Commissions Composed Of Cretins?

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Published on Tuesday, November 9, 2010 by FireDogLake.com

The Deficit Commission Tsunami

by Dean Baker

During the mass unemployment of the Great Depression, Keynes once quipped that if we couldn't find any productive work that needed to be done, in order to reduce unemployment we could just pay workers to dig holes and fill them up again. Keynes was being sarcastic, but it seems that the Washington crew picked up on this suggestion. This is the only plausible explanation for the proliferation of deficit commissions in our nation's capital.There are three separate deficit commissions prepared to share their wisdom with the American people before the end of the year. These three commissions all have two important features in common: not one member of these commissions warned of the catastrophe that would be created by the collapse of the housing bubble, and they all think it is a good idea to cut Social Security.
The country is currently experiencing its worst economic downturn in 70 years with more than 25 million people unemployed, underemployed or having given up looking for work altogether. It might have been appropriate for a commission that purports to be giving advice on the future of the country's most important social programs, as well as the overall budget, to include at least one person who was awake enough to notice the $8 trillion housing bubble that wrecked the economy.
But these commissions that want to tell the public what is best for us don't feel that they need to bother with trivialities like the economic collapse. In fact, the commissions include many of the people who had helped guide our economy off the cliff. They see their credentials in this capacity as lending to their credibility. This is sort of like an officer from the Titanic using this experience as a basis for being appointed ship's captain.
In fact, these commissions don't have much other than their credentials to support their recommendations for cutting Social Security and Medicare. While the media have been hyperventilating at length to try to build fears about the budget deficits, it is easy to show that these fears are unwarranted.
In the short term, the United States has large budget deficits for the simple reason that private sector spending collapsed. The arithmetic is straightforward. The collapse of the bubbles in residential and nonresidential real estate led to a plunge in annual construction demand of more than $600 billion a year. The indirect effect of the loss of $6 trillion in housing bubble wealth was to reduce annual consumption by $600 billion a year.
With a total loss of $1.2 trillion in private sector demand, the choice for the government is either to boost the economy by running large deficits or allow the economy to contract further and let the unemployment rate rise even higher. If our deficit hawk commission members knew their economics, they would have been warning of the housing bubble in 2002-2006. Then, we could have avoided this economic collapse - and we would have had smaller deficits.
It is important to realize that the debt that we are incurring at present need pose zero burden on future generations. We are putting to use resources that would otherwise be idle, not pulling resources away from the private sector. While the deficit hawks eagerly threaten us with the prospect of our children paying interest on trillions of dollars of debt, the Federal Reserve Board could simply buy and hold this debt, leading to no net interest burden on future generations. (The Treasury pays interest on the debt to the Fed, which then refunds the interest payments to the Treasury at the end of the year, leaving no net interest burden.)
While the longer-term projections do show a serious deficit problem even after the economy has recovered, this is due to projections of exploding health care costs. Since more than half of our health care is paid by the public sector, if health costs really do grow out of control, then it will lead to very serious budget problems. Of course, if health care costs follow the projected path then they will also devastate the private sector.
The point is that we have a health care problem. If we don't fix our health care system, then our economy will be in serious trouble, with one problem being large budget deficits. If we do fix our health care system, then there is no long-term deficit problem.
The basic story is that, in the short term, there is no deficit problem; the problem is a plunge in private sector demand caused by the collapse of the housing bubble. In the longer term, the deficit problem is actually the problem of a broken health care system. The facts are as clear as can be.
So, why then do we have all these deficit commissions? It's simply modern Washington's way of digging holes and filling them up again. It gives these people something to do. Let's hope it ends up being harmless.

© 2010 FireDogLake.com

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. 

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Published on Thursday, October 7, 2010 by The Guardian/UK

Economics 101 for Deficit Hawks

The same Washington policymakers who inveigh against the deficit want a strong dollar – clueless about the contradiction

