Robert (No Relation to Paul) Samuelson on the 1964 Tax Cut

Robert Samuelson has written some incredibly stupid op-eds but I think this one has to be the all time dumbest. It tries to claim our current fiscal mess started with the 1964 tax cut:

We are now suffering from — and have for decades — the second defect of JFK’s decision: the loss of budgetary discipline. Since Kennedy’s tax cut passed in 1964 — after his assassination — there have been 43 budget deficits and only five surpluses (1969, 1998, 1999, 2000 and 2001). Even the surpluses reflected luck more than policy. The last four resulted mostly from the 1990s economic boom, boosting tax revenue, and the end of the Cold War, lowering military spending.

Dean Baker has already corrected Samuelson on the long-run debt to GDP issue noting that it continued to fall until we had those Reagan tax cuts:

Samuelson complains that in the 50 years following the tax cuts we almost always ran budget deficits. While this is true, the ratio of debt to GDP continued to fall until 1980, dropping from about 43 percent in 1963 to around 25 percent in 1980. The interest burden remained low and the real interest burden of the debt was actually negative through most of this period. (The inflation rate exceeded the average interest rate.) The soaring deficits and rising debt burden began when Ronald Reagan took over in the White House.

Let me also add that while the nominal value of Federal debt was rising during the late 1970’s, the real value of this debt was declining. This is a fact noted by even conservative economists such as Milton Friedman and Robert Barro. Did Robert Samuelson forget about their writings on the topic? It seems that Samuelson also forgot that it took a lot of discipline during the Clinton years to have this boost in tax revenues and less defense spending. But hey – the Clinton Administration was about luck and not policy? But let’s turn back to the macroeconomic issues facing us back in 1963. Here is Samuelson’s take:

What Kennedy did was this: In early 1963, he proposed a $13.6 billion tax cut (today: about $320 billion) even though the economy was not in recession and the tax cut would enlarge the budget deficit. Kennedy adopted the theory that government could, by manipulating its budgets, increase economic growth, reach “full employment” (then a 4 percent unemployment rate) and reduce — or eliminate — recessions. It was a disaster.

Dean also corrected Samuelson’s claim that the economy turned into a disaster after the 1964 tax cut. But let’s add to Dean’s account that the unemployment rate as of May 1963 was 5.9%, which was seen as far below full employment. And by the end of 1965, the unemployment rate had dropped to 4% without a run up in inflation. And most macroeconomic textbooks will note that this fiscal stimulus led to an increase in real GDP, which in turned actually increased tax revenues. Somehow I suspect Robert Samuelson hasn’t read any of these textbooks. But let me recount something often not noted in these textbooks about what happened in December 1965. The President’s Council of Economic Advisors seeing that we were also getting fiscal stimulus from the Vietnam War as well as the Great Society appropriately warned the President that we needed to scale back this triple whammy of fiscal stimulus lest the Federal Reserve raise interest rate (which they did temporarily) or we see a rise in inflation (which was the great disaster Robert Samuelson notes). In other words, it wasn’t the 1964 tax cut as much as later events that led to the accelerating inflation. Anyone who has bothered to learn even the least about the macroeconomic history of our nation would know this – but apparently Robert Samuelson does not. He also does not know anything about how macroeconomics has evolved since the early 1960’s when he writes:

Kennedy and his advisers, overconfident of their ability to control the economy, damaged long-standing national norms and customs. They didn’t know what they were doing.

Actually, the Council of Economic Advisors did know that too much fiscal stimulus could lead to inflation but alas the politicians were not listening in 1966. But we should also note that the economic profession has not been so enamored with the notion that we always need fiscal stimulus to promote growth. We should note two points here. The profession has become more concerned about the possibility that we could repeat the mistakes of the late 1960’s. It has also long recognized that monetary policy is a powerful aggregate demand tool except in exceptional times such as the zero interest rate bound that we’ve been facing for the past few years. In other words, economists may indeed know what we are doing even if Robert Samuelson clearly has no idea what economists discuss on these matters. My only question is why would the Washington Post allow someone so ignorant to write such an incredibly stupid op-ed?

Is Obama To Blame For The Sequester?

Yes, but not for the reasons most people are saying so.

