Just Because It Is in the Wall Street Journal…

does­n’t mean it makes sense.

The link is to an arti­cle titled Four Rea­sons Key­ne­sians Keep Get­ting It Wrong.

Well, some­one is wrong four times.

1) big increas­es in spend­ing and gov­ern­ment deficits raise the prospect of future tax increases.

Actu­al­ly, anoth­er good dose of stim­u­lus would prob­a­bly push the econ­o­my into real growth. The most pow­er­ful way to dimin­ish the deficit (and lessen the need for tax increas­es) is to grow the economy.

2) most of the gov­ern­ment spend­ing pro­grams redis­trib­ute income from work­ers to the unemployed.

In the first place, I seri­ous­ly doubt this is true. Or rather, I am cer­tain that the per­cent­age of the fed­er­al bud­get that goes to the unem­ployed is actu­al­ly rather small.* It may be pos­si­ble to define “spend­ing pro­grams” in such a way that “most” of them redis­trib­ute income from work­ers to the unem­ployed, but there is some game play­ing going on there.

In the sec­ond place, mon­ey to the unem­ployed is mon­ey that gets spent, and fast. Tax cuts for the wealthy do not get spent. They get saved.

3) Key­ne­sian mod­els total­ly ignore the neg­a­tive effects of the stream of cost­ly new reg­u­la­tions that pour out of the Oba­ma bureaucracy.

Assum­ing it is true that the stream of cost­ly new reg­u­la­tions are hav­ing sig­nif­i­cant neg­a­tive effects on the econ­o­my (and I’m not con­vinced it is true**), this does not in any way mean that Kenye­sian poli­cies do not work.

4) U.S. fis­cal and mon­e­tary poli­cies are main­ly direct­ed at get­ting a near-term result.

Well, yes and no. They should be aimed as much as pos­si­ble at a near term result. But it is not true that the pos­i­tive effects (the jobs) dis­ap­pear as soon as the stim­u­lus ends. One only has to look at the last stim­u­lus. Over two mil­lion jobs were cre­at­ed while those stim­u­lus dol­lars were being spent. Now that those dol­lars have run out (or are down to a trick­le), the jobs have not disappeared.

I think there was a time when the Wall Street Jour­nal was not just a pro­pa­gan­da organ for the con­ser­v­a­tive right. But today it is owned by Rupert Murdoch.


Safe­ty net pro­grams: About 14 per­cent of the fed­er­al bud­get in 2010, or $496 bil­lion, went to sup­port pro­grams that pro­vide aid (oth­er than health insur­ance or Social Secu­ri­ty ben­e­fits) to indi­vid­u­als and fam­i­lies fac­ing hardship.

These pro­grams include: the refund­able por­tion of the earned-income and child tax cred­its, which assist low- and mod­er­ate-income work­ing fam­i­lies through the tax code; pro­grams that pro­vide cash pay­ments to eli­gi­ble indi­vid­u­als or house­holds, includ­ing Sup­ple­men­tal Secu­ri­ty Income for the elder­ly or dis­abled poor and unem­ploy­ment insur­ance; var­i­ous forms of in-kind assis­tance for low-income fam­i­lies and indi­vid­u­als, includ­ing food stamps, school meals, low-income hous­ing assis­tance, child-care assis­tance, and assis­tance in meet­ing home ener­gy bills; and var­i­ous oth­er pro­grams such as those that aid abused and neglect­ed children.

Note that much of that 14% is not going to the unemployed.

** If reg­u­la­tions are caus­ing so many dif­fi­cul­ties, why are equip­ment and soft­ware invest­ments out­pac­ing pre­vi­ous recov­er­ies. Why do only 13% of small busi­ness own­ers say that reg­u­la­tions are the biggest prob­lem they face. Also, remem­ber that when a study says that a giv­en reg­u­la­tion is going to cost a giv­en sum of mon­ey, that mon­ey is still cir­cu­lat­ing in the econ­o­my and it like­ly results in jobs. Final­ly, to not have the reg­u­la­tions is to accept that eco­nom­ic growth is more impor­tant than a clean envi­ron­ment and work­er and pub­lic pro­tec­tions. Note that lack of envi­ron­men­tal pro­tec­tion is like­ly to lead to tax increas­es at a lat­er date to pay for the clean up.

