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 …

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