Friday Reads: the long and wonky road

Good Morning!

I am grading essays and papers on currency crises (circa 1999-2002) and financial crises (the last one) and basically all those kinds of crises the tend to come from out of control speculation and the government encouraging the wrong kinds of things.  This mostly happens because rich people donate to the campaigns of politicians and own newspapers and media outlets.  Politicians want to get reelected and get more powerful and more rich.  Rich businesses and investors want to get more powerful and rich. It’s kind of the perfect alignment of shared interests based on lust and greed and all the baser instincts.  Isn’t it terrible when the facts get in the way?  So, they just ignore them or consider them an alternative liberal opinion.  It drives me nuts.

So, BB asked to me write something about what I research and teach and usually regurgitate to you. You know that the austerity narrative has theoretically fallen apart.  Well, it’s also falling apart via the numbers, data, facts and reality   So, let’s start out with some very bad, awful, terrible horrible Dubya Bush Policy 10 years ago and why tax cuts for the rich still don’t do good things for the economy or now, even the investment markets. This is written by economist Bruce Bartlett who was an adviser to the Reagan administration.

Ten years ago this month, Congress enacted the third major tax cut of the George W. Bush administration. Its centerpiece was a huge cut in the tax rate on dividends. Historically, they had been taxed as ordinary income, but the Bush plan, enacted by a Republican Congress, cut that rate to 15 percent. The tax rate on ordinary income went as high as 35 percent.

This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress. Mr. Hubbard was a strong believer that the double taxation of corporate profits – first at the corporate level and again when paid out as dividends – was a major economic problem.

During the George H.W. Bush administration, Mr. Hubbard had been deputy assistant secretary of the Treasury for tax policy and wrote a Treasury report advocating full integration of the corporate and individual income taxes.

Mr. Hubbard had also spearheaded enactment of big tax cuts in 2001 and 2002 that he said would jump-start the American economy. In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”

Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.

There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December. The real G.D.P. growth rate fell each quarter of 2002, and by the fourth quarter growth was at a standstill. Hence the need for yet another big tax cut.

The idea of the 2003 legislation was to raise dividend payouts, thereby bolstering personal income, and raise the prices of common stock, which would improve household balance sheets. As President Bush explained in his signing statement, “This will encourage more companies to pay dividends, which in itself will not only be good for investors but will be a corporate reform measure.” He also said the dividend tax cut would “increase the wealth effect around America and help our markets.”

The Treasury Department issued a fact sheet on July 30 asserting that the decline in dividends had been a cause of the weak stock market and noting that dividend payouts had risen since enactment of the tax cut on May 28.

Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation. A 2005 Federal Reserve Board study found that the United States stock market did not outperform European stock markets after the dividend cut. Nor did stocks qualifying for lower dividend taxes outperform those, such as real estate investment trusts, that did not qualify for lower dividend taxes. Non-dividend paying stocks slightly outperformed dividend-paying stocks, and many corporations that did pay higher dividends scaled back stock repurchases by a similar amount.

So, this is yet another example where Republican economic policy is totally out of step with outcomes, data, and reality.  Yet, they keep repeating that it works the way it doesn’t work just because, remember, the agenda is greed, power, and more wealth to the already greedy, powerful and wealthy.    The deal is they get it wrong, got it wrong, and continue to get it wrong but that doesn’t stop them from trying to weasel their way into a narrative that says, hey, this really isn’t wrong.  There’s still some validity there and all economists must be liberals like Paul Krugman who are just talking up their philosophical line.  Take austerity economics, please.  I mean it.  Take it and those idiots who push it to hell and leave them there.  Still, the very serious people want to take this very seriously even when it is just plain seriously wrong.  Take Michael Kinsley, please.  He can report from Hell.

