The sequester is not the problem. The sequester is [part of] the solution.

By mw | Related entries in Bad Decisions, Bipartisan, Budget, Congress, Debt, Deficit, Fiscal Responsibility, Obama
Find the “meat cleaver” sequester 

The steady drumbeat in the mainstream media about the sequestration “crisis” is getting louder by the day. With less than two weeks until the cuts go into effect it is already approaching an absurdist crescendo.

the scream
The sequestration is coming!

Let’s be clear. The “sequester” is not a crisis.  The “sequester” is not the problem. The real problem is the massive growth in federal spending creating unsustainable deficits and debt that will be shouldered by generations to come.  The “sequester” is a solution to a real problem facing America.

That said, the “sequester” is not a great solution.  It’s not even a good solution.  The sequester cuts are not a smart way to address the spending problem. The sequester cuts are also not adequate to solve the spending and unfunded liability disaster that looms in our entitlement programs. But the odds of getting anything smart out of this administration and congress that has even as little impact as the sequester cuts are vanishingly small. Since it’s a bad bet to rely on our leaders for smart significant cuts, let’s at least bank the cuts they already passed.

This is what “gutting” the defense budget looks like.

The across-the-board sequestered spending cuts that go into effect March 1st were proposed by President Obama, passed with a bipartisan majority in both the House and Senate, and signed into law by President Obama. The president even threatened to veto any changes to the sequester. The hypocrisy of the principal architects of the legislation from both parties trying to undo it border on the farcical. Recall that President Obama supported sequester before he opposed sequester. And note that Paul Ryan can’t decide whether he likes the sequester or not. Then there is…

Nancy Pelosi then:

Pelosi also on Thursday became the latest leader to say that she will oppose any efforts by members to undo the $1.2 trillion across-the-board spending cut that will go into effect in 2013 if the supercommittee fails.“The sequester is what it is,” Pelosi said.

And Nancy Pelosi now:

“Well, I think that the sequestration is a bad idea, all around. It is something that is out of the question. The fact is, we have had plenty of spending cuts…”

Screw ‘em.  They passed it. They supported it. I say if we can’t get the cuts we love, love the cuts we’ve got. And I am not alone in that assessment.

Howard Dean:

“We should let it happen,” Dean said of $1 trillion in domestic, defense and Medicare spending cuts set to be triggered on March 1. “I’m in favor of the sequester. It is tough on things that I care about a lot, but the fact of the matter is, you are not going to get another chance to cut the defense budget in the way that it needs to be cut.”

Cato Institute:

“Sequestration likely won’t be as bad as special interests and those in favor of ever-increasing military spending claim. The reductions would only apply to FY 2013 budget authority, not outlays. The Pentagon and Congress will then have greater flexibility starting in FY 2014 to adjust the reductions under the BCA spending caps. In the meantime, many programs could continue on funding already authorized.  We must also keep the cuts in proper perspective. The DoD base budget under sequestration would total $469 billion, about what we spent in 2006, which was not exactly a lean year for the Pentagon. And as for the claim that the military cuts will result in perhaps one million lost jobs, that seems implausible considering that the cuts would amount to less than three tenths of one percent of GDP.”

Charles Krauthammer:

If they do nothing, the $1.2 trillion in cuts go into effect. This is the one time Republicans can get cuts under an administration that has no intent of cutting anything. Get them while you can. Of course, the sequester is terrible policy. The domestic cuts will be crude and the Pentagon cuts damaging. This is why the Republican House has twice passed bills offering more rationally allocated cuts. (They curb, for example, entitlement spending as well.)  Naturally, the Democratic Senate, which hasn’t passed a budget since before the iPad, has done nothing. Nor has the president — until his Tuesday plea.

Senator Tom Colburn

“We’re gonna have a sequestration. we’re gonna have some pain because the politicians on the Hill aren’t going to make cogent, smart decisions about alternatives to this until they start feeling some pain,” Coburn said on Wednesday’s Morning Joe. “It’s a stupid way to govern, but that’s the way we’re doing it right now. I think the blame lies on everyone’s shoulders including the president’s. Then we’re going to start coming around and picking and choosing what’s important and eliminating what’s not of great value and what we can’t afford.”

Dave Cote – CEO Honeywell

“We need the reduction,” Cote said. “You could argue that the reduction would make more sense if we did it thoughtfully and spent a lot of time on it. I’m not sure that’s a real option, though. The options seem to be let it happen or take it away.” Cote remains a leading voice in the corporate “Fix the Debt” group, which spent months last year lobbying the Democratic White House and Republican lawmakers to reach a deal to reduce the national debt and avoid a year-end “fiscal cliff.” of spending cuts and tax increases. Having seen that deadline quickly replaced by the March 1 sequester deadline, Cote said that allowing the cuts previously agreed to take place may be the most practical way to start trimming the debt.”

