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President Barack Herbert Hoover Obama Explains How to Avoid a Depression

9:34 am in Uncategorized by Scarecrow

On several occasions after the Great Depression began, President Hoover admonished the public and those demanding the government provide economic relief that the nation had run out of money and that it would be irresponsible to borrow and engage in profligate spending. Over 80 years later, we are hearing virtually the same economic gibberish from President Obama.

From the President’s weekly address:

For years, the government has spent more money than it takes in.  The result is a lot of debt on our nation’s credit card – debt that unless we act will weaken our economy, cause higher interest rates for families, and force us to scale back things like education and Medicare.

Now, folks in Washington like to blame one another for this problem.  But the truth is, neither party is blameless.  And both parties have a responsibility to do something about it.  Every day, families are figuring out how stretch their paychecks – struggling to cut what they can’t afford so they can pay for what’s really important.  It’s time for Washington to do the same thing.  But for that to happen, it means that Democrats and Republicans have to work together.  It means we need to put aside our differences to do what’s right for the country.  Everyone is going to have to be willing to compromise.  Otherwise, we’ll never get anything done.

That’s why we need a balanced approach to cutting the deficit.  We need an approach that goes after waste in the budget and gets rid of pet projects that cost billions of dollars.  We need an approach that makes some serious cuts to worthy programs – cuts I wouldn’t make under normal circumstances.  And we need an approach that asks everybody to do their part.

And via Brad DeLong, here is President Hoover in 1932: Read the rest of this entry →

NYT’s Norris Surprised by Low Interest Rates, Can’t Figure Out What to Do

11:39 am in Uncategorized by Scarecrow

For some unknown reason, the New York Times editors chose to print on the front page of my delivered Times a confusing "news analysis" by its business/economics writer, Floyd Norris. Norris is surprised, shocked that interest rates are at record low levels when "financial circles" he apparently listens to predicted just the opposite.

As 2010 began, there was nearly unanimous agreement in financial circles on at least one thing: Interest rates were sure to rise during the year.

Quite to the contrary. As Labor Day approaches, interest rates have collapsed, plunging along with economic optimism.

That turn of events, which has shocked savers and stunned investors, appears to indicate that financial markets’ worries are turning in a very different direction from those of many governments.
. . .
Now, far from showing a reluctance to finance the American government, investors are seeking safety and evidently believe American government debt is the safest possible investment. They have rushed to send money to the Treasury, thereby reducing borrowing costs for the government.

Lions and tigers and bears, Oh My! What could this mean? Norris just can’t seem to sort it out.

He might start by reading the Times economic writers, some of whom have figured out, as the Times columnist, a Nobel economist, and friends have been explaining for more than a year, that rising interest rates and inflation were never going to be a problem as long as the economy languished in a near depression. They knew the government’s fiscal and monetary policies remained woefully inadequate to stimulate aggregate demand enough in a nation that had just lost $12-14 trillion in housing and stocks/pensions wealth.

Under those conditions, an even half-sentient Federal Reserve — about what we have today — would be unlikely to raise interest rates nor need to worry about inflation. So for more than a year, Paul Krugman, Brad DeLong and others who understood this have been alternating between educating us (thank you!) and ridiculing those deficit hysterics who fear-mongered about exploding inflation and rising interest rates when the economic recovery was timid, jobless and, so far, virtually groundless. They’ve been proven right.

What this hardly "news" to those paying attention means is that everyone who has been hysterical about near-term deficits, loading "unsustainable debt" on our grandchildren and interest payments leading to sovereign default has been 100 percent dead wrong, and listening to them, even without the "deficit [catfood] commission" has made matters worse.

There’s no surprise that the same people who were wrong about the market’s self-correcting ideology and unable to see the recession’s causes nor the need to deflect/mitigate them have proved incapable of fashioning effective remedies. They were wrong about the theory and now Norris notes they’re wrong on the facts and their predictions. No kidding. They were wrong. Just say it straight out, Mr. Norris, and you’d have a coherent column.

Unfortunately, Norris gets lost on a detour of Greece and Germany, neither of whose circumstances are similar to the US economy, though he does concede this:

The problems that confronted Greece could not precisely replicate themselves in either the United States or Britain. Both borrow in their own currencies, which they could print if others were reluctant to make loans.

"Not precisely?" Uh, if you have to mention Greece, how about explaining why Greece is "not even remotely" applicable to the US, so those who draw parallels are charlatans.

