The Voodoo They All do so well

I’m not sure what exact delusional or fugue state describes Paul Ryan’s psyche. Dammit Jim, I’m an economist not a psychologist!   I do, however, recognize b$gf$ck crazy when I see and hear it.  It makes me want to avoid whatever part of Wisconsin that votes him into office because there must be something in their water or air.  It amazes me that one small section of  our country can wreck so much havoc on the rest of us by sending a loony tune to Washington, D.C.   I’m beginning to think that Miami University should ask him to turn his degree back in and issue him a refund.  I certainly would be ashamed if he were the product of any of my economics classes.

Paul Ryan is an outstanding example of everything that is wrong within that damnable beltway.  He’s Daddy knows best on Acid.  He wants to usher in the Republican Big Daddy state.  In January, his type of crazy will dominate the House Budget committee. As a mater of fact, it’s already starting and it’s alarming.

RYAN’S RADICAL RULE?…. House Republicans quietly advanced procedural budget rules last week, which would be funny if they weren’t so ridiculous. But there’s a second part of this that shouldn’t go overlooked.

We talked the other day about Republicans’ “Cutgo” rules. The policy allows the GOP to try to keep slashing taxes, without having to pay for them, while requiring spending cuts to pay for new or expanded programs.

As Paul Krugman explained this morning, “Spending increases will have to be offset, but revenue losses from tax cuts won’t. Oh, and revenue increases, even if they come from the elimination of tax loopholes, won’t count either: any spending increase must be offset by spending cuts elsewhere; it can’t be paid for with additional taxes.” The Nobel laureate labeled this “the new voodoo.”

And then there’s the other part of House Republicans’ new budget rules.

A little-noticed detail in the new rules proposed by House GOP leaders would greatly increase the power of Rep. Paul Ryan, R-Wis., the incoming chairman of the House Budget Committee. As National Journal’s Katy O’Donnell reports, the new rules say that, for fiscal 2011, the chairman will set spending limits without needing a vote.

If that sounds insane, that’s because it is. Under the proposed rules, Ryan would be empowered to single-handedly establish spending levels if the House and Senate struggle to agree on a budget resolution. Just as important, Ryan’s levels would be binding on the chamber, without even be subjected to a vote.

Fascism doesn’t creep with Ryan in charge of things.  It sprints.  It’s typical of the radical right/Bircher mentality to think that when one can’t get to where they want with reasoned thought and plurality, it’s okay to lie about it and sneak things in under the radar.  Thankfully, Paul Krugman has a bully pulpit at the NYT. Krugman’s description of the entire thing is right on.  There’s only one problem.  Krugman consistently ignores just how much Obama has been enabling the voodoo.  It is, afterall, the Obama-McConnell Tax Cuts for Billionaires (TM) law.  In fact, I’m willing to go out there on limb and say Obama believes the voodoo and that other Democrats perpetually cut-and-run rather than hold ground on it.  Krugman seems to set on pointing out  the sin on one side of the aisle and ignoring the same behavior on the other side.  Let’s ignore that for a moment and concentrate on the good stuff Krugman offers.

But the tone changed during the summer, as B-day — the day when the Bush tax breaks for the wealthy were scheduled to expire — began to approach. My nomination for headline of the year comes from the newspaper Roll Call, on July 18: “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts.”

How did Republican leaders reconcile their purported deep concern about budget deficits with their advocacy of large tax cuts? Was it that old voodoo economics — the belief, refuted by study after study, that tax cuts pay for themselves — making a comeback? No, it was something new and worse.

To be sure, there were renewed claims that tax cuts lead to higher revenue. But 2010 marked the emergence of a new, even more profound level of magical thinking: the belief that deficits created by tax cuts just don’t matter. For example, Senator Jon Kyl of Arizona — who had denounced President Obama for running deficits — declared that “you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.”

It’s an easy position to ridicule. After all, if you never have to offset the cost of tax cuts, why not just eliminate taxes altogether? But the joke’s on us because while this kind of magical thinking may not yet be the law of the land, it’s about to become part of the rules governing legislation in the House of Representatives.

It’s one thing to say “That’s just crazy talk” to Republicans but to turn around and excuse or ignore the enabling and facilitating role that the President and Democratic members play is to commit a big sin of omission.  That troubles me when you’re one of the few economists with a very public bully pulpit.

