Russia and Gorbachov

Yesterday's Der Spiegel On Line, the internet version of the German magazine, published a very interesting interview with former Soviet leader Mikhail Gorbachov.

Gorbachov plainly has had enormous influence, not all of it planned, on the shape of the world today. The interview, headlined 'They Were Truly Idiots' (referring to his former Kremlin colleagues), is notable not only for the insider's tidbits, but for the light it sheds on Gorbachov's essential humanity. He was an important transitional figure, and we should be grateful for the role he played.

Speaking of New Ideas

How to get people working again, generate revenue, reduce the deficit and stimulate the economy by increasing aggregate demand - not a new idea, but a proven one:

How to cure the unemployment problem?:

"This isn't hard. Hire people to build things with the free money the world is offering us."

Posted by Mark Thoma on Monday, August 15, 2011 at 10:08 PM in Economics, Unemployment

Or how about this:

"The only policy that will really help is an increase in aggregate demand."

"The right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising aggregate demand. As Bill Gross of the investment firm Pimco put it recently: “While our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.”

Bruce Bartlett; Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Or this:


"Among those calling for a mix of cuts and revenue are onetime standard-bearers of Republican economic philosophy like Martin Feldstein, an adviser to President Ronald Reagan, and Henry M. Paulson Jr., Treasury secretary to President George W. Bush, underscoring the deepening divide between party establishment figures and the Tea Party-inspired Republicans in Congress and running for the White House.
“I think the U.S. has every chance of having a good year next year, but the politicians are doing their damnedest to prevent it from happening — the Republicans are — and the Democrats to my eternal bafflement have not stood their ground,” Ian C. Shepherdson, chief United States economist for High Frequency Economics, a research firm, said in an interview.
As for the longer term, Ethan Harris, co-head of global economics research at Bank of America, wrote this week that “Given the scale of the debt problem, a credible plan requires both revenue enhancement measures and entitlement reform. Washington’s recent debt deal did not include either.”

New Ideas

About this time in every election cycle, we begin to hear candidates, pundits and observers talking about how we need "new ideas."

The belief in new ideas isn't universal, though. Or even belief in novelty of any kind. For example:

"9  The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun."
Ecclesiastes 1:9

At least in human affairs, the preacher who wrote that book seems to be right. The more familiar you are with history, the more it appears that every so-called new idea is just a revamping of some idea long known to humankind.

Even so, if the idea is something you have never heard about, it seems new.

Yesterday's New York Times had an article lamenting not just the paucity of new ideas, but the shortages of any ideas at all. Neal Gabler, senior fellow at the Annenberg Norman Lear Center at the University of Southern California writes of The Elusive Big Idea. Gabler observes that not only do we no longer have big thinkers, our best new ideas seem trivial. He attributes the problem to a surfeit of information, readily available over the internet, which paradoxically crowds out thought and ideas.

The economist Jared Bernstein takes issue with Gabler. At least in the field of economics, Bernstein contends, ideas have been suppressed by a confluence of wealth and power.

"The financial crash of the 2000s revealed a confluence of many powerful and socially disruptive forces: levels of income inequality not seen since the dawn of the Great Depression, stagnant middle-class living standards amidst strong productivity growth, solid evidence that deregulated markets were driving a damaging bubble and bust cycle, deep repudiation of supply-side economics, and most importantly, even deeper repudiation of the dominant, Greenspanian paradigm that markets will self-correct." Despite the evidence and the warnings of economists, Bernstein continues, "And yet, at least from where I sit today, we let the moment pass.  Far from a debate over a new paradigm, our national political economy discussion is bereft of ideas, leaving us mired in recession as we self-inflict one economic wound after another.  Forget new ideas—we can’t seem to correctly apply the old ones!"

Why is that?  Bernstein explains: "Why did we squander the opportunity?  Not because there’s so much information on the web.  It is, at least in part, because the concentration of wealth and power blocked the new ideas from a fair hearing."

About Demand

"I hear politicians say that businesses have money and they should be hiring," said Riddle, a tall, distinguished-looking man who might be cast as the president if he were an actor. "But if you don't have the demand, you don't hire the people."

Aug. 14, LA Times

Here's the rest of the article:

Companies are afraid to hire, even if business is improving

Bailing Out

The labels need updating, but the cartoon is still good.

Cheerleading Politicians

A curious feature of American elected officials is that a number of them prepared for officialdom by serving as cheerleaders either in high school or college.

It makes sense. The function of a cheerleader is to stir the crowd to a hysterical level of support and optimism, no matter how dire the circumstances. The opposing team is ahead by four touchdowns and has the home team's back against the goal line, threatening another score. "Push 'em back," the cheerleader cries to the shouts of the fans, "push 'em way back.!"

Cheerleaders don't organize or select the plays,don't throw any passes, don't catch the ball or set any blocks. They don't even carry water to the folks who do.

Reality plays no part in the matter at all.

Among former cheerleaders in politics:

Thad Cochran, senior senator from Mississippi (Ole Miss);
Trent Lott, former senator from Mississippi (Ole Miss);
Kay Bailey Hutchison, former senator from Texas (University of Texas);
George W. Bush, former governor of Texas and former president of the United States (Phillips-Andover);
Rick Perry, governor of Texas (Texas A&M).

Third Party Nostrum

Last months' distressing dispute over the manufactured issue of the debt ceiling has inspired some pundits to fall in with the "third party" nostrum. The latest to join that particular bandwagon is the New York Times' Tom Friedman in a recent column.

The newest wrinkle in this third party scheme is a nationwide primary over the internet.

