Sunday, April 29, 2012

Keynesianism on a breathtaking scale, and other odds and ends of mythology

It's fascinating to read Michael Gerson.   His view of things is clear, based on good information, and utterly different from mine. 

In Friday's column he made a long sequence of observations and assertions, and I found nearly all of them seriously debatable---and I mean that.  They not only can be debated, they should be.  I disagree with most of the things he says, but I see why an intelligent, clear-eyed, well informed conservative would say say them, and I think he has identified at least some of the elements of the bigger discussion that has been progressing through a fog for years.  He has identified some of what it is that thinking conservatives (he calls them "reform conservatives") feel, the things to which those of us who feel differently must respond.  

It will take many blog entries to get through all of the issues he raised, so this morning, since time is limited, I'll start by talking about his preemptive preamble, which was as far as I can tell just a sop to the right and a taunt toward the left to grab our interest.   It really isn't a part of the concept he was writing about.  But it's so mistaken, and he and the entire conservative world find it so unarguable, that it has to be countered before we can get to any of the other things in the column.  It's a shame; it seems like an intentional distraction from the larger topic.  But it can't be helped.  We have to clean up this toxic spill before we can get to his other points.

In his first paragraph, he says: "Barack Obama has pursued Keynesian economics on a breathtaking scale, racking up three years of deficits in excess of a trillion dollars and presiding over a national credit downgrade."  This single sentence from the Gerson column is plenty to respond to in one blog post.

So let's take the credit downgrade first.

Obama didn't preside "over" the credit downgrade, presided under it.  Or beside it.  The credit downgrade was a response to debt-ceiling brinksmanship by the far right wing of the House; it was a response to extreme irresponsibility at the highest levels of Congress, not to any action by the executive branch.  The S&P report is here, but a few quick quotes from it are really enough to see this:  

"the downgrade reflects our view that the effectiveness,
stability, and predictability of American policymaking and political
institutions have weakened
at a time of ongoing fiscal and economic
challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011."


"we have changed our view of the difficulties in bridging the
gulf between the political parties over fiscal policy,
which makes us
pessimistic about the capacity of Congress and the Administration to be
able to leverage their agreement this week into a broader fiscal
consolidation plan that stabilizes the government's debt dynamics any
time soon."

S&P was absolutely right to be pessimistic about the ability of the political parties to compromise.  But the point that Gerson is trying hard to forget or to ignore is that Obama did not create the credit downgrade; he worked hard, and offered enormous concessions, in an effort to avoid it.  Coming, as it did, immediately after the stubborn refusal of Paul Ryan, Eric Cantor and other Tea Party Caucus leaders to raise the debt ceiling, after the image of rallies in which the audiences held up signs urging Congress to shut the government down rather than raise the ceiling,  S&Ps pessimism explicitly cited the political dysfunction, rather than any financial issue, as its source.   And there really is no doubt where that dysfunction starts.  It's an intentional effort by revolutionaries to disrupt the political process in an effort to impose their vision of how the country should work, and how the government should work.   One party was (and is) so convinced of the rightness of its vision that it was willing to bring the country, our country, to the edge of financial ruin to pursue it. And it was the people that Gerson calls "reform conservatives" who were at the center of that fight, pushing toward the downgrade with all their strength. It was those very people who refused to budge even an atom, even a quantum.  The extremism of the right wing rebellion has created a rift that no one knows how to cross. 

The other half of Gerson's initial taunt is even more wrong.  

Obama did try, at the very outset, to implement a stimulus plan, something that might be considered a Keynsian policy, but hardly on a breathtaking scale: many economists, including some in his own inner circle, said from the start that the stimulus was about half as large as it should have been.  That insufficient proposal was whittled down in negotiations with Congress to something even smaller, and much less stimulative.    

But government as a whole has not provided much stimulus over the last few years.  State and local governments have shriveled, and the net result has been dramatic, and has been a significant contrast to government's responses to prior recessions.  Here's a graph that Paul Krugman recently posted in his blog on this point:

The red and green lines are the responses, the changes in public employment, in the recessions at the start of the Clinton and Bush administrations.  Notice that public employment rose over time in both cases; the total public employment at all levels rose, and helped to provide employment as the recovery progressed.  The purple line is total change in public employment in the current recession.  There was a spike early on, not as a result of the stimulus but as a result of temporary census jobs.  But after that, government has shed jobs, and has increased unemployment, rather than decreasing it. 

The federal government has run large deficits over the last few years, and at least part of these deficits could be called Keynesian stimuli---the payroll tax cuts and similar policies were intended to preserve demand, and the continuation of unemployment benefits and food stamps, while motivated primarily by a desire to assist those in need, did provide stabilizing stimulus.  But the recent federal deficits has resulted not just from increased spending on recession-related aide to the unemployed or other spending, but also from a collapse of revenue, partly due to stimuli from temporary tax changes, but mostly due to the recession rather than to any intentional policy change. 

But most of the stimulating effects that have come from the federal government have been countered, in this recession, by strong contractionary responses, strong austerity responses, from the states.  The net result, from all levels of government, far from being a big Keynesian stimulus "on a breathtaking scale", was at best a mild stimulus, and apart from the initial stimulus bill possibly no stimulus at all. 

The remainder of the Gerson column outlined the tenets of "reform conservatism": that (1) the federal fiscal "crisis" and (2) America's economic challenge in general are a result of excessive use of an inefficient government that is controlled by planning rather than an efficient private sector that is controlled by consumer pressure in an impartial, unforgiving market, and (3) that America's social problems are driven by a "collapse of social capital among the poor", for which the remedy is to "transform the safety net" to "encouraging responsibility and provide training toward integration in the broader stream of American life."

A lot to talk about---but in other posts.

