Random Tired Comments

 A long exhausting day, so not much posting tonight.  But I want to post a link to this, which gives some data supporting the fact that we as a country, looking at all levels of government, have not by any means been stimulating the economy in a Keynesian fashion; in fact it is pretty breathtaking how contractionary our overall spending policies have been. 

I also want to point to this and this, largely because I'm  a fan of the Noahpinion blog, but also because I noticed a kind of intellectual dislocation between these two posts.  In the first he talks about economics without math, and even without models, economics as a kind of storytelling art.  In this view of economics, we all choose which story to believe (ie, balancing our budgets are good and create long term prosperity, or the free market price mechanism allocates all resources to their best use).   He examines the claim that the math doesn't add that much new information, and has been spectacularly unsuccessful in turning economics into a testable science---or at least that it hasn't made it more testable than the stories without the math.   For example, one story is that price inflation is a direct result of increasing the supply of money; in fact there are people who simply use those two interchangeably, and claim that inflation is defined as an increase in the supply of money.  But those people claimed 4 years ago, when the Fed started pumping money into the economy as a furious pace, that we would experience hyperinflation within a short time.  That's the directional result their story told.  We have not experienced hyperinflation, or even much of any inflation since then, which seems to provide some evidence that their story is wrong.  What additional evidence would we have had if we had worked from math models, whose parameters could be manipulated to yield any of a wide range of outcomes?

He comes out more or less defending the modeling-and-math process, on the grounds that even if we haven't yet provided real laboratory level proof that one macro model is better than another by using math, the mathematical precision at least provides a template that might someday provide that kind of proof.  His words:

“In other words, the basic, fundamental problem with macro, as things stand, is that it's not scientific. Making it less formalized, or less mathematical, doesn't get around that problem. And it seems pretty likely to me that if macro ever does come up with a way to tell if models are right, it's going to require that those models be of the formal mathematical type.”

So he goes for the math version rather than the plain story version.  But in the second post, he tells a story with no math, the story that private equity (ie, leveraged buy-out) firms increase efficiency in the firms they conquer, and as a result in the whole society in which they exist, and he shows a lot of circumstantial data that, to him, supports the story.   I doubt the security of the support he feels, and when I’m more rested I’ll try to respond to him.  But it’s interesting that he is using the story approach, instead of the math-and-model approach, to make this particular argument.

Bush/Obama/Generic Spending Binges

 
Once again Ezra Klein has cut through the poke-and-response political positioning between the parties, and written the obvious truth about the “Obama spending binge”, which does and does not exist.  And he has correctly pointed out that deciding whether it exists or not is a premeditated act of pugilistic political fantasy, not an effort to find any truth.   Everyone who is talking about this on either side should now make their way to the exit of the conversation, shuffling their feet and mumbling to themselves in embarrassment.  They won’t, but they should.  

Here’s the issue: Obama inherited the 2009 budget, which was passed in 2008, under Bush but by a Congress controlled by the Democrats.  And since the 2009 fiscal year, federal spending has actually declined slightly in real terms: under Obama, but in the last two years lashed to lower spending by a Tea-Party House and a Senate largely controlled by filibuster.  So who gets the credit, or blame, for 2009, which was largely executed by Obama but passed under Bush?   Here’s Klein’s response to that:

“I’d point out that this entire conversation is nonsense. So far, we haven’t mentioned the only fact that really matters, which is that the economy began to collapse in late-2008, and continued to crater through much of 2009. Or, as Donald Marron, director of the Tax Policy Center, puts it, ‘the real issue is that 2009 is an anomaly driven by crisis.’”

Yes.  And we have been driven by crisis ever since, too; the recession officially ended June of 2009, but the recovery is nothing like complete.  We are still grinding through hard times.  

There is a real debate to have on this topic: not how high the deficit has been, or how much spending has taken place, but how much should have taken place, and how much should take place in the future.  I’ve been arguing for a long time that spending was high in 2009 but should have been much higher, then and since.  And it should still be higher.  We should be borrowing money at near-zero interest rates, or taxing the wealthy, to spend money restoring and extending our infrastructure; this would not only alleviate unemployment (and reduce our unemployment-insurance payments), but would be a great investment for the country’s future.  We should be doing this on a massive scale.  That’s my view, and there are many respected economists who agree.  There are also many respected economists who strongly disagree.  It’s a debate worth having.