John Boehner says so, except when he wants to take credit with the GOP base for cutting spending without raising taxes.  Bob Woodward also says yes, even getting into a shouting match with Gene Sperling over it and then running to the media to crybaby about it when Sperling sent him an apologetic email that included the statement that Woodward would "regret" making his claims.  In today's New York Times, Bill Keller says so also, even though he admits the sequester came out of a complicated bipartisan process in August, 2011.  But Keller puts the bottom line blame on Obama for not accepting the non-existent Bowles-Simpson Commission recommendations.  The commission never made any recommedations because some of the Republicans on it, led by Paul Ryan, did not want to have any tax increases as part of it, although Bowles and Simpson later issued their own proposal, since described inaccurately but repeatedly by mainstream media as being the commission's recommendations.  In any case, Obama did not accept any, not that there was any evidence that GOPsters in Congress were any more likely to accept those with their proposed tax increases, so shame on him according to Keller.

Actually, I must agree that it is ultimately Obama who is responsible for the fact that this idiotic sequester is happening, although I can sympathize that when he let Jack Lew propose it to Boehner and then signed it, he really thought it would lead to a Grand Bargain, some variation on all that Bowles-Simpson stuff that Keller is huffy that he supposedly did not accept.  That is not the issue. 

The issue is why he ever proposed the damned thing in the first place, and that was to avoid a financial crisis from the House Republicans' refusal to raise the debt ceiling in August, 2011.  There were a lot of us at the time, myself included, who argued that he needed to squelch this debt ceiling thing once and for all by declaring it unconstitutional.  For some reason he let himself get convinced that it is constitutional, or maybe he was just afraid that the court fight that would ensue over this would endanger his reelection effort.  In any case, he missed an historic opportunity to end the truly assinine charade of these repeated fights over the debt ceiling.  If he had done the right and brave thing, to declare the debt ceiling unconstitutional and simply blow past it, he would not have had to propose this silly sequester to Congress.  He is indeed at fault, and it was political cowardice that led to this current unpleasantness. 

We should have been freed from this nonsense, but in fact it will be back again this summer, zombying its way across our political landscape yet again.  Maybe this time he will have the guts to drive the stake through its heart, or chop off its head, as I think stakes are for vampires, who are as fashionable these days and even more undead than those bloody zombies.

Oh, here are a couple of my old posts on this matter.  There is more from where those come from...

http://econospeak.blogspot.com/2011/07/bill-clinton-says-debt-ceiling.html

http://econospeak.blogspot.com/2012/11/can-borrowing-from-abroad-avoid-debt.html

Is Olli Rehn Talking to Lord Keynes About Fiscal Policy?

Brad DeLong rightfully mocks the EU’s economics chief. Not to pile on but consider this from Rehn:

“Given that average debt exceeds 90pc of GDP in the EU, I don’t think there’s any room for manoeuvre to leave the path of budgetary consolidation … We won’t solve our growth problems by piling new debt on top of our old debt,” he said. Defying his critics, Mr Rehn said John Maynard Keynes himself would not be a Keynesian today’s circumstances.

Keynes wrote the General Theory back in 1936. At the time, the US government debt to GDP ratio had not yet reached 90 percent but it was climbing fast. In the UK, the government debt to GDP ratio was over 150 percent. This did not stop Lord Keynes from recommending fiscal stimulus in order to offset the continuing effects of the Great Depression. So Keynes was a Keynesian under similar circumstances back in 1936. What makes Mr. Rehn think Keynes would have changed his mind today?

To Invest in Development, Try a Reverse Peace Corps

The Peace Corps was started back in 1961, one of the early, high profile initiatives of the Kennedy administration.  Since then it has sent more than 200,000 volunteers to low and middle income countries around the world.  It currently spends about $400 million per year and supports just over 8000 volunteers and trainees.  That’s about $50,000 per person, about the same cost as an average US job.  The volunteers earn less, but more overhead is needed to support their projects.

At the end of a volunteer’s tour, what remains?  There is the project work, of course, which can be of some value.  How much value depends on how sustainable it is—whether the local community has the interest and resources to keep it going.  No doubt the long run impact varies quite a bit.  The largest effect is certainly on the Peace Corps volunteers themselves.  They have been through a transformative experience and many go on to be leaders back in the US.  The Peace Corps, on balance, is an investment in ourselves.

So why not turn it around?  Instead of, or in addition to, sending idealistic young Americans to foreign countries, bring idealistic foreigners here.  My idea for a Reverse Peace Corps could look like this:

1. Open the program to high school graduates in low and middle income countries, with a preference for those who have not yet started college or university.  The reason for recruiting at this level is to draw in those who are old enough and sufficiently educated to benefit, but who have not yet been selected for a specific career or membership in the elite.  Participants should have the necessary language proficiency to be part of an English-speaking, or in some cases Spanish-speaking, team.

