Book Recommendation: Ron Paul’s rEVOLution by Brian Doherty

by Eric Shierman

On May 15, 2007 Fox News political analysts thought they had just witnessed the sudden meltdown of one of the many candidates for the Republican nomination for president when Ron Paul uttered the seemingly unthinkable suggestion that terrorist threats to the United States are a reaction to America’s interventions in world affairs. Thinking they had just witnessed the mother of all gaffes, political pundits began lining up to ask him if he would now be forced to withdraw from the race.

A year later Ron Paul had already earned more votes that Rudolph Giuliani, raised more money than most of his rivals’ campaign coffers combined, and began growing a political movement that fertilized Tea Party opposition to the inevitable Democratic winner of the general election. Brian Doherty’s book Ron Paul’s rEVOLution: The Man and the Movement He Inspired is not just a political biography of Ron Paul; it is a historical analysis of a political movement that could very well represent the future of the Republican Party.


Born in 1935, Ron Paul was defeated in his first race for Congress in 1974. When the conservative Democrat was soon thereafter appointed by the Ford administration to the Federal Maritime Commission, Paul won the special election to replace him. The first vote Paul ever cast was the first and last time he compromised his principles. It was a vote that expanded federal involvement in education and Paul faced strong pressure from the Republican House leadership to vote for it. He reluctantly did so and soon vowed he did not fancy his political career enough to ever do that again.

Paul quickly established his reputation as an iconoclast. Due to the domination of the south by the Democratic Party in those days, Paul actually held a swing district. Robert Dornan had helped Paul enormously to get elected, so it came as a shock to the Republican leadership as well as “B-1 Bob” when Paul voted against the supersonic strategic bomber. He was left to fend for himself in his bid for reelection in 1976 and Paul lost to another conservative Democrat that was more than happy to vote for any weapon system of any price. With no party support, he was elected to Congress a second time in a rematch two years later, an election that permanently sealed Paul’s independence.

This second stint in Congress was cut short by his failed run for the US Senate in 1984 which Paul lost to Phil Graham. Over the next three years out of office, Paul would build a name for himself in national libertarian circles as a public intellectual gadfly, building a national base of support by publishing two ghost written mailers, The Ron Paul Investment Letter and The Ron Paul Survival report. These publications managed to appeal to both libertarians and populist conservatives across the country, but the type of shock-stunt language used to attract the latter would come to haunt Paul later. In the mid 80s he was developing a base of support that sparked interest in his nomination as the Libertarian Party presidential candidate in 1988.

Ron Paul tried to burn his bridges to the Republican Party with as much fanfare as he could, writing a letter to the RNC Chairman Frank Fahrenkopf that was leaked to the Associate Press announcing he could no long remain a member of a party that had “given us unprecedented deficits, massive monetary inflation, indiscriminate military spending, an irrational and unconstitutional foreign policy, zooming foreign aid, the exaltation of international banking, and the attack on our personal liberties and privacy.” Paul said he was “wary of the Republican Party’s efforts to reduce the size of government,” because “big government has been legitimized in a way the Democrats could have never accomplished.”

Despite Paul’s devoted national base of support, he had a tough ride in 1988. First, let’s keep it all in perspective, while Paul’s mailing list and fundraising abilities dwarfed any other minor party candidate, it paled in comparison to the institutional infrastructure of the two major parties. Second, Paul’s buttoned-down demeanor, personal religiosity, and conservative positions on immigration and abortion did not sit well with the Libertarian Party of the 80s. Paul faced a spirited primary campaign from Russell Means, a former leader of the Sioux Indian’s 1973 revolt at Wounded Knee, who proudly claimed to have stopped paying his federal income taxes in 1971. Paul managed to clinch the nomination with the strong support of Murray Rothbard and his network of connections at the Ludwig Von Mises Institute only to win a mere 420,000 votes in the general election, less than the Libertarian Party’s previous record in 1980.

Doherty argues it would be a mistake to see Paul’s 1988 presidential run as a failure. There was no chance for a minor party to win anyway, but Paul added a new army of supporters to his direct mail list. When he returned to the GOP in 1996, it was less as a prodigal son begging for forgiveness than an insurgent mounting a rebellion with greater resources than he had wielded before. Paul’s old district was now firmly held by Tom Delay, but he owned a beach home in Texas’ 14th Congressional District which Paul changed to his legal residency to enter the Republican primary there. Newt Gingrich did everything he could to stop Paul, including convincing the Democratic incumbent to switch parties with the promise of considerable national Republican donors’ money in his primary campaign. With substantial resources at his disposal, the not-so-conservative former Democrat Greg Laughlin beat Paul in the primary, but with less than 50% of the vote. The Texas Republican Party then holds a second, run-off primary for the two candidates with the greatest plurality. Paul beat Laughlin in the second round by a narrow 54%, cruising on to an easy general election victory.

Ron Paul was back in Congress. For a decade he seemed content being a loyal nuisance to the Republican leadership. He voted for Clinton’s impeachment, but even then took the opportunity to stick it to his caucus on the House floor:

There is a major irony in this impeachment proceeding. A lot has been said the last two months by members of the Judiciary Committee on both sides of the aisle regarding the Constitution and how it must be upheld. But if we are witnessing . . . a serious move toward obeying the constitutional restraints, I will anxiously look forward to the next session when 80 percent of our routine legislation will be voted down.

Many would assume the invasion of Iraq was the trigger for escalating his factional fight with the majority of his party, but that would be a mistake. It was the Patriot Act. Previously, Paul’s most high profile legislative success was his defeat of a seemingly popular “know your customer” set of banking regulations which would have enlisted banks in profiling depositors’ transactions for federal law enforcement. On this point Doherty interviewed Paul’s legislative assistant for banking, Bradley Jansen:

Paul’s office organized a broad-based coalition against the regulations, including anti-tax and anti-regulation groups from the libertarian-leaning right. “It was done in the name of the war on drugs, to fight money laundering supposedly, so I went to the drug policy groups. I got banking associations on board, a lot of the Christian right on board because they didn’t like Clinton,” Jansen says.

Jansen recalls an “only in Ron Paul’s office” meeting on Capitol Hill, with a representative from Concerned Women for America sitting next to a representative of the Marijuana Policy Project sitting next to a representative of the Independent Bankers Association sitting next to “some lefty consumer privacy group” sitting next to the Competitive Enterprise Institute. Paul’s office managed to generate hundreds of thousands of public comments opposed to the program, Jansen says. While that law was defeated, in the wake of 9/11 most of its negative provisions have been enacted under other cover—a point Paul indeed often made after the attacks about the rush to control.”

It was not so much the budgetary costs from our expensive 9/11 wars or foreign policy in general. It was the way an accelerating growth of the federal government under George W. Bush was undermining domestic civil liberty that drew Paul back to the national stage.

At first he was reluctant to run for President again. After parrying aside many different national constituencies that were trying to mount a draft Paul campaign, it was his old staffer Kent Snyder that convinced him to run. It would not be a serious presidential bid, the kind that keeps you up at night and away from your family. It was just an attempt to use the platform of a candidacy to embark on a Jeremiad against big government conservatism.

This narrow purpose snowballed out of control in the wake of Paul’s exchange with Giuliani. The then novel website YouTube sent Paul viral into both the popular culture and into the short attention spans of people who would never have otherwise considered voting at all, let alone for a Republican.  The media naturally lumped Ron Paul with the likes of Tom Tancredo and Duncan Hunter, single-issue candidates using the presidential stage to advance their cause (immigration for Tancredo, defense for Hunter). Paul got little to no media coverage in 2007 and was soon excluded from the debates, yet he could stage rallies overflowing with devout supporters, something Obama could do but none of the other Republican candidates could match.

The enthusiastic attendance of Paul events was complemented by grassroots fundraising on a mass scale never before seen. The “money bomb” was developed where all his supporters were encouraged to give whatever small amount on the same symbolic day. Two of these days introduced the imagery of both the Occupy Wall Street and Tea Party movements. November 5th was chosen as the anniversary of Guy Fawkes’ attempt to blow up the British Parliament in 1605 by using the mask from the dystopian movie V for Vendetta as an icon that four years later would be embraced by anarchists in the Occupy movement. Then on the 234rd anniversary of the Boston Tea Party, the “Tea Party Money Bomb” raised $6 million dollars on December 16, 2007, an unthinkable sum for the all but broke McCain campaign.

The Ron Paul campaign of 2008 floundered for two salient reasons. First it could never really mount an effective challenge to the frontrunners. Doherty makes clear this had less to do with the lack of media attention and more to do with the fact the people running Paul’s campaign were amateurs that did not know how to win even if the stars aligned for them. Their events were largely organized by fans outside the Paul campaign using social media. The bounty of money raised often got spent on silly marketing bling like a giant blimp. And the official Paul campaign could not control the messaging of its many volunteers who would often bring their own signs and flyers linking Paul to obscure issues.

Paul’s second limitation was probably the most significant. He broke the categories of what a Republican was thought to be at the time. This was attractive to many independents on the fringe of political identity, but Paul held at least one strong view that alienated most reliable primary voters. His limited government bonafides were solid, but they were so consistent that his desire to limit the Pentagon too lost many traditional conservatives. There are moderate Republicans out there who love Paul’s support for gay marriage, but his unshakable pro-life position was a deal breaker for RINOs too.

A good example of the detail to which Doherty’s book delves into is nicely captured by his account of the origin of Paul’s view of abortion:

At his obstetrics residency in Pittsburgh, he had the abortion experience that defined his attitude toward the practice, a story he sometimes tells on the campaign trail. He even entered it in the Congressional Record in his first stint in Congress: “I did not always draw rather stringent lines on abortion until I was forced as a young physician to face up to the problem. I was called to assist one day as many young residents are in an operation performed by a staff member. It turned out to be a hysterotomy, a type of caesarian section with the removal of a 2-pound infant that cried and breathed. The infant was put in the trash and left to die. . . . We as physicians can now save many infants that are born weighing 2 pounds. . . . [F]ollowing this experience I reconsidered my position of ‘necessary abortion’ and came up with an entirely different perspective.” That’s another example of the Paul style—in most circumstances even his strong emotions are delivered calmly, measuredly, dispassionately. When I hear him personally deliver a version of this story, it is no more heated than this reads on the page.

In his assessment of Paul’s limitations as a candidate, I think Doherty was perhaps too kind. I can think of some other obvious factors such as the fact Paul was way too old to run for office and he has been at best a mediocre debater, coming off as extremely cagey to everyone but those who are already predisposed to accept his message. There I said it. With all of these challenges however, the beauty of the Ron Paul phenomenon is that the power of his ideas transcends the flaws in this pioneering messenger. The Ron Paul campaign of 2008 was destined to fail yet it possessed something none of his Republican rivals had, the ability to spawn a movement.

No Republican was going to win in 2008, but it was Ron Paul’s movement than buttressed America from a progressive takeover. In a time of such economic crisis that moment of Obama’s inauguration entailed, we would have expected something like the Occupy movement to fill the streets, demanding even more big government solutions than Obama himself thought politically possible. Indeed the Obama campaign did everything it could to convert its massive list of supporters into an activist group to back the president’s policies, but the opposite happened. The Tea Party movement emerged instead.

Looking back it might be too easy to assume a mass movement of middle class Americans demanding austerity during our economy’s darkest hour was inevitable, but it most certainly was not. A strange myth has emerged that a spontaneous rant by Rick Santelli triggered the massive demonstrations we saw build up for the next two years. Since very few people were watching CNBC that early in the morning, this narrative sort of begs the question: who was it that immediately copied that clip, put it on YouTube, and shared it with every known blogger of free-market persuasion? It was not the people at CNBC.

It was the same people from the former Ron Paul campaign who had perfected the ability to bypass the media to reach a mass audience. When John McCain wrapped up the GOP nomination he and all but one of his rivals were broke: Ron Paul still had $3.5 million in the bank which they used to convert their campaign into a PAC called LibertyPAC and create two new advocacy groups called the Campaign for Liberty and Young Americans for Liberty (which continues to dwarf most universities’ College Republican clubs in both size and passion). The Campaign for Liberty actually raised more money in 2009 than the Ron Paul campaign did in 2008 to continue financing a message war room that sought to connect a broad coalition of opponents to Obama’s agenda. They held their second Tea Party rally on its next historic anniversary.

On January 24, 2009 Young American’s for Liberty organized the first off-date Tea Party rally as a demonstration in New York against Governor David Patterson’s proposed obesity taxes on sugary products. That protest proved such a success, the Campaign for Liberty challenged all other limited government organizations to hold tea parties of their own, sharing organizing tips and offering assistance for turnout. By February 19th using Paul Campaign terminology, Rick Santelli simply helped fan the flames of protest that the Campaign for Liberty had already ignited. It was this former Ron Paul campaign infrastructure that made Santelli a household name beyond the few people who watch his reporting from the floor of the Chicago Mercantile Exchange early each morning by immediately copying that clip and rapidly sending it to every contact in their vast network.

If the Tea Party had been nothing more than an extension of Ron Paul’s campaign, it would not have had the mass appeal and influence that it has had. Neither Ron Paul’s foreign policy views nor even his views on the size of government would have attracted enough Republicans to defeat Richard Lugar in a primary race. The Campaign for Liberty fertilized the Tea Party movement but has since preserved ideological purity of the Ron Paul Revolution by keeping a healthy distance from its creation as the Tea Party began to attract the Sarah Palins, people sporting “keep your government hands off my Medicare” signs, and largely devolving into a decentralized auxiliary wing of the broader Republican Party. Ron Paul’s fingerprints remain visible in the Paul like transactional relationship the Tea Party has with old party politics and how opinion surveys of Tea Party goers show a remarkably informed perspective on monetary policy that would otherwise have been nothing more than a fleetingly temporary populist backlash against bank bailouts.

Deeply embedded into Paul’s 2012 campaign, Doherty is able to provide so much new detail it defies summery. Running another campaign four years later was never in doubt, but what to jettison and what to keep from 2008 was. Emerging from the first Republican debate in Greenville, SC on May 5th of last year was a modified strategy. Paul would retain his long held positions and speak with unhedged clarity, but he would also hire some professional Republican consultants to craft what would have otherwise merely been a well funded speaking tour, taking it to the next level.