Friedman seems to think we need a more moderate party. I think a major part of our current problem is that the political process is both dominated by and beholden to monied (especially financial) interests. Moderation won't help that.

As for primaries, they're already pretty open. I think they are a large part of the problem, along with the visible decline of the journalism profession.

A contributing factor for much of the present confusion is the left/right/moderate typology. There are better models of the real political word. One such model is found at The Political Compass, which describes political views on an x-y plot, adding an additional dimension to the usual left/right straight line. Check it out at politicalcompass.org. Take the survey and see where you stand. You might be surprised.

A different approach is taken by the Pew Center for The People and the Press. After every presidential election the Pew Center (and before the the Times Mirror) conducts a detailed survey and provides the results in a report titled Beyond Red vs Blue: The Political Typology. The most recent report, released May 4th of this year, finds that the public is more doctrinaire at each end of the ideological spectrum, yet more diverse in the middle than it has been in the past. The typology, the fifth since 1987, sorts Americans into cohesive groups based on their values, political beliefs and party affiliation.

The most recent survey divides the public into nine groups, one of which, the "bystanders," don't bother voting at all. Of the others, twenty-five percent fall into mostly Republican groups, forty percent fall into mostly Democratic groups, and thirty-five percent fall into mostly independent groups. If we had elections based on proportional representation, the eight groups (other than bystanders) might form the basis for roughly the same number of political parties.

The Pew site offers readers the chance to take a quiz to determine their personal typology. Give it a try.

Breaking News: Guru Remains Deceased

Chicago: Aug. 12, 2011 This just in - John Maynard Keynes remains dead, fulfilling his own prophecy. "In the long run, we are all dead," Keynes predicted in 1923. His complete forecast was: "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."

Chicago economists, however, have decided to undertake that very easy, useless task and reveal the plan: "leave the economy alone and it will come home. It's in the book."

Many observers hasten to add: "pay no attention to the apparent accuracy of predictions and mathematical models concocted by Keynes' disciples. Facts can only confuse things. What matters is dogma!"

Post War (WWII) Economic Reconstruction

My favorite economist, Paul Krugman, has pointed out a number of times recently that the profound increase in American prosperity after WWII took place in a period of high marginal tax rates and powerful labor unions. All true. I'm developing some thoughts about other things that were going on at the time that could have easily led to economic disaster except for some very effective economic planning for the postwar transition. More on that theme later.

I just came across a paper by the economist Brad DeLong comparing the postwar period with the period between WWI and WWII, especially in Europe:

"Another second important factor in making post-World War II economic reconstruction a success, a factor independent of the Keynesian revolution in economic policy, was the fact that post-World War II reconstruction was carried out in the shadow of the interwar period. The political and economic struggle between classes as it had been carried out in Europe between the wars had ended in complete disaster for all. Right-wing factions had wanted low wages, no welfare state, and stable prices; left-wing factions had wanted high wages and an extensive welfare state. The political and economic disruptions that this struggle generated led to fascism and Nazism. Hitler's rise had benefited no one." (Emphasis mine.)

Notice any familiar concepts?

Yield on Treasuries

Over the weekend, there was great concern that Standard and Poor's downgrade of U.S. debt would increase the cost of government borrowing.

Not so much.

It turns out the market has paid no attention to the downgrade. In fact, the yield on US Treasury Bills, Notes and Bonds is now less than 1% for five-year issues, and overall down by about 1% from the yield a month ago. So Much for S&P.

Some also believed there would be a rally in the stock market after the debt limit deal. The market, however, seems to have figured out that the deal was bad news for the economy.

What we really need is jobs to fuel a recovery and resulting increase of revenue.

Oh, well.

Wisconsin Recall Election

The nation's most interesting election news today will be in Wisconsin, where recall elections are being held. Today's recall efforts are against six Republican state senators. Next week, recalls will be held against two Democratic senators.

The ability of voters to "recall" elected officials before end of term was part of a package of reform measures advocated by Populist and Progressive groups in the late nineteenth and early twentieth centuries. The package usually included initiative, referendum, recall and direct election of US Senators. A related effort sought nomination by primary elections.

The reform package achieved support in some areas of the country not usually thought of as especially progressive. Mississippi voters, for example, adopted a constitutional amendment for initiative, recall and referendum in 1914. The state supreme court promptly declared the constitutional amendment unconstitutional.

Nearly three years ago a local resident inquired of the Pamlico County Board of Elections what the procedure was in North Carolina to remove me and other Oriental commissioners from office by recall. The answer was: there is no such procedure.

That's about to change. During the current session of the NC legislature, local bills have been ratified establishing recall procedures in Oak Island, Topsail Beach, Belhaven and Burke (school board). Who knows where that will lead?

A Salute to Service of a Special Kind

Received last weekend:

Subject: Fw: Salute to the SEALS
Date: Sat, 6 Aug 2011 22:50:58 -0400

Some of you may have been fighter pilots, others have known them. A brash group of people. I know a few of the younger tribe and they do very well. In particular there is one guy who was CO of the TOPGUN School and retired after 25 years of fulsome service. He wrote the following praise about the SEALS. Do read it. I’ve Met Them By lex, on August 6th, 2011 I don’t believe I ever met any of the fallen heroes from DevGru. I don’t know their names, have not seen their faces. They shun recognition from anyone not of their tribe, knowing that no one not of them can appreciate what they have gone through, what they have accomplished, what they have been forced to do. But I have met them, or men like them. I also know fighter pilots, know them well. They give pride of place to few, their arrogance is legendary, even if overblown by those who envy their accomplishments. I’ve known fighter pilots who can make an airplane sing, who can turn the turbulent world of air combat into an operatic ballet, with themselves as the conductor. Knowing every beat and stanza, placidly certain of the denouement. But I never knew a fighter pilot who in his most private self would not tip his head to those few, those noble few, who are qualified to bring death to our nation’s foes by sea, air and land. I never knew an admiral I respected more as a man than a second class petty officer SEAL. I believed that if I had played the game the way it was meant to be played, and caught a few lucky breaks, I might have made flag rank. I know that I do not have now, and never did have, what it takes to be a Navy SEAL. The selection process is rigorous, the training syllabus withering. You may think you have what it makes to be a member of the teams. But if the instructional staff has doubts about your intelligence, your dedication, your ability to work as a member of a team, your physical stamina and endurance, you are done. There is no court of secondary appeal. And when they have decided that you do not have what it takes to make the grade, to fight alongside their beloved brothers in arms, you will leave thinking it was your decision. You will ring the bell and be grateful. For those few who make the cut, those who get to wear the Budweiser, the real challenges are yet to come. The challenge now is not to make the cut, it is not to grasp the intricacies of advanced training. The challenge is to go to places so utterly foreign, and fight foes so thoroughly implacable that to take the mission is to willingly part with all that you have, and all that you love, and place everything in the balance in a desperate gamble. You will be expensively and thoroughly trained, of course. You will have practiced until your motions seem involuntary. You will have in your company men who know, trust and love you in their own rough way. You will have certain knowledge of the justice of your cause, and the depravity of your enemy. But you will also know that fate plays its own games as you feel the beat of your own heart in your breast, knowing – as young men should never have to know – that when you’re on a mission, the next beat is not promised. Knowing that the fog of war is ineluctable, no matter your training, experience and skill. Knowing that things can and will go wrong. And you go anyway. Night after night, week after week, taunting fate. You go knowing that it is not merely your own life that trembles in the balance, but the lives of those you love, and who depend upon you. You go knowing that there is something more important even than those things: It is the idea we as a nation represent, whose best exemplification is those you fight alongside. You do not dwell on it, nor do you wear it on your sleeve. But it is there nonetheless. I know this because I have met them. They are as humble in their public presentation as fighter pilots are ostentatiously obnoxious. A fighter pilot may feel that he has something to prove, a SEAL knows that he does not. At least not before mere mortals. The only beings that a SEAL feels obligated to prove himself to are his God and his teammates. And in the places that they insert themselves, God is rarely in the room. Privation instead, and hardship. Monastic devotion to fitness, warrior prowess and to each other. Long days of preparation and rehearsal. Slow, creeping hours of approach to contact and moments of fierce combat. Expecting no quarter, and giving little. Living in each moment while knowing that each could be the last. Buttressed by the man to your left or right. Face forward to the foe. Fight and win, or fight and die. No ejection seats. We had a tradition at TOPGUN of instructor staff leaving something for those they leave behind. One officer left a plaque which read, “For those who know, no explanation is necessary. For those who don’t, no explanation is possible.” Amen.

Cheers!

Post Hoc Ergo Propter Hoc Or: The Rooster

V.P. Ferguson was, to say the least, an unconventional student.

He arrived at the University of Mississippi from Columbus in the early 1950's and became a legend in his own time. He was especially renowned for a touch of irreverence. He was said to have hung a copy of Sallman's Head of Christ on the wall in his dormitory room, but replaced the eyes with a doll's glass eyes that were wired to follow a visitor as he moved about the room.

A talented musician, V.P. organized a dance band, whose jazz repertoire included a version of "The Little Brown Church" and other jazzed up hymns, arousing disapproval in some circles.

One year, V.P. was upset that the University increased dormitory rent. He refused to pay the rent, instead pitching a tent nearby. One morning, he arose just before official sunrise and put his trumpet to his lips. Just as the sun peeked above the horizon, he played a rousing fanfare, and announced to the gathered audience: "and now, courtesy of V.P. Ferguson, I present - the Sun!"

I just learned that V.P. Ferguson passed away last year in Paris, where he had lived on the Left Bank for many years as a science fiction writer.

Does Anyone Understand What's Going On?

I've been working on a hypothesis, but I'm having trouble making it testable.

You may recall that while no scientific hypothesis can be proven, it can be tested to see if it can be disproven. My hypothesis is that the world is run by fools. I'm having trouble formulating it in a way that can be disproven.

It would be simpler to form a hypothesis that most TV announcers, analysts and commentators don't know what they are talking about, especially (but not only) concerning economics.

This evening we were told by ABC that Standard and Poors' downgrade of the US Government's debt rating caused the stock market fall and that the remedy is to get Congress back and do more cutting of expenditures.

Wrong!

If S&P's action had any effect at all, it should have driven up interest rates on US Government T-Bills and Bonds, as lenders insisted on a higher rate as a cost of borrowing. In fact, the rates have gone down, indicating a flight of capital into the very instruments S&P downgraded. The world still sees US Treasuries as the safest harbor for capital.

So what did cause the fall in the stock market? Evidence suggests that after last week's debt limit deal, some investors recognized that the deal included no measures to increase aggregate demand or otherwise get a sluggish economy moving. Furthermore, it appeared politically impossible to take any positive action because of Republican intransigence.

It may be that program trading caused even more of a decline.

