Economic Fairy Tales and other Bed time stories

One of the things that grew out of the Reagan years was a set of myths. Primary among them were economic myths. The first one was that the country was overtaxed. The second was that there was no particular useful role for government. The third was a revival of our country’s Puritan ethos. None of these were particularly helpful and all of them were put to death–in short order–during the Clinton years by theory and empirics. Well, they were put to death by every one but those that rely on faith and ideology rather than theory and data. I see a revival of these myths in the signs of tea partiers. The tea party folks realize we’re losing our way of life. The problem is they are so angry they are looking to Reagan Fairy tales for answers. Republicans and Blue dawgs are playing those fears like magical harps. Fairy tales calm children’s fears, but they do not solve real problems.

A really good example of a stupid hypothesis in Reagan’s VooDoo economics that was soundly put to death by empirics was the Laffer curve.(That was the basis of the argument that we’re overtaxed.) However, I do know some one that has to rely on old articles to bring this ‘view point’ into his classroom. No matter how many ways I insist that it’s not our job to bring failed hypotheses to students he still keeps clapping for this very dead Tinkerbell. He wants to believe he’s over taxed no matter what the data says and I haven’t seen him for awhile but I have no doubt he’s participating in whatever passes for a tea party up in his rural part of Washington.

Paul Krugman’s hair is on fire about the Austerity Myth today. He’s not the only one. Here’s something from The Economist with the same urgency on the international scale called the Austerity Alarm. These articles seem even more prescient given the news about unemployment today. The U.S. economy is not creating jobs. It’s still losing them in large numbers. The economy lost 125,000  jobs last month. The previous dips in the unemployment rate seem to have come from part time Census worker jobs. This one comes from people giving up so they’re not counted. I warned 1 1/2 years ago that the Porkulus bill was not concentrating spending on the right things and too full of useless tax cuts. Surprise! Surprise! Job creation remains elusive. Mortgage rates are at record lows and without bribes to first time buyers, the housing market–perhaps the most central element of the American Dream Fairy tale–looks like a lost market. So, the best our leaders can do in response to all of this is reheat policies that failed during the Hoover Administration.

As Krugman points out, the U.S. and nearly all the world’s economies remain in a deep recession, so why are all the leaders talking about austerity programs and acting like the big issue is that some imaginary set of investors will treat them like Greece if they act responsibly? Why are they repeating the policies that made the Great Depression worse to begin with and then the policies that turned the recovery of the mid thirties into a double dip depression?

Krugman suggests that it’s the power of the village that keeps churning out the myth. It’s not the village economists that embrace this fairy tale. It is our village idiots and unfortunately, they seem to be in charge of economic policy these days. This is not to deny that the U.S. has long term budget problems. Demographics are presenting serious problems to both Social Security and Medicare. Both need to be revamped to meet future commitments. Revamping, however, does not mean tearing down all the buildings in the village to stop one fire from spreading.

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

So Krugman is a liberal and of course, the argument against him is that all we liberals believe is that the our big daddy government will get us out of trouble. So, why is the same argument coming from The Economist whose subtitle to their op-ed piece reads “Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous”. They are hardly a bastion of liberal thinkers and they call the austerity hawkers dangerous.

The austerity fad is also distorting politicians’ priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country’s huge medium-term deficit by, for instance, reforming social security. The result probably won’t be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been.

Go over to the Economist’s view and read Thoma’s series of links (including this one from The Dallas Fed which again is not a bastion of liberal economic philosophy among the Fed districts) and see if you can find any silver linings in predictions concerning the recovery. They aren’t to be found. Here’s an excellent piece from the NY Times by David Leonhardt paralleling the current squawks of the deficit hawks and the pressure on FDR to derail the New Deal mid depression. Sound familiar?

On the other hand, the most recent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won’t be much smaller than the 1930s version. From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product.

Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once. From 2009 to 2011, the tightening in the United States will equal 4.6 percent of G.D.P., according to the International Monetary Fund. In Britain, even before taking into account the recently announced budget cuts, it was set to equal 2.5 percent. Worldwide, it will equal a little more than 2 percent of total output.

I’ve been closely watching the insanity in the Senate and House this week as we continue to hear elected officials question the motivation of the long term unemployed. There are folks that really believe people are sitting around enjoying an extended vacation on meager unemployment benefits. I would like to see ONE of those loud mouths live on unemployment benefits for just ONE month, let alone years. Here’s some more reality-based analysis instead of the Fairy Tale spun by Republicans and the bluest of the blue dawgs which includes the truly immoral Ben Nelson of Nebraska who needs to be sent to unseated and unemployed.

