High Interest Charges Guarantee the Need for a Bailout

At MarketWatch today there's an article entitled 'Spain up against a wall as borrowing costs soar'.


Of course, it's logical, that if an entity in financial trouble is charged higher and higher costs for its existing borrowings something will have to give.  A catastrophe is predictable!


The obvious solution is have a fair procedure for bankruptcy for all nations who are insolvent.  Such procedures exist for corporations, why not for nations?  What form should national bankruptcy take?  


Moreover, how much responsibility should individual countries take for the effects of a great pool of (out of control) global funds that cause speculative bubbles in every nation they invade?

Mitt Reagan

This news title says it all:

Romney marks Memorial Day with call for continued military strength

I guess he’ll pay for all the extra defense spending the same way President Reagan did – tax cuts for the rich. If someone votes for this clown – we should wonder if that person understands basic arithmetic.

But haven’t we already tried borrowing to stimulate?

Paul Krugman reacts to the following childish insult from The Telegraph:

To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

The Telegraph does note that Paul’s policy advice is entirely consistent with the writing of British economist Lord Keynes. My title is where this op-ed starts in on its own view of why Keynesian economics might be wrong headed. But let me suggest that the author of this op-ed does not understand Keynesian economics. Keynes was not in favor of the type of long-term fiscal irresponsibility that we have witnessed say in the United States during the Administrations of Ronald Reagan and George W. Bush. Yes I know proponents of the 1981 and 2001 tax cuts could argue that we were not at full employment when these tax cuts were passed. However, the 1981 tax cut was not needed to get us back to full employment. Volcker’s monetary policy – for better or worse (worse in my view) – was the main driving factor for the U.S. economy. And we know George W. Bush pursued a host of fiscal policies that were more long-term in nature and all fiscally irresponsible. If the author of this Telegraph op-ed thinks Lord Keynes would have approved these episodes of fiscal stimulus – I submit he’s very ignorant of the brand of economics that Lord Keynes and economists like Paul Krugman strive to describe.

Romney-Ryan Fiscal Policy – a Return to Reaganomics?

Brian Beutler offers a very good discussion on whether Obama or Romney is offering more austerity with Brian correctly noting the short-term fiscal restraint would be a disaster in terms of getting our economy closer to full employment. He notes the ambiguity of Romney’s proposals (no specifics on tax offsets or spending cuts) noting:

Because we can’t know for sure what will become of the unknowns in Romney’s fiscal plan, it exists simultaneously on both ends of the Keynesian scale. If the offsetting base-broadeners never materialize, and the spending cuts don’t happen as advertised, Romney’s plan amounts to a hugely stimulative tax cut. “A large amount of stimulative tax cuts, and no contractionary spending cuts would suggest the true Keynesian in the race is Romney,” says University of Pennsylvania economist Justin Wolfers.

In other words – a return to the spend&spend and borrow&borrow policies during Reagan’s first term. But we also get this from Paul Ryan:

Paul Ryan — the GOP’s official spokesman on fiscal issues — boasted that a Republican victory in November will give his party a mandate to turn his controversial spending-slashing budget into law. “If we make the case effectively and win this November, then we will have the moral authority to enact the kind of fundamental reforms America has not seen since Ronald Reagan’s first year,” Ryan said.

Funny thing – spending as a share of GDP never declined under President Reagan. Sure we got a few domestic spending reductions but they were offset by increases in defense spending. And Mr. Romney has already said he is for more defense spending. Short-term fiscal stimulus when we are in a liquidity trap may be a good thing but the lasting effects of the Reagan fiscal stimulus was higher real interest rates, less investment demand, and slower long-term growth.

Preannouncement of Paperback Edition of my Book

After letting my book languish for almost five years Palgrave let The Confiscation of American Prosperity, they are about to release a paperback edition.  In addition, they are featuring me as author of the month and reprinting my new introduction, which I explain why the book was constructed as a crime story.

My picture and the introduction are at the bottom.

 http://view.mail.macmillan.com/?j=fe5816787c6d057f7316&m=feee1c737d6c02&ls=fdd015717762057b7511777465&l=fe5c1575746d01757512&s=fe3010727564037b731171&jb=ffcf14&ju=fe1f1773716d027b721777&r=0

Romney on Unemployment: 2, 4, 6, 8 – Who Do Appreciate?

CNN has a good story on all the fuss about the latest from the GOP Presidential candidate on unemployment:

"I can tell you that over a period of four years, by virtue of the policies that we'd put in place, we'd get the unemployment rate down to 6%, and perhaps a little lower," the presumptive GOP nominee told the magazine. The number marked the first time Romney had talked about a specific rate during this election cycle, although he listed 5.9% as the number he would strive for in his 59-point economic plan released in September. Economic forecasts suggest Romney may not be too far off in his prediction. Based on the current rate of growth, the jobless rate is expected to fall to around 7% by the end of 2015 and 5.5% by the end of 2017, according to reports by the bipartisan Congressional Budget Office. In a conference call Wednesday, Obama campaign spokesman Ben LaBolt pointed to those predictions in criticizing Romney's statement. "Government economists have been clear that under current law their projection today is that unemployment will hit 6% by that point," LaBolt said. He went on to cite recent remarks in which Romney, chiding the president for his job creation record, said any unemployment figure above 4% was not worth celebrating.

To their credit – even Republican leaning economists were critical of any claim we could get the unemployment rate down to 4% by the end of 2016 but why retreat to a goal of 6% unemployment when even the CBO is forecasting we’d get close to 5.5% by then. CBO seems to be saying: (a) that the GDP gap won’t fully close until the end of the decade; and (b) that the unemployment rate will be north of 5% when it does close. So is Mr. Romney promising to do worse than what is expected under current policy? Given the state of the economy and our dismal fiscal policy which is akin to doing nothing, I could almost vote for a Republican who decided to both promise a more vigorous return to full employment and put forth a credible plan to get there. CNN outlines what Mr. Romney claims is his plan:

"Well, there are a number of things," Romney said on Fox News. "You start off by saying, let's stop something that's hurting small business from creating jobs and that's 'Obamacare.' Get rid of it. No. 2, have an energy strategy that takes advantage of our natural gas and oil and coal, as well as our renewables. Those low cost energy fuels will ultimately mean jobs come back here, even manufacturing jobs that left here. And finally, get a handle on the deficit so that people understand if they invest in America, their dollars will be worth something in the future."

