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January 2, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Nobody Understands Debt

Posted: 02 Jan 2012 12:25 AM PST

We should be doing more to help the unemployed:

Nobody Understands Debt, by Paul Krugman, Commentary, NYTimes: In 2011, as in 2010, America ... continued to suffer from disastrously high unemployment. And ... almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.
This misplaced focus said a lot about ... how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they're talking about...
Perhaps most obviously, the economic "experts" on whom much of Congress relies..., the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while they've been waiting, those rates have dropped to historical lows. ...
But Washington isn't just confused about the short run; it's also confused about the long run... Deficit-worriers ... see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don't — all they need to do is ensure that debt grows more slowly than their tax base. ...
Second — ...the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. ... If your image is of a nation that's already deep in hock to the Chinese, you've been misinformed. ...
Now.., you don't have to be a right-wing ideologue to concede that taxes impose some cost on the economy... But these costs are a lot less dramatic than the analogy with an overindebted family might suggest.
And that's why nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today's conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of GDP for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan. ...
So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

Links for 2012-01-02

Posted: 02 Jan 2012 12:06 AM PST

More "Ricardianoid" Equivalence

Posted: 01 Jan 2012 12:12 PM PST

Robert Barro:

It's never part of Ricardian equivalence that the level of government expenditure doesn't matter.

John Cochrane:

Ricardian Equivalence ... is the theorem that stimulus does not work in a well-functioning economy...

Paul Krugman:

...John Cochrane weighs in on the Ricardian equivalence debate, sort of. I say "sort of" because he defines Ricardian equivalence as

the theorem that stimulus does not work in a well-functioning economy

which isn't at all what it means to the rest of us, and certainly not what Ricardo meant (for the record, it's the proposition that the timing of taxes doesn't matter for consumer spending, so that temporary tax cuts don't change spending).

And then he "explains" that government spending can't increase demand because of … Say's Law! Which, of course, Keynesian economists have never thought of.

It's quite remarkable. And I mean that in the worst way: 80 years of hard thinking about economics, completely forgotten.

Update: Brad DeLong:

Department of "Huh?!": John Cochrane and Ricardian Equivalence Edition I: "Ricardian Equivalence"--a theory not believed in by David Ricardo--is the claim that when the government cuts lump-sum taxes or increases lump-sum transfers in the present and balances this by a credible announcement that it will increase lump-sum taxes in the future such a shift in the economy has no effect on spending, prices, production, or interest rates. For Ricardian equivalence to hold, we need for:

  • people to be able to borrow and lend as much as they want at the market interest rate.
  • people to be your standard non-myopic economic agents.
  • people to care only about the subjective utility of their descendants.
  • everybody to leave a positive bequest to each of their descendants.
  • everybody to have some descendants.
  • nobody immigrates or emigrates.

To the extent that people cannot borrow and lend at the market interest rate, that people are myopic, that people care about descendants in other ways than seeking to maximize their subjective utility, that people don't leave bequests to all their descendants, that people don't have descendants, and that people immigrate or emigrate, Ricardian Equivalence will fail. How much it will fail depends on the magnitudes, etc., but fail it does.

This definition of a "well-functioning economy" is not something I understand...

A quick summary is to say that financial markets must be efficient, agents must be rational maximizers, and there has to be a sufficient degree of "connectedness" between generations (within a given country -- immigration or emigration breaks this).

Update: See also Brad DeLong's Department of "Huh?!": John Cochrane and Ricardian Equivalence II, and, for emphasis, Department of "Huh?!": John Cochrane III.

We Live in Two Different Worlds

Posted: 01 Jan 2012 10:16 AM PST

Via Kevin Drum, John Judis says the greatest unreported story of last year is the return of telemarketers:

The Subversion of the Do Not Call Registry, by John Judis: The great under- or, better, un-covered story of the year: Cardholder Services and the Do Not Call Registry. You don't know what I'm talking about? That's because you don't work at home. George W. Bush's administration invaded Iraq and let Bernie Madoff run wild; but to its credit, it established the Do Not Call Registry to block telemarketers from flooding our telephones with unwanted offers. After I registered my phone number on the Federal Trade Commission's web site in 2004, the phone calls virtually stopped. But guess what? Under the Obama administration, which claims to understand the power and wisdom of government regulation, they've begun again. I get seven or eight a day now (mostly I don't answer them), including to my cell phone, where I get charged for them. ... I have already filed complaints with the FTC twice this year... So the Obama administration has not followed through on the one thing that the Bush administration did right.