Professor Jeff Bergner – Georgetown University

“The most likely way to achieve significant reductions in spending is by across-the-board cuts. Each reduction of 1% in the $3.6 trillion federal budget would yield roughly $36 billion the first year and would reduce the budget baseline in future years. Even with modest reductions, this is real money. …let’s give up the politically pointless effort to pick and choose among programs, accept the political reality of current allocations, and reduce everything proportionately. No one program would be very much disadvantaged. In many cases, a 1% or 3% reduction would scarcely be noticed. Are we really to believe that a government that spent $2.7 trillion five years ago couldn’t survive a 3% cut that would bring spending to “only” $3.5 trillion today? Every household, company and nonprofit organization across America can do this, as can state and local governments. So could Washington.”

Liberal Democratic Blogger:

“As I said, cuts would hurt, and not just for those of us in the Federal government.  It’s a horrible time to cut spending, given that the economy is finally just getting back on its feet.  Economists have stated the sequester would likely reduce GDP by a full percentage point for the next few quarters. But the pragmatic side of me states that across-the-board spending cuts would force agencies to streamline, which isn’t necessarily a bad thing.  The pragmatic side of me says a short-term hit to the economy is worth it, IF it gets the U.S. to take a more realistic look at our military spending. Sequester?  Just let it happen.”

Conservative Republican Blogger:

“This sequester is a political test for those of us who want to cut the size and scope of government. Here we have $1.2 trillion in automatic cuts set to take place. All Congress has to do is nothing for them to happen. If we can’t get Congress to do nothing and let $1.2 trillion in cuts take place, how are we going to pass the deeper spending cuts and entitlement reforms we need to rescue our country from financial ruin? Finally, here is a chance to take on the sacred cow that is defense spending. If we cannot make these modest defense spending reductions, how are we going to take the hard look at our foreign policy that we desperately need? This is one time where Congress can help the country by doing nothing. They should not act and let the sequester happen as a small first step to getting the nation’s financial house in order.”

Let’s start fixing the real problem. Take the bird in the hand. Let the sequester go into effect.

Politically the sequester evens up the score. Democrats got some tax increases in December. Republicans get some spending cuts now. The stage is set yet again for another run at a “Grand Bargain”. Both tax and entitlement reform will be on the table while negotiating the continuing resolution and budget in March. That will be our last best chance in this administration to solve the real problem and fix any sequester issues.

I choose to be optimistic. I can only…

Cross-posted from The Dividist Papers


This entry was posted on Tuesday, February 19th, 2013 and is filed under Bad Decisions, Bipartisan, Budget, Congress, Debt, Deficit, Fiscal Responsibility, Obama. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

26 Responses to “The sequester is not the problem. The sequester is [part of] the solution.”

  1. Jim S Says:

    “Both tax and entitlement reform will be on the table while negotiating the continuing resolution and budget in March.”

    The fact that you can say this in spite of the fact that your Republican heroes have repeated over and over again that they refuse to consider any further increases in revenues doesn’t say much for your perception of this issue.

  2. mw Says:

    The fact that you can make this comment in spite of the fact that the Republicans agreed to a tax increase less that two months ago having repeated over and over again for years that they would refuse to consider any increases in revenues doesn’t say much for your short term memory of this issue.

    The fact that you quote me predicting Republicans putting “tax reform” on the table after sequester goes into effect then question my perception based on their appetite for “increases in revenue” [not the same] doesn’t say much for your reading comprehension skills.

    That said, I expect there will be some additional revenue increases as long as there are cuts in entitlements and the revenue increases are swathed in tax reform clothing. With sufficient changes to the tax code the R’s can claim close to rev neutrality, D’s can claim rev increases on the rich (example: elimination of carried interest with small decrease in rates accomplishes both goals) and both can save face.

    It is a guess, and I could be wrong. We’ll know in a few months.

    BTW – I voted for Obama.

  3. Tully Says:

    A very small part of the solution.

    Let’s put the sequester in perspective as relates to the size of the problem. Per the CBO, the actual spending “cuts” for 2013 (which are not “cuts” from the previous year’s spending levels but from the already-inflated “baseline” spending trend) will be about $44 billion, at the same time we have a projected deficit of around $1 trillion on projected spending of $3.8 trillion. Even with the sequester we will be spending more money than last year.

    The phrase “a drop in a bucket” comes to mind. We’re talking here about lowering the deficit by only around 4.4%, and overall federal spending by around 1.2%, or about one-quarter of one percent of GDP. This is why the markets are yawning and blood is not flowing on Wall Street.

  4. mdgeorge Says:

    I just don’t understand your single-minded focus on contractionary fiscal policy when unemployment is near 8%, money is practically free, and we aren’t seeing any hints of inflation. Whatever happened to “Jobs, Jobs, Jobs”?

  5. Tully Says:

    Um, it’s not contractionary fiscal policy. Contractionary fiscal policy is when government revenues exceed government expenditures by design, reducing debt. Not when the rate of accumulation of government debt is slowed a teeny tiny bit, or a projected increase in runaway future spending is trimmed a touch.

    There ain’t no such thing as free money (or rather, “free” money is worth exactly what it costs, and often less).