#1 is a return to a failed health care system and #2 is continued reliance on fossil fuels. Both are bad policies but neither has much to do with the current macroeconomic mess. So had he stopped there, I could understand his not so ambitious goal of reaching a 6% unemployment rate. But then he had to mention #3, which is austerity. Which is working so well in the UK and Europe – not! We have heard from the CBO that allowing the fiscal cliff will lead to another recession. I guess the Republicans are promising some other variation on austerity, which if implemented would mean a continued high GDP gap and high unemployment. Is Mr. Romney running for the office of President or Head Cheerleader?

Neoconservatives Wildly Misrepresent Iran (What Else Is New?)

On today's Washington Post editorial page, Marc Reuel Gerecht, formerly of the CIA, and Mark Dubowitz, current Director of the Foundation for Defense of Democracies and its Iran Energy Project (where Gerecht now works also), have a column titled, "In Iran Talks, one side ready to bend," neatly timed to coincide with the beginning of negotiations between Iran and the Group of Six, and just after Iran announced a willingness to open to outside inspections some previously blocked sites and programs.  The authors argue that the West, European countries particularly, will be looking for the least excuse to relax the economic sanctions against Iran for only stopping their uranium enrichment to 20% activities.  They argue that the sanctions should be maintained to "crater" the Iranian economy so that even enrichment to 5% (far below the 90+% needed for nuclear weapons, but needed for their domestic electricty producing reactors) is shut down as well.

Quite aside from the authors not noticing the existence of the Iranian domestic civilian reactors needing the 5% enriched uranium (with them presumably wanting those reactors shut down as well), or that the Iranian nuclear program dates back to the pro-US regime of the Shah, they make several simply outrageously incorrect claims.  The clearest is a claim that Supreme Leader Ali Khamenei has been actively supporting a nuclear weapons program since "when it was still covert" in the mid-1980s, before he became the Vilayat-el-faqih (Supreme Jurisprudent), although Rafsanjani is identified as the "true father" of the nuclear weapons program.  Quite aside from the fact that what program they had was shut down about a decade ago, this ignores that after that shutdown and also very recently and publicly, Khamenei has issued religious edicts, fatwas, against nuclear weapons.  That he had done so earlier was widely ignored in the US media, with only people like Juan Cole reporting on it.  This most recent utterance did get public attention, however, presumably because it coincided with the decision to move to this round of negotiations.  Most of the reports failed to mention that this was nothing new on Khamenei's part.

The other is a claim, based on quoting Anthony Cordesman, to the effect that pursuing nuclear weapons has been the "main focus of Iran's military strategy for the past quarter of a century."  This claim also runs into the same problem already mentioned above, that Iran gave up its half-baked pursuit of nuclear weapons a decade ago, with its Commander-in-Chief Khamenei issuing his fatwa against nuclear weapons not too long thereafter.  Of course, for much of this more recent period, it was fashionable to ignore Khamenei completely and focus on President Ahmadinejad, who conveniently issued periodic semi-insane remarks that could be focused on.  However, as it has become increasingly clear more recently that he is not in charge at all (and never was of military programs) and Khamenei is, we now have this weird drumbeat of focusing on Khamenei and actually presenting the beaten down Ahmadinejad as a "reformer."  I cannot begin to describe how ridiculous and misleading all this is, but this particular column is really far out there in terms of its egregious and hysterical misrepresentations of basic facts.

Global trends in an era of diminishing returns

In 1996, Lester Thurow's book entitled 'The Future of Capitalism' was published.  I found his book a very interesting read in the context of the global financial crisis which is continuing to unfold since 2007.  On pages 8-10 Thurow describes, what he terms as, 'five economic tectonic plates' crashing together and providing an ominous trend that helps to foretell capitalism's crisis.  They are:

1. The end of Communism (leading to an increase of one third of humanity operating under capitalism's umbrella, "with a very different set of criteria for success and failure..."
2. Technological shift to an era dominated by manmade brainpower industries which "don't have natural predetermined homes.  They are geographically free - capable of being located anywhere on the face of the earth..."
3. A demography never before seen.  "Population is booming in the poorest countries [leading to] "the pull of higher standards of living abroad" where "unskilled labour is not needed". Thurow also mentions the development of "a new 'class' of human beings - a very large group of elderly, relatively affluent people, most of whom do not work, and who are dependent upon government social welfare payments for much of their income."
4. A global economy.  "Shifts in technology, transportation and communications are creating a world where anything can be made anywhere on the face of the earth.....Thurow notes that this creates a 'disconnect' between "global business firms with a worldview" and national governments.
5. An era where there is no dominant economic, political or military power.  How (Thurow asks) is the economic world to be designed or organised in a multipolar world?

By looking at the trends outlined above one is able to predict a few other things occuring simultaneously in the global economy.  With the very large increase in the world's workforce it is probable that the global unemployment would rise significantly, and wages would decline.  The deepening of globalisation would, in turn, lead to difficulties for national governments to secure a big enough tax (revenue) base from the incomes of dominant corporations (who can flit money across national boundaries at the tap of the keyboard.) I would also expect financial regulation to become almost impossible under the laissez-faire mentality created by the emergence of powerful global (self-interested) corporate giants.

Indeed, on page one of Thurow's book he writes: "In all of Western Europe not one net new job was created from 1973 to 1994."  And the International Labor Organisation reported a few years back that in Europe between 1970 and 2005 the financial sectors share of corporate profits climbed from 21% to 42% [1].

But why are the trends that Thurow outlines above happening in the first instance? Have we entered an historical era of 'diminishing returns'?

It looks quite possible that, for decades now, global economic growth has actually coexisted with a steadily declining general standard of living. 

Brenda J Rosser, 23rd May 2012.

REFERENCES:

[1]  World of Work 2009.  Snapshot of the European Union

http://www.ilo.org/public/english/bureau/inst/download/eu_region.pdf

GDP Gap by End of 2013 if the Fiscal Cliff is Allowed to Occur

The Congressional Budget Office has considered the effect on real GDP growth in 2013 under two alternative fiscal policies:

Under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending—a development that some observers have referred to as a “fiscal cliff.” Today CBO released an analysis of the economic effects of that fiscal restraint. Under those fiscal conditions, growth in real (inflation-adjusted) gross domestic product (GDP) in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law.

