Don't take the Deal!

David Brooks, Tyler, & Megan all implore the Republicans to "take the deal", meaning to accept some tax increases in exchange for "trillions in spending cuts" as conditions for raising the debt ceiling.

I disagree.

But, Angus, those are smart people, smarter than you, what is your problem?

Thanks for asking.

Let's ignore the fact that our economy is still in a big mess with high unemployment and underwater homeowners and just look at the terms of the deal.

The "cuts" are over a 10 year window. People, we have seen this movie before. Presidents are elected for 4 years, House members for 2 years. Current decisions are non-binding on future politicians. The cuts are a joke.

The tax increases, I'll wager, will NOT be coming over a 10 year window.

All current politicians can credibly do is cut NOW. So Republicans, please: cut or get off the pot.

It will never happen, but what we actually should do is (1) raise the debt ceiling with no strings attached. (2) Cut, not raise taxes, (3) pray that our credit holds out long enough for the economy to get healthy. (4) when either the economy gets healthy or our credit runs out, then cut spending down to size.

Don't cry for me Greco-tina

People, we've seen this movie before. Greece is Argentina II.

The parallels are uncanny. Insolvency was mistaken for illiquidity. Devaluation was shunned. A big loan package was created with conditions. Conditions weren't met, but installments of the loan were still given (this has only been announced for Greece, it hasn't actually happened yet), and now a "second last chance" loan is being prepared.

All the while the economy and institutions of the country continue relentlessly downward.

The only ones getting bailed out here are the banks who have big exposure to Greek debt. Greece itself is not getting bailed out, it is getting deeper and deeper in debt!

I understand that a currency union is harder to get out of than a currency board, but the combination of fiscal irresponsibility and a fixed exchange rate is just lethal in our era of capital mobility.

Greece needs the ghost of Nestor Kirchner to swim over and give them the onions to simply default.

I guess Paul Krugman shops at the Gap...

....because he doesn't know much about Banana Republic!

Paul says trying to link spending cuts to raising the debt ceiling makes America more likely to be seen as a Banana Republic, because it will show that "crazy extremists" have so much "blocking power" that we can't "get our house in order".

I would venture the view that the opposite is more likely to be true. Unconditionally raising the debt ceiling (again) without changes to path of future spending is likely to re-confirm the view that America is well on the road to becoming the mother of all Banana Republics.

Historically, Banana Republics were not run by "crazy extremists", they were run by corrupt plutocrats who governed in favor of foreign companies that controlled the export of the country's primary product (Wow, is Goldman Sachs the USA's United Fruit??).

In order to save the budget we first have to destroy it

Christina Romer tells Ezra Klein that cutting spending now won't show people that it's going to be under control, but spending more now with promises to fix it later will!

People, I am not making this up:

If people do think we’re out of control of our budget, that surely can’t be good for investment. But how do we show we’re in control? House Republicans say it’s by cutting $61 billion out of this year’s budget. A more sensible view is that $61 billion won’t do anything, so why would anyone be reassured by that? The more sensible thing is we should have a package for short-term stimulus that also includes concrete policies that deal with the deficit, which means entitlements and taxes and defense spending and everything else.

Yeah, only a moron would think that cutting spending now would make people feel better about the budget. Just let us spend a little bit more now and we promise will fix EVERYTHING real soon!

Is there anyone who still buys this?

How not to do economics; a continuing series

At a blog called Angry Bear, someone named Rebecca Wilder put up a post claiming that the "corporate savings glut" is what is causing unemployment. Since then, Mark Thoma has both linked to the post and later quoted it at length, so I decided to take a look.

Not good.

The first problem is treating accounting identities as causal mechanisms, as in "elevated excess private saving (firms and households) keeps the government deficit in the red." People, you can't do meaningful comparative statics on accounting identities! There is no causal chain in an accounting identity!

The second problem is that Wilder is making up variables on her own account namely private excess savings and corporate excess savings. She is somehow able to divine these clearly endogenous and unobservable variables from the Fed's flow of funds data (I believe by assuming that ALL saving is excess saving*)! Personally, I would say that by definition, from the point of view of the household, excess saving is always zero!

The third and most egregious problem is conflating correlation with causality. Wilder shows that the correlation between the "corporate savings glut" and unemployment is .71 and leaps to the conclusion that corporate savings is causing unemployment! Of course it is equally possible (given the analysis done there) that unemployment is causing corporate savings.