Wednesday, April 25, 2012

Social Security. Again.

Since the new Social Security Trust Fund report has come out and created a kind of a mini-stir in the Washington Post and other conservative newspapers, I suppose I should say something about it, what with this being an economics blog and all.

So the first thing I should say is: don't panic. 

The report says that the Social Security Trust Fund will be depleted in 2033, three years earlier than last year, and there have been frantic cries of imminent doom from the usual suspects.  Here's the terrifying news from the summary report:

"After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years earlier than projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2086."

But two points should be emphasized: first, this estimated date has fluctuated up and down over the years.  The current change largely reflects the ravages of the recession and the fact that, due to a dysfunctional Congress here and a mistaken dependence on austerity in Europe, we did not provide sufficient direct stimulus three years years ago, or even two years ago, to stop this recession.  As the economy recovers that estimate may change.  And second, even after the trust fund is exhausted, Social Security tax receipts will be enough to pay 75% of the total scheduled benefits---forever.  Let me repeat that: the annual Social Security dedicated tax receipts will be enough to cover 75% of scheduled benefits under the current benefit formulas forever.  The Trust fund is only to cover that last 25%.

 But isn't the Social Security tax burden going to just overwhelm us at current rates, given the fact that the population is aging and the ratio of retired people to people in the working population is rising?  Well, here's the size of that issue as reported in the Trustees Report Summary:

"Program costs equaled 4.2 percent of GDP in 2007, and the Trustees project these costs will increase gradually to 6.4 percent of GDP in 2035 before declining to about 6.1 percent of GDP by 2050 and then remaining at about that level."

So the whole Social Security bill, if we pay every penny of Social Security obligations under current law, with the existing benefits and retirement age, is currently 4.2% of GDP, rises to a maximum of 6.4% in 2035, and then falls after that.  This is what it will cost us to care for the generations that preceded us at work in this country.  6.4%, max, and that huge sum for only a few years in the mid-twenty-thirties.  What on earth is the panic about?  Is that really too big a burden for us, too overwhelming a sacrifice for us to bear?  

Having said "don't panic", though, I should make it clear that I don't mean do nothing.  The fact that the trust fund is expected to ever be depleted  means that we should do something to correct that.  So the real question is what we should do.   So here are my opinions, in brief:

 We should do the very thing that the Samuelson in the Post, Paul Ryan in Congress, and the Tea Party everywhere want desperately to avoid: we should raise taxes sufficiently to cover those costs.  And we should do it soon.   There are a lot of options: we could make it a flat tax on all income, rather than a payroll tax on low incomes.  Right now there is a cap: no one pays a penny of SS tax on income above $110,100, and that cap is indexed for inflation.  a few years ago AARP estimated that raising that cap so that 90% of all income was in the Social Security tax base would cover 39% of the current SS projected deficit; simply eliminating the cap altogether would cover a good deal more of it, and it would go a long way toward making the total tax burden in this country more progressive. 

Or we could increase the payroll tax rate by 0.5% (one half of one percent): according to the same study that would close 23% of the gap. 

 Or, of course, we could simply supplement the dedicated Social Security revenues from the general fund, that is, through normal income taxes.

Finally, I don't like reducing benefits, but if we have to reduce them at all the reduction should fall on those most able to afford it: the same AARP study estimated that progressive price indexation by their formula would close 76% of the gap. 

But we should not, big emphasis on not,  privatize a program that has worked extremely well, providing some retirement income security for the last 75 years, with very little management overhead.  We should not eviscerate the program or reduce benefits for those who need them.  We should not raise the retirement age just to balance the Social Security budget.

(If you have a great urge to read the SS Trustees report itself, you can download it as pdf here, or just read the summary here.)

Saturday, April 21, 2012

Radical Feminist Nuns!!

Why did I want to add a few extra words to that title?  Like "Radical Feminist Vampire Biker Nuns"?

There has to be something going on here that I don't understand.  For the second day in a row the Washington Post has run, on page 2 below the fold, a story about the "Vatican crackdown on what it calls 'radical feminism' among" American nuns.  According to the story, the Vatican regards these women as radical feminists because of "their purported failure to sufficiently condemn such issues as abortion and same-sex marriage."

Seriously?  Radical feminists?  Because of a "failure to sufficiently condemn"??  Holy Tea Party!

In yesterday's paper, the story said that the nuns were being reprimanded "for spending too much time on poverty and social-justice concerns and not enough on condemning abortion and gay marriage".

Wow.  The Sisters of Mercy and the Little Sisters of the Poor are spending too much time on poverty and social justice? 

If this is really what the Vatican said, they need to do some deeper research into the meaning of all of those words, because a failure to sufficiently condemn anything, even abortion or same-sex marriage, is neither radical nor particularly feminist.   Nothing in the story claimed that the nuns in question were pro-choice, or advocated same sex marriage, or anything of that sort.  I assume they support the positions of their church on those issues.  Their transgression was that they were too distracted by the altruistic work they had joined their orders to do, and which they thought their faith required them to do, to be adequately livid in their condemnation of those whose lives or opinions are different from theirs.

It's not my religion, and not my personal power struggle.  I have no real stake in this.  But I don't really understand the Vatican's complaint here, and I certainly don't understand their choice of words.   And I think it may be a little rash on the Vatican's part to pick a fight with a group of nuns.  

Particularly radical feminist vampire biker nuns.

Thursday, April 19, 2012

Government is not a household. It's not a business either.

Some wine magazines will advise us on what wine is best with various meals (Sauvignon Blank with veal, perhaps, or a good Chianti with fava beans and liver); other less formal sources may advise us on what wine is best with various events (a fine burgundy with chamber music, or well seasoned rose with a cold night spent under a bridge).  Here we concern ourselves only with which wines produce the best blog entries.  Tonight's entry is produced with the aid of a pretty darned nice Chardonnay from the 14 Hands winery in Washington State. 

