Playing chicken with bond market, White House rolls the dice

by Eric Shierman

The amount of taxes that need to be raised to balance our budget without touching entitlement spending is so enormous, Democrats prefer to talk about it rather than vote for it. 

In case you missed it due to all the overwhelming Supreme Court coverage of late, votes have now been cast for Bowles Simpson, Paul Ryan’s budget, and the president’s budget. While last year, the president’s budget was allowed to proceed in the senate to a 97-0 failure, the Democratic leadership will not allow any of these bills to come up for a vote this year. In contrast, the house Republican leadership has allowed all three to get a vote. Here’s the score. Only one member of Oregon’s congressional delegation voted for Bowles Simpson which was defeated 382-38, and for that yea vote I think Kurt Schrader deserves a lot of credit. The Ryan budget passed 228-191 in the house with Greg Walden casting the only Oregon vote for it. In true bi-partisan fashion, every member of Oregon’s congressional delegation voted against the president’s budget which was defeated 414-0.

A major theme emerging from the Democratic message machine tries to convey the image of a reasonable senate and a reasonable president getting blocked at every turn by obstructionist Republicans in the house, a message at stark variance with the fact that these same Democrats gave up budgeting more than two years ago. Today they snicker at the house Republicans’ earnest eagerness to actually stake out a position and take the tough vote.

Senate rules prevent the filibustering of a budget, yet its Democratic leadership has had no interest in passing its own that raises taxes rather than cuts spending. The president’s budget contained a handful of focus group approved tax increases that generated more symbolism than revenue. The amount of taxes that need to be raised to balance our budget without touching entitlement spending is so enormous, Democrats prefer to talk about it rather than vote for it. Only in a stump speech will it mean taxing only millionaires, but real bills require real numbers.

The Democrats’ strategy has been to not vote for anything. They even voted against the president’s budget proposal because a vote for it could cost them politically as a vote for fiscal irresponsibility. The CBO which has been very deferential to Obama scored his budget assuming 4% GDP growth and even under that rosy scenario, it still commits us to debt levels unthinkable even a year ago.


The only thing that would get the president and senate Democrats to stop campaigning for a moment and manage our finances a little was the need for an expansion of our debt limit last year. One interesting indication of how bad our fiscal position has eroded in just the last six months is the disturbing fact that the new limit of $16.4 trillion dollars that Obama insisted upon so that he would not have to face another debt ceiling vote before his reelection might not be high enough to get us there. This past February, the US unexpectedly ran its single largest monthly deficit ever and Obama’s ability to postpone another debt ceiling fight until after the election now depends on how much revenue is raised in April. Wow, the walls of leverage are really closing in on us!

Beyond the politics, the policy fig leaf remains this notion that budgeting means austerity, and we cannot impose austerity when the economy is in a recession. While it is the case that our economic growth is hardly strong, it is important to remember the recession ended in June 2009. At what point between now and a run on the dollar do you suppose politicians will find it convenient to live within our means? Easy money has flowed into the assumptions of the Obama administration like free booze flowing into the cup of an alcoholic.

While thoroughly discredited among real economists, Keynes remains the patron saint of patronage spending politicians as that video so humorously portrays. When the hangover hits us the answer is always “serve me another drink” of spending, praying “Lord give me the gift of sobriety, but not yet.”

It’s hard to find a real Keynesian outside of political circles these days. Last fall I pointed out how a renaissance in macroeconomic methodology has empirically disproven the existence of the Keynesian spending multiplier. There has also recently been another groundbreaking paper published using World Bank data. The Romans did not need social scientific phrenology to justify their bread and circuses, but apparently our pols do.

Some people think of Paul Krugman as a Keynesian, he’s not. Krugman is an on message political pundit. If you have never heard of him, I’m talking about that guy who walks around New York wearing a sandwich sign. On the front it reads “I won the Nobel Prize in economics for proving the free trade position” while on the back it reads “I was a microeconomist that never published serious work on the macroeconomy so listen to what I have to say about matters beyond my expertise and I will tell you what you want to hear.” He also has a nice writing gig for the New York Times.

During the Bush administration, when Democrats wanted to hear that deficits were bad and threatened our future prosperity, he very dramatically warned his readers that long-term rates were about to start rising uncontrollably. Writing in 2003 he predicted:

But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point. ”Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

Thus Krugman concluded:

my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

Well no kidding! But now with a Democrat in the White House, Krugman’s loyal readers are looking for a different conclusion. With our fiscal deficit twice the percentage of GDP now than it was then, Krugman tells anyone who still takes him seriously that an infinite demand exists for U.S. Treasury debt.

That Pollyannaish notion has been humbled by the most frightening metric I have seen so far this year. When the Fed released its Flow of Funds Report for 2011, it revealed an astonishing 61% of Treasuries sold were purchased by our very own central bank. Take a look at this disturbing trend.

treasury purchases

The smart money has stopped buying our debt, but don’t worry folks, the Reichsbank has everything under control!

The reason we must budget, as a nation, is that the failure to do so brings dire consequences. We have become so accustomed to the benefits of the seigniorage of our currency, but those benefits come with responsibilities. If we continue to abuse our privileged position in world finance by exporting inflation to the rest of the world, we are fools to ignore the reality that alternative options for the world’s investors are emerging all around us. The day they turn their back on us will be the day our financial house of cards will collapse with such fury it will do more damage to our domestic economy than the most unthinkable terrorist attack.

Indeed an American fiscal reckoning is our single greatest national security threat. While Obama enjoys the hawkish pleasures of rattling swords with Iran, not only is the probability of a nuclear armed Iran actually launching a Hiroshima grade atomic warhead at the continental United States vanishingly small compared to the near certainty of an eventual mass sell-off of Treasuries, its economic impact would be smaller in comparison.

The economic damage of an acute spike in interest rates would harm our economy more than most people realize. If the Federal Reserve had suddenly jacked interest rates up several whole points today, most people grasp that would be a bad thing, and yet that would only be short-term rates as the Fed merely sold T-Bills. A flash crash of 10 year Treasuries that knocked long-term rates up several hundred basis points in a matter of a few days or even a few hours on our presently fragile economy would end American prosperity as we have known it. These are not times to play games with the bond market. A White House that submits budgets that even its own party is not supposed to vote for is rolling the dice on America itself.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change, and also writes for The Oregonian’s My Oregon blog.


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  • valley person

    Can we now bury Bowels Simpson once and for all?

    Can we also bury the Ryan budget, except as a campaign tool for both sides? In any case, it comes nowhere close to balancing the budget.

    And can we bury whatever budget Obama creates, which will not pass the House because it will include tax increases on wealthy Americans?

    OK, great. Where does that leave us? In pretty good shape actually. If Congress does absolutely nothing but maintain current policy, we will reduce the deficit by far more than any of the above over the next 10 years. The deficit will be reduced to a manageable trickle of GDP because ALL the Bush tax cuts will expire, the Social Security tax cut will expire, the spending reductions already agreed upon will kick in (including on Defense), and the economy will grow. Eric and the bond mongers can go back to doing whatever it is they do with other people’s money. 

    Keynes, Eric has been proved right in this recession. Massive increases in dollars have resulted in zero inflation and zero interest rates. Nations that have tried growth through austerity are mired in recessions while the US, with massive deficit spending is experiencing growth. You can’t get more Keynes than that.

    • Several progressive friends of mine have been pining for the “do nothing solution” recently. It makes me think that in the social media world we live in, there is a blog post out there that shows the CBO’s baseline without breaking down all the ways current law actually gets scored. I wrote about this for the Oregonian a year or so ago in an article titled “Don’t just do something congress stand there!” I have thought about doing an updated version of it for the Catalyst. Let me give you a down payment on that now.

      The Bush tax cuts’ expiration gets the most attention in the imagination of progressives for obvious reasons, but that is not where the money on the baseline’s curve is coming from. A full implementation of the AMT raises more money. That is to say taking away the middle classes’ ability to make mortgage and charitable deductions raises more revenue, particularly in the out years where even 3% inflation doubles income in two decades, pushing folks into what are now wealthy brackets even if their wealth never increases. In the out years especially, the tax increases on lower income earners is substantially higher than merely returning our top rate to where it was twelve years ago. 

      My progressive friends really need to look at the fine print on that baseline projection, because it also assumes cuts to entitlement programs that are far more draconian than anything Paul Ryan and Ron Wyden are proposing. It assumes that there will be no “doc fix” ever again so our two government health programs will cut the price they pay for services more than 30% and never raise them ever again – cut cap and balance indeed!

      Since there is no mandate that forces medical providers to do business with Medicare and Medicaid patients, this would be the end of these programs which would be change I could believe in! Even after the doc fix has been implemented every year, I hear physicians bicker and moan about how much money they lose now. I always assume they are merely negotiating, calculating in terms of opportunity cost rather than accounting loss. The fact they see these patients at all, while more high end providers have no qualms turning them away tells me there are medical practices out there who scrap by on low margins just like many other sectors of the economy. If however prices were suddenly rolled back to where they were 15 years ago, these programs would come to an end. Maybe there would be a handful of charity hospitals that took in very long lines of very poor people with very low expectations of the quality of their care, but the capacity to handle a wave of retiring baby boomers would be permanently eliminated. 

      The titanic savings that would accrue from the complete elimination of Medicare and Medicaid would lead to substantial surpluses in out years, but the CBO’s baseline does not use any dynamic scoring to take into consideration the supply elasticity of medical services. For every person that is unable to find a doctor that will serve them, the savings are not 30% they are 100%, but the CBO inputs only 30%. Although the CBO’s methodology low balls the actual spending cuts that a permanent cut and cap of health benefits would mean, it is still the single biggest factor that puts the baseline into the black. 

      Then there is Social Security. When the program has floated its last Treasury bond from its trust fund, under current law it will be limited to paying out only what it takes in. The CBO assumes a sudden 40% cut in benefits, and you can see it on their curve. That might be a rosy assumption because even with the payroll tax cut expiring, there will be only on worker for every five retirees. A sudden 60% cut in benefits is not unthinkable – more change I can believe in. 

      The progressive echo chamber may not be aware of these details, but most bond traders are. If you take out these cuts in entitlements and the substantial tax increases on lower income earners, we have fat deficits as far as the eye can see. That is exactly what I meant when I said that the amount of taxes necessary to leave entitlement programs untouched is so substantial, Democrats are only willing to talk about a few small focus group tested changes that don’t come close to getting us to a balanced checkbook. A tax bill that would include the level of taxes needed to balance our budget would be more unpopular than the Ryan-Wyden plan. If however the president actually led like Bill Clinton countering with his own unpopular plan out of the middle would pop Bowles Simpson looking a lot like the 1990 and 1997 deals.

      Keynesian theory, which is dead in the academy but alive and kicking among politicians, was first killed by stagflation, which if the General Theory is true, is impossible, but like the bumble bee managed to fly and sting. The coup de grace emerged with the development of vector auto regression. The spending multiplier was never empirically verified; it was assumed. It was always assumed that during a recession, counter-cyclical fiscal policy made things better. The only evidence for this was to input an ASSUMED positive multiplier and then DEDUCE how worse things would have been without the spending. The great reduction to absurdity of his theory was present in Keynes’ day. He was asked if it mattered what the money was spent on to get a positive multiplier. His dead pan answer was not only “no” but he suggested that if people were paid to dig holes and bury money, and other people were told where it was and allowed to dig it up and keep it, that would generate a positive multiplier. We now have the means to calculate the spending multiplier and it is been repeatedly verified to be less than 1 throughout the 20th century. It is not only intuitive that spending on hurricanes, earthquakes, wars, and broken windows generates no net increase in economic activity, since 2007 it has been rigorously demonstrated by Ramey, Barro, and Romer. We’ll see how long it takes for this to become common knowledge. It has already been incorporated into the 2012 edition of Greg Mankiw’s Economics, the most assigned introductory textbook. 

      No inflation? Are you sure? With the substantial drop in economic activity, not having any deflation is a form of substantial inflation, since adjustments in prices are critical to the business cycle’s recovery. We are now in a situation where a weak economy with 8.3% unemployment has inflation accelerating closely toward the Fed’s 3% upward target. The reason we do not experience Weimar Republic like hyper inflation is that we have a fairly independent Federal Reserve that throws our economy into recession to fight inflation.

      We have been out of recession for three years now. The contraction in GDP in 2008 was slightly greater than in 81, 90, and 01, but not enough to account for the position we are in now so many years after the trough. Our big problem has not been the contraction, it has been the lack of growth on the other side. I have presented several anecdotes from Ron Suskind’s revealing book on the degree to which this president repeatedly ignored the advice of his own economic advisers, progressives all. Having squandered his chance to put in place pro-growth policies that if not Reaganesque could have been at least Clintonesque, he did other things. When he lost control of one chamber of congress, he has done nothing now but campaign for a new congress. Obama finds himself in a situation where the fed will begin raising rates once inflation breaches 3%. How we got in this position has nothing to do with the size or nature of that recession three years ago; it has more to do with administering a stimulus program with a multiplier of 0.9. Like bloodletting advice from a medieval doctor, doing more of it would not have helped. 

      When long term rates continued dropping every year after 2003, Krugman suggested that we are in a bond bubble. When Obama was elected, Krugman set aside that suggestion, and the 2009 congress, the president, and the progressive blogosphere have all indeed been acting like market participants in a bubble with their “this time is different” disregard of the risk that the market will turn the other way. Like folks who bought shares of in 1999 or an investment property in 2005, everything is fine until suddenly it isn’t. No one sees it coming until it’s obvious. Then they tell everyone they saw it all along. I would rather Obama get reelected than suffer with him if the bond market presents us an October surprise before he is ready to govern, but then if he is reelected he will have to deal with a fed that is fighting inflation moping up all that liquidity they gave him in his first term. He is really going to hurt the Democrats’ brand one way or the other. As far as Krugman goes, his brand was defined in 2002 when he kept pounding the table that the only way to recover from the tech bubble was to create a real estate bubble. His repeated suggestions that economies need costly calamities to grow, is merely self parity, reducing Keynes to absurdity. 

