Kevin Drum

Playing With Economic Fire

| Fri Jul. 2, 2010 11:48 AM EDT

If the United States reduces spending and cuts its budget deficit, will that restore consumer confidence and help economic growth? Well, it's worked before — in other countries, other eras, and under other circumstances than today's. Bruce Bartlett summarizes the historical record:

Thus it turns out that fiscal contraction isn’t really expansionary except under conditions that do not exist today, and only when complimented by policies the U.S. is not free to pursue. Inflation and interest rates are at historically low levels and are not going to fall much lower even if the deficit disappears. As noted earlier, the Fed has limited capacity for further easing, and we can’t really depreciate our currency because it floats, nor is there any country to which we could realistically raise our exports to any great extent. Moreover, just about every other country is trying desperately to increase their exports to stimulate growth and all can’t do so simultaneously.

This is not an experiment that's going to turn out well. Consumer spending isn't going to rise while unemployment is high and wages are stagnant. (Former Jeopardy! champ James Pethokoukis on today's employment news: "If workforce had not shrunk so dramatically, the unemployment rate would have risen to 9.9 percent. Yes, I did the math.") Nor are consumers likely to draw down their savings or increase their borrowing. Just the opposite, in fact. And businesses aren't going to increase investment as long as consumers are in the doldrums. All of this remains true regardless of the state of the deficit. So how exactly is fiscal austerity going to help the economy?

It's possible, I suppose, that the economy will recover strongly and a few years from now we'll all figure out the mechanism that made it happen. But I doubt it. We're playing with fire here.

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Is Democratic Unity Possible?

| Fri Jul. 2, 2010 11:26 AM EDT

I think my general feeling about Bob Shrum is that if he says Democrats should do something, their best bet is to do the opposite. But this advice actually sounds fairly plausible:

Why should Congress take its annual August vacation while 15 million Americans are unemployed and millions more are underemployed, underpaid, or under the radar of official statistics because they are so discouraged they’ve stopped looking for work? With oil gushing into the Gulf, why should senators and representatives be rushing out of Washington to travel, raise money, and campaign?

Democrats in the House will respond that they’ve done their job; the Senate is the roadblock. Democrats in the Senate will plead that they’re not the problem; a willful GOP minority is blocking progress not just out of spite, but calculation. Republicans figure that a slow recovery and the lingering oil slick will drive a protest vote for them in November.

The Democratic arguments are right, but largely irrelevant and generally ignored by a fearful and frustrated electorate. Ironically, the way to break through is not to flee the Beltway, but to keep Congress there in a drama that plays out on center stage — in front of the cameras — with the president calling a special session of Congress to deal with too-long delayed issues of urgent national necessity.

This would sound plausible, anyway, if Democrats had their act together a little better. In general, the idea here would be for Obama to submit a raft of popular, highly targeted jobs bills to Capitol Hill and insist that Congress vote on them. One by one, either Republicans would defect and Dems would get a series of wins, or else, one by one, we'd get a series of 59-41 votes that would showcase Republican intransigence on the economy.

But would it work if, instead, each bill were the source of intra-party bickering that turned off the voters, long delays that made Washington seem impotent, and votes that ended up 53-47 because a handful of centrist Democrats insisted on breaking ranks? Probably not. And unfortunately, that's probably what we'd get. Better Democrats, please.

RNC Chair: Obama Started War in Afghanistan

| Fri Jul. 2, 2010 10:59 AM EDT

Adducing yet more evidence that Michael Steele is a mendacious clown hardly seems worth the bother, but this is pretty spectacular even by his standards:

Keep in mind, again, federal candidates, this was a war of Obama's choosing. This was not something that the United States had actively prosecuted or wanted to engage in....But it was the president who was trying to be cute by half by flipping a script demonizing Iraq, while saying the battle really should in Afghanistan. Well, if he's such a student of history, has he not understood that, you know, that's the one thing you don't do, is engage in a land war in Afghanistan? All right? Because everyone who has tried over a thousand years of history has failed, and there are reasons for that. There are other ways to engage in Afghanistan without committing U.S. troops.

It starts around the 0:20 mark. I'm taking bets in comments: what Bush-era policy will Steele repudiate next? I'm hoping he blames lower tax rates on Obama.

Boston With Good Weather

| Fri Jul. 2, 2010 10:28 AM EDT

Matt Yglesias on his visit to California:

Every trip I ever take to this state is a time to become frustrated anew that the bulk of America’s walkable urbanism exists in the horrible-weather locales of the Northeast or else the even-worse-weather locale of Chicago. Head west to California and the climate is lovely — tons of great places to walk around — but the built environment is inhospitable to such endeavors. It’s a huge shame. If you took Boston and relocated it to somewhere in California, it would possibly be the greatest place on earth. Instead it’s Boston.