Really, I can't begin to finish this topic in one blog entry.  But it does begin to look at the kind of thing I had in mind when I started this blog in the first place: the often silly things that politicians of both parties say about economic events and the economic world.  In this case what I have in mind is the odd view that politicians have (or think we have) about what government is.  They say: "families all over this country are tightening their belts, and it's not unreasonable to ask the government to tighten its belt too."  Or "we need to run the government more like a business."

Lord!  Amiytee!  What fools these un-Chardonnayed mortals be!

When families in the country are tightening their belt, that is absolutely NOT THE TIME FOR THE GOVERNMENT TO DO THE SAME!!!  This is basic.  Basic.  Basic, basic basic.  Neither I nor my Chardonnay can express how basic this is.  I don't have to unleash a Dynamic, Stochastic General Equilibrium model to express this; I don't even have to show my age by referring to IS-LM.  If demand from households collapses, businesses will not invest, because (see prior entries of this blog), businesses are driven by their confidence in the presence---future presence---of those magical creatures called "customers".  If neither investment nor consumption are providing customers for businesses, the only customer left standing is government.  If at this moment of demand vacuum government chooses contract its purchases then nothing stands between prosperity and the current condition of, say, Spain.  It is precisely when families are having to tighten their belts and as a result businesses are backing away from investment that government must spend.  When consumers are on a buying spree, and businesses, inebriated with the strong drink of plentiful customers, are bursting with irrational exuberance, THEN government should stand to like a champion, grit its teeth and tighten its belt, and store up its funding for harder times.   

Why is this a hard concept to understand?

And government is not here to make a profit, or maximize its bottom line.  Businesses are driven by that.  Businesses are beset by competition, both from other companies in the same industry and by competing industries, and must work hard, strive hard, by improving their products and identifying needs, to make their way in a difficult and starkly competitive world.  The have to make a profit, and quickly.  There is a great river of economic research on how this competition benefits households, who consume the product of businesses efforts.

Government has no competition within the country it governs; it does not (and should not!) promote one business over any other.  Competition among businesses creates efficiencies; lower prices; clever new products that households need.  Government does none of that, really.  But rather than creating clever products, government can move to create or protect whole industries, whole sets of industries based on a single resource, or on basic research beyond the interest of any single business. Government created the research that produced computing chips; Apple and IBM and many others created personal computing, word processors, calculating software; eventually Apple created the iPhone and others flooded into that market.  Government created the internet structure, ARPANET, DARPANET and the TCP/IP protocols that make the internet hum; google created a search engine scour the internet for your interests and transport them to your living room couch.  Government created the opportunity---through massive public financing and land grants---to create a rail system throughout the country, but Union Pacific and Central Pacific took the opportunity and found the routes to make that real.  Government created NASA and the space program; government created radar, satellites, GPS, jet engines, nuclear power, microchips, synthetic fuels and alternative energy; all the massive variety of spinoffs from those things that created or supported industries were the work of private business.  These are very different functions. 

Business works for its shareholders---if it is a broad minded or long-visioned business, it may be concerned with its the real welfare of its customers; if it is a big hearted business it may be concerned with the welfare of its employees.  Government works for the welfare of the whole country, and for the welfare of citizens of every age and interest, and even for citizens not even born yet.

Households consume, for their own purposes, the products that businesses create for their own profits.  Government provides the legal environment, the security environment, the public goods, the long societal vision, the basic research, the grand infrastructures, the dams, the rail systems, the highway systems,  the transportation and communication networks, that allows these two actors in the economic world to act together to everyone's benefit.

I know this is a new blog, and no one is out there reading this.  But I'm not finished with this topic, and I'd love to hear other ideas.  Speak up.  I'm listening.

Monday, April 16, 2012

What is Tax Reform?

I don't have much time to blog tonight---so of course I decide on a topic that could take books to answer.  And I don't have a real answer; what I have is a sense that seems to be different from the sense that drives Paul Ryan and the Tea Party, and the sense that drove the deficit commission report.  To a huge section of the population of the country, and certainly of this city, "tax reform" means---well, let me cite Jared Bernstein's blog:

"What is “tax reform” anyway?  For some it’s having just one rate, for others it’s a national sales tax, and for most it’s trading off lower rates for a broader base.  For all, it’s simplifying the current system (for me, it’s ending favorable treatment of one kind of income over another)."

The emphasis is mine.

Let's be clear: the definition of reform is a change that improves.  There is nothing in the phrase "tax reform" that implies lower taxes, or higher taxes, or anything about the level of taxes.  And there's certainly nothing about that phrase that implies "broadening the tax base"---what does that phrase mean?  In most of the proposals I've seen, what it means is making middle and lower income citizens pay more in taxes so that the wealthy can pay less.  

We can all agree that simpler is better---the tax-legislation version of Occam's Razor.  I think most of us agree that eliminating wasteful tax expenditures is a good goal for tax reform---but agreeing on which tax expenditures are wasteful will be hard, and maybe impossible.  But to argue that lower rates is "reform" presupposes that current rates are too high.  They are not, in my opinion.  They are far too low, in the long run.

Before you all faint, let me reassure you that I don't mean I like paying taxes; I'm not a masochist.  Nobody wants to pay taxes.  But they are a necessary discomfort for any nation that wants to achieve anything substantial, or make any great progress.  National investment in infrastructure, education, defense, research that is too risky or too long run for private industry to undertake, have to be paid for somehow.  Nations that want to prosper invest in these things, and nations that fail to invest in them degrade, and gradually, inexorably, fall behind.  

