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Andrew Craig-Bennett
07-26-2010, 06:34 AM
Martin Wolf is the chief economics commentator at the Financial Times.

http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

The political genius of supply-side economics

July 25, 2010: The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.


My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas.

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69% under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center ob Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.9% of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O'Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what John Kyl (Arizona) , a senior Repubican senator, has just said:

“[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans”
What conclusions should outsiders draw about the likely future of US fiscal policy?

First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).
Second, the White House will probably veto these cuts, making itself even more politically unpopular.

Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.

Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government (http://www.ft.com/indepth/coalition-government) dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

Pugwash
07-26-2010, 06:50 AM
Yo, yo, Bro'....


http://www.youtube.com/watch?v=d0nERTFo-Sk&feature=fvw


:D

Nicholas Scheuer
07-26-2010, 06:51 AM
Ahgh, but Andrew, the article doesn't regognize the Great God of Supply side, the originator of TRICKLE DOWN, Ronald Reagan. the President who did nothing but sleep through Cabinet Meetings, and was CANNONIZED for it!

It was Reagan who taught us that substance doesn't matter! His wife Nancy also invented the theme song of Repugnicans, "Just say NO".

Moby Nick

elf
07-26-2010, 07:48 AM
When the FT doesn't say what they want to hear, they just ignore it.

skuthorp
07-26-2010, 07:55 AM
As a species we are all prone to the boiled frog syndrome, and bad news doesn't win elections even if it's true.

David G
07-26-2010, 08:22 AM
“There is only one thing more painful than learning from experience and that is not learning from experience.” - Archibald MacLeish

Gerarddm
07-26-2010, 10:30 AM
Reagon was canonized, but as you say, perhaps cannonized would have been more apropos? ;-)

paul oman
07-26-2010, 10:57 AM
Andrew - to quote you:

Supply-side economics transformed Republicans from a minority party into a majority party


Wrong. It was freeing 4 million black american slaves and winning the American Civil War that made then a majority party (and ruling party for many years after the war). If it wasn't for the republicans, there would be no black president in the white house today.

McMike
07-26-2010, 11:22 AM
Wrong. It was freeing 4 million black american slaves and winning the American Civil War that made then a majority party (and ruling party for many years after the war). If it wasn't for the republicans, there would be no black president in the white house today.

What does that have to do with the modern Republican Party? Is this supposed to give them street cred with the black folks in America?

paul oman
07-26-2010, 11:42 AM
For about 50 years after the civil war, the republican party was the party of black america. They remembered which party set them free and which party fought to keep them in slavery. Blame screwed up policies in the 1920 for black america shifting to the democratic party. But what does democratic party politics 90 years ago have to with the democratic party today? Today, blacks represent votes to the democratic party, nothing more.

The question was what made the republican party a majority party, not the modern Republican party majority role.
Check out obama's rating at realclearpolitics - now ALWAYS in the negative.... and less than 100 days to the election to put american back into the hands of the majority.

Cuyahoga Chuck
07-26-2010, 11:46 AM
Andrew - to quote you:

Supply-side economics transformed Republicans from a minority party into a majority party


Wrong. It was freeing 4 million black american slaves and winning the American Civil War that made then a majority party (and ruling party for many years after the war). If it wasn't for the republicans, there would be no black president in the white house today.

Are you kidding? Slavery was doomed. Even the Russian czars realized they had to free their serfs in the 1860s. The days of an economy based on agriculture alone were coming to an end. King Cotton was on the way out even as the high-rollers in the slave states were initiating a war to save their right to own other people. By the late 1870s the Reconstruction was called off by a Republican president and the South was off and running with racism sans slavery.
The Republican party of Lincolns day was indeed the party of liberation but it quickly became the party of wealth, ownership, greed and oppression. By our day it became the prefered party of the racist South.

Captain Blight
07-26-2010, 11:48 AM
Today, blacks represent votes to the democratic party, nothing more..... and less than 100 days to the election to put american back into the hands of the majority.
*edited*

Please think before you post this sort of thing. It's untrue and quite inflammatory.

Paul Pless
07-26-2010, 12:15 PM
Where am I wrong, if at all? we could start here
and the other party relatively fiscally responsible

Landrith
07-26-2010, 12:22 PM
Martin Wolf is the chief economics commentator at the Financial Times.

http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

The political genius of supply-side economics

[B]July 25, 2010: The future of fiscal policy[SIZE=2] a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.



SHARE THE LOVE BABY! J P Morgan wants to use AIG through Goldman Sachs and the taxpayer guarantee to steal all my grand children's money through massive fraud and their own control over the government, then go try to spend the check. Stupid Greedy Fools. What's the consequence of default? Farmers worldwide will receive the cost of production for the food they grow? We won't all end up as serfs? Did I leave something out? Like we won't be paying Pakistan to provide us phony enemies anymore?

SMARTINSEN
07-26-2010, 12:23 PM
It is inapt to compare the Republican party of Lincoln's era to that of today.
It is as if the magnetic poles reversed on the earth where North is South and South is North.