Hmmm. That's been done, hasn't it? I think they called it San Francisco, and its residents are indeed convinced that it's the greatest place on earth. Just ask them. And with all the hills, it's much better for your cardiovascular health, too!

Are We Headed For a Double Dip?

| Fri Jul. 2, 2010 10:19 AM EDT

From the LA Times today:

A fresh batch of weak economic news Thursday heightened concerns about the staying power of the fledgling recovery, with more uninspiring news expected Friday when the government reports on the May job market.

....Most economists still see a "double dip" as a remote possibility, clinging to forecasts that the economy will muddle along at a modest pace for several quarters....After a series of strong economic data early this year, recent reports have been more mixed, but that hasn't altered the fundamental outlook for the economy, said Ken Matheny, a senior economist at Macroeconomic Advisers, a forecasting firm based in St. Louis.

Well, "most" forecasters may think a double dip is a remote possibility, but not John Hussman:

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions....What prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

....Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988.

Great. And today's lousy jobs report may put a few more folks in Hussman's camp. Buckle your seat belts.

Keeping Up With the Jones Act

| Fri Jul. 2, 2010 5:00 AM EDT

Have you heard of the Jones Act? Unless you read Newsmax and listen to a lot of right-wing radio, probably not. It's an obscure statute that's been on the books since 1920, and it requires all shipping between U.S. ports or in U.S. coastal waters to be carried in U.S.-flag ships that are owned and crewed by U.S. citizens.

So why are conservatives suddenly up in arms about it? Because, they claim, it's a labor-inspired rule that's obstructing aid to a Gulf Coast being ravaged by the BP oil spill. Why, if only President Obama would stand up to the union bosses and grant a waiver to the rule, we could get help from the Dutch, the Norwegians, the Belgians, and all the other countries that desperately want to help but are being kept away. Sarah Palin got the ball rolling on this meme a couple of weeks ago when she said, "It’s amazing to me and to so many others that though President Bush had been able to waive Jones Act provisions for Katrina, President Obama hasn’t thought to do that yet?" It's been a right-wing talking point ever since.

This is, as it happens, entirely false. No waivers have been requested yet because so far none have been needed. The Jones Act doesn't apply to vessels like oil skimmers that would be used in coastal areas, and the world's largest skimmer, a converted Taiwanese supertanker, is in the Gulf and will begin operations soon. It doesn't apply at all more than three miles off the coast, where the spill itself is taking place. There are, it turns out, over a dozen foreign flagged ships helping out with spill operations. "To date," reports, "25 countries and four international organizations have offered support in the form of skimming vessels, containment and fire boom, technical assistance and response solutions, among others." Only one offer has been declined.

Not surprised? Me neither. But I was pleasantly suprised by this headline on a Jones Act story distributed on Wednesday by McClatchy:

GOP's false talking point: Jones Act blocks Gulf help

One of the reasons that conservatives get away with mendacious memes like this one is because the media rarely calls them out directly on it. When it came up on Meet the Press last weekend, for example, David Gregory's response was "Mm-hmm," and it was left to Rep Ed Markey (D–Mass.) to explain why the charge was baseless. So three cheers to the heroic but anonymous copy editor at McClatchy who read William Douglas's story and didn't try to fudge things. It's a false talking point, full stop, and it's nice to see someone in a mainstream organization say so plainly.

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Are We In a Treasury Bubble?

| Thu Jul. 1, 2010 6:36 PM EDT

Conservative economist Scott Sumner tries to divine Paul Krugman's secret to economic prognostication:

If you read Brad DeLong, you probably notice that he is a bit in awe of Krugman’s ability to be right about everything. Actually, Krugman isn’t right about everything....But to give the devil his due, he is right about an awful lot of things. Why is that?

....Think about all his recent posts mocking the conservative fear that big deficits will lead to higher interest rates. What evidence does Krugman use? He cites the low and falling 10 year bond yields. In other posts he has used TIPS spreads to explain why inflation is the last thing we should be worried about. Now flash back to March 2009, when Krugman warned that $780 billion in stimulus would not be enough to get the job done. Did he know this from his models, as he claimed? Or did he cheat, did he peek at the equity, commodity and bond markets, and notice that all were predicting a severe recession with lots of disinflation, if not outright deflation? I think he peeked.

My theory is there are two kinds of economists:

1. Those who look smarter than they really are, because they rely on the EMH to predict

Paul Krugman

Scott Sumner


2. Those who look dumber than they really are because they rely on their own models to predict

EMH is the Efficient Market Hypothesis, and in this context it basically means that current prices reflect the best information we have about the state of the market. There are no hidden secrets and there are no models that can provide better predictions. If the market, putting its money where its mouth is, thinks that interest rates and inflation are going to remain subdued, then your best bet — as Krugman and DeLong point out regularly — is that interest rates and inflation are going to remain subdued.