I’ve spent a rather alarming portion of this week wading into intellectual pissing matches, so I’m loath to respond to Michael Kinsley’s response to last week’s brouhaha over austerity policies. But one paragraph does merit some pushback. After noting the backlash to his last column, Kinsley writes the following:

There are two possible explanations. First, it might be that I am not just wrong (in saying that the national debt remains a serious problem and we’d be well advised to worry about it) but just so spectacularly and obviously wrong that there is no point in further discussion. Or second, to bring up the national debt at all in such discussions has become politically incorrect. To disagree is not just wrong but offensive. Such views do exist. Racism for example. I just didn’t realize that the national debt was one of them.

Kinsley assumes that it must be the second explanation, and then goes on from there.

I can’t speak for anyone else who pushed back against Kinsley’s column from last week. Speaking for myself, however, I blogged about it because Kinsley was “spectacularly and obviously wrong.” I say this because almost everything I wrote in my response to Kinsley I knew at age 18 after taking Economics 101 in college.

To explain, let me focus on Kinsley’s motivation for thinking that the austerians have a point:

Austerians believe, sincerely, that their path is the quicker one to prosperity in the longer run. This doesn’t mean that they have forgotten the lessons of Keynes and the Great Depression. It means that they remember the lessons of Paul Volcker and the Great Stagflation of the late 1970s. “Stimulus” is strong medicine—an addictive drug—and you don’t give the patient more than you absolutely have to.

This is wrong for three reasons, one pedantic and two substantive. First, to be pedantic, the austerity debate is about the wisdom of using expansionary fiscal policy — i.e., running a significant federal budget deficit — to alleviate downturns. Paul Volcker was the chairman of the Federal Reserve and thereby responsible for setting monetary policy. He had nothing to do with fiscal policy. This is a distinction that I learned in my first few lectures on macroeconomics. So either Kinsley phrased this badly or he’s confused about what this debate is about.

It just keeps coming down to the fact that most journalists and politicians simply do not know what they are talking about when it comes to economics.  So, they assume an economist like Paul Krugman has a liberal bias on all things–including the color of the sky and the laws of gravity and demand–and they make the worse assumption that those arguing Republican policy these days must have a valid point when the only point is, yes, you know it … to deliver more wealth, power and influence to themselves and their friends that already have it.  Some times a lie really is just a lie.

Here’s a good blog post by Jonathan Bernstein that’s just oozing with the issue.   There is no argument or theoretical question about austerity.  But that’s not stopping the punditry.

A wonderful example of the myopia of the deficit scolds…

The background is that Michael Kinsley wrote a particularly bad column last week about “austerity,” a key point of which was based on factually incorrect memories of what went wrong in the 1970s; as you can imagine, this earned him plenty of corrections and dismissals from people who used access to accurate economic and government policy statistics.

Kinsley was quite taken aback by this, apparently, and wrote a follow up to defend himself. Dan Drezner has already pointed out that Kinsley is still relying on the same inaccurate memories that got his first column into trouble, but I actually found a different part of Kinsley II more interesting, in which he thinks he’s caught Paul Krugman in a contradiction.

Kinsley writes:
Paul Krugman takes credit for good economic news whenever it happens. On Krugman’s blog site (“The Conscience of a Liberal”) last week were two bits of prose side-by-side. One was an ad for his latest book, End This Depression Now! “How bad have things gotten?” the ad asks rhetorically.” How did we get stuck in what now can only be called a depression?” Right next door is Krugman’s gloat about the recent pretty-good economic news. “So where are the celebrations,” he asks, “now that the debt issue looks, if not solved, at least greatly mitigated?” Greatly mitigated? By what? Certainly not by anyone taking Paul Krugman’s advice. He has been, in his own self-estimate, a lone, ignored voice for reason crying out in an unreasoning universe.

