Simple math

Governor Tim Pawlenty, R-MN, says it is "ludicrous" to claim February's fiscal stimulus legislation helped turn the economy around.

Aug. 28 (Bloomberg) -- Minnesota Governor Tim Pawlenty, a possible 2012 Republican presidential candidate, charged that President Barack Obama’s $787 billion economic stimulus program still isn’t working...

With only 15 to 20 percent of the money spent, it “would be ludicrous to claim” the stimulus program is “what pivoted” the $14.1 trillion economy “at the so-called bottoming or now a potential beginning of recovery,” Pawlenty said.

Some simple math is called for. The stimulus package passed in late February, so almost all of the spending and tax cuts occurred in the second quarter of 2009. In the second quarter of 2009, GDP was $14,143.3/4 = $3535.8 billion (the BEA reports GDP at an annual rate, so you have to divide by four to get total production in a quarter). Say GDP was the same in the third quarter; that's $7071.7 billion for the most recent 6 month period. Fifteen - twenty percent of $787 billion is $118.1 - $157.4 billion, or 1.7% to 2.2% of GDP over that period. We don't know what the multiplier is on this combination of transfers and spending - probably somewhat under 1 for the transfers and somewhat over 1 for spending. If the multiplier as a whole is one, then the stimulus added somewhere close to 2% to GDP in the second to third quarters. That is not chump change, that's enough to make a bad downturn a mild one or turn no growth to modest growth. And the bulk of the spending is yet to come.

Budget deficit projections

The Congressional Budget Office says the combined budget deficit for the next ten years will be $7.1 trillion, assuming discretionary spending grows at the rate of inflation and taxes are as set under current law. The Concord Coalition says it has a more plausible estimate: assuming spending grows at the rate of nominal GDP growth rather than inflation, and that all expiring tax cuts (including the Bush tax cuts and those in the 2009 stimulus act) are extended, the deficit will total $14.4 trillion. And they have a scary picture:



Ok, no problem with the spending assumptions. But is it really fair to "score" explicitly temporary tax cuts as permanent? I mean, it's written right there in the tax code that the provisions of ARRA expire in three years and the top tax rate will be 39.6% in 2011. It would take an act of Congress to change that. Does it really make sense to base budget forecasts on predictions about future tax legislation? Or is the Concord Coalition's objective here just to promote some really scary numbers that people in the media or blogosphere will cite as evidence of the Obama Administration's reckless fiscal policies?

If that's the way the Concord Coalition wants to play the game, then I expect that if in coming years the Obama Administration declines to extend some of these tax cuts the CC will score that as fiscally responsible deficit reduction. I will be watching.

What happened to Chicago's "Life of the Mind"?

A depressing post from Economist's View. It's true, Steve Levitt truly has flown off the rails.

Time shamelessly to exploit the Democrats' fallen hero

Robert Byrd has it exactly right.

Sen. Robert Byrd (D-WV) called for the health care reform legislation to be named after the late Sen. Ted Kennedy. In a statement, Byrd said, "In his honor and as a tribute to his commitment to his ideals, let us stop the shouting and name calling and have a civilized debate on health care reform which I hope, when legislation has been signed into law, will bear his name for his commitment to insuring the health of every American."

Let the Baucuses, Dorgans, and Nelsons of the Senate know that to drag feet further on health care is to spit on the grave of Ted Kennedy. Appeal to the Hatches, McCains and Snowes for one last gesture of respect to their former colleague. Hoist his image high, rally around it, exploit his death for all it's worth. Teddy would have wanted it that way.

Jonathan Chait: The Crazy Train

From the New Republic.

George Will promotes the Doctrine of Letting Stuff Happen

George Will disapproves of the Obama and Bush Administration's efforts to stand government in the way of the natural progress of economic events. Presumably he would have let the financial system and auto industry collapse, and if a Great Depression was the result, then so be it. He is uncomfortable with a society that takes charge of events:

Even more than the New Deal and the Great Society, Obama's agenda expresses the mentality of a class that was nascent in the 1930s but burgeoned in the 1960s and 1970s. The spirit of that class is described in Saul Bellow's 1975 novel "Humboldt's Gift." In it Bellow wrote that the modern age began when a particular class of people decided, excitedly, that life had "lost the ability to arrange itself":

"It had to be arranged. Intellectuals took this as their job. . . . This arranging has been the one great gorgeous tantalizing misleading disastrous project. A man like Humboldt, inspired, shrewd, nutty, was brimming over with the discovery that the human enterprise, so grand and infinitely varied, had now to be managed by exceptional persons. He was an exceptional person, therefore he was an eligible candidate for power." So, shrewd and nutty people such as Rep. Barney Frank are brimful of excitement about arranging American life. What will stop them? The president accurately says Americans are "reluctant shareholders" of GM, AIG and Citigroup. But is he?