What I heard on ABC tonight was pretty consistent with Paul Krugman's description of the prevailing "stupid narrative." Here it is:

"August 8, 2011, 2:51 pm

The Downgrade Doom Loop

It’s not the whole story, but something like this threatens to develop:

1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

2. Fears that this austerity will depress the economy send stocks down

3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

4. This leads to calls for even more ill-advised austerity, which sends us back to #2

Behold the power of a stupid narrative, which seems impervious to evidence."

This isn't rocket science, but it IS very different from managing a household budget.

First: Spend money to put people back to work. That will actually reduce the budget deficit in the short to mid term.

Then: Fix the long term problem by paying for the programs the people want!

I say: let the Bush tax cuts expire - if need be, for everyone.

Town Dock II

Oriental's town manager submitted a grant proposal last Friday seeking Boating Infrastructure Grant funds to use in addition to town funds for a new town dock at the foot of South Avenue.

This proposal will make best use of the end of the town's right of way leading to the harbor. It represents the culmination of the effort to reestablish public access to public trust waters and protect public use of this area.

There is no guarantee that the grant will be awarded, but initial reaction seems positive.

An ancillary benefit of the town's request for a CAMA permit for the pier, is that the permit will also be issued to cover a bridge over the upper reaches of Whittaker Creek to be used for a bicycle/golf cart path connecting White Farm Road with the village of Oriental. Such a connection was included two years ago in the Comprehensive Transportation Plan for Pamlico County.

The Town of Oriental needs to have its own Comprehensive Transportation Plan in order to seek DOT funds for bicycle and pedestrian paths.

By the way, the town's new Gator will make it possible for public works personnel to access the proposed path for maintenance.

Keep up the good work!

Austerity Advice

Here's a graphic survival guide from the New York Times for our coming period of austerity.

Gator Aid

I've been reading up on the John Deere Gator line of utility vehicles.

Those who attended last week's meeting of Oriental's Town Board learned of the town's recent purchase of a John Deere Gator utility vehicle. As we learn more about the vehicle, I think we will conclude that it is the right size and mix of capabilities to expand the ability of our public works department. It is also likely to save money. Just using it as the vehicle for reading meters will result in a substantial fuel savings.

And it does so much more. It is a dump truck. It can tow a 1500 pound trailer. It goes off road and can access areas requiring maintenance that are inaccessible by our current pickup trucks.

I think it will be a force multiplier for Public Works.

Coburn: Destroy to Save

In a 1968 report by AP correspondent Peter Arnett concerning the fate of Ben Tre, a provincial capital of Viet Nam, an unnamed major observed that "to save the town it became necessary to destroy it."

This sort of logic happens in war. Senator Coburn of Oklahoma, in concert with Joe Lieberman of Connecticut, has brought the concept to Medicare.

Last month the two senators joined in an effort to reduce medicare benefits in an effort to "save" the program. Once they get through "saving" it, though, it will not be possible to see the existing program through the rubble.

I remember last summer during a series of town meetings, one Republican critic of health care reform shouted: "keep the government's hands off my Medicare." I join in that sentiment.

Standard and Poor Showing

So Standard and Poor's has downgraded US long term debt.

That plainly represents a political judgment rather than an economic one. S&P explains it this way:
“In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.”

Pardon me if I don't genuflect toward the rating agency that gave a triple A rating to bundled sub prime mortgages. That mistake helped bring our entire economy to its knees. And, as Robert Reich points out here, if S&P had done its job and accurately assessed the risk, the bubble wouldn't have been so large and so destructive.

The downgrade could be very bad news for every American with any debt. It is a direct consequence of S&P's previous failure, coupled with irresponsible Republican intransigence.

We won't know until Monday how this news will affect the market for US Treasury bills, notes and bonds, all of which have been trading at very low interest rates. We also won't know until the Asian markets open Sunday evening (our time) how equity markets will react.

The Wrong Trousers

Last Tuesday, America put on The Wrong Trousers, programmed by a larcenous penguin (played by Eric Cantor) to steal prospects for middle class prosperity. The larceny is nearly completed when Wallace (in the role of America) is awakened by an alarm (stock market decline), starts removing the trousers and begins an effort to bring the larcenous penguin to justice, aided by Gromit (played by Paul Krugman, Brad DeLong, Mark Thoma and others).

Watch the movie. It's more entertaining than actual events. Let's hope America wakes up in time, finds the correct trousers and celebrates with a bit of cheese..

Prediction and Governing

Last May I posted the observation that governing is prediction.

Various studies have concluded that, in general, liberals are better prognosticators than conservatives, especially if they have no law degree.

Now David Frum of the Wall Street Journal has joined the chorus.

"Imagine, if you will," Frum asks, "someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?"

The main problem I see with Frum's observation is the assumption that someone whose research and analysis of facts and trends differs from one's own is thereby an "enemy." We should all be seekers of truth, not seekers of vindication. The proof of the pudding is in the accuracy of resulting predictions.

Krugman's predictions are accurate. Wall Street Journal's are not.

Curmudgeon Status

I've been warned.

A couple of days ago during the morning status report at The Bean, one of my colleagues spoke up:

"Unless your blog posts become more emotional," he warned, "we're not gonna let you renew your curmudgeon's license."

I tried to think of a response. Finally I mumbled: "I yam what I yam."

It was a weak riposte.

August Oriental Town Board Meeting

There were some positive developments in the way last night's town board meeting was conducted.

Mayor Bill Sage reported that he has been reading Robert's Rules of Order and learning a lot from it. That is good.