by Dean Baker

There are few areas of economics more boring than accounting identities. This is really unfortunate, since it is virtually impossible to have a clear understanding of economic policy without a solid knowledge of the underlying identities.
Most of the people in Washington policy debates were apparently overcome by boredom before they could get this knowledge. As a result, we see some really silly policy debates.
The debate over the value of the dollar against the Chinese yuan is the latest episode in this silliness. The Washington tribal elite has been on the warpath against budget deficits in recent months. They have worked themselves into such a frenzy that nothing will stand in their way: neither concerns about unemployment, nor concerns about the well being of our elderly, nor even concerns about basic economic logic.
The central problem stems from the simple accounting identity that national savings is equal to the broadly measured trade surplus. A country with a large trade surplus will also have large national savings. Conversely, a country with a large trade deficit will have negative national savings. These relationships are accounting identities – there is no way around them.
This brings us to the next part of the story; where trade deficits come from. At a given level of GDP, the main determinant of the trade deficit is the value of the dollar in international currency markets. This is very basic supply and demand. If the dollar is higher in value relative to other currencies, then our exports will cost more to people living in Germany, Japan, and China.
If a car sells for $20,000 in the United States, then the price of this car to people living in other countries will depend on how much of their own currency (euros, yen or yuan) they must pay to get a dollar. The higher the dollar relative to these other currencies, the more expensive the car is to foreigners. And, the more expensive it is to foreigners, the fewer US-made cars they will buy. This means our exports will fall.
The story works in reverse on the import side. If the dollar is high and therefore buys lots of foreign currency, then imports are cheap. This means that we will buy lots of imports.
If we have low exports and high imports, then we will have a large trade deficit. End of story. We can train our workers to be more productive, urge our firms to invest more and try to improve our public infrastructure, but realistically, none of these factors can come close to offsetting the impact of a currency that is 20-40% over-valued. A severely over-valued currency virtually guarantees a trade deficit.
This brings us back to the budget deficit part of the story. If the United States has a large trade deficit, then it means that net national savings are negative. That is definitional. For net national savings to be negative, then we must have either negative private savings or negative public savings (that is, a budget deficit).
During the peak years of the housing bubble, private savings were strongly negative. This was because the wealth created by the bubble led homeowners to spend rather than save. With the collapse of the housing bubble, people are now saving much more. Furthermore, investment has fallen due to overbuilding, which means that private-sector savings are no longer negative.
This leaves us with our large budget deficit. The budget deficit follows from the fact that we have a trade deficit, which is, in turn, the result of the over-valued dollar. This brings us to the strangely paradoxical behavior of the Washington policy elite.
Many of the same people who routinely express horror over the size of the budget deficit were either on the sidelines or in actual opposition to the effort by congress to get China to raise the value of its currency against the dollar. While one can argue as to whether the bill approved by the house of representatives was the best route to go, anyone who hopes to get the trade deficit down must recognize the need to lower the value of the dollar. And, if one wants to get the budget deficit down, then it is necessary to reduce the trade deficit.
This raises the possibility that perhaps the deficit hawks don't really give a damn about the deficit. Perhaps the deficit hawks just want to cut social security and Medicare and other programmes that benefit the middle class and moderate-income people.
Of course, it is also possible that the deficit hawks are just confused when it comes to economic policy. It's hard to know for sure. But these days, ignorance and/or dishonesty appear to be the chief qualifications for entry to Washington policy debates.

© Guardian News and Media Limited 2010

Dean Baker is co-director of the Center for Economic and Policy Research

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Deficit Hawks Up To Old Tricks

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Published on Tuesday, April 27, 2010 by The Guardian/UK
Deficit Reduction: Argument by Authority

by Dean Baker
The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control.

What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.

Many public debates in the United States take this form. The issue is not what is said, but rather who says it. A few years ago all the authorities said that there was no housing bubble. The large body of evidence showing that house prices had hugely diverged from the fundamentals did not matter when the chairman of the Federal Reserve Board, the president's Council of Economic Advisers and other leading lights of the economic profession insisted that everything in the housing market was just fine.

Going further back to the mid-90s, many of this same group of deficit hawk luminaries tried to use argument by authority to cut social security. They came up with the story that the consumer price index (CPI) overstated the true rate of inflation. After workers retire, their social security benefits are indexed to the CPI. This crew (which included then Senator Alan Simpson, a co-chair of President Obama's commission, and Peter Peterson) argued that social security benefits should lag the CPI by one percentage point a year. In other words, if the CPI shows 3% inflation, then social security benefits will only rise by 2%.

That may seem a small cut, but it adds up over time. A worker retired for 10 years would have their benefits reduced by approximately 10%. A worker retired for 20 years would have their benefits cut by almost 20%.

To push this agenda, they put together a panel of the country's most prominent economists, all of whom blessed the claim that the CPI overstated the true rate of inflation by at least one percentage point. In addition to this panel, the social security cutters also pulled in other prominent economists, including Martin Feldstein, formerly President Reagan's top economist and the head of the National Bureau of Economic Research.