  6. mw Says:

    To Tully’s point: Even after sequester cuts, federal spending increases year over year from $3.538 T to $ 3.553 T. Not only does that not meet the definition of “contractionary”, strictly speaking, it isn’t even a spending “cut”.

  7. mdgeorge Says:

    Ok, I’ll agree that I misspoke when I said “contractionary.” Nevertheless, my question remains unanswered. Why are large deficits a problem right now?

    As for free money, interest rates are incredibly low right now. I agree they aren’t zero, but they are damned close. Even in the middle of a ridiculous default threat and a credit downgrade, the price of tbills was going up. And we’re not seeing inflation.

    So again, why is now not the perfect time to be borrowing money? We have real problems that need to be solved. The biggest one remains “Jobs, Jobs, Jobs”, and reducing the deficit through the sequester is actively counterproductive on that front, even without counting the multipliers that come from decreased confidence in our political system and increased uncertainty in the marketplace.

    So the downsides of less deficit are clear to me. I’m having trouble seeing the upsides. Everyone seems to agree that the only way to improve the situation is to grow the economy. Economics 101 says you increase the money supply, reduce taxes, and increase spending when you are in a slump. I haven’t taken anything beyond econ 101, so maybe some of you guys can help me out.

  8. Angela Says:

    My concern all along has been the spending cuts, 44 billion, in defense spending. While it may be true that the 44 billion represents a small a percentage of the total defense budget, its enough to cause cancelled contracts, employee layoffs, etc. Our defense department employs a lot of people, either directly, or indirectly, through contracts with high-tech manufacturers. In fact, some companies who have contracts with the defense department are currently experiencing a decline in their stock prices as investors are pulling out. (MarketWatch-Wall Street Journal).

    It seems to me, and this is pure conjecture on my part, that the Dems last year agreed to put the defense department in line for budget cuts as a bargaining chip, a carrot, so to speak, to bring the Repubs to the table. I’d like to know others thoughts on that. Since the supercommittee could not identify 1.2 trillion in cuts, which was expected I’m sure, and also expected that the automatic cuts would be bargained for. Its been a political game.

    While I questioned cutting spending “across the board”at first, thinking it would be better to negotiate items of importance, I now see it in a different light. It would seem to me that individual government departments would have the best knowledge of where to trim the fat and across the board cuts forces them, per se, to clean up their budgets. Yet, and yet, I am still leary of the defense cuts.

    To Mdgeorge, to put it quite simply, if you as an individual over borrow, will you not eventually find yourself with less discretionary money, and less cash in general? Same concept with the government except on a larger scale.

  9. mdgeorge Says:

    Angela,

    I borrowed an awful lot of money to go to college, as do many people. I think most people would consider that a wise decision, but that example seems to contradict your reasoning. It seems by your argument that I should have quit school because I might eventually have problems paying back my loans.

    After college I went to graduate school, which meant I had the option to defer my loans, but I also had enough money that I could have started paying them off. However, the interest I was paying on those loans was less than the interest my money would make sitting in a savings account, so it made more sense not to pay them back immediately. Another counterexample to the debt=bad logic.

    That said, I think the simplistic comparison between personal finance and governmental finance is just inaccurate. The way the government operates has a large impact on the (world) economy as a whole. Moreover, the government’s income is a direct function of how much money moves through the economy, where as my personal income is not.

    Note that I am also not proposing that the government should always have a large (or even any) debt. Debt is a tool, and we should use it when and where it is appropriate. Basic macroeconomics suggests that periods of low inflation and high unemployment are good times to have larger deficits, while periods of low unemployment and high growth are a good time to pay the debt down.

    Angela’s response is somewhat vague. The consequences of debt are that the country might eventually find itself with less money. On the other hand, the consequences of the sequester are completely clear: unemployment will tick up, at least back over 8% as a direct result of government layoffs, and jobs for everyone will be harder to find. We will have to pay more unemployment insurance and collect less taxes from those people. It will also have indirect immediate consequences because there will be less money moving through the economy, which means businesses will have fewer customers and so on. It will also have long term consequences because the money we will not spend on things like basic research and education will make us less competitive going forward.

    So can anyone be more concrete about what the consequences of maintaining or even increasing our deficit spending will be? Are you worried that people will stop lending us money? Are you worried that even during times of strong economic growth that we won’t be able to pay it back? What’s the concern?

    This focus on reducing the debt and deficit seems to me to be akin to the instinct to pull out of the stock market just after it tanks. Somewhat natural, but completely misguided.

  10. khaki Says:

    @ Angela: “if you as an individual over borrow, will you not eventually find yourself with less discretionary money, and less cash in general? Same concept with the government except on a larger scale.”

    This is incorrect. Better analogy is a company. If during a downturn when sales slow and when interest rates are cheap, if you don’t borrow to keep the lights on and to innovate in order to better compete and to ride out the cycle, you will go out of business.

    Ben Bernanke, a Bush appointee, agrees with MDGeorge. Short term debt is not the problem – it’s long term debt. Policies now should answer the long term calamity lingering out there and not the the politicized fantom problem that if we don’t cut a few billion out of the budget now, we all go to hell in a hand basket. Not only is it not true is does absolutely nothing to solve the problem., in fact making it worse. There are hard choices that do have to be made, but those choices are going to require long term thinking, far longer that political cycles allow.

