Quotation Of The Day: The Public Square And Markets And Lady Godiva Edition

Rod Dreher points to this interview of Patrick Deneen who discusses "neo-conservative Catholics."

What is more striking to me is the way that many Catholics of the stripe we are discussing are strenuous in their insistence that, on the one hand, the public square should not be stripped of religion and morality, but that the Market should have a wardrobe like that of Lady Godiva.  This view lies behind the crude but revealing criticisms on the Right of Pope Francis’s occasional but pointed criticisms of an amoral Market, with the likes of Rush Limbaugh and Larry Kudlow and Judge Andrew Napolitano insisting that the Pontiff stick to doctrine and cease discussing economics—as if the Catholic Church has had nothing to say about economics for, say, the last century if not longer.

Is The Deficit Shrinking Too Quickly?

This post from Investors Business Daily seems both counter-intuitive and troubling:

Here's a pretty important fact that virtually everyone in Washington seems oblivious to: The federal deficit has never fallen as fast as it's falling now without a coincident recession

To be specific, CBO expects the deficit to shrink from 8.7% of GDP in fiscal 2011 to 5.3% in fiscal 2013 if the sequester takes effect and to 5.5% if it doesn't. Either way, the two-year deficit reduction — equal to 3.4% of the economy if automatic budget cuts are triggered and 3.2% if not — would stand far above any other fiscal tightening since World War II.

Until the aftermath of the Great Recession, there were only three such periods in which the deficit shrank by a cumulative 2% of GDP or more. The 1960-61 and 1969-70 episodes both helped bring about a recession.

Far steeper deficit cuts during the demobilization from World War II and in 1937-38 both precipitated economic reversals.

No wonder economics is called the dismal science.

The Financial Cost Of Fear

Steve Clemons boils down the numbers:

Secondly, if one takes the approximate amount the United States was paying to "feel safe" on September 10, 2001 and account for inflationary growth since, the cumulative amount in just defense spending since is roughly $2.7 trillion. That doesn't include other domestic expenditures for Homeland Security which would make the collective bill even higher.

He acknowledges that comparing defense spending to other spending is an apples to oranges comparison, but it seems clear that costs of feeling safe have dangerous consequences:

To put the comparison in context, $2.7 trillion in economic activity in the private sector equates to approximately 6 million jobs sustained over the period between the 9/11 terror attacks and today.

Big, costly, unpaid-for wars are undermining the economic health of the country -- and are robbing growth and opportunity from the future to pay for these military objectives today.

It is a good debate to have whether the invasions of Iraq and the ongoing 'ownership' of the Afghanistan conflict have been worth the investment or not -- but not tending the economic health of America's core has been a strategic failure of enormous magnitude.

Six million jobs lost, $2.7 trillion borrowed, and lost civil liberties are high price for wars that have had a less than desirable result.

Quotation Of The Day: The Free Market Is Not Really Free

From this quotation on this Tumblr:

The idea that if economic life is detached from all moral considerations and left to operate by its own laws all will be well is simply an abdication of human responsibility. It is the handing over of human life to the pagan goddess of fortune.
— Lesslie Newbigin, Truth to Tell: The Gospel as Public Truth p77

Quotation Of The Day: Economic Policy Edition

From this New York Times article contrasting the economic problems confronting Europeans and Americans.

The huge bailouts, started in the administration of George W. Bush and continued by President Obama, worked. The banks were bailed out, and the survivors were forced to recapitalize.

The bailouts have become generally unpopular, in no small part because many banks seem to still view themselves as masters of the universe. There is nothing more grating than an ungrateful welfare recipient riding around in a chauffeured Mercedes complaining that he is not being treated fairly. But the reality then — and now — was that a modern economy must have a decently functioning financial system.

 I don't have the expertise to comment on the first paragraph.  The bolded part of the second paragraph, however, reminds me of a definition of poetry:  the best words in the best order.

Can Conservatives And Liberals Solve America's Economic Problems

Dr. Blanchard points to this Robert Samuelson column praising Sweden for successfully implementing both spending cuts and tax increases to solve its economic woes in the 1990s.  Samuelson writes,

Conservatives can take heart that many post-crisis policies came right from their playbook. Sweden’s income tax base was broadened and tax rates were sharply reduced. (In 1996, the average marginal rate — the rate on the last bit of income — was 46 percent; in 2010, it was 33 percent.) Spending was cut on old-age pensions, child allowances, unemployment benefits and housing subsidies. Union power over wages was reduced. Many markets (banking, air travel, telecommunications, electricity production) were deregulated. Low inflation and balanced budgets became broadly embraced popular goals.