Town Manager Bob Maxbauer reported on the status of planning for a new town dock at the end of South Avenue. He will submit a proposal for a grant under the federal Boating Infrastructure Grant (BIG) program, thus leveraging the money the town has set aside for the project. The area will be dredged to a depth of eight feet before installing a pier planned to be six feet wide and 120 to 130 feet long. It will be designed to BIG standards, expected to last for at least twenty years. The BIG program targets non-trailerable transient vessels at least 26 feet long and requires a depth of at least six feet alongside.

Maxbauer also explained the recent purchase, using funds from last year's budget, of a John Deer Alligator vehicle, which will provide new capabilities to public works with more economy than the existing pickup trucks.

The meetings still take too long. I will have some suggestions about that.

Gandalf

Gandalf frees the GOP from Grover Wormquist.

http://youtu.be/w65menUWLIY

Where Is The Stock Market Rally?

Today is the eighth straight day the market is down. No rally yesterday after the vote in the House. No rally today after the vote in the Senate.

Does the Market know something Washington doesn't?

Maybe they see this as a victory for the Tea Party but a loss for America. I do.

This deal, with its reduction in government spending, will be a drag on the economy. The consequences:

1. More jobs lost;
2. Reduction in the Gross Domestic Product (GDP);
3. More deterioration in the nation's roads, highways, bridges, railroads, harbors and other infrastructure (the quality of our infrastructure now ranks 23rd in the world);
4. Reduction in basic research;
5. Reduction in education;
6. Reduced ability to compete with the rest of the world;
7. More wealth diverted to the wealthy and powerful;
8. More blame to the blameless,
9. Reductions in Medicare and Social Security.

The Tea Party has now killed their half of the dog.

Cutting government expenditures in an economic downturn really worked out for Herbert Hoover in 1929, didn't it? Just remember - it was the Tea party this time.

Debt Limit Explanation

I have tried to explain what is going on, but today economist Jared Bernstein has a more clear explanation:

"While waiting to go on Larry Kudlow’s show last night, I heard Sen Mitch McConnell say:

“What we have done, Larry, also is set a new template. In the future, any president, this one or another one, when they request us to raise the debt ceiling it will not be clean anymore. This is just the first step. This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order.”

This morning, on Squawk on the Street (CNBC) I debated former Sen Judd Gregg who wholeheartedly endorsed this process, calling it the best way to impose budget discipline.

Predictable, I guess, but let’s think about this for a sec. These politicians are essentially saying the following:

“We in Congress cannot be counted upon to come up with budgets that pay for the spending we authorize. Therefore, we will have to borrow to make up the difference. But if that borrowing hits the cap, we will not raise the cap to cover the appropriations on which we already signed off, unless we get the spending cuts we want.”

To understand how nonsensical Sens McConnell’s and Gregg’s position is, you have to appreciate that Congress knows when they pass their budget whether it will breach the debt ceiling or not, just like you know when you order your lunch whether you’ll be able to pay for it. They’re saying, I’m going to keep ordering lunches I can’t pay for and when the cashier hands me the check, I’ll hand it right back and tell her it’s her problem.

The budget process is when you square the ledger. Or not—there will be budgets, especially in recession, that add to the deficit and breach the ceiling. In such cases, Congress must borrow to make up the difference, and sometimes that will mean raising the ceiling, as we’ve done without incident since 1917.

But Sens McConnell and Gregg would rather pass budgets they knowingly refuse to pay for, and then threaten default. You can call that budget discipline if you want. But I’m telling you, this is not the way of great nations.

On the plus side, while I was waiting to go on Lawrence O’Donnell’s show, I heard Barney Frank, who, while even more disheveled than usual, made a whole ton of sense on the debt ceiling debate (he was a ‘no’ vote in the House)."

Job Losses

Oriental Town Charter - Proposed Amendment

A couple of interesting items on tomorrow night's agenda for the meeting of the Oriental Town Board of Commissioners:

1. Under "new business" - Approve subdivision of property at 204 High Street. This is a continuation of a longstanding controversy in that neighborhood. There has been high public interest in the issue in the past.

2. Set public hearing for proposed amendment to Article VI of the GMO. I'm sure it's just a typo, because required notice of a public hearing has not been made - but the proposed amendment in the commissioners' briefing package says "adopted this 2nd day of August, 2011."

3. Similarly, the resolution of intent to adopt a charter amendment changing terms of office for mayor and council members from two to four years calls for a public hearing August 2, 2011. This is obviously in error.

For the information of citizens, NCGS 160A-102 sets out the procedure to be followed:

"The resolution of intent shall describe the proposed charter amendments briefly but completely and with reference to the pertinent provisions of G.S. 160A‑101, but it need not contain the precise text of the charter amendments necessary to implement the proposed changes. At the same time that a resolution of intent is adopted, the council shall also call a public hearing on the proposed charter amendments, the date of the hearing to be not more than 45 days after adoption of the resolution. A notice of the hearing shall be published at least once not less than 10 days prior to the date fixed for the public hearing, and shall contain a summary of the proposed amendments. Following the public hearing, but not earlier than the next regular meeting of the council and not later than 60 days from the date of the hearing, the council may adopt an ordinance amending the charter to implement the amendments proposed in the resolution of intent.

The council may, but shall not be required to unless a referendum petition is received pursuant to G.S. 160A‑103, make any ordinance adopted pursuant to this section effective only if approved by a vote of the people, and may by resolution adopted at the same time call a special election for the purpose of submitting the ordinance to a vote. The date fixed for the special election shall be not more than 90 days after adoption of the ordinance.

Within 10 days after an ordinance is adopted under this section, the council shall publish a notice stating that an ordinance amending the charter has been adopted and summarizing its contents and effect. If the ordinance is made effective subject to a vote of the people, the council shall publish a notice of the election in accordance with G.S. 163‑287, and need not publish a separate notice of adoption of the ordinance."