      • valley person

         “The Bush tax cuts’ expiration gets the most attention in the imagination
        of progressives for obvious reasons, but that is not where the money on
        the baseline’s curve is coming from.”

        Repeal of the tax cuts generates about 4 trillion over 10 years, or $400B a year. 

        “Since there is no mandate that forces medical providers to do business
        with Medicare and Medicaid patients, this would be the end of these
        programs which would be change I could believe in!”

        You don’t need a mandate when you spend 45 cents out of every health care dollar. Yes, some doctors, especially high priced surgeons, would spurn the lower paying customers. But  Most would not. No industry can walk away from 45% of market share. As an economist, you should know this. When Wallmart tells suppliers they have to meat certain targets, they either do so or someone else does.

        The “doc fix” is a slush fund for docs and hospitals that allows them to be very inefficient on delivering services.

        Now politically, its a different matter. Geezers vote, and if they think Congress is going to risk their access to any doctor, hospital or medical service they want, they will elect different members. And this is how it should be. If geezers want unlimited medical spending on themselves, they can press congress to keep the doc fix.

        “When there is Social Security. When the program has floated its last
        Treasury bond from its trust fund, under current law it will be limited
        to paying out only what it takes in.”

        In the year 2035, which is 13 years past the 10 year baseline I am talking about. Don’t mix apples and oranges.

        “That is exactly what I meant when I said that the amount of
        taxes necessary to leave entitlement programs untouched is so
        substantial… ”

        No democrat proposes leaving entitlement programs “untouched,” so what you have here is a straw man argument. Democrats, from Obama on down, have stated they are willing to trade some entitlement cuts for some tax raises on the upper income earners. Its the unwillingness of your side to even discuss this that has created the logjam in the first place.

        The Ryan plan, which every Republican has signed onto, also comes nowhere close to balancing anything, and to the extent it even reduces the future deficits it does so through smoke and mirrors cuts to unidentified tax loopholes.

        “Keynesian theory, which is dead in the academy but alive and kicking
        among politicians, was first killed by stagflation, which if the General
        Theory is true, is impossible, but like the bumble bee managed to fly
        and sting.”

        As it turns out, in this particular economic era, Keynes works. Countries that are doing heavy deficit spending are doing better than those that aren’t, and without any inflation.

        “No inflation? Are you sure? ”

        Statistically it is running below 2%. So yes, I am sure.

        “With the substantial drop in economic activity, not having any deflation is a form of substantial inflation..”

        Not having any deflation is a result of massive deficit spending and zero interest rates and quantitative easing. Keynesian policies prevented the deflation that would have taken hold had the government followed your advice. More Keyes, as Krugman is arguing for, would create a bit more inflation, and that would be a good thing if you care about the unemployment rate AND see the advantage of paying down a large public AND private debt with cheaper dollars. Its only bad if you are a lender holding long term notes.

        “When Obama was elected, Krugman set aside that suggestion,..”

        Well, why would anyone in their right mind not shift their thinking given the changed circumstances of 2008-09 versus those of 2003? A rapidly contracting economy is best met with rapid and massive public expenditures unless you have a pre 1930 view of economics that lets the whole economy find as low a bottom as it wants, and to hell with the orphans and widows.


      • valley person

         So the chart shows inflation wildly fluctuating between 1 and 3 percent. It seems to illustrate mine and Krugman’s point.

        • In a room full of progressives, if someone mentions the Bush tax cuts, it has been my observation that roughly 90% in that room think the speaker is referring to the reduction of the top marginal rate. Anyone who cites $400 billion in revenue in attribution to the expiration of the previous president’s tax cuts is referring to raising every bracket plus a full implementation of the AMT. If I remember correctly the CBO’s estimate was $330 billion in annual revenue for a total expiration. I do recall a private think tank coming up with $370 billion, so perhaps you are taking that number and rounding up. Either way, to raise that much revenue, you are doing a lot more than raise the top rate from 35% to 39%. You are raising the rate on a guy making 33k a year from a Bush rate of 15% that with a child and a mortgage pays an even lower effective rate, but not only will the rate of his bracket go up, AMT will impose a mandatory 28% regardless of deductions. There is much bait and switch going on here. There is a talking point that says “hey millionaires will have to pay a whole 39% if we let the Bush tax cuts expire!” which does not fully disclose that same bracket includes a Portland Public School teacher married to a Portland Public School principal whose combined earnings are $250k let alone the fact it includes doubling the tax burden of the lower middle class. Without this collateral damage, $400 billion is a pipe dream. 

          As I have said before, the CBO has been as deferential to this president as it was to Bush. This estimate extrapolates our current anemic growth rate only out to next year and then suddenly in 2014 we are roaring with 4% GDP growth! It continues to assume a 4% GDP growth for the rest of the decade. I don’t think you caught the full significance of that chart showing our rate of inflation. Some time between now and 2014, inflation will be above 3%. Indeed it looks like we will hit it by the end of this year. The Fed will prevent us from enjoying that rosy scenario. The summer of 2014 will be five years past the end of the previous recession, and it will be time for our regularly scheduled next downturn. We will be going into that next recession with what? 7% unemployment! 

          Our current annualized deficit is not $400 billion it is $1.3 trillion (9% of GDP). In the next decade, the baseline only brings us down to 2007 deficit levels if all their rosy assumptions were true. Take a look at the CBO’s baseline chart which I have attached below. Beyond that chart, the big budget explosion occurs from 2026-2050. Any deficit of any kind over the next decade is too much when we need to be running a surplus to pay down our existing debt in preparation for the last cohort of boomers to retire. 

          That is a good reason not to limit our focus on the next ten years. You seem to wrap yourself in a security blanket of a 1994 CBO estimate that Social Security will not become entirely dependent on the payroll tax until 2036. Those best case scenario analysts at the CBO also predicted in the same report that it would not go cash flow negative until 2017, but three years after the study was released it did just that (ten years early). So it is very rational to predict that when the CBO produces its new report in 2014, the new optimistic assumption will have to move forward at least ten years – and suddenly 2026 is right around the corner (three years after our current ten year projections). 

          Anyone who thinks that they have stumbled upon some hidden reality that current law eliminates all our fiscal problems needs to take a step back and ask themselves who would have doubted that much of our budgetary problems would go away if we could sustain 4% GDP growth for years and years to come while simultaneously cutting Medicare and Medicaid expenditures by 30% and capping them at 1997 levels with a 0% growth rate going forward? I would love for both of these  scenarios to come to fruition, but the Fed will block the former and progressives will block the latter. Anyone who thinks that a failure to enact the doc fix will have no material effect on access to care needs to crack open an introductory economic textbook and familiarize himself with the concept of the price elasticity of supply. 

          Anyone who thinks that Keynesian theory has been perfect for our “current economic era” needs to ask themselves how helpful it has been to put ourselves in a position to have 3% inflation with 8% unemployment. Every drop in the unemployment rate below 8% will present us with a higher accelerating inflation rate. Widows and orphans will be harmed more by the fool’s trade off these policies have given us. In exchange for preventing prices to contract proportionally with GDP in 2009, we have foregone the kind of restructuring that enables the next expansion. When we hit our next bust, people will be scratching their heads asking “What happened to the boom in between them?” Ramey, Barro, and Romer will have an answer. The real question will be whether or not the next Democratic president will heed it next time. 

          We have seen this movie before. Nixon brought us into the 70s announcing “we are all Keynesians now” he set in motion an acceleration of the inflation rate that the Fed was unwilling to fight until 1980. In between that time, Friedrich Hayek was able to do something that neither Krugman nor any other progressive economist has ever done – win the Nobel Prize in economics for his contribution to our knowledge of macroeconomics. My ideas don’t date back to the pre-30s, they date back to the moment we learned that Keynesian policies did more harm than good. The ability to empirically calculate the spending multiplier is only five years old. Before that its very existence depended on circular reasoning. 

          The only governments whose policies reflect my advice, have not had any problem to begin with such as Switzerland, Singapore, and Hong Kong. Western European countries that have spent themselves into a hole, have had austerity IMPOSED on them. Something many progressives friends of mine don’t know until I point it out to them, and most certainly would never learn it from reading Krugman’s column, is that the UK had a failed bond auction in March 2009. Countries that wait until things reach that point have a tougher road ahead than better managed polities. 

          And not all austerity is equal. There are better ways to get into the black. Just as Christina Romer’s research would have predicted, the negative effects of cutting government expenditures are minimal because its spending multiplier is at best 1, but she found raising taxes contracts GDP by a negative multiplier of several integers. 

          Krugman’s partisan inconsistency comes not from how he changed his mind during the recession; it’s how three years AFTER the recession he has taken up Dick Cheney’s 2003 mantra that deficits don’t matter. Take a good look at the slope of the acceleration rate of inflation in 2011. That does not confirm your point. If you have any doubts wait until the Fed is forced to become a net seller of Treasuries to raise rates. What Bernake giveth, Bernake takes away. If they bought 61% of our new issues last year, it would get ugly if that demand were simply taken off the table, but to reduce the money supply they have to SELL. It won’t be pretty. Now think about what happens to your baseline revenue expectations from current law if those years of assumed 4% GDP growth include a recession instead. Look at the CBO chart below, where best case scenario we simply return to where we were in 2007, but look at that chart and imagine another recession right in the middle of it. I suppose Krugman will then be calling for a big stimulus. 

          I am of course only talking about normal Fed operations. The biggest inflation fighter will eventually be the bond market itself. As you said inflation is “only bad if you are a lender holding long term notes.” That is not entirely true. Inflation is very bad for widows and orphans too. Things are also bad if you are a desperate borrower faced with higher interest rates when those lenders sell their long term notes and future lenders demand an inflation risk premium on future issues. Indeed that was the point of my article. 

          • valley person

             “Anyone who cites $400 billion in revenue in attribution to the
            expiration of the previous president’s tax cuts is referring to raising
            every bracket plus a full implementation of the AMT”

            You are correct. The $400B in annual additional revenue assumes all the Bush breaks, not just some.  If this is deemed too painful, then  negotiate a different distribution of cuts.

            “which does not fully disclose that same bracket includes a Portland
            Public School teacher married to a Portland Public School principal
            whose combined earnings are $250k”

            The top bracket only applies only on earnings ABOVE $250K. You of all people should know better.

            “let alone the fact it includes doubling the tax burden of the lower middle class.”

            Haven’t you and other conservatives been making the argument over the past several years that the lower middle class presently pays ZERO in income taxes? Doubling ZERO = ZERO, or did I get my math lessons wrong?

            Nevertheless your concern for the lower middle class is noted. I would keep their income tax at zero and make up the difference with a new tax bracket on earnings above say $1 million. Deal?

            “Some time between now and 2014, inflation will be above 3%.”

            Is that a prediction or the CBO model? If it comes true, then hooray. We need inflation to be above 3% in order to facilitate debt deleveraging.

            “The summer of 2014 will be five years past the end of the previous
            recession, and it will be time for our regularly scheduled next
            downturn. ”

            Downturns are not regularly scheduled. They happen if and when production exceeds demand for a period long enough that production has to be cut back. Given the length and depth of this particular recession, there is a large amount of pent up demand that could take a long time to satisfy. If we hit a “virtuous cycle” where increased demand results in more hiring AND higher pay, then that begets more demand and more production. At some point this will get out of balance and/or become inflationary, the Fed will damp down the money supply by raising interest rates, and we will have a hopefully mild downturn. But that point could as easily be a decade away as your 2 years, given where we are now.

            “Beyond that chart, the big budget explosion occurs from 2026-2050.”

            Projections beyond 10 years are not of much use. Too many variables. Second, no one is claiming that no changes should be made to the largest federal expenditure drivers. Obama has put long term cuts on the table multiple times, but only in exchange for movement on taxation.

            Let me give you our (liberal) perspective on the federal budget.

            The 2 biggest drivers of long term federal spending are old age pensions and health care. Conservatives screamed like bloody murder over the very modest proposals in Obamacare to reduce health care inflation over time. They also screamed over the cuts to Medicare Advantage. These actions demonstrated for all that conservatives don’t give a fig about the budget.

            They (you) use the budget deficit as a tool to get rid of government. “The budget” is a problem you don’t want to have solved. When it WAS solved, in 1996-2000 by a Democratic president AFTER raising taxes without a single Republican vote, the first thing a “conservative” president and Republican congress did was 2 giant tax cuts that re-created the budget deficit.

            t took us a while, but now we know your game and we are through playing it with you. Because of an aging population and all the necessary, not optional functions it performs, The federal government is going to remain at 20-25% of GDP for decades. Our perspective is that taxation should generate revenues in that range, and to the extent possible the burden of taxation should fall on those with the most ability to pay.  

            We aren’t going to go along with dismantling entire functions of government through gradual starvation so that you can keep cutting taxes for rich people. Its over dude.  If you want to solve the budget deficit, then start negotiating over both taxes and spending. If you want to sneak an Ayn Rand future onto Americans, forget it. You have been outed. 



          • That was a remarkably normative response to what have been more earnestly positive observations that the base line of current law will not only fail to make our debt problem go away or that it will constitute less pain than the Ryan/Wyden alternative. Let’s not forget what we were talking about: the too good to be true urban legend floating amongst my progressive friends that current law solves our deficit problem for us with little sacrifice for the 99% of lower income earners. 

            To your credit you seem to have abandoned the silly suggestion that cutting Medicare and Medicaid expenditures to 1997 prices and permanently capping them will have little material impact on those programs. Returning to Clinton era tax rates in exchange for starving that beast in such a radical way is a trade I would be willing to make. Since the greatest of magical thinking can at best get us only $400 billion a year from an expiration of our tax cuts, unless the doc fix expires as well, you don’t come anywhere near to moping up our annual red ink of $1.3 trillion. The revenue side of current law, despite its considerable pain, not only fails to generate enough receipts to move us beyond 2007 level deficits, as that CBO chart I provided you with demonstrates, it requires the unlikely scenario that suddenly in 2013 after these tax increases suddenly kick in, the economy will respond by roaring at 4% growth uninterrupted for the next nine years. I would love to see that happen, but it would be incompetent for any organization to plan on such best case scenarios. The CBO did the same stuff in the Bush years, that is why economists read its footnotes very carefully these days, because its independence has eroded. With 3% inflation along with 8% unemployment, no serious macroeconomist expects those rosy numbers to pan out. So if we were to do nothing, under current law we would incur all the disadvantages of higher tax rates, without adding anywhere near an additional $400 billion in annual revenue. 