Using the CBO estimate of potential GDP, the gap as of 2012QI was 5.4%. CBO also expects GDP to grow by a mere 2% during 2012, which would mean that the gap at year end would still be 5.3%. If policymakers allow the fiscal cliff to occur, this CBO forecast says that the gap will grow to 6.6% by the end of 2013. If policymakers avoided the fiscal cliff in such a way that GDP grew by 4.4%, however, the gap would fall to 3% by the end of 2013. While many economists might prefer some fiscal stimulus so as to close the GDP gap even faster, maybe our best hope given this dysfunctional Congress is that they don’t impose even more austerity.

Austerity by Magic Asterisk

Mercifully the Speaker of the House’s oped was short. I’m trying but that’s the only kind thing I can find to say about it. Its growth by austerity theme is evident from the inception:

The American people continue to ask "where are the jobs?" and the overspending going on in Washington, D.C., is a big part of the reason why. Our national debt, which has grown significantly due to President Obama's failed "stimulus" policies, is a drain on our economy and a crushing burden on our kids and grandkids.

But did we expect Mr. Boehner to do anything other than praise the policies of Herbert Hoover? He wants to blame the President for the failure to reach any compromise on long-term fiscal responsibility but he proposes nothing in the way of specifics. In fact, he criticizes the President for considering tax increases. No wisdom on how to get us back to full employment and no courage on long-term fiscal responsibility. This is what the Republicans have as leadership? It is a wonder that USAToday wasted any of its space on this oped!

Does the Chamber of Commerce CEO Recall the S&L Crisis?

Tom Donohue has a similar view as Mitt Romney on the recent JPMorgan fiasco:

The first government to help the banks was George Washington, and ever since, every time they do it, they make usurious amounts of money. And the government has got tons of money back from everything they did through the TARP funds and now they were sort of a little chagrinned to say they’re making a lot of money on the AIG deal.

And I thought taxpayers were out over $160 billion bailing out those S&Ls and commercial banks back in the 1980’s. Of course, the government did assist the US automobile sector and financially did OK with that deal. Funny thing – some folks like Mitt Romney thought that was a bad idea. I guess the Chamber of Commerce thinks lemon socialism is fine and dandy for the financial sector even without regulation. Ahem!

Will The Student Debt Burden Depress The US Housing Market For The Foreseeable Future?

There is every reason to believe so.  On the one hand, after years of mortgages being granted without down payments, those have been reimposed along with much stricter standards regarding analysis of credit worthiness of mortgage borrowers in the wake of the collapse of the housing bubble.  However, the student debt burden has now reached a record high in excess of $1 trillion total, with many recent grads unable to get jobs that will allow them to begin dealing with their accumulated burdens in a serious way, and even some of their parents and grandparents burdened with paying these.  These burdens are especially great for the most recent grads, who are very unlikely to be able to buy houses for the foreseeable future.

It is worth noting how alone the US is in having this level student debt burden.  It is clearly the result of our having by far the highest levels of tuition of any country in the world, substantially driven in more recent years by major cutbacks in state aid in for public colleges and universities.  In many nations college education remains free, and in most others the tuitions are all but nominal.  The small number with more substantial tuitions includes Austria, Netherlands, Chile, South Africa, and especially Canada, the only one that approaches the US level at all.  Canada does have a student debt problem, but it comes nowhere near that of the US, with current aggregate student debt amounting to $20 billion.  Yes, Canada is only about a tenth of the US size in population, but that still leaves the per capita student debt burden there at less than a quarter of that in the US. 

So, the US has a uniquely substantial drag around its younger population that will make large portions of its younger population unable to buy homes for a long time to come.  Forget any serious "recovery" of housing prices anywhere in the US anytime soon.

Ah, For the Ignorance that Is Ignorant of Itself

Catherine Rampell quotes Daniel Webster, who sponsored a bill to eliminate the American Community Survey, which was passed by the full House of Representatives: “We’re spending $70 per person to fill this out. That’s just not cost effective, especially since in the end this is not a scientific survey. It’s a random survey.”

Metaphorically Speaking

Robert Schiller opens his New York Times column today on a promising note, pointing out the power that metaphors have over our thinking about economics.  A particularly nefarious motif is “belt-tightening”, conjuring up the idea that running an economy is like managing the finances of a family.  When family income falls, under normal circumstances a proper response is to cut spending too: live within your means.  It’s a  misleading guide to macroeconomics, however, since it takes the outside world, the place where our money comes from, as given and looks only at how we can respond to it.

Unfortunately, Schiller’s alternative, while fine for some purposes, also misses the point.  He suggests “a winter on the family farm”, where, while when the land is covered in snow, it makes sense to invest time in repairing old equipment, investing in new methods, and so on.  He’s right of course, except that his metaphor also sidesteps macro.  It too takes “winter” as an exogenous force and fails to illuminate how economic winters are created by the behavior of the farmers themselves.

I’ve been looking for the right metaphor, and I don’t have it yet, but I do have a story.  It is the farm family version of the baby sitting coop, sort of.  Apparently we all have peasant roots and respond better to yarns about hardscrabble agriculturalists than yuppies looking for a place to park their babies.

It goes like this: there is a far-off land with just two farmers and their families.  One grows wheat, the other raises cows for milking.  Each produces for itself and sells the rest to the other farmer.  One day, the dairy farmer decides to try out a low-carb diet and reduces her family’s wheat purchase.  The wheat farmer’s income drops, and his family holds an emergency meeting to figure out what to do about it.  “Our income is down,” he says, “and we have no alternative but to tighten our belt.  This means we have to cut down on milk.”  And so they do.  But then income falls over at the dairy farm, and they too hold a meeting, and the result is even less wheat buying.  And so it goes, around and around, until neither family has any income at all, and everyone’s diet is terrible.

Yes, I have left out prices, and there is nothing about expectations.  It’s just a story, and the point is to make as vivid as possible the core macroeconomic insight that spending is income—that they are two sides of exactly the same thing.  Every dollar or euro the government spends is income for someone, and if income is dropping and the government responds by cutting its spending, that dries up the flow of income even more.

