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April 18, 2010

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links for 2010-04-17

Posted: 17 Apr 2010 11:02 PM PDT

"Can’t Cut Spending? Look Around the Globe"

Posted: 17 Apr 2010 05:40 PM PDT

You'll be shocked to discover that Tyler Cowen is in favor of a smaller government:

Can't Cut Spending? Look Around the Globe, by Tyler Cowen, Commentary, NY Times: America's long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, we'll likely see a combination of revenue increases and spending cuts. And we'll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. ... Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases.
The most potent way to add revenue is to impose a value-added tax. ... V.A.T.'s raise money so readily and so invisibly that they often climb to a range of 15 to 20 percent; politicians like the revenue, and voters don't always notice the burden.
A move toward a V.A.T., however, also brings price inflation, a big increase in the tax-collecting bureaucracy and the emergence of favored sectors with exemptions or lower rates. Though we may well end up with a V.A.T., it isn't obviously the best option.
Burdening citizens with much higher taxes would fundamentally change what this country is about. Our founders envisioned a government that would provide public goods but not guarantee everyone's well-being against every possible obstacle. ...
Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. Current residents might feel more secure in a larger welfare state, but over time the loss of commerce and innovation takes a toll. ...
The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. ... The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.
Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. ... To be sure, the spending cuts meant fewer government services, most of all for health care, and big cuts in agricultural subsidies. But Canada remained a highly humane society, and American liberals continue to cite it as a beacon of progressive values. ...
Canadian trust in government may have paved the way for government spending cuts... It's less obvious that the United States can head down the same path, partly because many Americans are so cynical about policy makers. ...
The issue of fiscal responsibility isn't going away. So the question is now this: How deeply will we dig ourselves in before we create a more mature and more forward-looking political culture?

"It’s Aggregate Demand, Stupid"

Posted: 17 Apr 2010 10:17 AM PDT

I've been worried that the administration is overselling the recovery, setting expectations high and then under delivering is not the formula for success. So it's good to see Christina Romer saying that we're not out of the woods yet, and that the economy could still use more help:

Romer: 'It's Aggregate Demand, Stupid', by David Wessel, RTE: Christina Romer, chair of the president's Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It's not the inadequacy or laziness of the workers or the long-standing mismatch between workers' skills and employers' needs. It's the old-fashioned Keynesian diagnosis: Too little demand in the economy.
"The overwhelming weight of the evidence is that the current very high—and very disturbing—levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk "It's Aggregate Demand, Stupid"; but my chief of staff suggested that I find something a tad more dignified," Ms. Romer said in  remarks prepared for a conference at Princeton University today.
It doesn't have to be this way, she argued, essentially making the case for more government stimulus to help the economy. "We have the tools and the knowledge to counteract a shortfall in aggregate demand. We should be continuing to use them aggressively." Her comments contrasted with a recent flurry of optimism among some forecasters that the recovery may turn out to be stronger than the lackluster one many anticipated. "We we are growing again, but not booming," she said. GDP is rising at a solid pace, but not as quickly as after other severe recessions and not as quickly as it needs to. As a result, the unemployment rate remains painfully high and is not predicted to reach normal levels for an extended period." The jobless rate, at last report, was 9.7%. ...
So what's the solution? More private demand is essential, she said, but government can do more than it is – and Congress should embrace everything the president has proposed and then some.  "One targeted measure that is likely to be very effective is additional fiscal relief to the states," she said. Another is putting money into smaller banks, as the president has proposed, to get them to lend more to small and medium sized firms. A third is more aggressive actions to open foreign markets to U.S. goods and services.

"Things are better," she said, "but they are not nearly good enough. We are painfully far from normal."

It's also good to see her taking on the "lazy worker" explanation for high rates of long-term unemployment.

Think Tank Politicization

Posted: 17 Apr 2010 10:08 AM PDT

More on think tanks:

Mark Thoma on Think Tank Politicization, by Bruce Bartlett: University of Oregon economics professor Mark Thoma makes a good point in response to my column about the politicization of think tanks:

I think these organizations -- think tanks -- have done great damage to economics. We hurt ourselves enough with the events leading up to the financial crisis, but there has also been a blurring of lines between academic research and think tank research -- some of which is simply not honest -- that has made it appear that there are divisions within the profession that simply do not exist, or that there is stronger support for some ideas than actually exists. The main problem, I think, is the he said - she said presentation of academic work in the media alongside the papers that think tanks put out as though there is an equivalence (or a similarly structured debate on, say, CNN). Much of the think tank work (but not all) is junk and no such equivalence exists, but the work is often given equal footing in the press. One of the reasons I started this blog was the frustration of hearing what economists "believe" (e.g. "tax cuts pay for themselves"), when those beliefs were anything but widely held. But you wouldn't know that reading the paper or watching the news. ...