But the most likely situation is that some set of third factors are causing both unemployment and corporate saving. Both of these variables are clearly endogenous in any sort of general macro model, and a realistic analysis would need to be with something like a structural VAR based on a clear identification scheme.

Corporate cash balances are high. Unemployment is high. That doesn't mean that one is causing the other.

*here is Wilder's stated definition: The excess corporate saving rate is the residual of the Current Account (external saving) net of government and household excess saving.

I didn't see a definition of household "excess" saving.

So Close, and Yet....

Matt Yglesias comes tantalizingly close to making sense for some of these, and then flitters away like a butterfly.

His list of "Things I Support for Policy"

— More redistribution of money from the top to the bottom.
— A less paternalistic welfare state that puts more money directly in the hands of the recipients of social services.

If these were taken as a couplet, I could sort of go along. The first by itself is nonsense; it's not wrong, it's impossible. But if we were to take all the money now spent on welfare and social services for the poor, and split it 80% to the poor, 20% tax rebates for the rest of us, AND PUT ALL THE 80% INTO A NEGATIVE INCOME TAX...then W. Pareto would smile. This is pretty much the argument I make in a paper forthcoming in Basic Income Studies. The point being we don't need more redistribution from top to bottom. What we need to do is make sure some of it actually makes it to the bottom, by preventing Robin Hood's Merry Men in Washington from drinking it all up and spending it on hookers.

— Macroeconomic stabilization policy that seriously aims for full employment.
— Curb the regulatory privileges of incumbent landowners.

I literally have no idea what the first one means. And the second one is clear, but terrifying. Good God, man, have you no shame? Have you no shame, sir? "Curb regulatory privileges" is just a straightforward taking, only without all that expensive (but Constitutionally-mandated) compensation.

— Roll back subsidies implicit in our current automobile/housing-oriented industrial policy.
— Break the licensing cartels that deny opportunity to the unskilled.

Jeez. Wot hoppint? These not only make sense, they are essential pieces of the libertarian economic program. And they are both well and precisely stated. I find it surprising that Matt Y actually believes the second. *I* certainly think the second is a huge problem, but....wow. Matt: much proper respect and love. This is good work, here.

— Much greater equalization of opportunities in K-12 education.

Put "public" and I'm with you. I don't see a reason to cap how good private schools can be (necessary to "equalize"), but I don't see why there should be such enormous disparities in public education, even in the same state. Of course, the way to do this is vouchers and charter schools. It would be fast and effective. Not sure Matt would go that far, though, 'cause he believes in government PROVISION of education, where I would go no further than government FUNDING of education, and even there I have some worries.

— Reduction of the rents assembled by privileged intellectual property owners.

Sure, yes. Don't feed the trolls. Patents and copyrights need reformed.

— Throughout the public sector, concerted reform aimed at ensuring public services are public services and not jobs programs.

Holy smokes! Not sure how this squares with the "full employment" thing, but if this be reform, give me more of it! In fact, the more I read this one the happier it makes me. Focusing on public service means you might be able to judge if it is a public good, and if it is worth something. Focusing on "jobs" means that evaluations go like this: (1) Do you have a budget? Yes. GOOD! (2) Did you spend it? Yes. VERY GOOD! Evaluation: Excellent program.

— Taxation of polluters (and resource-extractors more generally) rather than current de facto subsidization of resource extraction

Absolutely. AB. SO. LUTE. LY. Stop feeding the oil pigs, the coal pigs who rip the tops off mountains, stop subsidizing extraction with foreign wars that waste our young people and our taxes. If oil and coal were charged out at anything like their true prices, we would not need to subsidize "green" alternatives. Gas would (and should be) $5 a gallon, and coal would be expensive enough that we would find other ways to generate power. Instead, just as Matt Y says, we subsidize the pigs, and then we subsidize the "alternative" fuels. Since all we have to do is STOP spending tax money on coal, oil, ethanol, and so on, this should be doable. Sure, energy prices would go up, but they should go up. And if we had an effective basic income scheme, poor people could still afford the energy.

Overall: well done. Very solid on the list; counting 1/2 's I would say I am with him on 6 of these. I'm pretty confident that there are zero Republicans politicians that would get a 6/10 from me. So, Matt Yglesias for President!

Augustine lives!