NCGS 160A-103 Stipulates: "An ordinance adopted under G.S. 160A‑102 that is not made effective upon approval by a vote of the people shall be subject to a referendum petition. Upon receipt of a referendum petition bearing the signatures and residence addresses of a number of qualified voters of the city equal to at least 10 percent of the whole number of voters who are registered to vote in city elections according to the most recent figures certified by the State Board of Elections or 5,000, whichever is less, the council shall submit an ordinance adopted under G.S. 160A‑102 to a vote of the people."

Debt Limit Update

We hear there is an agreement.

The country's future has been held hostage, and we paid a substantial ransom.

The price will be economic contraction. Jobs will be lost.

I suppose disaster is better than catastrophe.

New Poll Questions

At least, these are questions I wish pollsters would ask:

Q: Do you support reduced government expenditures even if it means you lose your job?

Q: Do you support reduced government expenditures even if it means reduced unemployment compensation when you lose your job?

Q: Do you support reduced government expenditures even if it means reduction in Medicaid when you lose your job?

Q: Do you support reduced government expenditures even if it means reduced Social Security benefits?

Q: Do you support reduced government expenditures even if it means reduced Medicare?

For business owners:

Q: Do you support reduced government expenditures even if it means fewer customers buy your products or services?

Pudd'nhead Wilson, Chapter 1 by Mark Twain (Excerpt)

Mr. David Wilson, a young fellow of Scotch parentage had finished a post-college course in an Eastern law school a couple of years before. A homely, freckled, sandy-haired young fellow, with an intelligent blue eye that had frankness and comradeship in it and a covert twinkle of a pleasant sort, Wilson had just made the acquaintance of a group of citizens. An invisible dog began to yelp and snarl and howl and make himself very comprehensively disagreeable, whereupon young Wilson said, much as one who is thinking aloud:

"I wish I owned half of that dog."

"Why?" somebody asked.

"Because I would kill my half."

The group searched his face with curiosity, with anxiety even, but found no light there, no expression that they could read. They fell away from him as from something uncanny, and went into privacy to discuss him. One said:

"'Pears to be a fool."

"'Pears?" said another. "Is, I reckon you better say."

"Said he wished he owned half of the dog, the idiot," said a third. "What did he reckon would become of the other half if he killed his half? Do you reckon he thought it would live?"

"Why, he must have thought it, unless he IS the downrightest fool in the world; because if he hadn't thought it, he would have wanted to own the whole dog, knowing that if he killed his half and the other half died, he would be responsible for that half just the same as if he had killed that half instead of his own. Don't it look that way to you, gents?"

"Yes, it does. If he owned one half of the general dog, it would be so; if he owned one end of the dog and another person owned the other end, it would be so, just the same; particularly in the first case, because if you kill one half of a general dog, there ain't any man that can tell whose half it was; but if he owned one end of the dog, maybe he could kill his end of it and -- "

"No, he couldn't either; he couldn't and not be responsible if the other end died, which it would. In my opinion that man ain't in his right mind."

"In my opinion he hain't got any mind."

No. 3 said: "Well, he's a lummox, anyway."

That's what he is;" said No. 4. "He's a labrick -- just a Simon-pure labrick, if there was one."

"Yes, sir, he's a dam fool. That's the way I put him up," said No. 5. "Anybody can think different that wants to, but those are my sentiments."

"I'm with you, gentlemen," said No. 6. "Perfect jackass -- yes, and it ain't going too far to say he is a pudd'nhead. If he ain't a pudd'nhead, I ain't no judge, that's all."

-

Discussion Question - Was David "Pudd'nhead" Wilson an early member of the Tea Party?

Or was the dog?

Early Sunday Morning?

So, are we going to have a constitutional crisis?

No, Thomas Friedman, a third party won't help.

A modest proposal: can the debt limit. It serves no useful function.

Federal Spending 2007 to 2010

Here's a graphical picture of the increase in government expenditure as a percentage of GDP from 2007 to 2010.

The Truth About Federal Spending

New Data: There Has Been No Recovery

Turns out, according to latest data from the Bureau of Economic Analysis, we haven't had a weak recovery for the past three years - our GDP actually decreased from 2007 to 2010 by 0.3% per year. One of the main contributing factors has been decreased state and local government expenditures.

Here's what the Washington Post's Ezra Klein has to say in his article "The Recovery-Less Recovery."

Slow Growth: Chicken or Egg?

Today's Commerce Department report shows the economy is growing at an annual rate of 1.3%. That is not enough to keep up with population growth.

The New York Times explains: "The economy’s slow growth rate is partly responsible for stubbornly high joblessness across the country. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been reaching record highs month after month. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy."

The Times has it backwards. The stubbornly high joblessness is causing the economy's slow growth rate. But cheer up, things could be worse. And if deficit hawks in Congress get their way and reduce government spending in the midst of joblessness, they will be.

Ideas and Words

"Where an idea is wanting, a word can always be found to take its place."

- Goethe

Into the Valley of Death

Into the Valley of Death Rode the Six Hundred. Theirs not to make reply, theirs not to reason why, theirs but to do and die.

What kind of romantic nonsense have the Tea Party types been reading? Are they like the colonels who ordered their troops into a suicide attack, because they had bought their commissions and were incompetent? Or are they like Sir Joseph. the "ruler of the Queen's Navy" in H.M.S. Pinafore, who never thought of thinking for himself at all.