Hat tip: Alt­house

Why Jobs Are Created

There is, late­ly, lots of noise from var­i­ous Repub­li­can politi­cians blam­ing Oba­ma’s poli­cies for the slow job growth. They think less gov­ern­ment spend­ing, few­er reg­u­la­tions would lead to more jobs.

Imag­ine you own a busi­ness. Let us imag­ine that your prod­uct is such that one employ­ee can pro­duce 100 units of your prod­uct per year. At the end of the reces­sion, you have 100 employ­ees and turn out 10,000 units of your prod­uct a year. This num­ber was arrived at because it is the num­ber that you are selling.

Now, if the gov­ern­ment offers you a tax cred­it if you hire some­one, are you going to hire some­one? No. You are still only sell­ing the 10,000 units that your exist­ing staff can produce.

If the demand for your prod­uct increas­es and now you can sell 11,000 units a year, then you are going to hire ten more employ­ees to meet that demand.

There are employ­ers who are man­ag­ing to meet the demand by work­ing their staff over­time (cheap­er than the ben­e­fit costs of anoth­er hire) and in a few instances a tax cred­it of some kind might tilt the equa­tion towards hir­ing. But an increase in demand will also.

Jobs are cre­at­ed by demand. Demand is the spend­ing of mon­ey. When the gov­ern­ment is cut­ting spend­ing it is cut­ting demand. Since the Repub­li­cans won the House, fed­er­al spend­ing has been cut. More impor­tant­ly, there has been no more stim­u­lus to the states, so state and local spend­ing has been cut includ­ing the lay­off of many employ­ees. This is what has been hurt­ing job creation.

July 18, 2011 Update: Here is the Wall Street Jour­nal in appar­ent agree­ment with me. Appar­ent since one must be a sub­scriber to read the entire arti­cle, but the first para­graph says:

The main rea­son U.S. com­pa­nies are reluc­tant to step up hir­ing is scant demand.

Who’s to Be Blamed?

The most impor­tant fac­tor influ­enc­ing who wins the pres­i­den­cy in 2012 is the econ­o­my. If the econ­o­my is show­ing improve­ment, then Oba­ma wins. If the econ­o­my has dou­ble dipped into anoth­er reces­sion, things look bad for Oba­ma. And if the econ­o­my is sim­i­lar to today’s, limp­ing along in a slow recov­ery, then it will be a close race.

There is anoth­er fac­tor that in cer­tain sce­nar­ios is more impor­tant than the econ­o­my. That fac­tor is where the vot­ers lay the blame if the econ­o­my is poor.

I have read a lot about Oba­ma’s (and the Democ­rats) poor mes­sag­ing and posi­tion­ing. But we have arrived at a point where Oba­ma has man­aged to be on the cor­rect side of the mes­sag­ing and positioning.

The Repub­li­cans are hold­ing the econ­o­my hostage. They refuse to raise the debt ceil­ing unless it is accom­pa­nied with huge amounts of spend­ing cuts and no increas­es in rev­enue. The prob­lem for the Repub­li­cans is that they are using the lan­guage of a hostage tak­er. Oba­ma ini­tial­ly asked for a clean bill, but quick­ly “caved” and entered nego­ti­a­tions. Since then, it is the Repub­li­cans who have repeat­ed­ly insist­ed that it is their way or the econ­o­my gets it.

If Oba­ma had stuck to his guns for a clean bill, he would have been just as much a hostage tak­er as the Repub­li­cans. He did not and the Repub­li­cans are now look­ing at the pos­si­bil­i­ty of tak­ing the blame for a bad economy.

Cause and Effect?