And what exactly is the point of suggesting the end of Keynes, when the facts Norris is surprised by tell us the Keynesians are correct?

Norris recognizes that, gosh, with interest rates so low, this is a really good time for smart businesses to be borrowing and investing. But he doesn’t explain that strategy makes sense only if we can stimulate demand for their products/services or our trading partners are not similarly crippled by inappropriate austerity measures.

Worse, Norris doesn’t draw the obvious conclusion for government: with government able to pay record low interest rates to US bond holders, this may be the most propitious time in his or my lifetimes for the US to spend and invest in American jobs, public infrastructure and institutions. And that’s especially true since business investment remains risky as long as aggregate demand is low.

The nation’s economic conditions cry out for more government spending and public investment now. The cost is as low as it may ever be, the need is obvious and virtually unlimited, and the dividends to our future would be immense. And if that’s not enough, the correct policy just happens to be the best politics for the governing party.

But instead of drawing the obvious conclusion that Congress’ deficit hysteria and fear of spending are not only belied by the facts but grossly irresponsible, Norris can quote only Republican Senator Lamar Alexander:

Deficit hawks are leaning forward in the United States as well. “Many Americans and most senators feel that the level of the federal debt is at crisis levels,” Senator Lamar Alexander, a Tennessee Republican, said in a Senate debate last month, adding that the debt “threatens the security of our country.”

Uh, this is where Norris should give us a resounding "Wrong!" The federal debt is not at "crisis levels," and it doesn’t "threaten[] the security of the country," so if most senators believe that, they should be hounded out of office and sent to reeducation camps.

There are genuine threats to America’s economic present and future, starting with the failure to make public investments in its future when it makes sense to do so. That failure can only leave a crumbling nation and impoverished, not to mention uncompetitive, people. The only surprise here is that what is so obvious to the rest of us remains a surprise to much of America’s elite media and political leadership.

What Half a Depression Looks Like — And How We Escaped (So Far) the Other Half

7:24 am in Uncategorized by Scarecrow

If you want to see what half of a Great Depression (a.k.a. a "Great Recession") looks like, take a look at this graph of the extent and duration of unemployment for each of the last six recessions. It’s a chart compiled and kept up to date by Catherine Rampell, the New York Times Economix blog editor.

The chart shows each recession, with the zero point being the peak level of employment at the recession’s start and then showing the changes and duration in unemployment until unemployment returns to the starting level, whatever that was. We have a long way to go, and it could take years.

As Paul Krugman says of this lastest update, We’re Number One!, or "this is the big one." The depth and duration of this Great Recession’s unemployment scourge is far worse than anything in decades.

A couple other points. First, we can call this a "half depression," because the picture above could easily have been twice as bad if the Federal Reserve, Treasury and Congress under both Administrations had not thrown everything including the kitchen sink to stop a full on depression. That’s the conclusion of a just released but as yet little discussed study (e.g., see DeLong on Leonhart) by economists Alan Binder and Mark Zandi.

Binder/Zandi developed a model to estimate how much GDP would have shrunk and unemployment increased if the federal government had taken none of the monetary and fiscal actions of the last two years. From the initial Times story:

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.[*]

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. . . .

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

As many have noted before, a huge chunk of today’s deficits were caused by the near-depression baked into the cake by 2008. Since this year’s GDP growth is now expected to be about 2.5 to 3.0 percent, the Binder/Zandi study suggests that without massive federal intervention, GDP would have shrunk by about 3-4 percent, instead of growing slowly. Worse, instead of 15 million unemployed, we’d have over 23 million without work. So Binder/Zandi provide support for the Obama Administration’s (and many other economists’) argument that their actions (and the Fed/Treasury bailouts before Obama took office) have at least prevented a depression.

The economists examined the Federal Reserve’s actions, which were about double the size of the ARRA stimulus bill and provided trillions in loans, loan guarantees and asset purchases. These actions thus likely had a greater effect on turning the economy around than the ARRA/stimulus bill alone, though they argue the combined efforts likely reinforced each other. This finding should increase pressure on Bernanke’s Fed to do even more on monetary easing to ensure the economy does not slide back into a recession or worse and to tackle unemployment more aggressively.

A second point from Rampell’s chart is how it helps assign responsibility for the depression/unemployment catastrophe. The worst unemployment level was reached about six months ago, in January/February of 2010, but for a year before that, unemployment had been in free fall. Obama’s ARRA/stimulus didn’t pass until early 2009, and most of it took 6-12 months to kick in.

