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Posts Tagged ‘Stimulus’

I periodically get emails and phone calls from people wanting me to respond to particular statements from politicians, columnists, and other high-profile figures.

Not surprisingly, Paul Krugman occasionally is the subject of these communications, particularly with regards to his view that Keynesian spending is an elixir and universal cure for economic stagnation.

I certainly have waded into the so-called stimulus fight, addressing the issue over and over and over again. But I generally try to comment on the underlying economic and political issues while avoiding pointless arguments with other people (not always with total success, as seen here and here).

The most recent Krugman-related email I received, however, has nothing to do with fiscal policy. It deals with his views on housing bubbles. Here’s what he advised back in 2002.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Given what has happened in the past five years, Krugman’s endorsement of a housing bubble certainly leaves him vulnerable. And if it turns out that Alan Greenspan took his advice, that would be rather damning.

But I think he should be criticized for his general support for economic intervention, not his specific recommendation for a housing bubble.

Sure, his advice doesn’t look very good with the benefit of hindsight, but economists are notoriously awful forecasters, as I’ve noted before. Moreover, Krugman legitimately could argue that his advice was for the specific circumstances of 2002, and not a permanent recommendation.

That’s why my criticism is limited to his overall belief that government should steer the economy. And if you want to understand that issue, this post looking at the work of Robert Higgs is a great place to start.

P.S. If you want some amusing Krugman-baiting, you should read Best of the Web by James Taranto of the Wall Street Journal. Taranto often refers to Krugman as the “former Enron adviser” and routinely mocks Krugman for his silly assertion that horror stories about healthcare in the United Kingdom are false.

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I’m disappointed, but not surprised, to read in the Washington Post that President Obama has decided against any changes to restrain Social Security spending. He’ll still probably subject us to pious and insincere rhetoric about fighting red ink in tonight’s State-of-the-Union address, but it is very revealing that the President is rejecting even the recommendations of his hand-picked Commission.

More than two months after his deficit commission first laid out a plan for reining in the national debt, President Obama has yet to embrace any of its controversial provisions – and he is unlikely to break that silence Tuesday night. …the president’s decision not to lay out his own vision for reducing the national debt has infuriated balanced-budget advocates, who fear that a bipartisan consensus for action fostered last month by Obama’s commission could wither without presidential leadership. …Liberals…applauded the decision, arguing that Social Security cuts are neither necessary to reduce current deficits nor a wise move politically.

I won’t be surprised, though, if Obama proposes in his budget to increase the Social Security payroll tax burden. That’s an idea he endorsed during the 2008 campaign.

The right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this month.

But the President’s reluctance to touch Social Security is only part of the story. The White House actually intends to push for more government spending. Only they won’t phrase it that way. The President will claim the new spending is an “investment.” But Senator Durbin of Illinois committed a gaffe and admitted this is just a repeat of the failed stimulus.

“It’s part of a stimulus. but we’re sensitive to the deficit,” Durbin said on “Fox News Sunday” when asked by host Chris Wallace about the president’s expected plans to call for more spending for infrastructure, education, research in his State of the Union address Tuesday night to a joint session of Congress.

I’m not sure why people are talking about a new, centrist-oriented Obama. Recycling big-government proposals is hardly a sign of fiscal restraint. And ducking-and-running on entitlements hardly seems to indicate a new era of fiscal responsibility.

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Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months, and  let’s start with two items that don’t bode well for fiscal discipline.

First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,

As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.

This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.

That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.

It is a good idea to get as many savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.

The other item for discussion is the GOP’s apparent interest in retaining Douglas Elmendorf, the current Director of the Congressional Budget Office.

Many of you will remember that the CBO cooked the books last year to help ram through Obamacare. Under Elmendorf’s watch, CBO also was a relentless advocate and defender Obama’s failed stimulus. And CBO under Elmendorf published reports saying higher taxes would improve economic performance.

But Elmendorf’s statist positions apparently are not a problem for some senior Republicans, as reported by The Hill.

The new House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), gave a very public endorsement of the embattled head of the Congressional Budget Office during his first major speech as committee head Wednesday night. …“You’re doing a great job at CBO, Doug,” Ryan said after receiving the first annual Fiscy Award for his efforts at tackling the national debt. He added that he looked forward to crunching budget numbers with him in the future.

In the long run, the failure to deal with the problems at CBO (as well as the Joint Committee on Taxation) may cause even more problems than the timidity about cutting $100 billion of waste from the 2011 budget. Given the rules on Capitol Hill, it makes a huge difference whether CBO and JCT are putting out flawed numbers.