John Maynard Keynes was our age's great debunker of the doctrine of letting stuff happen. As the world hurtled toward Depression, he noted (I can't think of the source now) that orthodox economists would all agree that if someone somewhere were to make a large discovery of gold, the resulting increase in the money supply would solve the problem. And so they were willing to wait, impatiently, for such a discovery to occur. But Keynes pointed out that we can take control of events. Let's pretend that gold has been discovered and simply print the money that that new gold would have backed (we'll call this "devaluation"). More devastating to the orthodoxy was Keynes' observation (in his essay "Auri Sacra Fames" and elsewhere) that society had already gone far down the road of breaking the link between precious metals and money. Central banks no longer let the money supply fluctuate with short-term flows of gold, the public had long since learned to accept government's promises to pay gold as a substitute for gold itself. It was a small practical leap (but a great intellectual one) to take sovereignty over the money supply and by extension the macroeconomy.

But the idea that the government should step in and (to some extent) direct economic events has a much longer pedigree than this, in the U.S. going back at least as far as Alexander Hamilton and his National System (under which the government promoted domestic manufacturing by protecting it behind a wall of tariffs and investing in infrastructure). For that matter, what was Ferdinand and Isabella's sponsorship of Columbus' voyages or King Khufu's pyramids? If Will wants to take us back to some golden age where governments just stepped back and "let stuff happen," he's asking us to walk back through an awful lot of history.

Health care rationing

In a recent op-ed piece in the WSJ, Martin Feldstein criticized the Democratic health care reform plan for supposedly "rationing" service. As I noted in an earlier post, rationing is unavoidable whenever wants are unlimited while resources are finite. The question is how health care should be rationed, by government using the criterion of effectiveness, or by "the market" on the basis of willingness or ability to pay. Over at the Economist, Free Exchange critique's Feldstein's argument in more detail (via Mark Thoma).

The nub of the matter is this—government can afford to provide basic coverage to everyone, but it can't afford to provide every treatment everyone may want to everyone who wants it. It must therefore decide how to limit its expenses, and it can leave open the option of using a private practitioner to those who are denied care based on a cost-benefit analysis. Or government can provide coverage to no one, and those who cannot afford a treatment—effective or not—will go without. Those people will be just as fine as they'd be with treatment in some cases, they'll suffer in others, and occasionally they'll die because they couldn't afford coverage.

That's the nub of it, really. Faced with the prospect of a plan that provides effective treatments to everyone but forces people who want relatively ineffective treatments to pay for them on the private market, Mr Feldstein says he'd prefer a system where people who are unable to afford effective treatments don't get them, calling concern for those unable to pay for treatments "misplaced egalitarianism".

It's all well and good to let the market allocate televisions. Many people live happy lives without televisions, and lack of a television hasn't ever killed anyone. Attempting to provide a basic level of access to television to every American would be misplaced egalitarianism. I would have thought Mr Feldstein could understand the ways in which the market for televisions is different from that for health insurance.

I was intrigued by another implication of Feldstein's argument. He seemed to suggest that any procedure the government might use to reduce costs of public health programs (Medicare, Medicaid, VA) was "rationing" reflecting "misplaced egalitarianism" which is to be opposed. So what would he do about the long run fiscal deficits driven by the government's health care spending? Ignore it and let the government drown in debt, or eliminate the programs and let people die for lack of health care?

The difference between economists and politicians

Barney Frank, quoted in the WSJ, via Brad DeLong:

Not for the first time, as an elected official, I envy economists. Economists have available to them, in an analytical approach, the counterfactual. Economists can explain that a given decision was the best one that could be made, because they can show what would have happened in the counterfactual situation. They can contrast what happened to what would have happened. No one has ever gotten reelected where the bumper sticker said, "It would have been worse without me." You probably can get tenure with that. But you can't win office.