What the chart tells us is that gross mismanagement by the previous Administration, their financial regulators and regulatory philosophy created conditions for a genuine depression. That depression was only narrowly avoided, so far, by massive interventions by the federal government.

Even then, the Bush Administration’s economic team passed a Great Recession-near-Depression onto the Obama Administration, which has been struggling ever since to turn the economy around.

But this is not just George Bush’s legacy; it’s the legacy of an entire economic philosophy and regulatory attitude, supported as holy doctrine by the entire Republican Party and all too many Democrats. Most still haven’t taken responsibility for this huge failure; instead, they would/could, if allowed to rule again, easily drag us back into a Depression. Voters take note.

Finally, the chart makes clear that the federal government is not even close to doing all it needs to do with stimulus spending and monetary support to reverse course and meaningfully hasten the reduction in unemployment. By any standard, those efforts remain less than half enough; it took a long time for Obama’s advisers to concede this (sort of), and there are growing indications the Federal Reserve recognizes this too. [Update: see Fed member's deflation warning hints at policy shift.]

The Obama Administration now has the responsibility to lead the way out of the catastrophe it obviously inherited from Bush’s economic team and a shared, failed philosophy. That members of that team or those who retain that philosophy still have jobs as economic advisers is both astonishing and dismaying.

And there should be no doubt that Republicans and conservaDems who obstruct (or undermine) direct jobs programs, more stimulus spending, state budget rescues to prevent even more layoffs and so on are still hurting the economy and 15 million unemployed by tying the government’s hands either for political gain or because of their misplaced deficit hysteria. Further obstruction of necessary spending to revive demand is not just foolish; it’s unpatriotic, economically unsound, and morally unconscionable.

Come November, voters should endeavor to remove from office every one of these obstructionists and hysterics, Republican and Democrat alike, before they do even more damage to the country and its future.

*Blinder/Zandi correction:

JULY 28, 2010 1 P.M. CORRECTION: This article now contains corrected figures for our estimate of 2010 GDP with and without the stimulus. As the article now reflects, GDP in 2010 would be about 11.5% lower without the government’s response, and the fiscal stimulus has raised GDP by about 3.4%.

Update: Dean Baker critiques the study’s assumed counterfactual:

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

Baker notes it’s unlikely the Government would have done nothing; instead, it could have implemented other financial/monetary strategies that could have produced preferable results.

Brad DeLong, citing Krugman, ARRA: Underpowered from the start

Krugman/DeLong on the dangers of permanently high unemployment; also, How did we know the stimulus was too small?
NYT/Rampell, Bleak outlook for long-term unemployed; also, Job subsidies providing help to private side
NYT, Industries find surging profits in deeper cuts

Rand Paul Exposes His Moral and Intellectual Hypocrisy

7:03 am in Uncategorized by Scarecrow

I’ve been thinking more about the insulting remarks Rand Paul made in Kentucky when he suggested that skilled, unemployed folks should just suck it up and settle for whatever lower-paying job they can get. What I wrote here doesn’t fully expose his moral and intellectual poverty.

It’s bad enough that Paul doesn’t seem to know that with 15-20 million people under- and unemployed, hundreds of people will be lining up for a handful of jobs. His condescending "tough love" lecturing is oblivious to the enormity of the jobless problem. It’s even more insulting that he assumes folks at the ends of their hopes are not already doing everything they can to stay afloat.

It is a favorite theme of Republicans of varying stripes that the unemployed and poor are there because they deserve to be; their status proves they’re undeserving. Lecturing them on moral virtues is what conservative Republicans have always done.

But the worst part is the cynical hypocrisy illustrated in the same Blue Grass Politics article, in which Rand Paul was also asked how he felt about taking government Medicaid/Medicare payments for his medical practice.

To understand the full hypocrisy of this common Republican belief, recall that because of obstruction by Republicans and DINOs (Lieberman, Bad Nelson) who think just as Paul does, the Congress has failed to pass a modest jobs bill that would fund youth summer jobs and prevent states from having to lay off hundreds of thousands of teachers and cut Medicaid services, while extending unemployment and COBRA health insurance benefits. Yet our can’t-get-its-priorities-straight Congress and dysfunctional Senate have agreed on a measure to keep Medicare from cutting fees to doctors.

