NPR recently ran a story about the proposal to increase the nominal price of a stamp from $0.37 to $0.39 noting that this approximately 5% increase will be the first increase since mid-2002. Before Donald Luskin starts wondering about tax increases versus prices increases again, let’s consult with this source for a history of nominal prices since 1976 as compared to the GDP deflator to construct a historical series of stamp prices in real terms. As our graph shows, the relative price of stamps has hovered about $0.33 in terms of 2000 dollars for about 30 years.
Lawrence Kudlow defends President Bush’s decision to use Federal funds to address the aftermath of Katrina. While I also applaud the President’s decision, a couple of Kudlow’s arguments strike me as absurd:
Bush knows, even if others have forgotten, that the terrorists are carefully watching the U.S. government’s response to the natural disasters in New Orleans, Houston, and elsewhere. Hurricanes are one thing, but a terrorist attack with biochemical weapons or a nuclear weapon would be far more devastating. Even another 9/11-type bombing episode from the air, ground, or sea could present more of a challenge than what we now face in the Gulf Coast. Bush knows this. He knows that the U.S. must rebuild the Gulf no matter what it takes because this effort might be a test run for something far worse.
I doubt Al Qaeda was deterred by the fact that we took care of the families for the victims from 9/11. They made their horrific point (alas) and they were more likely paying attention to the pitifully slow response from FEMA after Katrina. Kudlow’s second argument seems to be that we don’t have to worry about the consequences of the deficit:
Yes, the budget deficit will rise for a year or two, from roughly 2.5 percent of GDP to perhaps something over 4 percent. Big deal.
The increase in the deficit from Katrina will be temporary. But Kudlow seems to be confused. The starting point for the General Fund deficit was closer to 5% of GDP than 2.5%. And that is a very big deal. Kudlow babbles on about Federal debt relative to total U.S. wealth. Alas, he forgets that Federal debt is rising relative to GDP, while the fact that national savings is near zero means a slower accumulation of total wealth. But Kudlow does suggest a few modest steps towards fiscal restraint in the form of proposals to cut spending that he knows will not pass Congress.
Some of the first signs of Katrina’s effects on the US’s national economic statistics were contained in this morning’s release of the estimates of August personal income and spending. From the news release:
Personal income decreased $5.3 billion, or 0.1 percent, and disposable personal income (DPI) decreased $7.4 billion, or 0.1 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.
…The August estimate of personal income reflects the effects of Hurricane Katrina, which hit the Gulf Coast States of the United States at the end of August. Rental income of persons and proprietors’ income were reduced by about $100 billion (annual rate) primarily reflecting uninsured losses of residential and business property. “Other current transfer receipts from business (net)” was raised by about $70 billion (annual rate) to reflect insurance benefits paid to persons. Because other effects of the hurricane were embedded in BEA’s source data and could not be separately identified, BEA did not attempt to quantify their impact.
What is slightly worrying to me is not the fall income, but rather the sharp fall in spending. Spending fell by far more than income did… suggesting that perhaps the recent signs of sagging consumer confidence are translating into lower spending nationwide, not just among those directly affected by Katrina.
Byron York tries to paint Mr. Earle as a prosecutor who abuses his business to shake down companies such as Sears:
A grand jury in Travis County, Texas, last September indicted eight corporations in connection with the DeLay investigation. All were charged with making illegal contributions (Texas law forbids corporate giving to political campaigns). Since then, however, Earle has agreed to dismiss charges against four of the companies – retail giant Sears, the restaurant chain Cracker Barrel, the Internet company Questerra, and the collection company Diversified Collection Services – after the companies pledged to contribute to a program designed to publicize Earle’s belief that corporate involvement in politics is harmful to American democracy … allies of DeLay, who has accused Earle of conducting a politically motivated investigation, called Earle’s actions “dollars for dismissals.”
But here is the account from Texans for Public Justice:
In its agreement with Earle, Sears promised to cooperate in the “prosecution and investigation of any other person for any offense related to the corporate contribution made by the defendant.” The company also agreed that it will not make any illegal political contributions in any state and that it will disclose corporate contributions on its Web site.
But so far I haven’t seen any of them, or DeLay himself, specify exactly what DeLay is supposed to be innocent of. The logical possibilities are:
1. DeLay is guilty as charged and the prosecutor can prove it beyond reasonable doubt.
2. The alleged transactions never took place.
(a) The corporations made no such contributions to TRMPAC; or
(b) TRMPAC never made the contribution to the Republican National State Elections Committee; or
(c) The RNSEC never made the corresponding contributions to the legislative candidates.