There’s a debate to have on who created the recession, too; I don’t really think that either Bush or Obama should be blamed for it.  Obama certainly should not be blamed for the initial collapse, since it began more than a year before he took office, and shouldn’t (in my opinion) be blamed for the length of the recession either, since he’s been fighting tooth and nail with an obstructionist Republican-dominated Congress to find a path out.  But Bush shouldn’t really be blamed either, or at least not alone.  What did he do that created it?  The tax cuts did not create the boom that Bush promised, but they also did not create this recession.  In my opinion it was created at least in part by decades of undersaving by the public, which was depending on rising housing prices to create the wealth on which they would retire.   When those housing prices collapsed the self-perceived wealth and security of those who had depended on them collapsed too.   And it was created in part by decades of increasingly lax regulation of banks, including the repeal of Glass-Steagall by a Republican Congress but under, and signed by, Democratic President Bill Clinton.  There are respected economists who agree on both of those, particularly the latter, and there are other respected economists who disagree. It’s a debate worth having.

But we can’t have that debate publicly, because this poking, dancing, posturing, sound-bite nonsense is crowding out any possible clarity about this.  Neither side is willing to discuss the real issues.

Here’s Klein’s conclusion:

“Properly understood, the fact that inflation-adjusted spending has fallen since fiscal year 2009 is the result of Republican obstruction in Congress. That Democrats are now crowing about these numbers -- the DNC is e-mailing them around -- and that Republicans are now viciously disputing them is an embarrassment to both sides. You could as easily imagine Democrats lamenting these numbers as evidence of our failed policies and Republicans celebrating them as evidence of their congressional successes.

But Republicans don’t want to admit that they bear substantial responsibility for the economic policy of the last few years. If they did, then it would be hard to argue that the economy’s performance in 2010 and 2011 is all Obama’s fault. And the Obama administration doesn’t want to clearly say that we should have been spending more in recent years, even if that’s what they believe, and what they proposed, because it polls poorly. And so here we are.”

Yep. Here we are, and here we will be for the duration of the campaign, and probably after that forever.

Ben E. King, Bertrand Russel, Keynes and the classical German austerians

 

Dreams are odd.  I woke up this with the dimmest recollection of a vision of a dingy roadside bar at night with a single lamp, a closed door and something a little frightening outside; inside there was an old jukebox dropping a 45 onto the turntable, and from the jukebox came a crackly recording of Ben E. King singing “Stand By Me”.  Ok, it’s a great song.  But why?  Something else was there underneath.  There had to be.  My dreams in the last few years have generally been a lot darker than that.  What are the words to that song?  The song is upbeat, uplifting…well, wait.  Skies are crumbling in that song.  Aren’t they?  Yeah.  And mountains are being washed to the sea.  So there is some darkness.   And the theme in the background was a bit of Bertrand Russel that Craig (my brother in law) had once sent to me.

It took me hours of puzzling to unravel it, to get back to where that all came from.  It was the title of this post backwards.  You don’t believe me?  I’ll go through it.

First the austerians: Guido Westerwelle, the German Foreign Minister, wrote an op-ed column in the Washington Post yesterday.  I read through the whole thing, but the truth is that my heart wasn’t really in it after I got past the paragraphs saying that the solution to the depressions created by austerity was more austerity, long, patient, enduring austerity until morale improves.  He’s sympathetic with the poor unemployed youth of Spain, but…well, here are his words:

“The real causes of the economic crisis are the massive debts incurred over many years and the lack of competitiveness in certain countries. The consistent, long-term continuation of budget consolidation is an indispensable precondition for recovery. The Group of Eight leaders subscribed to this approach last weekend when they committed to “sustainable fiscal consolidation policies.” That is why the European Union’s fiscal compact — the agreement to keep deficits in Europe permanently under control — must not be renegotiated now…

The countries caught in crisis have already decided to make important reforms. We have great respect for the difficulties faced by many in those nations. But given how considerably some countries’ economies have shrunk and the alarmingly high unemployment rates among youth, the reforms that have been launched are the only chance for getting back on track to sustainable growth. Patience is needed: It will be a while until the reforms take effect. But the experience in Germany, Poland and the Baltic states indicates that they will succeed.”