With Dimitri Kesari and Trygve Olson came negative campaign ads and a singular focus on delegates. The Ames Iowa straw poll demonstrated the Paul Campaign’s new found effectiveness.  While decidedly unscientific, this straw poll is a fairly good measure of each campaign’s ground game in Iowa, because only registered Iowa voters with an Iowa driver’s license are allowed to participate. This is a major fundraiser for the Iowa Republican Party, but while an unlimited amount of tickets to vote can be purchased by each campaign, only the presence of actual Iowans willing to cast them can make a difference. Michelle Bachmann’s campaign saw her victory as critical, managing to blow most of her money on the effort. She not only covered the cost of voting for her “supporters” – she paid people to vote, also providing them a free Randy Travis concert to boot. The Paul Campaign not only did not have to pay its Iowan supporters to vote, it required them to pay for their tickets as well. Paul came in a close second place.

That Paul would do so well in a state that non-overtly religious candidates tend to avoid should have been big news, but if one were watching the media coverage the next day, one would have thought Paul came in last. The media blackout Paul endured was so blatant, even Jon Stewart’s progressive leaning Daily Show which has been no friend to Tea Party candidates, called the networks out.

Doherty puts Paul’s media troubles into perspective. Political commentators were likely responding to the undeniable fact there was a clear ceiling to how high his support within the GOP could go. Had Paul gotten more favorable coverage, no doubt this would have propelled him to momentarily higher levels as evident by the temporary front-runner status enjoyed by ill-informed buffoons like Michelle Bachman and Herman Cain. If Paul had been able to stay in the media spotlight, he would likely have performed like Rick Santorum as a distinct standard bearer for a determined faction within the Republican Party that was unable to win the majority in 2012 with only his constituency’s support. Both Rick Santorum’s and Ron Paul’s voting blocks preferred a centrist like Mitt Romney over each other’s guy.

Doherty concludes Paul and the movement he has been leading won this election the way the long shot candidacy of Barry Goldwater ultimately won in 1960. Even if he had defeated Richard Nixon in the primary that year, Goldwater would have lost the general election by a wide margin just like he did four years later. Goldwater’s true victory was his creation of an organized wing of the Republican Party we now call the “movement conservatives” that finally came to fruition twenty years later in the election of Ronald Reagan.

Paul has created a new movement akin to Goldwater’s that seeks to surpass it. Motivated by an anti-Tea Party perspective, it is often commentators from the left that like to point out a very undeniably astute observation: Ronald Reagan’s record as governor of California would be seen as too moderate to win his party’s presidential nomination today. If Reagan were alive and constitutionally able to run for another term in 2012 his Republican opponents’ opposition researchers would have had a field day with Reagan’s record as president too. “Reagan grew the rate of increase in federal government spending far faster than Barack Obama,” attack ads would say, and they would be correct. Indeed Ron Paul temporarily left his party because of Reagan and that squandered moment. If you look at the arc of Republican Party history, the Reagan Republican has become the new Rockefeller Republican.

Reagan’s coalition included several constituencies that were stakeholders in increased federal spending. The Soviet Union was in immanent economic collapse at the very moment Reagan was sworn in to office, but to get his 15 carrier / 600 ship Navy, B1 / B2 Air Force, and M1 / M2 Army he eagerly agreed to the very automatic entitlement program increases that are now threatening our own collapse, thus the warfare state reinforced the welfare state. Paul’s revolution is primarily an innovation of Goldwater’s that now understands how in our Madisonian form of government, if Wilsonian foreign policy goals are in one party and Wilsonian domestic policy goals are in another, Woodrow Wilson’s progressive vision of America will continue to win no matter who is president.

What Doherty’s incredibly perceptive book does not know and cannot know, is who will lead this new movement forward. He strongly suggests it’s going to be Ron Paul’s son Rand Paul, but Doherty also devotes many pages of his book to identifying Paul inspired candidates running in 2012 congressional primaries too. I would suggest it will be events that do the voting for them. Just as it was Paul Volker’s vote on the Federal Open Market Committee that really elected Ronald Reagan, it will likely be bond traders that elect Ron Paul’s future standard bearer when they eventual start clicking “sell” on their computer screens. When that transformational administration comes into office, Brian Doherty will be known as the author of the classic book that explains how we got there. He will be presenting his book at Powell’s downtown store tomorrow Friday June 8th at 7:30pm. Get there early; Ron Paul related stuff draws a crowd really fast.

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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  • Steve Buckstein

    I will be giving a public presentation on school choice in Salem tomorrow night, but for anyone stuck in Portland I’m sure that the next best place to be will be at this Powell’s author presentation. 

    If you’re there, notice the average age of the crowd coming out to hear about a 77 year old politician. My bet is that they’ll be less than half his age.

    • valley person

      Absolutist, purist, one answer fits all ideologies appeal to young people who have  not had enough life experience to appreciate the gray zones. Ron Paul has these sorts of followers and nobody else. Some other Libertarian will no doubt replace him and appeal to the same 1 or 5% of the population.

      But Paul’s economic ideas, which are the only reason he gets any attention at all, are pure 19th century crackpot.

      • valley person

         I meant to add, anyone who thinks we are better off with gold or silver coins in our pocket in an age of debit cards is not offering much of use.

      • Steve Buckstein

        Me thinks you protest a little too much here. Perhaps you can shelter the young from these “crackpot” ideas by extending the compulsory school attendance age up to, say, 30, so “progressive” teachers get more time to mold their impressionable minds.

        • 3H

          Given the apparent volatility of political belief, and how it seems to swing back and forth, perhaps you should revisit your idea that “progressive” teachers are actually trying to mold impressionable young minds in their political image?  I’m sure there are a few out there, but I’m willing to bet not the majority.  Just as I’m sure there are some conservative teachers out there trying to mold the political opinions of their students.  

          • valley gender neutral

             Steve must have gone to very different schools than I did. I have a hard time remembering any teacher in elementary or high school who shared any political philosophy whatsoever.

          • Steve Buckstein

            I don’t remember any K-12 teachers doing so either, but that was then, this is now.

            For an example of a teacher in a local public high school who does so, see my commentary at:

            The second half discusses my time in this teacher’s classroom in March. While I appreciated him inviting me to speak, he has these kids attention every school day for a year, and he is not at all shy about pushing his left wing political philosophy.

          • 3H

            Do you know for a fact that he does that… all the time?  Or do you think maybe he was playing devil’s advocate?

            Secondly, do you have any sense at all of how pervasive this conduct it?  I had a high school phyics teacher, conservative, lecture us on the evils of Marxism.  Should I extrapolate from this one incident that all physics teachers were conservative?  Or that all teachers injected their conservative values into classroom activities?

        • valley gender neutral

           You misread me. I don’t want to shelter the young pups from anything. I’d like them fully exposed to any crackpot idea out there, but hopefully within an analytical framework that helps them figure out for themselves why feel good ideas if only we were all like this do not hold up in the real world where we aren’t like that.

      • Jebman55

        What is truly crackpot is to believe you can get sumpin’ for notin’ by just printing currency.

        • David Appell

          The last time you went to the grocery store, did you leave with sumpin’, or notin’?

        • valley person

           I can’t do that. But the gubmint certainly can and does every day.

  • Oregon Engineer

    to VP.  You know little of what you speak. Your comment “one answer fits all ideologies appeal to young people who have  not had enough life experience to appreciate the gray zones.” says to me you do not know about the SDS.  look it up.  the New Left began as young people.  Al Gore one of your heros recruits to the Climate change cause college students primairly Journalism majors but appeals to a large number of college students.  At least Ron Paul teaches the ecconomic reasons for how things work.
    Any movement to change the the status quo must start with the young people.  but they must first be educated outside of the “free” public education system (a form of indoctrination camp). You choice of Pseudonym is very appropriate as the “valley girl” (not to infer that you are one sex or the other) is considered empty headed and clueless.
    until you expand your studies to anything beyond the lastest TV reality show and liberal studies you will remain handicapped and a comic to read in these colunms.

    To Steve Buckstein by tommorow I take it to mean Friday the 8th?  where in salem?

    Thank you

    • valley gender neutral

      Your SDS example bolsters my case. As does the Che posters. Lets not forget the Che posters.  And the anarchists. There is a group of young folk who have it all figured out. Young, emerging intellectuals are prone to follow charismatic crackpots. Left or right doesn’t really matter. And Libertarianism is a crackpot ideology.

      What Ron Paul “teaches” is a bunch of nonsense. Its like the guy read one book, probably Hayek, and created his entire economic philosophy from that. It has nothing to do with “how things work.” It has to do with “how things ought to work in my model if only we could get rid of government.” That things have never, ever worked this way, and for very good reasons, matters not to Mr Paul or his young impressionable followers. 

      As for the rest…what you don’t know about me and what I study is a lot. I’ll leave it at that. 

      • Dean, the SDS example does not  bolster your case; it is your case. No doubt there are plenty of centrist technocratic folks out there in middle age but you are not one of them. You are so ideological by temperament that you spend a great deal of time posting simple progressive answers to complex policy problems under articles of your state’s premier conservative blog. You compose them with such a flippant tone that they are not even intended to persuade. 
        There is nothing wrong with that, indeed I would prefer to have more progressives reading my articles than people who already agree with me, but what you are really doing now is to engage in a very circular attempt to discredit the ideas of Ron Paul’s movement for being ideological simply because they are incongruent with your own ideology. Like so many of the silver haired progressives that call the Portland Metro area home, you have retained the simple answers of the 70s, even as so many of them have been discredited by the events of the past four decades. It was not too long ago that you had a standard answer about how everything works great in Sweden, not knowing until I pointed it out to you that the romanticized Sweden of the 70s was such a failure that the Swedes abandoned it a long time ago. So you jump to Denmark as your new exemplar since your quick google search made you think it is both doing just fine with the kind of policies you favor (amazing how hard one has to search to find such an example) Funny thing is, the Danes have been slow to make the same reforms the rest of Northern Europe so now you find your ideological compass pointing to them at the very moment their standard of living is declining while Sweden and Germany’s continues to respond positively with every market reform. Indeed I have seen you repeatedly confronted with solid empirical evidence on various points you have made on settled matters such at trade, the historic 20% of GDP upward bound of revenue collection of the income tax, and the mountain of evidence that disproves the existence of the Keynesian spending multiplier, yet time and time again your response to real data is to descend into a Baghdad Bob like denial of reality that requires both a great deal of ideological passion on your part and the anonymity of posting under a pen name. There are no technical reasons to reject the various means to ensure price stability. The rejection of hard currency is normative: the argument that we SHOULD tax the purchasing power of savers to benefit debtors and encourage more leverage. This position remains popular to progressives due to the unwarranted assumption that inflation harms the wealthy more than the poor. As we increasingly transfer money electronically, the size and weight of the physical currency itself becomes even less relevant, but if your concern is having too much physical mass to measure value with, the history of fiat currency is to continually require more and more of it. A good example of this comes from Paul’s approach to petroleum prices. When his Republican rivals were tripping over each other trying to argue who could guarantee the lowest price of gas, it was Paul’s response that had the most reality-based claim when he suggested he could get the price of a gallon of gas down to a dime. As you know I have called the standard Republican position out here on the Oregon Catalyst. Pumping more oil domestically will have little material impact on the price of gas in dollars, but Paul was talking about pumping less dollars.What the folks at Fox news are missing is that the rise in the price of gas is primarily a monetary phenomena. Indeed the fairly technocratic Monetarists that argue we should manipulate the value of our currency for counter cyclical purposes also argue that all macroeconomic inflation is purely a matter of the money supply. Their rejection of an inflexible currency regime comes from their assumption that it is possible for them to know the right moves to ensure price stability with optimal employment, and assumption that looks less astute every day. Paul pointed out the price of the amount of silver in the dimes minted before 1964 exceeds the price of a gallon of gas today. They did not weigh much more than a paper dollar, took up less space, and were more durable. The kind of heavy gold coins you are talking about actually weigh less than the equivalent value of the amount of 20s that would need to be withdrawn from an ATM. If these stable measures of value simply sat in banks while we make our transactions electronically through plastic and eventually smart phone apps, the only thing we would lose is the ability to tax people through the devaluation of their purchasing power. If Ron Paul read only one book, he would be more well read than most politicians. Doherty details Paul’s intellectual journey and it has been quite broad. Paul’s own books themselves are full of substance with annotated bibliographies – quite the contrast with the likes of The Audacity of Hope where its few details are now apparently under threat by David Maraniss’ forthcoming biography of Obama by the way (if the twitter leaks are true). 

        • Lulzpdx

           Nice tantrum.  Feel better?

        • valley person

           Bagdhad Bob? Oy vez.

          Lets examine which of us is more or less connected to reality.

          The Fed expanded the monetary base by a factor of 3 times between the time Lehman went down and late 2010.  Ron Paul and his brain trust predicted hyperinflation would result. Not tomorrow. Not 10 years from now. But pretty much right away. It would have to because more money = less value of that money in proportion to the amount of money.

          The average annual inflation rate since 2010 has been around 2%.

          In other words, we just ran a real time experiment on Ron Paul’s theory of money, which is basically that the more money there is, the more inflation there is, hence “fiat currency” robs people’s savings (hidden under their mattresses I suppose). Yet when the Fed tripled the amount of “money,” very little happened on the inflation front.

          As far as I’m concerned, empirically this confirms Keynes, not Ron Paul. When you have a deflation, you re-inflate with currency. You don’t do the opposite, which is what Dr Paul and his band of merry know-nothings recommend with great zeal.

          On the gold and silver as money thing. Ron Paul has stated on any number of occasions that he wants the government to allow private individuals to mint metal coins and pass those off as money, and that he believes this metal money will out compete the Feds fiat money. Frankly, I’d like to run that experiment as well. I’d love to see libertarians running around with pockets full of metal trying to buy things. It would be a hoot.

          Empirically, Dr Paul has got bupkes.  He is a crank. A gentle, entertaining crank. But listening to this guy on monetary policy? I don’t think so.

          • heyjoe

             2% annual inflation rate?  Only if you exclude the things you NEED from the equation. 

          • I have viewed several Ron Paul talks on monetary policy both in person and video clips via social media, never have I heard him predict instant near-term hyperinflation of the 1979 variety. This is a straw-man caricature on your part. But first let’s get one fact straight. The money supply has not increased by 300% since September 2008; it has increased by 80%. That would indeed have deserved predictions of a near-term Wiemar outcome. I have attached a graph showing  the past three decades of M2 expansion to put the past three years in perspective. They have been expansionary but not that expansionary. Sometimes Dean one has to wonder where you get your information. 

            Ron Paul has predicted the same thing now that he did during the last business cycle. He has proven to be quite prescient. Which is why Doherty points out Paul’s supporters’ favorite clips to share on Facebook are recordings of what he was saying twelve years ago. There are three insights he has been speaking out on for some time now:

            1) Expansionary monetary policy prevents prices from adjusting to market clearing levels during a recession. If the value of our currency needed to increase by 6% in 2009 but we managed to devalue it by 2% instead, distorting prices by 8% might not rise to everyone’s definition of hyperinflation, but it is a nontrivial opportunity cost to savers. 

