Making an Analogy

You'll often hear people say something like "Households have to balance their budgets - the federal government should too."  And the reply, "The government isn't like a household - you can't equate them."

I think both views are wrong:  households do not in fact have to balance their budgets every single month, and one can make an analogy between the federal budget and a household budget - though I'll imagine a household that lives in a stylized and simplified world for the analogy to be easily followed.

Suppose you work for the only employer there is.  (The federal government has only one economy, after all.)  Continuing our supposition for this hypothetical household, you have good credit, though you rashly allowed your relatives Ronald and George to run up your credit card debt irresponsibly.

Now you lose your job and there is no other. (Analogous to recession/depression hitting the national economy.  Again, for ease of simplification, I'm positing no income at this point.)  Here's what the future looks like:  after a wait of some time, it's pretty certain you'll get your job back when the employer's business has improved - perhaps in 4-5 years. (Analogous to the economy recovering - eventually.)   A couple more wrinkles:  if you invest in some training courses during this period of being unemployed, you'll improve your chances of being hired back at a higher salary, and if you invest in sprucing yourself up a bit - e.g. a new wardrobe to replace your worn-looking one - you'll improve your chances of being hired back sooner - perhaps in 1½ -2 years.   (Analogies to national investments in education and infrastructure.)  And oh yes: interest rates are really low, so you can borrow money essentially for free.

So you have three choices:

Option 1. "Balance your budget" by giving up your home and eating out of dumpsters while your increasingly shabby appearance makes the chance of your being rehired more and more remote;

Option 2. Accept that you're going to have to go into debt to maintain your household, adding to the debt already run up by your irresponsible relatives, but knowing that in a few years, before your credit has run out, you'll be rehired, and can then start paying off the accumulated debt;

or

Option 3. Take a deep breath, and invest in the education and sprucing up - and maybe some other useful things you were thinking of buying on credit in the future, but figure now is the time while interest rates are so low.  Yes, it means taking a deep credit plunge, but because you get your job back so much sooner, you in fact lay out no more (and probably even less) than you would have by just coasting on credit for a longer time without making the investments (option 2). You're also ahead on those future planned purchases you make now, as interest rates are going to go up once the only company in town is back to hiring everybody. And once you're hired back at that higher salary, you can pay off the debt more quickly than you would if you followed option 2.

Which option would you choose?

(Yes, yes, yes, it's very simplified, and not a true representation of an actual household, but I believe it's a perfectly valid analogy for the situation we found ourselves in back in late 2008.  Since then we've been coasting mostly on option 2, a little bit of option 3 back in 2009, and have been harangued by Ronald's and George's closer relatives to "act responsibly" by adopting option 1.)

Democrats Continue to Fail

Fail on the messaging front, that is.

As we approach the "fiscal cliff", Republicans continue to stay on message:  raising taxes on the wealthy will hurt growth, reducing taxes will spur growth they tell ua.

Of course, there is no evidence for this talking point: it is more akin to a religious belief than a statement of fact based on real world experience.  Yet we hear it over and over again whenever Republicans are interviewed by our news media - and I fear that a falsehood repeated often enough begins to feel like a fact to people who keep hearing it.

And the Democrats' reply?  Silence.  There's an old saying, "Qui tacet consentire videtur" - he who is silent is seen to consent.
By not vigorously countering the false narrative on taxes, the Democrats appear to agree with it.

What Democrats' should do:  on every accasion thay can, point out that the claim that high taxes on the wealthy stifles growth is completely bogus.  Look at the top marginal rate in the Eisenhower years - 91%  Yet the economy grew very nicely, thank you, and the deficit was well under control with an adequate revenue stream.

By constant referring to the 91% rate not stifling growth, the Democrats could inject a new realism into the debate over taxes. And they don't have to insist on the 91% top rate:  they can generously compromise on a top marginal rate of 70% .

Update   The same point made at The National Memo:

Since 1944, the United States has only raised taxes on the rich twice—in 1992 and 1994. What followed those tax increases was one of the greatest economic booms in American history.

Further update 11/29/12  TPM is quoting a GOP spokesman:

The GOP needs to claim victories on taxes as they come – not by passing the Schumer tax increase, but by calling out the massive Democratic cave and admonition that lower rates are beneficial.  Republicans should highlight that, it's a ideological inconsistency for Democrats on the tax issue, and we need to get back on offense rhetorically.

I'm assuming that the "admonition" there is a misprint for "admission."
As I said:  Qui tacet consentire videtur.
The correct response is that tax cuts for lower/middle earners are beneficial in a reduced economy, while tax cuts on higher "earners" are never beneficial.
What's so hard about that?

(BTW - the extension of the Bush tax cuts for lower income people should be temporary - until the economy revives - not permanent, as the Democrats are proposing.)

