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. 

The Lemonade Stand

After President Obama's not very elegant defense of government as the provider of the infrastructure space in which private business can flourish, Fox and Friends brought on a couple of young girls to explain how they hadn't needed government help in setting up their lemonade stand.

It's a pity that one of the networks that have some regard for intellectual honesty didn't have the initiative to invite them on afterwards to ask:

1. How do their customers reach them?  (On the street and sidewalk provided by their city government, presumably.)

2. How did they learn to read directions for making the lemonade, learn to write their billboard, learn to calculate how much to charge, and how to give change? (From their teachers, again we would presume.)

Which was the point President Obama was making when he said:

"If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you've got a business – you didn't build that. Somebody else made that happen. The internet didn't get invented on its own. Government research created the internet so that all the companies could make money off the internet."

Timing of ACA

I see Michael Tomaskey includes in his criticism of Obama that ".. it was wrong to push health care in year one.."

In retrospect, maybe.  But look at it from Obama's point of view coming into office:  he had promised a spirit of co-operation, and the ACA was based on Republican ideas from the AEI and from Romney's Massachusetts reform that Romney had suggested as a model for the nation.  Obama went so far as supporting the removal the public option from his own party's proposal, to keep under 65 health care entirely in the private sector. The reasonable thing for him to expect was that Republicans would join him in passing a conservative health care plan, so I can see how he thought that reform would be signed, sealed, delivered fairly rapidly.

He hadn't anticipated the GOP determination to block ANY Democratic initiative.  Once it became clear that the Republicans wanted to make health care a political fight, Obama was pretty much trapped into entering the slugfest it became - shelving the plan for another day would have given the GOP a huge and undeserved political victory in his first year.

So, yeah, in retrospect ACA sucked up political capital and energy that should have been devoted to boosting the economy and getting people back to work.  If Obama had any inkling ahead of time of just how low the GOP would sink purely for political gain, perhaps he would have put off  health care reform.  But he came into office promising co-operation, and naively thought the other party would reciprocate.

Romney and Bain

If the Democrats were to ask me how to counter Mitt Romney's claim that his background in business gives him a better ability to manage the US economy, I'd suggest something along the following lines.

Bain's MO was to use its investors' money to buy a company, and then load the company up with debt to pay back the investors.  Then Bain set about cutting costs at the purchased company by, among other things, reducing the workforce - putting people out of work.  Some companies struggled through the debt load and survived, some did not.  The debt load was an unproductive use of credit: all it did was benefit Bain and its investors.

Compare that to a productive use of credit:  taking on debt to invest in growing the company - installing new equipment and hiring more people to expand the company's capabilities and output, and then using part of the additional profits to pay off the debt.

Romney intends to bring the first (Bain) model to the US economy if elected.  He is promising he will add to the US debt burden by cutting taxes on the wealthy - so paying off his "investors" - with no benefit to the US economy.  And he is also promising to "cut spending" - i.e. put people put of work.  [There are three ways the Federal government can cut spending:  lay off government employees; cut purchases of goods and services (meaning the suppliers of goods and services will lose business, and lay off workers); and cut transfer payments like food stamps and unemployment benefits (meaning less money being spent, businesses suffering, and workers being laid off]. So "cutting spending" translates into adding to the unemployed - at a time when we have over 20 million unemployed or underemployed.  And the newly unemployed would not be spending - further exacerbating the low demand that is the drag on the economy at the moment, and threatening to send us right back into recession.

Contrast that with the Obama suggestion:  cut (temporarily) taxes on lower income people who will actually go out and spend the little extra income in their pockets, hire back state and local employees who will have incomes to spend, so generating more demand so businesses can expand and hire more workers, and infrastructure products that will help keep the travel and communications needed in our future economy while putting people to work right now.

So, yes, both candidates suggest increasing our country's debt.  But Obama is suggesting a productive use of borrowed money to put people to work and invest in our future, while Romney is suggesting an unproductive use while at the same time diminishing our economic output.

You'd think that it would be a no-brainer for the Democrats to contrast the two approaches, and to show how Romney's "business" approach would be disastrous for our country.  But right now they're quibbling over when Romney left Bain - 1999 or 2002.   Urgghh!


Update 7/18


Well - the "quibble" does seem to be working for them.  Turns out the issue of when Romney left Bain is exposing Romney's propensity for falsehood.

Kernen's Inability to Comprehend

I see that Joe Kernen is claiming that Paul Krugman called him or his colleagues a zombie, and that he thinks Krugman calls anyone who disagrees with him a zombie.  He is calling for an apology.

What Krugman was referring to were zombie ideas, that is, ideas that have been proven wrong over and over, so you would think would be dead by now, yet they keep coming back.  Zombie is a metaphor here, one that Krugman uses often, for ideas that should have been long since discredited, yet keep getting spread by the Joe Kernans of the world.  And yes, Mr. Kernan was spouting zombie ideas on this program, so the characterization was certainly apt.

That Mr. Kernan could not understand the simple concept of what the expression "zombie idea" means is indicative of Mr. Kernan's general inability to comprehend economic concepts.  And if anyone should apologize, it is Mr. Kernan for his failure to allow his guest on the program time to explain his ideas:  almost every time Mr. Krugman began an explanation, he was interrupted by hectoring from Mr. Kernan.

Mr. Kernan followed up with these tweets:

Krugman blogs "Zombies on CNBC" after interview. Dismissed every fact he didn't like as "myth".