2. After a period of training and orientation, volunteers would be placed in community action or related development programs in low income areas of the United States.  These could be urban or rural, but would draw on the sort of contributions nonprofessional volunteers can make.  The Americorps program offers many examples of this.  As with Americorps, there would be substantial local control of the projects, while support for the volunteers would be organized externally.  Indian tribes would be invited to participate.

3. Once volunteers had left the program and returned to their home countries, there would be no formal post-participation activities.  It would be up to them to decide what, if anything, to do with this experience.  Of course, lots of informal networking will emerge on its own, and the agency administering the program might want to maintain a formal network as well.  But that would be it.

What would volunteers gain from a working sojourn in the US?  I don’t think America will be seen as a sterling role model, whose ways of doing things should be replicated everywhere else.  Foreign participants will see some things that work and others that don’t.  But they will have the experience of working and living in a country with relatively high levels of productivity and the organizational capacity to mobilize large numbers of people and lots of resources.  Seeing how such a society functions at a granular level can be enlightening if you’ve never had the opportunity before.  It can also enhance a sense of personal agency: I know we can do this because I’ve been part of a group that has done something like it.  Ultimately, the idea is to propagate a global army of development activists.

And there would be large benefits over here as well.  Foreign volunteers would bring energy, idealism and broader perspectives to the communities they would work in.  Having them among us might instill a deeper sense of responsibility and an ambition to show them who we would like ourselves to be, beyond who we normally are.  This couldn’t help but be for the good.

Development is primarily about people—their skills, values and commitment to transforming ineffective or corrupt institutions.  The projects are useful but secondary.  Lets do at least some of the projects here and energize people from around the world.

State Department Mostly Correct About Canadian Pipeline

I do not like going against a "party line" consensus on politically hot environmental issues, but I am one who takes seriously science, a matter now in dispute since creationists are now playing the "religious freedom" card in trying to support creationist teachers in public high schools. No, I am not going to deal with that issue in this post,  but I want to make clear to the deluded supporters of Bill McKibben on the pipeline issue that if they wish to consistently and honestly stand up to these frauds pushing this distorted First Amendment line they must take their science seriously.

I am sympathetic with close personal friends who participated in the demos in DC on this recently.  But, facts are facts, and in the end I think the most recent State Department report is mosly factually correct folks, the State Department draft statement on the XL pipeline looks to me to be the straight stuff, a serious study by reasonably knowledgeable people not personally or institutionally being paid off by oil or coal companies or anybody else, indeed going against the a priori views of their new boss at State, Kerry.  So, this is not corrupted bs, but serious studies done before the capability for such studies is degraded by the disgusting sequester.  It is for real, and, sorry my enviro friends, but this is like Alar.  Anybody in the longer run supporting McKibben will simply look foolish, like those who freaked out about Alar.  It is seriously unfortunate that so many serious environmentalistests (and partisan Dems) got themselves so worked up about this big nothing of an issue.

Bottom line: Right wingers and AFL-CIO whining about jobs are wildly exaggerating.  A couple thousand jobs maybe for the next 2 years in construction, after that less than 100 in the long run. 
Gag, this is a big deal?   Sorry that the union movement in the US has sunk this low. And on the other side, nearly zero CO2 is involved in this decision, one way or the other.  A big nothing in the end, all the way around, despite the hyperventilations emitted on both sides.

For environmentaists, get real. The US has 55,000 miles of crude oil pipelines and 95,000 mile of refined products pipelines.  The XL project involves less than 2000 miles, and half of it is already approved and being built (south of Cushing, OK, actual site of where "Mid-Texas crude oil prices" are determend).  If this is turned down, well, either the Canadians will build to the Pacific or the East Coast, although at higher cost either way, but anybody who thinks those wannabe Texans in Alberta will be deterred by a negative ruling from the US is not fully aware of reality. 

No, folks, saying no to XL will not prevent the tar sands of Alberta from being dug up and burned.  In fact, I wish they would not be, but the State Dept report very realistically recognizes that we have no authority to tell the Canadians what to do, and while the Albertans may be running around in ridiculous cowboy hats (and they do), the long history of US violations of international treaties with Canada on environmental issues puts us in a position of not being able to remotely open our mouths to them on this issue in any way.