            2) Failure to allow prices to adjust has provided a non-trivial opportunity cost to everyone, savers and debtors alike. To enjoy a v-shaped recovery with strong sustainable job growth on the other end the economy needed deflation. We did not get it; we got a new credit boom to finance a different asset class to inflate. By 1979 it was commodities, 1991 junk bonds, 2000 equity, and 2008 real estate. We now seem to be reverting back to a 70s style commodity bubble, but the boom interval between each bust is getting shorter and shallower just as the Austrian Theory of the Business Cycle predicts. How did you like our boom for the past 3 years? Bernanke’s statement today reflects what I was warning you about the last time we talked macroeconomics. Our inflation numbers are too high for further stimulus. As they get higher, we are going to begin getting the opposite of stimulus after the election. So let’s compare crack-pot theories. We have 3% inflation with 8% unemployment now and going forward we have an accelerating rate of inflation and a decelerating rate of GDP growth. If you have read Keynes’ General Theory all you would know is that this is supposed to be impossible. If you have read Hayek’s Profits, Interest, and Investment you would know why it was inevitable. 

            3) Paul’s prediction of hyperinflation comes from his prediction of the Fed’s ultimate Hobbson choice between inducing the next recession or allowing inflation to continue compounding. First comes asset class inflation, only then is it followed by a systemic macroeconomic deterioration in purchasing power on the scale that undermines normal business transactions. We have avoided hyperinflation for three decades now due to the development of a fairly politically independent FOMC, though many Monetarists worry that this independence is eroding. Hayek was writing mostly in a time before Volker, but after inflation was tamed he warned that monetary policy could become subject to pro-inflationary short-term political calculation once again. The Fed today seems to be squandering the credibility Paul Volker established so long ago, policymakers today seem to take it for granted. 

            The idea that anything that has transpired since 2007 confirms  Keynesian Theory could only be uttered by someone who does not understand exactly what Keynesian Theory is. Keynes is all about the multiplier – no multiplier no Keynes. There is of course a folk theory of Keynes that goes something like this. If the government does intervene in the economy enough the world will not come to an end. Hey look the world did not come to an end, Therefore the government intervened enough. This modus tollens argument is valid but not sound because the first premise is false. If the government does absolutely nothing, the economy will recover on its own. Tired old assertions that marginal degrees of intervention have led to marginal increases in economic recovery lack evidence. Most interesting has been this new excuse for the failure of the largest fiscal stimulus in American history, the idea that our lack of growth today is merely evidence that the recession was that much worse. The problem with this magical thinking is that the worse the contraction the larger the bounce. The problem with the recession that ended three years ago has not been the size of the contraction, it has been the absence of the bounce. 

            In his book End the Fed Paul calls for the elimination of the Federal Reserve’s monopoly on the money supply. If you agree with that well great. If you fail to see how people could electronically trade gold certificates for products, take a look at gold spiders (ticker GLD) – a fully liquid denomination of value that could easily be fungible into retail sale transactions (if it were legal to do so). There would be less demand for this service if the US dollar could be maintained as a stable source of value. There are many policy options that could maintain price stability and prevent asset class inflation. If you recall I said I prefer simply pegging the currency to GDP growth. There is so much plausibility in Paul’s monetary views, it takes a far more ideological person to call him a crank.

          • valley person

             The adjusted monetary base increased from 800B to nearly 2800B according to the St Louis Reserve.


            I agree that is not the same as the total money supply. Nevertheless the point remains. Where is the inflation? It has to be there according to the Austrians. It was predicted very loudly by Dr Paul and others.

            “The idea that anything that has transpired since 2007
            confirms  Keynesian Theory could only be uttered by someone who does not
            understand exactly what Keynesian Theory is.”

            Take it up with Nobel Laureate Professor Krugman. Its about empiricism.


            You don’t need to get all lost in multipliers. You just need to reason out the paradox of thrift.

            Yes, even Keynes agreed the economy would eventually recover on its own. It would just take a long time. And during that long time there would be a lot of unnecessary suffering. 

            Let me ask you something Eric. If Romney wins the election, and our GDP growth is still around 2% or less, unemployment at 8% or more, and inflation under 2.5%, what do you think he will do? Will he quickly reduce spending and tighten money?

            And if not why not? He will be facing a 16 trillion debt after all. Is he a closet Keynesian?

          • So you confused the monetary base with the money supply, this is economics 101 stuff here my friend. Think of a water faucet and a bucket of water. The monetary base is the amount of water pouring into the bucket at any one moment in time. The money supply is the amount of water in the bucket. To use the language of mathematics, the monetary base is the derivative, the money supply is the function. Has quantitative easing increased the derivative of the growth of the money supply in an unprecedented way? Of course. Should we be thankful it has not tripled the money supply? yes. Bernanke made it very clear yesterday morning that there will be no QE3 unless the rate of inflation drops no matter how much economic trouble we find ourselves in. He was speaking for the FOMC which Obama has packed with inflation doves. Obviously they have been looking at the same leading economic indicators I have, plus they have access to better stuff than I got. They see the poltergeist of stagflation like the little girl saying “their baaack!”

            So I broke down clearly for you in three points exactly what Paul has been saying about inflation, all three points being exactly spot on. You ignored those points and restated your rhetorical question about a claim about instant hyper inflation that Paul does not make. If I recall correctly restating your conclusion while ignoring your interlocutor’s points is how you admit you are wrong. Where is the inflation? Three percent inflation with 8% unemployment with an accelerating rate of inflation and a decelerating rate of GDP growth is about the worst place for an economy to be in. It is exactly what Ron Paul has been talking about, and it has forced a hitherto very accommodating Fed to basically tell Obama, “sorry buddy no more sugar daddy!”

            Once again your response to the peer reviewed macroeconomic literature regarding the spending multiplier is to commit the logical fallacy of the appeal to authority which goes something like this: 1) As a microeconomic specialist, Paul Krugman won the Nobel Prize in Economics for empirically confirming that free trade is always more beneficial to an economy than trade protectionist measures, but he has never published any peer reviewed work in on macroeconomics in his life. 2) Krugman says he believes in Keynesian theory, and here is a short blog post where he says so. 3) Therefore: “I Dean Apostol declare that, though I reject Krugman’s views on trade, his opinion on macroeconomic policy is my rock solid evidence of the truth value of Keynesian theory!”

            In your link Krugman essentially admits there is no evidence, then follows with a few links that sound evidence-like unless you actually click on them. He says Keynes gives us a model. And it predicts the economy better than other models. He writes this for readers like you who will believe him just for saying so. He does not mention how poorly Keynesian models forecast. Keynesian models have trouble being accurate even when they look backward! Because they still have to assume a multiplier that gets pulled out of a hat and determines what happened. If the economy does not recover so well, the model says it would have been worse had there been no stimulus. If the economy recovers sharply the model says it could not have done this had there been no stimulus. For example of a forward looking model, the most important Keynesian model in question generated the following graph attached below. The Obama administration submitted this to congress. Everything is correct except the multiplier. Current work suggests it was 0.9 at best. We won’t know for sure for a while because the data for Valerey Ramey’s work lags by several years, but the econohipster blogosphere has it less than 1. 

            Krugman also intentionally leaves out the greatest flaw in Keynesian theory that caused it to be jettisoned decades ago. Under Keynes’ model stagflation is IMPOSSIBLE. It is impossible for Keynes’ theory to be true and stagflation to exist. Its inability to account for our present 3% inflation rate and 8% unemployment should cause any non-ideologue to move on to models that actually work. 

            You do indeed need to get lost in the issue of spending multipliers. If the multiplier is 1, all fiscal policy does is divert the same amount of economic activity that would otherwise have occurred from one place to another. It is often less than one due to both transaction costs and the way economic activity is diverted from more productive areas to less productive areas of the economy, so whether or not there is a paradox of thrift, government spending cannot do anything about it. When the multiplier is less than one, policymakers have inflicted more pain on working people than doing nothing would otherwise have entailed. 

            Hayek has a better model for understanding the paradox of thrift. If a natural rate of interest is determined by the savings rate, there will be an equilibrium between demand for goods in the present vs. demand for goods in the future. The disconnect between savings and output occurs when a low savings rate economy is not matched by higher interest rates.

            Krugman is likely aware of all the literature out there on the asymmetry between the economic contraction from raising taxes which are huge, compared to cutting spending which can be nil. When he claims that the “anti-stimulus” of austerity is bad therefore stimulus must be good, he engages in a great deal of equivocation, showing a chart that aggregates the many cases of increased taxes. He could just as easily have showed the different outcome in states like Estonia that simply cut spending. The best form of austerity is to never engage in profligacy to begin with. To me that makes Switzerland and Singapore the best examples of austerity. This is important because the kind of austerity we are seeing in southern Europe is not a choice, it’s what happens when no one will lend you money at rates you can afford. In 1990 Japan had no national debt. Two decades of aggressive stimulus where they have repaved every road many times, built countless bridges to nowhere, and hooked every rural hamlet up with broadband but their economy did not grow the way Keynes said it would but now they find themselves with a debt to GDP ratio of more than 200%. Every time fiscal stimulus does not work, there is always a faith based ideologue out there to say “well if only you had spent more!” The problem is that this just puts countries into deeper debt faster with little evidence it will work so that eventually austerity gets imposed on them sooner. When accelerated spending still does not grow the economy, the Keynesian will still claim it would have worked if only you had spent more. 

            The reason Krugman starts off identifying his beliefs as a model is that his claim to evidence in the 30s that stimulus was helpful is an obscure blog post of a paper presented in Europe in 2009 that could not find a journal to publish it. It presents charts but does not show the math or data that these charts are derived from. I have seen this link many times in recent years. Scrounging for some evidence of some kind, extremely ideological people of all ages looking for a simple answer will cling to something like this over the transparent and vetted work of Ramey, Barro, and Romer. I welcome these guys’ contribution. Let’s publish it so that we can all check their math. Ramey famously made a huge math error that the folks at the NBER had to correct for her. 

            It is also very revealing that Krugman in this blog post only alludes to evidence from the 30s. Given the right audience he will talk about the evidence from the 40s and the post war period, but Ramey, Barro, and Romer’s work has so discredited such claims that in that blog post he brushes every decade but the 30s off as “we don’t have a lot of post-war experience with stimulus.” This is so at variance with the current literature out there it speaks volumes as to how far into the depths of faith based ideology Krugman has descended for his many followers looking for their easy answers. This highlights the fact it is you that willingly ignores reality clinging to crank ideas that seem credible to you only because people who share your philosophical conclusions want to believe them too, but like trade protectionists and Aristotelian physicists the Keynesians have been empirically falsified long ago. 

            I have told you several times what Romney will do: Bowles Simpson, but I have also suggested that the same factors that will lead to his reelection could very well provide a large enough Republican majority in the Senate to pass “cut, cap, and balance.” If so Romney’s not going to veto it.

          • valley person

             See below to avoid the narrowing columns.

          • David Appell

            Ron Paul, Congressional Record(*), 1981:”As you know, I have introduced, and other members have cosponsored, H.R. 7874, which is a comprehensive bill to place the United States on a full gold coin standard within two years of the date of its passage.”I believe such a standard to be not only desirable and feasible, but absolutely necessary if we aim to avoid the very real possibility of hyperinflation in the near future, and economic collapse.”

            (*)As claimed by

          • valey person


          • I am hardly busted, since I have been talking about what Ron Paul has been saying now. What he was saying in 1981 was hardly far off either. When he uttered those words, the US was experiencing double digit inflation. It has been so long ago perhaps we have forgotten how disruptive that is to business transactions. 

            The one thing that Paul clearly got wrong was his political analysis that the monetary austerity measures of the Fed at that time would be brought to an end as the pain got too high. Oregon unemployment was much worse then than now. Had Reagan fired Volker, replacing him with a more accommodating monetary policy, Paul’s prediction would have been correct. The lesson learned was that the risk of hyper-inflation is primarily the risk that the Fed will be forced to fight it. As soon as our political culture will no longer support an independent central bank, the conditions for actually experiencing hyper-inflation will return. 

            We might also note that the average rate of inflation for the last 8 years of the 1980s was around 5%. What felt like a relief then would have people protesting in the streets now.

            Given the propensity of the progressive blogoshere to consider our hard earned price stability something to be taken for granted, there are legitimate concerns to be had about the political independence of the Fed going forward, just as Paul was well justified in holding those concerns in 1981. Locking in a full convertibility of the dollar to a fixed rate of exchange to a stable source of value would eliminate that risk as well as much of the financial turbulence we have come to accept as normal. 

          • David Appell

            We might also note that the average rate of inflation for the last 8 years of the 1980s was around 5%. 

            Or, we might not. It was 3.7%.


      • Jebman55

        I paid a handsome dollar to study the works of Hayek and other Austrian School economists, as well as Keynes and many others, at a very exclusive private college.  To dismiss something as ‘nonsense’ with no substantive argument is nothing less than an admission that you have no substantive argument – in other words, you are just shooting off at the mouth.  BTW, I am 57 years old and I am a fervent Ron Paul supporter, so it is simply inaccurate to say that his support comes only from young people with no life experience.  In fact, much of his support comes from people who have enough life experience to remember what a benefit civil liberties and economic freedom are to our society.

      • CactusCath

         I’m not an economist, but I am 52, educated, successful, and a fervent Ron Paul supporter.  His approach to foreign policy is the only moral and sane one.

        • It’s also quite 1935-ish suicidal.

          Except this next go-round, we won’t have the time for the do-over.

    • Steve Buckstein

       I’m speaking tonight (Friday) at 6:30pm before the Salem 9/12 meeting, at the Scottish Rite Center, 4090 Commerce Street, SE at 6:30pm.

  • HBguy

    I’m now reading “Hollywood Left and Right” which covers Hollywood political activists from Chaplin through Schwarzennegar. 5 from the left, 5 from the right. I’m now reading the chapters that cover George Murphy and Ronald Reagan in the 1960’s. 

    One thing that I didn’t know, was how Murphy, the first voice of the California Movement conservatives, was very much against “ill advised foreign wars”. And it wasn’t just the isolationist ideology, but also the fact that it created bigger government.Reagan on the other hand, was not as opposed to huge government spending on the military, largely due to his deep feelings about communism.So, perhaps you have something, Ron Paul is more like the original California movement conservatives from 1960. Reverse the new deal programs, reduce all government spending  including defense, roll back civil rights laws. A triumph by Ron Paul would be almost a do-over for the republican party where the original movement conservatives triumph.