  11. Tully Says:

    I don’t have the time to walk mdgeorge and khaki through basic econ and the flaws in the Keynesian models, but I’ll note that Keynes himself said stimulatory spending was ONLY for short-term application, HAD to be combined with tax cuts, and the resulting debt had to be made up ASAP when things got better. Politicians love to ignore three-quarters of that (they like the “free money” part) and latch on to any extra spending they can get. We are long past the short-term usefullness of debt spending as a “temporary” stimulant. A few years past it. In the long run continuing to grow the national debt faster than the economy means you WILL sooner or later [a] run out of money when people quit lending to you, and/or [b] have to monetize the debt, that is, intentionally devalue your currency (official inflation versus market inflation). And inflation will come along sooner or later anyway as long as money supply grows faster than GDP.

    If you think inflation is sleeping, you haven’t gassed up or tracked grocery prices the last few years. Low interest rates on borrowings that have to be turned over in the future aren’t much comfort. If you can’t pay the loan off, you refi at higher rates. As your debt ratio grows, your credit rating shrinks. Rates may be low now but lenders are being ultra-tight in who they loan to AND demand is still slumbering. When the economy does get rolling again, all that excess money created will come back to bite us with serious inflation. The Fed has been pushing on a string for a while now, and we’re looking at more ratings cuts in the future if we don’t get our debt levels under control. Which will, of course, boost our cost of borrowing.

    I’d also note one thing you can ALWAYS depend on. Forced government cuts will ALWAYS be aimed at causing the maximum pain to the citizens rather than reforming the bureaucracy. It’s bureaucratic blackmail. “Give us the money or we make you suffer.” The only thing I’ve ever noticed to work at reforming a bloated bureaucracy is continued starvation and a change in management. Bureaucracies do not live to serve us, they live to serve themselves.

    All we are accomplishing now with much of the deficit is feeding the bloat while shrinking our ability to fund things in the future. The way to stabilize (achieve neutral fiscal policy) is to get spending and revenue more or less equal. The way to reduce debt (actual contractionary fiscal policy) is to reduce your overall debt by achieving revenues higher than spending.

  12. Angela Says:

    Khaki: This is incorrect. Better analogy is a company. If during a downturn when sales slow and when interest rates are cheap, if you don’t borrow to keep the lights on and to innovate in order to better compete and to ride out the cycle, you will go out of business.

    But even a company cannot overborrow or they become less liquid. It eventually would affect the value of their stock, etc. Stimulative spending and tax cuts are not effective if it does not address the real situation. In other words, the problem should be defined accurately first before the right solution can be found. Stimulation of the economy by increasing debt, and by the same token, tax cuts, can only work in certain economic environments. I believe its why Obama’s stimulative package failed, for the most part, to give the results that were expected.

    High deficits, and high debt, if not controlled eventually have a negative impact on the economy. There needs to be a balanced approach between controlled spending and increased revenue. I agree, Mdgeorge, in investing in the economy, but I also believe we need to know where those limits are at and how effective its going to be. I would not invest $5.00 if I’m only going to get .001 back.

    Thank you for your comments.

  13. mdgeorge Says:

    Tully, you make a few assertions:

    1. We are [a few years] past the short-term usefulness of debt spending

    By what measure? It seems to my like the criteria ought to be when inflation and employment are low.

    2. When the economy does get rolling again all that excess money will come back to bite us with excess inflation

    Do you think we’ll wake up one day and all of a sudden inflation will be high? It seems to me that there will be pretty clear advance warning as we shift from an anemic economy to a robust one, and we will be able to reel in our expansionary measures appropriately. Indeed, this is one of the important points I gleaned from Bernanke’s recent testimony: the fed is keeping a close eye out for inflation, and has explicit plans to responsibly wind down QE once things start moving. I don’t understand why the fiscal side of things couldn’t work the same way (aside from complete legislative dysfunction of course)

    3. Ratings cuts will boost our cost of borrowing

    Last time around they decreased our cost of borrowing. But the point I keep making about interest rates is that our cost of borrowing is extremely cheap. People want to give us money.

    4. This isn’t a specific claim, but it seems like your paragraph about bureaucracy seems to be arguing that (a) the driver of our deficit is fat bureaucracy, (b) the only way to reduce the fat is to cut the total budget, (c) bureaucrats are evil, so even though they are fat, cuts to their budget will come out services instead of efficiency, so (d) we have a choice between unsustainable debt and maximum pain (and from the context, I’ll add (e) the only responsible response is maximum pain now).

    Now, please correct me if I’m manipulating you argument into a strawman, but this reasoning seems to be wrong for a number of reasons. The first is that the biggest driver of our long term deficit is medicare, and the reason that that is going to get more expensive isn’t government bureaucracy, it’s because we’re getting older, and because health care is getting more expensive.