Patience is needed…yes.  Long, hard patience, I thought.  And it’s true; in the long run, the long long run, all will be well again, as I’ve said before in this blog.  In the course of a long recession debts are reduced by bankruptcies, by economizing on household investments of all kinds from washing machines to college educations, and once those household obligations have been eliminated over the terrible years required to do that, the members of the households are free to work at much lower wages.  Banks fail because they bet on prosperity and got depression instead; businesses fail because there is no demand for their product.   But in the end when the deflation has completed its destruction the “ocean is flat again”.   And then, it's true, new businesses will grow, and new banks will be established.  Nothing lasts forever, good or bad.

The “ocean is flat”---that’s Keynes, the next link in the chain.   Westerwelle is telling us that in the long run it will work out.  But one of Keynes’s most famous quotes was this: “The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

In the long run, I thought, global warming will turn the planet into a wasteland, but you needn’t worry about it: when, through hunger, war and desease, the human population of the earth has been reduced enough so that the earth can heal itself, the tiny remaining human economy will have plenty of room to grow for a while.  Of course in the longer run the earth will boil away as the exploding sun expands past Earth’s orbit and devours us all. In the longer run the universe will become a thin molecular mist and then, yes, then all will be peaceful again.  From Bertrand Russell (next link in the title’s backward chain):

“That Man is the product of causes which had no prevision of the end they were achieving; that his origin, his growth, his hopes and fears, his loves and his beliefs, are but the outcome of accidental collocations of atoms; that no fire, no heroism, no intensity of thought and feeling, can preserve an individual life beyond the grave; that all the labours of the ages, all the devotion, all the inspiration, all the noonday brightness of human genius, are destined to extinction in the vast death of the solar system, and that the whole temple of Man's achievement must inevitably be buried beneath the debris of a universe in ruins--all these things, if not quite beyond dispute, are yet so nearly certain, that no philosophy which rejects them can hope to stand. Only within the scaffolding of these truths, only on the firm foundation of unyielding despair, can the soul's habitation henceforth be safely built.”

That, I thought, is what Westerwelle is telling us.  Only on the foundation of unyielding despair can Europe’s economic redemption be built.

Well, on the foundation of Spanish despair, and Portuguese despair, and Greek despair.  I worry about unemployment in this country, I worry about my own children, but in Spain unemployment among the young is 50%.  A whole generation of Spanish young people are falling behind in every part of life, and the statistics I’ve heard say that most young people who start life in a recession, whether here or in Spain or in Portugal or Greece, will never regain the time or the income they are losing now.  Westerwelle has “great respect for the difficulties faced by many in those nations”---at a distance.  Unemployment in Germany is down near 7%.  Germany’s doing fine.

But what about his argument that Germany’s experience in the last decade is proof that austerity works? The view promoted by Westerwelle, and by conservatives here, is that these countries were fiscally profligate, or that they had massively generous social service budgets that had to be “reformed”---by which they mean cut.  Westerwelle’s column, cited above, claims that “the real causes of the economic crisis are the massive debts incurred over many years”.

But that’s nothing like true.  Germany’s public social spending was about as big as Italy’s in 2007, before the current problems, and was far higher than Spain’s, Portugal’s, or Greece’s.  And while Germany did run a smaller deficit than Italy and much smaller than Greece in the decade before the crisis, over those same years Portugal ran a smaller deficit than Germany as a percent of its GDP, and Spain, on average over those years, had a budget surplus.  

