now isn’t the answer: House Speaker John Boehner included no explicit stimulus measures in his original offer and has only proposed to extend a handful of business tax breaks since then. It’s clearly been a point of contention in the negotiations as Obama’s stimulus proposal has progressively shrunk over time: In his third offer, reported Monday, Obama dropped his ask from $425 billion to $175 billion in stimulus

Suzy’s reporting reminds us what Ben Bernanke meant by the fiscal cliff:

Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery.

In other words, we need the stimulus that the President originally proposed to avoid the fiscal tightening that the Federal Reserve chair warned us to avoid. Our graph reminds us that the original Federal fiscal stimulus (FED) early during Obama’s first term has been dissipated over time. It also reminds us that state and local government purchases (S/L) has been contractionary over the past few years, a point that Bernanke also made in his June 7 testimony to Congress:

Another factor likely to weigh on the U.S. recovery is the drag being exerted by fiscal policy. Reflecting ongoing budgetary pressures, real spending by state and local governments has continued to decline. Real federal government spending has also declined, on net, since the third quarter of last year, and the future course of federal fiscal policies remains quite uncertain, as I will discuss shortly.

The Federal Reserve chairman has repeatedly begged Congress to reverse its unwise shift to austerity. We had hoped that President Obama in his fiscal cliff negotiations had actually started listening to Bernanke. But it seems he has stopped listening to him and most of us in the economics profession. If the President is not going to push for this fiscal stimulus, then why bother? Some might say we’ll fall off the fiscal cliff but it looks like we’ve been heading down that road for a while.

Chain chain chain . . .

http://www.huffingtonpost.com/ca-rotwang/chain-of-fools_b_2342679.html

To Hell With The Second Amendment And At Least Reinstate 1994 Ban on Assault Weapons Sales

Yet again we have had a nutcase engaging in mass murder in the US using semi-automatic weapons with massive magazine capacities.  We banned the sale of these in 1994, but let it lapse in 2004 under pressure from the NRA, who had managed to defeat such supporters of the ban as the late Jack Brooks, a longtime gun rights supporter and Congressional powerhouse who had the nerve to support this ban in 1994.  Nobody had the nerve to go up against them in 2004 (and the then president was certainly not in favor of renewing it).  All these people have the blood of innocents on their hands, even if they continue to protest that if only we had universal "open carry," these things would not happen.  I doubt that for the simple reason that most of these mass murderers have ended up killing themselves.  They are not to be deterred by the threat that they might die.

Over the last century we have had 25 mass murders in the US.  China is second with 10, Israel and the Philippines are tied for third at 8 each, and India is fifth with 7.  We are far ahead of other nations in terms of per capita gun ownership, at 88.8 per 1,000 population. Serbia is second at barely over 60, wth Yemen barely over 50.  Fourth place Switzerland is at 47.5.  Gun rights nuts often cite Switzerland, which has low rates of gun homicides, mass murders, and so on, although it has the highest gun suicide rate in Europe.  But guns are very strictly regulated there.  Most homes have them, but they are issued to those who served in the military through the draft and have been trained.  They are particular weapons to be kept under lock and key in the homes, with other types of guns simply banned, and only security officers allowed to carry guns in public.

Reading or listening to gun rights advocates one would believe that US liberty depends on the Second Amendment.  It does not.  Of the 48 rights advocated in the 1948 UN Declaration of Human Rights, gun rights are not among them (the other US constitutional rights not among them are the right to not self incriminate and the right to a trial by jury).  The only other nation with gun laws as loose as those in the US is Honduras, which competes with the US for providing guns to the Mexican drug gangs.

The Second Amendment is a historical mistake and should be repealed.  Short of that, the 1994 law should be reinstated.  Heck, if we had gun laws like Switzerland's we would be in far better shape, although there is unfortunately no way to get our guns per capita down anywhere near to where they are in the rest of the world, which means we are probably doomed to more Newtowns.

