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Some @*$&s Write a Letter

by Mike Kimel

Deficit numbers for CEA chair signatories on the deficit letter Cross-posted at Presimetrics Title updated

I’m kind of late to this, but apparently ten ex-chairs of the President’s Council of Economic Advisors decided to share their opinion about the national debt with the rest of us. There’s been commentary here and there about how hypocritical some of the names on the list are – the CEA chair is the President’s chief economic advisor, and many of these people served under Presidents (and provided economic advice) that drove up the debt. I thought it would be an interesting exercise to put some numbers on the hypocrisy.

To do that, I pulled the dates for which each CEA chair served and quarterly figures for the total public debt. The debt series I obtained (from the Federal Reserve Economic database) goes back to 1966. The terms of each CEA chair served did not completely coincide with a yearly quarter, but I split them up as best I could. (Note – because sometimes it took a while for a CEA chair to be confirmed, but that person could well be offering the President advice before confirmation, I assumed that each CEA chair “took office” immediately after his/her predecessor left.)

The debt was adjusted by quarterly CPI, and population, resulting in the real national debt per capita. The following figure shows the change in the national debt per person on a quarterly basis, over the length of each CEA chair’s term. The gray bars represent those who signed the letter.

Figure 1.

A few comments.

1. Most of the signatories to the letter increased the national debt per person.

2. A number of the CEA chairs are or have been with the Fed – none of them (Greenspan, Yellen, Bernanke) have signed the letter.

3. Harvey Rosen may look responsible… but that’s a function of the timing of the brief term (about a quarter) he served, encompassing the period when individual tax returns were due. He served under GW Bush, after all, and nothing GW, and despite what many supposed conservatives were saying through 2004, at no point did GW ever do anything that resembled being fiscally responsible.

4. About the only signatories who on the face of it have a leg to stand on signing this letter are Schultze (Carter’s CEA) and Bailey (Clinton’s last CEA chair).

5. I think its fair to stretch the leg to stand on thing to include Laura Tyson, Clinton’s first CEA chair. Yes, the debt increased while she was in office, but at a rapidly decreasing rate, and her advice provided some of the ground for the surpluses that came at the end of the Clinton term.

6. I’m sympathetic to Keynes’ view that a responsible government runs up the debt when times are bad, and pays off the debt at other times. By that standard, a lot of these signatories have no excuse whatsoever. I believe it speaks very poorly of economics as a profession that anyone takes Martin Feldstein, Glenn Hubbard, Greg Mankiw, or Edward Lazear seriously, and I believe it is a sign that they have no honor that they would have the temerity to put their names on a letter like this. These are not, after all, low level drones whose livelihood depends on not making waves, but rather financially secure architects of the policies that cratered this country’s finances. As I see it, they were in the position to do good, and instead they enabled bad.

7. That Obama inherited an economic mess does not excuse his economic policies, or those who provided him with advice (Romer & Goolsbee). Nationalizing debt incurred by companies (and there is no other way to describe the process by which nonperforming financial assets were taken off the ledgers of many companies) without also nationalizing the assets of those companies is a surefire way to ensure something like the Great Recession will happen again. And even a mediocre economist should have had the skills to convince even the densest of White House residents what happens when you don’t even try to incarcerate any of the bad actors.

8. I hesitate to disagree with Brad DeLong who is usually right, but I think there is yet another reason to avoid excusing his colleague Christina Romer. When a person’s most famous paper reaches a conclusion that gives ammunition to those who are wrong about economic policy, and that paper is itself a textbook application of Maier’s Law, that person’s advice can only produce poor results.

9. If I had to award a “Supreme Chutzpah” award to any of the signers, I guess it would be Glenn Hubbard. Not only did he turn a surplus into a deficit and lay the groundwork for bigger and better deficits to come, his defense of that deficit he created was fairly unique, involving an implicit assumption of double digit GDP growth!!!. (Yes, this man is now Dean of the Business School at Columbia.) I believe Hubbard was last seen co-authoring a paper explaining the desirability of “a 4.5 percent mortgage for homebuyers for a period of time. This bold idea, akin to our proposal on this page on October 2, would help arrest the decline in house prices and absorb excess inventory of housing.” I’m not sure what “a period of time” is to Hubbard, but we had rates in that neighborhood for about six months last year. The rates got there shortly after the Case Schiller Home Price Index had bottomed out and started rising, and right about the time the index started tanking again. The index is now rising to new post-crash depths.

10. On the other hand, I suspect Brad DeLong might nominate Greg Mankiw for some sort of award among the signatories of the letter and its hard to disagree with him. FYI – my views on debt haven’t changed since this.

Which leads to another look at the figure I put up earlier, this time color coded by the party of the President in office. Figure 2

And one more thing… as Michael Kanell and I wrote in Presimetrics, sooner or later “Democrats who make it to the Oval Office [will] realize that they are going to be tarred as fiscally irresponsible no matter what, so why make the tough decisions that Republican presidents have refused to make in recent decades?” I guess after Ford, Reagan and the two Bushes, an Obama has come home to roost.