The social security cutters were so successful in rounding up the big names that virtually no economists were prepared to publicly stand up and question their claims about the CPI. They had near free rein, running around the country with the "all the experts agree" line.

As events unfolded they were not able to get their cut in social security benefits. (Ted Kennedy and Dick Gephardt deserve big credit on this.) But what is really interesting for the current debate is what happened to the experts' claim on the CPI. There were some changes made to the CPI, but in the view of the expert panel, the major causes of the biases in the CPI were not fixed. They concluded that even after the changes the CPI still overstated the true rate of inflation by 0.8 percentage points annually.

If this claim is really true then it has enormous ramifications for our assessment of the economy. It means, for example, that incomes and wages are rising far more rapidly than the official data show. It means that people in the recent past were far poorer than is indicated by official statistics. If the claim about the CPI being overstated is true, then we would have to re-examine a vast amount of economic research that starts from the premise that the CPI is an accurate measure of inflation.

However, almost no economists have adjusted their research for a CPI's overstatement of inflation. In fact, even the members of the expert panel don't generally use a measure of inflation that adjusts for the alleged bias in the CPI. In other words, when they are not pushing cuts to social security, these economists act as though the CPI is an accurate measure of the rate of inflation. This could lead one to question these experts' integrity.

This history should give the public serious grounds for being suspicious about the latest efforts to cut social security and Medicare. A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion with their argument by authority.
© Guardian News and Media Limited 2010

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

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The Bankruptcy Boys

Cover of The Conscience of a Liberal

Published on Monday, February 22, 2010 by The New York Times
The Bankruptcy Boys

by Paul Krugman

O.K., the beast is starving. Now what? That’s the question confronting Republicans. But they’re refusing to answer, or even to engage in any serious discussion about what to do.

For readers who don’t know what I’m talking about: ever since Reagan, the G.O.P. has been run by people who want a much smaller government. In the famous words of the activist Grover Norquist, conservatives want to get the government “down to the size where we can drown it in the bathtub.”

But there has always been a political problem with this agenda. Voters may say that they oppose big government, but the programs that actually dominate federal spending — Medicare, Medicaid and Social Security — are very popular. So how can the public be persuaded to accept large spending cuts?

The conservative answer, which evolved in the late 1970s, would be dubbed “starving the beast” during the Reagan years. The idea — propounded by many members of the conservative intelligentsia, from Alan Greenspan to Irving Kristol — was basically that sympathetic politicians should engage in a game of bait and switch. Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government’s fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit.

And the deficit came. True, more than half of this year’s budget deficit is the result of the Great Recession, which has both depressed revenues and required a temporary surge in spending to contain the damage. But even when the crisis is over, the budget will remain deeply in the red, largely as a result of Bush-era tax cuts (and Bush-era unfunded wars). And the combination of an aging population and rising medical costs will, unless something is done, lead to explosive debt growth after 2020.

So the beast is starving, as planned. It should be time, then, for conservatives to explain which parts of the beast they want to cut. And President Obama has, in effect, invited them to do just that, by calling for a bipartisan deficit commission.

Many progressives were deeply worried by this proposal, fearing that it would turn into a kind of Trojan horse — in particular, that the commission would end up reviving the long-standing Republican goal of gutting Social Security. But they needn’t have worried: Senate Republicans overwhelmingly voted against legislation that would have created a commission with some actual power, and it is unlikely that anything meaningful will come from the much weaker commission Mr. Obama established by executive order.

Why are Republicans reluctant to sit down and talk? Because they would then be forced to put up or shut up. Since they’re adamantly opposed to reducing the deficit with tax increases, they would have to explain what spending they want to cut. And guess what? After three decades of preparing the ground for this moment, they’re still not willing to do that.

In fact, conservatives have backed away from spending cuts they themselves proposed in the past. In the 1990s, for example, Republicans in Congress tried to force through sharp cuts in Medicare. But now they have made opposition to any effort to spend Medicare funds more wisely the core of their campaign against health care reform (death panels!). And presidential hopefuls say things like this, from Gov. Tim Pawlenty of Minnesota: “I don’t think anybody’s gonna go back now and say, Let’s abolish, or reduce, Medicare and Medicaid.”

What about Social Security? Five years ago the Bush administration proposed limiting future payments to upper- and middle-income workers, in effect means-testing retirement benefits. But in December, The Wall Street Journal’s editorial page denounced any such means-testing, because “middle- and upper-middle-class (i.e., G.O.P.) voters would get less than they were promised in return for a lifetime of payroll taxes.” (Hmm. Since when do conservatives openly admit that the G.O.P. is the party of the affluent?)

