In ancient Rome an augur, pictured above, was a religious official whose responsibility it was to examine natural signs to determine the divine approval or disapproval of a course of action. Yesterday the New York Times put forth its own augurs in the form of its regular economics op-ed contributors, Greg Mankiw, Christina Romer, Tyler Cowen, Robert H. Frank, Robert J. Schiller, and Richard H. Thaler, who have, apparently, read the signs and find the new year not particularly propitious. Rather than summarizing their observations which are reasonably terse, I recommend you read them yourself in their entirety.
I was a bit disappointed by their offerings. The legendary theatrical producer David Belasco once said that if you can’t write your idea on the back of your business card, you don’t have a clear idea. I don’t believe that the NYT’s economics op-ed writers have clear ideas about what produces growth or what we need to do to move forward. The effect is rather as though we were setting out on a journey of exploration rather driving from New York to Chicago. We need a road map not Lewis and Clark.
Under the rubric of fools rushing in where angels fear to tread, I’ll try to put forward some clear ideas of my own. However, first a detour. Paul Krugman is conspicuous by his absence from the list of luminaries above. Since his views are well known they hardly bear repeating.
I think that Dr. Krugman and anyone else proposing fiscal stimulus as such as the remedy for our economic problems is wrong because of the peculiar conditions that face us today. We have just experienced the collapse of an enormous bubble. What was a $10,000 tulip bulb is now worth two bits. How can that not enter into the calculation of the economy’s productive capacity? In the context of today I think that means we are unable to calculate potential production. Keynesian stimulus is intended to fill the gap between present capacity and potential capacity. I see nothing in the General Theory that leads me to believe fiscal stimulus can be used to increase production beyond its potential.
Here are my ideas as simply as I can put them. GDP is about $15 trillion per year. Growth is slow and may be for the foreseeable future. Government spending at all levels is about $6 trillion per year. The deadweight loss of taxation is estimated as being from 15% to 75%. Spending itself causes distortions which results in additional deadweight loss. There are also costs of compliance and avoidance. These are borne by industry but don’t count into government spending.
Deadweight loss decreases growth in the economy. When growth is robust it doesn’t matter a great deal. When growth is slow increasing deadweight loss can absorb all of the potential economic growth.
I don’t mean by this to suggest that government is the cause of all of our problems or that we can eliminate all government spending. My point is that we need to revisit the reasons for the spending, spend what we need and no more, and transfer some spending from areas that will produce little or no growth to areas that will produce more.
Specifically, we need to spend less on defense and security and increase the productivity of healthcare and education. By that I mean get more while spending the same or even less. That’s a tall order. It will require a sea change; a paradigm shift. Without that sort of major change I believe we can expect more of the same in this year and in years to come.
Comments as schedule dictates, I’m reading the bits in the NYT first:
Mankiw’s comments are useless. He mostly restates stuff that’s fairly common knowledge, and offers no actual insight into anything. He does however cheer on the Federal Reserve. Boring and useless.
Romer’s comments are better, but still not terribly informative. (Plus she makes at least two comments sure to annoy Ben Wolfe!) But her “spend more and spend less” is really just an Rx for more of the same, as is her desrie for the federal government to give more money to the states to waste. (Surely she can’t believe that the states won’t just shift money around to protect the stuff they’re interested in protecting instead of just doing as the federal government dictates.)
So far not impressive. (And I apologize if Dave has said the same thing, as I’m taking his advice and reading the other stuff first.)
On Mankiw: Agree with Icepick here, Mankiw says absolutely nothing useful and continues his doomed love affair with monetarism despite the Fed’s utter inability to effectively manage the recession.
On Romer: More deficit hysteria. It would be nice if someone would challenge her to define who she thinks we owe money to, because we don’t. It continues to shock how ignorant our biggest names in economics are regarding the realities of sectoral balances. Totally agree with her on cutting the payroll tax and would go even further by permanently ending it.
On Cowen: It’s like the guy is reading from a book on atonement, repeating again and again how Europe must endure pain so that it may once more come into the light. “Stay the course” is probably the best summary I can think of.
On Frank: I agree that national income must be shifted back toward wages for long-term recovery and growth, but how do we do that? It’s fine to talk about the 1% vs. everybody else, but what good is that without a solution that address the root problem?