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The Lens of the 2012 Election

People have been asking me what I think of the Obama administration’s budget for 2012, as well as Republican plans to cut government spending. My thought in both cases is this: it’s all understandable – even predictable – if you recognize that both sides have one primary goal right now: to win the presidential election in 2012.

The Republicans: Excellent Students of Political Economy

Republicans in Washington, it is clear to me, have no interest in deficit reduction. (There may be an exception to this generalization, but I can’t think of any off hand, and would welcome suggestions.) Why do I assert this? Simply because none of them have proposed a serious plan to significantly and realistically reduce the budget deficit. No, not even Paul Ryan.

Furthermore, they have no discernable moral or ideological position on the size of the federal government. True, many Republicans have talked a lot about “out-of-control government” since Obama became president, echoing and amplifying the wild-eyed ways many of them talked about the federal government’s excessive reach (black helicopters and all) under the Clinton administration. But when a Republican is president they have no qualms about increasing the size or responsibilities of the federal government. (Think TSA and Medicare prescription drug benefit, for example.)

My conclusion is that Republicans in Washington right now are driven by one very simple and clear objective: to recapture the White House in 2012. Everything they say or do must be interpreted in that context, and then it all makes sense.

Next, we must recognize that they are also excellent students of political economics. In particular, they have taken to heart the lesson that the state of the economy is probably the single most important factor in determining which party wins the election for President. (Though there’s some debate about whether the “state of the economy” in this context is the level of income or its growth rate.)

Well, the equation is then pretty simple:

(Desire to beat Obama in 2012) + (Obama is more beatable if economy is bad) = Do what you can to make the state of the economy bad.

Yes, the cynicism and cold-heartedness embodied in this equation is truly breathtaking. But it explains a lot.

Why propose dramatic cuts in government spending? Because they will help make the state of the economy bad. Very effectively.

Why not worry about the unemployment effects of spending cuts? Because that’s an inevitable part of helping to make the state of the economy bad. (In other words, increased unemployment is exactly the point, silly!)

Why reduce aid to states facing their own budget crises? Because that is also an extremely efficient way to help make the state of the economy bad.

It’s a simple equation, and once you understand that the Republicans also understand this equation, and furthermore, that it is the one thing they deeply believe in, then Republican behavior in Washington becomes explicable and even predictable.

The Obama Administration: It’s All About the Middle 20%

Meanwhile, the Obama administration has just put out its budget for 2012. The cuts proposed by the administration have mystified many on the left. But they’re easy to explain if you believe that, given Republican control of Congress, the budget is purely a political document. As anything other than a political document the budget proposal is irrelevant.

And therefore the main usefulness of the 2012 budget proposal (from the Obama administration’s point of view) is if can somehow help Obama’s reelection chances.

For the Obama administration, the calculus works like this:

1. The chance of reelection depends mainly on the state of the economy. We need to do what we can to prevent the Republicans from actively making the economy worse over the next year, they think to themselves, but that’s probably the limit of what is possible regarding the economy. So let’s move on.

2. Given the state of the economy, the Obama administration reasons, the primary goal of purely political acts (such as the preparation of the 2012 budget proposal) must be to do whatever else can be done to persuade the “middle 20%” of Americans to vote for Obama. (40% of Americans will vote against him no matter what, and 40% will vote for him no matter what.) Note that this is the opposite of the Roveian strategy of firing up and turning out the base to win elections, but it is clearly what Obama’s political advisors believe.

3. The middle 20% will be more likely to vote for him if they think he’s in the middle himself – compromising, striking a balance between left and right, etc.

4. The 2012 budget proposal is a very good way for the Obama administration to persuade the middle 20% that Obama is in the middle himself. It offers some real cuts – including cuts that the left hates. It makes some gestures toward deficit reduction. But it is not as vicious as the Republican alternative, and leaves the entitlement programs that are loved by the middle 20% completely alone.

This calculus suggests to me that the 2012 budget proposed by the administration has exactly accomplished their goal: it has generated howls of protest from both left and right, thus helping to persuade the middle 20% that he’s in the middle, too.

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Deficit Hawks Down: The Misconstrued “Facts” Behind Their Hype

Reposted from New Deal 2.0 with permission from author.

Deficit Hawks Down: The Misconstrued “Facts” Behind Their Hype
by James K. Galbraith

Economist James K. Galbraith attends a Pete Peterson-funded road show.

The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. They came to Austin on February 9 and (partly because Rivlin is an old friend) I went.

Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change. Oddly none of those issues were actually mentioned by anyone, all evening long.

A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. But Mr. Bixby seemed not to have noticed either event. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.

A David Walker speech is always worth listening to with care, for Mr. Walker is a reliable and thorough enumerator of popular deficit-scare themes. Three of these in particular caught my attention on Wednesday.

To my surprise, Walker began on a disarming note: he acknowledged that the level of our national debt is not actually high. In relation to GDP, it is only a bit over half of what it was in 1946. And to give more credit, the number Walker used, 63 percent, refers to debt held by the public, which is the correct construct — not the 90+ percent figure for gross debt, commonly seen in press reports and in comparisons with other countries. The relevant number is today below where it was in the mid-1950s, and comparable to the early 1990s.