And in the last thirty years our infrastructure has been doing just that.   In the last thirty years we have been doing that.  Oh, we're still the wealthiest nation on earth, per capita; we're living on centuries of progress and government investment in highway system and bridges and dams and railroads, and research into rockets and radios, satellites and the creation of the internet, and we're living on centuries of privately owned businesses in industries that were spawned by all that research and aided by all that infrastructure.   

Yes, we have a deficit, and in the long run a serious health-care deficit problem.  But there simply is no acceptable way of cutting government spending enough to eliminate it in the long run and still maintain our national wealth.   Because on the important things, on things like infrastructure investment---not just repair of existing infrastructure, but new and visionary infrastructure, as the railroads were in their day, or the interstate highway system, or the internet---or long run research, on these things we are spending far too little as a nation.  

So what is tax reform?  Tastes differ.  To me, simple is good, and fair is good, and elimination of special tax systems that distort private consumption and investment choices is also good.  And to me, setting overall tax rates at a level that will continue to pay for the things we as a nation need to do through our government is good.  

And to me, that means raising the top tax rate---not lowering it---both to achieve fairness and to achieve sufficient revenue to pay for all the things we need to do. And it means using Pigovian taxes to correct or compensate for negative externalities (this is a long topic to be explored another time).  And it means treating all income as income: there is no reason to treat capital gains income differently from wage income, or from the income from revenue derived from the production and sales of real goods or services.  

What the phrase "tax reform" does not mean is blind hunger for lower marginal rates no matter what, or "broadening the tax base" to push the burden of taxes farther down the income scale.

Sunday, April 15, 2012

More magical creatures for Polly

It's been a while since I visited here.  It seems to be a strange and somber place.

So.  Magical creatures.  To recap the story so far, a few blogs ago I talked about Paul Krugman's ridicule of many economists and government officials who profess a faith in what Krugman calls a "confidence fairy", who will, if only they are very very good and practice budget austerity as much as they can, reward them with bounty in the end.  His criticism is justified: the people who were suggesting that "confidence" would save them in the end failed really to specify what kind of confidence they had in mind, or who would have this confidence, but the implication was that international bankers and bond traders, and businessmen, and maybe even consumers, were watching them to see if they were serious about attacking their national budget deficits.  And I agree with Krugman that the way to expand the economies of Europe (and anywhere else) is to expand them, not to engage in national self abuse hoping that our willingness to endure pain will restore the world's confidence in us.  The active players in the world don't want us to be in pain, and aren't impressed by our willingness to endure it.  They want success, and prosperity, and will be impressed by our willingness to achieve that.  In fact the people who are proposing a confidence fairy are saying something truly absurd: they are saying that they can restore confidence in their governments by implementing bad economic policies that fail to restore prosperity!   

Really.  That's what they are saying.    They frankly admit that, in the middle of the worst recession since the nineteen thirties, their austerity policies will weaken economic growth in the short run.   So I think the ridicule they got from Krugman and others was richly earned.  

But I'm not so happy about dismissing the concept of confidence, or the concept of magic, in a sense, in the economic process.  I guess by "magic" in this blog I mean events that are beyond our control or understanding, that cannot really be forecast by probability based models.  

I think confidence that these magical things, these unknowable things, will break in our favor in the future does matter, and does move people to do things that matter.    And so have many other economists over the years, although they didn't use the word "magic" or even the word "confidence".  In the last episode of this story I quoted Keynes as saying: 

 "Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."  

What I think he means by these words is that we have to act by a leap of faith, sometimes; we don't know, when we invest in a new capacity to produce something, whether we will be able to sell our product or not.  Maybe we will produce pet rocks or wacky wall-crawlers and become rich.  Maybe we will, at much greater expense, produce Edsels and lose our shirts.  In most cases when we relinquish one opportunity (such as putting our money into bonds with assured interest earnings) and pursue another (such as investing in productive capacity) we do so in the belief (the belief!) that the new opportunity will work, and that the magic that must happen to make them work will happen. 

Businessmen will invest if they believe that in the appropriate future customers will be there to buy their product.

Households will invest in cars and other large purchases if they believe that their careers are secure.  They will quit a job if they believe that a better opportunity will arrive to replace it; in general, that means they believe the future will provide employersThey will commit themselves to decades of mortgage payments to buy a house if they believe the future will provide them with a way to make those payments without leaving the area (employers or other opportunities), or that they will always be able to find customers to buy  the house when they need to leave.   

And so on.  If most of us have that kind of confidence that the magic we need will happen, we will act.  If we don't have that confidence, we will wait, preserve our options and hope for better times.


Monday, April 9, 2012

A quiet rant on the meaning of the word "earn".

I used to think that Robert Samuelson was an honorable, slightly conservative columnist.  Today he proved me wrong.  He is very conservative, and not at all honest.

The problem is that I work during the day, so I have to blog late into the night, and that means others are onto the obvious things well before I am.  There’s no point in going over ground already well tilled by others; Samuelson’s column today raised hackles all over the more progressive end of the econoblogosphere.  Jared Bernstein responded very well here, but he too deferred to another blogger with a track record on SS:  Dean Baker, at the Center for Economic and Policy Research.  You can find Dean Baker’s comments here, and I highly recommend them.   Baker exposes Samuelson's dishonesty, a dishonesty typical of the right’s SS arguments.  Through the whole piece Samuelson is talking about Social Security, and only Social Security, until this passage:

"Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Steuerle and Rennane."

Baker responses with this passage:

“Okay, this is a really nice trick. Remember we were talking about Social Security? Note that Samuelson refers to "lifetime Social Security and Medicare benefits." It wasn't an accident that he brought Medicare into this discussion. That is because Steuerle and Rennane's calculations show that this average earning couple would get back less in Social Security benefits than what they paid in taxes. That would not fit well with Samuelson's story, so he brings in Medicare (remember this is the Washington Post).