Even though he rants against government spending, Rand Paul hasn’t said boo against Congressional efforts to shield doctors from taking less pay for what they do. Instead, he told the interviewers this:

In another radio interview, with a Bowling Green station on Wednesday, Paul defended his acceptance of Medicare and Medicaid payments as an eye surgeon for the last 17 years. Paul said he wants sweeping cuts in federal spending, but as a doctor, he has little choice but to serve patients covered by the massive federal health-care programs.

“I work hard and I don’t see any other person in this country who’s gonna work hard and not be paid for it,” Paul said.

What Paul is saying is that a doctor works hard and is highly skilled, so it’s only fair that persons performing an essential public service be fairly compensated. I think most would agree with the principle. But when Paul speaks to an unemployed teacher with a Masters Degree in Education, even though the country’s educational system is crying out for skilled, energetic teachers anxious to teach, she should suck it up and consider flipping burgers. It’s tough love for her; subsidies for him.

But in Rand Paul’s world, we shouldn’t apply "tough love" to him, because he’s not one of the undeserving:

Paul declined to say how much money he gets from the programs, but he said approximately 50 percent of his income is Medicare and 5 percent is Medicaid. According to the Kentucky Cabinet for Health and Family Services, Paul has been paid $130,461 over the last five years through Medicaid. If that represents 5 percent of his income, then Paul’s Medicare payments over the same period would be more than $1.3 million or about $260,000 a year.

Rand Paul: tough love is only for the undeserving but not for his privileged class.


One more point
: I’d have thought a true libertarian would offer his services, and if he can’t sell them at what people can afford to pay, he would accept the market’s verdict and try another job. But what he essentially says here is he’s entitled to a comfortable living as a doctor. He has "little choice" because he can’t prosper as well as he believes a doctor is entitled to, unless he accepts Medicare/Medicaid patients and government payments. And his patients in turn can only afford his services if government pays him the fees he assumes he’s entitled to.

I think that’s a classic illustration of an entitlement system for doctors. Some libertarian.

Tough Love from Weak Minds: Rand Paul Tells Skilled Unemployed to Work for Less

2:48 pm in Uncategorized by Scarecrow

The folks at Kentucky’s BlueGrass Politics catch Rand Paul lecturing the unemployed in his state that they just need a dose of tough love. His original idea: take a job for lower wages.

Republican U.S. Senate candidate Rand Paul on Friday urged Americans who have been unemployed for many months to consider returning to the workforce in less desirable jobs rather than continue relying on government unemployment assistance.

“In Europe, they give about a year of unemployment. We’re up to two years now in America,” Paul said on Sue Wylie’s WVLK-AM 590 radio program.

“As bad as it sounds, ultimately we do have to sometimes accept a wage that’s less than we had at our previous job in order to get back to work and allow the economy to get started again,” Paul said. “Nobody likes that, but it may be one of the tough love things that has to happen.”

Gosh what a clever, helpful and original idea.

I just had a conversation with a woman who is just completing her Masters Degree in Education. She’s been looking for a teaching job for months, but unfortunately she’s finding that states and local communities are laying off teachers, not hiring them. She’s sent resumes/references and inquiries to dozens of schools all over the country, public and private, and all she’s got so far is a part time position for part of this summer but nothing beyond that.

So I’m sure she’ll be thrilled to hear this new idea and just run over to the local McDonald’s and get on their waiting list for trainees or join the 500 people waiting in line for the next Walmart opening.

I’m surprised the jobless haven’t thought of this sooner, but the undeserving never think of these things. So they’re fortunate that Rand Paul has the imagination to realize that America is just overflowing with minimum wage jobs for trained teachers and skilled workers trying to support their families.

Or maybe he’s just an idiot.

"There is no good reason for anyone to vote for a Republican." — Brad DeLong


More on Rand Paul’s Moral and Intellectual Poverty

Rand Paul Proposes to Tank Economy and Increase Unemployment During Recession

6:03 pm in Uncategorized by Scarecrow

Rand Paul can’t seem to avoid proving not only his economic ignorance but his apparent indifference to the harm his policies would cause. He told the folks in Kentucky that in the middle of the worst recession since the 1930s and with 15 million people unemployed, he’d insist on eliminating the US budget deficit, which would tank the economy and put even more millions out of work.

From Bluegrass Politics:

FRANKFORT — Republican U.S. Senate nominee Rand Paul vowed Monday to introduce his own balanced budget for the nation if he is elected.

“If filibuster be necessary to make them pay attention to the debate over a balanced budget, I think a good week’s time would be well spent to have the whole country talk about what’s going to happen to us if we become (financially troubled) Greece,” Paul said.