Kevin Drum has the answer:

I get these calls too, but luckily I have a solution! Remember a couple of years ago when you used to get three or four robocalls a day offering you a chance to extend your auto warranty? It was pretty annoying. But the FTC finally put these scammers out of business. I'll let the Wall Street Journal explain how it happened:

The Federal Trade Commission filed complaints on Thursday against two companies that were behind an automated telemarketing campaign that enraged Senator Charles E. Schumer and, authorities say, deceived thousands of people across the country.

Mr. Schumer, Democrat of New York, was in a meeting on Capitol Hill last week when he picked up his cellphone, triggering a phony, prerecorded sales pitch, ostensibly for an extended vehicle warranty.

Irate, Mr. Schumer became one of an estimated 30,000 Americans to make complaints about the robocalls with consumer protection authorities. He held a press conference to rail against the "robo-dialed harassment."

Did you get that? 30,000 Americans had already complained about these calls and the FTC did bupkis. They obviously Do Not Care about ordinary non-powerful Americans like you and me and 29,998 others.

But then Chuck Schumer got one call on his cell phone, called a press conference, and probably threatened the FTC with complete defunding if they didn't shut down the bastards tomorrow. And guess what? The FTC shut the bastards down.

The moral of the story here is that the FTC may not care about us ordinary schlubs, but they do care about pissed-off senators. So I recommend that Judis make a recording of the Cardholder Services robocall, get the private cell phone number of some senator (he must have contacts that can help him with this), and then call the senator and play back the call. Voila! A high-level complaint will be registered from one of the princes of Washington, and the FTC will spring into action.

You may thank me later.

I think there's another lesson to be drawn from this. It's helpful when the people representing us have the same experiences -- and the same frustrations -- as the rest of us. When the people making our laws live in a different world from the typical household -- as is more and more the case in our increasingly two-tiered society -- they are much less likely to share common experiences, and hence much less likely to effectively represent of their constituents. The amount of wealth required just to enter the political fray pretty much guarantees a disconnect between representatives and their constituents (and, to connect it to the previous post, this can affect their attitudes about whether deficits or unemployment is our biggest problem).

Jobs, Not the Deficit, Should be Our Most Immediate Concern

Posted: 01 Jan 2012 09:55 AM PST

The NY Times editorial staff:

As Good as It Gets?: ...The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures. As things stand now, however, Washington will provide less help, not more, in 2012. Republican lawmakers refuse to acknowledge that government cutbacks at a time of economic weakness will only make the economy weaker. And too many Democrats, who should know better, have for too long been reluctant to challenge them.
The drag from premature cuts is significant. ... It does not have to be this way. After nearly a year of trying to accommodate Republicans in their calls for excessive budget cuts, President Obama finally pushed a strong jobs bill including spending for public works, aid to state and local governments and an infrastructure bank, as well as renewal of a payroll tax break and jobless aid. Congressional Republicans blocked the bill, and with it, the chance to create some 1.9 million jobs. But late last month, the Republican leadership in the Senate and House retreated — even if extremists in the party did not — and managed to temporarily extend the payroll tax cut and jobless benefits.
The extension is only for two months, setting up another fight. But the good news is that in the showdown, Mr. Obama and the Democratic leadership did not back down. ...
The economy, and struggling Americans, need a lot more help. Mr. Obama needs to translate his newfound focus on the middle class into an agenda for broad prosperity, making the case that what the nation needs now is a large short-run effort to create jobs coupled with a plan to cut the deficit as the economy recovers.

Christina Romer agrees (me too):

Two Big Problems, Two Ready Solutions: The United States faces two daunting economic problems: an unsustainable long-run budget deficit and persistent high unemployment. Both demand aggressive action in the form of fiscal policy. ...
On the deficit, the big worry isn't the current shortfall, which is projected to decline sharply as the economy recovers. Rather, it's the long-run outlook. ...
But we can't focus on the deficit alone. Persistent unemployment is destroying the lives and wasting the talents of more than 13 million Americans. Worse, the longer that people remain out of work, the more likely they are to suffer a permanent loss of skills and withdraw from the labor force.
Despite heated rhetoric to the contrary, the evidence that fiscal stimulus raises employment and lowers joblessness is stronger than ever. And pairing additional strong stimulus with a plan to reduce the deficit would likely pack a particularly powerful punch for confidence and spending. ...
 Because many people worry about increasing the role of the federal government, why not give substantial federal funds to state and local governments for public investment? Tell them that the money has to be used for either physical infrastructure like roads, bridges and airports, or for human infrastructure like education, job training and scientific research. Then let the states, cities and towns figure out what would work best for their citizens. ...

It would be helpful if the press would react as negatively to a failure to produce a jobs bill as it does to failures to come to an agreement about reducing the deficit. But it doesn't. The lack of effort from Congress on jobs is hardly noted in the press while the deficit -- and calls to do something about it -- is noted almost daily.

We need to do more to help the unemployed.

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