Kevin Drum on Why the Social Security Trust Fund is Real

Kevin Drum has a short and sweet analogy for the position that the assets in the Social Security Trust Fund are real:

Now, suppose this surplus had been invested in corporate bonds. What exactly would that mean? It means that workers would be giving money to corporations, who would turn around and spend it. In return, the Social Security trust fund would receive bonds that represent promises to repay the money later out of the company's cash flow. In effect, it gives workers a claim on the cash flows of the company at a later date in time. When that time comes, the company would have to pay up, which would make it less profitable. If the company was already unprofitable, it would make their deficit even worse. If that's what had happened, there would be no confusion about the trust fund. Everyone agrees that corporate bonds are real things, and that the corporations who sell them have an obligation to pay them back, even though it means less money for shareholder dividends.

He then substitutes treasury bonds for corporate bonds and draws the same conclusion. QED! While I agree, let me try to offer the rightwing rebuttal, which begins with the proposition that the general fund is essentially bankrupt. Is it and why? Well – it is true that the Reagan years cut taxes on the very rich just as it raised payroll taxes. It is also true that President Reagan increased defense spending. Although we had the peace dividend and some reversals of those tax cuts during the 1990’s, George W. Bush put us back on the path of high defense spending and low taxes on the rich in 2001. The Republican Party seems to believe that we must forever have high defense spending and low taxes on the rich. Well if that is true, it is analogous to paying high dividends to corporate shareholders even as corporate profits are well below the dividend policy. But do we really have to accept this Republican belief system? No we can honor these promises to pay Social Security benefits if we as a nation are willing to tell the rich to pay higher taxes and tell the military industrial complex that it gets less largesse. But I guess some Republicans see the promises of low tax rates for the rich and continuing largesse for the military industrial complex as sacrosanct, which of course leads them to conclude that the problem is those promises to Social Security beneficiaries.

Retiring On the (Price Index) Chain Gang

So, Very Serious People are pushing the chained price index as a preferred alternative to the CPI for indexing future Social Security benefit increases.  This is estimated to raise benefits per year by about 0.3% less than the CPI does, and is claimed to be more accurate due to allowing for substitutability of goods, along with reducing future expenditures, if not reducing the deficit in the immediate term.  Anyway, it is on the table as part of the ongoing fiscal cliff negotiations. 

However, an experimental price index for seniors estimated by the BLS finds them facing higher rates of price increase than the CPI measures, although this index needs further refinement and research and has not been officially released.  Nevertheless, it is quite believable that seniors do face higher cost of living increases, particularly as they spend far more on medical care than other people as a perent of their spending and income, and that is one of the two most rapidly rising components of the CPI (the other being higher ed).

A letter has been issued with accompanying documents, signed by 250 economists, arguing for more study of this senior price index and against putting seniors on a Cost of Living Chain Gang Index.  The entire set of documents and the signatures can be found at http://www/epi.org/publications/social-security-cola-changes-letter .  If anybody had asked me, I would have signed it as well...

Lowest Unemployment Rate Since Obama Took Office?

A lot of pundits this weekend were calling the latest news from the BLS as good news. Yes – the payroll survey showed a modest increase in employment but the household survey suggested a decline. But then the pundits also note the decline in the unemployment rate to 7.7%, which is lower than the 7.8% rate observed for January 2009. But is that really good news? No because the employment to population ratio fell last month with the decline in the unemployment rate coming from a larger drop in the labor force participation rate. It is true that the employment to population ratio has had a bumpy ride increasing from its low of 58.2% during the middle of 2011. While the unemployment rate has showed a more impressive decline, a fair amount of that decline over the past 18 months has been from a decline in the labor force participation rate. Furthermore, our graph shows just how far both series have declined on net since President Obama took office. To be fair, Obama inherited an economy in free fall and the economy has been recovering slowly since the Great Recession ended. But let’s stop cheerleading how great the labor market is and it is still awful. Which is all the more reason to pursue fiscal stimulus not rather than allowing this “fiscal cliff” to occur.

Sweatshop Realities

The New York Times has an interesting story today on the failure of social responsibility monitoring to prevent catastrophes like the garment factory fire that killed between 260-310 workers in Karachi a few months ago.  The factory was a death trap, with blocked exits, grills over the windows, and heaps of combustible material everywhere, yet it had been certified as meeting the highest standards set by Social Accountability International, a global industry-funded organization.

Incidentally, no one knows exactly how many workers died because they were off the books.  The lack of formal employment relations is typical of sweatshops and apparently not an impediment to getting the imprimatur of social responsibility from industry monitors.

