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.