Nothing profound here, and I’m sure most readers are asking, why bother?  The answer is that none of us has time to book up on every subject of importance, and we need metaphors and simple stories to help us get through the rest.  That’s how it is for most people and economics.  How can we create potent little macroeconomic memes and send them out into the world where they can do some good?

An Open Letter to Alexis Tsipras

I have just finished reading the interview with you that was published in this morning’s New York Times.  I assume it is accurate, even if the questions were not always the ones I would have asked.  I was especially struck by this comment from the reporter:

Although he conceded that the Greek state had “significant dysfunctionalities and a need for deep structural changes,” he did not offer specifics beyond faulting the Socialists and center-right New Democracy for building up a jobs-for-votes system that helped Greece’s public debt balloon.

The rest of the interview was about Greece and the EU, Greece and the ECB, Greece and Germany, and so on.  Your party was portrayed as focusing its strategy on linking up with dissidents across the Eurozone who want to end the fixation on protecting creditors and enforcing austerity.

Fine: I can understand why you would do this.  Greece needs friends, and a regime change in Brussels and Frankfurt could do a world of good.  But if I were you I wouldn’t put to much faith in this approach.

Greece is now seen as a pariah state across the rest of Europe.  You can blame the leaders of Pasok and New Democracy for this: they joined into the charade of “bailouts”, giving the impression to ordinary people elsewhere (and especially in Germany) that feckless Greeks were subsisting off the handouts of the others, the honest, hardworking taxpayers north of the Alps.  None of these politicians pointed out that it was not Greece that was on the receiving end of these funds but banks and other private investors whose only goal was to get as much of their wealth out of the country as possible.  That game succeeded, and now it is only working class Greeks who will suffer if the country returns to the drachma and all domestic financial assets are radically devalued.  Meanwhile, bailout fatigue has settled on the rest of the continent, since the myth has been upheld that the very Greeks who are most at risk are the ones who benefitted.

In short, while it is necessary to fight for support throughout Europe for a zone-wide policy shift, I would place a lot more emphasis on domestic change—the goal Greece can pursue with or without Europe’s help.

The dysfunctionalities you briefly referred to are class issues, and this should be emphasized at every opportunity.

1. The tax revenue capacity of the Greek state is a class issue.  This is partly a matter of who pays and who doesn’t, although many small business owners who are hardly members of the elite also participate in tax avoidance.  The real issue, however is that working class Greeks  depend on the ability of the state to collect taxes in order to live a civilized life, to enjoy the protection of social insurance and public services without which capitalism would be utterly intolerable.  The rich don’t need this and are content to live in a society with a small, threadbare state.  We have this conflict in the US too, and its class dimension is perfectly obvious.

2. The patronage system of politics and economics is deeply injurious to the working class.  This is often disguised at the individual level, since each recipient of a job or the expedited consideration of a claim or help with queue-jumping is grateful for what he or she gets.  Such benefits, however, are purchased at the cost of submission.  The beneficiary must provide loyalty to the big shot who hands out the favors.  Each time this exchange of benefits for loyalty occurs, it reproduces the hierarchy that tells you, “They are above and I am below.”  It is a humiliation.  OK, I don’t know exactly how patronage is experienced in Greece, but such systems are known all over the world (I’ve personally experienced aspects of it in the US), and the story is more or less the same.  It is a matter of shifting from a system of favors to a system of rights.

My point is that focusing on Europe is a trap.  It buys into the narrative that the political choices in Greece are fundamentally about how to respond to the demands of the troika.  If cracking down on tax cheats and creating a truly independent civil service are seen as demands from their creditors, most Greeks will understandably oppose them, quietly if not openly.  But they are not primarily about forking over money to the rest of Europe but social justice in Greece itself.  They are class issues and should be fought for no matter what happens on the financial front.

There are two sides to the democratic deficit of the EU.  One is the lack of democracy at the level of Europe that has permitted so-called technocrats, which is to say acolytes of neoliberalism who put the interests of finance ahead of all others, to impose their will on civil society.  The other is the removal of essential economic issues from national political debate, because they have been superceded by “Europe”.  On these issues there is democracy neither up there nor down here.  I don’t know what Greece can do for the effort to expand the democratic political space in the EU, but it can do a lot for democracy in Greece by attacking a system founded on privilege.

The Boogeyman Of The Debt Ceiling Crisis Raises Its Head

Earlier this week House Speaker John Boehner raised last summer's boogeyman of a crisis over rasing the US debt ceiling again.  That particular fun and games led to a debt downgrade for the US and a slowing of many markets and the US economy, and as the only way for the GOP to win the upcoming presidential election is for there to be a significant slowdown of the US economy, well, with the rest of the world's economy slowing down, maybe a raising of last summer's boogeyman might just do the trick.

Maybe it will, but probably not, although of course the US economy is slowing and will probably slow some more,  making for a nicely close race coming up, oh joy.  But Boehner's particular scare probably will not play.  The deal made last summer appears to still be in play on this matter.  The official debt ceiling might be breached prior to the election date in early November, but the US Treasury will be able to stretch things out for a few months as last year with its usual tricks.  The "fall off a cliff" fiscal deal cut last summer to end that round of debt crisis will kick in before the debt ceiling is seriously hit.  The jockeying and efforts to cut that short before it arrives is already going on in a major way.

Part of that involves a reported effort by Boehner to put up for votes four different budgets.  One is Obama's official budget.  This one will die easily with possibly zero votes in favor it, given its details.  All such presidential budgets are always DOA and never voted on as such.  This will simply be for a show to embarrass O, although it will not make any impression.  But then neither will the other three, one of which will be Rand Paul's and the even more radical Mike Lee's, both of which massively cut wildly popular programs while engaging in massive tax cuts in the name of balancing budgets (I am unsure of the details of the fourth, although I gather it is another GOP "cut taxes and cut social safety nets" one that will encounter death in the Senate, even if it passes the House).

So, in anticipation of the game that will be played after November, irrespective of the outcome of the election, I suggest that Obama seriously consider what was strongly proposed by many of us last summer, and has been long on the table, proposed even as early as during the Reagan presidency by his then adviser, Bruce Bartlett (and still supported by him): repudiation of the debt ceiling limit as unconstitutional (14th Amendment, if not others).  After the election, Obama can pull it off, and this move by Boehner simply reminds all of us how ridiculous this whole debate is and how this boogeyman needs to have a stake driven into its heart so that it goes to the grave for good.