It should be clear by now that I’m skeptical of that view of how Germany turned around.  I’ll make this brief, since this is a long post already.  Here’s my guess, and it matches the guesses of many others---I don’t doubt that I came to it by reading those others, but it makes sense.  Early in the lifetime of the Euro capital flowed south, into countries like Spain, Portugal and Italy.  Prices rose in those countries compared to the prices in Germany, and as a result German goods looked cheaper by comparison.  But, you would ask, wouldn’t low prices mean that German exports would grow, and their payment balances would be strongly in their favor, strongly stimulative to the German economy?  Well, yes.  And that’s just what happened.  And exactly the opposite happened in Greece, Italy, Portugal and Spain (sometimes called the GIPS).  Paul Krugman has had several blog posts about this, like this one, which has a great graph that shows exactly this phenomenon.  Here’s the graph from Krugman’s blog:

My own view of what has happened in the last decade is that prices rose in the GIPS, which induced a large current account surplus in Germany, boosting their economy.  Now that the reverse must take place---rising prices in Germany to boost the economies of the GIPS---Germany will simply not allow it.  Inflation, even modest levels of inflation, is not acceptable in Germany, in their view.  But that is exactly what must happen to solve this problem without breaking up the Euro.  Germany’s prices must rise or Spain’s must fall, and that is a much, much harder process to endure.  Still, Germans would much rather watch Greece and Portugal struggle, watch investments in the GIPS dwindle and businesses collapse, watch the young in Spain lose all the opportunities for growth that should take place in their early years, than permit even modest inflation at home.

And that brings us to the last link in the title, the link to Ben E. King.  It’s not really fair to Mr. King, or to his meaning when he sang the words, but groggy connections made in dreams are not always fair.

I have a vision of Guido Westerwelle and Angela Merkel and the leaders of the European Central Bank standing together, steadfast against all critics, calling to each other: stand by me, stand by me!  They call.  If the sky in Spain should crumble and fall, and their mountains should wash to the sea, I won’t  cry, they tell each other;  I won’t cry, I won't cry, no I won’t shed a tear, just as long as you stand by me.

A comment on Pelosi's million-dollar-a-year middle class.

 
A quick word on Nancy Pelosi’s recent letter to John Boehner on the subject of the Bush tax cuts.  In it she suggested that Boehner and the Republicans should agree to allow those cuts to expire for the wealthy and continue them for the less-than-wealthy, which is the proposal they have rejected in the past.  But she sweetened the deal that Obama has been proposing by suggesting that the definition of wealthy could be raised to include only those whose annual income is over $1 million. 

Jared Bernstein, in his blog,  offered a big endorsement of the basic idea of extending them for the middle class and lower and ending them for the rich, but objected to the change in the dividing line.  In other words, he endorsed the straight Obama position on this.  Bernstein said:

“Congress should vote now to extend the Bush tax cuts on the middle class but not those on upper income households.  There is no political constituency against this extension—it is not contested ground.”

But about the move from $250K to $1 million:

“That is a very big, very bad deal.  It’s also a weird bargaining strategy, but I’ll leave that to the game theorists.  Fiscally, it loses something like 40% of the revenue according to the (indispensable) Citizens for Tax Justice—CTJ also points out that about half the benefits of this higher threshold accrue to—wait for it—millionaires, who would, under this plan, pay the lower Bush rates on their earnings from $250K-1mil.

But it also redefines “middle class” in this debate as going up to $1 million.  There is less than one-half of one-percent of American households with incomes above that threshold.”

Some guy named “Stuart” posted a response in Bernstein’s blog,  and since he probably can’t say it any better here than he did there, here’s the quote:

“Just for the record, there is a constituency—possibly a constituency of one—which believes that Obama and Pelosi and every other Democrat should stop trying to extend the Bush tax cuts for anyone. This lonely constituency is for simply letting all of the Bush tax cuts expire. That’s not because we have no sympathy with the working class, or that we don’t understand the negative consequences for the economy; it’s that letting the tax cuts expire is the only option that is really possible, because it’s the only option that doesn’t require some cooperation from Republicans.

The Republicans will never, ever compromise on this, and they will never, ever accept an extension of only a portion of the sacred Bush tax cuts. The idea that somehow we can divide the Bush tax cuts into segments, no matter where you put the dividing line, is a dead issue, a non-starter, deceased, demised, passed on, expired and gone to meet its maker, it has joined the choir invisible. I think we need to admit that even though its plumage is still beautiful, it’s an ex-idea.

So Obama should explain to Boehner that he understands that no compromise is possible, and so the whole question of extending the Bush tax cuts has been taken off the table, that he will simply let them all expire on schedule—then he should propose an Obama tax cut that makes sense. That way the Republicans have nothing to bargain with, or for, or against. They either vote for a tax cut or they vote against it.”