Those with a taste for irony will appreciate that Social Accountability International defends itself on the grounds that they did not do the inspections themselves.  No, this work was subcontracted to an Italian monitoring group, which in turn outsourced the actual field investigation, such as it was, to a shop in Pakistan.  So it turns out that the social responsibility industry has a supply chain problem too.  How can SAI protect its brand while avoiding the messy and costly frontline work of actually doing the inspections themselves?

The core problem is obvious to anyone who looks past the propaganda and examines the situation objectively: the industries that depend on cheap, reliable inputs from their global sourcing operations are the principals and the monitors are the agents.  The branded garment producers want to protect their image, but they also want to keep their costs down.  (This is a ruthlessly competitive sector, after all.)  Their incentive is to generate the best possible set of appearances for consumers at minimum actual expense in terms of compensating workers and upgrading working conditions.  Anyone they hire to manage the social responsibility apparatus will be engaged on terms that transmit these incentives down the SR supply chain.

The fundamental problem is that the system is accountable to the wrong principal.  It is the workers in this industry who ought to be the ones accreditors must satisfy.  That, of course, requires worker organization like independent unions, something neither the companies nor the governments in export platform countries like Pakistan are eager to embrace.  In the end, however, that is the only path to truly responsible production systems.  As long as monitoring is for the companies, there will be loopholes, gaps and dark corners; workers will not complain for fear of losing their jobs.  The indispensable inspectors are the workers themselves, who are in the right place with the right incentives to determine whether conditions are adequate or not.

One final point: the story quotes Alice Tepper Marlin, the founder of SAI, making the stock defense of sweatshops.

“This type of trade and development has played an important role in bringing people out of poverty,” she said. “Do we really want to say that we should move away from it because there are some factories with problems?”

This argument is trotted out every time a workplace disaster occurs, or stories are written about 60 hour workweeks at subsistence pay.  It is always presented as a new insight, something the critics must not have considered.  But it is a red herring.  The same argument was used in the US at the time of the Triangle fire, where the victims were impoverished immigrants trying to get their first morsel of economic opportunity.  Aren’t any jobs, even dangerous ones, better than none it all?  But that was not the choice, either then or now.

The question is not whether global production systems can extend to developing countries, providing jobs for those who need them, but under what standard those systems will operate.  The alternative to a fire trap in Karachi is not protectionism in the US, but enough worker voice in Pakistan to ensure that production in that country meets the standards of fundamental human decency.

Sandy and the Fiscal Cliff

Andrew Taylor reports that the President has proposed what should be a no brainer:

President Barack Obama's proposal for $60.4 billion in federal aid for states hit by Superstorm Sandy adds a huge new item to an end-of-year congressional agenda already packed with controversy. The president's request to Congress on Friday followed weeks of discussions with lawmakers and officials from New York, New Jersey and other affected states who requested significantly more money, but generally praised the president's request as they urged Congress to adopt it without delay.

Is the controversy surrounding the question of what not more aid? Of course not:

Pushing the request through Congress in the few weeks left before lawmakers adjourn at the end of the year will be no easy task. Washington's attention is focused on the looming fiscal cliff of expiring Bush-era tax cuts and automatic spending cuts to the Pentagon and domestic programs set to begin at the end of the year. And tea party House Republicans are likely to press for budget cuts elsewhere to offset some or even all disaster costs.

Again we see the confusion about what Ben Bernanke meant when he coined the term “fiscal cliff”. Mark Thoma has the latest for those who want to get their heads on straight as he highlights John Cassidy:

With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work ... At every stage of the experiment, critics (myself included) have warned that Osborne’s austerity policies would prove self-defeating. Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits ... With Republicans in Congress still intent on pursuing a strategy similar to the failed one adopted by the Brits, this is a story that needs trumpeting. Austerity policies are self-defeating: they cripple growth and reduce tax revenues. The only way to bring down the U.S. government’s deficit in a sustainable manner, and put the nation’s finances on a firmer footing, is to keep the economy growing. Spending cuts and tax increases can also play a role, but they need to be introduced gradually ... Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.