  • David Appell

    Ron Paul has played a vital role in our representative democracy. By taking so many nutjob positions, he forces the more reasonable Republican candidates to toss a few bones to the extreme right to get the nomination. Then whatever GOP candidate survives looks all the more hypocritical when they try to move back towards the center for the general election.

    May there be many more Ron Pauls in America’s future — they may be all that keeps us on this side of the fringe.

  • Jebman55

    The “gold coins in your pocket” comment betrays that you don’t understand at all what people are saying when they advocate for returning to a gold standard.  Don’t know how old you were in 1973 when Nixon completed the severing of our currency from anything other than fiat, but i was old enough to remember that credit cards, for example were already in widespread use while we were on a gold standard.  A gold standard is completely compatible with PayPal or any other medium of exchange anyone wants to invent.  What would not be possible however, if for the Dept. of Treasury to just print up an endless supply of currency so the government can loan itself endless amounts of money.

    • David Appell

      When has the Dept. of Treasury ever printed up an “endless” supply of currency?

      • David Appell

        (PS: And wherever did they put it all?)

    • valley person

       Ron Paul has stated flat out that he wants the government to allow the private sector to mint gold and silver coins that would somehow compete with the digital dollar. He isn’t talking about Nixon and the gold standard. He is talking about pre-Federal Reserve, which puts him somewhere in the mid 19th century. By the time Nixon dropped the gold standard, gold was already an anachronism.

      It is quite possible for the Dept of Treasury to print enough money to loan to itself pretty much as it sees fit. It is doing that every day, did it by the boatload in WW2, and did it with gusto under the so-called conservative Ronald Reagan.

      Where is the hyper inflation? It has to be there right? You just stated it isn’t possible to print all this money, yet it has been done and inflation is at 2%.

      The Fed proved beyond a doubt it could eliminate inflation any time it wanted by adjusting interest rates upward.   That is monetarism, and for the most part it works.

      • Inflation at 2% in BS land maybe. Gas, food, electricity, medical needs everything I buy is up. Even cows are up almost 100%  since the printing presses have cranked up. Look into how the government distorts the numbers. Chris Martensen has a very easily understood series of videos showing how the numbers have been changed over the years. If inflation were measured the way it used to be when it was accurate inflation has been running between 8 and 11%.

        • David Appell

          Sorry, there is no govt distortion. See:

          The Billion Price Project

        • valley person

           I’ve got an idea. Why don’t we throw out the CPI and all just make up our own personal inflation rate. If I am a gold bug, my inflation rate would be like 500% over the last few years. Man…that really hurts. 

      • David Appell

        Where is the hyper inflation?

        It’s coming, just you wait and see. It will be here about 10 years after whenever it’s not here yet. 

  • valey person

    Eric wrote: “So you confused the monetary base with the money supply”

    No Eric…YOU confused my statement that the monetary base had expanded by a factor of 3 with me thinking the money supply had expanded by that amount. I said monetary base, you said money supply, and I clarified my point to avoid your own confusion, not mine.

    But thanks anyway for the tutorial. I like your metaphor.

    “Bernanke made it very clear yesterday morning that there will be no QE3 unless the rate of inflation drops ”

    He said further monetary base expansion depends on several factors, and one of those is employment. Obviously the Fed’s job is to balance inflation against unemployment. He can’t unilaterally decide that employment doesn’t matter. You also left out the point that Bernanke urged Congress to spend more money in the short term to boost employment. In other words: Keynes.

    We don’t have “stagflation.” You keep fighting the last war. We have stagnation due to massive de-leveraging. It is a classic case of too much private sector debt, followed by a huge drop in asset value after the bubble burst. In this sort of case, Keynes prescription remains the only one that works. Government spending. More money circulating, not less.

    U Chicago Booth School of Business surveyed its panel of 40 eminent economists on the stimulus. 80% agreed that it had “worked” at creating jobs and increasing the GDP. 4% disagreed. I’m with the 80% and you are with the 4%.

    You and the 4% could be right, and I and the 80% could be wrong. Like on Global warming I guess. But as a non eminent economist myself, I’ll go with what the 80% says in this case.

    And here is a 2nd question posed to them that goes to your “was it worth it” issue.

    “Taking into account all of the ARRA’s economic consequences–including
    the economic costs of raising taxes to pay for the spending, its effects
    on future spending, and any other likely future effects–the benefits of
    the stimulus will end up exceeding its costs.”

    46% agreed and 12% disagreed. Closer, but still favoring the stimulus and by association, Mr Keynes.

    Now you can throw out some insults at me, say I am relying on the expertise of others, that I used Google, that I don’t offer my own analysis, that I don’t use my own name posting here, and whatever else you like.

    Or you can explain why the U Chicago economists board accepts a Keynes stimulus as the appropriate policy response given our circumstances. Why did Bernanke tell Congress to spend MORE given our current deficit?


    • valey person

       Eric wrote: “I have told you several times what Romney will do: Bowles Simpson”

      Bowles Simpson is a long term plan for reducing deficits. Its not a short term plan for dealing with today’s unemployment problem.

      I’ll be more specific. What will Romneys spending and tax policies be his first year in office, other than BowlesSimpson?

      Will he:

      a) immediately cut spending by a significant amount
      b) immediately raise taxes or allow tax cuts to expire

      c) keep spending high and taxes low despite mounting debt?

      And if he chooses c, which by the way he already said he would, doesn’t that make him a Keynesian?

    • I said before that it is perfectly fine to be an ideologically driven seeker of easy answers. You should not consider that an insult. I have merely pointed out that you are equally as normative in your approach as Ron Paul is, and that Keynesian theory today is no less crackpot than the Austrian Theory of the Business Cycle. Indeed of the few who do not subscribe to Monetarism, it is more easy to find serous Austrians than serious Keynesians (assuming one even really knows what Keynesian theory really is). I would for example wonder if you could tell the difference between Paul Krugman and Jeffery Sachs. If you are simply starting from a belief that there should be more government spending in the economy, both Krugman and Sachs advocate that goal, but the way Sachs would do it has at least had several examples of success while Keynes’ theory never has. Again that is if you even understand Keynesian theory beyond the notion it is some form of pretext for your normative goals. 

      You have so often done a quick google search scrounging for the first progressive blog post or metric you think supports your argument, confusing nominal GDP with real, giving me a link to papers whose abstract you misread and whose content you never did, that it was very correct on my part to recognize that you described the monetary base in the context one would have used the term money supply. I hear Glen Beck types do this all the time. Indeed you were intentionally using a Glen Beck type exaggeration of the significance of the monetary base when you tauntingly asked why there has been no hyper-inflation with such an increase in something I have no doubt you thought was synonymous with the money supply. You used the right term, but you did not know what it meant. I also wonder if, like many amateur gold buyers I know, you misread the significance of that near vertical curve on the out years of the graph. That is the way all compounding functions look on a graph. Every little bump in the earlier years looked vertical too in its day. We have had a acceleration in the rate of increase of the money supply. It has even been larger than the previous recession, but it has not been of Wiemar proportions. It threatens us not with hyper-inflation. It threatens us with the inflation of an asset class bubble which is more and more looking to be commodities this time around. There is little risk of hyper-inflation because the Fed will give us a recession instead when they are faced with that choice. As an ideologically driven guy, you believe a priori that the 2009 stimulus bill was a wise move. You then google around for anything that supports that point. The literature does not, something Krugman obliquely admits in that link you provided, so you now cling to the IGM survey, the most methodologically maligned survey of its kind. This nonrepresentative survey of 43 economists that broke almost every rule of survey making, the most important being to keep the individual’s responces anonymous is essentially a collection economists that would like to serve in Democratic administrations some day that are put on the spot to take positions that would ultimately piss off progressive activists when their name is googled by as they are vetted for nomination. There are also a remarkable amount of them that were actually in the Obama administration in 2009. Austan Goolsbe for example is on the panel. I have already shared with you Ron Suskin’s discovery of how both Goolsbe and Romer warned Obama that the Recovery Act was too weighted to spending on low yielding projects and mere transfer payments to states to make local government payroll without enough tax cuts. The asymmetry between the stimulus of tax cuts and spending increases is the very thrust of Christina and David Romer’s work before she accepted the job. Now imagine she was on that panel. In an election year she is not going to publicly condemn her work in government. Colin Powell has not even done that, but the way Goolsbe, Romer, and Powell would answer an anonymous survey would be very different from what they say publicly. You call this panel a survey of the “40 imminent economist” yet it did not even have the five top names in macroeconomics: Ramey, Barro, Romer, Romer, and Sachs. What is revealing is that you failed to mention the results of more effective surveys such as the American Association of Economists survey that gets published every three years, the latest will be due this fall.  It is also important to remember that we were talking about Keynesian theory. Find me a survey, any survey, that identifies whether or not each economist is a Keynesian or not. They are nearly all Monetarists now. Above all other political considerations, Monetorist value the political independence of the Fed the most. They often support fiscal stimulus as a gimmick to allow government to appear to be doing something so that the real stimulus can be done by the central bank. Those that are progressive however prefer Jeffery Sachs’ approach. I have told you before I am no Monetarist, but let’s remember their problems are in the technical limitations of execution. Unlike Keynes, empirical research has confirmed several aspects of Milton Friedman’s theoretical work, but that does not mean it is possible for actual central bankers to KNOW what the right interest rates should be to conduct effective policy. Unlike Keynes, at least Friedman’s models work looking backwards, but it still suffers from a data lag. Monetarists have an effective way of measuring what the money supply should have been to critique past policy choices; they just lack reliable tools to tell them what to do going forward.It is important to remember that not all left-wing policy prescriptions entirely ride on Keynes who, though British, has been a uniquely American thinker because he supplies positivist arguments for progressives for a political culture that seems to reject normative arguments for social policy. The American Progressive movement did not get very far with the argument that we should sacrifice economic growth as a trade-off for greater equality of condition. Then there is the northern European approach to government spending that is decidedly non-Keynesian. It possess confidence in the ability to slowly invest in spending projects that yield a maximum return on investment. Northern Europeans squeeze the maximum productivity out of a minimum amount of compensation for government employees and contractors, something Keynesian theory considers counterproductive. I think it would be helpful for you to listen to a real macroeconomist that is as ideologically progressive as you are: Jeffrey Sachs, who is probably to the left of Krugman, but as a serous macroeconomist has responded to the empirical verdict on Keynes. Sachs values government investment tremendously, seeing effective spending as worth the cost trade-off of higher taxes, but he has been very critical of the 2009 stimulus. Watch this interview with Charlie Rose: I read his book The Price of Civilization but don’t expect to be reading my review of it here on the Catalyst. Sachs calls for both a significant increase in taxes and also reforms that eliminate price friction like the Davis Bacon Act. He also calls for large increases in education spending that is done in a way to train less humanities majors and more engineers, and even more vocational training and less college prep in high school. Like the Monetarists, there is much to agree with here on a theoretical basis, but Charlie Rose manages to make my argument for me when he questions whether or not effective spending is politically possible. If you learn anything from this interview, I suggest you take the time to read his rather long tome of a book. Think very carefully about what Bernanke said yesterday. There is a dual mandate so of course he is going to say employment is a factor. Here is the problem. Three years after the end of the recession, the unemployment rate is now almost twice as high as it was in 2002. That is to say unemployment is twice as high as it was in the very moment the Fed was throwing the kitchen sink at stimulus, but inflation is now twice as high too. If you listen carefully to his actual remarks, not some spun source that spoon feeds it to you, he made it very clear the only kind of unemployment level that the fed will respond to with more stimulus is the kind that materially reduces prices. That is just another way of saying that the Fed will now allow us to dip into another recession before it engages in more easing. This is the very war policymakers found themselves in four decades ago. Again, under Keynesian models this is supposed to be IMPOSSIBLE. I have to wonder if you actually saw Bernanke’s remarks. I have watched every testimony by a Fed chairman live for the past 12 years, and I’ve got to say this one felt like the most high stakes exchange I can remember. There was no call for big spending increases, by Bernanke. There was his beg and a plead that current law not be allowed to go into effect all at once in January 2013. Like both the Bowles Simpson and the Ryan plan, he suggested we phase fiscal discipline in over time, not delay it indefinitely until we have 4% GDP growth. Bernanke has been saying this for more than a year now while you have been oscillating between calling for either postponement of such austerity or embracing current law. The longer we delay fiscal soundness the less gradual its inevitable implementation will be, thus he was adamant that failure to begin reducing the deficit NOW merely inflicts more pain on us later. I watch these remarks to understand future Fed action. Getting up so early in the morning is part of my day job. But while watching it, I was reminded that you are not alone in pursuing the logical fallacy of the appeal to authority. Politicians ask him leading questions to create sound bites for the oracle to support their policy positions. Nearly every Democrat on the committee asked him to weigh in on the proper mix of spending cuts and revenue increases. He repeatedly refused to do so beyond saying whatever mix congress chooses it needs to start phasing them in NOW. He departed from this line only once. The chairman, Bob Casey, who in my book I argue might represent the future of the Democratic Party, recited the list of spending programs that will expire next year and asked Bernanke to suggest which one’s expiration would have the most negative impact on the economy. Bernanke responded that of the many things that will come to an end, the expiration of the Bush tax cuts will have the most effect. That is of course what I have said many times. While I too am a consumer of the original research of experts, unlike you I recognize that the opinion of an authority figure is non sequitur when used as a premise to support my own conclusions. It is the substance of the research from a credible source that one builds a valid argument with. It matters not that Ben Bernanke believes the opposite of what you do. What is relevant is that Bernanke and I are both responding rationally to the substance of Christina and David Romer’s published, peer reviewed empirical evidence that marginal changes in tax rates have around three times the stimulative and contractionary effect than marginal changes in government spending whose spending multiplier is near 1. Massive deleveraging is nothing unique to our times. That is what all recessions are. Stimulus spending with a multiplier of 1 or less than 1 does not “get money circulating” any more than doing nothing would, but it does divert resources from areas in the economy that are already growing. It is important to remember that not all areas of the economy go through deleveraging at the same time. The deleveraging in a recession is centered around the asset class that led the previous boom. While construction and real estate related businesses have been deleveraging we have had a massive growth in oil, gas, and a few other commodities for three years now. We have chosen to add as much friction to that as possible rather than support it the way we have been subsidizing things with a negative return on investment. Healthcare, telecommunications, media, and technology have great promise too, but they face the greatest regulatory uncertainties of any other industry. Real recovery comes from real organic growth, not hiring construction workers to build a slow train to Milwaukee to turn McLaughlin boulevard into a single lane highway and spending considerable money on a new bridge over the Willamette that will not take cars. It is also important to note that like the legacy of years of forest fire fighting, each attempt to stop the deleveraging process by propping up prices has continued to build up the fuel for a greater fire in the future. Three decades after Volker imposed massive deleveraging on us, the duration and depth of our economic expansions has been decreasing. Falling asset prices is not the problem, it is the only real solution. Preventing the needed correction in the area of the bubble, while crowding out the area of the economy that is doing fine is worse than doing nothing. We don’t allow the economy to restructure, instead we promote more leverage, delaying recovery while setting ourselves up for the next fall. 