Just to remind everybody of some basic facts.  1)  The US is the only nation in world history to enact a nominal debt ceiling. 2)  The Constitution mandates the Congress with the approval of the President to pass a budget whose bills must then be paid for.  3)  The debt ceiling is thus simply an extra imposition on top of this mandated responsibility that has never served any other than a symbolic purpose since it was first imposed in 1917, four years after the income tax amendment was approved, and threatens to have the US violate its contracts.  4)  Until last year it was always raised with only minimal questioning because it was obvious that it had to be done as a matter of "good government."  5)  Finally last year, lunatics entered the Congress uninterested in "good government," so the essential stupidity of this nearly-a-century-old law has been exposed in the debt downgrade of last year as lunacy, now possibly becoming an annual ritual in the face of filibustered gridlock.  6)  So, the beast must be killed most expeditiously, and the sooner the better.  This upcoming post-election negotiation will be the moment to do it, and Obama is the man to do it, I dearly hope.

Romney: JPMorgan Loss – Just the Way America Works

The Republican’s candidate for the Presidency on that JP Morgan loss:

this was not a loss to the taxpayers of America. This was a loss to shareholders and owners of JPMorgan and that’s the way America works Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $2 billion JPMorgan lost someone else gained.

So what’s the fuss? After all – shareholder value remains at $135 billion. Never mind this little drop in their stock price. I’m speechless!

The Problem with the Eurozone’s Throw-Greece-from-the-Train Plan Is that its Timing Can’t Be Controlled

There is no democratic deficit in Greece: its people have clearly indicated they want to do two things, clean the slate by defaulting on their debts and staying within the Eurozone.  This is seen as unacceptable in Brussels and Frankfurt, and Greeks are supposed to understand that if they choose the first they will lose the second.

Alas, there is no legal procedure by which Greece can be expelled from the EZ; therefore the strategy has to be one of making retention of the euro so ruinous for Greeks that they will exit on their own volition.  The mechanism is the Target system through which euros are transferred from one national central bank to another.

The idea is this: when funding from the troika is cut off after a default, the Greek government will lack the resources to backstop its banking system.  Moreover, euro transfers via Target will be cut off.  Greek depositors who try to withdraw their funds will be told, sorry, but the cupboard is quite bare.  This will ignite a banking meltdown, and the only way out for Athens will be to redenominate financial liabilities in a new currency they can supply.  Whether they call it a drachma is up to them.

Clever, huh?  The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else.  There is a gradually accelerating bank run taking place which is likely to reach criticality before a Greek-EZ policy showdown can take place.

There is a broader lesson here.  By threatening to choke the Greek banking system, the EZ implicitly threatens to do the same for Spain or even Italy.  They can say otherwise, but why should depositors in shaky peripheral banks believe them?  Withholding euros from peripheral banking systems is a gun that goes off before it is fired.  Simply brandishing this weapon is causing havoc and speeding the demise of the entire zone.

Better to put the gun away and do what should have been done all along: have the ECB assume the lender of last resort function for all EZ banks, with centralized financing of deposit insurance in particular.  Don’t use the threat of a financial panic as a policy tool.

Greek Reforms

The news sources I have access to present Greek politics entirely in relation to austerity: will Greece have a government that continues to adhere to the troika’s austerity mandate (until the money runs out), or will they repudiate it and risk ejection from the EZ?  Momentous stuff, but what about domestic reform?

Looking in from the outside, it seems to me that two reforms are absolutely essential, no matter what happens with the euro.  First, the government needs to have real tax collection capacity, particularly over professionals and businesses.  Without the ability to raise revenues, the essential pubic goods that most Greeks depend on—health, education, social insurance—will be unaffordable.  Periodic cash infusions from outside the country obscure the real problem, that Greece has not been able to call on the resources of Greeks.  At its core, of course, this is a class issue.

Second, Greece needs an autonomous civil service.  All but the very top positions in the public sector should be under civil service protection, and that includes key personnel functions: hiring, promoting and rewarding civil servants.  Contra the claims of the troika, ironclad tenure for civil servants is essential; they should not feel that their jobs are at risk if they displease a political boss.  Enforcement of civil service protection should be lodged, as much as possible, within the system itself.  The goal is to break up the patronage networks that have corrupted Greek politics and economics, to make political payoffs, which cannot be ended entirely in Greece or anywhere else, the exception rather than the system.  It is also difficult to see how the tax collection problem can be addressed without transforming public service.

Perhaps these items are already on the agenda of the left parties.  Again, coverage in my neck of the woods is limited, and nothing I am saying is particularly profound.  I hope reform is seen as just as important as resistance to austerity; if Greece is tossed from the EZ, reform will be that much more vital.

One nice feature of the sort of reform program I’ve sketched is that it puts the rhetoric of the troika to the test.  They say they want reform too.  But are they interested only in smashing the organization, solidarity and living standards of ordinary Greeks?  It would be nice to see how they would respond to the real thing.

The Main Point

Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details.  From time to time, it’s good to come up for air—to remember what the fundamental issue is.  In a way, the debate over structural versus cyclical factors invites us to do just that.

Suppose the current recession/depression is mainly structural.  Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead.  According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits.  (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.)  If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.

If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock.  We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further.  But think about it: if we have the wherewithal to resume prosperity, what holds us back?  And why should rational people accept any excuses for policies that delay it?

Repeat: we have everything we need, right now, to restart our economies.  All the unemployment, the hardship, the lost opportunities are unnecessary.  That’s the main point.

The secondary point is about the why.  There are ultimately two reasons why economies like ours get stuck in a cyclical rut.  The first is that there is a reinforcing cycle of insufficient demand and insufficient investment.  This is where standard countercyclical policy comes in: through fiscal deficits the government increases demand on its own initiative, and through monetary easing an impetus is added to investment.  We are near the limit of what easing can do (diminishing returns to the QE’s), but not anywhere near the limit of fiscal expansion.