    As I think about it, your point about bureaucracies actually nicely encapsulates my thoughts about medicare changes, but that’s a digression and it’s getting late, so I’ll finish this thought another time.

  14. mdgeorge Says:

    I have another comment stuck in moderation, but a quicker response to Tully: my understanding of Keynesian economics includes the points you mentioned. It’s true that I’ve advocated for tax increases, but that’s in the context of a discussion about how to cut the deficit, whereas my broader point is that cutting the deficit is the wrong approach right now.

    But your comments about “the flaws of Keynesian economics” surprise me. Are you claiming that Keynesian economics is just wrong (like flat-earth theory), or just that it doesn’t apply universally in all situations (like classical mechanics)?

    If it’s the former, that’s an extraordinary claim requiring extraordinary evidence; from my (layman’s) perspective, Keynesian reasoning has both descriptive power (the examples in my mind are the great depression, Japan’s lost decade, and Greece’s current austerity woes), prescriptive power (the new deal, also Japan, and if you prefer anecdotal evidence, Paul Krugman’s accuracy in punditative predictions), and academic approval (again Krugman’s accolades come to mind for me, and the fact that this is what they teach in introductory economics courses). Am I wrong about all of these things?

    If instead you are making the weaker claim that Keynes is accurate in some situations but our current situation isn’t one of them, I’d be curious to understand why you think our current slump isn’t a textbook recession/weak recovery.

    Sorry to press you when you explicitly said you don’t have time to walk me through basic economics, but I’d really like to understand where you’re coming from, since you sound confident that my understanding of the world is wrong.

  15. Tillyosu Says:

    This video seems appropriate.

  16. Tully Says:

    Keynesian economics is a theoretical construct, not an empirical one. And yes, the overall theory in Keynesianism has flaws. When someone comes up with a Grand Unified Theory of economics that actually tests out empirically, I’m sure we’ll hear about it. In the meantime Keynesianism is one of several competing schools of thught, ALL of which have both strong points and flaws when explored empirically. Not all places teach Keynes as 101. Many teach neo-classicism, which has a better empirical track record for descriptive basics, just as the monetarist school has a better track record in certain areas. And the Austrian school isn’t exactly always wrong either. Yet none of them have remotely perfect theories. (The Austrians might debate that, but ask ‘em to quantify it and listen to the chorus of hemming and hawing …)

    I’m an empiricist. To me they’re all flawed. The greatest flaw I see is that at root economics is the empirical study of human behavior in the utilization of real resources, and humans are neither rational animals nor standardized units. Attempting to describe and analyze economies using mechanistic constructs will always fail to some extent simply because we’re not robots and economies are organic, not mechanistic. That’s one thing the Austrians have right. Economies are living systems, not mechanistic constructs.

    The breakdown in applied Keynesian theory was seen in the 1970′s when stagflation came to roost, which pretty clearly demonstrated that some of the key concepts of Keynesian theory broke down past the short term. According to Keynes’ beloved Phillips Curve, stagflation simply wasn’t possible. And yet we had it (and appear to be headed there again if we keep money-pumping).

    I would not put ANY faith in what Krugman says about economics as an op-ed writer. He regularly contradicts the very textbooks he’s written. He is a top economist when he isn’t being a partisan hack. As is Art Laffer, with the exact same qualification. When they’re being partisan hacks you can’t believe a thing they say. Their peer-reviewed work is solid. Their partisan hackery is partisan hackery. I also place no faith in that study you cited — to be kind, they don’t even list which predictions they picked to use, meaning that there is no way to assess that they did not exercise selection bias to extremes, intentional or not, or that the predictions selected were items amenable to empirical analysis or could be influenced by insider knowledge, etc. Undergrads with a stats construction model and subjetcive (and non-documented) data selection criteria are dangerously loose cannons, not scientists. :)

  17. Angela Says:

    Tully: The greatest flaw I see is that at root economics is the empirical study of human behavior in the utilization of real resources, and humans are neither rational animals nor standardized units. Attempting to describe and analyze economies using mechanistic constructs will always fail to some extent simply because we’re not robots and economies are organic, not mechanistic. That’s one thing the Austrians have right. Economies are living systems, not mechanistic constructs.

    Agree with Tully.

  18. mdgeorge Says:

    @Tully: I actually completely agree with your comments about the link I shared. I concur that it shouldn’t be taken as evidence of anything; I’m not sure what possessed me to share it in the first place. On the other hand, I think we’ll have to just disagree about Krugman himself – it’s just hard for me to see how someone can wear two different hats and give Nobel-prize-quality answers with one hat on and completely uninformed and wrong answers with another. So in the absence of actual economic knowledge, I’m willing to defer to his opinion on a question until I learn more detail.

    I also agree that humans are not machines, and that there will be flaws in any model of the economy. On the other hand, I also think that even though they will never by perfect, theories can be good approximations that can guide us towards good policy choices, and can encapsulate good ideas that can help us reason about our current situation, and weigh the plausibility of certain outcomes. We just need to be aware of the limits of whatever model(s) we’re relying on, which I guess is really what I’m trying to glean from you.