 Even within the US, given our massive existing set of pipelines, this is simply not a big deal.  We are already seeing it.  There were legitimate complaints raised about dangers to the underground water in the Sand Hill region of Nebraska.  TransCanada revised their plan reducing the exposure of their line the sensitive water areas to a 10-mile line of possible underground water pollution in a rural area.  OK.  So maybe we could reduce this to zero, but this is getting down to a very small area to hold up a massively backed project, the alternatives to which will be much more expensive for the whole world economy, but which will happen anyway even if this project is not approved. 

I suspect that strongly pro-dealing-with-global-warming new SecState John Kerry will, after the next half year of comments, eventually support this very dirty deal.  And unless something I am not expecting shows up to show that this is much worse than it appears, I shall strongly support what I expect will be his decision to agree with the carefully done (if still mildly flawed) decision to agree to letting TransCanada support this pipeline.  There will be later opps to deal with this seriously, and they will involve Kerry talking privately and fundamentally with the Chinese.

The real bottom line is that I have been very frustrated by this whole discussion. Both sides have made a stupid big whup about this, but, frankly the whole debate has been a pathetic joke given that on both sides very few jobs or CO2 emissions are involved (For those of you who do not know what "epsilon" is, well, that is what the late and famously eccentric and brilliant mathematician, Paul Erdos, used to call children, including to my face, me quite a few decades ago).

Green Keynesianism, De-Siloed

Here are two positions I think have big problems:

1. What we need are green jobs.  We can revitalize our economy by steering massive investment into alternative energy technologies and conservation.  That way we can have growth and sustainability, together.

2. What we need is to reject the growth paradigm.  Economic growth can’t go on in a world of finite resources.  We have to shrink our economy, starting now.

Each of these demands more time and space to debunk than I can provide right now.  (As usual I am up against harsh deadlines.)  Suffice it to say, the first is not green enough, the second too single-mindedly so.  I agree with Yves Smith that the scale of retrenchment we are going to need to deal with climate change on a viable schedule (if there is a viable schedule) can’t be offset by greentech.  There is an absorption problem: we cannot replace a century of fossil fuel-oriented investment with a decarbonized alternative in the space of a decade or so.  This is not an argument against greentech, of course, just that, from the point of view of growth and employment it simply isn’t enough.

On the other side, the anti-growth crowd really doesn’t get it.  If you’re against growth, you should be tickled by the sequester, the Eurozone’s austerity policies and all the rest.  Recession does wonders for reducing carbon emissions and other forms of pollution, as well as reducing the stress on nonrenewable resources.  But the whole point of being green is to improve our long run standard of living, not reduce it.  And the key insight is that economic growth is growth in value, which means anything people are willing to pay for, and not necessarily “stuff”.  The goal should be to rapidly shift production, especially in rich countries, away from resource-intensive goods to things (design, service) that replace physical throughput with human intelligence.

So that should clue us in to the third alternative: yes, we need to curtail investment and consumption in resource-intensive goods, especially those that will condemn us to the likelihood of horrific climate change, and promote expenditure-switching, and not only to clean energy-related goods, but also anything else that can improve our quality of life.  The alternative to more highway construction and ICE cars is not only cars with other fuel systems or even mass transit, but also better-designed and longer-lasting appliances, fresh bread at the corner bakery, more yoga (or economics) teachers or whatever sustainable forms of economic value people come to prefer.

And how to do that?  1. Massively and quickly raise the cost of unsustainably produced goods, especially by putting a stiff price on carbon.  2. Recycle the carbon revenues as frictionlessly as possible back to consumers, so they can switch demand to other things.  (This is one reason why carbon permits need to be auctioned.)  3. Maintain during the transition an especially watchful and vigorous macropolicy designed to ramp up public consumption and investment during periods in which private spending falls short.  #3 requires forward planning, so that governments at all levels have a portfolio of nonpolluting projects–-and not just those relating to energy---that can be initiated at short notice.

Note that this vision of Green Keynesianism is based on the rejection of silos.  Spending withdrawn from the carbon-dependent economy does not all have to be redirected to alternative energy, efficiency, or other officially “green” items.  We might have to make do with less energy and forego some of the things that energy is used for.  We might have to travel less, especially by plane.  We might have to change our diet if some foods, like meat, become a lot more expensive.  Not all energy-based problems can be solved within the time frame we have to cope with.  The Keynesian part, which is also (and this was definitely Keynes’ own view) about maintaining the quality of life, is making sure that, despite whatever constraints we face, we adopt policies that promote more and better income, employment and consumption.  Thinking about what those policies ought to be is the job for Green Keynesians today.