And, the high cost of Medicare benefits is not due to their great generosity. The high cost is due to the fact that we pay our doctors, our drug companies, and our medical equipment suppliers way more than do people in any other country, and we have no better outcomes. If our per person costs for health care were comparable to costs in Germany, Canada, the UK or any other wealthy country, then workers would be paying far more for their Medicare benefits than the cost of what they are getting in care.”

I added emphasis here and there in that passage.  But I can’t say all that any better than Dean Baker did, so I’ll leave the exposure of Samuelson’s duplicitous misdirection to him.

Instead I’ll tone down the rant response, and focus on an area where I think we may---giving Samuelson a benefit of the doubt that he doesn’t really deserve---we may be talking past each other.

First, a quote from Samuelson’s column, cited by Baker:

"Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they 'earned' these benefits. To reduce them would be to take something that is rightfully theirs."

And then Baker’s response to that passage:

“Of course Samuelson is 100 percent wrong here. Payroll taxes have been segregated. That is the point of the Social Security trust fund and the Social Security trustees report. These institutions would make no sense if the funds were not segregated.”

And here’s my issue.  Baker is correctly asserting that the Social Security Trust Fund has been segregated from the rest of government, and that it’s phony nonsense to claim that “it’s already been spent”.  But that’s not what Samuelson meant, at least I don’t think it is.  I think he meant that millions of Americans believe that their payroll taxes are segregated from the contribution of other Americans, in other words that the money they get back in SS payments when they are old is the very same money that they “saved” when they were younger, plus some accrued interest.  And Samuelson’s feeling, clearly, is that if that is not so then these people did not “earn” the retirement they are getting.

And that’s where my deepest issue with him really begins.  First, I think most people do understand that SS is a pay-as-you-go system like all other insurance.  But second, I have trouble understanding what in the hell Samuelson means when he says that these people didn’t “earn” the right to survive in their old age.

Social Security has been called a compact between generations, in which young, healthy Americans in the prime of their working lives give a little of their current income to maintain a dignified life for the generation that worked before them, the generation who left them the nation they work in, with all its freedoms, its wealth, its infrastructure, its technology, it’s vast web of existing businesses, in which most of them earn a living far more opulent than they might earn in other parts of the world. We do “earn” the care we get when we are older, but not by putting our own money in and taking our own money back out.  We earn consideration and support from younger generations when we are old by offering consideration and support to the generations before us when we are young. 

In a sense, a national health care system does the same thing: young people, who are healthy and often have little need for medical care, pay taxes which are used to pay the medical costs of the sick and the old.  In return they receive the security of knowing that when---if---they ever need care, it will be there for them.  They won’t have to bankrupt themselves or their children to pay for it; they won’t have endure sickness or death alone without help, because they have “earned” the right to medical care when they are sick by providing it to others while they are well.

Good lord, how touchy-feely!  How fuzzy and squishy and liberal!  A compact between generations, where we actually care about the other citizens of our country and care for them when they absolutely need it, and by doing that we “earn” the right to expect them to care about us, and for us.  

It drives the right wing nuts, that concept.  They don’t understand that meaning of the word “earn”.  They know what “earning” means: if it’s in your bank account, you earned it, and if it is not in your bank account you didn’t.

Tomorrow I’ll return to my regularly scheduled adulation of the free market system, and my expositions on the efficiency of private enterprise.

Sunday, April 8, 2012

Romney Economics

I want to comment on a phrase I read in the Washington Post a few days ago.  The phrase was from Mitt Romney's latest stump speech (which you can find here).  He said: "the economy is simply the product of all the nations' businesses added together". Earlier in the speech he says: “government at all levels consumes 38 percent of the total economy or GDP”, making it clear that his measure of the economy is the National Income and Product Accounts (NIPAs), which are recorded by the Bureau of Economic Analysis in the Commerce Department, and provide the official measure of the GDP.

The first thing that struck me about this was not that it is wrong---although it is wrong in several ways---but how tiny, how limited, this is as a view of the what the economy is, and what economists study.  If this were really all that economics was about my interest in the subject would never have lasted through the first week of my first economics course. 

I understand that Governor Romney wants to affirm his belief that business can be good, and on the whole does economic good for the country and for the world, and I agree with that.  He wants to affirm his belief that private property, used for productive purposes through privately owned businesses, is an efficient way to organize economic activity, and I agree with that too, although I’d add that there are some kinds of production that privately owned businesses can’t do or won’t do.  But private businesses are not the only way to organize economic activity, and they are not the only kinds of organizations that provide goods or services, or that do economic good.   Churches, charities, clubs, communes, villages, baby-sitting coops, households, and of course, government, all are active producers of one thing or another, sometimes as part of the recorded economy and sometimes off the books, as it were.  

Measuring the Economy, the Bureau of Economic Analysis primer on the NIPAs, available here, defines the GDP this way: “GDP is composed of goods and services that are produced for sale in the 'market'—the generic term referring to the forum for economic transactions—and of nonmarket goods and services—those that are not sold in the market, such as the defense services provided by the Federal Government, the education services provided by local governments, the emergency housing or health care services provided by nonprofit institutions serving households (such as the Red Cross), and the housing services provided by and for persons who own and live in their home (referred to as “owner-occupants”).”  (the emphasis is mine.)  So the idea of including product of other organizations, including charities and government, is not odd, and in fact to the extent possible those things are measured and are included in the reported GDP.  Far from “consuming” 38% of GDP, government expenditures are part of GDP as productive activities.  The government provides goods and services (defense, police, education, infrastructure, justice, health care and retirement income for the elderly, food and water safety, research into long-run concepts such as the internet in the sixties and seventies, etc.)

