Replies to post #99883 on Tornado Alley (PROG)

[fuagf]

Ruth Marcus Signs Up For Neo-Hooverism



As I’ve been documenting, there’s a disturbing plague of neo-Hooverism sweeping through elements of our punditocracy. Perhaps Nobel Prize winning economist Paul Krugman will come along with a blog post explaining why the neo-Hooverite mania is wrong, but for now you’ll have to settle for me and Dean Baker. .. http://prospect.org/csnc/blogs/beat_the_press_archive?month=10&year=2008&base_name=we_could_have_another_great_de .. But the epicenter of the bug appears to be the opinion pages of The Washington Post and the latest victim is columnist Ruth Marcus who’s skeptically hoping that the next president will embrace what she calls “the New Sobriety.” .. http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101402562.html

This kind of analogistic thinking is deadly when it comes to fiscal policy. For an individual, it’s true that high savings rates are virtuous and bring the prospect of greater prosperity in years to come. Thus, it’s seductive to think that public sector budgeting is the same. But it just isn’t the same.



When you’re facing a recession, especially a recession wherein monetary policy has little ability to stimulate aggregate demand because the banking system is all seized up (remind you of anything?), you need public policy to stimulate aggregate demand. The recession is caused by overall demand for liquidity getting too high. In those circumstances, it becomes rational for any given individual and any given business to also prefer saving to spending. But that only makes things worse. What’s needed is for the government to break the cycle with deficit spending. Marcus’ alternative theory was tried by Herbert Hoover in the early 1930s and again by Japan in the 1990s and it doesn’t work. What did work a little was the New Deal and then the truly balls-to-the-wall spending of World War II worked much better. Excessive virtue amidst the current crisis will doom us all.

Meanwhile, none of this is to deny that it was a mistake for the Bush administration to run up such huge deficits. The flipside of the need for deficit spending during a recession is that responsible political leadership takes advantage of good economic times to reduce the debt-to-GDP ratio. The fact that Bush did the reverse makes us worse positioned to cope with the current crisis than we would be had he behaved more responsibly. But past irresponsibility does not imply that future irresponsibility in the opposite direction becomes a good idea.

http://yglesias.thinkprogress.org/archives/2008/10/ruth_marcus_signs_up_for_neo_hooverism.php

[StephanieVanbryce]

Bernanke Warns Congress Not To Cut Spending, Cautions About 'Fragile' Recovery

06- 9-10 02:17 PM

While the conventional wisdom in Washington appears to focus largely on the need to lower the federal government's budget deficit, rather than on reducing the nation's nearly 10 percent unemployment rate, Federal Reserve Chairman Ben Bernanke sent a message Wednesday to lawmakers: Now's not the time.

"Right now I don't think is the time -- this very moment is not the time -- to radically reduce our spending or raise our taxes because the economy is still in recovery mode and needs that support," Bernanke testified before the House Budget Committee.

Bernanke referred to the nascent economic recovery as "still pretty fragile" and cautioned that the economy "may need more assistance."

Though the nation's output is growing, jobs are still scarce; nearly eight million jobs have been lost as a result of the worst financial crisis since the Great Depression. Since January the private sector has created about 480,000 jobs, Labor Department data show. At that rate, the economy won't return to its pre-recession employment level of about 115.6 million jobs until about 2016.

The lack of jobs accompanying the ascent out of the "Great Recession" has led economists and commentators such as regional Federal Reserve Bank presidents to term this a "jobless recovery." Others, while not making that claim outright, worry that's what the recovery will end up being unless current stimulative measures -- such as the Fed's policy of a near-zero main interest rate -- continue.

The Fed is "doing its part," Bernanke said of the central bank's "supportive monetary policy." The main interest rate stood at 0.20 percent in May, Fed data show.

The nation's central banker added that government's fiscal policy, like the nearly $800 billion stimulus bill passed last year, "is helping" and that it's "needed."

http://www.huffingtonpost.com/2010/06/09/bernanke-warns-congress-n_n_606232.html

[StephanieVanbryce]

Governments Moving to Cut Spending, in Echo of 1930s


n his 1932 presidential campaign, Franklin D. Roosevelt vowed to balance the federal budget.

David Leonhardt June 29, 2010

The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.

In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.

Longer term, though, it’s still impossible to know which prediction will turn out to be right. You can find good evidence to support either one.

The private sector in many rich countries has continued to grow at a fairly good clip in recent months. In the United States, wages, total hours worked, industrial production and corporate profits have all risen significantly. And unlike in the 1930s, developing countries are now big enough that their growth can lift other countries’ economies.

On the other hand, the most recent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won’t be much smaller than the 1930s version. From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product.

Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once. From 2009 to 2011, the tightening in the United States will equal 4.6 percent of G.D.P., according to the International Monetary Fund. In Britain, even before taking into account the recently announced budget cuts, it was set to equal 2.5 percent. Worldwide, it will equal a little more than 2 percent of total output.