In today's NY Times, Christy Romer opines on "What Obama Should Say about the Deficit". Her idea is along the lines of "Lord, grant me chastity, but not yet".

Here's the exact quote:

"He should make clear that the issue is spending and taxes over the coming decades, not spending in 2011"

Wow, "the coming decades". So spending will become an issue in 2021? Good to know.

I actually hope Obama does NOT follow her advice, as the current pool of Republican candidates is so mutant that I am hoping President O can get hisself re-elected.

Telling America that spending won't be an issue for the rest of his first term and all of his second term is not a path to electoral success.

Hans Rosling's Chart is SERIOUSLY MISLEADING

I guess I am the last person with an internet connection to see this video.

Yes he's an entertaining and enthusiastic guy. Yes, the rise of China and India is amazing and fantastic. Yes there is a large "middle class" of countries.

But people, have you looked at the horizontal axis of his chart? The distance between $400 and $4000 is the same as the distance between $4000 and $40000.

That is incredibly misleading.

Properly plotted on a linear scale, it would be clear that there was way way way LESS income inequality in 1810 or that magic year of 1948 than there is in 2010.

We are NOT living in an "age of convergence" with respect to per-capita incomes.

It is NOT only Sub-Saharan African countries stuck at the bottom.

Latin America is NOT catching up to the USA.

The whole thing is pretty much horse hockey.

Then the press grabs ahold and starts to exaggerate the exaggerations. Here's David Brooks:

"Then, over the last few decades, the social structure of the world changes. The Asian and Latin American countries begin to catch up. With the exception of the African nations, living standards start to converge. Now most countries are clumped toward the top end of the chart..."

Just keep repeating this to yourself people: "The left half of the chart covers a range of $3,600, but the right half of the chart covers a range of $36,000.

Holy Crap!

You sunk my battleship!

Wow! KPC friend Will Wilkinson scores a bulls eye. Please read the whole thing but here's a teaser to get you going:

"When it comes to macro policy, talk of bounded rationality, animal spirits, and the like is mostly just handwaving used to justify a retreat to "old-fashioned hydraulic Keynesianism" against the dominant stream of professional opinion when doing so suits one's ideological predilections."

Motes vs. Beams

People, Dean Baker is quite a piece of work. He goes after people hard with what I will charitably describe as less than a fully correct analysis.

Here's another example, a post purporting to explain "Robert Samuelson's confusion on real interest rates:

In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment. This means that the cost of borrowing is low relative to the return on investment. Because interest rates can't go negative, it is impossible for real interest rates to fall as much as would be desired given the weakness of Japan's economy. It would be ideal if it could keep its nominal rates at their current near zero level, while inflation rose to 3.0 or 4.0 percent.

The other reason why inflation would be desirable is that it would allow homeowners to get out from under their debt burdens. If wages rose 3.0-4.0 percent annually in step with inflation, the burden of a fixed mortgage debt would be eroded through time. Also, if house prices rose in step with inflation, consumers would gain equity in their homes.

Excuse me for a moment.....

[AAAAAAAARRRRRRGGGGGGHHHHHHH!!]

Thanks, now I feel a bit better. I think I may even be able to make a couple comments.

First, if the real rate is negative, then investment projects with a negative return may actually be "profitable". If the real rate is -4%, then a project with a -2% return "works". Strange way to rebuild an economy, no?

Second and more importantly, the most widely used model of the real interest rate is the Fisher equation which states that the nominal rate is equal to the required real rate plus a premium for expected inflation. It is beyond bizarre (but sadly not uncommon) to assert that inflation can rise significantly without nominal rates also rising.

Third, if inflation rose in a predictable manner, mortgage interest rates would rise as well (see point two) and there'd be no "savings" on new mortgages.

Fourth, to the extent that inflation was unanticipated, yes, borrowers would gain. But this is a zero sum game. Lenders, who after all are people, consumers, and voters too would lose an equivalent amount.

Fifthly and finally, as for how inflation builds home equity, all I can say there is WTF??? Housing is in the CPI. If all prices go up 3% how is the real value of your home increasing?

People, I am fine with trying a little bit of inflation here in the US of A. There are tons of idle cash sitting around, inflation is a tax on holding money, so maybe peoples will spend more. I don't think QE2 is the first sign of the apocalypse. But, even if it works to the specifications of its most ardent supporters, it's not going to come close to solving our problems.