The larger point Mark is making here applies as well to the decline of the news media, which I have also commented on recently. One of the things the right figured out long ago is that reporters and TV producers are lazy and the ones that aren't are too pressed for time to do more than take studies by think tanks or anyone else at face value. They don't have the knowledge, education or resources to do fact-checking or quality control. The best they can do is separate research from institutions deemed reputable from those that are total hacks, quacks and fly-by-night operations.

One consequence of Heritage's breakthrough in developing short, readable, time-sensitive policy analyses is that they were just as useful to the media as they were on Capitol Hill. Reporters had the same need for predigested studies written in plain English, as opposed to the sorts of books written in academese that were the stock-in-trade of traditional think tanks like Brookings.

Conservatives also realized that putting out a study saying the exact opposite of a liberal study was sufficient to muddy the water and prevent a reporter from drawing a clear conclusion from the liberal study. It didn't matter that the liberal study was done by a preeminent scholar in the field and the conservative study was done by a glorified intern. All that mattered is that they came to opposite conclusions, thus leading to on-the-one-hand/on-the-other-hand stories that everyone hates but the media won't stop writing.

Conservatives understand--better than liberals, I think--that most stories are lucky to last one news cycle. If the reporter later decides that the liberal study was really worthwhile and the conservative one was worthless, he isn't going to go back and do another article on the subject. It's water over the dam.

Parenthetically, I would add that the talking head approach to policy debate on the cable news channels reinforces all the negative aspects of this development. Once upon a time, I used to do a lot of cable interviews. At first, I was often paired with people I knew at other think tanks who were slightly more liberal than I am. But because we both shared common facts and knew the limits of what could be demonstrated through serious academic research, we naturally tended to agree with each quite a bit.

Having two guests who agree with each other is the last thing cable channels want; they want their guests to be 180 degree polar opposites. So gradually I noticed that I was no longer being paired with peers from liberal think tanks, but people I had never heard of who were identified as "Democratic consultant" or something like that. Such people clearly knew virtually nothing about the subject we were discussing and were just there to endlessly repeat talking points that someone gave them.

That was bad enough, but over time it got worse. I could see that I was going up against people who had media training. They knew how to filibuster by using more than their share of air time and forced me to use my time responding to their charges at the expense of making my own points. Eventually, I pretty much stopped either doing cable interviews or watching cable news at all.

Some of the people on these shows aren't qualified to speak as economists, but they get called again and again because they can spout talking points in an entertaining fashion. Paul Krugman paired against journalist Robert Samuelson in a CNN debate on the deficit a week or so ago is an example of this (though from what I saw it's not clear that Samuelson satisfies the "in an entertaining fashion" constraint). Menzie Chinn was certainly frustrated by the pairing:

Nonetheless, overarching all this is a simple question. Why do we ascribe any credibility to a person with an undergraduate degree in political science (what is called Government at Harvard) in the area of economics (let alone accounting)? (The question is inspired by watching the debate between Professor Krugman and Mr. Samuelson on Fareed Zakaria GPS yesterday...)

I'm not sure what the answer is. The elevation of entertainment over facts isn't going to change as that is the most profitable strategy for the networks, and economists are unlikely to become more entertaining. 

On "Heritage's breakthrough in developing short, readable, time-sensitive policy analyses is that they were just as useful to the media as they were on Capitol Hill," I think the outlook is better. A good blog post is exactly this, a "short, readable, time-sensitive policy analysis," and reporters do read and use these posts as contact points. Thus, I think that the internet -- blogs in particular -- have broadened considerably the number of experts that the print media has access to, and it has also given them comprehensible summaries of academic work. This has blunted the effectiveness of similar type of work from think tanks as reporters have come to rely more and more on blog posts and their authors as background and sources for their reports.

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