What about baby-sitting coops or production within a household?  The same primer continues, in the same paragraph:  “not all productive activity is included in GDP. Some activities, such as the care of one's own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included because they are difficult to accurately measure and value.” (again, emphasis mine).  In other words, the BEA recognizes all of them as real economic activity, and if we could measure the value of unpaid productive work, including things like cleaning your own house or making your own dinner, they would be included in the NIPAs; they are activities that create a good or a service for which you would have to pay if you obtained them on the market.

And of course “the economy” is much more than just GDP.  The unemployed, for example, are at least temporarily not part of any business, but the rate of unemployment is definitely a valid economic study; wealth and poverty and the distribution of income are valid economic studies; the provision of public goods is a valid economic study. 

But the exploration of all the myriad topics that are excluded from Governor Romney’s definition of “the economy” but are central to mine would take many pages, and maybe many books, and this post is long enough.   

Saturday, April 7, 2012

An update on optimism

Yesterday I hazarded a guess at today's headlines on the economy, and I was right.  The Washington Post's headline was "Hiring slows, casting shadow on U.S. recovery".  Above the fold, right hand column, big caps.    And even in the blogs, the tone was somber.   Paul Krugman said "What has actually been happening is that conventional wisdom overreacted to four months of good(ish) news, and the March numbers were a useful corrective",  and provided this graph of employment as a fraction of prime age population:

and in this you see the horrifying depth of the current recession, where the good news from the last few months is reflected in that meager uptick at the end.

I still think that there were some positive signals in yesterday's news---that may be wishful thinking, but it is what I see.  The chart he uses looks awful and is awful, but that last uptick is an uptick, and even that does not reflect the large decline in people working part time "for economic reasons".

But I do want to be clear: I'm not suggesting, and didn't suggest yesterday, that everything is now all better.  Even in the graph I used which is repeated here and shows the number of part time workers who would rather work full time, the big improvement last month still leaves the number higher than it had ever been before the current small depression.

So I'm not suggesting that we should now suddenly stop worrying about the unemployed and start worrying about inflation.  The Fed should not suddenly switch to tightening the money supply, and we should not suddenly adopt a vast austerity policy.  Unemployment is still our top issue, and will be for some time.  In fact, I want to support Jared Bernsteins closing assertion in his comments on this yesterday:

"You know what, America?  This monthly jobs report may be a one-off disappointment or it could signal that the job market is doing worse than we thought.  Either way, there’s too many un- and underemployed people out there. 

And guess what else there is out there?  There’s too many crumbling public schools, too many bad roads, too many water systems, airports, rail lines, and you name it in need of repair.  There are too many states and towns cutting back on vital services, laying off teachers, cops, firefighters.  Too many homeowners underwater on their mortgages.

So let’s marry a problem with a solution here, take advantage of historically low interest rates—a market signal that this is precisely the time to make these investments—and take out some serious insurance against the possibility that the March report is flashing red."

A large public investment in repairing and upgrading our infrastructure, a large increase in the number of public jobs, would help us get to where we need to be.

And I'll add another graph.  This one is from the Josh Bivens at the Economic Policy Institute:

This chart shows the change in public sector employment since the start of the last four recessions (I know it says the last four recoveries, but each of the lines starts at the starting point of the corresponding recession---the lines have been shifted so that the official beginning of the recovery for each recession lies on the vertical dotted line).   Notice that in the recovery from the 1981 recession, under Ronald Reagan, public employment grew at a rapid pace.  In all three of the last three recessions, in fact, public employment growth was a big part of the push toward recovery.  But this time, largely because of cuts in state and local spending, we get that red line---public employment has declined, and overall public spending has been a substantial drag on this recovery.

We're still in this thing, and we need policy to reflect that fact.

But it's still good news that the number of people employed part time who want to be employed full time has declined so substantially.   We need to take what comfort we can in these small things.

Friday, April 6, 2012

Jobs report

Ok.  Doing an econ blog I have to comment on the new unemployment numbers, so that if my read of them is true I can brag endlessly about it, and if it is not other people can make fun of me.  Fortunately, no one reads this blog right now, so the odds are in my favor.

The unemployment numbers came out today.  Tomorrow's headlines will all be dismal; job growth was way smaller than expected, with 120K new jobs instead of the expected 205K.  So my first comment is: don't panic.  The report is not as great as we wanted, but it's not horrible either.  You can go here for a really good report, in depth from Tim Duy if you want to---in fact you can do that anytime new official data comes out.   He's a good first read on all of that.

But one number kind of jumped out at me, and it was good.

I keep saying things like "several years ago I panicked at things I saw" etc. etc...well, one of the things I saw, even before the crazy run-up of excess reserves at the Fed, was this: 

I took this from Tim Duy's blog today.   It's a chart of people who are employed part-time "for economic reasons"---meaning because they want to work full time but can't find a full time job.  These people are counted as employed in the unemployment data.  No, I don't look this number up every month.  Someone on a blog I was reading in 2008 mentioned that it was weirdly high, and so I looked it up out of curiosity.  That was about halfway up that steep climb toward the end.  Take a quick peek back along that blue line.  It goes to 1980 or so, but you can see there are no climbs as steep or as high as that anywhere.   I followed this statistic back as far as there were numbers.  As long as this statistic has been kept, there has been nothing like the huge leap in 2007-2008.  When I looked at that, I knew we were in very scary territory.

But last month that number fell by 447,000.  That's the last part of the blue line, the down part.  It's coming down fast.  And this doesn't show up in the overall employment numbers.  This stat means that the number of part time jobs fell by that amount, and the number of full time jobs grew by that amount.  And that's good.

Now, here's the usual disclaimer: it's just one month, these numbers are pretty crude first-cut estimates and will be revised as new data is available, and anyway one month isn't a trend, only a trend is a trend.  But my take on this months crude first cut is: it's not as good as we wanted, but not all bad either.