On the other hand, liberals will also be reassured. Although Sweden trimmed social benefits, it hardly abandoned the welfare state. Overall government spending is still about 50 percent of the economy (gross domestic product), much higher than in the United States ,where the usual ratio is about 35 percent. To reduce income tax rates, the government raised other taxes. Gasoline and cigarette taxes were increased; so were taxes on dividends and capital gains, hitting the rich. Altogether, deficit reduction totaled a huge 12 percent of GDP from 1991 to 1998. Slightly more than a third of that came from higher taxes.

Blanchard claims "there is a lot more there to please conservatives, but it also shows liberals how a welfare state can be sustained."

I'm going to disagree for a couple of reasons.  First, as I posted in the comments on South Dakota Politics, Republicans have replaced "Thou shalt have no other gods before me with "Thou shalt never raise capital gains taxes."  It's not just the number of compromises or concessions that one is asked to make; it's the fervor with with which the positions that one is asked to compromise are held.  In the US, conservatives seemingly hold eliminating capital gains taxes sacred.

The second reason that I disagree with Blanchard comes from a point that both he and Samuelson seem to ignore.  Samuelson writes,

Unfortunately, in one crucial respect, the Swedish experience can’t be duplicated. In the early 1990s, the rest of the world economy was relatively healthy. Sweden could offset the depressing effects of its domestic policies by exporting more — and that’s what happened, aided by a huge devaluation of its currency, the krona. The devaluation made its exports more price-competitive.

Samuelson doesn't point out that Sweden reduces military spending as a share of GDP.  Conservatives in the United States seem unwilling to do that.

That refusal seems important because military spending makes up 20% of the U.S. budget as this chart from the Center on Budget and Policy Priorities points out.

Derek Thompson points out that the United States federal government is nothing more than a large insurance company:

The federal government was once elegantly described by Ezra Klein as a big fat insurance company surrounded by a standing army. It's a useful quip, because our government is basically in the business of security. Social Security, income security, health care security for the elderly, poor and veterans, and guns-and-helmets security account for about 80% of government spending. That's what we pay for when we pay taxes.

I would guess that all governments fit that description. Sweden cut income, health, and "guns-and-helmets" security.  If American leaders seriously want to solve the country's fiscal problems, they will have to do the same.  I don't see either conservative leaders, or liberal leaders for that matter, willing to make those tough decisions.

A Question For Economists

Tyler Cowen is an economist.  I don't pretend to know much about economics except to say that most people who claim to follow Adam Smith haven't really read Adam Smith, especially his moral philosophy.  I also know that someone called economics the dismal science, but it's not really a science.

If I read this Cowen sentence correctly, he apparently doesn't believe that economics is dismal either.

If there were a new invention as important as the toilet, shareholders would not and could not appropriate most of the gains.

Given that fewer people are controlling wealth, I can't believe that shareholders "could not appropriate most of the gains."  I have an easier time believing that aliens will abduct me tonight than I do that shareholders would not try to appropriate any and all gains.

Because summarizing and responding to a book,  Cowen doesn't take the time to warrant this assertion.  I would like someone to provide a warrant for me.  Please leave a cogent explanation in the comments.

Quotation Of The Week: Economic Policy Edition

From this David Frum post:

Even if consumers wanted to borrow, credit is just not very available to the typical person right now. Some credit, for example on credit cards, is not cheap. In fact, the average APR on credit cards is scraping a record peak: 14.96%.

As anxious as investors are about US personal debt however, they are blithe to nonchalance about the US public debt. Interest on that debt has sunk to record lows: under 2%.

The markets see deflation and depression, not inflation. Yet ironically this non-existent and much dreaded inflation is exactly the remedy we need to lighten the load of consumer debt.

As is, we’re looking at a continued economic slump, more unemployment, and more deleveraging via continuing catastrophic consumer default on mortgages, car loans, credit cards, and student aid. And now the GOP leadership is urging that the Federal Reserve make the catastrophe worse? To what end?

I know what the detractors will say: to the end of defeating President Obama and replacing him with a Republican president. And if you’ve convinced yourself that Obama is the Second Coming of Malcolm X, Trotsky, and the all-conquering Caliph Omar all in one, then perhaps capsizing the US economy and plunging your fellow-citizens deeper into misery will seem a price worth paying to rid the country of him.