            If you don’t think a PPS teacher married to a PPS principal are not in the top bracket, go to Cascade’s website, which has an Oregon government pay database and see for yourself. With a fully implemented AMT, it won’t matter how many munibonds they have bought or how much interest they pay on their mortgage. These reliable Democratic voters would never support the Republican alternative budget, but they would prefer Bowles Simpson over a full implementation of current law. They probably watch Charlie Rose and saw the hour long interview last week. If you missed it here is a link: 

            When the final phase of the Bush tax cuts kicked in it structured the tax code so that only 53% of Americans paid federal income taxes, with the top 1% paying 36%. The sudden broadening of the tax base would be in variance to Obama’s campaign promise not to raise taxes on the middle class. 

            There is one and only one way that the steep 2011-12 slope of accelerating inflation is going to be bent down: an economic downturn. The way in which you so eagerly hope for inflation, tells me that the only thing you know about Keynesian theory is that it provides talking points for more spending. Perhaps you do not know that the General Theory calls for austerity when unemployment is above the “natural rate” and stimulus when it is below. For a true Keynesian, the natural rate of unemployment is that which can sustain GDP growth without inflation. Coined the NAIRU (non accelerating inflation rate of unemployment) by Paul Samuelson, his bible-like textbook asserted that the US NAIRU was 6%. If he were alive today and saw those same inflation numbers he would tweet “OMG the NAIRU is 8.5!” 

            Paul Samuelson lived to see his life’s work set aside in favor of Milton Friedman and Anna Schwartz’s Monetary History of the United States which is the Monetarists’ equivalent of the General Theory. Monetarists now dominate the Academy. Since they dominate the politically independent  central banks of the world, including our own Federal Reserve, regardless of the unemployment situation, they will engage in monetary austerity to keep inflation below 3%. Fed policy is not an independent variable, the rate of inflation is. 

            Keynes was thrown out because he could not deliver growth without inflation. GDP if you will remember is P*Q. There is a point where all our GDP growth comes from P rather than Q. Look at our inflation numbers since the end of our recession three years ago, look at our GDP growth, and solve for Q. Not much left is there? 

            The notion that there was something so epic about our last recession, that it accounts for the stagflation we find ourselves in three years later is a pathetic excuse that Democratic operatives are forced to humiliate themselves by making, and progressive blissfully ignore real research from real macroeconomists clamoring instead to pundits that will tell them what they want to hear. Our contraction in 2009 was only slightly greater than 81, 90, and 01.  The degree to which we utterly lack growth three years after the trough has nothing to do with the size and scope of the recession. It has to do with the policy responses resembling the 70s rather than the last thirty years of both Democratic and Republican NeoLiberal policymaking. That our economy resembles the early 70s should be no surprise to anyone. This has certainly been no surprise to Christina Romer and Austan Goolsbee who behind closed doors tried to warn Obama but he did not heed their advice. There was not a Republican bone in their body, but they were at least serous economists that became depressed to watch the moment of America’s greatest need for sound policy squandered in favor of passing a decade list of ideologically craven projects like Obamacare and alternative energy. Peter Orszag, no conservative, resigned over Obamacare and the way he was forced to help rig it to appear budget neutral under CBO methodology (something the CBO no longer does, if you did not notice). 

            As you try to explain how recessions are caused and growth is achieved, it is very clear to me that you need to learn the difference between “demand” and “quantity demanded” this is an easy to learn concept that is far more than just a subtle distinction. Every student of economics must learn to move beyond vague political punditry and to acquire real tools of analysis. If you prevent prices from adjusting, you need to figure out how to increase quantity demanded. One of the central failures Keynesian theory is that it tries to shift the demand curve to the right, but cannot do so without pushing the price points out of equilibrium, thus lowering quantity demanded. 

            While it is the case that the longer the time-frame the more unreliable forecasts are, it is also the case that the more conservative the assumptions the more valuable the planning will be. So a ten year forecast of our fiscal position that assumes impossibly best case scenario economic growth is less helpful for planning purposes than a 50 year forecast with conservative assumptions particularly when current law gives Social Security a finite number of Treasuries it can sell. 

            So let’s then go back to your normative monologue of those last five paragraphs. A budget is not an optional tool valuable only to those who want to get rid of all government. We budget because scarcity is a physical reality. I detect in those five paragraphs a desire to be freed from the limits reality, as if you want to reside in that special world you claim Rupert lives in. Policy makers can raise taxes all they want, but there is an empirically demonstrable upper limit to how much revenue as a percentage of GDP they can raise. Here is link to a table that show how historically, though taxes have been much higher than they are today, the IRS has never been able to raise between 20-25% of GDP: I have also attached a graph that displays that same data set as a curve. Notice how that progressive bedtime story that all our budget problems were solved before the Bush tax cuts were implemented is challenged by the fact that revenue was dropping at a faster pace before they went into effect, and revenue stabilized quickly upon implementation. CBO projections in 1999 projected dot-com bubble economic growth rates ten years into the future predicting surpluses that no tax rate would have captured given the drop in economic growth that began well before Bush entered office on January 2001. Also notice how the Bush tax cuts took in no less a share of GDP than much higher rates in 1975. Only three years in our nation’s history have we been able to collect revenue even at the bottom of that 20%-25% spending range of yours, and the economy has not been able to sustain it – again even under decades of much higher tax rates than we pay today. 

            Your dream that the federal government can divert that large a portion of the private sector’s resources requires an alternate fantasy that permanent deficits of 5% of GDP are sustainable, but the other way scarcity creeps into your little world, is that there is not only an upward limit of how much revenue that can be taxed, there is also an upward limit of how much can be borrowed, which was the point of my article. Ken Rogoff has done yeoman’s work, exhaustively aggregating sovereign debt crises across the globe for the past couple centuries in his book “This Time is Different” finding that the upward limit to where an economy begins to sacrifice future prosperity for present consumption is 90% of GDP. Sometime before or after that point, but with no warning, credit markets will suddenly impose austerity on us whether we like it or not. The longer we wait to deal with it, the worse the choices will be.

          • valley person

             “the base line of current law will not only fail to make our debt problem
            go away or that it will constitute less pain than the Ryan/Wyden

            There is no “Ryan/Wyden alternative.” There is a Ryan proposed budget. It has real cuts and zero tax increases. Like I said.

            “Since the greatest of magical thinking can at best get us only $400 billion a year from an expiration of our tax cuts,”

            You left out the expiration of the SS tax cut, which is over $100 B a year. That too will expire. The totals I’ve seen are closer to $700B a year.

            Couple that with a decrease in spending as more people are working and fewer need help. The $1.3T current deficit comes down below $1T as employment recovers and the remaining war winds down.

            If you combine $500B in increased revenue with $500B in decreased spending you come to a $3-400B annual deficit. Not great, but quite manageable.

            “If you don’t think a PPS teacher married to a PPS principal are not in the top bracket, go to Cascade’s website,”

            Eric…dude…work with me here. You said that together they might make $250K per year. That puts maybe their last dollar earned in the top bracket ok? Their first $249999 is NOT in the top bracket.

            “These reliable Democratic voters would never support the Republican alternative budget, but they would prefer Bowles Simpson ”

            Your premise is that their preference on taxation is soley based on whether they save a few bucks or not. You assume their position as educators means nothing about how they feel about spending on things they care about. I think you assume way too much.

            “The sudden broadening of the tax base would be in variance to Obama’s campaign promise not to raise taxes on the middle class. ”

            Yes, it would. So what? Are we serious about the deficit or not? If not, then we can keep handing out candy with no charges.

            ” There is one and only one way that the steep 2011-12 slope of accelerating inflation is going to be bent down”

            This steep slope is what…1% to 2%? Please. That slope needs to be bent UP, not down. Otherwise we remain stuck trying to deleverage with high unemployment. That is not working for Ireland or Britain or Spain. Why would it work for us?  It is macro madness to choose austerity during a sluggish economy. There is zero empirical evidence that this has any chance of working.

            “Perhaps you do not know that the General Theory calls for austerity when
            unemployment is above the “natural rate” and stimulus when it is below.

            Yes, and unless you think the “natural rate” of unemployment is above 8%, you should be backing higher deficits right now, not lower ones.

            “For a true Keynesian, the natural rate of unemployment is that which can sustain GDP growth without inflation. ”

            And we are at 2% inflation. Are we supposed to shoot for zero? Hello permanent austerity. 

            “Monetarists now dominate the Academy.”

            Much less so than a few years ago. Once we got interest rates to zero and the economy kept declining, monetarism was left without an explanation, and more importantly, without a policy response.

            Wasn’t Bernanke a monetarist until he found it no longer worked? Wasn’t Hank Paulson? The last monetarists are in Britain and Grmany, and they are making a mutton pie out of their respective economies.

            “Keynes was thrown out because he could not deliver growth without inflation.”

            Keynes worked for 40 years. Monetarism worked for about 30. I’ve said before we need a new theory, not either of these two at this point. But until someone comes up with something truly new and worth trying, Keynes makes much more sense in the wake of a financial meltdown and deflationary pressure than does monetarism. If and when we hit inflation too high for comfort with no corresponding decrease in unemployment, then talk to me about Keynes not working. We are nowhere close to that point today.

            “Not much left is there? ”

            No, not much. But a lot more than Britain or Spain or Ireland, where Keynes has been ignored and “expansionary austerity” attempted and failed.

            We are growing, and unemployment is declining, slowly. It is slow because the private sector consumer had and still has too much debt, a loss of asset value, wages that are stuck, and fear of job loss. The consumer can’t buy our way out. Business can’t invest our way out. The government could spend our way out if we only let it. But we won’t because we fear deficits, fear inflation, and fear no one showing up at the bond sale one say.

            So we do just enough to limp along. Its frustrating as hell. And the more we limp the more you guys say the spending isn’t working and call for cutbacks. Which is like bleeding the patient.

            “that it accounts for the stagflation we find ourselves in three years later ..”

            There is no STAGFLATION. To have that we would have to actually have  some inflation. We don’t. You are fighting the last war general. Actually the war that was 3 wars ago, but never mind.

            “The degree to which we utterly lack growth three years after the trough…”

            Is due to our obsession with deficits and the bond market. The last 3 recessions were child’s play. The early 80s recession was entirely induced and could be grown out of simply by jerking the interest rate. Can’t do that this time. The early 90s recession was very mild and was solved the same way…lower interest rates. The tech bubble was more serious, and the cure did help set up the last crash. But there are not infinite policy arrows in the quiver.  

            “That our economy resembles the early 70s should be no surprise to anyone.”

            Its a big surprise to me. I don’t think it bears much of any resemblance to the 70s. Where is the inflation other than in your imagination?

            “as if you want to reside in that special world you claim Rupert lives in. ”

            Heavens no. And anyway he would never let me in.

            The real world does include budgeting. Math is helpful. If the private sector leaves a big pile of unused capital and labor lying around, and real people suffer as a consequence, the government, which is the only entity around that controls the supply of money that is the oxygen in the bloodstream,  can and should fill the gap by getting new money into circulation. That is Keynes, that is what Christie Roehmer and Krugman deduced, and she got about 1/2 of the mathematical gap past Obama and Congress. With that, we solved about 1/2 the problem. We got unemployment down from 10 to 8, but needed it down to 6. Your whole philosophy seems to be we would be better off at 12. Or 20 if you like Spain or Ireland.

            “though taxes have been much higher than they are today, the IRS has never been able to raise between 20-25% of GDP:”

            Then lucky us. We don’t need more than 25% to maintain all our current and projected federal obligations.

            And lets clarify something about the federal budget eric. About 50% of it is income transfers. The gov takes from well off people like you and me and gives a bit of our income to someone’s granny or some poor mom with 3 kids to feed. The government doesn’t spend that money. Granny and the mom and kids spend it.  It is not lost from the consumer economy. It simply buys basics for some at the expense of toys for others.

            Most of the rest of government is provision of services, from navigation to sewage treatment to managing parks and forests and, very importantly to conservatives, defending the nation. This money is also not lost to the economy. It is simply services we are compelled to pay for as opposed to those we choose to pay for.

            The government can take 90% of our income and hand back services and transfers, and the economy would function. The economic argument against too much government is that it is a less efficient service provider than the private sector. True in a lot of areas, not true in others. A moderate-liberal like myself sees value and necessity in most government services,but also supports efficiency and doing less than the maximum possible.

            Enough for now. Bed is calling.


          • valley person

             Tanned rested and ready.

            “Your dream that the federal government can divert that large a portion
            of the private sector’s resources requires an alternate fantasy that
            permanent deficits of 5% of GDP are sustainable”

            Its not  a “dream.” Its a recognition of reality. We have an aging population that is going to require more income and health care support. You and Pa Ryan can imagine this voting block will let you substantially shift the burden of their needs back onto their aging shoulders. They will give you a reality check at the polls.

            Ryan and the majority of Republicans do not want to reduce defense spending a single dollar. so you can check that one off.

            That leaves 16% of the entire budget, sans debt payments to work with. And that 16% includes all  the many critical but somewhat invisible services the Feds offer that the private sector can’t or won’t.

            Your dream that the federal government can be drowned in a bathtub is the alternate fantasy that Republicans cling to. Ain’t going to happen Eric. Nothing you can do changes our aging demographics, and you can’t sell the national parks to the highest bidder. You can nip around the edges. Being very creative and clever you could nip spending maybe to 20% of GDP 10 years from now. But I doubt it.