At this point, then, Republicans insist that the deficit must be eliminated, but they’re not willing either to raise taxes or to support cuts in any major government programs. And they’re not willing to participate in serious bipartisan discussions, either, because that might force them to explain their plan — and there isn’t any plan, except to regain power.

But there is a kind of logic to the current Republican position: in effect, the party is doubling down on starve-the-beast. Depriving the government of revenue, it turns out, wasn’t enough to push politicians into dismantling the welfare state. So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe. You read it here first.
Copyright 2010 The New York Times Company

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. Krugman was the 2008 recipient of the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, and his most recent, The Return of Depression Economics.

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Dean Baker Column

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Published on Tuesday, November 24, 2009 by Huffington Post

The Budget Deficit Crisis: The Blame Is Bipartisan

by Dean Baker

The country is being bombarded with stories claiming that record budget deficits threaten our children's future and jeopardize the credibility of the dollar. These stories are a serious problem -- they have hugely confused the public about the nature of the country's economic crisis. And both parties share the blame.
Starting with the reality behind the scare stories -- trillion-dollar deficits are really huge relative to the money that any of us will ever see in our lifetime. But this is an absurd measure. The United States is a country with more than 300 million people. It doesn't matter that a trillion dollars is a huge amount to any of us individually. What matters is the size of the deficit and the debt relative to the size of the economy.
Only people who want to deceive the public would talk about the deficit or debt in "trillions" of dollars. This is a very simple lie-detector test since honest economists and policy analysts always refer to these sums relative to the size of the economy.
Relative to the size of the economy, the deficits that we are running are large and the debt that we are projected to incur is substantial, but the deficit level is still not coming close to the levels hit in World War II. Nor is the debt level projected to reach post-war peaks or the levels sustained by countries like Italy and Japan. The idea that we are near some debt-driven crisis is absurd on its face.
The United States had the strongest period of growth in its history in the three decades following World War II. This undeniable fact should put to rest the idea that our debt levels will threaten the prosperity of future generations. We hand our children a whole economy and society. If we give them a bad education, a decayed infrastructure, a ruined environment, then we will be jeopardizing our children's economic well-being. However, the debt levels we are currently projecting aren't even large enough to make it to the list of serious problems.
The claim that the dollar faces an imminent crisis because of the budget deficit or national debt is readily refuted by the example of Japan. Japan already has a debt to GDP level that is far larger than we are projected to have by the end of the next decade. In spite of this debt burden, investors are willing to hold ten-year Japanese government bonds at just a 1.5 percent interest rate. If these debt burdens are supposed to make Japan a high risk, someone forgot to tell the people who are putting billions of dollars on the line by holding Japanese government bonds.
There is another side of this Japan story that makes the idiocy of the deficit scare stories even more apparent. According to the deficit fear mongers, the dollar has been falling in recent months because investors are becoming increasingly worried about the U.S. government's ability to pay off its debt. But one of the currencies that the dollar has fallen against is the yen. Are investors who are worried about the U.S. government's ability to pay off its debt selling dollars to buy the bonds of the Japanese government, which has an even higher debt burden?
Let's face it: The deficit hawks will say anything to advance their agenda. Even worse, the media will print it.
This deficit nonsense should have been put to rest long ago, but both parties have hyped it to advance their ends. Currently, the Republicans are making headway in the polls by blaming the Obama administration for a deficit that is primarily the result of economic mismanagement during the Bush years.
But Republicans don't have a monopoly on demagoging the deficit. During the Bush years, many Democrats spoke of the Bush deficits in cataclysmic terms. This was absurd. The deficits were larger than was desirable during part of the Bush administration (large deficits in 2002 and 2003 were helpful in boosting the economy), but they were not hugely out of line. There is certainly no story that can pass the laugh test in which these deficits are responsible for the collapse of the housing bubble and subsequent recession.
There were plenty of grounds to attack President Bush for the economy's performance under his watch. Most importantly, he let an $8 trillion-dollar housing bubble grow unchecked, and giving big tax cuts to the wealthy is not the way to create an educated workforce and a modern infrastructure.
But the Democrats often hyped the deficit -- it was the easiest way to score political points. That helped to give us a situation in which tens of millions of people somehow think the deficit is the cause of the economy's problems when in reality it is the only thing keeping it afloat. In short, the Democrats are paying the price of their own political opportunism. Unfortunately, so is the rest of the country.

© 2009 Huffington Post

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.