Sign me up for the Hippie Caucus

melting magic mushrooms by spookychild

If you’re like me, you’ll get a big laugh out of Brad DeLong’s on-going tongue and cheek label of pretty much every economist as being a member of the “hippie caucus” simply for giving the MSM a lesson on economic theory.  It’s not exactly the most complex model or theory that drives the idea that you deficit spend during a tough economy to create jobs and stimulate business.  Every first year macroeconomic principles students learns that.  My guess is that most of congress and the President never got that far.

So, here’s a list of Brad’s Hippie Caucus and the statements based on simple economic theory that puts them into membership.  These are some big name economists basically saying what I’ve been saying for a few years now.  The deficit is a long term problem.  The immediate problem is business’ lack of customers.  It’s an aggregate demand thing and increased government spending is the obvious policy remedy.

The first member is Laura Tyson who I’d really like to see as Treasury Secretary or head of the CEA again.  She served under Bill Clinton.  You remember Bill Clinton?  He’s the one that had the best job creation record of any modern president.

But the overwhelming evidence suggests the opposite: when the economy has excess capacity, high unemployment and weak private demand, cuts in government spending reduce growth and eliminate jobs.

On this point, there is widespread agreement among experts. Ben Bernanke, chairman of the Federal Reserve, recently warned that sudden fiscal contraction might put the still fragile recovery at risk. The June report from the C.B.O. contains a similar warning. Even William Gross of Pimco, a vocal critic of the long-term fiscal position of the government, cautions that a move toward fiscal balance, if implemented too quickly, could “stultify economic growth.”

As Simon Johnson noted in his recent Economix post, fiscal contractions are expansionary only under special conditions. None of these apply to the United States today.

So what should policy makers do? They should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually –- and pass both at once, as a package. Approving a deficit-reduction plan but deferring its starting date until the economy is near full employment will cut the odds that immediate contraction will tip the faltering economy back into recession.

Indeed, passage of such a package could bolster growth by easing investor concerns about future deficits, reducing long-term interest rates and strengthening consumer and business confidence.

The next member is Larry Summers.  You remember him, he’s the one we thought the President may have actually listened to when doing his economic policy thing?  Well, I’ve apologized for thinking Summers turned his back on his credentials and I’m having to eat my words again.

SUMMERS: I worry about a number of things with respect to growth. Most profoundly I worry about lack of demand in the United States. That means that factory capacity is unused, it means that buildings sit empty, it means that too many people are unemployed. And I look for measure that will serve to promote the level of demand in the United States. That’s why using this moment to repair our infrastructure is so important. That’s why I believe that the payroll tax cuts that put money in people’s pockets and increased employers incentives to hire are so important. And that’s why I believe that opening foreign markets and promoting U.S. exports which creates more demand is so important. And China is obviously an important part of that story.

So we already know that Paul Krugman is in the Hippie Caucus, but here’s an addition via Krugman. Traxis Partners Hedge Fund multimillionaire Barton Biggs  is saying the same thing.  Surprisingly enough, this comes from the WSJ whose editors have drunk enough Grover Norquist koolaid to be dead heads.

The U.S. and Europe are set to grow at an anemic pace for the foreseeable future unless the government can step in with an enormous fiscal stimulus, according to a veteran investor.

Speaking exclusively with The Wall Street Journal, Barton Biggs, managing partner at multibillion dollar hedge fund Traxis Partners, painted a bleak outlook for the developed world with only huge government intervention likely to improve things.

Mr. Biggs, former chief global strategist for U.S. investment banking powerhouse Morgan Stanley, demanded the U.S. government temporarily return to ideas used in the Great Depression as a way to get the country back to higher growth.

“What the U.S. really needs is a massive infrastructure program … similar to the WPA back in the 1930s,” he says.

The plan would be to employ some of the many unemployed people, jump start the economy, as well as help catch up with Asia, which is building state-of-the-art infrastructure from new mechanized port facilities to high-speed trains.

He suggested financing such building through the sale of U.S. Treasuries.

Okay, so Mark Thoma’s on the list too.  No surprise there either.  However, this comment is not on his blog Economist’s View, it’s at the FT.

I disagree with them that immediate austerity is needed. The long-term budget problem in the US is driven mainly by rising health costs, and we have many years to go before this begins to create big budget problems. Thus waiting, say, two years to begin reducing the deficit will not substantially change the probability of big problems down the road. But delaying austerity measures avoids placing a further drag on an already struggling economy, so the likely benefits are relatively large.

One of the arguments for austerity is that it would give the Federal Reserve “increased room for manoeuvre to adopt further quantitative easing if the economy weakens further”. I agree that the Fed fears being placed in the position of appearing to monetise the debt, but again I do not think immediate action is needed. A budget plan that both political parties can agree to, which is implimented only when the economy is stronger, would do a lot to give the Fed the confidence it needs to act.

Here’s a member of the Hippie Caucus from across the Pond.  That would be no other than the FT’s Martin Wolfe. He sums it up nicely by saying “enjoy the coming slump” but if you want to read the wonky way of saying it, here it is.

Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced? The BIS notes four answers: repayment; default; higher real incomes; and inflation. Let us rule out the last and focus on the first. Repayment means spending less than one’s income. That is what is happening in the US private sector (see chart). Households ran a financial deficit (an excess of spending over income) of 3.5 per cent of gross domestic product in the third quarter of 2005. This had shifted to a surplus of 3.3 per cent in the first quarter of 2011. The business sector is also running a modest surplus. Since the US has a current account deficit, the rest of the world is also, by definition, spending less than its income. Who is taking the opposite side? The answer is: the government. This is what a controlled depression means: every sector, other than the government, is seeking to strengthen its balance sheet at the same time.

Another former Obama adviser that’s in the Hippie Caucus and may join my list of people that most likely quit Obama because he wasn’t listening to any economists. That would be none other than former budget director Peter Orzag. You know I thought Christie Romer was a good one and was confused when she was supporting that weak ass stimulus.  I’m now even wondering about Austin Goolsbee.

Today’s fiscal policy debate straddles two divides: one between those who support jobs and those who favor austerity, and one between those who think additional revenue is needed and those who don’t.

On the first divide, both sides are right, because the truth is that the U.S. needs both jobs and austerity — and a combination would be more powerful than either piece by itself. We face a very weak labor market now and, over the medium- and long-term, an unsustainable fiscal path. It would make sense to combine an additional round of temporary job creation measures with a substantial amount of permanent deficit reduction that would be enacted now but take effect later.

So, I’ve been blogging around here like my hair’s on fire pretty much since this financial crisis set in.  I wrote the Obama stimulus was too little and too focused on tax cuts to appease the few Republicans resident in a then overwhelmingly Democratic Congress with a president with a mandate and political capital.  I blogged that we didn’t need to extend the Bush tax cuts to millionaires and billionaires because they were the only ones that were recovering nicely. I blogged that the President should forget about health care reform and focus like a laser on the sour economic recovery. I also said that all that would do would give the Republicans more hot air come the negotiations for the debt ceiling increase. I’ve blogged repeatedly that businesses–no matter what the tax rates or the rate of interests–are not going to spend their money on capital or labor here in the US because they need customers first and foremost.  I’ve also written extensively that all this cheap Fed money at the discount window and tax breaks for industry was likely to be used in places like Asia instead of here in the U.S.  Brad DeLong has done an excellent job showing you that many, many top economists believe the same things.  So, next time any one tells you that all economists are always caught off-guard, please remember all of this.

I truly believe that Republicans are trying to tank the economy and that Barack Obama is either tacitly or complicity or ignorantly going right down the garden path with them.  Again, if you’ve got terminal cancer and need surgery to save your life do you call some one who has never gone to med school to operate on you?  If you’re wrongly accused of murder and you need some one to argue that you’re innocent, do you want some one that’s never been to law school to represent you?  Why or why do so many idiots in the press, in the congress, and in the White House think they know more about the economy and the financial markets than those of us that have spent our lives researching, studying, and doing it?

We should be rioting in the streets like the English and the Greeks.  Instead,we’re acting like sheep to the slaughter.  What our government is doing right now is actively working against the interests of its people.  There are laws in place that require it to responsibly handle the economy and create jobs.  They are doing the exact opposite of this.  We need to get mad. Voting for idiots is not working.

17 Comments on “Sign me up for the Hippie Caucus”

  1. dakinikat says:

    Okay, how long have we been saying this one?

    Barack Herbert Hoover Obama

    from Krugman:

    Yep, the false government-family equivalence, the myth of expansionary austerity, and the confidence fairy, all in just two sentences…This is truly a tragedy: the great progressive hope (well, I did warn people) is falling all over himself to endorse right-wing economic fallacies.

    • mablue2 says:

      I think you missed this one from Brad Delong:

      This Is Very Bad: Barack Obama Fail Department

      I can’t excerpt it, just go read it if you haven’t.

      • dakinikat says:

        actually if you go about 9 comments, you’ll see a comment from me. I use my real name there. 😉

      • mablue2 says:

        You raised a very interesting point in your comment. I just had a discussion about that with a friend who works here in Germany for a giant pharmaceutical and who was down on economists. I asked him not to confuse economics from economic policy, especially when the policy is run by a bunch of nutballs.

        Btw, Mark Thoma wrote about Delong’s post and had this to say:

        We have Republicans threatening to default on the debt and blow up the economy if they aren’t allowed to put the economy at risk in another way — through immediate deficit reduction — and a president selling the demands from the other side as a jobs package. To make it worse, some Republicans seem eager for default to happen based upon the false belief that they’ll somehow gain political advantage for wrecking the economy. No wonder the economic outlook is so grim.

        With the economy struggling to get back on its feet, “Absolutely the last thing, the last thing” we should be doing right now is making threats or enacting policies that increase the risks of an economic setback.