Of course, neither Krugman nor DeLong is a big fan of EMH, so Sumner is having a bit of fun at their expense in this post. Still, there's a point to the snark, and it's why I'm a smidge less sure about the market's view of interest rates and inflation than K&D are. The problem is that I'm on their side when it comes to EMH: it really isn't a very reliable theory, and it's especially unreliable in the middle of bubbles. Relying on market prices as a guarantee of safety during the credit bubble of the aughts would have led you wildly astray, and I suspect that it might be doing the same thing now: thanks to the global recession, the overall dearth of good investment opportunities, and a general fear of the future producing a sustained flight to safety, we may be in the middle of a treasury bubble that's pushing interest rates to artificially low levels. If we are, then that bubble may pop unexpectedly and we may learn that the market has been fooling us all along.

Now, DeLong in particular has been tireless in making a related but separate point: it doesn't really matter what you think about the future. If the market — whether or not it's being fooled by a bubble mentality — is willing to loan the government money for 10 or 30 years at low interest rates, then the government should take the money. Once the rate is locked in, it means we're getting cheap funding to stimulate the economy, and we might as well take advantage of it. This has nothing to do with either EMH or any attempt to predict the future.

And I basically agree. I'm not sanguine about the state of the economy, and I think the risk that either expansionary fiscal policy or expansionary monetary policy will touch off a serious inflation storm is small. In any case, small enough that I'm willing to take it. Still, there is a chance that expansionary policy will, at some point, spook the market enough that it wakes up from its bubble and decides to send interest rates skyrocketing. I don't think it's a very big chance, but it's a chance. And it's why I'm just a little bit waffly on the whole subject.

Deficit Poser Alert

| Thu Jul. 1, 2010 1:48 PM EDT

Ryan McNeely isn't impressed with the deficit hawkery of Blue Dog Democrat Stephanie Herseth Sandlin (D–SD), who has been relentless in her efforts to reduce stimulus and jobs spending:

The problem is that Herseth Sandlin voted to permanently cut the estate tax, which “would have reduced government revenue by an estimated $268 billion over the next decade, according to the Center on Budget and Policy Priorities.” There were no corresponding spending cuts. She also voted for the Energy Policy Act of 2005, which contained billions in tax breaks for extremely profitable oil companies. She also voted against the deficit-reducing Affordable Care Act. Finally, she voted for a $100 billion emergency supplemental for the Iraq War without requiring a withdrawl timeline, against the wishes of Democratic leadership.

She's a deficit poser, not a deficit hawk. She doesn't care about the deficit, she just prefers that money be spent on rich people, big corporations, and foreign wars instead of the unemployed and those without healthcare. Which is fine, I guess. But tell me again why she's a Democrat and why anyone takes her alleged deficit hawkery seriously?

Chart of the Day: The Recession's Effect

| Thu Jul. 1, 2010 12:40 PM EDT

We already know that unemployment, long-term unemployment, and underemployment have been sky high during this recession, but a new study from Pew has some additional startling news: even among the still employed, 74% have taken a pay cut of one kind or another,1 either directly or via forced time off — and it's probably even worse than this since Pew apparently didn't ask about cuts in benefits. I wonder: does this mean that wages among the currently employed aren't as sticky as we think? And is this new? My sense is that we haven't seen pay cuts of this breadth in previous recessions, even in 1981-82. But that's just a sense. I don't know if there's survey data to back that up.

Other bullet points from the Pew study:

  • More than six-in-ten Americans (62%) say they have cut back on their spending since the recession began in December 2007.
  • About half the public (48%) say they are in worse financial shape now than before the recession began....Government data show that average household wealth fell by about 20% from 2007 to 2009, principally because of declining house values and retirement accounts. This is the biggest meltdown in U.S. household wealth in the post-World War II era.
  • A third (32%) of adults now say they are not confident that they will have enough income and assets to finance their retirement, up from 25% who said that in February 2009.
  • Throughout most of the decade of the 2000s, Republicans were significantly more upbeat than Democrats about the state of the economy. That pattern is now reversed.

That last point, by the way, almost certainly explains the different levels of economic optimism among various demographic groups. In all cases, the more Democratic trending group is also the most optimistic.

In other related news, homes sales are down, GM is selling fewer cars, jobless claims spiked last week instead of falling, and thanks to Ben Nelson (D–LetEmRot) unemployment benefits still haven't been extended. Those benefits are only for losers in other states, after all. As long as Nebraska is doing OK, why should he be worried?

1A couple of commenters point out that the categories in the chart aren't mutually exclusive. A single person might fall into more than one of them, so you can't just add them up to get 74%. That's true. So the real number is lower than this. At a guess, though, it's still well over 50%.

Question of the Day: Journalistic Ethics

| Thu Jul. 1, 2010 11:22 AM EDT

From Max Sawicky:

If it is forbidden for journalists to privately deride their subjects, why is it fine for them to publicly idolize them?

Well, um, because.....look! Halley's comet!