The picture remained unyieldingly grim from the long-term unemployed. The median duration of unemployment rose to 25.2 weeks in June, from 23.2 in May. And the percentage of long-term unemployed, those Americans who have been without a job for 27 or more weeks remained unchanged, stuck at its highest peak since the Labor Department began collecting such data shortly after the Great Depression.

Digging a little deeper, the recovery from the Great Recession appears to be leaving more and more Americans behind. In June, about 2.6 million people were marginally attached to the labor force, an increase of 415,000 from a year earlier. This means they are not counted in the unemployment numbers but that they have looked during the past year and they want a job.

The overall unemployment rate, incorporating those discouraged and marginalized workers, stood at 16.5 percent.

“This economic recovery does not have enough momentum to sustain on its own without government help,” said Sung Won Sohn, an economist at California State University, Channel Islands, and former chief economist at Wells Fargo. “It is a Catch-22 situation. Businesses are reluctant to hire for fear of a double-dip recession. Without jobs, the economy can’t grow limiting job growth and spending.”

We continue to provide limitless funds to two very hopeless looking wars and huge amounts of funds to bailing out what ever huge business looks about ready to fail from its own bad decisions, but heaven forbid we should help individual Americans or regions taken for a ride by those same businesses. Nancy Pelosi had to look to Republicans to continue to fund the American war machine and got them. Harry Reid, however, can’t get the jobless benefits pass his own Senators.

So, now,we’ve also got a “Fiscal Commission” put together by fearless leader (and sneaked into the War Funding by hapless Nancy) to appease the Fairy Tale crowd. Perhaps it should be with war funding because it certainly declares war on the average American. Here’s a great article by James K Galbraith that explains exactly why the commission does not serve the American People.

Clearly the “bipartisan deficit commission” — like practically all bipartisan commissions – was a device to deflect this pressure. The President created the Commission while pressing for a stronger growth strategy, and has sent every discreet signal (notably in the commission’s minuscule operating budget) that the exercise should not be taken seriously.

Nevertheless, there is a danger that the Commission will take a path — “stimulate now but austerity later” – that will lead to unnecessary, economically-damaging and socially destructive cuts in Social Security and Medicare. And there is a danger that such cuts will be stampeded through Congress in the months immediately following the 2010 elections.

In a statement made on behalf of Americans for Democratic Action to the Commission, I make the case against cutting Social Security and Medicare as a “deficit strategy” — on the grounds that it’s not necessary and it won’t work. Instead, we need an economic policy built on realistic assumptions and focused on our actual economic problems: jobs, the state-local budget crisis, public investment, energy and climate change. In my statement to the Commission, I have tried to explore these issues a bit further.

Read Galbraith’s points. They get to the heart of the matter. What kind of dance was the commission invited to and why appoint some one like Simpson to look at the problems we have now that impact not only American businesses and financiers, but American people?

A general cannot speak of the President with contempt. Likewise the leader of a commission intended to sway the public cannot display contempt for the public. With due respect, Senator Simpson’s conduct fails that test.

Brad deLong even calls the Administration on the rug for believing it’s own spin so it can support the Austerity Hysteria.

Obama should be saying that his policies have helped stop the economic decline. He should not be saying that the state of the business cycle is “improving.” Even more so, he should not believe and act on a belief that the state of the business cycle is “improving.” It ain’t so …

Is this real leadership? Create a commission to deflect pressure? Repeat the mantra that Prosperity is just around the corner until you actually believe it too? Clearly, the US people do not want their social security gutted. They also do not want to fund a series of failed wars that are committed to nation building just about any country but our own. Poll after Poll shows both the congress and the President losing the the citizenry who believe the country is on the wrong path when they repeat the same failed Republican policies of the Reagan Years. The majority of American People do NOT buy the fairy tales because they dwell in the reality.

Clearly, economists do not buy these fairy tales either. I’ve been particular with my quotes because the majority of people I’m quoting here are in fact practicing economists and most have PhD.s. I’m clearly writing this piece from my vantage point as an economist who teaches macroeconomics and monetary policy. Before that, I worked for the Fed and I worked for banks and savings and loans. I got my liberal bias by studying economics, to be perfectly honest.

To me, one REAL question remains. Why do President Obama and the Democratic Leaders continue to go against the will of the people and adopt policies that will fail and will bring more suffering? They must be designed to fail the American people and serve that class of people who will continue to wallow in an orgy of profit and excess if the Fairy Tale is maintained. That’s my only explanation.