Will Wants Innumerate Gold Buggery

So, last week I said nice things about George Will, but today he was back in usual form, pontificating about economics without even the cover of having a last name that might make not well informed folks sort of take him seriously, as some of his WaPo colleagues sort of do.  Anyway, there he was, visiting the Richmond Fed and getting all worked up about a 401.75 troy ounce bar of gold on public display, worth about $14,000 in 1952, but now supposedly worth "about $642, 800.00."  He makes not entirely idiotic or ignorant remarks about the role of Richmond Fed prez, Jeffrey Lacker, as leading dissident to recent Fed decisions.  One can disagree with Lacker's views on the near term dangers of inflation (as I do), but while Will quotes him extensively, it appears that he never actually spoke with Lacker during his visit, or if he did, Lacker somehow failed to provide any specifically juicy items for the Great Will to bloviate about after quoting.

And I am not surprised, as Will falls into something that I am sure Jeffrey Lacker has no interest in encouraging, namely gold buggery.  Indeed, I am unaware of a single living professional economist who advocates a return to the gold standard, even though physician Ron Paul was for it.  I am thinking of such possible candidates as my friend Larry White of George Mason, one of the leading advocates of the Austrian Hayekian free banking theory that supports shutting down central banks and letting the private banks create currencies on their own.  Indeed, Larry supported the recently shot-down proposal in the Virginia legislature for a study of a possible Virginia currency.  While Delegate Robert Marshall, who introduced this bill, clearly would like VA to issue gold coins as the Commonwealth currency, the bill was only to study this, and Larry very carefully did not support the idea of gold coinage but only a study of a competing state currency.  Lest any of you think this is merely some rightist fantasy, I note that another friend of mine, Post Keynesian MMT theorist Mat Forstater of UMKC, has in the past supported the issuance of separate currencies by Argentine states.

In any case, not only do neither Larry White nor Mat Forstater support a return to the gold standard to the best of my knowledge (either of them or their friends can correct me if I am wrong in this assertion), neither even remotely does Jeffrey Lacker, a student of Tobin's student Don Hester at Wisconsin, who continues to praise his student, something he most certainly would not do if he suddenly started spouting truisms of William McKinley as the guide to monetary policy. Not only do no professional economists support a return to the gold standard, neither does any government on the planet, nor even any faction within any government on the planet that I know of, including even most notably in nations that produce and export gold, such as South Africa and Russia.  Hell, if this was a big deal that authoritarian jerk Putin would be playing this card, but as someone who knows some of his top economic advisors, I can assure everybody that this is not even remotely near being on his plate of annoyances to bother others with.

So, after all this we have the ever-pompous George Will telling us at great length about the changes in the price of gold over time, as if this mattered one damned hoot.  Without a shred of support from anybody at the anti-inflation Richmond Fed, he sneers at the upcoming centennial celebration of the Fed: "So, before blowing out the 100 candles on the Fed's birthday cake, consider the perverse result of current Fed policy: Although money is promiscuously printed to keep interest rates low, credit is tight as money flows toward high-return assets.  Such as gold."  Really.  That is what he wrote.

I shall simply note that if one cherry picks say 1952 and compares the price of gold then to it about a year and a half ago, wow!  But the price of gold peaked at over $1900 an ounce back then and is now down to under $1600, with Will noting its current value, while somehow failing to note that this is a significant decline from recent heights. So, sure George Will, companies may not be engaging in large scale capital investments that would raise employment more rapidly, but it is not because they have been putting their money into gold so that it could fall from $1990 an ounce to $1600. No way.

Barkley Rosser

PS as of afternoon 3/1/13:  Larry White corrects me in Comment 3.  Briefly, he supports a return to a gold standard within a free banking setup.  He says other academic economists also supporting it are Steven Hanke of Johns Hopkins and Joseph Salerno of Pace.

Only 6% Of Public Knows Deficit Is Declining

Yes, here we go again, massive public ignorance post # I forget how many.  This has been floating around out there for awhile but was on Rachel Maddow last night, and here is a link with suitable discussion of relevant facts from Dave Johnson, perhaps important as this silly sequester is about to land on us supposedly driven by the overwhelming need to get the deficit under control, http://blog.ourfuture.org/20130226/deficit-is-falling-dramatically-but-only-6-know-that .  As it is, apparently 62% think it is rising, while 28% think it is constant. 