BLS told us yesterday that our employment-population ratio, which was already low, dipped. Now it is the time for stimulus not austerity. Also consider the fact that the President’s request is less than 0.5% of current year GDP. Since would a one-time spending surge if enacted, the impact on the long-run tax rate should be calculated as $60 billion divided by the present value of future GDP – making this impact microscopic. And if we add into the analysis Cassidy’s “cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase”, then the extra spending could be seen as self-financing. Public investment now rather than later has always been as a smart countercyclical move for several reasons. One if that the government can borrow at virtually zero real interest rates. The other is that residential investment is running at less than half its level witnesses in 2005 (in real terms), which means that construction workers are still looking for gainful employment. So yes – approving the President’s request so be a no brainer. Then again – we have to wonder whether some folks in Congress actually use their brains.

Time To End The War On Terror Says Fareed Zakaria

In WaPo of 12/7/12 Fareed Zakaria calls for an eventual end to the officially designated "War on Terror."  I fully agree.  He notes that the US has been since 9/11/01 in a state in which the president has wartime emergency powers, the limits of which remain undefined, even though the US Congress has not declared war since 1941.  The mastermind of 9/11 has been terminated, and the core of his organization has been decimated, even if a shadow of it remains.  While offshoots crop up here and there, none of them seem capable of attacking the US itself, and indeed none have since 9/11.  It is time to end this unpleasant state in which presidents continue to expand their ability to monitor and control the most private details of the lives of US citizens.

This peculiar situation reminds me of a story that many consider to be quite silly.  During WW II, one of the most brilliant people who ever lived became an American citizen, the logician Kurt Godel, who was at the Institute for Advanced Study in Princeton at the time.  Accompanying him to the final installation in Trenton were Albert Einstein and Oscar Morgenstern.  They were well aware that Godel was worried that he would fail the exam and be denied citizenship and had been carefully studying such matters as who were the Chairs of County Boards of Supervisors around the country.  At the swearing in, the judge made the required speech about the duties of citizens and declared that the US was a democratic nation that could not become a fascist dictatorship of the sort that the US was at that time in a legally declared war with.  Godel interrupted the judge to declare that it was possible under the Constitution for the US to be a fascist dictatorship.  What followed that declaration remains in dispute as his companions intervened.  In any case, Godel was granted his citizenship, but we have never learned why he thought this unpleasant outcome was possible.  However, the current situation of 11 years in a row of presidents possessing emergency wartime powers without any war being declared or any attack upon the US during this time suggests that whatever Godel's own ideas on this were, he had serious grounds for his concern.

More Abe

I had more thoughts last night on the politics of Lincoln.

1. My parents would have loved this film.  Their volumes of Carl Sandburg’s biography were prized possessions.  I am reliving a generational conflict.

2. Contrary to this film, the thirteenth amendment was not very consequential.  It was a nice piece of paper, but the fourteenth, for good and ill, was the one that counted.

3. In January 1865 the confederacy was prostrate; it would be just a few months before its surrender.  The main item on the agenda in Washington was what to do with it.  Much of the South was already under military occupation.  With the end of hostilities, what would be the mission of these occupying troops?  Was the purpose of the war simply to preserve the union, in which case the occupiers could pack their bags and go home?  Or was it to dismantle the political and economic order whose interests had proved to be incompatible with democratic government as understood by the rest of the country?  Lincoln hedged and straddled.

4. Much fun is made in the film of patronage as an instrument of political manipulation.  In fact, over time the Republican Party devolved into a clientelistic regime with little justification beyond the reproduction of its privileges.  This is why the Grant administration is regarded as a nadir of nineteenth century politics.  The lesson the film wants us to learn is that dirty ends have to be employed for noble means, but in reality the means became the end.

4. Even if you grant the legitimacy of the political fairy tale at the heart of the movie, what is its meaning for today?  Lincoln is portrayed as a practical idealist who bent every scruple, even dissembling on a peace overture from the confederacy, in order to remain true to his one inviolate principle, the abolition of slavery.  Fine.  Is Obama supposed to be our modern Lincoln?  We know his compromises; what is his guiding purpose?  To replace warfare with peaceful international adjudication?  To subdue the political and economic power of finance?  To rally the world to overcome the threat of catastrophic climate change?

The means has become the end today too.