But on any realistic assessment of the problems faced by Americans – and not just would-be Republican office-holders – it’s the recession, not the presidency, that is National Problem #1 and demands the most urgent action. It won’t be enough to save Obama if he does not deserve saving – but it may be enough to save your neighbor’s house, job, and family. Or even … your own. Republicans after all have been victims of this crisis too. It’s an hour of national emergency even more urgent and overwhelming than the aftermath of 9/11. And things may soon get worse, if the Eurozone begins to crack up, as it seems it may. This is the hour for united action against the economic crisis, not partisan maneuvering.

The Adults Are Finally Speaking Up; Will Republicans Listen?

I think that the Bloggers' Rule Book says I'm supposed to answer this question at the end of the post.  I'll break the rule.  I fear the answer is no because ideas, or the lack thereof,  have consequences.

First, conservative columnist David Brooks who scolded,

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases.

A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

This, as I say, is the mother of all no-brainers.

But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.

The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.

The Economist adds its voice to the scolding Brooks began,

This newspaper has a strong dislike of big government; we have long argued that the main way to right America’s finances is through spending cuts. But you cannot get there without any tax rises. In Britain, for instance, the coalition government aims to tame its deficit with a 3:1 ratio of cuts to hikes. America’s tax take is at its lowest level for decades: even Ronald Reagan raised taxes when he needed to do so.

And the closer you look, the more unprincipled the Republicans look. Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer.

Both parties have in recent months been guilty of fiscal recklessness. Right now, though, the blame falls clearly on the Republicans. Independent voters should take note.

Last night Speaker John Boehner withdrew from negotiations with President Obama.  The New York Times reports,

But the prospect of getting the bulk of his own Republican majority behind a $4 trillion, 10-year agreement was looming as a very heavy political and policy lift for the speaker who is still in his first year in the position.

As potential elements of the plan became public, Mr. Boehner was encountering stiff resistance from fellow Republicans determined to oppose any package containing proposals that could be construed as a tax increase, worried such a deal could cost the party dearly in the 2012 elections. In the initial White House talks last Thursday, Representative Eric Cantor of Virginia, the No. 2 House Republican, broke with the speaker and pushed for a mid-range agreement.

Joe Carter analyzes "X-Cons" and makes the following observations about Generation-X conservatives.

• X-Cons do not have a broad grasp of history. If we have an interest in history, we are likely to have a read a few books which we hold in high esteem and consider authoritative (Paul Johnson's Modern Times is among our favorites). At best, we may have done in-depth study on a particular historical era (the American founding, the Civil War, World War II) but we lack a deep understanding of general history. We have almost no comprehension of the intellectual history of conservatism.

• Talk radio has had a profound influence in shaping our political sensibilities. Just as William F. Buckley, Jr. provided the cast for conservatism in the 1950s, Rush Limbaugh shaped the conservatism of X-Cons in the 1980s and 1990s. Limbaugh provided not only the content but the style in which we conservatives would engage in political discourse: assured, confrontational, snarky. Talk radio taught us X-Cons to appreciate confirmation of our political views. Arguments needn't be persuasive when you are certain not only that we are right and our opponents are wrong, but also that we are right and they are wrong-headed.

• With confirmation came a sense of (virtual) community and a realization that a Ph.D in Political Science wasn't required in order to express a valid opinion on politics. Imbued with a sense of confidence from a young age, we X-Cons grew comfortable expressing ourselves in a conversational style that imitated our talk radio mentors. Blogging was (and remains) a natural outlet for our mode of expression.

• Unlike previous generations, X-Cons do not necessarily associate conservatism with either the East Coast, the preppie-class, or Republicanism. William F. Buckley, Jr. and George Will may still command respect, but they are considered eccentric curiosities rather than exemplary models of conservative intelligentsia. X-Cons associate such elitism with liberalism and consider the GOP, rather than the Democrats, to be the party of the “little guy."

In short, Generation-X conservatives have little respect for experts or intellectuals.  That attitude is having consequences now as Brooks observes,

The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it. . . .

The members of this movement have no economic theory worthy of the name. Economists have identified many factors that contribute to economic growth, ranging from the productivity of the work force to the share of private savings that is available for private investment. Tax levels matter, but they are far from the only or even the most important factor.

It's easy to see why a group with "little grasp of history" would "have no economic theory worthy of the name."  Further, a group that doubts scholars, considers intellectuals like Buckley a "curiosity," and believes that many opinions, including those screamed on talk radio, are the equivalent of those who have spent a lifetime studying a subject, will not listen to the adults warning them of the risks they're cavalierly taking

Is Kristi Noem Playing Political Poker With My Money?