          • When you first suggested that we can put aside Bowles Simpson and any Democratic or Republican budget proposal, I still am left wondering if you were aware that current law imposes more austerity than any of those options. I also wonder if you were aware that the CBO’s baseline includes the assumption of economic growth for this decade that beats the 1990s with 9 out of the next ten years sustaining unmitigated growth of 4% year after year. To anyone looking at the numbers, it is remarkable that with such manna from heaven and Medicare and Medicaid permanently capped at 1997 spending levels our budget drops down merely to where it was in 2007. Would you not then agree, you should have included some disclaimer in your first post? Would you not agree with this statement: “In the improbable scenario that we have a booming economy for the next decade and can permanently cap Medicare and Medicaid by 30% of present expenditures we will then return to the same budget deficits that candidate Obama was campaigning against!”??

            You did admit the political improbability of the healthcare cuts. If they don’t happen, the budget picture gets even worse than it was in 2007. Any deviation from nine straight years of 4% GDP growth and the deficit remains unsustainably bloated. Another decade like the last, and we will no longer have the options we have now. 

            The past three quarters of GDP growth have been 1.6%, 1.5%, and 1.6% respectively. By what metrics, could anyone bank on a sudden explosion of 4% GDP growth as early as 2014 and then sustained for the next 9 years? That is the significance of the SLOPE of the inflation graph I presented you with. When I mentioned the slope, you responded that that current inflation is just one or two percent. That is of course not true; it is well over two percent, indeed February’s CPI figure was 2.87%, but even if it were one percent, it is the SLOPE that should concern you. In calculus it is called the derivative. At the same time our GDP growth was declining last year, the accelaration rate of inflation was off the charts. A inverse ralationship between those two trends are about the worse leading economic indicators there are. Go back to that chart and look at the sudden acceleration of inflation over the same three quarters of weaker growth than the preceding three quarters. With an acceleration rate that high, it is easy to forecast the level of inflation that 4% GDP growth would entail. The most optimistic model would put it well above 5%. Under current law the Fed is not going to allow the kind of economic growth the CBO’s baseline assumes if that level of growth creates more than 4% inflation. 

            That is the monetary austerity, but let’s not forget your concern about fiscal austerity. Current law involves a great deal of austerity. I suspect that the reason it seems attractive to you is that it would be none other than the greatest tax increase since 1943. In regards to people at the 33K – 50K income level, it will be the greatest sudden increase in tax burden in American history. You may think this is necessary for normative reasons, but surely you do not think it will have no trade off in economic growth.

            To put into perspective just how important this issue is, let’s just take into consideration the expiration of the payroll tax, what we might call the Obama tax cuts. While much smaller then the Bush Tax cuts, there has been much focus on them recently. To sell their renewal two months ago, White House beat House Republicans over the head with the prospect of contracting GDP growth by 0.4% which is more than chump change when current growth is only at 1.6%! Actually a headwind of 0.4% is still a big deal when growth is 4%. Remember the CBO, by methodology cannot dynamically score tax changes. It assumes GDP growth of 4% and all the wonderful revenue the repeal of the payroll tax would bring, but it cannot take into consideration the fact that just the repeal of the Obama tax cuts moves us down from 4% to 3.6% GDP growth, and this is just the payroll tax! – a fraction of the Bush tax cuts and AMT when $33k earners go from 15% to 28%! So again my friend, on what basis can we bank on the economy responding to these tax increases by jumping on a dime from less than 2% growth to more than doubling into a 4% roar unimpeded for the next decade?

            So again shouldn’t every claim you make of the wonders of lower spending due to a massive economic expansion and increased revenue include some kind of disclaimer that there is little evidence such a dream will come true? Indeed does a rigorous analysis not require a more honest disclaimer that 9 years of consistently 4% GDP growth is extremely unlikely? These are important questions because those nine years of 4% growth only bring us down to 2007 deficit levels, but 2% or even as much as 3% growth rates under current law saddles us with even more debt that it pushes us well over an accumulated debt to GDP ratio of 100% in a matter of just a few years.  

            Keynes has been rejected not because his theory stopped working after forty years. Keynes has been rejected because his theory was demonstrated not  to have ever worked. The first problem was that it was shown not to provide protection against inflation. Fiscal policy can never be politically independent so real congresses are happy to run deficits when unemployment is above the natural rate, but they never fight inflation when unemployment is below that natural rate. Real congresses are all about stimulus all the time. This was known in Keynes’ day and he suggested that if legislatures fail to impose endogenous shocks to the economy, we will eventually have an exogenous shock that will knock inflation down for them. We had more than a few exogenous shocks between 1932 and 1960, but the Philips curve kept rising steadily until the point where exogenous shocks had no effect or curtailing the acceleration rate of inflation. Last year the Nobel Prize was awarded to the guy who empirically verified a theory known as Rational Expectations using Chris Sim’s Vector Autoregression. (Chris Sims shared in the award) He was able to confirm what many critics of Keynes had long speculated, that there is a fundamental asymmetry between inflation and deflation. Deflation has a price point that serves as a floor but there is no upward limit to the momentum of increasing acceleration of the rate of inflation.

            I could not help but notice in your post you put Romer and Krugman in the same sentence: “That is what Christie Roehmer [sic] and Krugman deduced.” Don’t confuse the similarities between what Romer and Krugman were saying to sell the stimulus bill with what Romer was saying in the White House policy meetings. As Ron Suskind has shown, she touted her pre-White House research suggesting more stimulus through tax cuts, but her position internally was that the spending side was too large. She was to the stimulus bill what Colin Powell was to invading Iraq, her credibility was used and abused, and her time in government was cut short to salvage her reputation.

            Which leads us to the greatest of all blows to Keynes which came from Ramey, Barro, and Romer in their separate work which all began to trickle into the literature from 2007-2009 using a new application of vector autoregression that could actually measure the keynesian spending multiplier for the first time, finding it is less than one, meaning it contracts GDP, restraining growth. So Keynesian counter-cyclical policy actually prevents both price adjustment and growth at the same time – the worst of both worlds. This argument was asserted in Keynes’ day, but without empirical evidence for or against the size of the multiplier, both sides engaged in the circular reasoning of assuming a multiplier and deducing the effects of Keynesian policy. Steve Buckstein gave you a link to one of the latest papers on this topic. In my article above, I presented another link toward another project that compares World Bank data across countries. This is real evidence, from real macroeconomists, that have done something Krugman has never done: publish macroeconomic research in the leading peer reviewed journals. At what point are you going to alter your assertions to reflect the actual evidence?

            When I pointed out the obvious, that the academy is dominated by Monetarists, don’t take that as an endorsement. If you listen carefully to the lyrics of that rap video, it reflects the producer’s (Russ Roberts’) perspective that Monetarism is an extension of Keynes in that it seeks to do the impossible: manage something as complex and overdeturmined as the macroeconomy to produce optimal growth without inflation. While you hold out for the next fad that promises a snakeoil remedy for the business cycle, perhaps you should take into consideration the possibility that such things are impossible, or at least hold out a healthy skepticism of those who sell politically popular theories without evidence of the benefits and an indifference to the negative side effects. 

            It is the most disingenuous of straw man arguments to say that the UK, Ireland, and Spain are engaging in expansionary austerity. They are engaging in MANDATORY austerity. They can authorize all the spending they want but if no one will lend them the money they will have to limit themselves to the tax revenue they can actually raise. You are  ignoring the fact that the UK had a failed auction, because it is not a member of the Euro, and the PIIGS are all dependent on the monetarist dominated ECB’s willingness to buy their bonds, a willingness that has both strings and limits. Any concern you have about mitigating the effects of austerity when financial markets impose it, would naturally direct you to the evidence Christina Romer has accumulated that the effects of raising taxes are three times as contractionary as cutting spending. 

            Your inability to understand just how much a matter of predeturmined fate, Western Europe’s situation is reflects your faith based rejection of the realities of scarcity. Your response to the data that no matter how high our tax rates, we cannot generate more than 20% of GDP is “Lucky us. We don’t need more than 25 percent to maintain all our current and projected obligations.” How seriously could anyone take that response? First it is no relief to know we only need to spend 25% of GDP when with high tax rates or low tax rates the average revenue has always remained 18% saddling us with debt year upon year of an average deficit of 7% of GDP, pushing us closer to the 90% of outstanding debt to GDP tipping point that makes future austerity a fait accompli. You do not follow your responce with any evidence that we have the ability to ignore economic gravity.

            When you claim that government can take 90% of our income, you are forgetting that it cannot force us to work as hard for the remaining 10%. We have had rates like that, but they still produce the same average revenue of 18% of GDP. This is not a normative assertion, I provided you with both a chart and the data set. Did you even bother to look?

            Rather than show evidence that such revenue can be squeezed out of the private sector you support your argument with normative reasons why we should WANT to spend such money. No doubt such arguments prevailed in Portugal, Ireland, Italy, Greece, and Spain, but such arguments don’t sell bonds to investors when national debt passes 90% of GDP. 

          • valley person

             Eric, scroll to the bottom for a response to avoid the narrowing column problem.

  • Rupert in Springfield

    Now that is one amazing video. Considering the subject matter these guys do an amazing job.

    I think Krugman at this stage of the game is pretty much done as far as anyone other than the far left taking him as making a serious contribution. When you are so wacko as to claim faking an alien invasion would get us out of this mess in 18 months you have moved over to the kiddie table at dinner.

    Krugman is shameless in changing his convictions to suit the times. Only so many times one can do that before becoming a laughing stock. When Stim1 was judged by most to have failed, Krugman was right there to claim cradit for predicting its failure because it was too small. Mere months later, when Obama proposed Stim2, Krugman heartily endorsed it even though it was half the size of Stim1. How something half the size of the original would work, when Krugman said the original was too small in the first place didn’t seem to matter. What mattered to Krugman was Stim2 was proposed by a Democrat, not the economics.

    Personally I think Democrats have done an astounding job of somehow keeping the spotlight off their malfeasance. Do you think the average person knows Democrats have totally abandoned budgeting for years? I doubt it. Do you think most people know the presidents budgets have gone down in flames two times running? Not on your life. The success in camouflaging these failures is truly astonishing and surely one of the most poignant indictments of the press in recent times.

    • valley person

       Krugman rightly predicted Stim 1 was too small by using macro math. He supported stim 2 because that was the best available at the time, based on the political reality that the Republcians controlled the House. He has been right in every economic prediction he has made since the crisis began, including that increased deficits would have no impact on inflation or US bond rates. And that “expansionary austerity,” as practiced in britain and Europe and advocated by people like yourself, would result in GDP shrinkage and higher deficits. This has now been proven to be the case.

      That you refuse to take him seriously is your own failure, not his.  You are letting your ideology get in the way of your understanding of reality.

      • Rupert in Springfield

         Actually I think refusing to take someone seriously who proposes the government fake an alien invasion to get us through a recession indicates common sense on my part rather than sound economic theory on Krugmans part.

        Obviously you prefer the space alien theory but I can promise you, in that moment a lot of people decided Krugman was a hack.

        The fact that you think that Krugmans Stim1/Stim2 call represented economic and not partisan judgement on Krugmans part is really a little scary.

        In reality what this shows is the lefts famous inability to be critical of anyone who supports their positions. The total lack of introspection of the left so long as someone toes the party line. Its unreal.

        I mean seriously, what would be such a big deal about admitting Krugman is a hack? Is it so threatening to you to admit when someone on your side is wrong? Krugman was clearly wrong to call for Stim 2’s passage if he really believed what he said about Stim 1. His suggestion about faking a space alien invasion was patently idiotic.

        You can’t admit that? You defend it?

        Good lord, get real. The guys a hack who would ben his economic theories and endorsements according to the part affiliation of the subject. The fact that you cant see that is a little mind boggling.

        • valley person

           You are the one who shouldn’t be taken seriously because you took a joke by Krugman as an actual proposal. He was making a point that  it unfortunately takes a big existential threat to mobilize the body politic at a scale large enough to ramp spending up enough to mitigate a serious economic downturn. It was a metaphor, and you took it as reality.

          Krugman critiqued stim one on its size based on a macro economic model. He was proven right. He took on those like Eric, who drum up bond price fears due to deficit spending, and he has been right for 3 years running. He warned the Europeans and Brits against austerity, and he has been shown to be right on this as well. In fact, I can’t think of a single macro economic point Krugman has been wrong about for quite some time.

          You can blather on all you want, but you can’t tie that guy’s shoes on economics.

          So there is nothing form me to “admit.” Krugman was right on facts, and you still think he was wrong despite the facts. Its your issue dude. Your economic theory, to the extent you can call what you have a theory, is your problem, not his and not mine. Calling Nobel prize winners hacks doesn’t improve your theory a bit. But you are consistent. you do the same feeble attacking on global warming and you are just as wrong.

          As I’ve said many times Rupert, you are reality challenged. When reality doesn’t fit your limited theories you lash out against those who accept and articulate reality.

          • 3H

            Hmmmmm…  when Rupert attacks the theory of global warming… is he toeing the conservative line?

          • valley person

             Who knows? He inhabits Rupertville. Reality is only allowed inside if it plays by the house rules.

          • Rupert in Springfield

             House rules being the reasonable person test. No reasonable person would defend Krugman on the space aliens or Stim1/Stim2 nonsense.

          • valley person

             No reasonable person with a shred of sense would think Krugman was being serious about faking a space alien attack. So by your own house rules, you should be evicted.

          • Rupert in Springfield

            First of all, Global Warming is not theory, it is hypothesis.

            Second, no, I am not toeing the line, because I give logical reasons for the basis of my opinion.

            The admission by CRU that they were entirely wrong in their predictions being exhibit A in those reasons.

            Please, I have asked you endless times, when you have nothing to contribute to the actual discussion, but yet feel moved to take a stab at me, at least think it out a little.

            This one was another fail. Sorry.

          • 3H

            Oh!  So if a liberal happens to agree with various policy positions of the left, they must be toeing the line. 

            When you agree with a conservative position it’s because of a well thought out decision weighing all the facts.  

            LOL.  No fail Rupert.  I think I illustrated my point quite well with your help.  Thank you.