Today, no wealthy country is an obvious candidate to be the world’s growth engine, and the simultaneous moves have the potential to unnerve consumers, businesses and investors, says Adam Posen, an American expert on financial crises now working for the Bank of England. “The world may be making a mistake, and it may turn out to make things worse rather than better,” Mr. Posen said.

But he added — after mentioning China, India and the relative health of the financial system, today versus the 1930s — that, “The chances we’re going to come out of this O.K. are still larger than the chances that we aren’t.”



•

The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood. In the 1932 presidential campaign, Franklin D. Roosevelt vowed to outdo Herbert Hoover by balancing the budget. Much of Europe was also tightening at the time.

If anything, the initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found.

In 2008, though, policy makers in most countries knew to act aggressively. The Federal Reserve and other central banks flooded the world with cheap money. The United States, China, Japan and, to a lesser extent, Europe, increased spending and cut taxes.

It worked. By early last year, within six months of the collapse of Lehman Brothers, economies were starting to recover.

The recovery has continued this year, and it has the potential to create a virtuous cycle. Higher profits and incomes can lead to more spending — and yet higher profits and incomes. Government stimulus, in that case, would no longer be necessary.

An internal memo from White House economists to other senior aides last week noted that policy makers “necessarily tend to focus on the impediments to recovery.” But, the memo argued, the economy’s strengths, like exports and manufacturing, “more than make up for continued areas of weakness, like housing and commercial real estate.”

That optimistic take, however, is more debatable today than it would have been a month or two ago.

As is often the case after a financial crisis, this recovery is turning out to be a choppy one. Companies kept increasing pay and hours last month, for example, but did little new hiring. On Tuesday, the Conference Board reported that consumer confidence fell sharply this month.

And just as households and businesses are becoming skittish, governments are getting ready to let stimulus programs expire, the equivalent of cutting spending and raising taxes. The Senate has so far refused to pass a bill that would extend unemployment insurance or send aid to ailing state governments. Goldman Sachs economists this week described the Senate’s inaction as “an increasingly important risk to growth.”

The parallels to 1937 are not reassuring. From 1933 to 1937, the United States economy expanded more than 40 percent, even surpassing its 1929 high. But the recovery was still not durable enough to survive Roosevelt’s spending cuts and new Social Security tax. In 1938, the economy shrank 3.4 percent, and unemployment spiked.

Given this history, why would policy makers want to put on another fiscal hair shirt today?

The reasons vary by country. Greece has no choice. It is out of money, and the markets will not lend to it at a reasonable rate. Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction. Spain falls into this category, and even Britain may.

Then there are the countries that still have the cash or borrowing ability to push for more growth, like the United States, Germany and China, which happen to be three of the world’s biggest economies. Yet they are also reluctant.

China, until recently at least, has been worried about its housing market overheating. Germany has long been afraid of stimulus, because of inflation’s role in the Nazis’ political rise. In responding to the recent financial crisis, Europe, led by Germany, was much more timid than the United States, which is one reason the European economy is in worse shape today.

The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.

Finally, the idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change.

In an ideal world, countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that.

Instead, we are left to hope that we have absorbed just enough of the 1930s lesson.

http://www.nytimes.com/2010/06/30/business/economy/30leonhardt.html?hp

[StephanieVanbryce]

Raising the Retirement Age

By Kevin Drum | Fri Jul. 9, 2010 7:01 AM PDT

Via Ezra Klein, Here's a chart from Larry Mishel that's pretty astonishing. It shows that since 1972 the life expectancy of men with low incomes has increased by two years while life expectancy for men with high incomes has increased by more than six years. That fact that the haves are healthier than the have-nots doesn't surprise me, but the magnitude of the difference is pretty stunning.
[ http://voices.washingtonpost.com/ezra-klein/2010/07/more_on_raising_the_retirement.html ]



The context here, unsurprisingly, is Social Security and whether we should raise the retirement age. Obviously, increasing the retirement age to, say, 70, is a much bigger deal for someone likely to live to 79 than it is for someone likely to live to 85. In my book, this is yet another reason not to try to balance Social Security's books by changing the retirement age dramatically.

And we probably don't have to. There are plenty of other ways we could do it instead. And if we do do it, this chart suggests a couple of things: (a) the change should be modest (maybe going from 67 to 68) and (b) it should be accompanied by an explicit acknowledgement that disability retirements will be routinely available at the same age as now to workers who perform body-draining physical labor. If you put these things together it's not clear that this change is even worth pursuing, which I think is the whole point. If we insist on addressing Social Security in the near term, there are better ways of doing it than fiddling with the retirement age.

http://motherjones.com/kevin-drum/2010/07/raising-retirement-age