      Like Reagan in 1981, once elected Romney does not have to worry about the short term. Neither did Obama three years ago. Making the right long term decisions once in office puts a president in a better position for reelection four years later. I have shared with you several passages from Ron Suskin’s book Confidence Men showing how time and time again Obama ignored the long term advice of his economic advisers in favor of the short term advice of his political advisers. Now it is Obama that has to sweat short term factors that effect unemployment. Romney’s short term plan for dealing with unemployment need be little more than to getting out of the oil, gas, agriculture, healthcare, technology, media, and telecommunications’ way. 

      • valley person

         You can try to kill me off with shot volume, and you may succeed.  I’ll return volley.

        1) “Keynesian theory today is no less
        crackpot than the Austrian Theory of the Business Cycle. ”

        What can I say to that claim? Keynes was the universally accepted model of democratic state economies from the end of WW2 until the late 70s. It was more or less displaced by Monetarism, not Hayak. And since monetarism just had a Waterloo of sorts, there has been a resurgence of Keynes, known as neo Keynes. When something has actually been tried and has actually worked for decades, and is being re-tried in real time, it can hardly be called crackpot.

        On the other hand, eliminating the federal reserve and going back to private coin minting? Not being tried anywhere. Crackpot.

        2) On my “ideology.” I don’t have one. I’ a liberal empiricist. The liberal part concerns the ethics of economic outcomes, not the mechanics of economic function. If a Hayak or Ron Paul world produced  decent outcomes for most people, I’d be fine with it. I feel the same way about state socialism by the way. Both systems had their chance and both failed.

        3) “As an ideologically driven guy, you believe a priori that the 2009 stimulus bill was a wise move.”

        See above. I’m not ideologically driven. I’m perfectly open to the idea that the stimulus bill was unwise, or did not work. But the evidence is that is was wise, and did work, though amounted to a 50′ ladder in a 100′ hole.

        4) “This nonrepresentative survey of 43 economists”

        All I can say is, read their description of their panel. It IS representative and their findings are widely respected.

        5) “you failed to mention the results of more effective surveys such as the
        American Association of Economists survey that gets published every
        three years, the latest will be due this fall. ”

        I can only shake my head in wonderment here. Since they only report every 3  years, and have yet to report on the effectiveness of the stimulus, which passed AFTER their last report, why in the world would I have cited them? And why would you even bring them into this discussion? This is a WTF moment for me.
        6) “Find me a survey, any survey, that identifies whether or not each economist is a Keynesian or not.”

        A quick Google search (ha ha) reveals the following self-identified new Keynesians:

        Alan Blinder
        Raj Chetty
        Brad Delong
        Huw Dixon
        Jacques Drez
        Jason Furman
        Jordi Gali
        Mark Gertler
        Robert Gordon
        Stephany Grifith Jones
        David Romer
        Nouriel Rabini
        Joseph Stiglitz
        Paul Krugman

        Romer is considered a leader in new Keynesian economics by the way, which contradicts your thesis about him no?
        7) “There was no call for big spending increases, by Bernanke. There was his
        beg and a plead that current law not be allowed to go into effect all
        at once in January 2013.”

        He doesn’t want spending cuts or tax increases now because it would harm economic growth. This despite the 16 trillion debt. He is obtuse, I agree, but seems to be saying more Keynes for now, and dealing with structural deficits at the appropriate time. Or phased in if you prefer.

        8) “It matters not that Ben Bernanke believes the opposite of what you do. ”

        He doesn’t. It is only your interpretation of what he thinks and I think that makes you think this. He and I agree that tax increases and spending cuts should be phased in. He and I agree (I think) that longer term changes are needed to reduce structural deficits. He and I agree that an immediate reduction in federal spending is unwise.

        9) “Massive deleveraging is nothing unique to our times. That is what all recessions are.”

        I guess this depends on one’s definition of massive. This recession is the first truly global one since the 1930s. That makes it like Passover: “Why is this night different from all others.” We don’t have any direct experience with this degree and breadth of a crash. Thinking it is a garden variety recession prevents the scale of response needed to get out of it. Your entire analysis reminds me of Mellon’s advice to Hoover to let everything liquidate down to whatever level is needed to rebuild from. Sound advice no doubt. But 34% unemployment, 4 years later, and no end in sight, not exactly a way to politically sustain capitalism. 

        We somehow managed to go over 70 years between major world wide recessions using Keynes and Monetarism in succession. Using your theory, that would seem to be an impossible record. We would have suffered deeper and deeper crashes along the way because we couldn’t possibly “manage” the economy through interest rates and spending. Yet we did.

        We have disagreed on the primary causes of the current crash. Was the housing bubble a public or private sector creation? I say both contributed in different ways.  Now the question is, how do we get all the way out of the hole? Do we just let de-leveraging happen or should the government and the fed do what they can to arrest the decline and speed the recovery?

        If you are a Ron Paul-Hayak follower, that answer is easy. The government can’t possibly help and can only harm. If not in the short term then in the longer term. 

        Not being a follower, and being pragmatic, I’ll just say that in the real world, not the theoretical one, democratic governments have to act. Keynes provides a means to act. We are using his advice to a limited extent, and it is working about to the extent we are using it. In the long run, we may be creating other problems, but we know what Keynes said about the long run. 


        • I attempt to be thorough not to fire buckshot, but out of respect for my readers to learn something. I do the same on Oregonlive, having found that human pride prevents an interlocutor to admit he is wrong when the available evidence does not support his position, but a remarkable amount of people read these conversations months, even years after the fact, and I often get twitter, facebook, and email responses of gratitude from people who have learned something. It is all part of this free lance writing thing I have been dipping my feet into. Otherwise I cannot imagine the value of parking my self on a daily basis over at Blue Oregon posting flippant remarks at the opposition with no interest in persuasion. There are too many places to see and undergraduates to do. 

          1) The idea that Keynesian Theory worked is a conclusion that can be repeated cheaply by merely typing that claim over and over again in a forum like this, but evidence for it is not only lacking, we have real evidence to the contrary. If the multiplier was 1 during the 30s, Keynes’ prescriptions were not helping. You might want to reread that blog post from Krugman and ask yourself what he meant by only the 30s providing evidence of Keynesian success, even Krugman has been forced to respond to Ramey’s work on the post war era which has become the gold standard for macroeconomic research (I suppose that was a pun). 

          Let us remember that Keynes was displaced by Friedman, but this displacement was because Keynes was empirically falsified. That is not the case with Hayek. Thus as Monetarism falls there are only two places to go: Austrian or Neo-classical. By the way there is group of Neo-classical economists that have incorporated the only empirically verified thing Keynes ever wrote about (the stickiness of wages) and the only somewhat empirically verified work of the Neo-Keynesians (the macroeconomic implications of monopolistic firm behavior). What does this group of Neo-Classical economists call themselves? That is a trick question I will answer further down. 

          The Austrian Theory of the Business Cycle does not necessarily call for the elimination of central banking or even the privatization of currency. It calls for a market interest rate that is determined by an economy’s savings rate. Ron Paul advocates doing it the old proven way, but there is a new proven way that has been adopted by Sweden, Hong Kong, Switzerland, and Singapore that simply pegs growth of the money supply to GDP, which has proven very successful and hardly crackpot. They seem to have eliminated endogenous shocks but are still subject to exogenous ones. Of course Sweden is facing one now. Anyone advocating throwing money at as many spending projects as possible regardless of their merit or their cost would be considered a kook in Sweden. To turn their ship of state into the storm, Sweden has been running a budget surplus of 2% of GDP. Did you watch that interview of Jeffrey Sachs by Charlie Rose? Here is the link again: 

          2) To paraphrase a liberal empiricist that became Clinton’s first Secretary of Treasury and served to become Robert Reich’s prime policy opponent: Dean, I served with liberal empiricists. I have known liberal empiricists. Liberal empiricists have been friends of mine. Dean you are no liberal empiricist. Liberal empiricists are free traders knowing that free trade and fair trade are the same thing. They are not “I’m for free trade, but…” only to go on to explain why they are not for free trade. Liberal empiricists look at the data on tax revenue and recognize that the most amount of income tax revenue the federal government can hope to take in is an average of 18%. And it is impossible to be both a liberal empiricist and a Keynesian at the same time when the empirical evidence has been so tough on Keynes’ Theory – that is if you even understand what Keynesian Theory really is. 

          If you cannot tell the difference between Krugman and Sachs, it is not at all unreasonable to assume you don’t understand Hayek. From Switzerland to Singapore there are countries that are Hayekean, not Misesean, but certainly Hayekean. The standard of living of their lowest quartile exceeds that of their Danish peers, and unlike the Danes, their lot is improving not declining. 

          3) As I have mentioned before the data lags, but in the next couple of years there will be papers that measure the 2009 stimulus bill’s spending multiplier. If it turns out to be 1, then a liberal empiricist would acknowledge that the 2009 stimulus did not stimulate would he not? If it turns out to be less than 1, a liberal empiricist would readily acknowledge its only help was to impede the recovery right? While we wait for the results, many folks of an empirical nature tend to assume that since it has already been discovered that from 1929 to 2006 stimulus efforts have never been more than 1.1, it is warranted to assume it is not the multiplier of 5 that Keynes predicted it would be. 

          4) So you reassert that the IGM panel is an accurate survey how? You provide a link where they say they are representative. Perhaps you did not understand how important it is that a respondent’s survey results be kept anonymous. In their attempt to be representative they have put on this panel the same percentage of Republicans that can be found in the top tier universities. Many people who are Republican get Phds in economics. Of them few are attracted to the notion of pursuing academic careers relative to private sector employment. Much has been written on this self selection. So the very act of only trying to be representative of universities means one is intentionally skewing it to be primarily Democrat. I cannot even figure out who the Republicans on the board are. Of the ivys, on the top of my heard I can only think of two Republican economists: Greg Mankiw and Robert Taylor. But forget about the partisan makeup, the primary problem comes when these Democrats who would like to be appointed Fed Chairman or something some day are forced to state positions on the record forever susceptible to google searching by congressional staffers. Most economists are Democrats for the same reason most affluent people are, for civil liberties first, foreign policy second, with environmental policy coming in a close third. Their economic views are of the DLC variety, but they don’t want to get the Cory Booker treatment for contradicting Democratic dogma during an election year. After the notion that private equity is evil, could there be a more dogmatic position in Democratic circles that the stimulus was worth the cost. So when the IGM’s methodology is so skewed to heavily to progressive responces, it’s really telling you something when not even half these folks will say the stimulus was worth the cost. The many undecided on the second question are obviously waiting for Valery Ramey’s forthcoming paper to come out. I suppose those undecideds are liberal empiricists and those that said yes clearly are not. While those who said yes are entitled to their opinion just like anyone else, there is no evidence to support it. 

          5) The American Economic Association’s survey is an anonymous randomly sampled pool of members. The 2009 survey had a question on stimulus spending. Since the circularity of Keynesian models tells us it always works, it does not matter if we ask him before the stimulus is enacted or many years after. If the economy has soon after enactment, he inputs into his model the assumptions of a huge multiplier. If the economy does not do so well, he simply readjusts the assumptions of how bad things would have been had we done nothing saying everything was worse than we thought. 

          6) In response to your “ha ha” I am not sure if it is appropriate to respond with a “ha ha” of my own. How many times have you provided me a link, a metric, and the like with some smug ha ha and what you provided me was the opposite of what you though it was? When this happens offering my own ha ha would be like Adam Sandler’s character laughing after wining a game of dodge ball in the movie Billy Madison. In this latest case, you can almost be forgiven because the labels are almost intentionally misleading. What is a British public school? It’s what we Americans call a private school. What is a New Keynesian? It is that group of NeoClassical economists that have incorporated the stickiness of wages and the macreconomic implications of monopolistic firm behavior into their theories. In other words, a New Keynesian is someone who rejects everything John Maynard Keynes ever said except the prediction that wages don’t adjust as smoothly as the price of apples. The monopoly thing came later, perhaps from Paul Samuelson, but I forget. With the exception of Krugman and Stiglitz, you appear to have given me a list of New Keynesians. Krugman used to identify himself as a New Keynesian back when he used to be an economist, but his political punditry public has motivated him to turn his back on his New Keynesian past. God only knows how you formed that list since you are missing the two leading New Keynesians: John Taylor and Greg Mankiw who are both conservative Republicans affiliated with the Hoover Institute! Supply Siders too are all New Keynesians. Go ahead and add Arthur Laffer to your list. The reason they have the name “Keynesian” in their self identification is because they believe in the need for fiscal stimulus and its primacy over monetary expansion, but they believe that government spending does little to nothing to achieve this. New Keynesians call for deep tax cuts. 

          Before the list you used the term “Neo” Keynesian and after it you mentioned Romer as a “New” Keynesian. While “Neo” is the Greek word for new, Neo Keynesians and New Keynesians are not only different; they are the opposite of one another. The only thing they have in common is a recognition of the significance that wages are sticky, there are limits to competition, and recessions call for countercyclical fiscal policy. But Neo Keynesians believe that government spending increases are more stimulative than tax cuts for which there is no evidence, and New Keynesians believe tax cuts are stimulative but government spending is not for which there is some evidence. Now perhaps you understand why Christina Romer was so critical in internal debates of the 2009 stimulus about the way House Democrats wrote it. If you recall from Suskind, she pounded the table for the payroll tax cut and against the aid to the states. She was disgusted with what was in the final bill and resigned.

          When Paul Krugman uses the term Keynesian without a prefix, and when a left-winger like Jeffrey Sachs writes op eds in 2009 saying Keynesian theory is a gimmick that does not work, they are both referring to “Neo” Keynesians. Once again my friend this is all Economics 101 stuff. I believe Portland State, like most universities, assigns Greg Mankiw’s introductory textbook which means the library will have a copy on hold at the front desk. It’s time you cracked one open. For a guy that likes to devote so much time discussing these matters, it would behoove you to acquire a greater grounding in the basics to at least get the terminology down. 

          7) Well this appears to be the closest I have ever seen you admit that you were wrong. I in fact did not leave “out the point that Bernanke urged Congress to spend more money in the short term to boost employment.” He did not call for any further fiscal stimulus of any kind.

