Logic and Reason ain't what they used to be.....

Recently I have come to some disturbing realizations. First, we are reaching a point of complete political paralysis. This article by Ezra Klein shows how screwed we are:

The president sold himself as the great post-partisan hope, the leader who could bring comity and peacefulness to a town riven by partisanship and rancor. When McConnell refuses to come to bipartisan agreements with Obama, he damages Obama’s brand. More than anyone else, McConnell has been responsible for his failure, and key in demonstrating how little any one leader can do to change the tone in Washington.

There’s supposed to be a curb on this sort of behavior: If you don’t participate in the legislative process, you don’t get anything out of the process. Here’s McConnell’s most important insight: That’s wrong. Withholding minority-party votes forces the majority party to hand its most moderate members — and the most moderate members of the other party — an effective veto, which drags the legislation substantively to the center, and in the current situation, to the right.

Health-care reform was more conservative than it would have been if more Republicans had been willing to support it. The stimulus was smaller than it would have been if conservative senators had been willing to back the whole in return for concessions on the parts. It turns out that a partisan political strategy results in more bipartisan policy. The opposition can have its cake and eat it, too. That doesn’t leave much reason for it to be bipartisan, of course. But for a minority party that wants to defeat a president who sold himself as a unifier, that’s a plus.

What you are left with is an opposition that has no incentive to ever compromise. Think about that. Possessing a majority in 2/3rds of the government means you can not govern. The public has so little interest/knowledge in policy that this is an effective strategy.

The majority is so desperate to accomplish anything, they will accede to the demands of the minority, just to look as if they are moving forward. So you get bad policy. I do not want to mince words here. The main republican goal is to defeat Obama. If they must blow up the economy to accomplish that. The so be it. They have told us so themselves. Crying hypocrisy is useless, call them out for what they are doing.

Secondly, bad economic argument is all the rage. Bad ideas get traction because the media is compliment and people are stupid. No one likes taxes, so Republicans have the ability to just lie about basic economics. Two graphs that illustrate our problems:





Revenues are simply a part of the equation. With out them, you have no equation. You can not have deficits and you can not have surpluses. It is just juvenile to assert otherwise. The President absolutely needs to hold Republicans to the fire on the debt-limit. It needs to be draped around their neck like a gigantic scarlet letter of mendaciousness and stupidity. But the President is so wrapped up in his brand that we will all suffer on the alter of false comity. And when the policies he capitulates on don't work or out right make things worse, he will be blamed. As well he should, because it is his own hubris which made it happen. One person does not change Washington. You have to have willing partners. He does not. It is time to accept that.

That he won't is what keeps me up at night.

-Cheers

Austerity is the new black

Watching Fareed Zakaria this morning and he had an interesting panel Eliot Spitzer, Chrystia Freedland, Ann Coulter, and Andrew Roberts.

They were talking about the Republican presidential field as well as a discussion of Keynes vs Hayek. What I found interesting is, that when you have austerity advocates, they never explain the mechanism by which austerity works. Do not get me wrong there is a time and place for cuts in spending and to be more thrifty in general, however, when you are in the midst of the worst recession since the Great Depression and pushing up against the zero lower bound. You need to explain how removing money from the economy will encourage growth. I have not heard that explanation given. Generally it is cloaked in talk of "confidence", and not the standard language of supply and demand. So I am highly suspect of it as an explanation.

That being said, Paul Krugman does a spectacular job of illustrating what the problem is with the austerity movement during a recession:

Self-defeating Austerity

There’s a quite good case to be made that austerity in the face of a depressed economy is, literally, a false economy — that it actually makes long-run budget problems worse.

People like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer — but the heck with it, I’m going to lay it out.

So here’s the outline. Suppose you slash spending equal to 1 percent of GDP. That looks like a budget saving, right? But if you do it in the face of an economy up against the zero bound, so that the Fed can’t offset the demand effects with lower rates, it’s going to shrink the economy. Let me use a multiplier of 1.4; you can adjust the numbers as you wish.

Now, a weaker economy means less revenue. Assume that every dollar up or down in GDP means $0.25 in revenue, which is conservative. Then the fiscal austerity reduces revenue by 0.35 percent of GDP; the true saving is only 0.65 percent.

Now, the government has to borrow those funds; let’s say the real interest rate is 3 percent (it’s actually much lower now). Then the long run impact of the austerity on the fiscal position is to reduce real interest payments by 0.0195 percent of GDP.