One of poker's most basic unwritten rules is never bet more than you can afford to lose. The only exception to that rule is when one is betting with someone else's money. Today's Mitchell Republic reports,

U.S. Rep. Kristi Noem, R-S.D., said any budget deal will need to include “trillions” in budget cuts before she would vote to raise the nation’s debt ceiling.

“In order for me to vote to raise the debt ceiling, we need to cut trillions and change the way we spend money in Washington, D.C. That’s what I’ll be looking for,” Noem told reporters Thursday.

In short, Noem is willing to risk default.  Most of the debate about the effects of a US government default has been theoretical.  Today, however, Kevin Drum points to a case study and its results.

Here's an interesting factlet from Bruce Bartlett. He's addressing the question of whether a "technical" default — i.e., one in which the Treasury Department misses payments to bondholders for just a few days — would affect interest rates. It turns out that we actually have a case study on just this question:

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

Six-tenths of one percent interest rate hikes sound like trouble to me especially given the current job crisis and the rising cost of food and fuel.  Drum does a little math to drive the point home.

My back-of-the-envelope chicken scratching suggests that if this happens again it would cost the government something like $50-100 billion per year. In other words, no matter what debt ceiling deal we reach, upwards of half of it could be wiped out by higher interest costs if it comes too late to prevent default on the debt.

Looking at Drum's numbers, default will cost at least $1 trillion, wiping out one-third to one-half of the cuts Noem claims she wants.  Plus, no one knows the full economic effect of rising interest rates.  If rising rates cause another economic downturn, the deficit will probably increase even with Noem's desired "trillions" in cuts.

(HT @coralhei for Mitchell Republic link)

Why We Need An Economic Version Of The X-Files.

I've blogged that facts don't speak for themselves here and here.

At South Dakota Politics, Dr. Blanchard posts "The Fiscal Mess We're In" with a follow-up. Blanchard calls uses New York Times, Wall Street Journal, and Weekly Standard articles to call for cuts to entitlements including Social Security. 

To his credit, Blanchard, unlike many conservatives admits that tax increases might be necessary.  I'm unsure if  Blanchard would would agree with the facts, tone, or reasoning that Robert Ferguson and Thomas Johnson present in Salon.

Between 2002 and 2007, for example, the richest 1 percent of Americans garnered 62 percent of all income gains, while the bottom 90 percent of the population saw their incomes grow by 4 percent. At the same time, thanks to the Bush tax cuts, the rich were also paying proportionately fewer taxes. Considering that ordinary Americans fronted most of the money for the bank bailouts and have endured most of the recession’s “collateral damage,” it seems only simple justice that if the program needs fixing, the best way to do it would be to raise the ceilings on earnings subject to the Social Security tax, which is currently only $106,800. That would put the burden on people who cannot plausibly claim to be suffering.

Further, Ferguson and Johnson conclude the following about entitlements:

But even now there is no near-term threat to Social Security’s solvency. In 1983, Congress enacted into law recommendations of the Greenspan Commission to raise Social Security taxes to cover the retirement bulge coming from baby boomers. Since then, the program has piled up enormous surpluses. These have been invested in government bonds, thus helping to finance the rest of the government.

The 2011 Report of the Trustees of the Social Security Trust Fund projects that the Trust Fund and interest earnings from it will suffice to cover all benefit payments until 2036. Even then, the fund would not be empty -- the report projects that tax revenues will still cover approximately 75 percent of promised benefits until 2085. Talk of the bankruptcy of Social Security is hot air.

Meanwhile, Blanchard contends,

The Democrats in Congress have agreed to promises of future spending cuts, but only in non-entitlement spending. That just begins the process whereby entitlement spending and interest on the federal debt squeezes out all other spending. Until and unless entitlement reform is really on the table, agreeing to revenue increases just compounds the problem.

Where's the economic version of Mulder and Scully?  The truth has to be out there.

Economic Comparisons between U.S. AndGermany

Writing about German Chancellor Angela Merkel's visit to Washington, the New York Times's David Leonhardt writes, "Yet for all the strengths of the United States, almost nobody claims that the economy is in especially good shape. It so happens that our current out-of-town guests could teach us a few things."  Leonhardt asserts, ". . . .the American economy’s strengths may still be greater than the German economy’s. But Germany sure does seem more serious about dealing with its weaknesses."  That seriousness includes both spending cuts through efficient government and careful stimulus.