Among things that the public is wrong about, this one sticks out for being so far off from the facts.  And as is noted, not only is the deficit declining, but it is doing so at a very dramatic rate.  Without doing anything we should be able to stabilize the debt/GDP ratio within about two to three years, although to maintain that down the road, further adjustments would need to be made.  Being an austerian is one thing, but being completely out of touch with reality is quite another.

Barkley Rosser

Is U.S. Fiscal Policy Near the Tipping Point?

Of the various critiques of the empirical work presented by David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin, Ryan Avent nails it:

I was immediately concerned by the data sample: 20 advanced economies over 12 years. What's particularly distressing is that just over half of the sample countries are members of the euro zone. In choosing to study advanced economies, the authors specifically note the problem of "original sin" in studies of emerging markets—that countries which borrow in foreign currencies are subject to different debt dynamics—only to then use a sample in which most of the chosen economies are unable to print their own money.

For more on why this matters – see Paul Krugman. But to be fair, I am intrigued by the author’s dynamic debt modeling and this:

we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

The authors rightfully worry about the U.S. polarized political system and our political will to increases taxes enough to cover spending and pay down the debt slowly over time. I have to seriously question, however, why an 80% percent debt/GDP ratio is the tipping point. Let me explain with a simple and perhaps pessimistic version of their model, which really harkens back to Domar’s modeling and Sargent and Wallace’s unpleasant arithmetic. Let’s assume that the real interest rate (r) = 3% and the long-run growth rate (g) = 2% so the present value of primary surpluses expressed as a percent of GDP (s) is given by s/(r – g) which is 100 times the primary surplus ratio given our unpleasant assumptions. How hard would it be for U.S. fiscal policy to have taxes as a share of GDP to exceed government spending as a share of GDP by say 1 percent so we could readily handle the current level of debt in the long-run? I’ve been looking over government spending and revenue figures as shares of GDP over the past 60 years. I prefer to do this as overall government spending and revenues (Federal, state, and local) as we know the Federal government could push certain responsibilities such as Medicaid off to the states if Ryan Republicans have their way or could assist cash strapped states with more Federal revenue sharing if I had my way. Recall that we did manage to pay down the massive Federal debt after World War II despite the fact that we had a larger defense budget as a share of GDP than we even saw under President Reagan or Bush43. OK, we have higher state and local government purchases now than we did in the 1950’s and transfer payments as a share of GDP have risen over time. But notice that in the late 1990’s, we did see total taxes as a share of GDP reach 31%. So can we get back to that level and keep spending at 30% of GDP? Well we did have government purchases drop below 18% of GDP in the 1990’s even as state and local purchases being 11.5% of GDP and nondefense Federal spending being 2.5% of GDP by telling the Pentagon that they get less than 4% of GDP. Oh, I know Republicans hated the decline of the military industrial complex but I would argue this is just smart policy. So the trick on the spending side will be to limit government spending on health care to 6% of GDP if we maintain Social Security benefits at 6% of GDP. While that will be a real challenge, the other challenge will be to find some political agreement on how to raise taxes as a share of GDP. We Democrats should admit that we are loathed to increase the tax burden on the working class even as that is really the Republican’s secret desire. And we know the Republican agenda is to insure that their rich political masters see an even less tax bite than they face today. But if we can get past this class warfare, avoiding fiscal default is something we know how to do.

Fiscal Space Cadets

I had intended to write something about the strange empirics in this paper on the supposed dangers of our fiscal path, but then I figured that others, and certainly Paul Krugman, would take up the task, and I was right.  So no additional criticisms.

Nevertheless, the issue of US fiscal space is too important to be left to the ideologically blinkered.  (There is no other explanation for the crude methods employed in Crunch Time.)  No country’s fiscal space is unlimited, not even ours—or Japan’s for that matter.  Here are four points to bear in mind.

1. The US borrows in its own currency, so it can’t be compared to countries that don’t.  This is the core of the many published critiques of Crunch Time.

2. A second consideration is whether a country is a chronic surplus accumulator or deficit secreter.  Japan, for instance, has had decades of surpluses (we are talking current account here), so there is a vast pool of domestic savings to draw on.  Taken in isolation, this call would go against the US: we are the biggest deficit country in history.