McMike
07-26-2010, 12:34 PM
Check out obama's rating at realclearpolitics - now ALWAYS in the negative.... and less than 100 days to the election to put american back into the hands of the majority.

You racist sack of crap.


Reported. Sweet jesus you're an odious little man.


Actually , I think Paul Oman makes a fair and logical argument, if you take the cynical point of view that politicians are only in the game to get re-elected. No different than the sometimes held view that Bush and Cheney played to Christian fundamentalists so they could have their little war which did nothing but make a lot of money for friends of Bush and Cheney.

There is a big difference between stated ideological platforms and skin color. I'm not sure if it was Paul Oman's intention to be completely racist by inferring the majority is white America or that the ideological majority that thinks big business and a free market can make this country run better than big government and a regulated market.

I'm hoping it wasn't meant how it sounded, I'd like to give him a chance to explain his remark.

Captain Blight
07-26-2010, 12:45 PM
He can explain it when he gets back from his banning. Holy Hannah that sort of thing makes me angry.

McMike
07-26-2010, 12:53 PM
He can explain it when he gets back from his banning. Holy Hannah that sort of thing makes me angry.

I absolutely see where the offence is but I can also see where it may have been a comment given and taken out of context. I hope he can explain before/if he gets banned.

paul oman
07-26-2010, 01:13 PM
of course if you have only married or dated women/men of your own race, you may be a racist. At the very least, you're expressing a racial preference (for those of your own race) in your own personal life. I have a non-white wife, which probably makes me less of a racist than most of you.

noting obama's falling ratings in hardly racist. Calling everything you disagree with as racist suggests some very negative things about you and sets back real race relations by a generation (when was the last time you had a beer summit with a non white person?)

paul oman
07-26-2010, 01:35 PM
So, calling a guy who has a multi-racial marriage a racist, is a hard sell, especially if your relationships are single race.

McMike
07-26-2010, 01:46 PM
The following quote is the one in question . . .

Check out obama's rating at realclearpolitics - now ALWAYS in the negative.... and less than 100 days to the election to put american back into the hands of the majority.



So, calling a guy who has a multi-racial marriage a racist, is a hard sell, especially if your relationships are single race.


of course if you have only married or dated women/men of your own race, you may be a racist. At the very least, you're expressing a racial preference (for those of your own race) in your own personal life. I have a non-white wife, which probably makes me less of a racist than most of you.

noting obama's falling ratings in hardly racist. Calling everything you disagree with as racist suggests some very negative things about you and sets back real race relations by a generation (when was the last time you had a beer summit with a non white person?)

So you don't get how your remark could be taken the wrong way? Or was it taken the right way? A racist remark is a racist remark no matter what skin color your wife has. All I'm asking is were you referring to the white majority when you made the remark above?

Captain Blight
07-26-2010, 01:56 PM
Paul, I gave serious thought to marrying my Ghanaian girlfriend Marie. She had skin of a fine shining dark brown. I've been pretty omniracial in my dating; all cats are grey in the dark, and it's the content of character that matters most to me not the the color of the skin.

I apologize for my remark, but PLEASE don't make statements like what you did. They are patently and provably untrue.

paul oman
07-26-2010, 02:15 PM
Norm

when I wrote the post about obamas falling rating I was going to say
put america back in the hands of the republicans. It changed it to majority (less than 50% of votes now back obama) thinking the word republican would be too upsetting to the forum (boy did I have that backwords!) - sorry for any misunderstanding.

I like to quote the real clear politics poll numbers because the are a composite of about 10 different polls and not a single poll. Some of the polls are left based and some are right based. Interestingly for most of last week the fox news poll -one of the several in that week's real clear poll average - had one of the highest positive pro obama numbers). The real clear poll numbers change sometimes several times a day as they track maybe 50 different polls but only average the most recent 10 or so. So a poll that has obama up or down by 10 points will eventually get bumped by a newer poll.

Personally, the level of politics we debate over here (and try to get a rise out of each other!) is beyond the range of the average voter. Many blacks will vote for obama simply because he is black. Many democrats or liberals will vote for him because he is a democrat or liberal. Other will vote for or against the party in power because the have a job or don't have a job. Others will vote for changing of the guard, no matter who is in office. I suspect the obama magic is gone amount is amazing original voter base and I also think businesses don't trust him and will not offer up the needed jobs while he is in power/control. Just my opinion, of course.

I admit to gloating over conservative and/or republican up-ticks in the polls and news stories, but heck plenty of gloating here and across the nation when obama was elected. Just human nature to gloat when your side scores a point or two! - Wait until after the Nov elections - one side or the other is going to be gloating and grinning ear to ear (with lots of "I told you so" cracks) here on the forum.

I got some very pro sarah p. emails the other day. I would love to post them here in the bilge to 'stir up debate' but afraid that would start WW3 - instead of good natured debate. What a shame. The bilge seems to bring out the worst in many forum members - too much of it directly aimed at me and the other members with a right wing slant. Not much in the way of open minds here! Norm, you do your side of the fence an excellent job - I like that, "even if we disagree" - (don't understand how such as smart fellow as you could be so wrong on this issues - wink wink my friend!). Keep it up Norm, you're a better man than me.