God help me, I may have to half root for the Vikings this year.

(more photos here)

Nouriel Roubini says growth in the second half of 2009 will be only temporary

From the RGE Monitor Newsletter:

A number of economic and financial variables have exhibited signs of improvement recently even if macro indicators are still mixed. The pace of economic deterioration has slowed significantly, and after four quarters of severe contraction in economic activity, RGE Monitor now forecasts that the U.S. will display positive real GDP growth in the second half of 2009. As discussed below, however, that does not mean that the recession in the U.S. is already over, as many analysts have argued. Indeed, all the variables used by the National Bureau of Economic Research (NBER) to date recessionary periods will continue to contract or display sub-par growth. However, RGE Monitor now anticipates that policy measures and other factors will boost real GDP growth, albeit in a temporary manner, in the second half of 2009. Yet the shape of the recovery (will it be V, U or W?) and other challenges will influence the U.S. economic outlook going forward. According to RGE Monitor, growth will remain well below potential in 2010, while the shape of the recovery will be closer to a U.

Some of the so-called “green shoots” observed in the economy in recent months can be defined as green shoots only if compared with the economic picture painted at the beginning of the year. The contraction in some indicators, such as industrial production, is still comparable to the recessions in the 1970s and 1980s. The July 2009 employment report displayed “only” 247,000 non-farm payroll losses—hardly qualifying as a green shoot in any other post-war recession. (See Easing Job Losses Don’t Change Weak Prospects for U.S. Recovery). However, given how close the U.S. was to entering a depression, even 250,000 payroll losses seem capable of cheering up investors.


H2 2009 Pick-Up in GDP Growth a Temporary Phenomenon

In H2 2009, as the economy bottoms out from a record contraction (the worst in the last 60 years), adjustments, such as slower inventory destocking, will occur, while policy measures such as “cash for clunkers” will boost auto production and induce continued spending brought on by the stimulus. According to RGE Monitor, these factors will likely bring U.S. real GDP growth back to positive territory in Q3 2009. However, the NBER is not likely to call the end of the recession until at least late 2009 or early 2010. In addition to GDP growth, the NBER looks at four variables in making recession calls: real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production and payroll employment. While all of these indicators might perform better in H2 than in H1 2009, they are likely to remain in contraction or register sub-par growth. With the labor market now a leading indicator for the recovery in private consumption and the wider economy, trends in payrolls will definitely influence the NBER's call.

Lower Trend Growth Will Characterize the Recovery

The inventory adjustments will largely be over by the middle of 2010 as will the impact of the stimulus. But since the recovery in private demand will be weak, the economy is poised to slip back to anemic growth (well below potential) in 2010, posing the risk of a double-dip recession. Exhausting most policy measures now means that there will be little room for additional fiscal and monetary stimuli in the future. Policy measures entailing long-term fiscal costs can only provide temporary stimulus to growth. Any sustained economic recovery will ultimately have to come from the revival in private demand—i.e. through consumption and investment—both of which will be constrained by structural factors.

Preceded by a financial crisis, this is the most severe and prolonged recession since the 1930s. Avoiding the short-term pain of private-sector deleveraging by socializing private losses and re-leveraging the public sector with large deficits and debt accumulation will spur long-term costs and crowd out private spending. The drivers of the previous economic boom—consumers, the housing sector and easy credit—will remain under pressure even after the economy is out of recession. Structural weaknesses will persist. Until the economy finds new sources of growth, it will grow below potential for several years. Potential GDP growth might also take a hit, falling from around 2.8% during 1997-2008 to around 2.25% in the coming years. Productivity growth has held up - on a temporary basis - during the current recession, not due to innovation or productive investment, but due to aggressive cuts in labor and labor hours by firms. In the coming years, productiity growth will remain under pressure as workers age, structural unemploymnt rises, labor skills deteriorate, and innovation slow.

Don't invite Nouriel Roubini to your next cocktail party. He's a buzz-kill.