What’s the problem? The linked post by Krugman isn’t a gloat about good economic news! It is, to be sure a gloat; it’s a gloat about deficits…Krugman goes so far as to call lower deficits “progress,” although as I read it he’s really just saying that lower deficits should be counted as progress from the point of view of the deficit scolds.
What’s happening here is that Kinsley is projecting onto Krugman a classic deficit scold mistake; Kinsley is conflating the federal budget deficit with the economy. Krugman isn’t doing that; it’s purely Kinsley’s invention.

It gets, however, to exactly why Kinsley was buried under a large pile of abuse after his first column. Well, in part; the other part, as Krugman notes elsewhere, is “the existence now of a policy blogosphere…which makes bluffing harder.” Say something factually inaccurate these days, and you’re going to get slammed; it seems that some pundits who preceded that development find it hard to get used to it.

I still have no idea why journalists feel they just know everything about economics compared to say, knowing everything about Brownian motion or performing brain surgery.  It’s the same with politicians.  They just seem to confuse a really complex subject that most people really struggle with in college and never take beyond that with something like a political science class or a journalism class.  You don’t even get real economic stuff until you way up there in school.  The introductory stuff is like the ABCs and they don’t even seem to grasp that.  Anyway, stop confusing getting facts wrong with just another opinion …

If you want to read the source of all this consternation go the NYT book review written by Krugman of the book Austerity: The History of a Dangerous Idea.

Clear evidence on the effects of economic policy is usually hard to come by. Governments generally change policies reluctantly, and it’s hard to distinguish the effects of the half-measures they undertake from all the other things going on in the world. The Obama stimulus, for example, was both temporary and fairly small compared with the size of the US economy, never amounting to much more than 2 percent of GDP, and it took effect in an economy whipsawed by the biggest financial crisis in three generations. How much of what took place in 2009–2011, good or bad, can be attributed to the stimulus? Nobody really knows.

The turn to austerity after 2010, however, was so drastic, particularly in European debtor nations, that the usual cautions lose most of their force. Greece imposed spending cuts and tax increases amounting to 15 percent of GDP; Ireland and Portugal rang in with around 6 percent; and unlike the half-hearted efforts at stimulus, these cuts were sustained and indeed intensified year after year. So how did austerity actually work?

The answer is that the results were disastrous—just about as one would have predicted from textbook macroeconomics. Figure 2, for example, shows what happened to a selection of European nations (each represented by a diamond-shaped symbol). The horizontal axis shows austerity measures—spending cuts and tax increases—as a share of GDP, as estimated by the International Monetary Fund. The vertical axis shows the actual percentage change in real GDP. As you can see, the countries forced into severe austerity experienced very severe downturns, and the downturns were more or less proportional to the degree of austerity.

There have been some attempts to explain away these results, notably at the European Commission. But the IMF, looking hard at the data, has not only concluded that austerity has had major adverse economic effects, it has issued what amounts to a mea culpa for having underestimated these adverse effects.^*

And yet, we still have those that love the idea of ‘conventional wisdom’ clinging to the idea that our economy is struggling under some kind of huge debt burden and too high taxes on corporations and rich people.   I assume that most of these folks believe Jesus and Dinosaurs hang out together in heaven and Einstein got it all wrong.  But then there’s the journalists that just love the idea that every fact has to come with two opposing opinions and even if one is fact and the other is just propaganda that is extremely wrong, all of  it still deserves equal consideration and a hearing. The deal is that these guys are coming gruesomely close to hoping the economy is imploding and not recovering so they can continue that silly notion.

In that vein, Fed Chair Ben Bernanke makes it clear we may have begun to turned the corner and it is time to stop the spigots of easy money and low interest rates before we get a bubble again.  Too bad we didn’t enact a bigger stimulus and see this like FIVE years ago.

There was some initial consternation yesterday after Federal Reserve Chairman Ben Bernanke gave the clarity we were hoping to see.  From Reuters:

“If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings … take a step down in our pace of purchases,” he said.

“Next few meetings” sounds like September at the eariliest.  Indeed, September or December are the most likely meetings given both have an associated press conference.