Captain Blight
07-26-2010, 02:29 PM
Maybe a smiley or two would help your cause.

I realized a couple weeks ago just how negative my postings had become, with me getting angrier and angrier at people who were obviously (in retrospect) just teasing. it's an easy trap to fall into. I can't change the past, but I can change the future, or at least my future. So if I seem a little hot under the collar, I ask that it be brought to my attention; I can't change if I don't know what to change. Ya folla?

McMike
07-26-2010, 02:32 PM
when I wrote the post about obamas falling rating I was going to say
put america back in the hands of the republicans. It changed it to majority (less than 50% of votes now back obama) thinking the word republican would be too upsetting to the forum (boy did I have that backwords!) - sorry for any misunderstanding.

I'm satisfied. Thanks for the clarification.

paul oman
07-26-2010, 03:02 PM
Capt Blight - your comments have become sort of nasty. But I've been married way too long to point out 'faults' in others. My wife's skin is super thin and she holds a grudge for months - I've learned to keep my direct critical comments to myself and to believe her when she suggests it was my fault anyway. Not like I have a 100% track record on being right!

Osborne Russell
07-26-2010, 03:21 PM
Which one of these dudes said "Deficits don't matter" -- Cheney?

ccmanuals
07-26-2010, 03:24 PM
Cheney


Former Treasury Secretary Paul O'Neill was told "deficits don't matter" when he warned of a looming fiscal crisis.

O'Neill, fired in a shakeup of Bush's economic team in December 2002, raised objections to a new round of tax cuts and said the president balked at his more aggressive plan to combat corporate crime after a string of accounting scandals because of opposition from "the corporate crowd," a key constituency.
O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said, according to excerpts. Cheney continued: "We won the midterms (congressional elections). This is our due." A month later, Cheney told the Treasury secretary he was fired. The vice president's office had no immediate comment, but John Snow, who replaced O'Neill, insisted that deficits "do matter" to the administration.

David G
07-27-2010, 10:47 PM
Just a bump for the sake of helping my conservative friends to continue to consider what their leaders are risking in the interests of political power. I personally think that both liberals and conservatives - well informed and of good conscience - have critical roles to play in our society. It pains me deeply to see either side espouse faulty and dangerous policies cynically. Unfortunately, I have to say that the Right seems much more willing to do this in recent years. Here's hoping that they come back around to reason, and a willingness to take their necessary role in the nation's affairs.

PeterSibley
07-27-2010, 11:48 PM
From an outsider's perspective it has been truly amazing how fast this thread degenerated into Rep V Dem with nothing but the most cursory discussion of the original article .

Quite horrifying .You guys are in serious trouble and you can't even discuss it .

John P Lebens
07-28-2010, 02:16 AM
From an outsider's perspective it has been truly amazing how fast this thread degenerated into Rep V Dem with nothing but the most cursory discussion of the original article .

Quite horrifying .You guys are in serious trouble and you can't even discuss it .


I could not agree more with the above comment. The posted article is by a senior writer from one of the best business newspapers in the world. He has some excellent insights and some real credibility. I have not been around this site much lately (working on the boat and enjoying the summer weather) and I have to say I find this arguing tiresome. How about some fact-based discussions? How about skipping the name calling and generalizations?

elf
07-28-2010, 03:39 AM
I don't think you understand, David. If it didn't come from the freshwater school, it's wrong. De facto, wrong. And irrelevant, too.

Look at Cris Ross, a relatively sensible Republican here trained as an economist. Just can't handle it.

It's like religion. There's no way an opposing perspective can be correct when you believe.

You can try to force feed them, but they'll just throw it back up anyway.

If only they were the only ones who were going to starve as a result.

C. Ross
07-28-2010, 07:28 AM
Emily, my dear, can't handle what? ;)

I saw the article the first time, but didn't find it particularly interesting or persuasive. But since you've challenged me, my comments:

Republicans are indeed wrong when they say tax rate reductions increase revenue. Happens only in edge conditions, and when rates are cut and growth increases, coincidentally.

Democrats (and the author of this piece) are similarly wrong about the power of stimulative government spending to reverse the business cycle. I prattled on about the death of Keynesianism on another thread. If I didn't convince anybody then, I won't convince them now, but the evidence remains overwhelming that governments can only stimulate growth and produce non-government jobs on the margin. Government cannot produce full employment in the absence of a robust economy, any more than government can cut tax rates and thereby increase receipts.

Just for fun, here's a quote from yesterday's WSJ about the absence of evidence of a "multiplier" where government spending results in more than a dollar of stimulus:

Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn't advocate more now. "We just don't have enough evidence to prove that it's good."So what to do?

I think political parties and the citizens who elect them should give up on the fantasy of omniscient and omnipotent governments which can solve all problems costlessly. We have become so arrogant that we think we can wage war without shedding the blood of the innocent and that we can have endless, cycle-less prosperity if we just pick the right leaders or the right policies.