Yeah.  Exactly. 

Comment on Krugman on Dimon and Romney (and....um....well, whatever.)

First, I apologize for being absent for so long; these last weeks have been hectic and tense.

I have a couple of saved up comments though.

A few days ago Paul Krugman wrote an op-ed in the New York Times about the JPMorganChase event. For those who have lived in a cave for the last week, or were shipwrecked or adrift at sea, the bank lost $2 billion by gambling on hard-to-comprehend derivatives recently, and may be on the way to losing even more---all because of exactly the kind of risky behavior that created the financial cataclysm in 2008, and which Jamie Dimon, CEO of JPMorganChase, has been telling us could never happen again because of the exceptional internal risk mitigation strategies that modern banks have implemented. 

Early in the piece, Krugman cited this quote from President Romney---oh, dang.  That can't be right.  I mean Candidate Romney. Anyway, his response was: “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.”

Krugman takes him to task, explaining that there is risk involved, and some of that risk is guaranteed by taxpayers, so some of those that may lose in these transactions are not consulted in the decisions that created the loss.

All of that is true.  But I think the part about someone else winning what JP Morgan lost needs some additional commentary.  It's not just that the losses at a big bank are guaranteed by the taxpayers, because the risk involved is not only the risk that the invested money will be lost, or that the bet made by the bank will be a losing bet.  Romney is right that every bet has two sides, and every bet by JPMorgan is matched by an opposite bet by someone else.  When the bet is lost, if that is all that happens, then JPMorgan loses and someone else gains an equal amount, and the world as a whole is no worse off.  And the same thing can be said about the taxpayers money: yes, they lose it, but JP Morgan gets the money the taxpayers have lost, so it's a wash for the economy, according to Romney's logic.  And the taxpayers can complain, as implied in the Krugman article, that they weren't the ones who decided to take a risk---but that's not entirely true.  In fact it's not at all true.  They did decide to take those risks.  They, through their representatives in Congress, decided on a policy of lax bank regulation, which is a decision to run exactly the risks that JPMorgan, or Lehman's or AIG took.  They didn't buy the derivatives themselves, but they voted to allow JPMorgan to buy those derivatives with no or little oversight.  If they want to reduce their exposure to that risk, then they should vote for people who will implement strong oversight and strong bank regulation---otherwise, they should expect to take a loss when banker's risks go wrong.

Above I said that someone loses and someone else gains 'if that is all that happens'---but there's a bigger problem with Romney's remark: that is rarely all that happens.  Reaction to massive financial loss is rarely restricted to the person or institution that faced the loss; there are emotional, financial, and economic externalities to very large risks that lose spectacularly.   When the losses occurred in 2008, for example, they helped induce the biggest recession since the great depression.  And the taxpayers are the least of those hurt when financial chaos creates a recession.  When the economy falls off a cliff---even a small cliff, but certainly when it falls into a deep crevasse, as it has for the last few years--- there is a loss that is not made up by anyone else's gain: the decline into recession creates a gap between what the economy could produce, the potential GDP, and the actual recession GDP.  That gap is a dead loss for the country and for the world; it is production and investment that is lost forever.  All of those who become unemployed or underemployed lose enormously.  Those who must put off their life's ambitions, young people who limp financially for their early lives and never recover, or who must drop out of college because they can no longer afford it, lose enormously.  Older people who lose jobs, or lose pensions, lose enormously.  And no one gains.  There is no one on the other side of these risks that has bet the other way.

This is not a zero sum game, as Romney implies.  The sum is never really zero, and in the case of financial chaos the sum can be massively negative.

Next saved comment: recently we heard the name Gordon Gecko on this blog, and in our email chains.  The context in here was more a defense of capitalism as a system than a defense of Gordon Gecko and leveraged buy-outs, but Krugman's blog post on LBOs is very very worth reading.  It's here.

Activities pursued for the sake of self interest can have widely felt beneficial effects, as Adam Smith pointed out.   But greed---that's taking self interest to another level, and it's not at all clear that greed is always good, or even that greed is ever good.

Maybe we'll explore the distinction between self interest and greed in another post.