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June 13, 2014

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Paul Krugman: The Fix Isn’t In

Posted: 13 Jun 2014 12:24 AM PDT

Is the Republican Party about to get "even more extreme"?:

The Fix Isn't In, by Paul Krugman, Commentary, NY Times: How big a deal is the surprise primary defeat of Representative Eric Cantor, the House majority leader? Very. Movement conservatism, which dominated American politics from the election of Ronald Reagan to the election of Barack Obama — and which many pundits thought could make a comeback this year — is unraveling before our eyes.
I don't mean that conservatism in general is dying. But what I and others mean by "movement conservatism," ... is something more specific: an interlocking set of institutions and alliances that won elections by stoking cultural and racial anxiety but used these victories mainly to push an elitist economic agenda, meanwhile providing a support network for political and ideological loyalists.
By rejecting Mr. Cantor, the Republican base showed that it has gotten wise to the electoral bait and switch, and, by his fall, Mr. Cantor showed that the support network can no longer guarantee job security. For around three decades, the conservative fix was in; but no more.
To see what I mean by bait and switch, think about ... Thomas Frank's book "What's the Matter With Kansas?" in which Republicans would mobilize voters with social issues, but invariably turn postelection to serving the interests of corporations and the 1 percent.
In return for this service, businesses and the wealthy provided both lavish financial support for right-minded (in both senses) politicians and a safety net — "wing-nut welfare" — for loyalists. ...
So whither movement conservatism? Before the Virginia upset, there was a widespread media narrative to the effect that the Republican establishment was regaining control from the Tea Party, which was really a claim that good old-fashioned movement conservatism was on its way back. In reality, however, establishment figures who won primaries did so only by reinventing themselves as extremists. And Mr. Cantor's defeat shows that lip service to extremism isn't enough; the base needs to believe that you really mean it.
In the long run — which probably begins in 2016 — this will be bad news for the G.O.P., because the party is moving right on social issues at a time when the country at large is moving left. (Think about how quickly the ground has shifted on gay marriage.) Meanwhile, however, what we're looking at is a party that will be even more extreme, even less interested in participating in normal governance, than it has been since 2008. An ugly political scene is about to get even uglier.

Links for 6-13-14

Posted: 13 Jun 2014 12:06 AM PDT

'Synthesis Lost'

Posted: 12 Jun 2014 08:38 AM PDT

As someone who had a series called "Market Failures in Everything" when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I'm glad to see views evolving. (Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed. That is, redistribution is needed to claw back income that flows unjustly according to my definition of equity to those at the top as a result of their economic and political power, e.g. monopoly power that distorts incme flows, and political power that allows rent-seeking behavior. Markets have had 40 years to solve the inequality problem, and it has only gotten worse -- being at full employment for many of those years has not reversed the growing inequality problem. A "hands off" policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard.)

This is from Paul Krugman:

Synthesis Lost: Brad DeLong has some notes on the evident trouble we've been having maintaining the "neoclassical synthesis" — the doctrine, made famous by Paul Samuelson but actually there in Keynes too, that macroeconomic policy is needed for full employment but once you have that a relatively free-market policy works.

As it happens, I wrote a longish post about this back in 2010. ...

I'd add that I agree with Robert Waldmann: the policy judgement that you shouldn't have too much detailed government intervention mainly reflects an appreciation for imperfect government, not faith in perfect markets.

And I still think that the Keynes/Samuelson view is reasonable, although market imperfections loom larger in my mind than they used to. But these are not reasonable times …

Medicare Growth is Really Low

Posted: 12 Jun 2014 07:49 AM PDT

Aaron Carroll:

Medicare growth is really low: ... It turns out that actual Medicare growth for the first eight months of the fiscal year has been 0.3%. That's amazing. But, of course, there are some temporary policies in place that have been restraining spending. These include things like the seqester, some ACA stuff, and frozen means-tested Medicare premium income thresholds.* Without these policies in place, growth would have been 2.5%. ...
Economic growth is 3.9%. That means that Medicare growth is nowhere near the GDP + 1% or so that would be needed to see the IPAB kick in. This has important, and positive, effects on the long-term federal budget outlook.
*Of course, there are temporary ACA-related things like the filling-in donut hole, which are increasing spending as well, so actual growth is likely less. Amazing!

'The Social Impact of Fiscal Policy Responses to Crises'

Posted: 12 Jun 2014 07:41 AM PDT

Contractionary fiscal policy in recessions is contractionary (contrary to those who advocate "expansionary austerity). It also worsens social indicators (though for some undermining the social safety net is one of the goals of austerity):

The social impact of fiscal policy responses to crises, by Carlos A. Vegh and Guillermo Vuletin, Vox EU: Fiscal policy in many developing countries is typically procyclical. Expansionary in good times and contractionary in bad times, these policies often amplify business cycles. The most convincing explanations for such practices seem to be limited access to international credit markets during bad times and political pressures that tend to encourage too much public spending during boom periods (Calderon and Schmidt-Hebbel 2008). Whatever the reason, the pattern is well documented (see Frankel, Vegh, and Vuletin 2011 on the spending side and Vegh and Vuletin 2013a on the tax side). In particular, contractionary fiscal policy in bad times seems to have increased the severity and duration of crises (Vegh and Vuletin 2013b).

Ironically, the procyclicality of fiscal policy has also become a hotly debated issue in the context of the current crises in Europe, with influential economists such as Olivier Blanchard (IMF Chief Economist) arguing that fiscal multipliers in the Eurozone have been underestimated by the IMF and others and thus that the contractionary effects of fiscal austerity have been considerably higher than typically believed (Blanchard and Leigh 2013).

Counting the social impact

Lost in much of the discussion on fiscal-policy procyclicality has been the social impact of contractionary fiscal policy during recessions – things such as:

  • the poverty rate,
  • income inequality,
  • the unemployment rate, and
  • domestic conflict.

In a recent research paper we look at how the fiscal-policy responses to GDP crises have affected social indicators such as those listed above (Vegh and Vuletin 2014). We find that contractionary fiscal policy during crises has tended to worsen social indicators both in Latin America and, more recently, in the Eurozone, which calls into question recent claims on 'expansionary fiscal austerity.' ...

Policy conclusions

While many Latin American countries have 'graduated' from procyclical to countercyclical fiscal responses to GDP crises, many industrial economies (like Greece, Ireland, Italy, and Portugal) followed contractionary fiscal policies in the aftermath of the Global Crisis. Our work finds that countercyclical fiscal policies tend to soften the undesirable effects of GDP crises on social indicators such as poverty, income inequality, unemployment, and domestic conflict. On the other hand, austerity policies tend to worsen all of these social indicators.

This evidence supports the desirability of pursuing expansionary fiscal policies in times of distress – which may mean postponing for some time needed structural fiscal adjustment – rather than embarking on fiscal austerity in the midst of a recession. ...

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