None of these characters, however, had the power to drag a whole nation into disaster with them.

It must be a heady brew for eighty or so ignorant young idealogues.

Certitude unsupported by facts.

Where Are The Milk Jugs?

Remember a couple of years ago when local organizers in Oriental mailed empty milk jugs to Washington in opposition to President Obama's health care reform? Many of them were afraid the health care reform would harm their medicare. They were apparently influenced by "mediscare" reports.

I'm waiting for them to start up their protest again, mailing the jugs to Republican members of Congress. Turns out Republicans really want to reduce or abolish medicare, and are using the national debt limit to extort agreement.

Vicious Cycle

Here's a recent post by Robert Reich. I think he's absolutely spot on.

Let's Cut Spending and Follow Britain

Pentagon Staff Officers used to turn to each other after receiving particularly muddleheaded direction from on high and say:"that's dumb - let's do it."

In case we need current evidence that government austerity when a country is in a liquidity trap contracts the economy, just look to Britain.

Since invoking austerity, British GDP has shown no growth for the past nine months. The Tories have a number of excuses: it was the royal wedding of Prince William and Kate Middleton; no - it was the Japanese earthquake and tsunami; no - it was record high temperatures in April; no - it was advance ticket sales for the 2012 Olympics in London.

Really?

Might it be the result of reducing government spending, thus reducing demand when the economy is already weak?

Goldman Sachs seems to think that will happen here, according to a report quoted by economist Jared Bernstein. Goldman Sachs analysis:

“A review of the spending and tax data at the federal, state, and local level suggests that a significant part of the weakness in economic activity in 2011 so far is due to fiscal retrenchment. In the first quarter, the Commerce Department estimates that spending cuts at the federal, state, and local level subtracted 1.2 percentage points from the annualized pace of real GDP growth; moreover, the expiration of the “Making Work Pay” federal tax cut and hikes in state taxes probably offset most, if not all, of the boost to disposable income from the temporary payroll tax cut.

In the second quarter, the fiscal policy impact was probably smaller, but still negative. Indeed, monthly data on defense spending, state and local employment, and state and local construction all show a clear downward trend for 2011 so far.”

So don't be surprised if our next employment report looks bad.

In the meantime, I like this photo:

Voting

The North Carolina legislature today attempted unsuccessfully to override Governor Perdue's veto of House Bill 351, the Voter ID bill. According to the News and Observer, there may be future attempts to override.

I have commented previously on this and similar bills here and here.

Meanwhile, Back at Town Hall

The Town of Oriental has now resolved the police hiring impasse by recognizing that town administration, including hiring and supervision of police officers, is the legal responsibility of the town manager, not the Board of Commissioners.

The morning this revelation was announced, one of the commissioners revealed that she (the commissioner) had tasked one of the town employees with uncovering all of the amendments to the town charter and putting them on the web site.

Not a bad idea, but a better approach would have been to suggest the course of action to the manager and let him decide how to go about it. He is the one who must assign tasks to the staff. This is neither the duty nor the responsibility of a commissioner.

Now that the principal of how responsibilities are divided by North Carolina law between the board of commissioners and the town manager has been accepted, I think commissioners will find their own job very much easier. And they will probably do it better.

Debt Ceiling Kabuki

Here's what Brad DeLong thinks we should do about the debt ceiling: http://delong.typepad.com/sdj/2011/07/what-to-do-about-the-debt-ceiling.html

I like it. It's an example of the TACAMO principal (Take Charge and March Out).

There's another principal the Republican intransigents should consider if they get their way: you broke it, it's yours. In other words, if they succeed, everything that goes wrong with the economy in the next year and a half belongs to them! Be careful what you wish for, lest you get it (the Midas Principal).

Heads You Win, Tails I Lose

Here are some thoughts on the probable effects of the debt talks: Lose-Lose-Lose.

Not in a Depression - Yet

One of the reasons we are only in a recession and not in a depression is the existence of safety net programs put in place eighty years ago under FDR, supplemented by programs put in place nearly fifty years ago under LBJ. As a consequence, even though the percentage of the population with jobs is lower than at any time since the great depression, we don't have masses of people living in Hooverville's, rummaging through garbage dumps for sustenance.

Because of those programs, which Republicans opposed from the very beginning, not only have individuals and families been able to survive, businesses that would otherwise have had to close their doors have been able to stay open.

The scale of our programs is significant. Twenty percent of all personal income in 2010 came from government transfer programs. Just imagine the impact if those programs didn't exist.

Before the year is over, you may not have to imagine it. Some programs, such as extended unemployment insurance, are due to expire later this year. Some stimulus programs are also due to expire. Among measures proposed to reduce government spending are proposals to raise retirement age, raise the age of eligibility for Medicare and increase the costs paid by individuals.

As of now, it appears that neither party is pushing for measures to stimulate the economy, create jobs, thus increasing GDP and revenue, reducing the deficit by growing our way out of it.

So whatever results from the current budget negotiations, it looks like government spending will be reduced.

This will kill jobs.

In the long run, though, there are issues beyond aggregate demand that need attention. How do we address the jobs deficit in face of outsourcing offshore, computerization, or a combination of both. Where will our future jobs come from?

University of Texas economist James K. Galbraith has some thoughts on the subject in a recent essay published here by the New America Foundation.

Senator Tom Coburn (R) Oklahoma Is After TriCare

Senator Tom Coburn, physician, of Oklahoma, wants to drastically reduce the health care benefits of retired military personnel and their families.