I’ve already written that fixing the mess at CBO and JCT is a critical test of GOP resolve, and I actually thought this would be a relatively easy test for them to pass. It is an ominous sign that Republicans aren’t even trying to clean house.

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This blog repeatedly has chronicled the huge discrepancy between the gold-plated compensation for government employees and the meager salaries and benefits of people in the productive sector of the economy, including a video conclusively demonstrating that bureaucrats are overpaid.

This message is now resonating all across the nation. Even the New York Times, as shown by the excerpt below, now realizes that taxpayers are sick and tired of paying exorbitant taxes to finance excessive pay for the bureaucracy.

But public awareness is only a small step in the right direction. What really matters is public policy. Will the bureaucracy be downsized? Will salaries be frozen for several years? Will absurd pension plans be replaced by 401(k) systems? And what will happen to unaffordable health plans for government workers?

We’re going to see some interesting battles at the state and local level. One of the many great things about federalism is we get an opportunity to see some governments do the right thing and some do the wrong thing. And as we watch states like California descend into bankruptcy, this teaches everyone about the policies that should be avoided.

But the long-overdue day of reckoning won’t happen if Obama and the other politicians figure out how to bail out reckless state and local governments. That’s already happened once, since funneling federal money to the states was one of main goals of Obama’s failed stimulus.

But sending more money to the states would be akin to providing an alcoholic with a case of booze. If House Republicans have any brains, they will make sure taxpayers in places like Texas don’t pay more to subsidize politicians and special interests in places such as Illinois.

Cross your fingers that they hold firm. In the meantime, let’s enjoy the change in the public mood. Here are a few passages from yesterday’s story in the New York Times.

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules. …a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending. A brutal reckoning awaits, they say. …Fred Siegel, a historian at the conservative-leaning Manhattan Institute, has written of the “New Tammany Hall,” which he describes as the incestuous alliance between public officials and labor. “Public unions have had no natural adversary; they give politicians political support and get good contracts back,” Mr. Siegel said. “It’s uniquely dysfunctional.” …In California, pension costs now crowd out spending for parks, public schools and state universities; in Illinois, spiraling pension costs threaten the state with insolvency. And taxpayer resentment simmers.

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Fed Chairman Ben Bernanke is at it again, giving an interview that combines all of the worst features of Keynesian economics. I have an excerpt below from a New York Times report, which features an amazing amount of mistakes in a very short amount of space. Here are three that demand correction.

1. The economy needs less government intervention, not more “government help.” Bernanke doesn’t understand that job creation and entrepreneurship are hurting because politicians are doing too much, yet he wants more interference from Washington.

2. The economy needs less government spending, not Keynesian nonsense about big deficits to boost consumer spending. Bernanke seems to think so-called stimulus schemes for more wasteful spending help the economy, even though those policies failed for Hoover, Roosevelt, Bush, and Obama.

3. The economy needs a strong and stable dollar, not inflationary quantitative easing. Bernanke wants us to believe that low interest rates are the key to growth, but apparently oblivious to the fact that interest rates are very low now (and have been very low in Japan during that country’s 20-year stagnation. Memo to Ben: People don’t invest when they expect to lose money, regardless of interest rates.

Here’s the excerpt about Helicopter Ben’s thinking:

Federal Reserve Chairman Ben Bernanke is stepping up his defense of the Fed’s $600 billion Treasury bond-purchase plan, saying the economy is still struggling to become “self-sustaining” without government help. In a taped interview with CBS’ “60 Minutes” that aired Sunday night, Bernanke also argued that Congress shouldn’t cut spending or boost taxes given how fragile the economy remains. The Fed chairman said he thinks another recession is unlikely. But he warned that the economy could suffer a slowdown if persistently high unemployment dampens consumer spending. The interview is part of a broad counteroffensive Bernanke has been waging against critics of the bond purchase plan the Fed announced Nov. 3. The purchases are intended to lower long-term interest rates, lift stock prices and encourage more spending to boost the economy.

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The Bureau of Labor Statistics announced this morning that the unemployment rate jumped to 9.8 percent last month. As you can see from the chart, the White House claimed that if we enacted the so-called stimulus, the unemployment rate today would be about 7 percent.

It’s never wise to over-interpret the meaning on a single month’s data, and it’s also a mistake to credit or blame any one policy for the economy’s performance, but it certainly does seem that the combination of bigger government and more intervention is not a recipe for growth.

Maybe the President should reverse course and try free markets and smaller government. Here’s a helpful six-minute tutorial.

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I’m understandably fond of my video exposing the flaws of Keynesian stimulus theory, but I think my former intern has a great contribution to the debate with this new 5-minute mini-documentary.

You may recognize Hiwa. She narrated a very popular video earlier this year on the nightmare of income-tax complexity.

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