Of course the recent job num­bers now reveal that Oba­ma has destroyed the econ­o­my (at least accord­ing to some con­ser­v­a­tive voic­es). Here is a reveal­ing chart:

This chart shows pri­vate sec­tor job growth. Red is dur­ing the last year of the Bush admin­is­tra­tion and blue is the Oba­ma admin­is­tra­tion. The blue line to the far right is May of 2011. April 15 was when the 2011 bud­get was final­ly passed. The bud­get that cut spend­ing. What is the fal­la­cy? Post hoc ergo propter hoc. And, let us admit, the bud­get did not cut all that much spend­ing. But there is this:

About $8 bil­lion in imme­di­ate cuts to domes­tic pro­grams and for­eign aid were off­set by near­ly equal increas­es in defense spending

But cuts in gov­ern­ment spend­ing are not the only thing the Repub­li­cans have man­aged to do that might influ­ence eco­nom­ic and job growth.

There is the dread­ed “uncer­tain­ty”. This con­cept is a favorite of Repub­li­cans when, for exam­ple, there is a pos­si­bil­i­ty that the top tax rate might or might not go from 35% to 38% and job cre­ators sit on their mon­ey instead of cre­ate jobs with it since they do not know what the tax rate will be. I think that “uncer­tain­ty” is bunk, but…

What of the uncer­tain­ty of whether the US is going to pay its debt or not? Ever since the 2011 bud­get passed, the Repub­li­cans have made all kinds of noise that they will let the gov­ern­ment go into default if they do not get their way. Does this not cre­ate uncer­tain­ty? I sug­gest this cre­ates a hell of a lot more uncer­tain­ty than the pos­si­bil­i­ty that the top tax rate might go up!

Cause and effect? Ithink things were going along pret­ty good there until the Repub­li­can house final­ly start­ed influ­enc­ing what was happening.

Delegating Powers to the Vice President in the Mubarek Administration

OK, that does not roll off the tongue as nice­ly as rear­rang­ing deck chairs on the Titan­ic. But either metaphor serves in the case of our elect­ed fed­er­al offi­cials and the deficit.

Let us begin with an old chart from the Con­gres­sion­al Bud­get Office via our, ahem, good friend Ross Perot:

This chart is a bit dat­ed, but the curves have not changed much. Future deficits are the result of medicare/​medicaid and inter­est. The last being the same as say­ing future deficits are the result of future deficits. If future deficits can be brought under con­trol, then the inter­est pay­ments will take care of themselves.

Want some­thing more recent?

This is from Feb­ru­ary 25th, 2011. It assumes that the Bush tax cuts will expire and that the Oba­ma stim­u­lus tax cuts also expire. Note that the growth of health spend­ing goes from over eight per­cent of GDP to 12% of GDP while the total deficit at that point is 3.2 per­cent of GDP. So the entire pro­ject­ed deficit in 2021 could be attrib­uted to the growth of med­ical spending.

The Afford­able Care Act (Oba­macare) actu­al­ly includes sev­er­al mea­sures intend­ed to bring down med­ical costs. The CBO grades the Act as low­er­ing the deficit even though they did not take many of the cost sav­ing mea­sures into con­sid­er­a­tion on the grounds that the mea­sures had not yet shown they would work (they were not even law at the time…).

So the only seri­ous deficit reduc­tion effort in Wash­ing­ton today is the Democ­rats defense of health reform. Oba­ma freez­ing spend­ing and the Repub­li­cans talk of cut­ting spend­ing amounts to noth­ing more that del­e­gat­ing pow­ers to the vice pres­i­dent in the Mubarek administration.

Oh yes. If you want to clear up the short term deficits, this chart might prove useful:

For good or for ill, the spend­ing that the Repub­li­cans want to cut is there for a rea­son. Peo­ple like it. That spend­ing is pop­u­lar. War, the Bush tax cuts, and the reces­sion dri­ve the short term deficit.

Even if the wars end tomor­row, the sav­ings there will be min­i­mal. Some­thing else will come along. It always does.

Many of the cuts the Repub­li­cans pro­pose would actu­al­ly weak­en the eco­nom­ic recov­ery and so increase the deficit.

The Bush tax cuts should be allowed to expire. All of them.