The most telling contrast may be between average workers.  Leonhardt reports,

Inflation-adjusted average hourly pay has risen almost 30 percent since 1985 in Germany, the kind of gains American workers have not enjoyed since the ’50s and ’60s. In this country, hourly pay has risen a scant 6 percent since 1985.

Conversely, American workers work more hours.  An Inland Voyage quotes Robert Reich to show that American workers must work increased hours to maintain a middle class life style.

Coping mechanism No. 2: Everyone works longer hours. By the mid 2000s it was not uncommon for men to work more than 60 hours a week and women to work more than 50. A growing number of people took on two or three jobs. All told, by the 2000s, the typical American worker worked more than 2,200 hours a year — 350 hours more than the average European worked, more hours even than the typically industrious Japanese put in. It was many more hours than the typical American middle-class family had worked in 1979 — 500 hours longer, a full 12 weeks more.

Most importantly, income inequality has not increased in Germany as it has here.

The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.

"In fact," Leonhardt writes,"[in Germany] middle-class pay has risen at roughly the same rate as top incomes."

Yesterday's taxation quotations, especially the statement "According to the Norquistian theology, a good small-government conservative can’t agree to close a tax loophole that’s bad public policy in order to entice Democrats into agreeing to spending cuts" produced sobering displeasure. Leonhardt adds to the discontent:

Some Democrats say Social Security and Medicare must remain unchanged. Most Republicans refuse to consider returning tax rates even to their 1990s levels. Republican leaders also want to make deep cuts in the sort of antipoverty programs that have helped Germany withstand the recession even in the absence of big new stimulus legislation.

New York Has Fashion Designers; South Dakota Has . . .

bill collectors?

This post over at An Inland Voyage pointed me to Demo Memo.  A quick scan of posts uncovered this nugget.

State with the highest concentration of...

Pest control workers: Florida
Fashion designers: New York
Mental health counselors: Pennsylvania
Meeting planners: District of Columbia
Optometrists: Hawaii
Crossing guards: New Jersey
Bill collectors: South Dakota
Bartenders: Montana

Source: Bureau of Labor Statistics, Occupational Employment Statistics

Bubbles Toil and Oil Troubles

It's been a long time since I took an econ class, so I might not remember everything correctly, but I'm pretty sure this isn't how Adam Smith saw capitalism.

Daniel J. Weiss and Valeri Vasquez write,

Americans spent 28 percent more for gasoline during the first three months of 2011 than the same period in 2010. Meanwhile, the big five oil companies—BP, Chevron, Conoco Phillips, ExxonMobil, and Shell—made 38 percent more profit. The companies then used a major portion of these additional profits to enrich their board of directors, senior managers, and shareholders by purchasing shares of their stock.

Further, the corporations "are battling to retain $40 billion of tax loopholes that will be paid for by taxpayers who are already providing their additional profits due to high oil and gasoline prices."  In short, Weiss and Vasquez conclude, "While consumers and taxpayers get hit with bills for higher gasoline prices and tax loopholes, Big Oil companies get richer by the minute."

Weiss and Vasquez published their article on May 3. 2011.  Yesterday, the commodities market took a hit, "led by the steepest drop in oil prices since the fall of 2008."  The cause seems to have a commodities bubble.

“You’re in a situation where a lot of these markets have pushed to all-time highs and it’s at a point where it became very unstable and that’s where you started to topple,” said Dax L. Wedemeyer, a broker analyst with US Commodities, a brokerage firm West Des Moines, Iowa.

Writing for his Mother Jones blog, Kevin Drum points out,

". . . it does make you wonder if we really do have a global economy these days that's inherently built on bubbles of one kind or another. Our financial rocket scientists seem almost incapable of making money in a normal economy — making enough money to satisfy themselves, anyway — so instead they spend their time seeking out smallish bubbles and then working overtime to supercharge them enough to spin out some temporary wealth before everything crashes back down to earth."

Of course, the big time folks looked at the bright side.

“I think it’s very healthy,” said Michael Rose, a trader at Angus Jackson. “The market was like a seesaw with everyone on one side, and now the markets will have time to clear out and balance."

He added, “The losers are going to be the small investors who thought it was going to go on forever like in the cases of the real estate and Internet bubbles.”

 So everything is good.  Consumers pay too much; small investors take a hit, and multi national corporations make out like bandits.  Drum muses, "One of these days we might actually get serious about regulating leverage enough to slow this down, but it hasn't happened yet. Maybe another half dozen bubbles will finally do the trick."  Drum seems to have be an optimist.  It'll probably take two or three dozen bubbles before anyone gets serious.