Health care reform politics

I agree with the liberals that we are likely to get far less from health care reform than we would in a better world. In a better world the Blue Dog Republicans would be more liberal or more courageous than they are. There would be 50+ or 60 Democratic votes for a public plan. Failing that, there would be 10 Republicans liberal enough or courageous enough to support a public plan. That better world, sadly, is not the world we live in. I don't blame Obama (here once again I find myself disagreeing with Paul Krugman). No amount of charismatic defense of the "public option" is going to convince independent voters in places like Montana to hop on board; no amount of public displays of passion is going to persuade the likes of Max Baucus and Kent Conrad, much less Chuck Grassley, to act against what they see as their political self-interest.

There's another reason to kow-tow to the Blue Dogs on this one. The next item on the agenda is cap-and-trade. I'm much more comfortable going into that debate with the Blue Dogs feeling that they've won a victory of sorts in the health care negotiations than if they have a chip on their shoulders from having the public option rammed down their throats.

Kow-tow for now, says I. If progressive groups want to take out their frustrations against the Blue Dogs in the 2010, 2012, and 2014 elections, I say more power to 'em; send me an email, I'll contribute to a liberal primary opponent.

Do we need a public option?

The goal is to provide competition for insurance companies to force them to find ways to reduce premiums and cut costs. Currently a single health insurance company controls more than half the market in at least 21 states; two companies control more than half the market in at least 39. No wonder Kent Conrad, in whose state Blue Cross - Blue Shield controls 90 percent of the market, is opposed to the public option.

But why is the insurance industry so uncompetitive? In part it's because of state regulations restricting the types of policies that can be sold. One of John McCain's proposals last fall was to eliminate these restrictions and free up the health insurance market. Auto insurance can be sold across state lines, why not health insurance?

Would this proposal increase competition? I don't know. Democrats scoffed at the proposal, but I don't recall hearing a counterargument. Someone somewhere, I believe, wrote something about how this would create a "race to the bottom" in the health insurance market, but I don't know exactly why that would be the case. At any rate, if the government were to impose some requirements on insurance coverage at a national level it would prevent any kind of race to the bottom. It sounds like such national standards are part of the various bills under consideration. I don't know what the hell these "exchanges" are all about, but that too sounds like a way to create a competitive market in a standardized product. Prohibiting companies from denying coverage to people with pre-existing conditions would also force competition by price rather than by cherry-picker.

Another potential problem with eliminating restrictions on cross-state insurance is that it would accelerate consolidation in the health insurance industry. Cody Willard at MarketWatch says companies like BCBS, Wellpoint, and United Health are gobbling up independent insurers at a frightening pace, in the process becoming lobbying giants that deploy their resources to prevent reform. (Wait a minute, can I trust anything written by a guy named Cody?) He proposes applying anti-trust laws to the insurance industry, from which for some reason the companies are exempt. That too sounds like a no-brainer.

So couldn't some combination of exchanges, cross-state competition, national standards, strict regulation, and anti-trust actions perform the same purpose as a public plan? I think so. Here's a sensible proposal along those lines.

Much as a public plan makes sense to me, it doesn't have enough support even among Democrats to pass the Senate and the public isn't wild about it (perhaps because they're idiots, but nevertheless...). If it's not necessary, drop it, compensate with strong regulation, and declare victory. Also, as I understand it, there's nothing stopping a state or a group of states from getting together to offer a public insurance plan. Advocates of single-payer and its ilk can work for this once the basic framework of universal coverage in a competitive market is in place.

Holy blind spot!

Richard Thaler and Greg Mankiw argue that a public health care plan would drive private sector competitors out of business. But, but... they are both employed in an industry in which the private sector has thrived alongside a heavily subsidized public entity providing a simlar service! Has Greg Mankiw never heard of the University of Massachusetts? Has Richard Thaler never heard of the University of Illinois?

There's nothing new under the sun

[Richard Hofstadter, The Paranoid Style in American Politics, From Harper's Magazine, November 1964]

American politics has often been an arena for angry minds. In recent years we have seen angry minds at work mainly among extreme right-wingers, who have now demonstrated in the Goldwater movement how much political leverage can be got out of the animosities and passions of a small minority. But behind this I believe there is a style of mind that is far from new and that is not necessarily right-wing. I call it the paranoid style simply because no other word adequately evokes the sense of heated exaggeration, suspiciousness, and conspiratorial fantasy that I have in mind. ...