          Yet you are still getting it wrong when you say “He does not want spending cuts or tax increases now because it would harm economic growth.” Perhaps you need to actually watch his remarks yourself. I’m sure they are available on YouTube by now. Bernanke cautioned that we not allow current law to go into effect all at once in January 2013 or any other sudden attempt to balance the budget all at once. He called on Congress to begin reducing the deficit NOW, but gradually, and that is exactly what both Bowles Simpson and even the Ryan plan do. It’s not what the President’s budget does, and the last time we were discussed this you were saying forget about Bowles Simpson, current law solves all our problems! Not the position of a liberal empiricist. 

          8) Unlike Greenspan, Bernanke is very clear. 

          9) By “this recession” being a “truly global” one, perhaps you are referring to the one we might be falling into now. During the time period between the NBER Dating Commitee’s beginning and end of the last recession there were many engines of economic growth all around us. We had ample opportunity to export massive amounts of coal and lumber to China. All manner of federal anti-trust and privacy investigations were hoist upon our growing tech sector. Our telecoms have been starved of spectrum. The blocking of ATT’s acquisition of T-mobile tremendously disrupted rational restructuring. We could be a massive exporter of liquefied natural gas. We could have been exporting Ford Explorers to a booming Korea three years ago, but the first orders are coming in this year. Tremendous opportunity was lost not because the entire world was in recession, but because we suppressed the very industries that had what those booming other markets needed. Instead Obama’s largest export has been ten year Treasuries. 

          We have a tremendous amount of experience with a crash of all sizes. The only things that are different now have been self inflicted. I suppose you have to go all the way back to the 30s to see the kind of intentional suppression of business activity we have chosen to implement today. Back then it was things like a growing utility business that was nationalized and replaced with inefficient public utilities. Amity Shlaes has a great book about that called The Forgotten Man. Our answer to this has been to suppress fossil fuels when they were in high demand around the world, so that inefficient green projects might be more competitive. Even were we to stipulate the need to sacrifice for the environment, it does not negate the magnitude of the costs of the sacrifice. 

          It is also not since the 30s that we have seen government spending on this scale before. Valery Ramey’s work identified a historical range of stimulus spending multipliers from 0.6 to 1.1. God forgive us if we have been getting 0.6. 

          It is very helpful that you bring up bring up Mellon’s advice to do nothing. What is missing from the People’s History of the United States is the fact Hoover did not heed it. He canceled private oil leases on public land to create a government monopoly to do the drilling in a way that would finance a massive Forest Service for which he had the federal government carve off land for public parks and national forests, hiring an army of park rangers. He doubled the number of VA hospitals. He hired an army of new lawyers to staff a massive new anti-trust unit at the DOJ. He ended the private contracting of federal prisons creating the Federal Bureau of Prisons with the hopes of employing more people than the private prisons did. He went on a hiring spree of social workers for the Bureau of Indian Affairs. H began far more major public works projects such as the Hoover Dam than most people today realize. Since so many of these things were completed after he left office, sloppy historians often don’t realize how much has been assumed to be an FDR project was instead financed and approved by Hoover. He lobbied Congress for and signed the Anti-injunction Act the first major pro-union federal labor law, and then there was his victorious fight for the Smoot Hawley Tariff Act. 

          Hoover was a disaster, but he was no exemplar of the hands off approach like Warren G. Harding. I just mentioned the major ones that he got through Congress. Many of his proposals were never passed like his call for universal old age pensions. He was unpopular at the time, but the shallow level of historical knowledge we have today has many people unaware of the fact that his unpopularity was primarily due to the way the economy’s continued decline got blamed on his progressive policies and his deficit spending. Perhaps you cringe to hear Obama called a socialist today. Look at the editorials of the time period from southern states, they called Hoover a Bolshevik. Another very easily verified historical fact is that too win the south FDR campaigned on a limited government platform that sought to end Hoover’s wasteful spending and balance the budget which has got to be the most cynical presidential campaign of all time.

          You miss the significance of the do nothing advice. Today it is easy to say as you do that “the degree and breadth of a crash” affects the rate of growth of the recovery. This is true, but the opposite of the way you are portraying it. The deeper the economy contracts the higher its rate of growth will be after the trough. This has been true of every recession where Mellon’s advice was taken. The recession prior to Hoover had far greater degree and breadth and the economy roared back then and every preceding one. Harding faced far more deleveraging as a percentage of GDP than Hoover did. The difference is that Hoover and his predecessor actively worked to prevent prices from adjusting. When we delay a recovery, we inflict more harm on people than market forces would otherwise have. 

          Your post war mythology reads like you get your economic history from a high school text book. You are missing two important things: a) the price stability that came with the gold standard. b) The New Deal died in 1940 and was not revived until the Great Society of the mid 60s. The federal government was far less a burden on society for the first two decades of the post war era. With the gold standard there was no Monetarism. In that blog post from Krugman he himself declared we have had no fiscal stimulus since the 30s. That is not entirely true, but it was both small in those days and Ramey clocks its multiplier well below 1. 

          The deficit spending that followed the implementation of the Great Society quickly ran into the wall of the gold standard so Nixon ended it in 1971. From 1964 to 1980 it was all stimulus all the time, and there was talk of a war on poverty, but what we really got was a war on productivity and it shows. Those 16 years are also the golden age of Keynesian policy and that shows too. The business cycle curve dampened to the point of stagflation. It is not at all clear that we would have suffered deeper crashes without it. It seems more likely we would have enjoyed stability more like the two post war decades. Indeed, after a nasty decade, Paul Volker had to cap it all off with a self inflicted crash of serous “depth and breadth” that at least was followed by a v-shaped recovery. The “depth and breadth” we had three years ago was only slightly greater than 1982. There is not enough difference in the seriousness of the two recessions to account for the complete lack of growth three years after our last one other than the very different policies pursued. Thirty years ago, their deleveraging as a percentage of GDP was even greater than ours was three years ago, but here we are in our L-shaped recovery with Obama looking for excuses.

          The dampening of the business cycle curve over the past 30 years has come from a different set of policies than the 1964-1980 time span with the dominance of Monetarism and supply sided fiscal stimulus. Admittedly better policy than what preceded it, having taken twice as long to give us low growth, high unemployment with an accelerating rate of inflation. It remains to be seen if a new era of policies will follow. I suggest crisis will force them on us. It could very well be we will be adopting them from other more successful countries like Switzerland and Singapore. We are already no longer the freest economy on the western hemisphere trailing both Chile and even Canada. We will get this change no matter what party is in power. The vote that will matter will be that of the bond traders. 

          We are living in the long run right now. It is Keynes’ Theory that has been dead for 30 years. Perhaps Friedman’s is passing away as well. 

          • valley person

             So many insults, so little time. Rather than send you a full list of what I read, what I think, who I had lunch with, and so forth to answer your kill the messenger rant, I’ll limit my response to  2 points.

            First, your unusual take on the fiscal multiplier of the stimulus.

            You write: If it (the stimulus multiplier) turns out to be 1, then a liberal empiricist would acknowledge
            that the 2009 stimulus did not stimulate would he not? ”

            No, he or she would not acknowledge that. He or she would say that GDP was raised $1 for each $1 spent. That is what a multiplier of 1 means. If GDP went up, then the economy was stimulated by that amount.

            But we will never know if the stimulus multiplier was 1, or less or more. We can only do good guestimates. Economists have wrestled with this question for many decades, and there doesn’t seem to be a ton of consensus. But what there does seem to be is broad agreement that a stimulus, whether from a  tax cut or spending, has a multiplier effect in proportion to the  functioning of the economy at the time. If the private sector is in a trough, like it is now, a dollar of new spending is worth at the least a dollar of non inflationary new GDP. There are spare resources out there, labor and capital, the private economy isn’t using. So if those are put to use that is only additive.

            If on the other hand an economy is running at full capacity, as it was during the 60s, a “stimulus” has little or no stimulating effect. It can’t because there are no spare resources to put to work. t can only be inflationary, and experience of the 70s suggests this was the case.

            On spending versus tax cuts as a stimulator. There is broad agreement among economists that to the extent a tax cut is spent, it stimulates. To the extent it is put in savings, it doesn’t.

            If the same money builds a bridge, I suppose its fair to say the amount of stimulus depends on where the materials are purchased, what the contractor does with the profits, and what the workers do with their wages.

            An important psychological variable that can only in truth be guessed at for any particular circumstance is the extent to which a stimulus will raise the “animal spirits” of the people. Will they react by re-gaining confidence to start spending again and stop hoarding? Who really knows? you don’ know, I don’t know, and even Christie Roemer couldn’t have known, though I imagine her educated guess would be better than yours or mine.

            Next, what happens to interest rates? If they climb due to a capital shortage, then the stimulus can have a dampening effect, and this is the core argument conservatives always make against government spending and deficits. Clearly, there has been no rise in interest rates since Obama’s stimulus, so I hope we can put that one to bed in this instance.

            The arguments before the Obama stimulus were around these points. How much will get spent versus saved? What happens to interest rates. You seem to be saying there is some fixed number attached to a stimulus that ALWAYS attaches. What economic textbook did you get that from?

            2nd point is your strange and very passionate distinctions between new, neo and plan old Keyensiesm.

            Robert Solow, a Nobel prize winning economists said not long ago: “We’re all Keynesians here. It doesn’t matter if we’re 45-degree, post-Keynesian, neo-Keynesian or what have you.”

            In the interest of brevity, I’ll go with his description.

            Now you can find different ways of trying to insult me Eric. Or you can make a rational argument and let that stand.

          • I adhere to a strict no insults policy, thus when an interlocutor of mine thinks I have insulted him, it reveals more about him than me. One important characteristic of all insults is that they are inherently non sequitur. Let’s take for example a certain reality that there are many people who comment under articles who are not very smart. Even when I am clearly dealing such a person I never call him stupid. Even if it were true, it is essentially a hominen. Stupid people can make valid arguments that if their premises are true, can be as sound as the arguments coming from a smart person, and I see smart people making invalid arguments all the time. 

            We should not however confuse the many times I have had to point out that arguments of yours are invalid with being insulted. We all have an ego that gets bruised when we are wrong. If I formulated my arguments in the form of so many Rhetoric 101 text book logical fallacies, and someone called me out on them, no doubt I would feel bad, but those feelings would prompt me to be more careful in the future rather than repeat it with glee. 

            I never label someone an ideologue even when they clearly are, unless it is in response to an extremely ideological person calling people with whom he disagrees with ideological while he insist he himself resides on the empirical high ground. Indeed this was the very reason I got involved in this discussion. 

            We also should not confuse my making the observation that you really need to get a better grasp of the basics to articulate your policy positions more persuasively. I cannot imagine any other reason why someone would spend so much time discussing policy with people they disagree with beyond the motivation to persuade. 

            No doubt I would feel humiliated if it were me that were trying commit the logical fallacy of an appeal to authority by arguing that it must be the case that increasing government spending to stimulate the economy is effective because the majority of economists agree with me only to back up my assertion with a list of economists who reject that position. If I were to spend so much time over at Blue Oregon telling its readers what economists think, I would justifiably feel uncomfortable if I did not grasp the basics of what the various schools profess. I would for example not dig myself into a deeper hole by delivering an old quote from the late Jim Tobin and attribute it to the still alive Robert Solow. 

            I can only wonder on what egg shells I must step upon to even address this without making you feel insulted. If you now want to argue that Neo Keynesians and New Keynesians are the same thing, you probably don’t want to do so using a quote that was uttered before the term New Keynesian came into use. It might have been helpful to take note of the fact the term New Keynesian was not even in the quote. The context of the quote was to pacify the very real differences between the Keynesians that trained him, like John Kenneth Galbraith, and the then emerging Neo Keynesians. It’s like you had said “most politicians in Congress agree with me on increasing government spending.” Then you give me a list of Republican congressmen that only believe in cutting taxes. After I had pointed out your obvious factual error, you then attempted to argue there are no differences between Democrats and Republicans by quoting Barack Obama’s 2004 DNC speech “There is not a Republican America or a Democratic America. There is only the United States of America.” We tend to say there are no differences between groups at war with each other primarily because the differences are so profound. The difference between the New Keynesians on Obama’s Council of Economic Advisers and Obama’s political advisers in the west wing was very profound. 

            Outside of popular progressive circles, you really have to search long and hard to find a Neo Keynesian today. The long-run has caught up with them, and they are mostly all dead. They did live long enough to see their theory die an empirical death, but it lives on in the imagination of the American left. A liberal empiricist would move on. 

            Certainly it cannot be considered an insult for me to point out that you misrepresented Bernanke’s views as badly as you misrepresented the views of the New Keynesian school of macroeconomics. Heck I make mistakes too once and a while. If you notice above, I tried to guess off the top of my head what the average rate of inflation was in the last eight years of the 1980s. David Apple pointed out that I was off a bit, and I thank him for it. I try to keep such mistakes to a minimum, yet I cannot ever imagine grouping the likes of Paul Krugman and Arthur Laffer into the same school of thought. 

            Then there is the multiplier. How do I address this delicately without making you feel insulted? You said: “GDP was raised $1 for each $1 spent. That is what a multiplier of 1 means.” Without accusing you of not knowing basic arithmetic, let’s review that if $1 raises another $1 the multiplier is two. If the multiplier is one, then $1 raises nothing. If the multiplier is less than one, it has done the opposite of raising money – it has contracted it. 

            I have shared with you before several links to the major breakthrough in macroeconomics that has come from the work of Valery Ramey among others. She was first out of the gate with this paper: Robert Barro independently confirmed similar numbers using a slightly different methodology. There were other technical means that indicated Keynes’ multiplier of 5 was a pipe dream decades ago, but the knowledge that we have the ability to measure the spending multiplier, and that it has been between 0.6 and 1.1 ought to eventually filter into progressive circles, but since the empirical work that has disproven trade protectionism has not made much impact on House Democrats, I won’t be holding my breath. It should however register well with liberal empiricists. The data lags a bit, but Ramey and Barro are working on ARRA right now – October surprise?

            When you claim that we will never know what the multiplier was, that sounds less liberal empiricist and more like the medical profession’s reaction to the work of William Harvey. Keynesian theory and bloodletting had a lot in common. They both worked on patients that could self heal to provide the confirmation bias, and every time a patient died, the Medieval doctor thought if only I had bled him more. Over the centuries those doctors developed all kinds of terms to describe the humors, that were so ingrained into our popular intuitive notion of how the body worked that folk knowledge presevered these concepts long after the rise of scientific medicine had disproven them. There is an entire Keynesian narrative that seems bent on living on as well about “animal spirits” and spare capacity that the government has to put to use. 