    • Peggy Sue says:

      But then, if you listen to the GOP Herbert Hoover is an unsung hero. Ai-yi-yi!

      I guess I’ll have to take back a comment I made earlier today that I hadn’t heard any sensible solutions soming from economists. Maybe the problem is that they’re being drowned out by the incessant chant: ‘we don’t have a revenue problem; we have a spending problem.’ Everytime I turn on the news, I hear the same damn thing. And, of course, the spending problem is always equated with anything having social merit or advancing the welfare of the American public.

      War? Hey that’s okay. The top 1-2%? We can’t touch them. Oil and gas companies? They deserve those subsidies. Private jets? How many people own a private jet? And this is what POTUS throws out as red meat.

      I’ll tell you one thing that scares the bejesus out of me was an article I read earlier this week that Barack Obama has decided to stop listening to his staff and follow his own instincts. Does anyone know what the man’s instincts are??? One thing I know for sure: he is not a financial guy, a poor politician and a consummate opportunist. It’s obvious the only thing he has on his mind is reelection. And ‘he’s’ going to take over the debt ceiling battle??

      So now even Larry Summers is banging the jobs drum? Maybe the tide is turning because I heard old crusty Simpson, the hatchet guy, say that the GOP’s recalcitrant stand on taxes [the Norquist theory] is utter BS. My jaw dropped.

      I hope something is turning because I have this sickening feeling that the Republicans ideolgues are suicidal.And they don’t care how many American citizens they take with them. Ann Coulter claims Republicans don’t care what others think of them because they believe in God and a vertical structure to the universe. I think we need to ask: what God is that, Ann? The same one Blankfein believes in???

      These people are nuts, institutionally so.

  2. dakinikat says:

    From Scarecrow at FDL:

    Earth to Democrats: It’s Not Just the Tea-GOP Trying to Tank the Economy. Obama Believes Their Argument.

  3. dakinikat says:

    Speaking of Christi Romer:

    The economic evidence doesn’t support the anti-tax view. Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment. …

  4. djmm says:

    Dakinikat, you have been talking sense for years. You are a founding member of the Hippie Caucus!


  5. HT says:

    Goodness, after all the years of malingning Hippies, finally people are starting to realize that they weren’t nutbags. As a former Hippie, who still believes that everyone, including the rich should pay their way and ensure that all citizens are taken care of – oops guess I’m still a hippie. Great list of links – will take me several hours read them all but time well spent. .

  6. Branjor says:

    I could look at those “melting magic mushrooms” all day long.

  7. fiscalliberal says:

    So lets postulate who has been the major figure advising Obama in finance. My guess has to be Geitner and Summers. The economists are all leaving. Probably because they realized they have no influence, Even Summers has left probably because he is smart enough to realize that there is no way out of the hole he dug,

    After what he did to Brooksly Born, I put him right along with Greenspan in terms of culpibility on the Financial Crisis. Who knows what part he played in the new regulations, but I conclued that he defended the interests of the financil community, where he recieves speaking fee’s

    Geitner was in charge of regulating Citi who was violating Glass Steagle before Phil Grahm and others (Rubin et al) took it down. I think taxpayers were bailing out Citi after ownly a couple of years. I suspect Geitner is in over his head and wants to get to his payback years. Oh by the way, does Geitner have a solution for Fannie and Freddie?

    I think history is not going to treat George Bush very well. Obama will be a small notch above, but nothing of consequence.

    • dakinikat says:

      This explains a lot to me:

      Patrick Gaspard, former community organizer, ex-lobbyist for the Service Employees International Union (SEIU), and now Obama’s Director of the Office of Political Affairs, is quoted in a 2008 New Yorker article describing what Obama said to him during his job interview: “I think that I’m a better speechwriter than my speechwriters. I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m gonna think I’m a better political director than my political director.”

  8. Tim says:

    I’ve just been reading the Declaration of Independence (mainly because Miss Kitty is being a bit revolutionary and I remember something being mentioned about the founding Fathers in National Treasure being of the same inclination. I’m British, this is where I get my American history.) Anyhoo, it seems like you do have the right of revolution, I’ll just quote and leave it at that:

    We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

  9. Linda C says:

    I often wonder if collapse isn’t inevitable because we have forgotten our collective history.
    The government has been dismantling the New Deal and the Great Society since Reagan. I do believe that we have to hit rock bottom again before people awaken from their Reagan myth of lies.

    It did take some time before the government acted during the Great Depression. The government ordered to shooting of the WWI vets during the depression who wanted their bonus early to assist with economic hardship.The government did nothing about the Dust Bowl until the soil of the Plains ended up on the Capitol building. It’s 1932 all over again

    • dakinikat says:

      If they play around with the debt ceiling much more, collapse is inevitable.

      • Peggy Sue says:

        That’s what really worries me. Collapse and the ultimate chaos–The Shock Doctrine in all its splendor. Sometimes I think I must be losing it, thinking in these terms. But at other times [like this past week], I’m thinking it’s not that far off the mark.

        Extremists will go to extreme measures to get the result they yearn.