For financial market participants, I would say this was a mixed message.  Bernanke is dovish if you expect the Fed to move in June, hawkish if December at the earliest.  But imagine the message that would have been delivered to financial markets had Bernanke not spoken ahead of the minutes of the April FOMC meeting:

 A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.

It seems to me that the threat of an imminent policy change would have been taken very poorly had Bernanke not already spoken yesterday morning.  So, in a sense, Bernanke saved traders from an even more tumultuous day.  Expect Bernanke to use the June press conference to lay the ground work for a reduction in the pace of purchases as early as September.

From a different viewpoint, Bernanke might have just sandbagged his colleagues.  Recent comments from Federal officials suggest they reasonably believed they were close to cutting the pace of purchases, and it seems like they received this impression from the discussion in the last few FOMC meetings.  Hence, for example, why San Francisco Federal Reserve President John WIlliams felt comfortable suggesting an imminent reduction in the pace of purchases as recently as Monday of this week. Bernanke, however, sets everyone straight.  It’s not going to happen this summer.  Maybe fall.

The problem is that the serious people are paying attention to the falling deficits and not the squalid unemployment rate.  Unemployment is still a huge issue in Europe and a major one here.  Economist Mark Thoma has some suggestions for Bernanke as he looks for the underlying economic improvement and just not the health of Wall Street.

Why hasn’t the Fed shown the same boldness and creativity in responding to the unemployment problem that it displayed when it needed to bail out financial institutions? When banks were in trouble, the Fed created a whole host of special facilities and pushed the rules to the limits. Some of the special facilities and polices worked out very well, others didn’t work at all, and some had unintended consequences. But the Fed was willing to take the necessary risks and that allowed it to come to the rescue of the financial system.

But now, when unemployment is the problem, the Fed seems unwilling to push the limits to the same degree. For example, the Fed could charge banks for holding excess reserves instead of paying them interest on those reserves as it does now. With such a penalty in place banks would have a much larger incentive to make loans, and some of the piled up reserves would leave banks and turn into new demand for goods and services. That’s just what the economy needs.

More aggressive, out of the box policy could speed the recovery of output and employment, and there are many other steps the Fed could take to help the economy along. It could even consider the use of helicopter money as debated recently by some of the leaders in monetary policy. But whenever such suggestions are made to the Fed the response is invariably the same. Time and again as the struggles of the working class drag on and on, financial stability –– something Chairman Bernanke was careful to point to in a recent speech –– and fear out of control inflation take precedence over more aggressive policy to help the unemployed.

We do not want to repeat the wage-price spiral problems of the 1970s and the recession of 79-82 that was needed to break the cycle. So in the long-run, we want to hit our inflation target. We also don’t want to repeat the financial meltdown we’ve just been through. But the risks of inflation and financial instability have been overblown relative to the large costs associated with high long-term unemployment and it’s time for the Fed to address the unemployment problem with the same creativity, boldness, and perseverance it displayed when banks were its main concern.

It is really difficult to sit in a position where you know what medicine the dying patient needs but you keep seeing faith healers and snake oil salesmen invited to the sick room.  Jim Grant is one of those snake oil salesmen that doesn’t just sell placebos on TV.  The man sells poison! Yet, CNBC seems to keep on broadcasting his utter nonsense to the yearning masses.

He says that like it’s a bad thing ‏@Kelly_Evans “Ph.D. economists are running this country!” -Jim Grant @CNBCClosingBell.

Yup, goofy Jim Grant–another conspiracy theorist who creates a false narrative over facts–gets air time.   I just wish it was a big ol’ joke.  This guy belongs in an insane asylum; not on TV.  Watch the clip from March 21st and see how wrong this guy gets it with just a few months of perspective.  The data shows him very very wrong.  This is just one more guy who has serious issues with fact avoidance.  He’s just one of the poison pushers that needs to go to jail for murdering the facts.

So, what’s on your reading and blogging list today?