But wait: what if there are long-run negative effects of a deeper slump on the economy? The WSJ piece showed one example: workers driven permanently out of the labor force. There’s also the negative effect of a depressed economy on business investment. There’s the waste of talent because young people have their lifetime careers derailed. And so on. And here’s the thing: if the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity.

How big do these negative effects have to be to turn austerity into a net negative for the budget? Not very big. In my example, the real interest payments saved by a 1 percent of GDP austerity move are less than .02 percent of GDP; if the marginal tax effect of GDP is 0.25, that means that a reduction of future GDP by .08 percent is enough to swamp the alleged fiscal benefits. It’s not at all hard to imagine that happening.

In short, there’s a very good case to be made that austerity now isn’t just a bad idea because of its impact on the economy and the unemployed; it may well fail even at the task of helping the budget balance.

It’s important to realize that I’m not saying that government spending always pays for itself, and that saving money is always counterproductive. These kinds of effects are specific to a liquidity trap situation. But that’s the situation we’re in.

I have not seen a counter to this other then, "Austerity will increase confidence!". We have a demand problem. Until that is addressed confidence is the least of our worries.

-Cheers

The Resilence of Zombie Lies.....

The 10th anniversary of the Bush tax cuts was early this week, and it is safe to say that they were pretty much the mistake economists said they would be.

Annie Lowry does a great job of summing up just how spectacular they were at not accomplishing anything they were predicted:

In 2001, the Bush administration inherited a few years' worth of budget surpluses, so it decided to cut income tax rates, double the child-care credit, and sharply reduce the levies on investment income. The economy then slowed, even entering a brief recession. As a form of stimulus, the administration doubled down, expanding and hastening the 2001 changes. Bush promised that the tax cuts would do a whole lot more than put money in people's pockets—which, in fact, they did. He said they would "starve the beast," forcing Congress to reduce the size and scope of government. He promised they would increase the prosperity of all Americans. He also vowed: "Tax relief will create new jobs. Tax relief will generate new wealth. And tax relief will open new opportunities."

.....What about the president's claims? Take his pledge that the cuts would spur job growth. To be fair, we'll ignore employment changes during 2008, the year the Great Recession seized the economy. During the 2001 to 2007 business cycle, America's economy enjoyed 52 straight months of job growth. But it was sluggish—in fact, the slowest rate of jobs growth on record since World War II, and just one-fifth the pace of the 1990s.

Then there's wealth. Put simply, the aughts were a decade of income stagnation: The tax cuts failed to bolster most taxpayers' earnings, even before the recession hit. Median real wages actually dropped from 2003 to 2007. Household income from business-cycle peak to business-cycle peak declined for the first time since tracking started in 1967. As documented by my colleague Timothy Noah in his series "The United States of Inequality," this did not hold true for the nation's billionaires and millionaires. Garden-variety high-wage earners saw their income go up. And incomes for the top 1 percent skyrocketed. For some people, obviously, the cuts "generated new wealth," in the president's phrase. But overall, inequality got worse.

Interestingly enough....this is virtually the same exact logic that Gov. Tim Pawlenty is using.
Whatever the problem, tax cuts are the solution. Economic boom? Tax cuts! Economic Recession? Tax cuts!!!! Global warming? Well that doesn't exist...but if it did...TAX CUTS!!!!!

Not make light of the subject, but honestly there is a time an a place for cutting taxes. This just isn't it, especially when you are going to run around screaming about the debt.

-Cheers

Gone Fishing....

A bit of a long break from blogging recently. Contracted some virulent virus that sidelined me for a few weeks. But everything seems to be on the mend, so back to complaining!

First off a couple posts on the state of the economy:

• Paul Krugman on the mis focus of our economic discussion
• Jared Bernstein on "Shoulda vs Coulda" in politics
• Krugman again, on how it is looking more like 1937

I am going to avoid the "Weiner-gate" and "Palin's ride with Paul Revere". The truth is I just don't care. The unemployment rate has jumped back up and all the commentariat can talk about is debt. We have human capital being squandered and the only thing Republican's want to talk about (and by extension the media), is how to shrink government.

I would honestly like, just once, for someone to ask the leading Republican officials/contenders how austerity will create jobs or growth in the economy. And if I hear one word about confidence, I will hit them with a fish.

-Cheers