Yay Austerity

Last week, we noted a report that seems to show that the U.K. is doing worse now than it was at the same point in the Great Depression. Here’s Little Professor Krugman yesterday on the topic:

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom,praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

The payroll tax cut extension: Where are we?

The House just rejected the Senate compromise bill that extends this year’s payroll tax cut for two months into 2012. Well, they didn’t so much reject it. Okay, this is complicated. Let’s see where we started, where we are, where we’re going, and how we got here.

First, let’s make one point clear: This whole mess has almost nothing to do with the payroll tax cut itself. Both sides agree it should be extended. The hullabaloo is over additions that Republicans want made to the bill. Riders, as many people call them. Most of them are completely unrelated to tax policy at all. But, we’ll get to that in a moment.

Remember last December’s lame-duck Congress? The one where a huge number of deals were made, mostly because everybody involved realized that with a radicalized Republican House about to take power, it would be the last chance for any deals? Well, among the many deals made was that payroll taxes (different from income taxes—yes, this shit is complicated—payroll taxes are what you pay out of your paycheck for Social Security and Medicare; you may see this as “FICA” on your pay stub) were cut by 2%. Not enough to really hurt the programs for which they fund (they tend to run surpluses—bet you didn’t know that!). But, enough to put a small amount of extra money in people’s pockets, especially since a lot of people were not getting raises in the new year.

The tax cut was made temporary, with the hope that the economy would rebound enough in the next year that everybody could easily go back to business as usual. Sadly, the economy didn’t pick up as much as hoped. You can pretty much blame Europe and a year full of Republicans shutting down the government/forcing default for that.

Regardless, at the end of the year, the payroll tax cut expires. So, the President and Congress decided that it should probably be extended for another year. Again: it’s not that much money in aggregate, but a small cushion for those out there who still aren’t getting raises, or at best getting small ones.

Watch how your small cost-of-living raise will go away if the cut expires. Using this calculator from the White House website, I plugged in a standard $45,000 salary for a married couple. They will pay $900 extra next year if the cut is not extended. If that salary is the result of a (generous) 2% cost-of-living raise, the raise ($900) is gone.

So, if everybody agrees that it should be extended, why isn’t it? Because Republicans in the House are demanding a number of additional pieces be added to the bill. For one, they’re obsessed and enamored with the Keystone XL oil sands pipe project, a pipeline that will go from the oil sands in Canada to refineries in the Gulf of Mexico. The administration has delayed permitting the project, citing the enormity of it and the potential environmental hazards, and the need for more research. Republicans claim it should be fast-tracked, claiming that the project will create a large number of jobs. In addition, they’re demanding that the extension be paid for by making cuts to discretionary spending, even though Congress just finally passed an appropriations bill this weekend. The problem, other than that, is that stimulus spending (whether it’s spending or chopping taxes: both are technically spending) should by its very nature not be immediately paid for.

Despite the impasse, Democrats and Republicans in the Senate worked this weekend to craft a compromise, which basically admits that some parts should be paid for and there maybe could be an early decision on Keystone, in exchange for two more months of payroll tax cut. Basically, to give it all some breathing room so a better compromise could be reached. It passed handily—89-10—and went to the House, where most leaders (including Speaker Boehner) expected it to also quickly pass.

Here’s some procedure: In order for it to pass by the end of the year, the House would have had to just plain accept the bill as passed by the Senate. Any amendment would send the bill to conference, where it could take weeks to work out: staffs have to be chosen, language needs to be ironed; it’s a sticky process.

A funny thing happened on the way to the forum, though: House Republicans were vehemently against the bill. Citing it’s short-term nature, they shot it down today. But, of course, the way they shot it down is also complicated.

See, no Republican wants to actually vote against a tax cut. So, this is what they did instead. Originally, it would be a standard “motion to concur,” which would pass the Senate bill as written. Instead, they voted on a “motion to reject,” which immediately sends the bill to conference. So, a “yes” vote is effectively a “no” vote. Indeed, they didn’t even vote on the bill, but a motion to reject the bill.

Confused yet? That’s what they’re hoping for.

What happens now is the House calls a number of votes on what they want out of the conference negotiations (if there are any). The House and Senate then appoint members to the conference committee, which would theoretically meet over the holiday recess, during which time members would just go home. However, Senate Majority Leader Harry Reid has suggested that Senate Democrats may not take part in the conference unless the House passes the two-month extension.

Isn’t Congress fun?