Paul, appearing on the Rush Limbaugh radio show with guest host Walter Williams, stressed his call for a federal balanced budget by law.

He noted that Kentucky requires a balanced budget.

Kentucky “is suffering through a recession like every other state but we are nothing like California because we are forced to balance our budget,” Paul said.

“We don’t spend money we don’t have.”

Earth to Rand Paul:

1. California’s state constitution requires it balance the budget, every year. That, along with crippling voting requirements (which Rand would likely approve) to pass a budget or raise revenues, makes it extremely difficult time getting a budget out, year after year.

2. Neither California nor Kentucky can help solve this because states can’t print their own currency. Only the US/Fed can do this. That’s partly why we have/need a federal government and national currency.

3. The US is not Greece. But Kentucky and California, like Greece, do not have their own currency. Unlike Kentucky and California, the US can "spend money it doesn’t have."

4. And unlike Kentucky/California, the US can expand money and increase spending without a balanced budget. The fact the US has increased spending during the recession means that Kentucky’s economy is significantly better off than it would have been if Rand Paul’s proposals had been imposed.

5. If Rand Paul’s fiscal and economic recommendations were followed, it would tank Kentucky’s and the US economy and put millions of people out of work across the US.

I should add that since states are having to contract their budgets during the recession, the effect, as Matthew Yglesias points out, more than offsets the federal stimulus effects.

Looked at comprehensively, what the country has been implementing is a mild version of the conservative policy prescription for boosting growth—fire bureaucrats and trim spending. And it’s not working very well. And with continuing economic weakness, state and local governments are set for further trimming even as federal stimulus winds down. This is going to be a disaster. Nothing about having economically pressed jurisdictions lay off huge quantities of teachers is going to improve the situation.

And not just teachers, but critical safety net measures like health care.

Governors and state lawmakers, already facing some of the toughest budgets since the Great Depression, said the repercussions would extend far beyond health care, forcing them to make deep cuts to education, social services and public safety.

Good luck, Kentucky. Hope you can sort this out before Rand Paul’s misguided thinking tanks the whole economy and puts you out of work.

John Chandley

This would blow Rand’s mind: HuffPost/Warren Mosler, G20 Says Expansionary Policy Not Sustainable
And this is heresy: Paul Krugman, Madmen in Authority
Another synapse too far for Paulites: Brad DeLong, We Need Bigger Deficits Now!

Did G20 Economies Just Vote for Another Great Recession, Massive Unemployment?

12:10 pm in Uncategorized by Scarecrow

Unless I misunderstand these stories, it appears the world’s biggest economies just decided, over US objections, to resurrect Herbert Hoover, rebury Keynes and pursue another Great Recession, tanking their economies and putting millions more out of work. And it’s all driven by a world-wide plague of deficit hysteria syndrome.

You can’t tell what the world’s largest economies just agreed on from the AP (via WashPost) article of the G-20 financial summit in South Korea. The piece has several diplomatic statements from Tim Geithner warning Europe it can’t look to a booming US economy to lift Europe, so they better have plans to grow their own economies by expanding internal demand. Stronger demand in Europe would then support US hopes to use increased exports to help drive US economic growth. That plan now looks dead.

The Financial Times coverage of the same event tells us a majority of G20 nations plus the International Monetary Fund (IMF) are planning to shrink their economies and depress demand, signaling a broad rejection of the claimed US position.

First, the US/Geithner centric version from the AP (via WashPost):

The Group of 20 welcomed measures taken by the European Union, the European Central Bank and the IMF, including a $1 trillion bailout, to help countries cope with the fallout from unsustainably high debt.

"All of us have a strong interest in seeing those programs succeed in restoring confidence," U.S. Treasury Secretary Timothy Geithner told reporters after the meetings ended.

Long-term, sustainable growth will depend on rebalancing growth, he said.

"The United States is moving aggressively to fix things we got wrong and to strengthen our economic fundamentals," Geithner said, noting that as Americans boost savings and investment and consume less, other countries will need to generate more growth.

"All the countries recognize the basic reality that the U.S. is reforming and adjusting and that for the world to grow at its potential it is going to require that growth outside the U.S. will come more from domestic demand than in the past," he said.