There’s obfuscation on all sides of this stupidity however.  BostonBoomer asked me about a response to Krugman’s criticism here that’s grounded in something  wonky at JustOneMinute. The writer of that post tries to call  out Krugman by screaming “deception and misdirection”, then referring to Ricardian economics.  You must use the Wayback Machine for this one.  The article is like reading a critique of modern democracy based on what they did in Athens around 500 BC.

Let me just refer to the Wikpedia on Ricardian Economics to tell you how far we have to go in the Wayback machine.

David Ricardo was born in 1772 and made a fortune as a stockbroker and loan broker.[1] At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energized by the theories of economics. His main economic ideas are contained in Principles of Political Economy and Taxation (1817). This set out a series of theories which would later become theoretical underpinnings of both Marx’s Das Kapital and Marshallian economics, including the theory of rent, the labour theory of value and above all the theory of comparative advantage.

Ricardo wrote his first economic article ten years after reading Adam Smith and ultimately, the “bullion controversy” gave him fame in the economic community for his theory on inflation in 19th century England. This theory became known as monetarism, the theory that excess currency leads to inflation.[2] He was also a factor in creating classical economics,[3] which meant he fought for Free trade[4] and free competition without government interference by enforcing laws or restrictions.[5]

Yes, that’s right.  Ricardo is an early 19th century economist philosopher writing during the time when the main sector of all economies was agriculture using technology like  horses and slaves under a system called Mercantilism. That’s the reason to criticize Krugman.  Yes, we academic economists teach Ricardian concepts, models, and principles still.  However, it’s just because it’s an easy entry for people that do not have good calculus skills and are unfamiliar with the most basic economic concepts. These simple models weird enough people out as it is. Also,  it’s the original, early attempt at theory that under pins classical economics.  Tons of empirical data and computer models plus advances in mathematics have pushed us beyond all that.  Most of the Ricardian stuff has been reformulated–as has a lot of the Keynesian stuff and that’s only from about 100 years ago–and tested empirically.  To put it in blunt terms, some of the impacts have the right sign and do exist, but they show up as so trivial that no one takes them seriously when you’re dealing with real world economic policy.   A really good example of this is the ‘crowding out effect’.  Another is what Tom Maguire points out at JustOneMinute.    Let me refer to a thing via new school on Barro who is one of the reformulaters.

Almost immediately, Barro turned on his Keynesian roots and joined the Rational Expectations revolution with two central pieces: his celebrated “Ricardian Equivalence Hypothesis” (1974) and his famous money neutrality paper (1976). Under a particular set of assumptions (e.g. intergenerational altruism or immortality, perfect capital markets, lump sum taxation, and the condition that debt not grow faster than the economy), Barro’s (1974) “Ricardian Equivalence Hypothesis” argues that every bond-financed deficit must be met by a future tax increase, that this tax increase would be forseen by living agents and that these agents would care enough about posterity to adjust their present consumption accordingly. In short, this implies that agents do not take a bond-financed fiscal expansion as a lucky windfall but rather will save the entire proceeds in anticipation of the future tax burden – and thus not raise their demand for goods and services. Thus income received by agents from government deficit-spending is all saved – and hence has no effect on consumption (thus no multiplier) – and that these savings go into the demand for the very same bonds that were supplied to finance that government spending (so bond demand rises exactly to meet higher bond supply, and money demand is unchanged) and thus there is no effect on interest rates either.

Barro’s “Ricardian Equivalence Hypothesis” has spawned a virtual research industry of its own as a whole generation of economists have climbed over each other tortuously examining, assailing, and verifying the validity and implications of Barro’s theorem (his 1974 paper is among the most-referenced papers in economics today). Barro’s 1976 paper on the neutrality of monetary policy (i.e. that changing money supply growth would not affect output or interest or any real variables) followed up on the work of Lucas and Sargent and although less unique, it was no less controversial.

This stuff is at the root of the conflict between the freshwater (Neoclassical) and the saltwater economists (NeoKeynsian) economists.   I highlighted the most germane thing in all of this above and that is the phrase “under a particular set of assumptions”.   It takes just as many unrealistic assumptions to make a free market economy work as it does to create a Marxist Utopia.  The most suspect assumption of all is that of perfect capital markets. 