Thursday, April 5, 2012

Ok. Time for a history of the fork.

Not tonight---it's late.  But it's time for a break in the long journey toward an understanding of how magical creatures keep the money supply under control.

But I'm interested in the progress of the fork across Europe.  If you ask the average citizen of the average Creative Anachronism festival they will tell you that it wasn't invented until recently.

But Romans used forks.  Here's an image from this site of a 4th century Roman multitool---isn't that a fork on the other end of the spoon?

Forks have been found in ancient Chinese archeological digs.  Pitchforks were used everywhere.  Even large kitchen forks were common.  So it's clearly not true that the fork had not been "invented".  It was everywhere.

Here's an excerpt from this Wikipedia entry: "use of the table fork in Western Europe was facilitated by two Byzantine imperial princesses who married into the Western aristocracy: the Empress Theophanu, wife of Emperor Otto II, in 972...most of Europe did not adopt use of the fork until the 18th century".  Seriously?  700 years?  Why?

Here's my theory.  Europeans didn't use the fork at the dinner table because they didn't want to.  They knew it was possible, but it separated them from the pleasure of feeling their food in their hands, which was part of the sensual pleasure of a meal.

Any other theories out there?

Thom liked the title of this blog, I assume because it scans in a sense.  It's easy to remember, and the syllables don't stumble over each other.  But in a comment Craig said: "I don't much care for the title. You aren't lacking enthusiasm and you aren't going from one subject to another in an unfocused, halfhearted way. " 

I'm not really satisfied with it either.  "Desultory" was a damned good description of my mood when I set it up, but I'm not always in that kind of mood.  So I think I should change it, and if I'm going to change it I should do it before it's too set in my brain.

"Moody Economist"?  Naaahh.  Besides, there's already an economics site called Moody's Analytics.   "Bipolar Eco......naaah.  Not even worth putting the closing quote mark on that one.

A lot of what I might write here will be reactions to things said in public that I disagree with---or, much more rarely, that I agree with enthusiastically---but I'm not sure "Reactionary Economics" is the right title either.

In fact I doubt that I will stick to economics as topics.  Sometimes I do think about other things.

So I'm thinking about other blog titles.  What are the facts?  I was trained as an economist, all the way through to the Ph.D. level, but I have never really worked as an economist.  These days I'm an engineering project manager.  Still, I think of myself as an economist in my spare time.  "Spare Time Economist"?  Nah.  "Spare Change Economist"?  Nahhhhh.  Not an academic, an ordinary person who has some economics training.  "Ordinary Economist"?  That'  Not horrible. 


Since I do all of this at night I could change it to "Ordinary Nocturnal Economist".  What do you think?

Any other suggestions?


Wednesday, April 4, 2012

A bedtime story for Polly.

I promised to tell Polly a bedtime story, about magical creatures scampering about the economic landscape.

I’ll start with one she already knows. 

For a long time now Paul Krugman has been excoriating the Europeans and austerians everywhere because they have openly stated that their goal is to recover the confidence of---well, of someone.  Of international bankers to get loans to cover the deficits of Spain, Ireland, Greece, whoever.  Of businessmen to induce them to invest.  Of consumers to induce them to consume.  It’s not really clear whose confidence is supposed to blossom as a result of government budget austerity, but many of those Krugman calls Very Serious People (VSPs, in Krugmanese) have demanded reduced spending by government to create some kind of confidence somewhere, thus creating a sense of gladness about the future, and restoring fertility to the land.  Or whatever.  Krugman made fun of these Austerians, saying that they believe that if we only flay ourselves with the austerity whip the demons called the International Bond Vigilantes would leave us in peace, and a magical Confidence Fairy would come to save the world.  This was pure faith on their part, since no serious economic theory supports that view.  Start here and here and here to read a bit  of Krugman on this.  Oh, and definitely here

I love this stuff from Krugman, because I agree with everything he intends when he says it.  Austerity when the economy is booming might be a good idea, but austerity in the middle of a major slump is not just catastrophic, it's stupid.  And it's the official favorite stupidity of VSPs.  

But my problem is that I do have a kind of faith in something beyond the mathematics that moves the economic world.  I believe that there is a group of magical creatures out there, a special kind of creature that makes the economy come alive; when they arrive in large numbers, businesses pop into existence like mushrooms in the woods after a spring rain; when they arrive jobs are created, and wealth is created.  When they leave, jobs are lost, wealth is lost and businesses die.  Really.  I’m not making this up, and I’m not the only one who believes in these creatures.  Sober businessmen know about them and seek them out, and spend large amounts of money hoping to coax them from their hiding places. 

We call these creatures “customers”.

I don’t think consumers and businesses are that focused on government deficits, at least as a determinant of their daily activities.  Yes, everyone is worried about the burden of future debt.  We complain about it, and chatter about it, and we will all do our political bit to curb it.  We have our own opinions about how that curbing should best be done.  But I think households make consumption decisions based on their current situation, their current needs, and on their confidence that in their own future there will be customers for their labor (called “employers”).   In other words, they do not base their current consumption on some politician’s guess about a possible distant and abstract future government debt; they base their consumption on the current facts and expectations in their own life.  To the average household the government’s budget is a distant phantom controlled by incomprehensible and Byzantine political interactions among policy wonks. 

And businesses are not basing investment decisions right now on a possible government debt in 2050.  If businesses have confidence that customers will arrive in, say, six months or a year to buy their goods, they will be willing to invest today to achieve the ability to produce those goods. 

Even the dreaded Bond Vigilantes are more likely to respond to the prospect of a healthy economy in the near future than to slashed budgets, because if a nation’s economy is thriving it will be much more likely to be able to pay its debts.  And if a nation fails to invest in its own future, it will be less likely to be able to pay its debts when that future comes.