3. But the third point is that it also matters whether a country issues a reserve currency—and, in the case of the US, the denomination that accounts for about two-thirds of the global total.  As long as the US supplies the world’s primary money it has a lot of leeway to borrow.  The dollar’s strength is bolstered by the absence, for the time being, of a credible alternative; in particular, it helps the dollar’s cause that the Eurozone has often resembled a suicide cult.

4. Past experience is no guide at all, because there has never been a situation like this in all of human history.  We have a country that has run current account deficits ranging from large to mammoth for decades, that has large domestic debts, public and private, it cannot wind down, but also supplies the dominant reserve currency.  We are playing it by ear.

People are right to be worried, but this is not about fiscal deficits per se; the entire edifice of public and private debt in the context of continuing external deficits is unsustainable.  I can only speculate, but my guess is that it will all end suddenly, unexpectedly and unpleasantly.  2008 didn’t do the job, so we are headed to another seismic event.  Alas.

Only The Little People Pay Taxes

There have been lots of comments on the latest from David Brooks with my favorite being how Kevin Drum reacted to this:

My fantasy package, and I'm not running for office, would include a progressive consumption tax, and it would have chained CPI, and it would have a pretty big means-test of Medicare.

Kevin correctly noted:

Still, I have to chuckle when he complains about Obama not proposing a "politically plausible" plan, and then offers up an alternative that includes a progressive consumption tax, something that Republicans have been unrelentingly opposed to for decades in any reasonable form.

In the current negotiations that David Brooks and Ezra Klein were discussing, it is clear what the hold up is. The President is willing to accept some spending cuts if the Republicans accept a few roll backs for the preferential tax treatment for capital income but the Republicans have been steadfastly opposed to anything that would raise the tax bite for the ultrarich. This is nothing new as this has been the political debate for over 30 years. And the next time you hear a pharmaceutical executive complain about rising tax burdens - remember that their effective tax rate is likely to be less than 25 percent.

What’s the Matter with “Triumph of the Will”?

By your esteemed film critics,

Now that the Third Reich’s annual film awards are almost upon us, we are hearing voices that object to some of the entrants, especially Leni Riefenstahl’s stirring “Triumph of the Will”.  We have heard the objection, for instance, that Riefenstahl selectively showed smiling and enthusiastic faces, ignoring the many in the crowd who were bored, hostile or simply tired.  They say this is rewriting history.

Actually, this kind of nitpicking is little more than a pretext for debate over the politics of the movie itself.  These critics don’t like Hitler, and they are using “Triumph of the Will” as an opportunity to make themselves heard.  But this shows only that they don’t understand Art.

Films are about entertainment and beauty, not truth.  If they are true it is by accident.  And this applies to all literature and art: was Shakespeare “true”?  Karl May?

“Triumph of the Will” captured the imagination of the public because of its beautifully composed imagery and cinematic rhythm.  However accurate it might be about what actually transpired at that rally in Nürnberg, which is something we may never know, it did exactly what great movies are supposed to do.  The critics, on the other hand, express their contempt for the movie-going public.  They think that viewers are simply passive objects of government propaganda, unable to think for themselves.  Maybe they have more in common with Herr Goebbels than they know.

Invention remains one of the prerogatives of art and it is, after all, the job of writers, directors and actors to invent counterfeit realities. It is unfair to blame filmmakers if we sometimes confuse the real world with its representations. The truth is that we love movies partly because of their lies, beautiful and not. It’s journalists and politicians who owe us the truth.

The Terror of Solitude

For the first time in my life I am going to praise George Will.  I could easily spend an ultimately stupifyingly long (just like most of his columns) list of his erroneous and completetly stupid and ignorant columns that stretch so long, well; not worth the bother.

So, I must give serious moral intellectual legal and philosophical praise to George Will for making public the fact that the long accepted and deeply entrenched practice of holding prisoners in solitary confinement within the US is a violation of the 8th Amendment to the US Constitution (and the the Bill of Rights). That solitary confinement is severe punishment is without doubt to any person who actually understands these matters is without question. I will go further and state pubicly for the first time that both I and my wife (she more than me) have been on the receiving end of such "extraordinary" (well, without further enumeration of unpleasant details)....

So, I applaud George Will for standing seriously for human rights and liberty.

J. Barkley Rosser, Jr.

Don’t Take Nocera for an Answer

Joe Nocera has a rather muddled column in today’s New York Times about why, in his view, stopping the Keystone pipeline would do little to forestall climate change.  Along the way he confuses mitigation and adaptation and generally gets carts and horses all scrambled up.