I think Republicans may propose to extend current tax policy (the "Bush tax cuts"). Is that a "tax cut" or maintaining current tax levels? Depends on your party, I guess.

I don't think President Obama will oppose and veto tax reductions, but will negotiate. Remember 1/3 of the stimulus package was tax cuts, and he proposed additional middle class tax cuts (which were withdrawn).

The argument that tax cuts are less efficient as stimulus is flat out wrong. Again, from yesterdays WSJ:


Economists who say Mr. Obama should have relied more on tax cuts cite research of an unlikely source: Ms. Romer, his adviser. In a study she and her husband, David Romer, conducted before she joined the administration, Ms. Romer found large multipliers from tax cuts, which she concluded "have very large and persistent positive output effects." Tax increases, she also found, hurt growth.The fact is that we cannot afford any more tax reductions or stimulus spending.

The article from the FT would have been better if it had said that adherence to supply side and keynesian delusions are dangerous, and that the right solution is in the middle ground as adopted by Europe. Alas, instead it swallows whole the Religion of Painless Stimulus and Painless Tax Increases on the Rich.

Andrew Craig-Bennett
07-28-2010, 09:16 AM
Cris writes:

Just for fun, here's a quote from yesterday's WSJ about the absence of evidence of a "multiplier" where government spending results in more than a dollar of stimulus:

Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn't advocate more now. "We just don't have enough evidence to prove that it's good."



So what to do?

Cris, I'm sure that is right for defence spending, which is in economic terms, making something and then throwing it away (ideally in the direction of the enemy, of course). I am not at all sure that the case can be made as strongly in repect of thought-through stimulus spending. The economic benefits of, say, the dams built in the USA in the Thirties must surely be greater than the economic benefits of an order for Sherman tanks of equal value, because the dams are still generating electricity today.

C. Ross
07-28-2010, 05:19 PM
I simply don't agree. It's rare to see supremely competent government... but it's not all that uncommon to see worthwhile government efforts.

Yes, but the point is that just because governments can do some things well (and they do!) it doesn't mean they are omnipotent. Sometimes the answer is...bad things happen, and government cannot save us.


Furthermore, there's no escaping the paradox: if we agree that tax cuts don't pay for themselves in revenue, but if Republicans still argue that 1) the deficit is the problem, and 2) tax cuts have a stimulative effect, then they are arguing both sides against the middle. It simply makes no sense.

And Democrats argue that 1) the deficit is a problem, and 2) spending has a stimulative effect. How is this any different, except that you would prefer government to tax more and spend more, and I would prefer that government tax less and spend less.


I'd be happy to see alternative sensible solutions....

The most proven and repeatable alternative sensible solution is a strong central bank which has strong monetary policy levers and the power to take extraordinary efforts to intervene in financial market crises. It worked very well in late 2008 and early 2009 across the world, and has worked well before, repeatedly.

Sometimes the alternative sensible solution is avoid heroic futile efforts. Invasion of Iraq in response to terrorism was heroic and futile. A $800B stimulus bill was heroic alright, but did not result in the promised reduction in unemployment. Yesterday's WSJ:


The Obama administration is stocked with heirs of Mr. Keynes, including academics Christina Romer and Mr. Summers. Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It's 9.5% today.

Captain Blight
07-28-2010, 05:31 PM
Yes, but the point is that just because governments can do some things well (and they do!) it doesn't mean they are omnipotent. Sometimes the answer is...bad things happen, and government cannot save us.I think that this kind of depends on the notion that all liberals believe all government can solve all problems. I can maybe see the logic there, but only in a "We Are The Government" sense of things.




And Democrats argue that 1) the deficit is a problem, and 2) spending has a stimulative effect. How is this any different, except that you would prefer government to tax more and spend more, and I would prefer that government tax less and spend less. Again, we are much in accord here; I think it's important to differentiate spending on frivolities, throwing money down a dry hole, and spending on projects of real and lasting worth. remember last summer when we talked about dusting off the old WPA concept for returning veterans, and putting them to work re-building infrastructure? Like that.




The most proven and repeatable alternative sensible solution is a strong central bank which has strong monetary policy levers and the power to take extraordinary efforts to intervene in financial market crises. It worked very well in late 2008 and early 2009 across the world, and has worked well before, repeatedly.So how does this square against the 'less government' end of things? Seems to me that a strong Fed is almost diametrically opposed to the concept of strengthening the 10th Amendment vis-a-vis state's rights.


Sometimes the alternative sensible solution is avoid heroic futile efforts. Invasion of Iraq in response to terrorism was heroic and futile. A $800B stimulus bill was heroic alright, but did not result in the promised reduction in unemployment. Not yet, anyway. I certainly don't know as much about the way these things work, but really: If and when the economy recovers, how can anyone point to any one thing and say, 'this is what made it succeed' or 'this is what made it happen slower?' It's all of a piece, isn't it?