            Ultimately what a spending multiplier of 1 means is that government spending simply moves money around the economy that was already there. The way in which this is the cause of private sector inactivity is the concept you are missing. 

            Even when the government borrows money, for every dollar the government spends, spending elsewhere in the economy falls by that same amount. It is important that at any one time there is a certain amount of funds available for lending, and all borrowers compete to get a loan. The yield on a ten year Treasury is remarkably low right now, but this is no surprise when our Capital Account surplus is so high. During a recession, it is not so much the scarcity of capital that is the problem; it is the risk aversion. There is a flight to safety. It is very uncertain going forward, but historically the full faith and credit of the US Treasury has been considered the north star of risk – the borrower with the world’s best credit rating. During a flight to safety, the yield drops as demand increases for the most risk free asset. The thing you are missing is the fact that if there were no Treasuries to sell, that money would go someplace else. If the American companies with the best credit rating were the beneficiaries of this insatiable demand for US dollar denominated fixed income assets their ability to deal with their balance sheet recession would be substantially aided by the ability to refinance all their debt at the zero bound. Investors would also be pushed up the risk curve, financing the many areas of our economy with growth potential outside of the sectors of the economy that are correcting from a bubble. 

            We have had overcapacity in housing; we have not had overcapacity or bad balance sheets in oil, gas, telecommunications, media, and technology that would have had their business plans for expansion dramatically accelerated had the price of their financing dropped to Treasury levels because risk averse investors had no where else to go. This is how the massive auctions of US Treasuries have been crowding out private investment in a time when investors have little appetite for risk. 


      • valley person

         Guilty of using the Google once again, I offer these charts on the national economy under Obama. Every data point is positive since the stimulus spending went into effect. Its not wishful thinking. Its reality.

        • valley person

           And for a final summary of my position, it is well articulated here (though probably with a bit different long term spending and tax balance point):

          • Yes I remember Henry Blodget, Mr. Dotcom bubble celeb extraordinary. Now he’s pitching for the sovereignty debt bubble. That’s great! It’s like we can substitute the short term need run up our federal debt in this article with his his old research reports at Merrill Lynch calling for the short term need for profitless companies like to continue expanding so that they might show a profit some day long into the future. 

            All recessions are balance sheet recessions. Some of his charts are deceptive in two ways. First like the problem with the vertical nature of the out years of the monetary base chart, recent years look out of control, while decades before seem modest in comparison. Every similar chart of every previous recession looked just as menacing. Second, they all involve total US debt, which includes government debt. His solution thus involves adding more leverage to make the problem worse. He fails to see two important problems. First the countercyclical policy does not buy time for deleveraging; it slows private sector deleveraging down while merely  transferring even more leverage onto the public sector which will have to eventually tax the same private sector all that much more to eventually deleverage the public treasury. He tries to sell this as an effort to relieve the productive sector of debt, but he is forgetting that the productive sector will merely be trading debt burden for tax burden. 

            Second, he assumes we will build the infrastructure we need. A lot of money was blown in Oregon from ARRA. The only thing of any real value seems to be the widening of the northern quarter mile of highway 217. I took a ride on WES recently just to see what it was all about. I took a lot of great pictures that I might narrate into an article for next week or one of these days. Blodget does not really specify, but it is assumed he is talking about the federal government here. That is the primary problem. For example, the mother of no brainers is to build a 205 like freeway on the west side of Portland from Wilsonville to somewhere north of Vancouver that has a new river crossing. Instead of things like that we get stuff like the Milwaukee light rail. I am all for the government’s role in building the infrastructure we need, but it needs to come from local government. Federal infrastructure spending involves money being taxed from every state, sent to DC in a leaky bucket, and then stove piped back into the states for various projects of a certain kind. To finance the infrastructure we need it needs to all be paid for and controlled at the local level, and the debt to GDP level of most of the states is better than the federal government as well. 

            And infrastructure is not something to be rushed. Building the right thing for the lowest price possible for the highest return on investment requires a slow, continuous process that should happen throughout the business cycle.

          • valley person

             “All recessions are balance sheet recessions.”

            How was the Carter-Reagan recession of 79-82 a balance sheet recession? People and businesses didn’t retrench on spending to pay off debts, they retrenched in the face of high interest rates. As soon as the interest rates came down spending went right back up and the economy recovered, but with lower inflation, as the monetarists at the Fed designed.

            Yes, Henry’s solution, Krugman’s solution, and the logical solution to the problem we are in is to increase the government debt to keep overall spending higher enough to keep people working and paying off their debts, then transitioning back to lower government spending as people are able to be consumers once gain.

            That is the argument in a nutshell. And your argument is austerity now, however much is required, to purge the rot out of the system and then rebuild from the ashes.

            In an imperfect world I’ll take option A.

            “And infrastructure is not something to be rushed”

            As one who makes a good part of his living designing and planning infrastructure, I know that other than emergency repairs, it can’t be rushed. But it can be ramped up or down, and right now, with negative public borrowing costs, and long term private sector de-leveraging ahead of us, we ought to get real busy on infrastructure. Debt financed.

          • That recession thirty years ago was every much a balance sheet recession as all those before it and all those that have followed. Firms operate on leverage. If their revenue suddenly drops they become over leveraged. The agricultural sectors and resource extraction industries that formed a bubble by 1979 were some of the most capital intensive sectors of the economy. 

            Once you acknowledge infrastructure investment cannot be rushed you have just removed a key premise to support Krugman and Blodget’s logic. I am certain that of all the planning needed to build infrastructure, the landscaping takes the least amount of time, and yet that can’t be easy either. It has not been the landscaping that has held up the CRC. One can only wonder if their failure to make it high enough was the result of rushing. I suspect you value a thorough environmental impact statement as well. But like any other investment, the analysis of the project’s return on investment is the most important aspect that gets both rushed, bypassed, fudged, or ignored when crafting legislation like ARRA. 

            Did you watch Charlie Rose’s interview with Jeffrey Sachs?  In case you did not here again is the link: It’s only about 30 minutes long. This guy is as progressive as can be, but in the middle ten minutes he explains fairly well from a big government standpoint why Keynesian policy fails. In the rush to get money out the door money is thrown at projects that yield a negative return on investment. We don’t get the bridges we need, we get slow, expensive, and empty trains. In his book, Sachs is also very critical of the waste we heap on higher education, spending so much money to graduate a remarkably large amount of unskilled college graduates. 

            I’m all for debt financing infrastructure projects that make sense, and whenever possible they should be financed by user paying revenue bonds. This is not a tool for stimulus, it is merely a core function of government, local government. To get the stuff we need and avoid the waste, we need to apply the principle of subsidiarity.

        • Most of those charts depict bad news not good. There is a mathematical reality to time series data that depicts percentage changes that many people who read these charts don’t understand, and many people who display such charts intentionally try to manipulate for deceptive purposes. If something drops by 5% and then rises by 5%, it looks symmetrical on this kind of a chart but you are still in the hole. 

          When this same data is charted using a time series graph depicting nominal figures, it more accurately depicts the L-shaped recovery we are living in. The problem is not with using Google, its with not understanding what it is you find.  

          • valley person

             “If something drops by 5% and then rises by 5%, it looks symmetrical on this kind of a chart but you are still in the hole. ”

            Its funny you would say that given you have been arguing that we should have let the hole go as deep as it wanted to with no government interference so that we could climb out more steeply.

            I understand what I find Eric. I’m also beginning to understand that your ego can’t stand a counter argument. 

          • There is little evidence that our countercyclical policies are reducing  the amount of the contraction by much. There is substantial evidence however that allowing prices to fully adjust triggers higher rates of growth after the trough, rates of growth that quickly reach the high water mark of GDP in a matter of months. From a utilitarian stand point delaying a recovery as a trade off for a slightly higher trough inflicts more pain on more people. 

          • valley person

             You are arguing a counter factual. If Obama had done nothing and let the economy crater further, it would have been only slightly worse and we would have rebounded more quickly. This is something you can’t know and can’t prove, but you can assert.

            But a point you should think about is that modern recessions, when they happen, have automatic stabilizers that did not exist back in the pre-30s period. The SS checks continue to roll, unemployment kicks in, food stamps, energy assistance, etc all cushion the drop by themselves even if there is no stimulus spending.  

          • We seem to be descending into radical skepticism once again. Any one who has read Rene Descarte’s Discourse on Method knows there is only thing I can prove, my own existence. I cannot prove your existence nor can I prove that I am not a brain in a vat in a laboratory being fed stimuli. Everything beyond that has a level of doubt, the question is how plausible. 

            Nearly all contemplation of public policy involves arguing a counterfactual. I think it is perfectly rational for a liberal empiricist to argue that if the industrial revolution never happened, our planet would be cooler. That is not only a counterfactual, it involves models that are both more complex and more overdetermined than anything in macroeconomics.

            In this case, it is actually you that are plagued by the epistemology of the counterfactual more than me. I was absolutely correct to say there is little evidence that countercyclical policies have actually prevented our troughs from dropping lower. However it is a fact that every time no countercyclical policies were put into place, the growth rates after the trough were higher than when countercyclical policies were employed. It is also a fact that when countercyclical policies were not used the deeper the drop the higher the bounce, which is the point of this blog post by a leading New Keynesian John Taylor:

            So in a tale of two counterfactual narratives about this past recession, claims that we would have been worse off had there been no 2009 stimulus bill are less plausible than making reference to recorded history that shows what happens when we don’t throw money out the door at pet projects. 

            So when we take time to consider that today we have automatic transfer payments. We ought to remember that there were automatic transfer payments before as well through family and charitable support. Remember the recession that preceded what we call the Great Depression was actually worse, but there was no famine. Even in the 30s we did not have much of a welfare state; nearly all of it originates in the late 60s. Having said that, I think the price tag of maintaining an efficient social safety net is not our problem. In addition to the waste of ARRA, most of our waste comes from the military and the funding of entitlement programs for the middle class and wealthy. 


          • valley person

             See below for response to avoid the narrow columns of dialogue death.

          • David Appell

            If something drops by 5% and then rises by 5%, it looks symmetrical on this kind of a chart but you are still in the hole.

            Not by much — it would be down a total of 0.25% from its initial value. Over short periods of time (as on these graphs) the effect is negligible — and the graph of nominal figures certainly isn’t “L-shaped.” 

          • Now that we all recognize the significance of compounding down, here is what an L-shaped recovery looks like when comparing not the percentage changes in real GDP, but the nominal accumulation as the economy tries to compound back not only to pre-recession levels, but to “potential GDP”, a trend line set by the Production Possibilities Frontier Curve. 

            Below I have attached two graphs: today and 30 years ago. I got these from John Taylor one of the founders of the New Keynesian school and after David Romer, considered to be one of its leaders. Neo Keynesians like to compare these two graphs to show how a tax cut driven stimulus is far more effective than its government spending driven alternative. They also like to point out that 30 years ago the Fed was working against government efforts at stimulus while today, the Fed was aggressively stimulting the economy well before the 2009 stimulus bill was signed into law. 

          • David Appell

            What the graph shows is that nominal GDP is higher than before the implosion — making claims of an “L-shape” ridiculous. 

            After the disaster of the Bush administration, I’m amazed anyone would still use the words “tax cut driven stimulus” in that particular order:  

            “Bush On Jobs: The Worst Track Record On Record,”Wall Street Journal, Jan 9, 2009

            Once I realize that people are describing graphs as showing what they do not show, and making statements (“5%”) that the easily found data (“3.7%”) do not support, I tend to lose interest. Their conclusions are clearly not data-driven.

          • That graph shows an L because our GDP growth is parallel to the PPF not on a course to intersect it. As we graduate more students into the workforce, support more retirees, make more babies, and welcome more immigrants, simply returning to 2007 levels three years later is not a recovery as our per capita GDP has declined. 

            I have been critical of Obama, but you should have seen what I said about Bush. Obama has been exactly what he campaigned against: more of the same. Bush’s tax cuts were modest by New Keynesian expectations of what countercyclical fiscal policy should be. It was intended only to eliminate the austerity of running a budget surplus. Bush’s macroeconomic policies were as dominated by spending for stimulus as Obama’s only worse. When Bush was sworn in federal spending relative to GDP was 19.5%. When he left office it was 27.3%. As critical as I am about things like the WES train and the like, if we are going to blow money away I would rather it be on a train here than paying for a new bridge over an Iraqi river after paying for the bomb that blew the previous one up. Bush was a disaster. 

            That link you provided was great, but it was only a table of figures from the WSJ’s blog, and it looks like Obama’s number will be worse. A much better dig at Bush was published on the opinion page of the WSJ yesterday by none other that everyone’s favorite New Keynesian Arthur Laffer: 

            The difference between compounding down and compounding up was a very legitimate point. The greater the downward movement the greater the gap. Perhaps rather than choosing the 5% example I should have chosen 22% which is how far we dropped. If followed with a gain of 22% it leaves us just under 5% short. 

            I fully admit to carelessly guessing what the inflation rate of the last 8 years of the 80s was. I was pecking in a response from my phone while waiting in line to get into a club downtown. I was sober, but not in a position to fact check without leaving the page I was typing on. I would never have been so sloppy had I been writing an article, however let’s keep all this in perspective. I said an average of “around 5%”. The median on that table you provided was 4.4%. I think that’s not too bad for a guy going off memory while flirting with some college girls in the middle of the night. It is also the case that the correct number continues to confirm my point. We seem to have gotten used to high unemployment, but the greatest pressure Obama seems to face going forward comes from food and energy price increases. If the fed allows us to hit 4.4%, it will have a material effect on the “right track/wrong track” polling.  

          • valley person

             The Reagan graph shows 6 years to recovery. the Obama graph is only a 3 year time period. So unless you know what happens over the next 3 years in advance, you can’t know that the Obama recovery won’t actually match that of Reagan’s over the same time period.

            And again, the CBO, in their latest analysis of the stimulus, put a much lower multiplier on tax cuts than they did on Federal purchase of goods and services.

          • The graph for our most recent recession shows four years (the spending was out of control before ARRA and before Obama was inaugurated), but more importantly the slope in 1981’s recession was pointing toward an intersection with the PPF within a year, while we today have not only sustained a perfectly permanent parallel line, leading economic indicators show downward trends. If inflation were lower than 3% or at least accelerating downward, you could argue for some plausibility there will be a sudden pickup in growth in the next two years, but remember that curve measures REAL GDP. Two future alternatives will hold real GDP down. 1) inflation eats into it or 2) the fed fights the inflation which sends the real GDP down too. The second course of events is the most likely, but only after the election of course. 