3. The transactions took place, but didn’t violate any law; Texas law allows otherwise illegal contributions to be laundered through Washington.
4. The transactions took place, but were merely coincidental: it just happened that the companies gave to TRMPAC, TRMPAC gave to the RNSEC, and the RNSEC just happened to make precisely equivalent contributions to the legislative candidates.
5. TRMPAC orchestrated a violation of the law, but DeLay had no knowledge of that fact.
6. TRMPAC orchestrated a violation of the law, and DeLay knew of the facts but not of their illegality, and therefore didn’t “conspire.”
7. It’s all true, but the prosecutor can’t prove one or more of the elements beyond reasonable doubt.
Mark pulls the rug out of possibilities two through four.
Update: Talkleft notes the GOP Texas mafia has smeared Mr. Earle before. Since Judith Miller is finally testifying, the slime and defend machine will soon turn on Mr. Fitzgerald.
Tyler Cowen has an interesting theory as to the “economics of magazines” as an explanation as to why the National Review has such incredibly dumb op-eds from their econopundits:
Most popular political magazines live and die by direct mail. The “burn rate” of non-renewals is very high, and either advertisers or donors will care about subscription numbers. So new subscribers must be found frequently (NB: the real culprit is lack of loyalty of previous subscribers). Given their natural constituencies, that makes it hard for a right-wing magazine to come out against George Bush.
Other than President Bush himself, no one in the administration has been making the case that the economic recovery of the last two years is due to the success of the tax-rate cuts of 2003.
It is true that employment has risen since 2003 but it fell after the 2001 tax cut. Given that the 2001 recession was an investment-led recession, it stands to reason that investment will lead the recovery even without a tax cut. Notice Canto offers no evidence that the 2003 tax cut led to more investment or employment for the simple reason that both the employment-to-population ratio and the investment/GDP ratio are still below their levels during Clinton’s second term when tax rates were higher.
Rather than trying to separate business cycle effects and tax policy effects, Canto decides to attack a fiscally responsible Republican Senator:
Ohio’s employment never recovered from the reduction in competitiveness that the Voinovich tax increase brought about. During the presidential election campaign last year, John Kerry blamed the employment loss in Ohio to outsourcing. However, much of that “outsourcing” was to neighboring states.
Again, he offers no evidence. In fact, he fails to tell NRO readers that Voinovich was governor from early 1991 to the end of 1998. During his term, employment rose and the unemployment rate fell from 6.2% to 4.2%. And the unemployment rate continued to fall for the next two years ending up at 3.9% as of December 2000. It is true that Ohio’s unemployment rate rose with the rest of the nations – but I’m not blaming that on the 2001 tax cut.
As the Commerce Department confirmed that real GDP grew at an annualized rate of 3.3% during the second quarter of 2005, this AP story is suggesting that growth will slow for the rest of the year:
The 3.3 percent growth rate for the April-to-June quarter was unchanged from an estimate made a month ago. That performance met analysts’ expectations. In first three months of the year, the economy grew at a healthy 3.8 percent pace. In the aftermath of the two hurricanes, however, economists are predicting that production and hiring will take a hit, slowing overall economic activity in the second half of this year to a pace of around 3 percent. Before the hurricanes, second-half growth was expected to top 4 percent.
I wish to say well done to two conservatives. First, Arnold Kling was also offended by this National Review nonsense. The other well done goes to the National Review for more wisdom and honesty from Bruce Bartlett:
I was asked to testify before a hearing of the Senate Democratic Policy Committee. I made it clear to them that I was a Republican, but they said they wanted me anyway. I suppose they knew that I have become very disturbed by the Republican party’s fiscal policy and they presumed that I would attack it. I did not disappoint them … It is just appalling that the recent highway bill had 5,000 “earmarks” in it. These are, almost without exception, utterly unjustified pork-barrel projects. I am further appalled by President’s Bush’s unwillingness to use his veto pen to maintain some semblance of fiscal discipline … But pork-barrel projects – even tens of billions of dollars worth – are not what has dug us into a fiscal hole. It is the rapidly escalating cost of entitlement programs. President Bush is well aware of the problems in this area. He eloquently explained the deteriorating fiscal condition of the Social Security program in many speeches this year, as part of his effort to reform that program and stabilize its finances for future generations.He was unsuccessful in large part, I believe, because he made the finances of the Medicare program — which were in far worse shape than those of the Social Security program to begin with — vastly worse by adding a huge, unfunded drug benefit. The Medicare program was already bankrupt and should have been the primary focus of Bush’s reform effort. Instead, he not only ignored Medicare’s looming crisis, he made it an order of magnitude worse.