C. Ross
07-28-2010, 05:31 PM
Cris, I'm sure that is right for defence spending, which is in economic terms, making something and then throwing it away (ideally in the direction of the enemy, of course). I am not at all sure that the case can be made as strongly in repect of thought-through stimulus spending. The economic benefits of, say, the dams built in the USA in the Thirties must surely be greater than the economic benefits of an order for Sherman tanks of equal value, because the dams are still generating electricity today.

Well, Lord Keynes' exact quote is: "Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York."

Some of the dams built in the US in the thirties, especially the ones in the Tennessee Valley that were not used at capacity for decades to come, might very well count as two railways from London to York. And, of course, the Sherman tanks were a pretty good investment in 1944 and 1945, wouldn't you say? ;)

But to be less cheeky and respond to the actual economics: the theory of the "multiplier" is that a government dollar, say to hire a construction worker to build a school, is spent more times than a private sector dollar to hire a construction worker to build a home or a factory.

The econometric "proof" for this is nothing more than regression to the mean - when private spending is low, government spending is more noticeable in the economy than when private sector spending is high. In the words of Friedrich Hayek, Robert Lucas, Milton Friedman and my teenage daughters, "well, duh!"

C. Ross
07-28-2010, 05:42 PM
Again, we are much in accord here; I think it's important to differentiate spending on frivolities, throwing money down a dry hole, and spending on projects of real and lasting worth. remember last summer when we talked about dusting off the old WPA concept for returning veterans, and putting them to work re-building infrastructure? Like that.

I don't mind spending tax dollars on parks, schools, roads, and culture. Your comments last summer about the risk of PTSD vets returning to civilian life and no jobs stuck with me, and I thought your ideas were decent. I have no problem spending taxes on stuff we want, and like. That's different than spending tax dollars to revive the private sector.


So how does this square against the 'less government' end of things? Seems to me that a strong Fed is almost diametrically opposed to the concept of strengthening the 10th Amendment vis-a-vis state's rights.

Power of currency is reserved to the federal government. I think most days I'm really just a Hamiltonian anyway...


Not yet, anyway. I certainly don't know as much about the way these things work, but really: If and when the economy recovers, how can anyone point to any one thing and say, 'this is what made it succeed' or 'this is what made it happen slower?' It's all of a piece, isn't it? Well, exactly! And if we don't know whether bedrest or swallowing mercury or bleeding makes me well when I'm sick, I'll take bedrest, thank you! Without overwhelming evidence, how dare we spend $800 Billion that is going to come out of my daughters' pockets, not mine?

Captain Blight
07-28-2010, 05:48 PM
Damn good point. I would have to believe that there may have been evidence that was not made public for fear of creating bank-run panic, but that's really only a guess.

PeterSibley
07-28-2010, 05:53 PM
And Democrats argue that 1) the deficit is a problem, and 2) spending has a stimulative effect. How is this any different, except that you would prefer government to tax more and spend more, and I would prefer that government tax less and spend less.



How about increasing taxes and paying down borrowings ,so your grandchildren don't have to ?

johnw
07-28-2010, 06:19 PM
I'm not clear on why you differentiate between public and private spending when it comes to multipliers. If a rich man builds a monument to himself, does his spending have a multiplier effect? If a government spends on overpasses over the railway so that railroad traffic can move faster (one of the projects in the stimulus program) would that have a multiplier effect? In either case, a dollar goes into a workman's pocket, gets spent at the corner store, when the shopkeeper has a dollar more to spend, etc. Why would there not be a multiplier?

Spending on consumption of groceries is not an investment, but it is spending, so it strikes me that there should be a multiplier effect unless economics has changed a great deal since I was in college. I have never heard that spending of a government dollar had a greater multiplier effect than private spending. The Keynesian argument is that you need government spending to substitute for private spending that isn't happening, not that government spending is somehow better than private spending.

This is a straw-man argument:


But to be less cheeky and respond to the actual economics: the theory of the "multiplier" is that a government dollar, say to hire a construction worker to build a school, is spent more times than a private sector dollar to hire a construction worker to build a home or a factory. This bears no resemblance to anything I was taught about economics, nor to anything I've seen written by Keynesian economists. Where precisely did you get this idea?

C. Ross
07-28-2010, 09:27 PM
How about increasing taxes and paying down borrowings ,so your grandchildren don't have to ?

Yes! I would be happy to vote for any tax increase not used for new spending.

C. Ross
07-28-2010, 09:54 PM
This bears no resemblance to anything I was taught about economics, nor to anything I've seen written by Keynesian economists. Where precisely did you get this idea?

The University of Minnesota and Yale.

Here is the Cliff's Note version (http://www.cliffsnotes.com/study_guide/The-Keynesian-Theory.topicArticleId-9789,articleId-9742.html), and a decent academic article (http://www.econ.brown.edu/fac/Peter_Howitt/publication/multip.pdf).

The multiplier is defined as 1/(1 + mpc) where mpc = marginal propensity to consume. Unless mpc <1 (and it never is) then the keynesian multiplier is always positive, QED.