          • Ardbeg

            In Rupert land the world is flat and that whole ’round’ thing is just an unsubstantiated theory of liberals

          • Steve Buckstein

            Was Krugman also “joking” when he suggested that destruction of the twin towers on 9/11 would actually have some good economic consequences?

            Any excuse to argue for more government spending.


          • 3H

            LOL..  I didn’t see anything unreasonable in that article.  Perhaps you could explain your thinking in more detail.  

            By the way, just as he pointed out, any excuse to give more tax breaks to the wealthy.

          • Rupert in Springfield

             How are you on the reasonableness of faking a space alien invasion to get the economy going? Good idea?

          • 3H

            How are you on realizing when someone is deliberately exaggerating to make a point?  

            “Please, I have asked you endless times, when you have nothing to contribute to the actual discussion, but yet feel moved to take a stab at me, at least think it out a little.

            I’ll let you dwell on your failure.  

          • Ardbeg

            Stop with the whole ‘space alien’ thing. Your starting to sound like Romney and his beliefs…and he is the guy you’ll vote for.

          • Steve Buckstein

             If you didn’t see anything unreasonable in that article, then I won’t bother you with an explanation. Others might want to read it and draw their own conclusions.

          • 3H

            My apologies. I thought I saw a chance for discussion. I didn’t realize I was qexpected to simply take your word for it. Consider me fore-warned for future posts.

          • valley person

             From reading the article (thanks for including the link) no, he wasn’t joking at all. And economically, he was probably correct.

            There is a lot that is counterintuitive about macro economics. And you of all people should know that economics is an amoral field. Spending on cancer treatment is treated eaxctly the same as spending on a new car. Its all the same to GDP. 

          • Steve Buckstein

            Yes, economics may be an amoral field, but what money is spent on, and where that money comes from, may indeed change the effects on the GDP. 

            The kind of government “stimulus” spending Krugman argues for, for example, has been shown to actually result in negative GDP growth (a negative multiplier). Here’s a 64-page study laying out the argument and research findings:


            Macroeconomic Effects From Government Purchases and Taxes


          • Rupert in Springfield

             You know – it’s kind of uncanny. When someone on the left says something thats clearly idiotic, I have no idea why it is so hard for the left to just be honest.

            What is so hard about saying “Yeah, Krugman was wrong on that” or “Yeah, Krugman was kind of an idiot there”

            No – We hear this lame defense that it was a joke.

            This is why self identified liberals will always be in the minority. There is only so long an adult can hang with a crowd that can never admit a mistake.

            I mean lets get real here – Try and get someone on the left to admit Pelosi has crazy eyes.

            Seriously, its a great bar game – find the honest liberal – “Show of hands everyone, who thinks Pelosi has crazy eyes?”

            You wont get a single liberal to even admit that.

          • Rupert in Springfield

            Actually if you think back, plenty of those on the left suggested that the Japan tsunami would have great economic consequences. There would be lots of building products to sell them to re build.

            Of course when there was no such boost, then the tsunami became an additional reason for the sluggish economy.

            Whereas a short while before, the boom for building materials was suggested, now the reason why the economy sucked was because of interruption in supply chains due to the Tsunami.

            Kind of ridiculous, but hardly unpredictable. Anything to cover for the incompetence of this administration.

            I mean when Obama touts himself as a constitutional law professor and screws that up on thinking a commerce clause law being overturned by the Supremes would be astonishing, how can you expect any competence on something like economics?

            Frankly I’m not sure I would trust this guy to represent me for a parking ticket.

          • valley person

             Japan’s economic growth rate this year is double what it was before the tsunami.

          • Rupert in Springfield

             >You are the one who shouldn’t be taken seriously because you took a joke by Krugman as an actual proposal.

            Actually I was watching Krugman when he made the statement. It was not a joke and in no way would his countenance, demeanor or attitude, nor the response of others in the discussion in any way reflective of him making a joke.

            Look, its really very simple – if someone is on your side politically you are utterly incapable of saying they are wrong.

          • valley person

             Or maybe you just can’t get deadpan humor dude.

        • 3H

          In reality what this shows is the lefts famous inability to be critical of anyone who supports their positions. The total lack of introspection of the left so long as someone toes the party line. Its unreal.

          LOL.  Famous only in your mind, and the mind of others who simply cannot see, or acknowledge, the diversity of thought on the left.  Tell me, what is a lefty to do when liberal pundits criticize Obama for his assertion of presidential authority to kill American citizens in foreign lands without even a sham trial?  Or when liberals criticize Obama for reinstating military tribunals at Guantanamo?   In fact, you’d think  the fact that Krugman was criticizing Obama should have been a clue that your belief in the monolithic nature of liberal opinion and thought was incredibly flawed.   One lefty cannot necessarily be substituted for another.Let me put it this way… true of false: you don’t like it when people assume that because you’re a conservative, that you agree with all conservative positions?  If you were able to think beyond your preconceptions, and your obvious lack of knowledge about the left, you might have asked yourself, “if this was true for you, it may be true of liberals as well!”

          • Rupert in Springfield

            >LOL.  Famous only in your mind, and the mind of others who simply cannot
            see, or acknowledge, the diversity of thought on the left.

            Given that you cant even admit Krugman was wrong for his space aliens assertion or for Stim2 after condemning Stim1, I would say this comment is especially silly.

            Dean – I barely have to resent an argument. I can merely make a statement about the left, and your reaction will prove my contention.

            I mean how childish. Krugman was wrong. What is so hard about admitting that?

            Ill tell you what – the lefts famous lack of introspection. You are so fearful of ever admitting someone on your side was wrong. It’s amazing. Look at you twist and turn here. YOu are totally proving my point.


          • valley person

             Earth to Rupert. Krugman did not make a “space aliens assertion.” He made a space alien attack metaphor.

            His metaphor was not “wrong.” Your understanding of what he said is wrong. Deal.

          • Ardbeg

            Something I remember from my college days was young children and adolescents take everything literally.  Something about brain development and the inability to recognize facial expression, voice and context.  Sound familiar?

          • valley person

             Yes. Dear Rupert may actually be slightly autistic. Its not uncommon in engineers, and he says he is an engineer.

            But engineers are supposed to also be hyper logical. Rupert would have to logically believe that a Nobel prize winning economist on the faculty of Princeton University literally meant that the US should fake an invasion by space aliens in order to juice up government spending. The sheer illogic of that ought to have occurred to Rupert, but apparently not.

          • Ardbeg

            How funny, I forgot he was an engineer. I started out as an engineering major in college. I loved math and science and engineering ran in my family. It took about a year to realize no matter how much I enjoyed the content there was no way in hell I could work with these anal retentive fools for the next 30-40 years of my career, I actually changed my career path because of the people I was having to take classes with.

  • Bob Clark

    I am glad the Fed Reserve is the primary buyer of U.S debt of late rather than other nations and peoples.  So we are effectively printing money, altho I would advocate even less borrowing from other nations and peoples than the implied 39% from above.  If it’s the Fed Reserve holding U.S debt then the debt limit seems less a real issue, and a spike in interest rates seems less an extended risk.

    Unfortunately, other nations and peoples still hold a large chunk of U.S debt, and so the risk of an extended interest rate spike is very real.  Because of this it is important to make significant progress in closing the current huge (50% in magnitude) gap in federal spending over federal revenue.

    I would advocate continued easy monetary policy (with the Fed buying most all new U.S treasury issuances) until the U.S unemployment rate drops from the current 8.3% range down to around 7% (this is when labor inflation might become an increasing concern).  I would freeze nominal federal spending and freeze tax rates (maybe allow the capital gains and dividend rate to increase back to 20% from current 15% just to throw the Democrats a bone in their constant obession with class warfare).  I would roll back federal government regulation back to 1990 law until economic growth routinely exceeds 3 to 3.5% in GDP (I believe there is a negative correlation between economic growth and government regulatory burden).  Subsequent economic growth would put in place a path to closing the budget gap significantly I believe over the course of the next five to ten years.

    What I advocate is a measured returned to fiscal discipline rather than a jump to fiscal austerity either in the form of sharp nominal federal spending cuts or sharp increases in tax rates.  I would, of course, also change out the messenger from adversarial persona Obama to “We-can-do-it-all” Romney.  Romney isn’t Reagan but he’s the best available rah-rah agent.  I guess Obama’s “hope and change” wasn’t so shovel ready; and it seems to have turned out more for the ivory tower and crony wall street types than the mainstream types.

  • Investor

    Does the word clueless ring a bell here???

    • Oregon Engineer

       That is sooooo funny!!! Pretty much says it all.

  • valley person

    Eric, I disagree that current law has “more austerity” than the various competing proposals. What it has is a return to higher tax rates. It has very little in terms of reduced spending on important andpopular social programs.

    You appear to grossly misstate the CBO GDP growth projections. According to page 27 of their report, they are 1-2% per year but for years 2014-2017, when they are at 4%. It isn’t 4% for the entire 10 years. Not even close.

    On the probability of health care spending cuts. I think they are  probable IF we retain Obamacare and let it play out. That is current law by the way and is factored into the CBO baseline.

    What I think is improbable is the Ryan proposal to slowly bleed Medicare down by shifting the cost onto the geezers. Obmacare doesn’t do that. It takes on the providers, and it does so by empowering a board to evaluate results and paying for what works rather than what doesn’t.
    You are cherry picking on inflation, and then assuming a slope that does not exist. CBO has inflation projected at 1-3% using various measures for the entire 10 year duration. No slope.

    So it seems Eric, you are arguing not based on CBO, but based on what Eric thinks will happen, or what you think the CBO said but they didn’t say. Its hard to tell exactly.

    I agree all the tax cuts expiring at once would dampen GDP growth. I’m not for that. I’d rather see a phasing in. If I were negotiating with Republicans in DC, that would be my position. But I’d rather let the tax cuts go even quickly than accept the Ryan plan as a basis for negotiating. It is a poison pill, top to bottom.

    On Keynes, lets just agree to disagree.  We’ve had this back and forth before, and you clearly draw historical lessons that neither I, Krugman, or the economic textbooks I studied have drawn. When we can’t agree on what actually happened and why, its hard to agree on what may happen under various scenarios.  

    “At what point are you going to alter your assertions to reflect the actual evidence?”

    There is “actual evidence” in terms of the recent papers you have cited. Then there is the “actual evidence” of Today’s economy. Those nations and currency zones that have NOT followed Keynes recommendation to increase spending in a downturn are stagnant, notably Britain and the Euro zone. Those that FOLLOWED Keynes and spent are growing, notably Australia, the US, and China. Two of these 3 spent very freely and recovered very rapidly. The third, the US, spent about 1/2 what was modeled and has had a 1/2 recovery.

    Britain is NOT engaging in mandatory austerity. It is purely voluntary in their case. Not so for Ireland and Spain of course, because they have to sell bonds in a currency they can’t manage.

    You say economies can’t be “managed” optimally via monetary and fiscal policies. This is a strange claim really, given that this has been done pretty effectively over the past 70 years. We had one significant inflationary period that lasted about 5 years, and was nowhere near the hyper inflation we are always warned about by the gold bugs.   We had two major recessions, 1980-82 and the current one. We had only one major financial sector meltdown, and this was in fact arrested  fairly quickly, unlike the experience of the 30s where it rolled downhill for 3 straight years.

    The 70 year evidence is that central banks and elected governments HAVE managed our economic system pretty optimally, balancing inflation and employment and growth.  On a few occasions they let things slip, but fairly quickly set things right before it all fell apart. This was NOT the case pre New deal, when the economy would hit severe depressions every 20 years or so, each worse than the one before. And there was a lot of human suffering all during this period, even between depressions, due to the absence of any social safety net.

    A NEW theory would take better account of the increased internationalization of finance, growth, etc.  The existing theories, moneterism and Keynes, speak to a nation state managing its economic affairs. Unfortunately nation states, even the US, are so tied to international happenings that it limits the employment of the available tools. What we need is much better coordination of the world’s currencies, and this is very difficult for lots of reasons. But it is going to be the next great leap in economics.  

    “with high tax rates or low tax rates the average revenue has always
    remained 18% saddling us with debt year upon year of an average deficit
    of 7% of GDP, ”

    Nonsense Eric. There is nothing magical about 18%, the number has fluctuated and in fact under Reagan we were spending over 22% of GDP. He sold a myth that we could cut taxes and increase revenues in greater proportion. When that didn’t happen deficits got worse. He couldn’t cut the budget precisely because of the reasons stated, that income transfers to  geezers and paupers is necessary, as are all the other functions of the federal government save a few outliers. Clinton proved that the deficit can be tamed by raising taxes, modest spending restraints, and a period of reasonable GDP growth. THAT is the formula going forward, albeit at a slightly higher spending ratio due to our aging population.

    Ryan is trying to turn wine into water by pretending he can ignore the impact of the aging population by gradually reducing their individual take….and he and you confuse this with reducing “government spending”. It doesn’t reduce “government spending” at all. As I pointed out, income support is simply an income transfer from one private pocket to another private pocket. The government isn’t spending that money. It is a middle man that takes a very low admin overhead. If geezers have to pay more for their own health care, it makes them more poor and someone else more rich, but does ZERO for the economy as a whole and is meaningless with respect to government spending. This is why 18% or 22% is not the relevant number, but rather what one does with the 4% in question. If the government took that 4% and burned it up on dumb projects, then it is wasted. But if it takes that and hands it to someone to spend then it is not wasted, and the government didn’t even spend the money.

    I use 90% as a metaphor. It isn’t on the table. I agree, at a point “socialism” weighs too heavily on individual initiative. From a GDP standpoint, as I’ve pointed out before, a total government take of 50% of GDP, assuming this is used reasonably well (not squandered on mansions for despots) is quite sustainable and has proven to be sustainable for decades in the Nordic nations. I we prefer to tax working people less and allow more old people to live in poverty, that is our choice, but it won’t make us any better or richer in the aggregate. It just shifts who has how much around. And in Ryan’s budget, it makes the rich richer and a lot of people poorer.