So Far So Good

I just want to take a moment here to point out that, to the best of my knowl­edge, today, Thurs­day March 5, is the first day that any­thing the new Con­gress has done that might influ­ence the econ­o­my takes effect.

Today is when the two week con­tin­u­ing fund­ing res­o­lu­tion takes effect with its four bil­lion dol­lars worth of cuts.

I also would point out that the eco­nom­ic news has been trend­ing increas­ing­ly pos­i­tive for some time now (oth­er than oil and food prices which seem to have more to do with demand in Chi­na and India and uncer­tain­ty in the Mid-east than with US gov­ern­ment policies).

Credit Where Credit is Taken?

You may have heard that the eco­nom­ic recov­ery has con­tin­ued to strength­en. Of course, Repub­li­cans are quick to take cred­it. Real­i­ty presents a dif­fer­ent picture:

This chart* is the change in GDP by quar­ter. The red rep­re­sents the end of the Bush admin­is­tra­tion, the blue the begin­ning of the Oba­ma administration.

It would appear that the failed stim­u­lus and bailouts real­ly fouled things up!

In any event, the econ­o­my was clear­ly in growth mode before the Repub­li­cans had any chance to influ­ence it (espe­cial­ly giv­en that the Repub­li­cans have yet to do any­thing that would have an effect!!!).

But what does evi­dence mean to a par­ty that large­ly denies human caused cli­mate change (when they are not deny­ing cli­mate change itself) and most­ly does not accept evo­lu­tion as a valid the­o­ry of how life works on earth?

*Chart from The Wash­ing­ton Month­ly.

Financial Regulation

I do not pre­tend to under­stand the ins and outs of big banks and deriv­a­tives and what not. My guess is that more reg­u­la­tion is needed.

On the oth­er hand, even more impor­tant than reg­u­la­tion is lead­er­ship that will stand tall and address prob­lems before they become disasters.

It was obvi­ous there was a tech bub­ble at the time. Peo­ple made mil­lions sell­ing com­pa­nies with lit­tle more than an idea.

It was obvi­ous there was a hous­ing bub­ble at the time. Peo­ple were mak­ing thou­sands of dol­lars flip­ping hous­es. Often with­out doing any­thing to the house oth­er than hold­ing on to it for a few months.

Bub­bles pop and dam­age the economy.

When the next bub­ble appears, what will be need­ed is a leader who will take action to gen­tly let the bub­ble down, not reg­u­la­tions designed to pre­vent the last breakdown.

Regulating the economy

To be hon­est, reg­u­lat­ing the econ­o­my is most­ly over my head. Or, maybe, just bor­ing to me. Either way, when­ev­er an arti­cle men­tions deriv­a­tives two or more times, it is iffy that I will get to the end.

Still, it is an impor­tant top­ic. I’m sure some argue that the less reg­u­la­tion the bet­ter. And I can’t argue that. As long as there is enough, there should­n’t be more.

I’m guess­ing that every time an eco­nom­ic reg­u­la­tion is writ­ten, there are par­ties that imme­di­ate­ly set about find­ing a way around it. So, even though it is impor­tant for the present reg­u­la­to­ry scheme to be adjust­ed to new real­i­ties, we should nev­er assume that all con­tin­gen­cies are covered.

It seems like what we real­ly need is some­one who iden­ti­fies prob­lems and acts on them. Did­n’t most of Amer­i­ca under­stand there was a hous­ing bub­ble? Was­n’t this clear a cou­ple of years ago? Or ear­li­er? Did­n’t Fed Chair­man Greenspan com­plain of irra­tional exu­ber­ance in the stock mar­ket in 1996, four years before that recession?

In both cas­es, every­one under­stood that eco­nom­ic growth was being dri­ven by bub­bles. But no one had the polit­i­cal courage to do some­thing about it. Maybe end­ing a bub­ble inevitably leads to a reces­sion (and who wants to be respon­si­ble for that?), but I’m bet­ting end­ing the bub­ble soon­er rather than lat­er would lessen the recession.

Maybe the next round of eco­nom­ic growth will be pow­ered by an increase in pro­duc­tiv­i­ty instead of a bub­ble. You know, for a change.