You say there is no difference between private and government spending. I agree!

The core Keynesian argument, though is that production GDP and consumption GDP are not self-regulating because prices and wages are sticky. The argument is that business cycles are caused by demand shocks, and that when this happens, government spending is required to create equilibrium. A quaint argument, and one which was wobbly before being pushed over by econometric evidence from Prescott that most business cycles can be described by supply shocks and wage stickiness, not demand shocks.

So the argument is that government spending is more valuable in times when "natural" demand is less than supply, and so should pay attention to the demand multiplier of government consumption. And in some circles, this is justified as "paying for itself".

Captain Blight
07-29-2010, 12:55 AM
Wow. No one's ever put it to me like that before. That makes total sense, now. Thanks, that's another piece of the puzzle for me.

This leads me to wonder something I'm kind of mulling over lately in general. Is the ability of private citizens to manipulate entire economies, contintental and global in scale, tantamount to the ability to mount a coup? I mean, isn't controlling the flow of money roughly the same as pursuing an independent economic policy than the Government? How can we possibly begin to address this with anything approaching efficacy and fairness, without stifling economic growth?

Holy wow. I guess some of those policy wonks really do earn their pay.

C. Ross
07-29-2010, 07:41 AM
This leads me to wonder something I'm kind of mulling over lately in general. Is the ability of private citizens to manipulate entire economies, contintental and global in scale, tantamount to the ability to mount a coup? I mean, isn't controlling the flow of money roughly the same as pursuing an independent economic policy than the Government? How can we possibly begin to address this with anything approaching efficacy and fairness, without stifling economic growth?

Well, a snarky reply would be that in democratic countries, private citizens are reserved the right to run their affairs freely, which means that individuals do and should run the economy, government be damned.

You mean, I think, that we should be concerned about a few people manipulating economies for their own benefit the welfare of others be damned, right? Too big to fail, so leave them alone come hell or high water? I think people focus too much on evil individuals and evil corporations, because it makes it personal, and dramatic, and understandable. Personally, I'm more interested in explanations from sociology or organizational behavior, rather than drama or individual psychology. I think we have more threats from non-conscious collusion - the kind of thing that led an entire finance industry to accept outrageously non-fiduciary behavior, or which led home buyers to believe that their houses were not homes but ATMs and investment vehicles. I think our future depends on culture, as well as regulation. If outrageous behavior in pursuit of outrageous wealth became uncool, then we'd be getting somewhere.

My contribution is to own a wooden boat. I seem to pay a lot of people to help keep it up, the materials I buy for it are built mostly with skilled labor. I'm my own stimulus plan!

johnw
07-29-2010, 01:32 PM
The University of Minnesota and Yale.

Here is the Cliff's Note version (http://www.cliffsnotes.com/study_guide/The-Keynesian-Theory.topicArticleId-9789,articleId-9742.html), and a decent academic article (http://www.econ.brown.edu/fac/Peter_Howitt/publication/multip.pdf).

The multiplier is defined as 1/(1 + mpc) where mpc = marginal propensity to consume. Unless mpc <1 (and it never is) then the keynesian multiplier is always positive, QED.

You say there is no difference between private and government spending. I agree!

How do you square that with this statement?


But to be less cheeky and respond to the actual economics: the theory of the "multiplier" is that a government dollar, say to hire a construction worker to build a school, is spent more times than a private sector dollar to hire a construction worker to build a home or a factory.

It seems to me that the Keynesian view would be that the workman is as likely to spend the money regardless of what he's building, but when the housing bubble bursts you need some activity to replace that private spending. This would logically lead to running a surplus in good times (Clinton) and deficit spending in a recession (Obama.) This would work out pretty well if you didn't have people running huge deficits in economic growth years (Bush.) Recent history suggests that Democrats are able to execute both ends of this strategy, while Republicans keep mouthing supply-side fantasies about tax cuts paying for themselves. This worries me, because eventually the party in power becomes corrupt and needs to be replaced. We need a Republican party with a viable program for governing, not just one with a tendency to pandering. That means a party capable of learning from experience, as Reagan did when he saw what tax cuts were doing to the deficit and raised taxes.

I think the Democrats have taken in the lesson that there are limits to the Phillips Curve. I don't see any sign that Republican leaders are willing to acknowledge the far more obvious limits to the Laffer Curve. The result is that the latter are willing to embrace policies that would be ruinous to the Republic.

Which is pretty much what the FT piece argues.

Pugwash
07-29-2010, 02:35 PM
You mean, I think, that we should be concerned about a few people manipulating economies for their own benefit the welfare of others be damned, right? Too big to fail, so leave them alone come hell or high water? I think people focus too much on evil individuals and evil corporations, because it makes it personal, and dramatic, and understandable. Personally, I'm more interested in explanations from sociology or organizational behavior, rather than drama or individual psychology. I think we have more threats from non-conscious collusion - the kind of thing that led an entire finance industry to accept outrageously non-fiduciary behavior, or which led home buyers to believe that their houses were not homes but ATMs and investment vehicles. I think our future depends on culture, as well as regulation. If outrageous behavior in pursuit of outrageous wealth became uncool, then we'd be getting somewhere.