The second reason arises in balance sheet recessions: too much private borrowing has taken place, debtors find it difficult to sustain debt service, and both debtors and creditors retrench.  In this case, which is ours, the essential problem is that fulfillment of claims on wealth—both credit claims and equity claims on debt-related assets—interferes with the conditions required for restarting growth.  In other words, the shadow of past wealth creation is depriving new wealth creation of sunlight.  While respecting wealth claims is desirable during normal times, since it supports long-term planning, there come episodes in which a choice must be made between the past and the future.  This is such a time.  Wealth claims need to be trimmed, quickly and sufficiently, in order to reduce leverage and permit economies to return to growth.  We shouldn’t forget the main point, which is that economic growth produces the stuff of which real wealth is made, while satisfying the claims inherited from yesterday only allocates this stuff.  (And in a slumping economy the claims can’t be honored anyway.)

If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.

Balancing the Budget with Tax Cuts and Defense Spending Increases

Charles Riley of CNNMoney has a must see graph showing how defense spending under Mitt Romney would compare to the current DOD baseline budget over the next decade. His title notes the spending over the next decade will exceed the baseline budget by more than $2 trillion. I like this:

Romney has proposed a slew of tax cuts, and plans to cap federal spending at 20% of GDP. But in both cases, the Romney campaign hasn't fully explained how those provisions will be paid for. The lack of detail means that Romney's claim of moving toward a balanced budget requires a great deal of trust.

But no one should trust Mitt Romney on fiscal matters. No one.

Is President Obama Taking Credit for Austerity?

Let’s put together two recent tidbits. First Justin Lahart documents the decline in government employment since December 2008 as he writes:

One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought … The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

Evan McMorris-Santoro catches President Obama saying:

It’s worth noting, by the way – this is just a little aside – after there was a recession under Ronald Reagan, government employment went way up. It went up after the recessions under the first George Bush and the second George Bush. So each time there was a recession with a republican president, we compensated by making sure that government didn’t see a drastic reduction in employment. The only time government employment has gone down during a recession has been under me. So I make that point just so you don’t buy into this whole bloated government argument that you’re hearing.

I find this statement a little puzzling. OK, it is factually true. And the Republican Party along with its presumption Presidential nominee is currently calling for even more austerity, which would make the Great Recession even worse. But I hope the President is not citing this as one of his successes. No, it is a failure of our policymakers. Now it may be true that Republican opposition to sane fiscal policy has put our government on this destructive course. I guess the President is working on the presumption that his political opponent is not attacking him from the progressive side of the political spectrum as such a statement would be horribly damaging politically. But with Mitt Romney being the serial flip flopper of all time, you never know what he is going to say next. And if he claims that fiscal policy under the Obama Administration has not been stimulative enough – for once, Mr. Romney would be telling the truth.

How to Rebalance the European Fiscal Compact

Here is the problem: on the one hand, it is urgent to get countercyclical funds flowing in the Eurozone, particularly in regions hit by double-digit unemployment.  Dealing with trade imbalances and placing the banking sector on more secure footing are longer term objectives; growth needs to be restarted within months or the European project at a whole is in serious danger of collapse.  On the other hand, however, there is neither the institutional framework nor political support from Germany (a sine qua non) for either a relaxation of fiscal targets or central underwriting of sovereign debt.

Nevertheless, there is a way out.

(1) Keep the current fiscal targets.  Perhaps provide some form of central underwriting for a portion of old debt, to cap interest costs, but not for new debt.

(2) Create a European-level investment authority, linked to the European Investment Fund (or the Bank) with a mandate to conduct countercyclical public investment, financed by loans, most of which would be purchased by the ECB.  This authority would spend directly, not lend, and it should target its spending in regions in greatest need of fiscal stimulus.  Decisions regarding the overall size of its program and its distribution across countries would be taken on a supermajority basis of national representatives.  Thus the political conundrum of national sovereignty over fiscal policy and the necessity for interregional transfers would be overcome at the level of the Eurozone as a whole: it would be the Eurozone as an entity that takes on burden of countercyclical deficits and turns to the ECB for accommodation.

Note that this loosely parallels the institutional framework used in the currency zone called the United States.  Individual states do not have the ability to run operating deficits, nor do they normally look to the Fed for finance; this function is federal only.

In this way the emerging European growth consensus can move quickly to expand public spending in the most affected regions, while avoiding the perceived moral hazard of backstopping the deficit policies of some countries with the savings of others.

Austerity Economics: Tied Up in Knots?

A core element of neoclassical economics was to emphasize transactions rather than work, workers, or working conditions. The idea was that the justification of the system was the utility enjoyed by consumers. All considerations of work, workers or working conditions were to be swept aside. Production is relevant only insofar as serves to satisfy consumer needs.




Macroeconomics was expected to depend upon this neoclassical micro foundation. Nonetheless, macroeconomics centered on demand is rejected by all good austerians. Instead, the current fad is to emphasize supply-side economics. Trading the social safety net encourages hard work. Tax cuts ensure more employment.



Over and above the self-destructive consequences of austerity, the recent wave of austerian nonsense has the unintended consequence of contradicting the intellectual foundation of neoliberal economics.

Limitations of Raising Expected Inflation to Increase Aggregate Demand

Robert Samuelson is getting a bit of praise for this Battle of the Beards:

What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years.

I’m for anything we can go to get our currently anemic aggregate demand to increase. But note that at current market rates for 10-year government bonds – nominal being just under 2% and real being around a negative quarter percent – we have already passed this 2% inflation target at least for now. OK, telling markets we will tolerate 3% inflation for the next 5 years could further reduce real borrowing costs even as short-term nominal rates hover around zero. I think, however, that James Hamilton has a point here:

I pointed out that the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Even if the Federal Reserve could further reduce real interest rates to 1% by letting expected inflation be 3%, how much extra private demand will this really create? This type of liquidity trap where national savings at full employment greatly outstrips private investment even at negative real interest rates calls for an outward shift of the IS curve more than a movement along the current IS curve. Of course, a more expansionary fiscal policy is clearly called for – an issue where both Bernanke and Krugman have agreed repeatedly. Alas, some powerful members of Congress choose not to listen.

Indiana Republicans "Choose Between Party And Country"

So says Dana Milbank in Sunday's Washington Post in regards to the Tuesday GOP Senate primary between 36 year incumbent Richar Lugar and tea party fave Richard Mourduck.  Lugar, who has a 77% conservative rating according to the American Conservative Union (more conservative than the Maine Senate Republicans who are around 50%) is behind by 10% according to recent polls, and Mourduck is running ads about how Lugar is Obama's "favorite Republican," which have been effective.