If, after our historically discontinuous examples of the paranoid style, we now take the long jump to the contemporary right wing, we find some rather important differences from the nineteenth-century movements. The spokesmen of those earlier movements felt that they stood for causes and personal types that were still in possession of their country—that they were fending off threats to a still established way of life. But the modern right wing, as Daniel Bell has put it, feels dispossessed: America has been largely taken away from them and their kind, though they are determined to try to repossess it and to prevent the final destructive act of subversion. The old American virtues have already been eaten away by cosmopolitans and intellectuals; the old competitive capitalism has been gradually undermined by socialistic and communistic schemers; the old national security and independence have been destroyed by treasonous plots, having as their most powerful agents not merely outsiders and foreigners as of old but major statesmen who are at the very centers of American power. Their predecessors had discovered conspiracies; the modern radical right finds conspiracy to be betrayal from on high. Important changes may also be traced to the effects of the mass media. The villains of the modern right are much more vivid than those of their paranoid predecessors, much better known to the public; the literature of the paranoid style is by the same token richer and more circumstantial in personal description and personal invective. For the vaguely delineated villains of the anti-Masons, for the obscure and disguised Jesuit agents, the little-known papal delegates of the anti-Catholics, for the shadowy international bankers of the monetary conspiracies, we may now substitute eminent public figures like Presidents Roosevelt, Truman, and Eisenhower., secretaries of State like Marshall, Acheson, and Dulles, Justices of the Supreme Court like Frankfurter and Warren, and the whole battery of lesser but still famous and vivid alleged conspirators headed by Alger Hiss...

The basic elements of contemporary right-wing thought can be reduced to three: First, there has been the now-familiar sustained conspiracy, running over more than a generation, and reaching its climax in Roosevelt’s New Deal, to undermine free capitalism, to bring the economy under the direction of the federal government, and to pave the way for socialism or communism. A great many right-wingers would agree with Frank Chodorov, the author of The Income Tax: The Root of All Evil, that this campaign began with the passage of the income-tax amendment to the Constitution in 1913.

The second contention is that top government officialdom has been so infiltrated by Communists that American policy, at least since the days leading up to Pearl Harbor, has been dominated by men who were shrewdly and consistently selling out American national interests.

Finally, the country is infused with a network of Communist agents, just as in the old days it was infiltrated by Jesuit agents, so that the whole apparatus of education, religion, the press, and the mass media is engaged in a common effort to paralyze the resistance of loyal Americans...

The paranoid style is not confined to our own country and time; it is an international phenomenon... This glimpse across a long span of time emboldens me to make the conjecture—it is no more than that—that a mentality disposed to see the world in this way may be a persistent psychic phenomenon, more or less constantly affecting a modest minority of the population. But certain religious traditions, certain social structures and national inheritances, certain historical catastrophes or frustrations may be conducive to the release of such psychic energies, and to situations in which they can more readily be built into mass movements or political parties. In American experience ethnic and religious conflict have plainly been a major focus for militant and suspicious minds of this sort, but class conflicts also can mobilize such energies. Perhaps the central situation conducive to the diffusion of the paranoid tendency is a confrontation of opposed interests which are (or are felt to be) totally irreconcilable, and thus by nature not susceptible to the normal political processes of bargain and compromise. The situation becomes worse when the representatives of a particular social interest—perhaps because of the very unrealistic and unrealizable nature of its demands—are shut out of the political process. Having no access to political bargaining or the making of decisions, they find their original conception that the world of power is sinister and malicious fully confirmed. They see only the consequences of power—and this through distorting lenses—and have no chance to observe its actual machinery. A distinguished historian has said that one of the most valuable things about history is that it teaches us how things do not happen. It is precisely this kind of awareness that the paranoid fails to develop. He has a special resistance of his own, of course, to developing such awareness, but circumstances often deprive him of exposure to events that might enlighten him—and in any case he resists enlightenment. We are all sufferers from history, but the paranoid is a double sufferer, since he is afflicted not only by the real world, with the rest of us, but by his fantasies as well.