    • Once again we seem to find ourselves in an aporia where you start responding in Baghdad Bob like fashion “Those are not US tanks over there; that is your imagination.” I believe I have reminded you three times that the UK had a failed bond auction in 2009. Was that their imagination? Those GDP growth assumptions of the CBO were not my imagination either. I wonder if you even read the report. Do you know what “real GDP means?” Go to page 29 where you will find the table of their assumptions. You will see that far from exaggerating their assumption, I was in fact rounding down.

      What I think you are doing now is playing an equivocation game with NOMINAL GDP vs REAL GDP. Politicians, reporters, and most folks in between when citing a GDP figure, always refer to nominal GDP perhaps because the numbers are so much bigger. To stay on the same page I too refer to GDP with nominal figures. If I am adjusting for inflation (solving for Q) I will explicitly refer to “real GDP.” Even with modest inflation, real GDP growth is significantly smaller than nominal GDP growth. Read that report carefully and compare both its nominal and real GDP assumptions to the 1990s and you will see that they are predicting that in the next decade our economic growth will far exceed that of the 1990s. The CBO did the same thing when forecasting the 2000s in 1999. The CBO’s forecasting record is notoriously poor for always over estimating economic growth. 

      Am I not strait with my readers? In comparison, how is one to take you seriously when you refer to current law and its permanent cap of Medicare and Medicaid expenditures by 30% with 0% increases thereafter as having “very little in reduced spending” on what I’m sure you consider “important and popular programs?” But the Ryan/Wyden plan amounts you say to slowly bleeding Medicare “by shifting the costs to geezers.” Given the reality of the price elasticity of supply, what could shift costs more than telling the same geezers, we are limiting their purchasing power to 1997 levels and will never increase it again no matter what price inflation health care services grow at. If they can’t find a doctor willing to provide services at the prices we are willing to pay too bad! Perhaps the AARP will be happy to sell them supplemental insurance to make up the gap. Like I said I’m down with that approach, but remember, unless it is actually done, our deficit does not even come down to 2007 levels. 

      As I wrote a few weeks back, Obamacare’s IPAB is not inherently a bad thing in its role of choosing what services Medicare and Medicaid will cover. This simply means they engage in an attempt to economize as a substitute for the ways individuals paying out of their own pocket would naturally have rationed their own care. One should not lose sight of the fact that their attempts to affect prices is limited to the demand curve. Most of IPAB’s role in pricing was gutted out of the final bill, but let’s imagine it was some kind of a powerful price fixing czar that remained un-captured by the healthcare industry. In that scenario, IPAB still could not draft corvee labor or force medical service providers to work for below market prices. 

      Cherry picking inflation? What? I am “assuming a slope that does not exist?” I was referring to our past three quarters, the quarters anyone would choose when calculating leading economic indicators. The inflation assumptions that the CBO uses for the next decade would only make sense with the acceleration rate we saw two years ago, not the one we see now. As Tom Sargent would have predicted our acceleration rate is compounding at a higher rate. Did you ever take calculus? Do you know what a derivative is? This means it is impossible to have the high growth rates the CBO assumes with the low inflation rates it also assumes. It would be nice, but institutions that succeed do not make plans based on impossibly rosy scenarios. If you read what I said carefully, my prediction is that the CBO’s low inflation assumption is likely to pan out, because the Fed will be fighting inflation over the same time period, but to do that, the Fed must take away that robust growth. When it does, people are going to be asking themselves where the boom was in between the two busts, and the bond market is going to ask, will they ever pay us back!

      You do acknowledge that the CBO’s GDP growth assumptions will not pan out under current law because the baseline’s fiscal austerity will be contractionary. So you say you would prefer the tax cuts were phased in. Think about what you are saying. Since the only way current law gets us down to “mere” 2007 deficit levels is to immediately raise all those taxes and have the kind of growth you admit won’t happen, you are thus conceding that current law will not make our fiscal problems go away.

      Regarding Keynes, agreeing to disagree does not mean disagreeing with ME, it means disagreeing with the best macroeconomists of our time. What economic textbook are you referring to? a four decade old edition of Paul Samuelson’s classic? The wave of current research is so overwhelming, it has got to be humiliating to cling to theories that were never empirically verified. Now that more effective methodologies have been developed to actually measure Keynes’ spending multiplier, you prefer to ignore the evidence? It makes me think of Aristotelian Thomists refusing to look into Galileo’s telescope.

      And then there is Krugman. This trade specialist won the Nobel for empirically proving the free trade position so far beyond any reasonable doubt that you would be hard pressed to find a tenured economist who opposes free trade in the academy today. You disregard the substance of Krugman’s life’s work, but you cling to his authority on his non-rigorous punditry on matters beyond his professional expertise? 

      Think for a moment about that you are calling “actual evidence  of today’s economy.” It is helpful you brought up three economies that are plagued by the very accelerating rate of inflation that killed Keynesian theory: Australia, China, and of course us. They all share the most frightening of all leading economic indicators – an inverse relationship between the acceleration of inflation and a declining growth rate, but the way in which Keynesian macroeconomic policy’s inflationary bias sacrifices future REAL GDP growth is but one problem. The other is what these economies are getting in exchange for curtailing their future growth. If in the short-run they were actually generating economic activity with multiplier greater than one, perhaps an argument could be made for an intertemporal trade-off. How does Dean Apostol know that the recovery in Australia, China, and the US would have been weaker if these governments had done absolutely nothing. Does he prefer the circular reasoning of assuming a multiplier of say 1.4 and then deducing what would have happened with out it to actually being able to measure the multiplier and know for sure? 

      It is a fact economies recovered on their own long before Keynes published his General Theory. In the 20th century, attempts at stimulus with multipliers of 0.9 were unhelpful but did not prevent economies from recovering all together. Without a way to measure the economic activity the stimulus created or destroyed, politicians prefer a world where they can lay claim to benefits they did not create. They have been laying claim to recoveries that emerged despite the headwinds they themselves created. Now that we can measure a 0.6 multiplier from 1930s macroeconomic policy, do you find yourself wishing we did not have these tools? Ought it be considered forbidden knowledge for the way it challenges your mythopoetic narrative of the past?

      It is then helpful to take into consideration economic life before the New Deal. The deep recessions every 20 years with contractions worse than the 1930s first and foremost remind us that there is no such thing as permanent deflation. Indeed there is no such thing as secular deflation. Every recession before the advent of Keynesian policy was followed by a sharp V-shaped recover and strong growth before the next recession. More importantly, the average rate of Real GDP growth of the 80 years before 1932 was substantially higher than the 80 years that have taken place since. We have had our recessions too. The difference in GDP contraction of 20th century’s recessions and 19th century’s recessions is not large enough to make up for the substantial loss of economic growth in between them. Of course people were poorer in the past before years of economic growth whatever its rate accumulated over time, but that only begs the question of how worse off we would be now had we slowed the average rate of economic growth earlier. Implementing Medicare in 1865 to deliver 19th century medicine would have been a devastating trade-off when one realizes it comes with post 1965 rates of economic growth. We are the beneficiaries of those high growth rates that punctuated those recessions in the gilded age. In the 20th century we have been imposing the opposite gifts on our decedents. 

      So I provided you with a link to a table of tax data showing the percentage of GDP the IRS has been able to collect and I attached a chart that graphically displays that same data set. It shows that the revenue raised has been remarkably the same in both times of high taxes rates and low tax rates. Your response is to call the data “nonsense!” Really? What is more nonsensical, to heed reality when making fiscal policy or to ignore it? It is a fact that the average is 18%. That number is not magical; it is merely consistent. It has fluctuated between a very narrow range. DID YOU EVEN LOOK AT THE CHART? Only three times in American history has it touched 20% but can never stay there for a sustained period even if rates are kept high for decades at a time. So the average is not 20%. The average is 18%. Any sustained spending above that average compounds our debt burden until the point it reaches Ken Rogoff’s 90% debt to GDP ratio. At that point we are eating our seed corn. 

      Regarding Reagan, look at that table and look at the chart. It is a fact that the 1981 tax cuts raise more revenue. It is also a fact that Reagan tax rates took in more revenue as a percentage of GDP than Harry Truman’s tax rates did. The problem with Reagan is he increased spending at a faster rate than he increased revenue. To get his 15 carrier Navy then at the very moment the Soviets were in imminent economic collapse, he agreed to the very automatic entitlement spending increases that are presenting our own existential challenges now. I’m no fan of Reagan. 

      I am a fan of Clinton, who did something no Republican has ever done: cut entitlement spending. We have been so accustomed to worrying about our three entitlement programs that we have forgotten that there once was a fourth one out there that was compounding at an ever faster clip: AFDC. Any astute observer of 90s politics would know this spending discipline had little to do with the Republican take over of congress compared to a Neoliberal takeover of economic policy in the White House. Clinton did not raise taxes any where near a return to the high marginal rate levels that preceded Reagan, but he raised more revenue as a percentage of GDP than any other president in American history. If you look at that table you will see his best revenue year was still only 20.6% of GDP. That high water mark could only be sustained one year and tax revenues then began suddenly dropping long before the Bush tax rates went into effect. Like Icarus trying to fly to the sun, 20% of GDP is that point of revenue collection that seems to melt the economic wings. 

      I am trying not to laugh at your attempt to draw an economic conclusion from a semantic construct. Are you trying to say that the spending multiplier of transfer payments is higher than when the government spends on a project with a low rate of return? When comparing a scenario where the government takes money from an earner to finance a grant for some boondoggle of a project, you do see how that could be problematic to economic growth, but if the same government takes money from an earner to give it to someone else who does nothing in return you see no waste in that at all. Perhaps it is important to remember that the people who get paid from a boondoggle spend the money too, in exchange for that government grant they have provided society with a product or service of some kind whose benefits were smaller than the project’s costs on society. People on the receiving end of transfer payments are no more likely to spend their money than the folks at a government contractor, but they offer no product or service in return. They are in essence a boondoggle too with an even lower rate of return. But this is like Presocratics trying to do physics. We moderns pursue empirical evidence. Ramey, Barro, and Romer have discovered the evidence yet you ignore their work. 

      Heeding their work (indeed heeding reality) will make us richer in the aggregate. Just as the lives of the lowest quartile of income earners improved far more in the 80 years that preceded 1932 than the 80 years that followed, the decisions we make now have enormous consequences. The choices we face now are easier to make than the ones we will face when the bond bubble bursts.

      • valley person

         The “failed” British bond sale. They did not sell every single 40 year bond on offer at one auction, so from that you conclude they had no choice but to go full into austerity, shrink the very economy that can pay new and past bonds, raise unemployment, lower tax intake, and end up with even more debt? Seems like a case of overreaction to me.

        You can argue against the CBO projections all you like. Neither you nor I are more qualified than they are, and in comparing apples to apples, they use the same modeling tools for every proposal on the table; baseline, Presidents budget, Ryans budget. If we don’t buy the CBO projections then we are arguing out of our posteriors as far as I’m concerned.

        Drop the doc fix from base projections and you change the number by at most $29B a year. Drop Obamacare and you change it by $50B a year. Fixing the doc fix is nothing compared to the Ryan plan cuts. Childs play. It is a political football, useful for Republicans in arguing for dismantling Medicare by bleeding it.

         I find it passing strange that free marketers believe that influence over 45% of all medical spending leaves the government powerless to affect prices. Does Wallmart have 45% of the unnecessary plastic object market in the US? I doubt it, yet they have driven down prices everywhere. If the US government got serious about what it will and won’t pay for over inflated medical services it could and would bring fees down and keep them there. The fundamental problem is paying for services rather than results.  Moving away from fee for any service under the sun is a first logical step, and Medicare is onto that now thanks to Obamacare. And early reports suggest it is already working.

        On your “inflation slope. We are presently “sloping up” from zero inflation. This is both a sign of recovery AND a prod for further recovery. You see it as a problem. I see it as a good thing.

        But you go on by extrapolating a very modest and necessary slope into a much larger and longer one by piling on assumptions. Slopes don’t always steepen and they don’t always continue to infinity or beyond.

        We should be so lucky to get 4% inflation rate for a while. It would do wonders to shake corporate cash loose for productive use, and would get people back to work. If you objectively compare national economic performance of Democratic and Republican presidents over the last 70 years, you find the Democrats beating Republicans on every important measure but one, inflation. Dems have done better on GDP growth, the stock market, and employment. A democratic tide lifts all boats. But, Democrats have historically run higher inflation rates. Coincidence? I doubt it. An inflation rate above what bankers and financiers like is good for just about everyone else, especially working people who depend on a paycheck.  The Feds long term 2% inflation target is fine. But long term shouldn’t mean always. It should include periods of higher inflation when our unemployment is at unacceptable levels.

        “Regarding Keynes, agreeing to disagree does not mean disagreeing with
        ME, it means disagreeing with the best macroeconomists of our time. ”

        Since we are appealing to authority on macro, I have Krugman, Steiglitz, Blinder, and Roubini on my side as well. A great party crowd who happen to be on the right side of present reality.

        “How does Dean Apostol know that the recovery in Australia, China, and
        the US would have been weaker if these governments had done absolutely

        DA has never claimed to be able to know a counter factual. The evidence is in comparing those nations that have stimulated with those that have followed your advice. And the history of the 1930s and 40s, which we disagree on.

        Forget “stimulus.” Its an unfortunate term for many reasons. Counter cyclical spending by government fills a short term production gap to help ease suffering. 10% unemployment extended for any period, waiting for a bottom to hit, is very old school…pre 1932 and has serious consequences for real people right now AND well into the future for reasons I won’t go into.
        “It is a fact economies recovered on their own long before Keynes published his General Theory. ”

        No one ever claimed otherwise. Its also a fact that those pre-Keynes times were pretty brutal.

        As national economies became more industrialized and urban, there were more people working for fewer (very rich) people and dependent on cash incomes rather than gardens and barter and extended families. Keynesian economics modernized the field and changed the macro game by making governments something other than passive players in national economies, especially during severe downturns. The premise, alien as it is to today’s Republican, is that governments have a responsibility for the well being of their citizens. In bad times government deficit spending could overcome the paradox of thrift, and limit suffering. 