What Lugar has done over a long stretch of his career has been a leading GOP voice for sane policy regarding nuclear weapons.  What was the source of these ads was his support in late 2010 for Obama's push for a renewal of the SALT with Russia, something supported by all living previous Republican Secretaries of State and Defense.  This is the main framework for the post-Cold War control of the US and Russian nuclear arsenals, still large enough to wipe out humanity if  all set off in a full exchange.  This is not just country, but the entire world, and whatever else he has done, his announcement after the 2010 election that passing this was his top priority was one of the most intelligent and wise things Obama has supported, something that should be slam dunk obvious. 

In addition, Lugar coauthored the Nunn-Lugar Act in 1993, which provided for the initial monitoring of the post-Soviet nuclear weapons arsenal, again about as important a thing there is.  It really is easy to forget that no other issue comes close to being as significant as this one, although withoug regular drills for school kids to hide under their desks or people building fallout shelters in their backyards, it is easy to forget this.  Whatever we do with our economy or social or even environmental policy does not involve threats that could wipe out humanity entirely, certainly not anytime soon (maybe runaway global warming in the distant future). 

Anyway, while some Dems think it will be great if Lugar goes down because they might have a better chance of defeating Mourduck than Lugar in the general election, I think that if  Lugar goes down on Tuesday as appears likely, this will be one more serious nail in the coffin of any sort of intelligent discourse on the US national political scene, where complete fantasies triumph in a miasma of propagandizing that is so incoherent it cannot even be called ideological, because that would suggest that there might actually be some ideas involved beyond just the worst sort of knee jerk partisanship and looney bin cage rattling.

The French Election, As Seen Through the Lens of the New York Times

Has anyone else noticed that the Times’ backgrounder on the Hollande victory begins with speculation about a possible confrontation with Merkel and ends by envisioning a future confrontation with the unions?  Prescience or wishful thinking?

The Origins of Orthodoxy

I’ve been thinking a lot recently about the differences that flow from whether you have an income or a wealth perspective on economics.  In a nutshell, an income perspective is concerned primarily with the production of new goods and services, the incomes that are generated by that production, and the employment it requires.  Roughly speaking, we can call it Keynesian.  The wealth perspective is oriented toward the preservation and expansion of wealth: the protection of existing wealth against the threat of default or its confiscation by taxes or inflation, and the accumulation of additional wealth through sufficient returns on financial investment.  I identify this orientation with orthodoxy.  Each is rooted in particular social interests, and each has been elaborated in the form of economic theories and rhetorical motifs.

In fact, the origins of macroeconomics, at least in the English-speaking world, belong to orthodoxy.  Why is this?  My speculation is that the key institution that structured how thoughtful people looked at the economic system back then, and the lens through which many still see it today, is banking.  Banks are nodal points in the economic network, and the banking system spans the economic system as a whole.  Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health.  Before the advent of publicly collected economic statistics, not to mention the emergence of economics as a profession, banking was, along with tax collection, the only feasible basis for thinking about economic processes on a large scale.  Even today, it is one of the best.

Banks are in the business of wealth preservation and expansion.  It is not an aspect of what they do; it is everything.  To look at the economy through the eyes of a bank is to observe the impact of events and policies on wealth; it means being orthodox.  From a bank’s point of view, how could Argentina and Iceland, who have defaulted on debt obligations, possibly be regarded as more worthy than Brazil and Ireland, who have not?  national income data, which point to the benefits of default for future growth, would be an afterthought, perhaps off the radar entirely.

The irony is that a banker’s eye-view of the economy is indispensable.  It really is essential to see an economy as made up of interconnected balance sheets.  The best economic analysis from Keynes onward has been cognizant of this.  The problem is how to take this practical insight without being derailed by the banker’s attachment to wealth at the expense of incomes when the policies that promote them diverge.

Argentina and Brazil, Income and Wealth

Paul Krugman compares the economic record of Argentina and Brazil, giving us an Excel chart of real GDP growth:

Yes, it’s true: wicked Argentina, which has violated every rule in the book, is growing more robustly than virtuous Brazil.  From the standpoint of employment and income generation, this is the main event.  Says Paul:

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged?

But here is another case of focusing on income versus wealth.  From an income point of view, Argentina looks good, but what about wealth?  Argentina defaulted on its sovereign debt, Brazil didn't.  For a Keynesian, this is important only in terms of its impact on future growth, and clearly Argentina’s default was a constructive policy move.  If your perspective is the preservation of wealth, however, it’s a huge, huge deal.

And the confiscation of wealth was not a one-time event.  Here, courtesy of the World Bank’s Development Indicator database, is the record over the same years of “the real interest rate”.  (This is a measure of the private sector lending rate minus the concurrent rate of inflation—not ideal, but a reasonable indication of the real return on capital.)

In Brazil wealth-holders can count on rapid accumulation of more wealth.  In Argentina the situation for wealth is dire.  In fact, if Argentina’s inflation is underreported as some claim, the real return is even more negative than what we see.  In essence, claims on output are being reallocated from current wealth-holders to net borrowers and the state.  It is no surprise that people with money are trying to take it out of the country, which is why the Argentine government deploys a canine corps to sniff out suitcases of cash at the Buenos Aires airport.  Are all the folks trying to give their money a Swiss vacation rich?  The rich are certainly the most influential of the lot, but many are likely to be middle class as well.  When they worry about what the country is doing to their personal finances they are not hallucinating.

Just to be clear, I think that producing more of the goods that sustain a high quality of life and providing productive, decently paying work to those who need it should be light years ahead of wealth preservation in priority.  Nevertheless, from a political point of view, the balance of priority between income and wealth is rather different.  Opposition to the Kirchners is based primarily on their confiscation of wealth, and it will not disappear because Argentina’s GDP is growing faster than Brazil’s.

Footnote: Even from a Keynesian point of view there is some cause for concern.  Inflation in Argentina has drifted upward to the point where a takeoff into hyperinflation is no longer a negligible risk.  At some point soon the policy will have to turn toward disinflation, and unless they can pull off an incomes policy miracle, it will take the form of reduced growth.  Even so, of course, the decade-long run of rapid growth is almost certainly worth it.