Part of the answer lies here.

http://www.ted.com/talks/dan_pink_on_motivation.html

And here.

http://www.ted.com/talks/lang/eng/dan_ariely_on_our_buggy_moral_code.html

Both 20 minutes, but worth watching if you haven't seen them already.

Landrith
07-29-2010, 03:56 PM
John W asked: How do you square that with this statement?

I defend the Laffer Curve even though Obama's Big Bank Trickle Down Economics combined with zero interest and near zero and even negative corporate taxation failed to produce any jobs.


As far as the danger of unintentional collusion observed by C. Ross:

"Personally, I'm more interested in explanations from sociology or organizational behavior, rather than drama or individual psychology. I think we have more threats from non-conscious collusion - the kind of thing that led an entire finance industry to accept outrageously non-fiduciary behavior, or which led home buyers to believe that their houses were not homes but ATMs and investment vehicles."

, I believe it was organized crime:



"April 3, 2009

William K. Black suspects that it was more than greed and incompetence that brought down the U.S. financial sector and plunged the economy in recession — it was fraud. And he would know. When it comes to financial shenanigans, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, has seen pretty much everything.

Now an Associate Professor of Economics and Law at the University of Missouri, William K. Black tells Bill Moyers on the JOURNAL that the tool at the very center of mortgage collapse, creating triple-A rated bonds out of "liars' loans" — loans issued without verifying income, assets or employment — was a fraud, and the banks knew it.

And while there is no law against liars' loans, Black points out that there are, "many laws against fraud, and liars' loans are fraudulent. [...] They involve deceit, which is the essence of fraud."

Only the scale of the scandal is new. A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis. The difference between now and then, explains Black, is a drastic reduction in regulation and oversight, "We now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80." "

http://www.pbs.org/moyers/journal/04032009/profile.html

johnw
07-29-2010, 05:49 PM
We deregulated S&Ls and got a crisis. We deregulated banks and got a crisis. I'm detecting a trend.

On the other hand, Carter deregulated trucking, airlines and freight railroads and all became more efficient. Maybe it's because when safety slips at an airline, it doesn't make all the other airlines crash.

C. Ross
07-29-2010, 07:49 PM
I think the Democrats have taken in the lesson that there are limits to the Phillips Curve. I don't see any sign that Republican leaders are willing to acknowledge the far more obvious limits to the Laffer Curve. The result is that the latter are willing to embrace policies that would be ruinous to the Republic.

John, with all due respect, a $800 billion stimulus bill, plus calls for even more stimulus, is definitive proof that Democrats acknowledge no limit to the Phillips Curve.

Split government works pretty well. Clinton governed with a Republican Congress as a fiscal conservative; Democratic majorities were a fine balance to Reagan and Bush 1 and, as you said, tax increases when appropriate. Bush 2 and the Republican Congress were atrocious stewards of the public purse. We don't yet know how President Obama and a Democratic Congress will turn out.

elf
07-29-2010, 08:52 PM
Clinton was crippled by the Republican Congress. Sorry.

ripley699
07-29-2010, 09:05 PM
Ya folla? ..........Robert Shaw "The sting:

RonW
07-29-2010, 09:09 PM
Clinton was crippled by the Republican Congress.

Yea clinton was crippled alright, but I don't think it was by congress..

So what about this great housing bubble everyone keeps mentioning. And why hasn't anyone mentioned the automobile bubble, or the land bubble, food bubble, fuel bubble and on and on..........It is called inflation...

So when did inflation take off and who created it?

Maybe it took off in the clinton years and was started by none other then the federal reserve's policies........

And now you are seeing the results of the great economy years of clinton..

RonW
07-29-2010, 09:14 PM
check out when the dow jones started going crazy..


http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=%24INDU&ShowChtBt=Refresh+Chart&DateRangeForm=1&C9=2&ComparisonsForm=1&CE=0&DisplayForm=1&D4=1&D5=0&D3=0&ViewType=0&CP=0&PT=11

johnw
07-30-2010, 03:18 PM
John, with all due respect, a $800 billion stimulus bill, plus calls for even more stimulus, is definitive proof that Democrats acknowledge no limit to the Phillips Curve.

Split government works pretty well. Clinton governed with a Republican Congress as a fiscal conservative; Democratic majorities were a fine balance to Reagan and Bush 1 and, as you said, tax increases when appropriate. Bush 2 and the Republican Congress were atrocious stewards of the public purse. We don't yet know how President Obama and a Democratic Congress will turn out.
What you say would only be true if the lesson was that the Phillips Curve never works. That's not the lesson learned.

The lesson they learned was that you only want fiscal stimulus in certain circumstances. High unemployment, both of labor and of capital, means the stimulus won't be inflationary. Combine that with a federal funds rate close to zero, and you can't use monetary policy to stimulate the economy.