        “…politicians prefer a world where they can lay claim to benefits they did not create.”

        They also get blamed for problems they did not create.

        “the average rate of Real GDP growth of the 80 years before 1932 was
        substantially higher than the 80 years that have taken place since. ”

        Perhaps, but emerging industrial economies grow faster than mature ones. China, Brazil and India (and others) are experiencing very rapid growth because they are turning peasants into industrial workers and developing a tertiary economy around new industry. The US and Europe can’t re-live 19th century growth because we can’t relive a one-off, a transition from agrarian to industrial. Full blown economic liberalism would produce no more growth than partial economic liberalism has done since 1980. In fact, if economic liberalism worked, the US growth rate would have exceeded what we had in the 30s-60s, when we were a lot less liberal yet grew a lot faster. Economic liberalism in a mature economy only re-creates higher booms and deeper busts, without any corresponding increase in long term growth. And the average person would be more screwed because they would never be able to dig out from the last bust in time for the next one. In fact, we have already reached that point.

        Unless you can bake Ayn Rand into the Constitution or repeal electoral politics, your fantasy economic return to the 19th century will last exactly as long as its first full  economic cycle. Only next time you may get Huey Long as President.

        “It is a fact that the 1981 tax cuts raise more revenue.”

        Is it? Or is it a fact that revenue increased as the economy recovered from a very deep recession?

        “I’m no fan of Reagan. ”

        A rare point of agreement.

        “I am a fan of Clinton”

        2 points. We should stop there.

        “who did something no Republican has ever done: cut entitlement spending”

        To be fair to you guys, Gingrich tried to cut even deeper.

        “Like Icarus trying to fly to the sun, 20% of GDP is that point of revenue collection that seems to melt the economic wings”

        Bringing us back into violent disagreement. It may be a political threshold. It isn’t an economic one.  And it won’t remain a political one if the tradeoff next time is cutting geezer checks instead of cutting checks to poor minority women and their kids. (The former vote and the latter don’t.)

        “Are you trying to say that the spending multiplier of transfer payments
        is higher than when the government spends on a project with a low rate
        of return?”

        No. I’m not making any argument about a multiplier. I’m saying that in terms of GDP, it makes near zero difference if the government takes a buck from me and hands it to a geezer to spend on false teeth. It isn’t “government” spending.” Its private spending facilitated by a government transfer. You are a clever enough fellow that if you will just stop and think about this, it will make sense. The only economic argument against a transfer is that you will disincentivize the transferer or the transferee and thus reduce GDP. Its an argument, like the Laffer curve, obviously true at a point but not true at most points. 

        On “boondoggle” spending, its a misallocation of resources. Feeding a poor person is being human.

        “People on the receiving end of transfer payments are no more likely to
        spend their money than the folks at a government contractor, but they
        offer no product or service in return. ”

        Yeah…what’s with these people anyway? Why can’t those geezers get a job or at least open a lemonade stand?

        Geez Eric.

        “We moderns pursue empirical evidence. ”

        Empirically, nations that spend more on transfer payments have much less poverty than nations that do not. 

        “Heeding their work (indeed heeding reality) will make us richer in the aggregate. ”

        No evidence of that. It may indeed make a few people much richer, but it isn’t going to make most people richer, Northern Europe is an empirical fact dude. 

        The bond bubble bursting. Let me ask you Eric. Give me a timeline. Tell me at what point of debt to GDP ration, or some other measure, at which US bonds will not be purchased. Don’t just say “someday.” Give me something to work with. 

        • A failed auction is a very serious thing. When you cannot raise all the money you need to pay your outlays, the “failure” does not belong in quotation marks. Consider it a first traffic ticket that results in an option to take a share the road class to wave the fee. The next ticket won’t have that option, but being one’s first ticket, a judge will reduce the amount. Every ticket issuing officer thereafter sees previous tickets as they run your license and are statutorily obligates to mark greater and greater fines the more tickets you get. Things compound if one does not change his behavior. 

          In the case of failed bond auctions, like all failed auctions, the seller set terms that did not attract enough buyers. That event then cascades. When the next auction occurs, the bond buyer’s expectation prompts him to bid lower and force the government to offer higher interest rates than it previously was willing to pay. This snowballs as more and more of the budget starts going to pay interest on the accumulated debt. These mounting interest payments lead to more austerity down the road. The only way to stop this cascading effect is to alter the bond investors’ risk perception.  

          The UK did not suddenly try swinging to a balanced budget from a deficit of 9% GDP, but that is exactly what will happen the moment they can no longer attract financing. Before that day arrives, interest payments will continue to crowd out other budget items, so the earlier they deal with this problem the better, and the UK’s parliamentary system without its checks and balances and a five year term allows for tougher decisions to be made more proactively than our own political system. 

          When you were unaware that the CBO’s GDP growth assumptions were so outlandish because your cursory scan of their report found only the inflation adjusted figures, you were quite happy to argue the merits of their methodology. Nominal GDP rates of around 3% would still be quite optimistic but not crazy optimistic. If you went to page 29 and saw how outlandish their assumptions are, perhaps that is why you have fallen back on your favorite logical fallacy: argument from authority. If the CBO’s growth assumptions are unrealistic, it does not matter to you. You embrace the CBO as an authority, and as long as the CBO concludes something that you agree with, the only premise from which you draw your conclusion is that the CBO said something you want to hear. The CBO as a bipartisan institution, is helpful compared to its alternative of having competing opaque Republican and Democratic estimates. The CBO’s methodology is refreshingly transparent, but there is one lie both political parties enjoy telling their constituents: that we can grow our way out of our budget problems. Republicans want higher growth rate assumptions to make tax revenue look higher, and Democrats want higher growth assumption to make it look like there will be less need for public services. The CBO is an effective tool for consumers of its content not faith-based believers in its heaven sent forecasts. 

          I do not make arguments from authority. I care about the credibility of sources, but I am a consumer of their information, constructing arguments with the premises they provide me with, not their conclusions. When I site the latest research on a particular subject. The substance of the research is open for debate, its assumptions, its math, whatever. When I point out that your desire to agree to disagree, is a disagreement with the greatest macroeconomists of our time, what makes Ramey, Barro, and Romer great is not the endowed chairs they hold at top universities, it is the substance of their work. 

          What I have seen from you repeatedly is non sequitor reasoning that involves citing any public figure that agrees with you whether or not that person is himself making arguments that are supported by evidence. The very act of saying that in response to the work of Ramey, Barro, and Romer, you’ve got Krugman, Stiglitz, Blinder, and Roubini reveals that you can only mention people who have never in their lives published any research in a peer reviewed journal that has empirically supported Keynes. 

          In the case of Krugman and Stiglitz, it involves two microeconomists who produced free-market policy supporting work in discreet subject matters only to retire from economics and engage in partisan Democratic punditry. Krugman as you know worked on trade. If we ever find ourselves discussing trade policy, can I count on you to cite his authority? Stiglitz is even better, having proved the signalling theory of education, he was hired as a token lefty at the World Bank. There is nothing wrong with making their arguments your own, but don’t forget the evidence. That Krugman and Stiglitz have normative opinions too is great, but it is not evidence just because it came from them.

          Blinder and Roubini are at least macroeconomists, but I am puzzled why you mentioned them for they most certainly are not Keynesians. Blinder is a fairly partisan Democrat, yet he is the author of the 2nd most used introductory textbook whose content is still identical to Mankiw’s. He even uses the minimum wage as its example of why price controls don’t work, and he explains why Keynes has been rejected for the same reason I did, its inflation bias curtails future real GDP. It is important to remember than not every progressive out there advocating spending is necessarily a Keynesian. When I think of Blinder, I see a guy who acknowledges Thomas Sargent’s work on Rational Expectations, but will get out there on the talk shows and support individual policies like say cash for clunkers if he thinks it will show a return on investment. What I have seen from him regarding the budget, is that he tries to hammer home that we don’t really have much of a domestic discretionary spending problem compared to where he really pounds the table on entitlement spending. As a serious macroeconomist, Blinder warns of the fiscal bomb that will be going off in the 2020s. I am sure behind closed doors with congressional Democrats he has offered a message they do not want to hear. So in Alan Blinder you see something very different from Krugman, Stiglitz, and yourself. I have seen him speak favorably of the Ryan/Wyden plan for healthcare, but I am sure he rejects other aspects of the house Republican bill. He supports Bowles Simpson (he even supported the Domenici Rivlin proposal before that) and is an opponent of doing nothing. You probably don’t want to commit the logical fallacy of authority with him, especially on trade policy. 

          Your embrace of Nouriel Roubini is even more puzzling. If you know of any time he has ever endorsed the CBO current law do nothing option, please send me the link. You ask me when I think the bond bubble is going to burst? If you asked him in 2006 he would have said any day now. Roubini is all doom all the time. Known for his early predictions of the dangers of a real estate bubble, he has also been pounding the table about western world fiscal policy for about fifteen years now particularly Italy. Perhaps you have seen a clip from a famous 2002 debate between Roubini and Krugman where in response to Krugman saying that the only way to recover from the tech bubble is to create a housing bubble. Roubini said “five words: how about no more bubbles?” Now that he has made a name for himself, he argues that the financial crisis related to housing is just the beginning of a larger and worse financial crisis in sovereign debt because the western world ran up too much debt during the good times that its policy responses to the bad times will be followed by several sovereign defaults. He was saying this before 2008. Your not going to find him supporting a Krugman like “deficits don’t matter” the “CBO baseline will solve everything,” but Roubini is a big fan of devaluations. What you have in all four are celebrity public intellectuals that have enjoyed much time in the limelight, but it has prevented them from ever publishing any evidence that empirically supports Keynesian policy. 

          I did not say the baseline cut more in spending than the House Republican budget. I said the doc fix cuts Medicare and Medicaid more than the Ryan/Wyden plan. The baseline will reduce expenditures by 30% and never raise them which is substantially more than turning current expenditures into a voucher whose growth rate will be capped at GDP+1%. The concern among progressives is that actual premiums could grow faster than the voucher. In the case of the doc fix, that is already the case. Think about your Walmart analogy for a moment. Do you think Walmart pays the same for Milk and light bulbs now as it did in 1997? 

          Walmart reduces prices in real terms, that is to say it forces its suppliers to increase prices slower than the rate of inflation or not increase them at all. If you are aware of an instance where Walmart was able to find a supplier that could immediately cut its prices by 30% and never raise them ever again send me the link. There are anecdotes of Walmart squeezing prices down in nominal terms, but when they do 5% is huge. Walmart increases its suppliers economy of scale and demands the lower costs per unit of output be reflected in prices. Medicare and Medicaid are purchasing a large frequency of small transactions from small firms in a service sector that shows no returning economies of scale. This is very different from to the kind of productivity gains that Walmart’s suppliers provide when they are suddenly presented with a big new order to produce a particular product over and over again the same way. 

          Medicare should be every bit as tough a negotiator as Walmart, especially Medicare part D. The political reality is that it never will be because it will always be captured by industry. Obama bludgeoned Hillary for not supporting this, and then the first deal he cut was with Pharma not to do so. 

          Setting the issue of regulatory capture aside and imagining we could, Walmart is less apt a metaphor than the military. The greatest problem with the House Republicans’ budget is it actually increases military spending. Imagine cutting military spending. The largest expense is wages. The military dominates the market for recruiting 18 year-olds who want to go right into the workforce after high school. Rolling back what the DOD pays in salary and benefits to 1997 prices and never increasing it again would run into the reality of the price elasticity of supply, particularly in the Army. Similarly Medicare and Medicaid can lower the prices they are willing to pay below what medical service providers are willing to accept in our all volunteer medical sector, and government health plan beneficiaries will be priced out of the market. If you and I both like the elimination of the doc fix, then let’s shake virtual hands in agreement on that!

          When you call that inflation slope a sign of recovery, it tells me two things 1) you understand that economic growth brings inflation and 2) you only skim through what I am writing. What happened to GDP growth in the same time period? It has been dropping! Look at our quarterly GDP growth rates. We peaked in 2010 and are trending back down. An inverse relationship between these two trends means nominal GDP is increasing while real GDP is falling. 

          It is possible to increase nominal GDP and make everyone worse off at the same time. In 2008, John McCain would repeat his claim that the economy was fundamentally sound by pointing out that the traditional definition of a recession was two consecutive quarters of negative GDP growth, but nominal GDP was increasing only because prices were increasing. Real GDP was negative as he continued to misspeak. In the past year we have seen this same trend emerge to the point that if we hit a 4% inflation rate later this year with the same growth rate we have right now, our real GDP will be contracting again. Talk about an October surprise! Anyone who has read the General Theory would know it is theoretically impossible to have 3% inflation with 8.2% unemployment yet here we are. Remember I pointed this out to you in the context of the CBO’s inflation assumptions and their growth assumptions. One of them will be true and it won’t be the growth figures. 

          I am not predicting high inflation. We will have low inflation because the Fed will keep it low. When you point out that “slopes don’t always steepen, and they don’t always continue to infinity” you are correct, but fill in the blank as to how inflation rates oscillate down. If you can find for me one moment in recorded human history where the accelerating rate of inflation declined at the same time the economy was growing I would like to hear of it. There is only one way to bend that slope downward, and it involved either fiscal or monetary contraction. Over the past year we have had accelerating inflation and decelerating growth, the worse leading economic there is. A decade of 3% real GDP growth does not follow after that structural flaw. 

          I wonder how rigorous the study comparing presidents by party was. I also wonder how dated it was. Did it include Obama? Regarding growth I assume you were not talking about real GDP were you? The difference in inflation might mean Democratic real GDP is lower. But think of the qualitative issues as well. My favorite progressive Chris Hedges would argue that Nixon was the last progressive president and Clinton was the most effective Republican president since Coolidge. 