    The thing I still don’t understand about your position is that it seems rather arbitrary to me what theories you reject and what theories you embrace. You dismiss the Keynesian approach to our current situation on the grounds that people aren’t machines, but you seem perfectly happy to declare that you know exactly what the outcomes of various policy choices will be. In fact you have helpfully capitalized many of the places where you are making mechanistic predictions about the way that the economy works (words like ALWAYS, NEVER, ONLY, HAD TO stand out). My calculus professor described that as the “calculus for non math majors proof” – say it, and then say it again in a louder voice :).

    To be honest, I don’t know the story of stagflation in the 70s; perhaps that will be my homework assignment. Is it your contention then that our current economy is more akin to that of the 70′s than it is to, say, Japan’s in the ‘lost decade’? If so, why do you think that? I guess what I’m trying to get at is that you’re telling me that stimulus is a bad idea, but I still don’t understand where the predictions you’re making are coming from.

  19. mdgeorge Says:

    @Tillyosu: I enjoyed that video, although the “Keynes” presented there was kind of a strawman, so it didn’t really shed much light on the issue for me.

  20. Tully Says:

    Is it your contention then that our current economy is more akin to that of the 70?s than it is to, say, Japan’s in the ‘lost decade’?

    A bit of both. One was the result of a collapsing asset bubble (check) and the other was the result of a collapse in demand that the government attempted to cure with fiscal/monetary policy (check). Do not make the error of believing that there are exact analogs to deploy as resonse templates. History doesn’t repeat itself so much as play improv encores. Also do not make the error of thinking that because we don’t understand everything in mechanistic detail (impossible in an organic/dymanic system) that some things are NOT mechanistic. A large part of empirical economics is the assessment of system limits. Physical resource constraints are very very real, no matter how many games you play with money. Think of money as shares in the national economy–that clears up a lot of muddy thinking. A dollar bill is one share. If you create more shares without increasing the real resources behind them, each share becomes worth less.

    The key to growth is demand. Keynesian stimulus theory is based on stimulating demand by deficit spending (by borrowing and/or creating money) and reduced taxes during down cycles and moderating demand during up cycles (cutting spending and raising taxes) to pay off the deficits. Which sometimes works and sometimes doesn’t. But when demand does not respond (and that’s where we are right now, pushing on a string) more Δmoney/Δspending “stimulus” will not help. It just creates more “slack” in the string (larger money supply without corresponding real resources backing that money), slack which will come back to haunt as inflation when demand does finally pick up. At which point no stimulus is needed …

    Keynesianism relies strongly on the Δmoney–Δspending multiplier concept, but adherents have real trouble grasping that multipliers are not constants but conditional, and that contrary to Keynesian theory empirical studies indicate that the Δspending multiplier is not only lower than the Δtax multiplier but can be and usually is 1 or less. Empirical research suggests that the Δspending multiplier is ~0.7 to 1.2, and the Δtax multiplier ~2 to 3. (Neoclassical models [NCM] are even worse at estimating implied multipliers than Neo-Keynesian [NKM], another reason I remain an empiricist. Let’s not get into detail there about Frisch elasticity and bad market friction assumptions, but it’s a conceptual model flaw of the NCM, just as the constant-multiplier and >1 Δspending multiplier assumptions are the result of conceptual flaws in the NKM.)

    Moving on, the bottom line for ballparking deficits and debt is this, in stark simple math: Assuming money supply matching growth levels, if your governmental debt grows faster than your economy, your economy will sooner or later stagnate/shrink/collapse. You are using more resources than you are creating. If your economy grows faster than your debt, you will sooner or later have no significant governmental debt, and growth will steadily increase. You are creating more resources than you are using and those new resources can be used for growth instead of debt service. And if the two grow equally, your real debt level stays constant and growth becomes entirely a function of other economic factors. That’s expansionary, contractionary, and neutral fiscal policy in a nutshell.

    I remain an empiricist because the real world insists on not following the predictions of the assorted models, but the limits of real resource management. Except for the Austrian school, which is cheating because the Austrians refuse to really quantify anything. Theirs is not a model so much as a cynical philosophical analysis of politico-economic behavior. Being cynical about politicians is the right stance, but it doesn’t lend itself to the mathematical modeling of economies. And that’s all you get for the 20-minute speed-type.

  21. mdgeorge Says:

    Tully,

    Just to double check: I was having trouble understanding ?Money/?Spending until I stopped reading “/” as “divided by” and instead read it as “and/or”. Same for ?Money-?Spending… you meant “?Money in connection with ?Spending” and not “minus”, right? Made much more sense to me that way :)

    My comment above finally escaped from moderation (more moderation in public discourse, less moderation on the donk!), I’d also like to challenge you on another assertion.

    5. You quote that the ?Spending multiplier is typically 0.7-1.2 while ?Tax is typically 2-3. That surprises me. I’m curious about where those numbers come from. Do you have a reference I could look at?