Joseph Stiglitz earned his Nobel Prize for a career spent outlining all the ‘frictions’ in markets. That would be all the stuff in reality that make markets so damned imperfect.  Stiglitz’s big thing is asymmetries of information which is something I talk about a lot when it comes to financial markets.  The capital markets are loaded with them; especially now.  Then, there’s the little friction involved with basic market structures. Back in the Ricardian days it was possible to point to the market for wheat and label it a somewhat ‘perfect market’.  We’re way past that.  We’ve got so many monopolies and oligopolies and so much government regulation and rules, that what Ricardo and Smith describe is as arcane as Marxism.  Greg Mankiw is probably the closest ‘real economist’ source I can name that still ambles along those lines.  However, he does so with a huge amount of caution. No one serious denies the role of frictions in markets.

The most silly thing about the JustOneMinute commentary is it ignores the source of Krugman’s Nobel–international trade–which starts with the Ricardian ‘comparative advantage’ framework.  It also ignores Krugman’s writings outside of the NYT.  Here’s an example  from MIT that’s still standing called ‘Ricardo’s difficult idea’. Krugman writes this in the 1990s.  Now, why was that so difficult to Google?

And so one is prepared to be sympathetic after reading a passage like the following, on the first page of Sir James Goldsmith’s The Trap: “The principal theoretician of free trade was David Ricardo, a British economist of the early nineteenth century. He believed in two interrelated concepts: specialization and comparative advantage. According to Ricardo, each nation should specialize in those activities in which it excels, so that it can have the greatest advantage relative to other countries. Thus, a nation should narrow its focus of activity, abandoning certain industries and developing those in which it has the largest comparative advantage. As a result, international trade would grow as nations export their surpluses and import the products that they no longer manufacture, efficiency and productivity would increase in line with economies of scale and prosperity would be enhanced. But these ideas are not valid in today’s world.” (Goldsmith 1994:1). On close reading, the passage seems a bit garbled; but maybe he is just a careless writer (or the translation from the original French is imperfect). One expects him to follow with a discussion of some of the valid reasons why one might want to qualify Ricardo’s idea — for example, by referring to the importance of external economies in a high-technology world.

But this expectation is utterly disappointed. What is different, according to Goldsmith, is that there are all these countries out there that pay wages that are much lower than those in the West — and that, he claims, makes Ricardo’s idea invalid. That’s all there is to his argument; there is no hint of any more subtle content. In short, he offers us no more than the classic “pauper labor” fallacy, the fallacy that Ricardo dealt with when he first stated the idea, and which is a staple of even first-year courses in economics. In fact, one never teaches the Ricardian model without emphasizing precisely the way that model refutes the claim that competition from low-wage countries is necessarily a bad thing, that it shows how trade can be mutually beneficial regardless of differences in wage rates. The point is not that low-wage competition never poses a problem. Rather, what is significant is that despite ostentatiously citing Ricardo, Goldsmith completely misses one of the essential lessons of his argument.

It’s really obvious that Krugman–indeed, most of us–don’t see the Ricardian model as anything but an early attempt to take economics out of the realm of philosophy and apply the scientific method and models.  It’s like yelling at a learned Psychologist for not continually citing Freud as a modern authority or a learned Molecular Biologist for not continually citing Darwin as the be all and end all on evolutionary theory.  These guys started modernizing their fields, but a lot of new evidence, tools, and data have arisen since then.

So,  my bigger question is why do we have Republicans pushing a 19th century world view when it comes to economics?  I then would also like to know why  Democrats–especially a Democratic POTUS–enable them?    Well, according to The Hill, Democrats are ripping the proposed rule.  Democrats always seem really skilled at shaking their tiny fists before anything really happens.

Democrats argue the provision would give unilateral power to Ryan and flies in the face of GOP promises of transparency.

“Allowing incoming Chairman Ryan to have unilateral power to set spending limits — instead of subjecting those limits to a vote on the floor of the House — flies in the face of promises by House Republicans to have the most transparent and honest Congress in history,” said Doug Thornell, spokesman for incoming House Budget Committee ranking member Chris Van Hollen (D-Md.), in an e-mailed statement.

“Unfortunately, the House GOP is reverting back to the same arrogant governing style they implemented when they last held the majority and turned a surplus into a huge deficit,” he added.

Drew Hammill, spokesman for incoming Minority Leader Nancy Pelosi (D-Calif.), also criticized the rule change. He said the decision to cede power to Ryan “runs counter to the Republicans’ promises of transparency and accountability.”

The deal is will they actively FIGHT it and stop it?  Then the bigger question is will Krugman talk about the complicity of the Democratic congress critterz and the President in enabling their stupidity?

Forehead, meet palm.