Greeks not lazy—that’s the Germans you’re thinking of

Writes Matt Ygelsias:

It’s true that Germans and Greeks work very different amounts, but not in the way you expect. According to the Organization for Economic Co-operation and Development, the average German worker put in 1,429 hours on the job in 2008. The average Greek worker put in 2,120 hours. In Spain, the average worker puts in 1,647 hours. In Italy, 1,802. The Dutch, by contrast, outdo even their Teutonic brethren in laziness, working a staggeringly low 1,389 hours per year.

….

The truth is that countries aren’t rich because their people work hard. When people are poor, that’s when they work hard. Platitudes aside, it takes considerably more “effort” to be a rice farmer or to move sofas for a living than to be a New York Times columnist. It’s true that all else being equal a person can often raise his income by raising his work rate, but it’s completely backward to suggest that extraordinary feats of effort are the way individuals or countries get to the top of the ladder. On the national level the reverse happens—the richer Germans get, the less they work.

It’s a pretty standard American expectation, grounded partially in the old “protestant work ethic,” that if you’re rich you worked harder, or more, than the poor, who clearly aren’t working hard enough, or else they’d be rich. But, in reality, it’s always the other way around: it’s hard work being poor, and if you’re rich, it’s probably dumb luck.

Stupid thing successful

Congress this year made sure that the government spent a lot less this year. As a result (and pretty logically, really), this year’s deficit is expected to dip below a trillion dollars for the first time since the economic crisis:

The Treasury Department forecast Monday that the budget deficit for fiscal 2012 will come in at $996 billion, the first time President Obama has presided over an annual deficit of less than $1 trillion.

The budget deficit in fiscal 2011 and 2010 was $1.3 trillion, while the Obama stimulus law pushed the deficit up to $1.4 trillion in fiscal 2009.

For people who care about such things, this would be good news. Look! The deficit is shrinking!

Now, sure, today’s economic news—record low new unemployment claims and reports showing expanding manufacturing— was pretty good. But it isn’t great. It’s nowhere cheery enough to point to getting out of the slump anytime soon.

We could be borrowing money at negative interest rates (yes, that means if I borrow a dollar today, I have to pay back less than a dollar later) to invest in infrastructure that we need to build. Our roads are shit, our bridges are shit, our railroads are shit, our Internet is shit, our schools are shit, our airways are shit. Some day or an other we are going to have to fix them. It would actually be the cheapest to do it now, because borrowing is so cheap and labor (due to the employment crisis) is the cheapest it will probably ever be. It would put people to work, we’d get some much-needed infrastructure (the things that make an economy possible), and now would be cheaper than later.

But no. The deficit is the most important thing. So, good news!

2.5%

The economy grew at an annualized rate of 2.5% in the third quarter of 2011, according to the Bureau of Economic Analysis (a division of the Commerce Department).

That’s not bad. It’s better than expected. However, it’s not really good either. See, 2.5% w0uld be absolutely, spot-on perfect if the economy was doing well. If you had 4-5% unemployment and wages were rising, this is the number you would love to see. It’s a perfect coasting—no acceleration or deceleration.

Unfortunately, it’s perfect coasting, and we need to be going faster. According to this chart, at the 2.5% growth rate, you’re looking at about 2020 before we cover the output gap we’ve been stuck in since the recession.

But, it’s kind of good news. It means that the likelihood of a double-dip recession is smaller. It means we’re picking up a little steam. It means we’re, well, coasting, not falling. The last time growth was this high was in the thick of the Recovery Act spending, and that’s not really a factor anymore.

Here are some particulars:

This is the second quarter that nonresidential fixed investment has gone up by double-digits. Structures are down a tad, but equipment and software are way up. This I believe is the confluence of a number of factors, not the least important are companies adopting Windows 7 (I know personally of three large companies that made the switch over the late summer) and iPads, and abandoning Blackberries for more modern devices. Those are the biggest tech stories of the past year, and I think that’s starting to show.

Another good sign: Consumer spending is up 2.4%. Durable goods are up 4.1% (compared to a loss last quarter). That’s appliances, but, more importantly, cars. People are buying cars.

Those number would lead you to believe that the overall growth rate would be higher. Usually. However, a drop in inventories killed the total rate by 1.08%. Why? What happens when you fear that the economy is about to collapse? You stop making stuff. So, people bought out the store and the producers stopped making more. So, if the companies made enough stuff to compensate for what they sold, you’d be looking at something like 3.6% growth.

That’s good news.