If we were facing high inflation, as we were after the oil shocks of the 1970s, the limits of the Phillips Curve would apply. If we're on the edge of deflation, the situation is quite different.

I know there are those who think inflation is always the big problem. Consider this from Allan Meltzer in early May 2009:


http://www.nytimes.com/2009/05/04/opinion/04meltzer.html?_r=2&pagewanted=1

Paul Volcker is now the head of President Obama’s Economic Recovery Advisory Board. Mr. Volcker and the administration’s many economic advisers are all fully aware of the inflationary dangers ahead. So is the current Fed chairman, Ben Bernanake. And yet the interest rate the Fed controls is nearly zero; and the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.Well, these factors remain, and where's the inflation? And in the absence of inflation, how can you claim we are in any way at the limits of the Phillips Curve? As inflation remains low and unemployment high, doesn't that confirm rather than refute the Phillips Curve?

(For those who skipped that day in Econ 201, here's a quick summation of the Phillips Curve from tutor2u: )


The basic Phillips Curve idea – economic trade-offs
In 1958 AW Phillips from whom the Phillips Curve takes its name plotted 95 years of data of UK wage inflation against unemployment. It seemed to suggest a short-run trade-off between unemployment and inflation. The theory behind this was fairly straightforward. Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise. If the Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in labour and the product markets.
The key to understanding this trade-off is to consider the possible inflationary effects in both labour and product markets arising from an increase in national income, output and employment.
The labour market: As unemployment falls, some labour shortages may occur where skilled labour is in short supply. This puts extra pressure on wages to rise, and since wages are usually a high percentage of total costs, prices may rise as firms pass on these costs to their customers
Other factor markets: Cost-push inflation can also come from rising demand for commodities such as oil, copper and processed manufactured goods such as steel, concrete and glass. When an economy is booming, so does demand for these components and raw materials.
Product markets: Rising demand and output puts pressure on scarce resources and can lead to suppliers raising prices to widen profit margins. The risk of rising prices is greatest when demand is out-stripping supply-capacity leading to excess demand (i.e. a positive output gap)

RonW
07-30-2010, 03:41 PM
Here are a few problems..


Combine that with a federal funds rate close to zero, and you can't use monetary policy to stimulate the economy.

Now what effect do you think bernake's almost zero rate is having on the econmy. I know do you?
And the monetary policy has everthing to do with the economy...


And yet the interest rate the Fed controls is nearly zero; and the enormous increase in bank reserves — caused by the Fed’s purchases of bonds and mortgages — will surely bring on severe inflation if allowed to remain.

What enormous increase in bank reserves. There is over 100 banks in the U.S. that have been closed so far this year, and about 150 last year, with around 100 in 2008.. banks are dropping like flies due to this clown bernake. Oh yea the big five are making out like rats with new reserves complimentary of bernake..
They are destroying the small banks..And as to inflation, when things basically can't go no lower, then it will start upwards with a new influx of money from the last left to still be standing the top 5 banks...-jpmorgan/chase--citibank--wells fargo--banke of america..and our good friends goldman sachs...

Landrith
07-30-2010, 07:19 PM
Here are a few problems..



Now what effect do you think bernake's almost zero rate is having on the econmy. I know do you?
And the monetary policy has everthing to do with the economy...



What enormous increase in bank reserves. There is over 100 banks in the U.S. that have been closed so far this year, and about 150 last year, with around 100 in 2008.. banks are dropping like flies due to this clown bernake. Oh yea the big five are making out like rats with new reserves complimentary of bernake..
They are destroying the small banks..And as to inflation, when things basically can't go no lower, then it will start upwards with a new influx of money from the last left to still be standing the top 5 banks...-jpmorgan/chase--citibank--wells fargo--banke of america..and our good friends goldman sachs...

At the beginning of the Obama Administration, I thought TARP's 23 Billion continuation of Bush/Paulson's insane plan would have had the effect of increasing demand for consumer goods and resulted in jobs and inflation ala the Clinton years, but on steroids. Instead all the money (far more than 23 Billion) went down the black hole of the NY Fed co-conspirator banks. The 600 + Trillion in derivatives kills everything. We can only hope to keep up appearances until after the election, then I imagine our creditors pull the plug on what's left of our sovereignty.

RonW
07-30-2010, 07:45 PM
Well I believe tarp was a scam and just a trnsfer of wealth from us to them. We (the econommy) would have been far better off if the financial institutions was allowed to sink or swim, no bailout and no socializing the losses..
Interesting that you mention derivatives. I believe they are not really that big of a deal. But unfortunately may become or made into a big deal.
Derivatives are insurance policies or hedge bets and we have to simply ignore them. Whoever sold them to whoever for whatever is their problem and not the taxpayers problem. Let companies go broke that sold and can't back up or pay off on the insurance claim.
That is the only way, derivatives are far too large to be bailed out, and if they even start to try something that stupid, then we are sunk.
And they will be used as a simple transfer of wealth, from us to them..
As for sovereignty, it will not come into play by economics, but more like politics, and we will only loose sovereignty if it is givern up from within.
As is presently being done..