    6. You claim that the stimulus package was “pushing on a string”, which if I understand correctly means that the response in terms of economic growth was not commensurate with the investment. But in my view, the Keynesians (by which I mean Krugman – I don’t get out much) argued before the stimulus was implemented that it was too small, but it had a clear impact that was positive but too small. To my mind, that’s a response that is commensurate with the investment. Similarly, my understanding of the measures the fed is taking is that they’re doing the best they can but that there’s only so much they can do on the monetary side without more expansionary effort on the fiscal side. QE for example has never been billed as being enough to solve our problems, just something that will help.

    Wonkery aside, I agree with your approach of viewing fiscal policy as a resource management issue and focusing on the real choices about where to allocate our resources. From that perspective though, I also feel like the deficit is not a problem.

    As I mentioned above, taking out loans to improve our education makes sense both as individuals, and I would argue as a nation. Especially in times of economic weakness (you’ve heard of students returning to or staying in school when jobs are hard to find?). Borrowing money to make your energy use more efficient is smart, both for individuals, and I would argue for our government. Similarly, if you will use your car to get to work every day and it gets totalled, then taking out a car loan is a good idea (and again going back to energy, taking out a slightly bigger loan to get a more efficient car is also smart). Analogously, a lot of our economy is very dependent on our transportation infrastructure, as well as our infrastructure for transporting bits and watts. Health wise, preventative care and wellness is so much cheaper than emergency room care that if you decide that you’re going to do what it takes to stay healthy, then it makes sense to take out a loan for preventative care and pay it back with the money you would eventually spend on emergency care instead. As a society, we’ve agreed that we will provide emergency room care to anyone who needs it, so it makes sense to take out a loan to invest in wellness and prevention, which is how I view the ACA (subsidized insurance that must cover preventative and routine care).

    The constant discussion about cutting the debt and deficit seems to be akin to looking at a college student and saying “oh my god, you’re spending 50,000 a year on tuition and you’re only working part time taking in 10,000 a year, that’s unsustainable. You should get rid of the car you drive to work, stop going to the doctor, and return all of your textbooks.”

    Thanks by the way for engaging in this discussion. Our public discourse would be much improved if there were more detailed respectful discussions between smart people who disagree.

  22. Tully Says:

    On double-check and leaving out the delta symbols that require coding, yes, the first usage that’s a dash not a minus, meaning the association between the two implied in theory. For money/spending it means the entwined concepts of stimulating via monetary creation and/or spending.

    Empirical studies consistently show that the government spending multiplier in the real word is 0.7 to 1.2, and generally falls at 1 or below, whereas NKM assumes much higher multipliers. The real world seems to beg to differ in the ordinary course of events. One can of course speculate why the theory doesn’t pan out, but my personal (subjective) take is that politicians do not spend money very effectively, especiallu when you have to subtract out the cut the bureaucracy takes for weregild. They aim it at cronies and interest groups. The obvious rejoinder that that shouldn’t matter begs the question of why we don’t just “stimulate” with helicopter money. Which in circularity leads back to the above on politicians and cronies and such. Had the stimulus been provided as helicopter money, it would have had a much greater kick.Instead it largely went to the connected and to grow the bureaucracy into a higher entrenched baseline.

    To continue that because it directly applies to pushing on a string, if the demand to USE that money in productive (profit-making) ways is lacking, you are pushing on that string. Which guarantees you are dropping into <1 multiplier territory, and slamming more money at it just keeps dropping that multiplier. You enable the recipients to stack up wealth, not drive more trade. The mattress-stuffing effect, the exact opposite of the stimulatory effect desired. Once demand DOES finally kick in, you still have to use up the slack in the string before the real stimulatory effect is felt, at which point the stimulus is no longer required. But you're gonna get it anyway, with resulting inflation.

    For the delta-tax multiplier: Romer, Christina and David Romer, (2010). "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, vol. 100(3), pages 763-801. The Romers found that the multiplier effect of tax changes was between 2 and 3, depending on the tax. If the lead author's name looks familiar … it's because she was Obama's chair of the Council of Economic Advisors. We can only speculate as to why she left after less than two years in such a prestigious position. I would just note that she left right after her paper was published and you can draw your own conclusions. Honesty is not in high demand in politics. Money quote evidence on that speculation, from the Romer paper :"Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."

    The problem of relying on borrowed resources is that to ever pay them back you have to use them in ways that produce a profit, create resources over and above not just principal repayment but also above the interest due. Otherwise your debt simply keeps growing until no one wants to lend you anything because the odds of repayment keep shrinking. When you buy a car on credit, presumably the car helps you make the money needed to repay the loan. But generally all the government borrowing money leads to is higher demand for more government funds.

    Same standard: The college loan is probably not a real good one for you to use in addressing that right now. We're in a bubble there right now with higher education, and the value of college versus its cost is rapidly becoming a very poor bet outside of some specialized areas. The more prestigious and high-priced the school, the worse that bet looks if you're not already part of the well-connected aristocracy.