Marchin' for a budget

Before today, the last time I participated in a demonstration in Gettysburg was when the 3000th US soldier was killed in Iraq. Then it was about a dozen lonely and cold people in front of the courthouse having insults hurled at us from passing motorists.

This time, much better. Several hundred people (over a thousand maybe?) marching through town to publicize the effect that the state budget standoff is having on local social service providers. And many passersby honked or clapped.

We'll get some tv and newspaper coverage, which is good. Still, I get the feeling we'd have more impact if we cornered a politician and screamed at him about how we want our country back, and why do the Republican legislators want to kill our children?

How can insurance companies compete with a public health plan?

Ralph sez he understands people's concerns about the proposed public health insurance option. A government-run, heavily subsidized plan is bound to drive private insurers out of business. Just look what's happened to higher education - who could possibly compete with Penn State for example?

The world's greatest legislative hairball

That's Gail Collins' apt description of the health care reform efforts. Ross Douthat asks why Barack Obama doesn't sell this thing using traditional liberal arguments (justice, security). I think he made a decent start on a new approach yesterday in Portsmouth, but in the end it's hard to compete with the image of crazies shouting into microphones saying they want their country back. Our representatives need to understand that the crazies represent a relatively small (though loud) sliver of the electorate. They're the Ron Paul voters, the core Republican activists. They are not typical Americans. At least I hope to God they're not.

Budget crisis hits home

Because the state of Pennsylvania has no budget, the South Central Community Action Programs (SCAAP) has run out of money. This mean's Adams County's homeless shelters, food pantries, and other social services are closing their doors at the end of next week, for how long no one knows. One of those agencies that will be forced to close is my kids' day care program. I will make do somehow (one of the benefits of a flexible work schedule), but there are dozens of parents who will not have day care or after school programs for their kids. Not to mention the homeless and abused women and children with no place to sleep, and the hungry with no place to get a meal. Read the article here. And do something about it by joining the march from the Rec Park to the square and back again, Thursday at 11. Meet at the Charles Sterner building.

Extra special bonus thought: that Albert Pujols sure is one lucky guy

Albert Pujols (1B, St. Louis Cardinals) sure is one lucky hitter. Seems like every time he gets up to bat he's getting a hit (.327 average), knocking a teammate home (100 RBIs), or smacking one out of the park (36 HRs).

In a similar vein, Niall Ferguson argues that that Barack Obama is one lucky president - passes the stimulus bill, makes progress on his major policy priorities like health care, global warming and financial reform, gets the economy turned around, restores America's reputation abroad. Dang, if only the last president had been so lucky!

Ok, special bonus thought on health care rationing

While I was gone, apparently this country's right wing lost whatever remnants of its mind it had earlier retained. Do people really think that "Obamacare" means a government bureaucrat will visit the home of every elderly American to tell them it is their duty to die? Apparently they do.

Fortunately, there's a "teachable moment" in one aspect of the health care debate - that is, the health care reform opponents' opposition to "rationing" of health care. Matt Yglesias makes an astute analogy: when our public schools decline to teach students Japanese, we don't complain about the "rationing" of language instruction, we just accept that the government's resources are finite. He could go further, however, and this is what I'll teach my Econ 101 students in the weeks to come. All societies must ration all goods and services in some way because of the well-known principle of economics that wants are infinite while resources are finite. Markets ration on the principle of ability and willingness to pay. We currently ration health care in all sorts of ways - most egregiously, by denying tens of millions of Americans the insurance that would give them full access to care. How, I wonder, would my students propose we go about rationing health care?

I'm baaack

Back from my summer travels, tanned, rested, ready for the new semester, I devote myself anew to blogging. My theory is, if I don't have one amusing or interesting (to me at least) thought per day that I can toss onto the internet, then how do I justify my existence on this planet? Kids? Feh.

My thought of the day: this time of year, don't come to me with your talk of man+woman+kids equals "family" values. Unless every year you spend a full week in the woods with 100+ brothers, sisters, aunts, uncles, cousins, cousins-in-law, cousins once and twice removed, second, third, fourth cousins; unless your son knows and looks forward every year to playing with your aunt's great great granddaughter or your kids know 30 of their second cousins by name; unless you can sit down and eat pancakes with four generations of relatives who you've known all your life; you simply don't have the chops.