          When we run into issues of evidence, another aporia you descend to is radical skepticism. If you were walking by me on the side of the street a year ago and I shoved you into oncoming traffic. Today, a whole year later, you might actually claim to know a counterfactual in claiming that you would not have been hit by that car had I not done so. Nearly all talk of public policy involves a great deal of counterfactual analysis. There is nothing wrong with counterfactual analysis, it simply requires evidence. Everything you have said in support Keynesian policy has involved a counter factual. Indeed everything you have said about global warming requires a counterfactual as well.

          You know that economies will recover if we do nothing, so how do you know that the economy would have been worse in the 1930s without the New Deal? The initial contraction in GDP was less than the recession a decade before which roared back in a year, but the New Deal was followed by a pathetic recovery stretched out for years. Your curiosity to know for sure ought to make you eager to have the tool to measure the spending multiplier would it not? 

          We have several developed economies today that have been able to sustain emerging market rates of growth even though their one off transition from an agrarian economy to an industrial economy was completed a long time ago: Taiwan, Singapore, Hong Kong, Chile, and Switzerland. They all share low rates of government expenditures to GDP. This can help you understand a major structural difference between the post FDR decades and the post LBJ decades. After 1945 the war had killed the New Deal and the political gridlock of the Truman years prevented its return. Those decades’ federal outlays as a percentage of GDP were in the teens. Nearly everything we think of as the New Deal emerged and reemerged between 65-69 and not only has survived, it has compounded apace. Between FDR and LBJ there was no Medicare or Medicaid. Social Security was a parsimonious program whose age of eligibility was a year or two past the average life expectancy. Besides the interstate system, when infrastructure needed to be built it was mostly financed and approved locally without anything like the Davis Bacon Act. They had their problems in the realm of civil rights, but not of the fiscal variety we have today. 

          If you think the 18% Federal revenue as a percentage of GDP is limited by politics rather than the economy how can you explain FDR’s tax rates in a time of patriotic civic unity could not push us into the 20s? High tax rates in the late sixties to 1981 kept us in the teens. Clinton’s tax increases raised us to 18, raising much revenue for its ability to stay at that level, but when it his 20 it began dropping long before the Bush tax cuts went into effect. If we get the political will to return to very high tax levels, what evidence do you have that it will yield a different outcome?

          Regarding transfer payments you made my argument for me. Economic growth is all about incentives to produce, not subsidizing consumption. From FDR to LBJ most people worked until they died, retiring only when they were physically unable to work. This was because life expectancy was so low and SSI was so ungenerous. Only a small percentage of people could retire with private pensions, supplementing it with SSI. The idea of a mass entitlement to a few decades of vacation in comfort, recreation, and leisure is a post LBJ phenomenon. It is very attractive to anyone turning 62. The reason the CBO’s 2004 projections of SSI’s cash flow were so off is that they did not realize how high a rate boomers would be taking the early option and how many 50 year olds would discover an even earlier option through disability. 

          While understandably attractive, decades of retirement are not physically necessary. Few people are unable to work in their 70s, particularly in our economy with far less physical labor required. Those few who cannot work are essentially disabled. If we had to we could raise the retirement age to 80 and both means test and medical exam test eligibility for both SSI and Medicare. This is what entitlement programs will look like if we do nothing until the bond market vetoes our budget. 

          The other way transfer payments disincetivize work is they disincentivize the kind of deferred gratification that is required to save and invest so that when we cannot physically work, our money can work for us. 

          If this was just about feeding people who can’t feed themselves, we would not have a budget problem. Entitlement spending as we know it is about middle class folks enjoying their golden years in comfort. I understand the “because we can” argument might guide their vote. They can elect politicians who ignore economic reality, but the principles of economics never come up for a vote. 

          It ultimately does not matter if the political will prefers profligacy. With an upward limit of 18% revenue for the federal government as it competes for resources with state and local governments. Deficits that exceed our growth rate accumulate us to that Rogoff point of guaranteed sacrifice of future growth. Once we reach that point, somewhere between 90%-100% of GDP we can hold an auction but no one will bid at a price we can afford.  

          It is one thing to recognize a bubble, it is quite another to time its collapse. Micheal Lewis’ The Big Short is a wonderful book about several hedge funds that traded against the housing bubble in 2005 and kept loosing money for two years. I actually feel confident we will not reach a debt to GDP ratio of 100%, because our elites will solve this with Bowles Simpson if not in 2013 then after the next midterms, regardless of who is elected president. So the issue of a financial crisis erupting that prevents us from still having that option largely depends on inflation in the next 24 months. The primary trigger for the bond market’s move will probably be when the Fed has to start becoming a seller of Treasuries. If this were to coincide with China taking our advice to float their currency, that could easily trigger the sell off that will forever change our calculations about what is fiscally possible.

          • valley person

            ” When you cannot raise all the money you need to pay your outlays, the “failure” does not belong in quotation marks.”

            It is in quotation marks because it was a meaningless failure for a nation that has its own currency. To the extant Britain can’t find private buyers for the pound at an auction it can “print” as much currency as it needs at a given moment to make up the difference. In other words, a soverieng government that can borrow in and print its own currency does not have to accept a “traffic ticket” from the bond buyers.

            Choosing to print more money to cover current debts has implications for the value of one’s currency on international markets, and on inflation. And this is where we get into the whole larger debate over how macro economies are best managed during serious economic downturns. Its a large discussion, probably not suited for the limitations of this blog. Britain had a choice because they have their own currency. Spain, Ireland, Italy and Greece and the rest of the Euro zone do not have much choice unless they change the way their central bank operates.

            The US has 3 basic choices to dig out of this downturn. 
            1) choose to print money
            2) sell bonds
            3) “tighten our belt”

             If we print money we risk some inflation and devaluation. If we sell bonds, which have been very cheap to sell for us by the way, we incur debt obligations and run the risk that someday all our bonds might not sell at the low rate we like. If we “tighten” we incur more unemployment and a deeper recession.

            Its a choice. Its not ordained. Each choice has advantages and disadvantages, winners and losers. Your choice, tightening, favors “them with the gold,” to coin a phrase. Mine, run up the debt as much as needed to bring unemployment down, favors them without. This is why we have a 2 party system.

            “When you were unaware that the CBO’s GDP growth assumptions were so outlandish”

            Stop yourself Eric. I never agreed with you that the CBO growth assumptions were outlandish. I in fact disagreed with you and still do. So please don’t put your assumptions in my head ok? You claim they are outlandish. I don’t buy your claim for reasons already stated.

            “What I have seen from you repeatedly is non sequitor reasoning that involves citing any public figure that agrees with you …”

            Dude, its the other way around. I’m agreeing with them. Their arguments make the most sense to me given the observed conditions. If you could point to a single country that has tried austerity during this downturn and has achieved higher, quicker growth out of recession than countries that have chosen debt, I’d like to know about it.

            The anti Keynesiasts are not without good arguments or theories. But right now they (you) lack any good real world examples. They (you) have been warning about no one buying US bonds for 3 straight years now, and interest rates on those bonds keep dropping because there are so many buyers. So you latch onto a single “failed” British bond sale to make a full on case for austerity now? Ignoring what that austerity has actually bought (low growth, higher unemployment and deepening debt)?

            “That Krugman and Stiglitz have normative opinions too is great, but it is not evidence just because it came from them.”

            The “evidence” is that they have been shown to be right by events. I wouldn’t give a fig about their opinions if they turned out to be wrong.

            On Alan Blinder, he is arguing that we DO NOT have a short run deficit problem, and in fact we should be running greater deficits right now to help get out of this downturn. Yes, he also argues for longer term budgeting, including on entitlements. So does Krugman. So do I. This position is entirely Keynesian. Keynes did not advocate long term or forever deficits. In fact, if you really want forever deficits, see the Paul Ryan plan or the GHWB tax cuts.

            “The concern among progressives is that actual premiums could grow faster than the voucher.”

            That is only 1 concern. The bigger concern, which I share, is that Medicare is successful as a single payer model. It could easily be built on gradually to wean health insurance away from the unnecessary and overly expensive private sector to a broader single payer system on the French model, with private insurance relegated to supplemental duties. 

            “Do you think Walmart pays the same for Milk and light bulbs now as it did in 1997? ”

            Eric…try to be the least bit conceptual here. I’m not arguing for 1997 health care reimbursement rates and never have. The Wallmart analogy is about controlling costs by using purchasing power. If the Us government truly controls 45% of health care spending (and growing) it could use that as leverage to demand lower costs. We haven’t done this much because the AMA is a very strong lobby. Its politics, not economics.

            “If you and I both like the elimination of the doc fix, then let’s shake virtual hands in agreement on that!”

            OK I guess, but we probably see way different scenarios after that point. I see migration towards single payer plus supplemental and you see a “freer” health care market.

            According to the BEA, real GDP growth was 1.8% in the 3rd quarter 2011, and 3% in the 4th quarter. That is an accelerating, not decelerating trend. Not sure what the 1st quarter of 2012 has been, but manufacturing is at around 3.5%.

            “Over the past year we have had accelerating inflation and decelerating growth, the worse leading economic there is. ”

            Who’s growth measure are you using? Not the BEA I take it.

            “I wonder how rigorous the study comparing presidents by party was. ”

            I don’t know, but the figures are taken from the Annual Economic Report Of the President. And they pre-date Obama, but to be fair he has not been around long enough to judge.

            Here is a link to an article that links to the original reports:

            I just re-skimmed the article and as it turns out, inflation under Democratic presidents has actually been BELOW that of Republicans, which blows my thesis all to hell. But otherwise, the ds beat the Rs on every single measure of economic preformance. Can it be just blind luck, or do policies that favor the bottom half end up lifting even the top half? Did we get trickle down completely backwards? It looks that way.

            “With an upward limit of 18% revenue for the federal government”

            I don’t buy this limit. Sorry.

            But you have opened up a much bigger philosophical debate over the modern idea of retirement compared to the good old work till you drop days.

            Yes, people could work longer and many probably should. And its way unfair to tax low income blue collar workers to pad the retirements of high income geezers. And it would be better economically and fiscally (I think) if we had a true “individual retirement savings” system that built capital from birth to whatever, ending in a decent annuity. 

            But if we really want to build a transition to a better system, it has to be done over many decades and will have zero, and maybe negative impact on the federal budget for many years in between. A transition period that funds current and near term geezers while building savings for youngers is going to cost a ton and a half, and needs a lot of debate, pilot testing, adjustments, and some fail safes for those who can’t work steadily for the decades needed. Its frankly such a daunting prospect that we are most unlikely to tackle it, especially in todays dysfunctional politics where a House budget passes with only R votes and a Senate budget passes with only D votes. And these are single year budgets.

            “I actually feel confident we will not reach a debt to GDP ratio of 100%,
            because our elites will solve this with Bowles Simpson if not in 2013
            then after the next midterms, regardless of who is elected president. ”

            I don’t share your confidence. The Republican party is so dead set against any tax increases they have left them selves zero room to compromise. Recall the primary debate where EVERY Republican running rejected a budget deal that would be 90% cuts and 10% tax increases. It takes 2 to tango and we don’t have that.



  • valley person

    I offer as further evidence that your inflation fears are not widely shared:

    The Fed. What do they know that Eric doesn’t? That a soft labor market mitigates against inflation maybe?

  • valley person

    I’ll skip the health care debate because it is too off topic. Suffice to say we disagree about what single payer is, how it works in practice, and what the results are. 

    I accept the GDP assumptions in the CBO report at face value. I don’t “tout” their authority. The Fed projections I sent you back them up. And the fact people are happily buying long term bonds at quite low interest rates suggest the market is also backing them up. Slow growth AND low inflation are forecast together for some time. Everyone could be wrong and you could be right. But for now I’ll go with everyone.

    “When I asked you what evidence you have that moving forward we can
    collect 20-25% of GDP… your
    only response is “I just don’t buy this limit sorry.” ”

    We have collected a bit over 20% of GDP in taxes at times, and we have spent within that range more often than not.  If we decide we want current service levels with the projected increase in retirees, and we don’t want much deficit,  then we have  to be closer to 25% than 20% in tax take down the road.

    50% or more of that projected “government spending” is private spending facilitated by government transfer. You see this as inherently mitigating against overall productivity. I don’t. Our productivity is in large part due to government spending on education, infrastructure, R&D. Cutting that spending, as Ryan proposes, probably does more long term damage to productivity than a higher tax rate would.

    “We are already three years beyond the last recession. ”

    We are 3 years beyond GDP contraction and 3 years into very modest GDP growth that has yet to fill the hole left behind, so for many people this is still a recession. We are experiencing the wake of a financial market crisis the likes of which we have not seen for 80 years. You suggest this is nothing more than a typical recession, with a predicted recovery path leading to a next business cycle recession. I doubt it. Because our recovery will likely be slow and long, and because consumer activity is so important to the business cycle, it may be a long time before we hit aother down business cycle. Look at car buying as just one example. We have an aging car fleet. People can only patch their old junks together so long. They have started to buy. That trend can grow for years before it becomes the least bit inflationary.

    The same is true for housing. We have a lot of household formation ahead of us because we just had 3 years of household loss. That will beget a lot of purchasing.

    Same is true for debt. We are just now coming out of deep personal debt. After people pay down, they can start to buy. 

    What would instigate another recession is the same policy decisions that Roosevelt made to reduce spending in 1937. In other words, if we follow your advice Eric, and worry about deficits now, we will cut the legs out of a consumer driven recovery.

    Bowles Simpson is dead. It had its moment. What happens next really depends on the 2012 election, and all signs are that it will prove to be a muddle, with divided government remaining in some form. One party, the democrats, have repeatedly shown that they are willing and able to deliver reasonable long term entitlement cuts in exchange for tax increases, primarily at the top. The other party refuses to budge. That is why current law playing out, with some rounding of the edges, is the most likely outcome.

    Mr Ryan is probably the least useful person in Washington on this whole topic. He is nothing but an ideologue, and his budget and policy ideas reflect this. That the Republican Party is waiting for him to ok a modest tax hike tells us all we need to know about the prospects for compromise. 

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