Sunday, November 21, 2010

People: Do NOT eat Wheaties!!

Because from what I learned today, they make you very, very, very dumb.

Let me break it down for you. First, Tyler sends me to a Brad Delong post about medicare. Then I see a link to another Delong post called "Joe Klein has really eaten his Wheaties today". Intrigued, I checked it out, only to come to the horrifying discovery that Wheaties must be really bad for your brain.

Here's Klein:

Perhaps it isn't a coincidence that so many of the people whinnying the loudest are prominent members of the financial community, the sector that has had the most to do with hollowing out our manufacturing base....

People, you just know that this bizarre claim is submitted without any evidence or proof! It's a real head-scratcher. The Goldman-Sachs destroyed our manufacturing sector? Really? How? This is nuts.

Here's more Klein:

There is, for example, Glenn Hubbard, who was featured on the New York Times op-ed page recently in defense of the deficit commission, describing the problem this way: "We have designed entitlements for a welfare state we cannot afford." This is the same Glenn Hubbard who served as George W. Bush's chief economic adviser when Dick Cheney was saying that "Reagan proved deficits don't matter." One imagines that if Hubbard was so concerned about deficits, he might have resigned in protest from an Administration dedicated to creating them.

Wow. First, one can easily and logically consistently believe both of the following: (A) Our entitlement programs are unaffordable and (B) deficits don't matter.

Saying entitlements are unaffordable means you want entitlement spending cut. It's the SPENDING THAT MATTERS. Deficits, to a first approximation are future taxes so, yes one could hold the view that, while deficits don't matter, spending does, and the future path of our entitlement programs put us on a path to too high spending.

I am an example of someone who believes both (A) and (B) above, so is Milton Friedman.

Look, I am not a Glenn Hubbard fan by any stretch of the imagination, but there is really nothing necessarily hypocritical in simultaneously espousing the two views being attributed to him by the wheat-and-milk-addled Klein.

The last bit, that anyone who didn't resign from the Bush administration has no legitimate standing to discuss future entitlement spending, is just plain asinine.

People, Brad is a smart guy, so I figure he knows Klein is full of it. Thus I view his post as an elliptical, but important PSA on the ill effects that Wheaties have on brain function.

Thanks Brad!


Anonymous said...

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eightnine2718281828mu5 said...

Deficits, to a first approximation are future taxes

So anyone that believes that deficits don't matter obviously believes that future taxes don't matter.

Since spending must be paid for by a combination of past, current, or future taxes, your position is that it's consistent to believe that the portion of current spending financed by future taxes doesn't matter while the portion financed by past or current taxes does matter.

Norman said...

eightnine, spending determines the present discounted value of current and future taxes. Deficits determine what share of that PDV comes from present vs. future taxes. I believe the position described is that the total PDV of all current and future taxes--as determined by current spending--matters, while how those taxes are allocated across time do not.

This is not only a consistent position, it is pretty persuasive unless you have a strong reason why distributing the same tax dollars (in present value terms) matters. Delong thinks it does, but not everyone agrees.

Angus said...

Anon: dude, I said DON"T eat wheaties.

89: It's the spending that matters, not the timing of when we pay for it. No idea what your last paragraph is about; it's certainly not my position.

eightnine2718281828mu5 said...

Sorry, I'm not a fan of Ricardian equivalence.

I doubt that the average consumer pays much attention to US debt structure or takes it into consideration when making financial decisions; I've certainly never heard my neighbors or co-workers raise it as an issue when talking about saving, spending, etc.

And I know people who swear that SS won't be there when they retire but they still don't seem to be saving much for retirement. If they're ignoring issues of that magnitude it's hard to make a case in support of RicEq.

I'm particularly puzzled by folks who believe that government uncertainty is ruining the current economic environment while at the same time making arguments based on RicEq that assume detailed knowledge of future government tax burdens and debt.

eightnine2718281828mu5 said...

In "Essay on the Funding System" (1820) Ricardo studied whether it makes a difference to finance a war with the £20 million in current taxes or to issue government bonds with infinite maturity and annual interest payment of £1 million in all following years financed by future taxes. At the assumed interest rate of 5%, Ricardo concluded that

In point of economy there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever, or £1,200,000 for forty-five years are precisely of the same value.[2]

However, Ricardo himself doubted that this proposition had practical consequences. He continued:

But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

In other words, if people had rational expectations they would be indifferent between the two systems, but since they do not have them, they are subjected to a "Fiscal Illusion", which distorts their decisions.

from 'fiscal illusion':

Finally, another example of fiscal illusion may be seen in deficit spending. CATO Institute economist William Niskanen (2004), for instance, has noted that the ‘starve the beast’ strategy popular among US conservatives wherein tax cuts now force a future reduction in federal government spending is empirically false. Instead, he has found that there is ‘a strong negative relation between the relative level of federal spending and tax revenues.’ Tax cuts and deficit spending, he argues, makes the cost of government appear to be cheaper than it otherwise would be.

Shawn said...

"The Goldman Sachs." Haha...I don't know if I'm ever going to be able to hear Sachs or Bernanke without adding "the."