Inflation and Government Deficit Accounting for the 1970’s

Let’s do a simple example of what Robert Barro meant by this:

one-to-one effect of expected inflation on nominal debt growth

as a follow to my and Brad DeLong’s critique of Donald Thorton who noted that the nominal value of government debt rose by an average of 2.1% of GDP during the 1970’s and that this nominal deficit showed variability. The 1970’s also had high and volatile inflation. During this decade, the GDP deflator doubled, which means the inflation rate average 7%. The nominal interest rate on long-term government bonds averaged 8% implying an average real interest rate equal to 1%. Our example will assume that GDP equals $5000 billion and the normally stated deficit equals $100 billion (2% of GDP). Let's also assume an initial debt/GDP ratio = 34% so the debt begins at $1700 billion. If the nominal interest rate is 8%, then nominal interest expense alone is $136 billion so the non-interest portion of the government accounts represents a $36 billion surplus. Now if you protest that we must also include interest expenses, economists such as Robert Barro and even Milton Friedman would note that real interest expense is what matters for the increase in the real value of government debt. In our example, real interest expense only $17 billion. So when Brad writes:

Why 1970--when nothing happens to derange either the pattern of deficits as a share of GDP or the trajectory of the debt-to-GDP ratio--rather than 1980, when the election of Ronald Reagan does change the pattern of deficits and the trajectory of the debt-to-GDP ratio?

We can read this as noting the path of the real value of the government debt. My problem with Thornton’s paper and the blog post from Tim Taylor as the money illusion distortion in the reporting of deficits during high inflation was widely discussed during the late 1970’s and should be part of any economist’s recognition when discussing fiscal policy during this era.

Lincoln, Blinkin’ and Nod

Out of misplaced civic duty I finally betook myself to the local cinemaplex and stared at the screen where Lincoln held forth.  I had successfully avoided Spielberg for a couple of decades now, and only the curiosity aroused by reams of online debate over whether this was a revolutionary or execrable cultural event brought me thither.  Perhaps also the hope that Tony Kushner would work some verbal magic every now and then.

On the positive side, I will say this: Tommy Lee Jones is one heck of an actor.  His character was mis-written, more to settle scores with present day radicals than to construct a credible representation of the real Thaddeus Stevens, but what the heck.  I would watch TLJ in just about anything.  David Straithairn too, although his role was impossible to do much of anything with.

Daniel Day-Lewis?  He was just what Spielberg wanted him to be.  That’s a professional achievement, but the film might have been better if he had screwed up in an interesting way.  And don’t forget the excellent cinematography.  When all else fails, admire the production values.

Better to watch than to listen: the score, even played by the Chicago Symphony under their actual conductor Riccardo Muti (Spielberg doesn’t cut corners, does he?), was truly dreadful, thinned-out, dumbed-down, reconditioned Aaron Copland.  (Lincoln said that.  Abraham Lincoln said that.)  Spare us, pleeeeease.

And now we get to the politics.  Yes, the film does not romanticize either the confederacy or the war that crushed it.  (The momentary exception: Ulysses Grant and his lieutenants tip their hat to the solemn, dignified Robert E. Lee before he turns his mighty steed and rides off into the distance.)  The scene where confederate bigwigs have to acknowledge armed black soldiers fighting for the Union is compelling.  The openness and ubiquity of racism, and sexism for that matter, is honest.  That’s on the plus side.

The other list is a lot longer and weightier.  The hagiography of the Great Man is mawkish and embarrassing.  I desperately wanted to close my eyes when the camera alighted, as it often did, on the dewey eyes of an admiring black servant so grateful for the gift of freedom that Lincoln was bestowing on him or her.  Seriously: how would Spike Lee have played those scenes?  I don’t know either, but I would have had more reasons not to doze off.

More to the point, the fundamental premise of the film is simply wrong: slavery in America was not eliminated by the thirteenth amendment.  It was dismantled above all by the slaves themselves, who used the opportunity of the war to flee their bondage and, in vast numbers, enlist in the Union cause.  This was ratified by the Emancipation Proclamation, which also served to encourage those who had hesitated to act.  Moreover, if the amendment had not been passed by the lame duck congress, it would have sailed through the incoming one—the congress that gave us a few years of radical reconstruction.