Footnote #2.  For another example, consider Ireland and Iceland.  If your main concern is stemming the slump and restoring GDP growth, Iceland beats Ireland hands down.  But Iceland defaulted on the obligations of its banking system, while Ireland has gone profoundly into hock in order to avoid defaulting on theirs.  From a wealth point of view, it’s like comparing saints and criminals.

Confidence in What?

“A widespread lack of trust in public finances weighs heavily on growth: there is uncertainty regarding potential future tax increases, while funding costs are rising for private and public creditors alike. In such a situation, consolidation might inspire confidence and actually help the economy to grow.”  – Jens Weidmann, President of the Bundesbank

Confidence.  This is the main argument for austerity, repeated in a thousand forms but always more or less the same.  Wealthy people, who hold the reigns of the global economy, have to be propitiated, and if we can manage to ease their stress they will reward us with low interest rates and high levels of investment.  If you put it that way, it has the feel of a hostage syndrome.

But Keynesians also argue from confidence.  In a slump, investors lose their urge to invest, their animal spirits.  Low investment reduces the demand for output, which validates low investment in a vicious circle.  The way to break out of it is to visibly stimulate the economy, even if temporarily.  This is the rational notion behind the old priming-the-pump metaphor.

Taken at face value, this is an uneven contest.  The problem with the austerian confidence story is that it is entirely speculative, for two reasons.  First, there is no way to measure it.  One could administer a survey to rich people and ask them to rank their worries, but a survey of investor sentiments alone would not be enough to establish the link between mood and action (or inaction).  Just because I don’t like current government policy doesn’t mean I’m going to cut production.  Second, there isn’t really a formal argument that connects the diffuse sentiment encapsulated by the orthodox notion of confidence to outcomes that show up in the national income accounts.  Just perhaps, you could model in a general way how cascading anxieties could set off a financial panic, although calibrating it (being able to call the tipping point) is in the realm of sci-fi, and in any case this is about a liquidity crunch, not generally dampened investment.  How exactly do you go from “uncertainty regarding future tax increases” to reduced investment outlays?  (Investment has at most a weak relationship to actual taxes.)

Meanwhile, the Keynesian version of confidence has a plausible theoretical basis that also permits measurement.  The idea is simply that firms care most about the potential market for their output.  If they think consumers will be flush with income and eager to spend it, they will invest more; if they think otherwise, they invest less.  To a large extent, the PMI index captures exactly this; it is Keynesian confidence in action.  There are disputes among Keynesians as to why the instabilities to which investors respond arise, but at the policy level the dynamic is approximately the same.

So what is it that leads some people to embrace the Keynesian understanding of confidence and others to enlist with orthodoxy?  Noah Smith thinks it comes from somewhere in the digestive system.  He could be right.  My view, which I set out a few days ago, is that it is really about different primary objectives.

Keynesians care mainly about flows.  Income growth.  Output gaps.  Employment.   The production of new goods and services.  Their theories are optimized, so to speak, to elucidate the causes of interruptions to these flows and make the case for policies to keep them flowing.  The followers of orthodoxy, on the other hand, are primarily concerned with the protection and expansion of wealth.  They fear inflation, default, and various forms of expropriation, while promoting conditions that favor more profit-making.  There is a bit of overlap, insofar as both see a link between income and wealth via profitable investment, but the difference in perspective is even larger.  Each side is better at arguing for its own core concerns and weaker in making the case for the other’s concerns.  The problem is that political reality demands that both issues be addressed.

Supporters of economic orthodoxy speak naturally in a way that makes sense to wealth-holders.  Don’t add more debt and run the risk of default.  Don’t try to pay for stimulus programs with higher taxes on the rich.  Don’t accommodate populist experiments by printing money and inviting inflation.  Alas, an appeal to wealth-holders alone would be politically stupid.  The argument has to be extended to address concerns about employment and growth.  That’s the function of the “confidence” trope: it connects the entirely understandable concern about wealth-erosion to the world of income determination.  It bears a ton of weight because it has to do this, but not because there is any particular reason why actions that make wealth-holders more comfortable also make economies grow.  That’s why the confidence touted by austerians is a fairy.

Keynesians are not flawless either, however.  They can make an excellent case for policies that promote growth, but political reality requires them to win over the wealthy too.  Thus, they also argue that expansionary policies in a slump will be good for assets, or at least not bad.  More borrowing to promote near-term growth will reduce the risk of public and private default, while better economic conditions will be peachy for equities too.  Redistributive taxes?  Well yes, but this will produce a warm glow in the hearts of the well-to-do, since money buys the most happiness when it is given away.  And don’t worry about that “euthanasia of the rentier” bit.  I am being facetious, but is it really so different?  The point is that the argument for Keynesian policies being favorable to wealth is much, much weaker than the argument about incomes.

Where am I going with this?  In part, I just want to understand the intellectual environment we live in, and my starting point is always the classical theory of ideology: different people have different interests, and this causes them to see the world in different ways.  The second part is that, if I am right, this way of framing the debate disabuses us of the naive notion that a smarter or more precise argument will win the day, and leads us to the political transformation that’s needed instead.

Ron Paul Praises the Post World War II Economy for Its Reduction in Government Spending

Paul Krugman notes his debate with Ron Paul:

he insisted (if I understood him correctly) that currency debasement and price controls destroyed the Roman Empire. I responded that I am not a defender of the economic policies of the Emperor Diocletian.

I studied ancient history as well as economics in college but I don’t profess to know much about the policies of Emperor Diocletian either. Paul’s performance was strange in so many ways. For example, he pretended to be the defender of free markets as accused Dr. Krugman of not being in favor of market based economies. Yet, Ron Paul was the one who does not want the market to determine exchange rates, which is just one of many ways we know he is not very familiar with the writings of Milton Friedman. I guess there was one subtle point of concession between the two debaters. Both seemed to think the economy that followed World War II was a good one. But Ron Paul’s praise of this period struck me as odd as he claimed that the reason that the government debt to GDP ratio fell was an alleged decline in government spending. Our graph does show that government spending as a share of GDP was still high in 1945 so this ratio had to decline as we reduced defense spending as World War II ended. But our graph shows that government spending rose as a share of GDP for much of the latter half of last century. So maybe Ron Paul knows more about the Roman Empire than I do but his knowledge of recent history is suspect.