On Schiller: Measured and reasonable ideas on dealing with tax-code inefficiencies regarding home ownership and will probably be helpful in the long-term. He doesn’t, however, discuss tighter lending standards which I believe are a necessary part of the mix.
On Thaler: Offers band-aid solutions to a health care system with a dismal outlook. Not sure I’m crazy about the notion “technology” will keep track of every pill I take and berate me to continue doing so. Says we should go for walks, which doctors have been telling us for about two or three thousand years. I didn’t read Nudge and am thinking I didn’t miss much.
Cowen’s piece is a little better. He lays out a part of the situation in Europe, explains what THEIR central bank is trying to achieve, what it would take for it to work, and at least a partial description (which is all a reasonable person could give anyway) of what would happen when it starts to fall apart. Then he goes all Optimist Club and gives it a 1-in-3 chance of working. Probably somewhat informative to most readers.
Frank’s piece is the most interesting so far. If I cared more I’d want to see the raw data, but what the Hell, I’ve got things to do (I’m taking a breather) and who cares that much?
I do think he should add something to his toil index, though. Throw on the cost of paying for one’s OWN education into that mix. That would show how hard it is becoming for people to move up the income ladder.
@Ben, I’ll address some of your comments later. Back to the grind.
I’m tempted to skip Schiller’s piece based on the headline alone.
Shiller apparently wants the government to help more poor people buy houses. Sigh. The only good thing is that he wants to eliminate the current mortgage deduction, and what he says about THAT ties in with the Frank piece before it.
Thaler’s piece is the kind of stupid bullshit that Ivy Leaguers love, and that won’t work across the population as a whole. Do you really think $500 as incentive will get people to stop smoking? Smokers would save far more than that JUST FROM NOT BUYING TOBACCO products every year. Stupid fucking useless twat. And THAT counts as what the BEST and BRIGHTEST can contribute. The country is so totally hosed….
@Icepick
Thaler and Mankiw are a glaring demonstration that we do NOT live in a meritocracy.
Thaler and Mankiw are a glaring demonstration that we do NOT live in a meritocracy.
Not exactly correct. They ARE meritorious, but only because the definition of merit has nothing to do with real world accomplishment. They have succeeded in academe and politics – the only other thing that matters at the top is having money, and it doesn’t matter how you got it.
@Icepick
Here’s the thing: to me, merit doesn’t just mean you earn your way in and then you’re set for life. It means you must continue earning the right to stay there. Getting into a club which then works to ensure you never fail no matter how bad a job you do or how wrong you are is elitist rather than meritorious in nature. Perhaps you disagree, but if I’m wrong and your definition is the correct one then meritocracy has and is serving us poorly by saddling the country with deadwood at the top.
Ben, I agree with you. I just don’t think that’s how the people running the show see things, because it isn’t beneficial to them.
” My point is that we need to revisit the reasons for the spending, spend what we need and no more”
We spend too much time debating the size of government, rather than making it work better.
Steve
Be wary of pursuing a will o’ the wisp, Steve. Can government work better? Of course. But it can’t work perfectly nor should it be expected to.
Additionally, deadweight loss is real and inevitable. It’s not an ideological pose. Central planners cannot avoid it.
Here’s my projection for the year: People begin to realize the Democrats have gone as far off the deep-end as Republicans have. Whereas the right has quadrupled-down on its bigoted roots and Jesus fetish, the Democrats have become Nixon and embraced the most extreme and lawless policies we’ve seen including the Bush Administration.
I hadn’t examined my thinking on the subject in aggregate until I read Alex Knapp’s column on how Ron Paul is just too far out there on the 14th Amendment to become president, but I’m grateful to Alex for helping me realize that if Paul is insufficiently supportive of constitutional liberties for election then judging by the same standard Obama should be impeached.
Time to come out of the closet and accept I’ve become a civil libertarian, and acknowledge I’ve been unfair and harsh at times in criticizing the libertarian movement.
Libertarianism or, as it used to be called, liberalism is a very fine principle with which one can inform one’s politics. Unfortunately, the psychology of people for whom libertarianism is the core principle of their politics is such that it severely limits libertarianism’s influence in the two major political parties. They just aren’t joiners. They’re just not statist enough.
With libertarians taking a back seat by preference in both parties that leaves the Democratic Partyin tension between its technocratic and its machine politics populist wings and the Republican Party mostly under the control of its social conservatives. They’re the only ones with the organizational sticktoitiveness to wield the reins of power in the parties.