Senator Coburn, who never himself served in the military, according to his bio, has decided to aim his budget cutting axe at military benefits for active duty and retired military personnel and retirees. Under his axe are Tricare Prime and Tricare for Life, the military's medical care system that covers some active duty personnel as well as retirees and their families. His proposals would increase enrollment costs by as much as eight times and add thousands of dollars to fees charged to Medicare-eligible retirees. "It's a matter of fairness," he says.

Coburn would also raise the cost of pharmaceuticals by three to five times, and he would target prices in commissaries as well.

Walter Pincus of the Washington Post describes Senator Coburn's plan here.

Heresy and Heretics

I'm not sure these days exactly what or who is conservative.

There was a time when "conservative" referred to people who dressed conservatively (women wore white gloves and hats, men wore suits and ties with hats and perhaps a vest), spoke with attention to grammatical and factual correctness, and who were cautious about making changes to the existing order. Plainly that understanding no longer applies.

There always were, I knew, different kinds of people who called themselves conservative. A quarter of a century ago, I was puzzled by two of them in particular: James J. Kilpatrick and William F. Buckley, Jr.

What puzzled me was the fact that, though I seldom agreed with James J. Kilpatrick (except when his topic was the English language), I could understand what he was saying and follow the logic of his arguments. Buckley, on the other hand, made no sense to me at all. Because of this, I had no idea if I ever agreed with him.

I asked an Irish Catholic friend and co-worker, who explained: "Kilpatrick is a Protestant. He presents facts and uses logic to make his case. Buckley, on the other hand, is seeking to expose heresy." Then he added: "by the way, liberal Catholic columnists do the same."

It appears that we are being led toward economic catastrophe by a group of grand inquisitors bent on rooting out heresy against the revealed truth as proclaimed by sainted (though dead) economists. If the economic facts collected by statisticians don't fit the revealed theories, then the facts are wrong! If predictions based on those theories don't come to pass - well then, there must be some other explanation.

Debt and Remembrance

Here's a comment from Paul Krugman's blog today:

July 22, 2011, 9:59 am

Debt and Forgetfulness

I keep seeing comments along the lines of “Keynesianism doesn’t work, because liberals keep running deficits even when times are good, and never pay debt down.”

Guys, how about looking at recent history (pdf)?

Between 1993 and 2001, federal debt held by the public fell from 49.2 percent of GDP to 32.5 percent of GDP. What stopped the paydown of debt wasn’t liberal big spending; it was demands from conservatives that the surplus be used to cut taxes. George Bush said that a surplus means that the government is collecting too much money; Alan Greenspan warned that we were paying off our debt too fast.

Oh, and I was very much against those tax cuts, arguing that we should pay down the debt to prepare for future needs. As a reward, I now get accused of inconsistency, for saying that deficits were bad under Bush but good now.

Anyway, get your history straight before making claims about who’s fiscally responsible.

Wisdom and Politics

"Do you not know, my son, with how little wisdom the world is governed?"

Axel Oxenstierna, Chancellor of Sweden to his son (1648)

He would feel right at home today.

Larry Summers Comments: Jobs Deficit

I have copied the following comments by Larry Summers from economist Brad DeLong's blog:

Felix Salmon sends us to the Walter Isaacson interview:

The smart and charming Larry Summers: "I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970′s, and have inflation and have excessive borrowing. But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.

"Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be. That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.

"So I think the President has been right to be focused, and I think he could even focus more intensely on what is, I think, the central problem, which is how to get enough demand and enough confidence going, so that this economy achieves escape velocity from the recession. We’ve been flying out of the recession, but we’ve been flying out of it dangerously close to stall speed, and doing something about that should be our top priority. I mean it is crazy.

MR. ISAACSON: "Does that mean more stimulus?

DR. SUMMERS: "Well, you can call it that. That’s one part of it. It is crazy if you think about it, that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls. We can borrow money to invest in fixing that, at 2.8 percent. Twenty percent of the people in the country who are doing construction are unemployed, and we’re not trying to do something about that, when we have a major demand problem? It just doesn’t make any sense. We have infrastructure in this country — I mean you can argue whether we need a new high speed rail system or whether we don’t need a new high speed rail system. But I don’t know what the argument is for letting bridges collapse. I don’t know what the argument is.

"I mean every time, and unfortunately it’s fairly often, I fly in and out of Kennedy Airport to any other airport in the world that you might fly to from Kennedy — you can fly to Europe, you can fly to Asia, any of those places, and you compare Kennedy Airport with the airport where you land, and you ask yourself which is the airport of the greatest country, richest, most powerful country in the world? I mean, and you know, you can say airports aren’t that important or whatever. But it is symbolic of an approach to infrastructure that probably never made any sense, and certainly doesn’t make any sense when you can borrow money at 2.8 percent and you’ve got 20 percent of the construction workers unemployed. So I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit. Those are deficits that we need to focus on also.

"Yes, in the long run right now, thanks mostly to what happened during the Bush administration, the United States of America taxes 14 percent of GDP. Fourteen percent. That’s about four and a half percent below the average of what we’ve done over the post World War II period, and we now have the oldest population that we’re ever going to have, a larger debt than we had before. We have, apart from the aging of the population, a public sector that’s heavily involved in health care, and in every country in the world, health care has grown relative to GDP. The idea that somehow 14 percent is adequate, or that the priorities starting at 14 percent should be to cut taxes, is crazy...

Posted on July 21, 2011 at 08:48 AM in Economics, Economics: Fiscal Policy, Economics: Macro, Obama Administration, Political Economy, Political Economy: Social Democracy, Politics | Permalink | Comments (7) | TrackBack (0)