Lesson from 1937: Halting inflation a good way to create recessions

A solid read over here, but here’s the key take-away:

If we are to avoid the mistakes of the past, it is important to have an accurate assessment of what those past mistakes were. The severity of the Recession of 1937-38 was not due to contractionary fiscal policy or higher reserve requirements. By contrast, the policy tightening associated with gold sterilisation was not modest – it did not simply reduce the growth of the monetary base by a few percentage points, it stopped its growth altogether. While the Federal Reserve is often blamed for its poor policy choices during the Great Depression, the Treasury Department was responsible for this particular policy error.

The recession of 1937-38 occurred long ago, but it does have policy lessons for today. It suggests that, in a weak recovery, a pre-emptive monetary strike against inflation (which was very low at the time, as it is today) is capable of producing a devastating recession.

More evidence the stimulus “worked”

Dylan Matthews pours through nine studies on the efficacy of the ARRA and concludes:

As the descriptions above make clear, none of the studies are flawless. But while the optimistic studies do, in fact, support the conclusion that the stimulus worked, there is some reason to doubt that the pessimistic studies support the conclusion that it failed. Conley and Dupor found a negative effect on employment and output but, as they concede and critics of the study have emphasized, their results are not statistically significant. Taylor found that the stimulus did not increase government purchases significantly but, as Noah Smith argued, this result could be consistent with the stimulus increasing employment and output. Oh and Reis found a small multiplier for tax transfers of the kind found in the stimulus package, but as they concede, their model produces estimates for key figures that are empirically implausible. Using more plausible figures produces a significantly larger multiplier, meaning the package was more effective than the model initially suggested. Due to these issues, I’m inclined to believe that the preponderance of evidence indicates the stimulus worked.

It’s a good run-down of the studies and their findings; I recommend looking at it.

Why don’t poor people want to help poorer people?

Turns out we’re all just assholes. Those near the bottom just don’t like helping out anybody who is worse off than themselves. The Economist explains:

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

Michele Bachmann clearly doesn’t understand oil markets

Candidate for the Republican nomination for president and winner of the Iowa Ames Straw Poll Michele Bachman made a very strange promise:

“Under President Bachmann you will see gasoline come down below $2 a gallon again,” Bachmann told a crowd Tuesday in South Carolina. “That will happen.”

Why are Republicans against extending the payroll tax cut?

Part of President Obama’s economic plan is to extend the payroll tax cut, passed last year as part of a compromise package, into next year. It’s a small tax cut and doesn’t really affect the real deficit, because they’re on payroll taxes, as opposed to income taxes—yeah, it’s not obvious—it’s the part of taxes that go to Social Security and Medicare.

You’d think that Republicans would be all over this shit. They love tax cuts, and hate raising them. That’s what the whole last six months have been all about. But, no, they oppose extending the cuts because, as “Serious Guy” Paul Ryan said last week on Fox News, “it would simply exacerbate our debt problems.”

Yeah, this is the same guy who doesn’t want to add any revenues to help solve the debt problem saying that he wants to add some revenue to help solve the debt problem. He’s not the only one. Rep. Camp, of the Ways and Means Committee also scoffed: “I’m not in favor of that. I don’t think that’s a good idea.”

What’s the problem? If you take at face value the Republican opinion that tax cuts are good for the economy, then you’d have to think they’d be on board with that idea. It’s tax cuts! Tax cuts are good!

Unless the aim of the Republican party is to stimulate the economy when they’re in office, and do everything they can to stagnate the economy when they’re not. Which is exactly what it looks like, and, if the so-called debt “crisis” is any clue, it is exactly their aim. They know full well that the next election will turn on the economy, and if it’s slow, they have a much better chance of winning. Then, they can insist on the massive cuts to the federal government, scrapping protections from people from the growing power of their corporate backers, all the while explaining it away with empty phrases like “small government” and “liberty.”

Of course, if this isn’t their plan, then they’re just plain dumb. Or Hanlon’s razor is in full effect: Never attribute to malice what can be satisfactorily explained away by incompetence.

Some hot Kool-Aid there in that boat

This has one of the worst mixed metaphors I’ve read in, well, ever?

Gregory Curtis, chairman and founder of Greycourt, a Pittsburgh-based wealth-management firm, said he and his clients never really believed in the recovery story, because it relied on a large liquidity injection by the Federal Reserve, rather than stronger economic fundamentals.

“I’m sure there were some wealthy families who were drinking the Bernanke Kool-aid and got burned,” he said.  “But I don’t know many families in that boat.”

You gone done righted good.

Non-paywalled here.

How much do we spend on food?