And that brings up the most important point.  In 1865 the central issue was not the legal status of slavery, but (1) to what extent would the North use military force to drive the slavocracy from power in the South, and (2) what economic and political support would be offered to enable ex-slaves to live independently, with opportunity to achieve equality in all aspects of life?  Thaddeus Stevens, the wild man whose greatest contribution, according to the movie, was to keep his mouth shut at the critical juncture, was in fact the man of the hour, the national politician who demanded a revolution in race relations.  His version of reconstruction, if it had been allowed to do its job, would have spared this country a century and a half of injustice, not to mention the debilitating influence of an entrenched, reactionary caste aristocracy ruling over a large portion of our reunited commonwealth.  From the vantage point of the present, the main importance of the assassination of Lincoln is that it may, but only may, have been a crucial setback to the cause championed by Stevens and his comrades.

I hated the way Stevens, in the end the most principled and clear-sighted character in the story, was ridiculed.  But like I said, Tommy Lee Jones is one hell of an actor.

A Few Critiques of Tim Taylor’s Historical Review of U.S. Government Deficits

Tim Taylor summarizes a review of our history of government deficits by Daniel Thorton. I’m a little surprised that neither referenced a 1979 analysis by Robert Barro:

This behavior implies a positive effect on debt issue of temporary increases in government spending (as in wartime) a countercyclical response of debt to temporary income movements, and a one-to-one effect of expected inflation on nominal debt growth.

Tim writes:

For starters, here's a figure showing U.S. annual budget deficits over time going back to 1800. There are five episodes of major budget deficits in the history of the U.S. government: the Civil War, World War I, the Great Depression, World War II, and the last few years. The deficits of the last few years don't match those of the major wars in U.S. history, but as a share of GDP, they do exceed the deficits of the Great Depression.

In other words, Tim is saying what Barro wrote back in 1979 – that the debt/GDP ratio spikes during major wars and severe recessions. Barro argued that US fiscal policy during other periods allowed the debt/GDP ratio to fall over time. My first critique, however, is an objection to this:

Thornton emphasizes that the roots of our current deficit and debt troubles go back well before the Great Recession of 2007-2009, and well before Bush tax cuts earlier in the 2000. Instead, Thornton locates the start of the problems back to about 1970. In the chart of annual deficits, for example, notice that after about 1970 a pattern of volatile but growing deficits emerges.

Brad DeLong was also upset with this passage:

Why 1970--when nothing happens to derange either the pattern of deficits as a share of GDP or the trajectory of the debt-to-GDP ratio--rather than 1980, when the election of Ronald Reagan does change the pattern of deficits and the trajectory of the debt-to-GDP ratio?

Barro and many others including Milton Friedman during the late 1970’s were aware of the fact that we had nominal increases in government debt but they also were aware that the real value of government debt was falling even in absolute terms. Hence Barro’s “one-to-one effect of expected inflation on nominal debt growth”. I would have hoped Tim would have remembered the discussion back then and not fallen victim to what some of us were calling “money illusion” back in my graduate school days. The other quibble comes from Tim’s discussion of the alleged explosion of Social Security spending:

My own take is that it's been clear since at least the 1980s, and arguably earlier, that the U.S. budget was going to run into severe difficulties when the baby boom generation started retiring. The leading edge of the boomer generation was born in 1946, and thus is just now hitting age 65 and heading into retirement in substantial numbers. This demographic shift was going to cause problems for Social Security, but those problems could be dealt with by phasing back the retirement age and tweaking formulas for payments and benefits.

President Reagan’s Social Security commission understood the implications of this “demographic shift” and chose to address it in part by increasing the payroll tax. Why Tim would adopt the Tea Party mantra about scaling back benefits is beyond me as we know that under the Great Recession, the increase in payroll taxes was sufficient to build-up a trust fund for future Social Security benefits. In the way Tim summarizes Thornton’s paper, the blame for Reagan’s shift from “tax&tax and spend&spend” to spend&spend and borrow&borrow (aka the 1981 tax “cut”) and Bush43’s decision to “cut” (more like defer) taxes in 2001 and 2003 appears to get lost. But as Brad notes – this is where much of the blame belongs.