But Mr. Walker countered that fact with another, which I’d never heard mentioned before: in real terms he said — that is, after adjusting for inflation — per capita national debt is now twice what it was back then.

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The problem is that real per capita national debt is a concept with no economic meaning or importance. (No government agency reports it, either.) Even in the private sector, debt levels matter only in relation to income and wealth: richer people can (and do) take on more debt. Real per capita national income is well over three times higher today than it was in 1946 — so how could it possibly matter that the “real per capita national debt” is twice as high?

Next, Mr. Walker made a comparison between the United States and Greece, with the implication being that this country might, some day soon, face that country’s interest costs. But of course this is nonsense. Greece is a small nation that has to borrow in a currency it cannot control. The United States is a large nation that pays up in a money it can print. There is no chance the markets will mistake the US for Greece, and of course they have not done so.

Finally, Mr. Walker warned that “foreign lenders… can’t dump their debt but can curb their appetite” for new US Treasury bonds. This was an oblique reference to the yellow peril. The idea, when you think about it, is that the Chinese central bank will acquire dollars — which it does when China runs an export surplus — and then fail to convert them into Treasury bonds, thereby choosing, voluntarily, to hold dollars in cash, which earns no interest, instead of as Treasury bills, which do. Mr. Walker did not try to explain why this would appeal to the Chinese.

Walker closed by calling for action tied to an increase in the debt ceiling; specifically for a hard cap on the debt-to-GDP ratio with “enforcement mechanisms,” which could include pro rata cuts in Social Security and Medicare benefits and tax surcharges. He did not specify whether the cap should apply to gross federal debt or only to that part of the debt held by the public (a number which the Federal Reserve can change, any time it wants, by buying or selling public debt). When pressed, in the question period, he would not even say what he thought the cap should be.

I waited for Ms. Rivlin to add something sensible. But she did not. Apart from some platitudes — she favors “serious tax reform” and “restructuring Medicare” — her interesting contribution was to restate Mr. Walker’s comment about “foreign lenders,” who might say “we’re not going to lend you any more money.” That this would amount to saying “we’re not going to sell you any more goods” seems — from a question-and-answer and brief exchange afterward — genuinely not to have crossed her mind.

The Fiscal Solutions Tour comes with a nice brochure, and even (in my case) with a flash drive containing Mr. Bixby’s powerpoints. But does Mr. Peterson think he’s getting his money’s worth? The President, in his State of the Union, mostly ignored him. The Bowles-Simpson effort (which he paid for in part) and the closely allied Rivlin-Domenici plan are fading from view. And as the House Republicans forge their own course, demanding radical spending cuts right now — for political rather than economic reasons, which they don’t even bother to explain — the tired and shabby arguments of these old deficit-worriers hardly seem connected, any more, to the battles at hand.

James K. Galbraith is a Vice President of Americans for Democratic Action. He is General Editor of “Galbraith: The Affluent Society and Other Writings, 1952-1967,” just published by Library of America. He teaches at the University of Texas at Austin.

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Nearing agreement says NYT

Nearing agreement says NYT

An administration official said that in the emerging deal, the “Making Work Pay” credit would be replaced with a one-year reduction in payroll taxes for workers.

In addition to a two-year extension of the income tax rates enacted under President George W. Bush, the deal includes a one-year extension of jobless aid for the long-term unemployed. Officials said negotiators were also close to an agreement to restore the federal estate tax, which lapsed at the start of this year, with an exemption of up to $5 million per individual, and a maximum rate of 35 percent.

(bolding mine)

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Why austerity now?

Michael Hudson at New Economic Perspectives points us to the difference between the overall economy and the financial sector:

When politicians let the financial sector run the show, their natural preference is to turn the economy into a grab bag. And they usually come out ahead. That’s what the words “foreclosure,” “forfeiture” and “liquidate” mean – along with “sound money,” “business confidence” and the usual consequences, “debt deflation” and “debt peonage.”

Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the “real” economy: industry as well as labor.

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In Linda’s post on the budget deficit in the comments it was claimed that the budget deficit was Obama’s fault and a chart was cited that showed the deficit in someone’s estimate of real dollars.

The standard way of comparing deficits across time and across different countries is to show the deficit — past and projected future — as a share of GDP. There are good reasons for this standard practice, as it is the only valid way to make meaningful comparisons over long periods of time when the dollar values change so much. Using other approache makes it too easy for readers to be mislead.

But here are the latest CBO data and projections. The CBO data is the gold standard for making budget comparisons and any other projections are automatically suspect.

The data shows that the budget deficit peaked just as Obama took office. If CBO actually published seasonally adjusted quarterly data it would show that the deficit was over 10% of
GDP before Obama took office and that Obama has actually reduced the deficit since taking office. Moreover, the CBO projections show that in the out years the federal deficit will actually be smaller — as a share of GDP — than it was in the final years of the Reagan administration.

Yes, the federal deficit is a serious problem. But much of what you hear and see about it is pure republican propaganda that massively exaggerates the scope and scale of the problem.
As with most propaganda it depends on the ignorance and/or gullibility of the reader for it to work.

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