Interesting (and interactive) map from The Ration on how much countries spend on food, and how very unequal the cost is. Natalie Jones explains:

A one dollar bag of rice in the U.S. is not the same as a one dollar bag of rice in Indonesia. For an American, who, on average, devotes about seven percent of his or her spending to food, it won’t matter that much if the price of rice doubles to two dollars. An American can likely take the money that would have gone to a “non-essential” item and put it towards food instead. But for an Indonesian, who devotes 43 percent of his/her spending to food, it could mean less to eat.

Related: Nearly 25% of New York households with children do not have enough money to buy food. Also, look for corn prices to go up next year as unseasonably hot weather has led to tighter supplies.

How much of “Made in China” is made in China?

Interesting numbers regarding U.S. imports (emphasis mine) from the Federal Reserve Bank of San Francisco:

[O]f the 11.5% of U.S. consumer spending that goes for goods and services produced abroad, 7.3% reflects the cost of imports. The remaining 4.2% goes for U.S. transportation, wholesale, and retail activities. Thus, 36% of the price U.S. consumers pay for imported goods actually goes to U.S. companies and workers.

This U.S. fraction is much higher for imports from China. Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.

Frum’s moderate conservatism, or, where did all the serious people go?

The big quote of the day, so to speak, from none other than David Frum is:

It’s being quoted everywhere, as if it, by itself, means something—”Look! David Frum loves Paul Krugman!” or something. Actually, what leads to it is far more interesting (as is often the case):

When people tell me that I’ve changed my mind too much about too many things over the past four years, I can only point to the devastation wrought by this crisis and wonder: How closed must your thinking be if it isn’t affected by a disaster of such magnitude? And in fact, almost all of our thinking has been somehow affected: hence the drift of so many conservatives away from what used to be the mainstream market-oriented Washington Consensus toward Austrian economics and Ron Paul style hard-money libertarianism. The ground they and I used to occupy stands increasingly empty.

Once upon a time, the two sides of American politics basically agreed on economics. They took Keynes (“We’re all Keynsians now,” harped Nixon), added in some Friedman: agreeing that the free market was good, but sometimes the government was needed. Sure, there was disagreement, but it was more on what side (between the market and intervention) to err, not which was wholly 100% correct.

While no viable hard-left movement ever arose (OMG! Socialism!), since Reagan, the right side has gotten more and more radical. Remember, it was Republican George H.W. Bush who called Reagan’s then-radical economic policies “voodoo economics.” That was really the beginning of the end for the consensus. Since then, the left has moved into the center, and the right became, well, crazy.

No wonder Frum (and Sully) are sitting around wondering where everybody went, and find themselves accidentally surrounded by Democrats (Democrats, who would be more comfortable in a center-right party anywhere else in the world). And, no wonder Frum is finding he has more in common with “Little Professor” Krugman, the academic economist who’s also sitting around wondering where all the consensus economists went.

A Raw Deal

Welcome to the age of austerity.

In the first half of 2011, the economy grew by a measly 1.3%. That number should be alarming. It’s the slowest growth rate since the Great Recession, and in any other time, would be a dire omen and people would be predicting recession.

And, of course, it’s at this time that we’ve decided to pursue austerity. Over the past few months, a routine exercise to raise the debt ceiling turned itself into a moratorium on government spending and debt while the Republican party hijacked the process to force ideologically-driven and massive cuts to the federal budget.

Now, why are we basically the only country with a debt ceiling? Because of the unique nature of our democratic structure. Most democracies are parliamentary in nature: the parliament decides how much to tax and spend and borrow, and has the authority to do all three. Ours, however, is a divided system: Congress determines the level of taxation, appropriates spending, and authorizes borrowing, while Treasury is tasked with fulfilling the congress’s mandates. When Treasury doesn’t have the requisite money to pay for what congress mandates, it has to issue a bond. Before this century, Congress had to authorize any bond that Treasury wanted to issue. As time wore on, that became burdensome for congress, so a deal was reached: Congress would authorize Treasury to issue any bonds it needed—but that authorization would come with a cap, and if that cap was reached, congress would have to authorize a higher total. That’s the so-called debt ceiling.

So, we have a debt ceiling, and, since its inception, it has routinely been raised. And, it’s always raised because to fail to do so would have dire consequences to the economy: possible default is the biggest extreme predicted, but even at the most conservative, draconian cuts and a possible constitutional crisis (Treasury would have to decide what bills to pay, and it does not have that authority). There’s usually some token disapproval from the opposition party, but it always gets raised.

Continue reading »