Saturday, April 9, 2011

Note to Krugman

Paul Krugman complains about the Ryan plan (in which he has exposed massive quantitative flaws in a series of recent blog posts):
I’m in an airport lounge, for my sins, and there’s no avoiding the TV running CNN. And there’s David Gergen, telling me that the Ryan plan, whatever its flaws, is “serious”. So I guess that’s the Very Serious People line.


So, we have a plan that proposes to cut spending to Calving Coolidge levels, without explaining how it will do that; that includes $2.9 trillion in tax cuts, but asserts that it will make that up by broadening the base — yet says literally nothing about what that means; and has as its centerpiece a Medicare plan that will collapse as soon as seniors start getting their grossly inadequate vouchers.

Oh, and it directs us to a totally ludicrous Heritage Foundation analysis for support.

There’s nothing serious about this plan. And the way our pundit class swooned over this fantasy document suggests that all those people lecturing the American people about our unwillingness to face up to reality and make hard choices should spend some time looking in the mirror.
The reason for this is that the pundit class is by and large innumerate.  And the reason for that is that journalists and TV producers are by and large innumerate.  I don't mean that they can't add or subtract, but they can't look at numbers or statistics and begin to ask or answer the most elementary but important questions: how big is this number as a fraction of other important numbers in the problem space?  How does the current instance of the number compare to the trend over time?  What would happen if I corrected this for inflation or economic growth?

The blogosphere is the best hope of this improving over time.  At a minimum, it has meant that some of us now have access to expert opinion that is not filtered through the lowest common denominator of what a news culture dominated by one-time english or journalism majors thinks the public wants to know.  And hopefully, over time it will elevate to more prominence thinkers who are extremely savvy and quantitative (Calculated Risk comes to mind).


bordoe said...

>And hopefully, over time it will elevate to more prominence thinkers who are extremely savvy and quantitative (Calculated Risk comes to mind).

I doubt it; although I encourage you to continue trying.

CNN is about too complicated for many Uhh-mericans.

The right wing blogosphere and the fringe left are full of popular but totally bogus people.

Calculated Risk and Tanta (R.I.P) were totally ignored back in 2005-2006 when their advice would have helped.

And I think the problem is with people; they would much rather believe mystical nonsense about something they poorly understand than taking their time to comprehend.

I realized this when almost no one I knew (personally, IRL) commented on the Japanese nuclear meltdown.

If people cant see the seriousness of that crisis; I dont see HOW they can see the seriousness of a financial crisis, of subtle things like monetary inflation or slow but sure processes like soil erosion and Peak Oil.

Nebris said...

Matt Taibbi had a few choice words on Ryan yesterday. *laughs*

brett said...

The think tank class is paid to come up with these plans and the pundit class is paid to promote them. It is a better short term scheme for the corporations and rich to game the system than it is to pay taxes. No rational argument is going win this fight over economic policy. We will continue to see a push for such budget policies until they are discredited by the collapse of the system.

Burk said...

Right on... but it isn't just the "serious people", talking heads and civilians who are not understanding. It is the mainstream economic profession as well that is in the tank for neoliberal viewpoints, despite being completely discredited in the recent unpleasantness.

If the economic profession (Paul Krugman mostly excepted!) doesn't know what it is talking about, and can be easily captured and used as mouthpieces by conservative interests/"think" tanks, etc,.. what hope do regular people have? The rot is far-reaching.

Particularly, the deficit commission enunciated this basic mainstream premise that the deficit & debt are "bad". Well, it isn't, and I would be happy to give chapter and verse as to why. The short answer is that Japan has tons more debt than we do, and haven't fallen into the sea yet (for financial reasons, at least!). And are in no danger of doing so. Currency issuing governments are not households.

Stuart Staniford said...

Ah Burk. I see Krugman isn't quite with you that deficits never matter, though.

Burk said...

Hi, Stuart-

Yes- a very astute citation. That is why I stuck in the "mostly"! As you can see from the reader recommended comments to that posting, the MMT folks would not feel that they had been fairly represented. Indeed, like Paul, they agree that deficits matter very much, but only depending on the larger macroeconomic situation, as Paul also explains. Deficits can indeed lead to inflation and all the ills he points to. The real question is... who is in charge?

Where we part company is, I think, on two main issues. One is on the sovereignty of "the bond market" (TBM). From what I understand, TBM has always been willing to buy US debt.. always. Additionally, the rule that the government has to match all deficit spending with private bond market issues is not an economically justified. It is a relic of the gold standard.. the old world where money didn't grow on trees, but was more of a zero-sum game. Now we print our own, and whether we put out bonds or not makes no difference at all. A shocking statement, I am sure, but those buying bonds are giving up money they would have otherwise saved anyhow, and gain an instrument that is completely liquid .. the process does not "sterilize" money from being spent in any way. So the Fed could just fund government spending as needed.. it would make no difference, other than the annuity stream sent out to rich people.

Nor has the US national debt ever been redeemed.. ever. It has always grown, even as the deficit has swung from positive to negative territory depending on mostly external conditions. So this idea that we have to "pay it off", or that each person in the US "owes" X amount.. is a complete misconstruction of the situation. It is savings that we communally are very happy to hold and treasure.