All of this sounds pretty mystical, and not the stuff of serious economic theory.  But let’s go to the master himself. Here’s what Keynes said in the General Theory of Employment, Interest and Money:

“ a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

So I don’t want to be too dismissive of confidence fairies, or of the animal spirits that confidence evokes in businessmen, consumers, and even, as difficult to imagine as this is, in bankers.  A lot of economic good can come from exuberance, whether rational or irrational; optimism about success can help create success, and the spiral of economic recovery can start with improving confidence that recovery is near.

What does all that have to do with yesterday’s talk about the Modern Monetary Theorists, and accounting identities, and the reserve ratio, and the money multiplier?  I’m not sure, really.  There’s something there, a connection, but I’ll have to put off that topic until tomorrow, or maybe the weekend.  It’s late.

Tuesday, April 3, 2012

This is the first post of my first blog.  I'm starting this because for the last few years I've been overloading the inboxes of everyone on my email address list with impenetrable economic blather.  It's really just therapy for me.   Long ago, in an earlier lifetime, I completed a graduate program in economics, and then got a job doing something entirely unrelated to that field.  My relationship with economics was largely this: I was irritated by ignorant but pontification-prone politicians.  I started describing myself as a "recovering economist".  But a few years ago I looked around and got a little panicky about what was happening, and what the responses were from the political world.  That's when I started exporting my panic to my friends through email.  Most of them, I'm sure, didn't want to get panic in their inboxes several times a week, but I kept sending it out anyway.

It's time to make these posts voluntary: the stark panic has subsided a bit.  From now on I can just send links to this site rather than massive emails that only clog the internet.  But I'm new to blogging, and it's late, so I'll start by simply posting the latest email I sent out.  Here it is:


I'm going to send this to a bunch of you, but it's the beginning of a of personal exploration about a spat that has erupted on line between some of my favorite people. 

Here's the stimulus: some people I like a lot have been bickering.  Paul Krugman has apparently been dissing the Modern Monetary Theorists a bit---although it's not totally clear from his blog post what he said that dissed them.   And a Canadian economist named Nick Rowe is even more vocal on his blog. 

It's a spat I knew was coming.  I didn't think it would come this soon, or on this topic, but it had to come.  Krugman is an old school IS-LM-er, at least as a first cut at a policy generator during recessions, and I am totally with him on that.  He's also an eminence, an sage in the world of economics.  The MMT-ers are brash youngsters by comparison.  Well, some of them are not really young as individuals, but as a force in the economic world they are still youthful and full of swaggering confidence.  Somewhere in their main vision, if I understand it at all, there is a theme that simply points out some basic undeniable accounting facts: every transaction is simply a transfer of funds within a sector or from one sector to another, and a modern national bank with its own currency has no theoretical limit on its ability to create money: it is the limitless source of all money in its own currency.   And I'm completely with them on that, at least as an accounting or legal fact.

My only possible problem with this theme within MMT is that I don't trust accounting as an economic theory.  The world is full of accounting "truths", and they are very rarely really economic truths.  Government deficits may crowd out investment, if demand for investment resources are already stretched, but I=S does NOT require that economic outcome as an "accounting identity"---seriously, don't even get me started on that.  Say's law may may be absolutely true as an accounting vision, but it is not a binding economic equilibrium equation.  And so on.  So I'm always suspicious of economic theories that grow out of an accounting truth.  

But that's not the argument  that has emerged between Krugman, Rowe and the some denizens of the world of finance, possibly including the MMT folks, although it's not clear to me what the real argument is with the last group---must be buried in the comments to Krugman's posts.  No, this argument is about the limits on the growth of the money supply.  And here I'm not sure Krugman is right---since he is Krugman and I am not I'm not really sure he's wrong either, but I guess that I haven't fully grocked his view. 

So here's where I lose everyone on the email list who isn't already asleep. 

The standard economic view in a world of fractional reserve banking is that the Federal Reserve Bank can create money at it's merest whim, and that the money it creates is expanded by the banking system as a whole through the "Money Multiplier".  Any individual bank is limited to lending or purchasing by its own deposits or assets, that is, it can only lend what it has, but the banking system as a whole helps the Fed to create money.  It works like this: the Fed creates some amount of money, say $1000, by adding that amount to the Federal Reserve account of a member bank (not for free: it purchases some asset, usually a Treasury Note, that is owned by that bank).  When the Fed does this it can just create the money out of thin air.  The bank that receives the money can't do that, but it can  lend some of that money out---not all of it, but some of it.  A fraction must be reserved ("fractional reserve") in the Fed to preserve the soundness of the bank, and of the whole banking system.  The person who borrows that money puts it into his own bank account, possibly at another bank, but that new deposit is also new "money", since it is a deposit that did not exist before.  And the new bank can then lend out some of that new deposit (but must reserve a portion of its new deposits at the Fed).  And so on.  The net result is that the total money created by the Fed's initial action is far greater than the initial $1000: it is the Money Multiplier times the initial amount, and the pure theory in the textbooks would tell you that the Money Multiplier is 1/RR, where RR is the required reserve set by the Fed.

The problem comes in when RR approaches zero.  In that case, we have a problem.  As RR approaches zero, the multiplier approaches infinity.  And in many countries the reserve ratio is zero---and in the United States the reserve ratio is effectively above zero only for household deposits.  Check it out here.  That means that in theory we need a new theory for what is it that constrains the infinite explosion of the money supply.  Krugman offers one, but I don't completely buy it yet.  I think I have a different one, but it involves magical creatures, so I have to develop it a bit before I expose it to sunlight. 

Let me know if you have read this far and want to read a few economic fairy stories as I continue this puzzle.