Next, what the Europeans are saying, via the Financial Times (subscription required):

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

So, our trading partners, particularly Europe, are giving up trying to increase demand through stimulus and other measures and are focused on reducing deficits, even though that switch is bound to depress economic growth and put millions of people out of work. And the deficit reduction and other "austerity" measures are aimed directly at wages, benefits and safety nets for the less well off — exactly what the deficit hawks are urging for the US through Obama’s stacked deficit reduction commission.

It seems there’s a world-wide pandemic of deficit derangement syndrome, being pushed by the usual economic elites at the expense of everyone else. And even if "belt-tightening" is needed in some cases, there’s no talk of asking for shared sacrifice among the wealthy. Bond holders/Creditors must be protected.

The angry citizens demonstrating in Europe’s cities know this is class war being waged against them by the world’s economic elite, but nobody calls it that; instead, it’s all wrapped there and here in the language of "fiscal responsibility" (from FT):

Many other finance ministers accepted market realities had changed the G20’s policy, Christine Lagarde, French finance minister, said: “There’s a large majority for whom redressing the public finances is priority number one. For a minority, it’s supporting growth”.

Even Dominique Strauss Kahn, managing director of the International Monetary Fund who championed fiscal stimulus since January 2008, recognised the world was suddenly different. Asked whether he felt comfortable with the change in tone from the G20, he replied: “Totally comfortable. I am not the champion of fiscal stimulus, but the champion of right fiscal policy.”

Where’s Our Plan B? New Team A?

The Obama Administration is staring at a failed economic policy. The recovery is not robust enough, and they can’t point to a credible driver for sustained growth. At best, it’s likely to take years to recover the 9 million or so jobs we’ve lost.

They’ve shackled themselves to half policies. Obama was unwilling to ask for more than half the fiscal stimulus his own economists told us we needed last year. Now they’re afraid to ask Congress for what the economy still needs and can do nothing while nihilist Republicans and inexcusably ignorant Blue Dogs tell us we can’t afford to keep states from laying off hundreds of thousands teachers and others as they curtail Medicaid. We can’t even afford to have summer jobs for students.

It’s inexcusable that Ben Bernanke told us, before he was confirmed, it’s not his problem, even though it is. Now more of his Fed colleagues are clamoring for policies that could produce another recession if pursued now.

Once the Administration was unwilling to spend enough and unwilling to demand the Federal Reserve follow its mandate to pursue full employment, the economic team told us we’d use expanded trade to grow our way out of the Great Recession, e.g., looking to European expansion. But G20 and panic in Europe just killed that, and Obama’s own pandering to the deficit hysterics makes our protests unconvincing.

We need more than a Plan B; we need a different Team A (save Romer). Even if the current team claims they "saved" the financial sector (to do what? The "reforms" preserve the same looters, only bigger) after ignoring how they let it nearly collapse, it’s not convincing to say we shouldn’t give a different economic team a chance. We might even find some actual Democratic economists for a change. I suspect Democratic voters would approve.

John Chandley

What Digby said, Global Neo-Hooverism
Krugman, Lost Decade, Here We Come

Paul Krugman, The pain caucus; Lost decade looming
Dean Baker, Pearlstein nails spendthrift Blue Dogs; Deficit Hawks opposed to the jobs bill were too dumb to see $8 trillion housing bubble
Brad DeLong, The ten-year US treasure rate is . . . 3.20%; Well yes, my hair is on fire . . . linking to Duncan at Eschaton
Simon Johnson, French Connection: European crisis worsens; Eugene Fama and TBTF banks
Calculated Risk: check out the unemployment graphs, esp. here and here.

Mindless NYT Story on Weakened Jobs Bill Stirs More Deficit Hysteria

6:33 am in Uncategorized by Scarecrow

"Panicked Congress Tells Unemployed and About To Be Fired Teachers to Stuff It."

That should have been the headline for this mindless New York Times article, "Currently in Vogue: Ringing the Deficit Alarm," by Carl Hulse, who claims "Deficits finally matter."

Hulse manages both to describe and legitimize Congress’ growing hysteria about the size of US deficits/debts. But he doesn’t bother to ask or quote a single economist, let alone the many who have been explaining for months, now screaming, that deficit spending now is not only not a serious problem but absolutely necessary to deal with lingering effects of the Great Recession.

All Hulse had to do was check with the Times Nobel economist or any of the Times’ stable of economic/business writers. Paul Krugman, along with Brad DeLong, Joe Stiglitz, Jaime Galbraith, Dean Baker, or if you prefer, Mark Zandi and many, many other serious economists, have been calling out the fraudulent arguments of the Pete Peterson deficit hawks for months and telling us we need more, not less spending to help the economy.