            If one were taking a test for an introductory logic course, a quiz might ask the following task: Identify which logical fallacy this is:

            1) The CBO’s assumptions are true.
            2) The CBO assumes that government spending has a higher multiplier than tax cuts
            3) Therefore it is the case that government spending has a higher multiplier than tax cuts. 

          • valley person

             “while we today have not only sustained a perfectly permanent parallel line,

            How do you know it is “sustained?” It might be only delayed.

            Are you saying the CBO is wrong on its interpretation of the multipliers? Or are you just being snarky?

  • valley person

    Yet another point Eric. Your notion that government spending can’t exceed 18% of GDP and be sustainable. I’ve argued before that the sustainable number, and the norm for modern nations, is more like 40-60% of GDP for total government spending.

    According to the OECD, every member except South Korea and Ireland exceeds you threshold by more than double.  We know Ireland’s economy is in the tank, so lower spending doesn’t seem any more sustainable than higher spending, as in Sweden (54%), France (53%) and Denmark (52%). Sweden, as you have pointed out, has one of the highest GDP growth rates in the OECD either despite or because of its high government spending.

    The average seems to be around 45% of GDP.

    • The key word there is TOTAL. So in addition to national governments it includes not only local governments but outlays to state controlled enterprises as well. 

      Have you forgotten what we were talking about? It was whether or not the CBO’s baseline was a real policy option. You were saying, hey forget about Bowles Simpson, the CBO says current law makes our budget problems go away. I tried to point out two methodological facts about the CBO baseline 1) they exaggerate their growth estimates as a bipartisan gimmick both parties can agree on. Republicans want to believe lower taxes will generate more revenue while Democrats want to believe there will be less demand for social services. 2) The CBO is prevented from dynamically scoring so if taxes are suddenly jacked up, its methodology has to assume the same level of economic growth that would have occurred if there was no tax increase. 

      You would not believe either of those two facts. For you the CBO was an authority, and thus you repeatedly restated your conclusion: “I accept the GDP assumptions in the CBO report at face value.” Your only evidence being that the CBO is an authority. Since then two of your authority figures have been sounding the alarm, that current law will most surely send us back into a recession said Bernanke last Thursday, but even more amusing, and perhaps in response to the influence of the progressive blogoshere on Congressional Democrats the CBO itself issued a warning that they predict the “Taxarmageddon” will immediately contract GDP in the first half of 2013 by 1.3%. They cannot include dynamic scoring in the base line (which assumes 5.2% GDP growth next year) but I guess they can hold a press conference to warn us not to take their assumptions at face value. 

      One of your many non sequitur responses to my argument that we will not get those size growth rates with those tax levels was and I quote: “we have an aging population that is going to require more income and healthcare support” – sort of the little house on the prairie kind of evidence “we just godda pa we just godda” not that we can, we just need to. 

      It basically started when you rejected all that New Keynesian school evidence out there about the upward limits to how much revenue can be raised from an economy saying: “It took us a while, but we know your game and we are through playing with you. Because an aging population and all the necessary, not optional functions it performs, the federal government is going to remain at 20% to 25% of GDP for decades. Our perspective is that taxation should generate revenues in that range.” If perhaps your speaking in the third person plural was in reference to all the rational empiricists out there, I provided you the following data set: showing that though taxes have been much higher than they are today and sometimes lower, the revenue as a percentage of GDP has fluctuated between a narrow band of 15% to 20% of GDP averaging around 18%. Your response to the empirical evidence was “I don’t buy this limit. Sorry” Well so much for liberal empiricism. 

      Perhaps one thing that you are missing is that the federal government is not the only stakeholder in raising revenue from this economy of ours. State, county, municipal, and all kinds of port authorities are suckling upon the private sector’s teat as well. So total US government spending then is much more than 18% of GDP, it is 39%. The total US tax burden is 26.9%. 

      There are many countries out there that are substantially higher than us all of whom have lower per capita GDP than we do. Of the countries that have higher per capita GDP than the US, two spend about as much as we do (Norway is at 40% Luxembourg is 37%), and all the rest spend substantially less than we do. Most interesting however is the positive economic response to lowering it, as Sweden has come way down. It is interesting that you still tout that window of 40% to 60% when every country above 53% is desperately poor, and the most successful are below your lower boundary. Taxes have less to do with it; the biggest factor that makes countries substantially larger spenders relative to their GDP is the presence of state controlled enterprises. 

      Whether we are talking about a national government or a city government, the historical average revenue it can hope to tap from its GDP is very important. Debt spending that exceeds that limit as a percentage of GDP can be sustained at equal to or less than its growth rate. 

      • valley person

         I know it is “total” government spending. But some nations, like France, tax and spend almost entirely out of the centralized government. Others, like the US and I presume Switzerland, have much more government taxation and spending at the local level. Who cares?

        The point is the percent of GDP allocated to government. You claimed 15-20% is some sort of magic number. The evidence says you are way off.

        Here in the US, there is no practical difference between whether that 39% is federal, state, local, or any particular combination. I know you think local and state governments have less waste or make better decisions, but I work as a consultant for all levels of government, and I can tell you this is not the case. I doubt you can find any productivity difference amongst government levels. If anything, local governments are the worst simply because they have less talent and skill because they pay less.

        Think of it this way. 44% of every dollar the Us Government “spends” is nothing more than transferring income from working younger people to non working older people. The “cost” of that transaction is nil, a few percent at most. State governments have few or no similar income transfer programs, so can’t operate dollar for dollar as efficiently as the feds.

        Check out this comparison of government spending within the oecd.

        Page 5 ranks oecd nations by the amount of gdp their governments spend (2004-07 averages). The US is at 36.7%. Sweden, one of your heroes, tops the list at 54%. Yet Sweden has one of the fastest growing economies in the EU, and much faster than in the US.

        How can this be Eric? In your world view, is it even possible for a nation to spend half its GDP on government services and be growing at all, let alone faster than multiple nations with lower spending?  Including the US? What is your explanation for Sweden’s success? You can say they have cut spending since 2007 perhaps, but they can’t have cut it to anywhere near what we spend. 

        My own pragmatic, liberal-empiricist conclusion is that there is little relationship between government spending level and gdp growth. Other, multiple  factors are way more important. So going around stating that we simply have to get our spending into a fixed historical range is a bunch of nonsense. It is a cover for an ideology that just wants smaller government, regardless of consequences. 


        • The reason we should care about making a distinction between total government spending and the federal income tax, is that I have never argued there is a 20% of GDP ceiling for total government revenue collection. That is why I took the time to remind you of our previous conversation in the post you just replied to. I made a claim backed by solid empirical evidence that no matter how high our marginal rates are, we are not going to squeeze more than 20% of GDP out of the federal income tax base. Federal income tax rates have been much higher and lower, but they fluctuate between a narrow range of 15% to 20%. I have again attached that graph that I did last time when you refused to accept this reality. Here is a link to our previous conversation: 

          Regarding wasteful infrastructure projects, the difference in productivity between federal and local workers is not the issue, the incentives to seek a maximum return on investment are. When transportation dollars are distributed back to the states, local governments treat it like free money that is exogenous to their own budget. Congress distributes the money under a national political calculus rather than a local one. One state might get less money as a trade off due to a deal being cut to keep open a needless military base. Also the money gets stove piped into particular kinds of projects that may or may not make sense on the local level. Distribution of the money this way does not follow a formula for the state to rationally allocate to their local needs, but the money comes as a competitive grant for whomever most fits into a cookie cutter federal goal. To get the highest return on invested public dollars, we need clear and direct accountability between the population that will use the infrastructure and the politicians that oversee the project. 

          Infrastructure is of course very different than entitlement programs where there is no return on investment of any kind to be had. Entitlement programs are a form of consumption not investment. 

          As I mentioned before, the primary way a country can increase its spending as a percentage of GDP is the ownership of state controlled enterprises. If the US nationalized all its grocery stores, then every time people bought their groceries it would be revenue to the government. We could call it a food tax if you want, and every time the grocery workers and suppliers got paid, that would be a government outlay. Countries that are well into the upper 40s own entire sectors of their economy such as healthcare or individual enterprises that compete with private carriers like a national airline or oil company. 

          Sweden does not spend 54% of its GDP, it spends 51%. Your old data was correct, but as I was telling you the more Sweden cuts its spending the greater it performs. It has privatized its pension system converting from a pay as you go program to private accounts. To do that right, it has been expensive. They have been forced to make up the difference as young people’s money gets diverted out of the program. Over time, as current pensioners pass away, Sweden’s percentage will start to drop more rapidly. Sweden is not in my eyes the ideal country; it’s the country of ideal reformers. Singapore, Switzerland, and Hong Kong are countries I would identify as ideal. 

          Having looked at your paper from the Center for American Progress, I cannot help but wonder where you get that whole 40% to 60% window when every country well into the 50s or above is a total basket case. France is now at 56% and it will be fun comparing them with Sweden. Break out the popcorn Dean and let’s watch the next epoch of European history unfold. 

          One thing very admirable about the northern European countries, is that when they spend public dollars, they spend them well. That is essentially the point of Jeffrey Sach’s book. As he makes clear, to the Swedes, the utter waste of Keynesian countercyclical fiscal policy is sheer lunacy to their political culture. Besides the fact that there is a reason Sweden is reforming itself so dramatically and so swiftly privatizing state owned enterprises one after another, you also need to keep in mind the problem with looking at Swedish spending levels and assuming other countries can adopt the same rates and have the same success. Even as close as southern Europe, Nordic productivity, health, low crime rates, low corruption rates, and even rationality are traits not easily matched. Southern Europe also values a robust state sector, but is unable to raise as much revenue and is unable to spend the money as wisely as the Scandinavians do. Here in the US our behavior patterns seem to resemble southern Europe more than its northern neighbors. 

          It is interesting that when faced with rigorous evidence that the spending multiplier is 1 or less, you jump to the over determined metric of spending relative to GDP with the apparent hope that there is no relationship between the two on that level where culture and maybe even DNA come into play, and yet even there we find a strong statistical relationship. Probably the most pronounced period is those critical three years of 2007-2010. So I have attached a graph showing the relationship between the rate of increase in OECD governments’ spending relative to GDP growth during that time period before Greece began face default. So what is an empiricist to do? probably not run from evidence every time it is presented to him.

          • valley person

             “I made a claim backed by solid empirical evidence that no matter how
            high our marginal rates are, we are not going to squeeze more than 20%
            of GDP out of the federal income tax base.”

            That is way different than saying the federal government can only spend X. If I take your new statement at face value, then we could add a value added tax, or a carbon tax, or some other tax to cover the expected increases in elders demands on the treasury.

            “To get the highest return on invested public dollars, we need clear and
            direct accountability between the population that will use the
            infrastructure and the politicians that oversee the project. ”

            I’ll just say that you have a lot more faith in state and local politicians than I do. And I’ll add that federal transportation funding, which is by far the largest pot of infrastructure money, is mostly allocated to states based on population formulas, and the states and regional governments get to decide how to spend it. There are very few actual earmarks (in terms of spending proportion). And even those earmarks are lobbied by locals, not just made up by the feds.

            “Sweden does not spend 54% of its GDP, it spends 51%”

            That would seem a distinction without a difference Eric. I acknowledged that spending may have come down, but is still far above what the Us spends.

            “Here in the US our behavior patterns seem to resemble southern Europe more than its northern neighbors. ”

            Not in my experience. There is very little outright corruption in the US, especially at the federal level. If you have spent any time at all working through federal contracting procedures you would understand why.

            “It is interesting that when faced with rigorous evidence that the spending multiplier is 1 or less”

            The relationship between government spending and GDP growth in your chart seems awfully evident when you look at poor Ireland, which should be the poster child for what happens when you follow the advice of Eric. You tank baby.This despite low government spending prior to the crackup, very low tax rates , and a balanced budget.

            Ireland is the experience your side doesn’t want to talk about anymore. 

  • valley person response to your post above on counter facutals and recession recovery rates….

    Rather than go through charts of pre-1930s recessions to calculate recovery rates, I’m going to accept your premise that recovery rates were uniformly steeper and faster in pre big government days. I don’t know if this is true or not, but I’ll buy it for the sake of argument.

    Isn’t it possible…even probable…that the reason recoveries were steeper  back in the days before government got involved in “managing” the economic cycle that recoveries were faster and steeper simply because the overall rate of economic growth was faster, and this was due primarily to the transition of an agricultural to an industrial society?

    You look at China or India today, or the Soviet union’s early period, and you also see very fast economic growth.  It seems to me this has little to do with the size of the public sector, and everything to do with increasing productivity as peasants become industrial workers.

    But this is a one-off for any society. You can only shift from ag to industry once. After that you enter a different world where growth is limited by a host of interelated factors. Looking backward a periods of high growth and then making assumptions about the gold standard or the Fed or government stimulus and so forth seems fraught with conceptual problems to me.

    We live in a modern, post industrial world. We haven’t figured out how to keep people whole, or if you prefer, allow people to keep themselves whole, while relatively well paying industrial jobs are either automated here or shifted overseas.

    My hypothesis, and it is reinforced by the latest data on US household wealth loss, is that we are in uncharted waters. And that simple prescriptions, especially those that are backward looking, and whether from the right (end the Fed) or the left (get back to higher unionization)  are not all that helpful.

    Those preaching government austerity, like yourself, have to contend with this question. If we really do cut pensions, cut health care spending, cut education spending, and cut down the government work force, what takes the place of that loss of jobs and spending in the economy? It isn’t going to be industrial jobs. It isn’t going to be farm jobs. And given e-tail, it isn’t going to be retail. You and I are both white collar professionals, and we probably know a lot of fellow white collar professionals who are also under or unemployed, so more higher ed isn’t going to get us there either.

    Those advocating more government spending, like myself and Mr Krugman, have to face the fact that this is not sustainable unless GDP resumes at least a 3% longer term growth rate. If that does not or cannot happen, government spending has to come down later if not sooner.

    We need some new creative synthesis for what is going on here and what we can do. The left used to   say natural resource scarcity, especially energy, would force us to scale back our consumption. We were ridiculed for this and “proven” wrong after Reagan and the dropping of energy prices in the wake of new discoveries.

    Now it is your side saying we have to scale back consumption because government is too big and is a drag on economic growth. But the evidence for this is shaky at best. So lots of re-interpretations of the past are trotted out to show that the Great Depression was really Roosevelt’s fault, that the high tax rates of the 50s and 60s were somehow not real, and that government spending is higher as a proportion of GDP than it actually is,

    When I argue against the points you raise, is is because your explanations simply do not hold up. They require too much faith in the private sector. I don’t claim to have a better answer for the future, but I’m still searching..  

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