Update Jan 10, 2012.  Very disheartening that the Bush tax cuts (except for a tiny proportion) have been made permanent.  A big win for the GOP and loss for the country.

Beware CNBC

Paul Krugman is right. "(D)on’t spend much time watching CNBC. It’s bad for your financial and intellectual health."

Previous posts on CNBC's Squawkbox here and here.

Good Use of an Hour

If you (or any of your friends) is a little shaky on macroeconomic fundamentals, let me recommend this discussion between Paul Krugman and Joseph Stiglitz - both Nobel Prize winners in Economics.  (As the linked posting indicates, you'll need to scroll ahead - the embedded video has about 25 minutes of audience settling in and irrelevant housekeeping announcements before Krugman and Stiglitz come on stage.)

(While I'm at it, I'll recommend adding both Economist's View and Krugman's blog to your bookmarks to maintain your understanding of good macro policy and the bad policy so often pushed by our elected representatives.)

This Is Scary

Senator Saxby Chambliss sat down for an interview with Suzy Khimm recently.

One of his answers managed to fit more ignorance in one paragraph than you might have thought possible.

"From a stimulus standpoint, we don’t need to be spending any more money. We’ve seen that the Keynesian approach did not work then, and it won’t work now. We need to respond to the marketplace. CEOs around the country are sitting on a lot of cash because of sequestration, as well as failure to address  the long-term debt issue. You’re going to see that cash flow back into marketplace from a capital standpoint. That’s going to create jobs. Stimulating the economy through spending won’t work — that’s been proven. Stimulating it through real responsible tax reform will."

Let's unpack:

 From a stimulus standpoint, we don’t need to be spending any more money.

Yes we do if we want to improve the employment figures and speed economic growth.  The AJA would be a good start.

 We’ve seen that the Keynesian approach did not work then, and it won’t work now.

We saw that ARRA halted the 2009 slide in the US economy, and began the turn around to economic growth.  (Though as the stimulus was inadequate, growth has been much slower than it would have been with a more aggressive Keynesian approach.)

 CEOs around the country are sitting on a lot of cash because of sequestration, as well as failure to address  the long-term debt issue. 

Corporations are sitting on over a trillion dollars in cash because low demand gives them  no incentive to invest.  (They were already sitting on their cash before the sequestration silliness was passed.) What businesses should be doing is using the cash on hand to pay their employees more, both as a matter of basic fairness as well as to promote economic growth,  But as the power of private sector unions has been eroded, there is no pressure on corporations to share the profits from increased productivity with their employees.

 You’re going to see that cash flow back into marketplace from a capital standpoint. 

It's not clear what this means, but if senator Chambliss means that corporations will invest in new capital goods, then they will only do so when their perception of current and future demand will justify the investment.  The quickest way to increase demand is or the federal government to  get spending money in people's pockets - preferably through jobs programs like infrastructure improvements.

That’s going to create jobs.

If the "that" were clear, this might make sense.  If the notion that there will be a supply side increase in investment before the demand is there, then it is deeply silly.  It's jobs that  give people the income to spend that created the demand that results in business investment  to meet the demand that results in new jobs that ...  - the virtuous cycle.  But the cycle needs to begin with jobs - or at least income.

Stimulating the economy through spending won’t work — that’s been proven.

Stimulating the economy through spending does work — that’s been proven, both in the 1930s and 1940s, and in 2009 - 2010.

Stimulating it through real responsible tax reform will.

This is a completely meaningless statement.  Reducing taxes on lower income people is stimulative. Reducing taxes on upper income people is not.  Reducing corporate taxes can have stimulative effects, but only in an economy where the reduction in tax payments releases money to put to use in investments justified by demand.

So why the title of this posting?

The fact that a Senator with this degree of ignorance is in a position to set policy, and to obstruct a program of realistic economic policy proposals that could get unemployment down and increase growth, is deeply scary to me.

Kernen & Krugman Redux

Not satisfied with mischaracterizing what Krugman said on Squawk Box, I see Joe Kernen is now calling Krugman a communist.  And Mr. Kernen further exhibits his ignorance by admitting he doesn't know who Dean Baker is.  (Anyone else unfamiliar with Dean Baker should immediately add his blog to their bookmark list.)

Good Advice

TPM reader JB has excellent advice for the Obama campaign. The whole post is worth reading.
Money quote:

(I)t is clear that the Romney campaign doesn’t believe it can win on the current facts, it needs a better case. And that is a sign of weakness. That should be an attack point for Democrats. Don’t complain about the lying, which looks whiny and weak, use it to show weakness.......when Democrats highlight every lie, over and over as a sign of weakness, then the MSM will have a story to pick up and run with.