Every one of these reputable economists refutes the assumed premises of Hulse’ article and the prevailing ignorant mindset of too many in Congress that our debt/deficits are too high for the conditions we’re in. Instead, Hulse just takes for granted the false view, spread by deficit hawks, that deficit spending is irresponsible, an unfair burden on our children and a risk of inflation. No, it’s not.

Any of the Times economic/business reporters could have told him the core inflation rate is barely 1 percent, only half the Federal Reserve’s 2 percent target, and that an even higher target rate for the near future could help to stimulate growth and reduce unemployment under current conditions. But since Ben Bernanke has ruled that out, fiscal expansion of some sort is necessary.

Or Hulse might have asked what happened to the US economy in 1937-38 when FDR was talked by that era’s deficit hawks into letting up on fiscal expansion and instead balance the budget, only to see that strategy thrust the country back into depression and massive unemployment.

The article might have explained that reducing the deficit now would stifle economic growth and increase unemployment. To illustrate that, Hulse might at least have given us the views of prominent non-stupid Democrats who are appalled that Congress can’t pony up a paltry $23 billion to prevent budget-stressed states from laying off 300,000 teachers, or authorize a few billions to cover expiring unemployment benefits, increased Medicaid costs or continue COBRA subsidies for states dealing with high unemployment. Did Hulse and his editors even wonder what effects denying these funds will have?

But no, all we get is quotes from a panicked, misinformed Blue Dog Democrat, Jim Cooper, and Alabama’s Republican Senator Jeff Sessions, one of the stupidest men in the Senate but sadly representative of his party’s appalling economic ignorance.

“We have to stop spending money we don’t have,” said Representative Jim Cooper, a Tennessee Democrat who voted against the bill. “I hope deficit reduction fever is catching.” . . . [yes, there is a sickness here]

“Are we in denial in this body?” asked Senator Jeff Sessions, Republican of Alabama and another opponent. “Do we think it’s just business as usual, that we can just continue to spend, spend, spend and borrow, borrow, borrow?”

No, it’s not "business as usual." We have nearly 10 percent unemployed. We’re trying to get a seriously underperforming economy and 15 million people out of a deep recession, and yes, spend, spend, spend is exactly the right thing to do.

Carl Hulse’s homework assignment:
Paul Krugman, Bad analysis at the deficit commission; Conventional madness; We’re not Greece.
Brad DeLong, The Group of 30 has lost it’s collective mind; On Harold Meyerson and Washington’s Pathology

Doug Elmendorf, Estimated Impact of the ARRA (stimulus)

Dean Baker, Congressional deficit hawks act to slow growth and destroy jobs; Do you have to be clueless about the economy to talk about fiscal responsibility?; and Looniness in the cause of deficit reduction at the NYT.
Mark Zandi, The US cannot afford to not have a second stimulus package
Bruce Bartlett, Is Obama repeating the mistake of 1937?

Jamie Galbraith (Ezra Klein interview) on panicky deficit hawks
Joseph Stiglitz, Obama must resist "deficit fetish"
Mark Thoma, linking Robert Reich, Why deficit hawks are killing the recovery

Economist Jamie Galbraith on Panicky Deficit Hawks: There’s No Coherent Story There

3:07 pm in Uncategorized by Scarecrow

Kudos to Ezra Klein for interviewing University of Texas economist Jamie Galbraith on the deficit hawks’ incoherence in warning of the supposed dangers of current US budget deficits. Galbraith, along with Dean Baker and friends, are to the deficit hawks and their cynical scare mongering what the skeptical and ultimately correct McClatchy reporters were to Dick Cheney’s fabrications about Saddam’s weapons of mass destruction and links to al Qaeda. The scaremongering was all a cynical lie that led to a Three Trillion Dollar War.

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.

EK: What are the policy implications of this view? . . .

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we’d be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I’ve supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That’s one difference between us and Europe. . . .

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it’s the only way to inject financial resources into the economy. If you’re not running a deficit, it’s draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they’re exactly the same thing! A government deficit means more money in private pockets.

The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now.

If Galbraith is correct, and as I read them, our best known economists are saying he’s right on the essentials, then what are we to think of the anti-deficit, anti-employment policies now sweeping Europe, partly at the urging of the US government? The logic tells us Europe and Obama’s economic advisers think the way to fix their respective economies is reduce spending and put more people out of work. Huh?