Said 50 percent of GDP was the acceptable level of US government spending. Best economy in his words a "Free Market Welfare State"

So when Mr. Krugman correctly points out that one of Mr. Kernan's ideas is a myth, Mr. Kernan's reply on his tweet is that his idea is a "fact." A perfect illustration of clinging to a zombie idea.

And Mr. Krugman did not, as Mr. Kernans tweet suggests, say that 50% of GDP was THE acceptable level of government spending: he said that he would be concerned if it were to get above 50%, but Mr. Kernan did not give him a chance to explain what he thought an appropriate percentage would in fact be. I imagine Mr. Krugman would have pointed out that the percentage of government spending would depend on the business cycle: a lower percentage when the economy was expanding well, a higher percentage during depressions to stimulate the economy back to growth. Again, a simple concept that seems beyond the capability of Mr. Kernan to grasp.

Update:  for a model of how an interview should be conducted, see here and here.

Krugman at the LSE

If policy makers had ever asked me for advice on the economy,
I would have told them: listen to Krugman.

Here's an opportunity for all of us to listen to what he has to say.  (Some interruptions at the beginning over projection problems, but gets rolling after that.)

And why listen to Krugman?  Well, this for a start.

Messaging and the ACA decision

Not my own recommendation this time.  Andrew's column has this suggestion from one of his readers:

I do not understand why Democrats don't embrace the newly defined "tax"[ the penalty for not having health insurance], saying: you bet we raised taxes, but not on the hard-working, responsible middle class. This is a tax on those deadbeats who don't pay for their own insurance but still expect care when they show up at emergency rooms. It's a tax, all right, and I think we should agree to raise it even higher so they have more of an incentive to buy their own damned insurance and leave the rest of us alone. Let the Republicans protect the rights of deadbeats; Democrats are fighting for people who play by the rules.

Messaging, ctd

We've all heard the ACA described by Republicans as "government take over of health care".

So let's see:  requiring citizens to buy private insurance to cover treatment by private doctors and private hospitals constitutes government take over of health care.


So by that logic, states requiring motorists to have insurance against injury and damage constitutes state government take over of medical/surgical care and of the auto body shop repair industry.


Seems a simple point to make.  But do we hear it from our inept Democratic spox?  Hah!

The GSA Boondoggle

Recently my brother was complaining about the wasteful expenses run up by the GSA at its Las Vegas conference, and I was agreeing that it was shameful, until my brother said, "And this is at a time when there's over 8% unemployment."

Today's high unemployment is completely the wrong thing by which to judge the GSA expenditure.  The money spent on shrimp and commemorative coins and other fripperies was helping people who supply such stuff keep their jobs, and so (albeit in a small way) helping the employment situation.  Of course it would have been better had the money been spent on something useful for the future of the country - fixing a bridge or a road, keeping a teacher from being laid off, added to the pot of investment in renewable energy, and so on - but in the context of today's unemployment rate, if it's a choice between spending the money foolishly and not spending it at all - then foolish spending is better than none.

It's indicative of the poor job our news media does in informing the public of the relationship between government spending and employment that my brother would fail to see the inappropriateness of the context by which he chose to judge the GSA's wasteful spending - and this is a person who deals with figures for his living: he's an accountant.

Messaging, ctd

There are two simple ways the Democrats could go on the offensive against stated Republican economic policies, rather than continually being put on the defensive.

1. Republicans: "We'll cut regulations."  Well, regulations are not an end in themselves: they are the mechanism for enforcing government protections of the public.  Protections against dirty air and water, against unsafe working conditions, against fraud in the marketplace, against toxins in our food, against airplanes crashing into each other - you could extend the list as long as you wanted.  All the Democrats have to do is change a single word: don't defend regulations per se, but go on the attack by pointing out that Republicans want to do away with protections.

2. Republicans: "We'll cut spending."   Cutting government spending means putting people out of work, either directly (laying off government employees) or indirectly (buying fewer goods and services from the private sector, so businesses lose income, and lay off employees).  It's the worst policy at a time of high unemployment, so every time a Republican talks of cutting spending, a Democrat should be responding that Republicans want to put more people out of work in a time of already high unemployment.  (Coupled with an observation that cutting spending may be appropriate when unemployment is back to normal, so laid off people have a good chance of finding another job - which right now they don't.)

It's dispiriting to see how hapless the Democrats are at simple messaging.  Sometimes I think they deserve to lose - but the country doesn't deserve another neocon administration that might actually put Paul Ryan's budget plans into practice.

Aaaarrrghhh!

I continue to be aggravated by the Democrats' complete ineptitude when it comes to messaging, and in articular their failure to mount even the most obvious replies to attacks by Republicans.  If only they'd asked me....

For instance, when Romney says that "all the economy needs to grow is for government to get out of the way," the obvious response is "Government got out of the way of the financial industry - and look what happened as a result!"

And when Romney and Gingrich say that "under President Obama's policies the price of gasoline has doubled," the obvious response is (worded better, but in essence) "Yes, gasoline prices did fall when the economy tanked.  Now that President Obama's policies have resulted in a recovering economy, gasoline prices are also going back up to their previous level. So yes, President Obama's policies have indeed resulted in a higher gasoline prices, and Republicans could indeed bring gasoline prices down - all they have to do is tank the economy again.  And their stated policies will do just that."

But are we hearing anything like this from the Democrats?  Hah!

So - aaarggghhh!