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)

Debt Ceiling Analysis

What will happen if Congress doesn't raise the debt ceiling?

One analysis was provided today in an e-mail from Congressman Walter Jones.

"The House Republican leadership recently invited Jerome Powell - former Undersecretary of Treasury in the George H.W. Bush Administration - to present members of Congress with a nonpartisan debt limit analysis, and to present a fact-based look at what consequences our country will be facing without a resolution to the current budget crisis."

Actually, I don't agree that we have a current budget crisis. What we have is an artificially-induced political crisis over a matter that should be treated as a routine housekeeping matter. This is what President George W. Bush's Director of the Office of Management and Budget, Mitch Daniels, called the debt limit. He was right.
Jerome Powell, George H. W. Bush's Undersecretary of the Treasury, provides a debt ceiling analysis here. Powell's analysis makes it clear that the consequences of a failure to increase the debt limit could be catastrophic. He describes the risks as serious. In my view, he understates the risk, because he doesn't address the cascading effects of resulting job losses, interest rate increases and contraction of the economy likely to result.

So read the analysis, but bear in mind the consequences of default could be very much worse.

Oriental Town Charter: More Info

For those following the saga of Oriental's 1899 charter and subsequent amendments, I now have a copy of the 1997 ordinance, entitled 'AN ORDINANCE TO AMEND CHAPTER 184, PRIVATE LAWS OF 1899 ("TOWN CHARTER OF THE TOWN OF ORIENTAL").

The operative portion of the document reads as follows:

"BE IT ORDAINED BY THE BOARD OF COMMISSIONERS OF THE TOWN OF ORIENTAL:

That Chapter 184, Private Laws of 1899 ("Town Charter of the Town of Oriental") be and the same is hereby amended by adding Section 16 as follows:

"Section 16. That the Town of Oriental shall operate under the council-manager form of government in accordance with Part 2 of Article 7 of Chapter 160A of the General Statutes of North Carolina and any provision of this act [the 1899 charter] not in conflict therewith."

ADOPTED THIS 12th DAY OF NOVEMBER, 1997

/s/ Sherrill Styron
MAYOR

/s/ William M. Crowe
TOWN ADMINISTRATOR"

The bottom line: Pretty much what I have been reporting for the last year, as summarized here. In other words, the board of commissioners makes policy and political judgements, and the town manager administers the town.

Annoying (and Erroneous) Bloviations - Summary

Relating to several of my recent posts, economist Jared Bernstein today brings clarity to many issues in his post, "Roundup of Deeply Annoying Stuff."

I particularly like his analogy of the sinking boat. I may try to rework that one for Pamlico Sound.

Deficit? How About Jobs

Yesterday I posted a link to a good article in the Washington Post about deficits and debt.

The Post article, however, left out the most important thing - why managing the federal budget isn't at all like managing a household budget. The reason is jobs and overall economic health of the nation.

The government manages our money. The public quite rightly holds the president and members of congress responsible for the economy.

Money is a creation of man. Whether gold, silver or paper, it is a social artifact that must be managed. Wisely.

Some fantasize that a return to the gold standard for our currency will bring financial stability, forgetting that we were on the gold standard in 1929 when the great depression began and for four years after that. It didn't help. Other proposed magical solutions for a financial utopia include a balanced budget amendment. After all, every state has to balance its budget.

But states don't have their own money.

The federal government does.

There are two ways the government uses money to maintain or restore the health of the economy:
(a) Monetary policy. The Board of Governors of the Federal Reserve System and the Federal Open Market Committee (FOMC) make key decisions affecting the cost and availability of money and credit in the economy. If the Fed determines that inflation looms, they increase the discount rate or reduce the money supply to cool down the economy. If economic activity falls below trend, it may reduce the discount rate or increase the money supply.

The statutory goals of the Fed's monetary policy are to maintain stable currency and full employment. That is already very different from managing a household budget.

(b) Fiscal Policy. On a day to day basis, the Department of the Treasury borrows and repays money as necessary to conduct government operations. Government receives its revenue sporadically, but has to pay its bills when they come due. It covers any shortfall by short term borrowing and repays the debt when revenue is received. This is very much the same way businesses operate. Payment to businesses for goods or services provided is typically received well after the goods or services are produced and delivered. The business in the meantime has to pay its employees, its suppliers and its contractors. To cover the delay in receiving payment, businesses establish lines of credit with a bank. The bigger the business, and the greater the resulting income, the larger the line of credit a bank is willing to extend. Nothing unusual here.

Bear in mind that every expenditure the Treasury covers has been authorized by the Congress and funds have been appropriated. Strict controls are in place.

That being said, it is possible that monetary policy, controlled by the Fed, may work against fiscal policy, controlled by the Congress and the president, since expenditures in excess of revenue can be expansionary, while revenue in excess of expenditures will be contractionary.

Right now, with the Fed’s interest rate set as low as it can go (the zero bound), there is nothing more the Fed can do to stimulate the economy. Businesses and banks are awash in cash, interest rates are as low as they can be, but businesses aren’t borrowing to expand capacity. They already have excess capacity as it is. What they need are customers.

For the foreseeable future, only the government can act as a purchaser at the scale needed to get the economy going again.

The last thing we need is reduced government spending.