The news is full of stories not just about the efforts to forestall a Greek default — a uniquely extreme problem — but promises by Spain, Portugal and Great Britain to implement severe budget contractions immediately.

When the Obama stimulus plan was being debated last year, our best macro economists taught us that deficit spending was not only okay, it was essential to make up for depressed private demand when monetary policy — lower interest rates — was exhausted. We needed deficit spending to increase demand, to put money into the economy via the public sector to increase spending and create both public and private jobs. These experts had a plausible story: you have to do this to staunch unemployment and rebuild the economy, and if you don’t do enough — "we need a bigger stimulus" — you risked a "jobless" recovery and/or extended period of unacceptably high unemployment, along with increased deficit spending to deal with that. They’ve been proven right.

And the economists also told us that if government curtailed deficit spending too early or too fast, it would push the economy back into a second recession. That would repeat FDR’s strategic blunder in trying to balance the budget in 1937, which reignited massive unemployment and another downturn. So it was a mistake to listen to the anti-Keynesian deficit hawks, who convinced FDR that US deficits had to be reduced or else.

Okay, isn’t that where we and Europe are? I understand there’s another serious complication with the Euro currency disconnected from national budgets and a central bank disconnected from fiscal policy and coherent theory. That makes this harder to solve.

But the lessons of 1937 still seem a coherent, credible story. So someone needs to explain why it makes sense for the UK, Spain and Portugal to be making what appears to be the same mistake FDR made in 1937, and why the Obama Administration is pushing this mistake not only on Europe but on ourselves.

And if, as the Administration has repeatedly told us, we’re counting on increasing exports to help produce our way out of the current recession, why does it make sense for Europe, one of our largest trading partners, to reduce spending, increase unemployment and shrink their economies?

It seems the incoherent story coming from the Peterson/Washington Post/Administration deficit hawks that Jamie Galbraith worries about is sweeping not just Washington but the capitals of Europe. These people seem like the real weapons of mass economic destruction. If that’s not true, we need a coherent story why. Hello?

NYT: Deficit cuts promised in Britain
NYT: Portugal follows Spain on austerity cuts
Dean Baker, The deficit problem is not "we the people," it’s you the incompetent elite, and many other posts there.
Paul Krugman, Are we Greece?, and Shock and Uh?
Brad DeLong, via Matthew Yglesias, A complacent capital [about unemployment]; also Spending cuts for the UK
Baseline Scenario/Simon Johnson: Restructuring the Eurozone; and see The kitchen sink . . .
MSNBC, For lawmakers, easing joblessness isn’t Job #1
Naked Capitalism/Edward Harrison, MMT: The accounting of budget deficits

Senate Republicans to America’s Unemployed: Drop Dead

3:45 pm in Uncategorized by Scarecrow

On the same day the Republican Party released a health "reform" plan that fails to prohibit insurers from denying coverage to the sick, the GOP Senate is deliberately stalling a bill that would extend unemployment benefits to nearly 200,000 people — just because they can.

HuffPo’s Ryan Grim reports:

The extension overwhelmingly passed the House 331-83 in late September. Senate Majority Leader Harry Reid (D-Nev.) made a motion to pass it by unanimous consent in early October; it was blocked by GOP objections.

After negotiations, Reid filed for cloture on Oct. 21 to break a GOP filibuster. On October 27, the Senate voted 87-13 on a motion to proceed to consider the bill, breaking the filibuster.

But under Senate rules, the GOP is still allowed 30 hours of "debate." There actually isn’t much debate, but the clock is ticking while senators take to the floor to make speeches about whatever they like.

To get things moving, Democrats sweetened the pot, adding in billions in tax breaks for business — a net operating loss carry-back provision that the GOP has long favored — and an extension of the homebuyer tax credit. Reid introduced the goodies in a substitute amendment with Sen. Max Baucus (D-Mont.), a champion of the business tax break.

. . .

Still, the GOP fights, requesting that the 30 more hours of "debate" elapse. That’ll take the Senate to late Tuesday night. If Reid invokes cloture again to proceed to the underlying bill, another 30 hours would take the Senate to Thursday morning at the earliest for — at last — a vote on the bill itself.

In the meantime, over 180,000 people whose unemployment insurance ended during these delays are waiting while Mitch McConnell pretends his 20 percent party only wants to help.

How would Alan Grayson describe the GOP’s jobs policy? "Don’t lose your job; but if you do, . . ."

The Hill, Reid: Republicans to Blame for 5-week unemployment insurance delay