Abstracting from sequestration, mitigating the buildup of greenhouse gases means just one thing, leaving fossil fuels in the ground.  The more we leave there, and the greater their CO2 equivalent, the less climate change we’ll have.  Switching to green energy, achieving conservation efficiencies and all the rest is about how we can do this with minimum adverse impact to our standard of living—how we can adapt to what we have to do to mitigate.  This is very basic stuff but easy to lose sight of.

What this means is that making it economically impossible to develop the Alberta oil sands contributes to mitigation, as long as it’s not coupled in some way with greater exploitation of some other resource.  So what happens if the Keystone pipeline is not approved?  First, no Alberta tar sands, assuming the pipeline to the Pacific is stopped too.  Second, greater scarcity of supply means some increase but certainly no decrease in the price for oil in the US.  Hence at least some of the Alberta sands will not be offset, and competing supplies at the moment have a lower CO2 equivalence, so from a mitigation perspective it’s a clear gain.

Of course, trying to keep oil in the ground one pipeline or coalfield at a time is an inefficient strategy; Nocera is absolutely right about this.  Much better would be a permit system that restricted the amount of fossil fuel entering the US economy.  Even a tax to restrict extraction and imports, as advocated by Hansen, would be a lot better.  But the US is politically incapable of passing such a law over the next two years and probably at least two more years after that, so, with the greenhouse gas clock ticking away relentlessly, we have to do what we have to do.  Stopping Keystone is a useful start, and it’s more than merely symbolic.

Incidentally, why would Nocera say that “we are far better off getting our oil from Canada than, say, Venezuela”?  Has he made a calculation about the economic good that US dollars would do in the pockets of oil sector workers and investors in Alberta compared to the social programs Chavez is funding with oil money in Venezuela?  From a purely economic point of view, what difference does it make to the US current account deficit whether we exchange our dollars for loonies or bolivars?  And if relations sour further between the US and Venezuela, does Nocera expect the Venezuelans to bankrupt themselves by refusing to sell their oil?  (Try that strategy out on Iran.)  Sorry to make such a big deal of it, but vacuous comments like this are truly annoying.

How to Think About Aggregate Labor Markets

The remarkable Tyler Cowen has me scratching my head again.  Here he is at the beginning of a critique of minimum wage laws and sticky-price Keynesianism.  (The latter is an oxymoron, as anyone who knows the history of Keynes’ dispute with the “Treasury view” knows, but we’ll let it pass.)

Let’s say your labor is worth $10 an hour but you won’t go back to work for less than $12, thereby leading to the unemployment of you. 

In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless.

You can guess where this is headed.

The interesting thing is that Cowen apparently has no inkling that most people would find his opening sentence insulting.  It implies that some significant portion of the unemployed are simply worth less than they think they are.  Imagine going up to someone who’s been without a job for a while and saying, “I’m sorry, but have you considered the possibility that your abilities are really not very valuable, and your job search has failed because of this delusion?”  If you insist on saying this, I’d advise doing it from a distance.

Now, of course some people have an inflated sense of self-worth, and others are too bashful.  It might be an interesting research project to see whether the distribution of these types is correlated with employment status.  I don’t have any priors about which would predominate where—do you?

What makes this interesting to an economist is that the popular perception of unemployment actually fits how we model the aggregate labor market pretty well.  Let me explain.  The view of most unemployed people, according to the interviews I’ve seen, goes something like this: “I’m looking for a job, and I’m willing to take something that’s worse than what I used to have, but I haven’t found anything yet.”  The unemployed person hopes that the job is out there but that the connection hasn’t been made.

This formalizes to the now-standard model of search and matching, for which Peter Diamond and especially Dale Mortensen and Christopher Pissarides split a Nobel.  Equilibrium in such models does not occur where the Beveridge curve crosses the 45-degree line, which it would if the criterion were supply equals demand, but depends on a larger array of factors.  The model is used to explain why the ratio of unemployed workers to vacant jobs is typically greater than one, even in “full employment”.

This is how knowledgeable economists study aggregate labor markets today.  Supply and demand, as deployed by Cowen, is a special and highly unlikely case that assumes away the complications that make the theory empirically relevant.  If you see someone drawing supply and demand curves for labor and trying to explain unemployment as a result of too-high wages, you know they are employing outmoded methods.

What’s striking is that the more high-powered model actually conforms better to popular intuition.  You have to have a rather uncharitable view of human behavior to believe that excess unemployment is due to people overestimating their true worth.