    Bottom line is debt matters, and resources are never free. As Greece and Argentina can currently attest. Or as Mexico can, though they've come a goodly ways in getting a grip on their problem. But I still have a 10,000 peso bill from the 80's that I use as a bookmark. When it was iussued it was worth $100 US. At the time I got it a few years later (and forgot to cash it in) it was worth around $45 US. Today it's not worth 45 cents US.

  23. mdgeorge Says:

    When you buy a car on credit, presumably the car helps you make the money needed to repay the loan.

    The reason I chose this analogy for infrastructure spending is that America uses its “roads and bridges”, and more broadly our transportation infrastructure, to get to and do our work. This is also becoming more and more true of our power grid and broadband internet.

    and the value of college versus its cost is rapidly becoming a very poor bet outside of some specialized areas.

    I agree that our current higher education costs are out of whack, and I actually think there is a place for the federal government in regulating that. But that’s a different discussion. Nevertheless, the fact that we currently have a bubble in tuition for higher education doesn’t contradict my basic position that investing in education can pay off. This is especially true for investment in early childhood education.

    But generally all the government borrowing money leads to is higher demand for more government funds.

    I think this is the key assumption that we disagree on. If you start with the cynical assumption that any money that government spends does no good for the public or it’s ability to improve the economy, then of course you come to the conclusion that the government shouldn’t borrow any money. But it doesn’t seem to me like the teachers and firefighters that are getting laid off are living high on the hog and doing nothing for our society, nor do I see things like food stamps and medicare as just flushing money down the hole. Hungry kids without quality education are a huge liability for our country; a well educated workforce is a huge asset.

    That’s not to say that there isn’t wasted spending in the system (by wasted, I mean that the payoffs will be less than the interest). If you believe all or most of our spending is wasted, then of course across the board cuts are a good idea. But if you don’t, then it follows that across-the-board cuts will do more harm than good. No matter what you believe, targetted cuts make more sense.

  24. Tully Says:

    But it doesn’t seem to me like the teachers and firefighters that are getting laid off are living high on the hog and doing nothing for our society, nor do I see things like food stamps and medicare as just flushing money down the hole.

    Me neither. But that is the principle the admin has applied in pushing down the cuts. See previous about the “firefighters first” effect, as your contra-example is a perfect illustration of what I have been saying about bureaucratic blackmail. And I say it as someone who has been a part of “the machine” in many ways for the last couple of decades, and I’ve seen it in action over and over again. It’s not party-specific, it’s incumbent-specific. Dare suggest a budget cut and the mayor lays off firefighters and teachers and cops, while the nepotistic deadwood at City Hall goes untouched, and the Bureau of Basket-Weaving cuts its coffee budget by 0.2% and preens about its sound fiscal management practices and how they’re doing their part.

    You should find out how much of the stimulus actually went to anything resembling pays-for-itself infrastructure. It wasn’t that much. For the most part that portion went to previously shelved projects local/state government had already deemed not worth paying for, wish-list projects that would only get built with “free money.” Nor is the bulk of our deficit due to infrastructure spending. Hollow argument. A Bridge to Nowhere makes great pork but is not in any fashion economically justified. Our bigger problems are an entrenched bloated bureaucracy, ever-expanding regulation (part and parcel with the first) and over-promising on entitlements.

    If you start with the cynical assumption that any money that government spends does no good for the public or it’s ability to improve the economy

    Please spare me the straw-manning. That one’s as bad as the opposite assumption that government can do no wrong and can never ever spend money less effectively than the private sector, and never spends wastefully. I don’t assume that’s your position, so why try to claim the other is mine?

    Which brings us back full circle: It is a simple mathematical truth that if your debt grows at a higher rate than your income does, your spending levels are unsustainable. That’s not even arguable. The line that you have to borrow to make more collapses when your borrowing is demonstrably NOT leading to income growth higher than your debt growth. If you keep debt growth more-or-less matched with income growth, you’re at least not becoming worse off. And if you simply grow your debt slower than your income grows, your debt load shrinks in proportion even if you continue to borrow and increase your debt. Do notice that NONE of those scenarios says “Don’t use any debt.” Do also notice that they are all simple mathematical truths, cold equations.

    No argument that targeted cuts make more sense — but we are at this point because the admin and Senate Dems have refused to make targeted cuts and insisted on boosting spending regardless. The White House was offered the authority to make their own targeted cuts, and turned it down. The Senate Democrats have refused to even submit a budget for four years running now, despite being required by law to do so, and it is in the budget reconciliation process that those trade-offs are made.

    Here’s some more food for thought on bloated bureaucracies.

  25. Sequester, Sequestivus and the Airing of Grievances - Centrists Rising - Centrists Rising Says:

    [...] people considered what the dear leader said and asked. “WTF? An only 2.3% decrease in the rate of spending increases? Are you kidding me? Do you have any idea what kind of cuts we’ve had to endure the last four [...]

  26. Donklephant » Blog Archive » The Legend of Sequestivus and the Airing of Grievances. Says:

    […] people considered what the dear leader said and asked. “WTF? An only 2.3% decrease in the rate of spending increases? Are you kidding me? Do you have any idea what kind of cuts we’ve had to endure the last four […]

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