Bruce is talking about eliminating – not simply deferring the prescription drug benefit. Even liberals have argued that this new entitlement was more expensive than necessary and it certainly adds to the taxes future generations will have to fund given that this White House refuses to increase taxes now. But I was bothered by one aspect of Bruce’s oped:
I explained that I am not particularly a deficit hawk and that the size of the Bush tax cuts does not bother me.
Federal tax revenues as a share of GDP have fallen from 20.8% in 2000 to 18.1% as of the second quarter of 2005, but Bruce prefers to focus on the fact that Federal expenditures have risen from 18.9% of GDP in 2000 to 20.4% as of the second quarter of 2005. Let’s say we repeal the Rx bill and eliminate the GOP driven pork barrel spending that he rightfully complains about. Let’s say we reduce Federal spending to only 19% of GDP. The General Fund deficit will still exceed the Social Security Trust Fund surplus unless we raise taxes. Of course, the National Review crowd might not wish to hear this message, but Bruce did deliver such a message to the Senate Democrats.
Cheers fans might remember Kelly Boyd who dated Woody Boyd for a short time. During one Cheers episode, Woody tried to explain to Kelly that he did not have any money. She laughed and simply suggested that he go to the ATM machine. It seems Tom Nugent has found a similar way to pay for the Katrina-Rita cleanup:
Does anyone asking that question actually know how the government pays for anything? Essentially, the federal government pays for things in just one way – it credits a member bank account. Let’s review the process: The federal government writes a check to a construction company to pay for a bridge. The construction company deposits the check at a bank. When that check clears, the Fed credits the bank’s reserve account at the Fed, and then the bank credits the company’s bank account with “good funds.” Bottom line: Operationally, virtually all of the federal government’s spending per se consists of the Fed crediting an account – that’s all. The federal government doesn’t have any “box of money” that gets “filled” from tax collections and the proceeds from new Treasury securities and then gets “used up” by spending or lending. This is an operational reality. In today’s world of non-convertible currencies, spending is necessarily nothing more than “score keeping.”
Now pro-growth fiscal conservatives might be worried about such matters as crowding-out, but Tom counters:
Will private borrowers be crowded out? Impossible. The causation is “loans create deposits,” as taught on day one of every traditional money and banking class. The act of borrowing itself creates exactly that same amount of new liabilities (deposits). The process is “self funding” and circular, as a matter of accounting. The concept of a “pool of savings” that somehow gets “used up” by borrowers is a throwback to the time of fixed exchange rates and gold standards, and has no application in today’s floating-exchange-rate world.
To be fair, he continues:
The true economic cost of Katrina is the real, physical resources committed to repairing the damage that otherwise could have been used elsewhere to expand productivity or improve overall standards of living. But with today’s excess capacity in everything but energy, there is not going to be much of an opportunity-cost to rebuilding, apart from temporary dislocations of building materials and energy production. In other words, shortages of goods and services due to rebuilding should be temporary and modest.
But Tom – you have just described the crowding-out thesis. However, you have things backwards as usual. While it is true that there may be some degree of excess supply from Keynesian insufficiency of aggregate demand, business cycles are not permanent events.
While I’m not yet ready for us to declare victory and come home, I have to admire Cindy Sheehan. Take a gander at this picture and tell me she is not taking our country back from these neocons who declare war for partisan purposes and then tried to suppress all dissent. Tell me that with all their might they have a chance to stop this woman. I think not. Maybe when she lost her son in Iraq, she decided that all she had left was a country that needed taking back. And for that – I’m behind her 100%.
With the launch last week of “TimesSelect,” you now have to pay a fee of $49.95 per year to read Krugman online, along with Thomas Friedman, Maureen Dowd, Frank Rich, and the rest of the Times op-ed pundits. So the scope of Krugman’s audience has collapsed. This is supply-side economics – so obvious that even an Ivy League economics professor like Krugman should understand it: When you put a tax on readership, you get fewer readers.
Hat tip to Mark Thoma for his email and the fact that Mark knows the difference between market prices and taxes.