The second issue is the advisability of deficits on an ongoing basis. The mainstream folks (and I am not sure whether Krugman falls in this camp) claim expressly, or intuit, that over the course of the business cycle, our federal budget should be balanced. This would allow a bit of Keynesian tweeking, but hold to the household analogy overall, keeping us virtuously solvent, as it were. MMT says that this is fundamentally flawed, since the basic pressures on our monetary system can be unbalanced on a sustained basis. If we consistently have negative balances of trade, because people abroad consistently want to save in dollars, (i.e. China), then we have no choice but to run continual deficits, cranking out the necessary money. It's a tough job, but somebody's got to do it!

Obviously, our job is to keep our currency on an even keel, inflation-wise. But that does not equate to always keeping a balanced budget, or balancing over the longer term. Growth, and savings desires domestic and foreign will keep draining away dollars that it is the government's job (in part) to conjure. Someday, this may all turn around amid contraction, massive trade realignments, and demographic collapse, etc. But that day is really a very long way off- totally off the radar.

All this is not to say that deficits might not need to be reduced in the nearer future. But we very much agree with Krugman that now is definitely not the time. The deficit is mostly the product of the economic downturn- it would be folly to screw the economy by lowering government spending now, if the whole point of our economic policy is, as it should be, not to hit some supposedly "virtuous" numbers, but to get the economy working and unemployment down. Of course the Republicans see it differently. They want the economy to tank, and with it Obama's fortunes. It would be a small price to pay!

bordoe said...

Burk Braun >From what I understand, TBM has always been willing to buy US debt.. always.

You're missing the picture by not focusing on people like Bill Gross of PIMCO, when he recently starting talking about the PRICE of USTs being the important point as QE2 ends. His data showed he dumped ALL US Treasuries from his bond fund.

It's true that unless the US Treasury does something massively stupid (like default), it WILL get funded; but the PRICE of that funding (interest rate) is not to be determined by the State (or the Fed/Central Bank).

It's when the State/Central Bank tries to set the PRICE as well as VOLUME of issuance that pressures start to develop in the economic system.

The Federal Reserve is now buying 70% of the issuance of US Treasury.

As Fischer has increasingly strongly voiced, this is basically a thinly veiled version of monetization.

As Gross notes; what happens when this ends? The UST will very likely get funded; but at what PRICE will it get funded?

Smart money is now betting that interest rates are naturally (without QE2) quite a bit higher than currently suppressed rates.

I agree. And I think that with the huge leverage and funding needs the government has built for itself, we will very likely see a "debt spiral" situation develop in the US and Japan.

Stuart Staniford said...

On the treasury bond fears, I have to say when I read this story (which essentially says that now the govt shutdown scare is over, the republicans next plan to hold the debt limit hostage to their Ryan plan agenda) a tremor went through me as to the holdings of treasury bonds in my pension plan. Did anyone else feel that way, or am I overreacting?

bordoe said...

>Did anyone else feel that way, or am I overreacting?

I think you are very likely overreacting.

Default of the US Treasury is an "unthinkable" event and will destroy the viability of Federal Credit and basically take down the entire banking system with it (via lack of FDIC, quick default on GSE debts, etc). Many municipal governments hold "slugs" or special purpose US Treasury debt in lieu of checking accounts at banks. Many banks hold US Treasury "overnight" for demand deposit accounts. Money market funds (MMF) wont function as they hold tons of short-maturity US Treasury bills. The Fed's portfolio is largely government and government backed debts.

In short; default will be a disaster.

Is it possible? Yes.

Is it likely that a bunch of politicians who ultimately cater to the banks (think of how quickly TARP came into existence) will mess this one up this bad?

I doubt it.

But in the longer term, inflation and rising interest rates* is the big threat to the US Treasury, and we're now, in my opinion, in a long term down trend of US Treasury prices (ie, long term up trend in yields).

So I think holding US Treasuries is quite bad from that limited perspective of price (too high) and likely future prices (lower).

But not because of default.


*Rising bond prices = lower yields and vice versa. This effect is especially notable for long term fixed rate debts. See duration vs. maturity for a further exploration.

marku said...

No I don't think you are overreacting. I think the Republicans are venal enough to cause a completely unnecessary debt repudiation of the USD in order to spite Obama. And Obama is spineless enough to allow it to occur.

I think the MMT people are right in that a technologically managed economy with a non-negative balance of trade (and that part is key) would be able to apply MMT sucessfully. Think Singapore.

But the US? No.All the levers of government are captive to the financial industry (leading to incompetent and corrupt decision making), and the very real risk exists that foreign buyers (necessary to service the CA deficit) can panic out of buying US debt. This panic could then spread to fears in the US about the safety of the dollar. Once that sets in, hyperinflation occurs (whether justified by the money supply or not) as people flee the currency to buy anything of enduring value.

I think you already see the outline of this occurring in commodity and precious metals prices.

marku said...

Also, just to point out, debt certainly matters if you owe it to someone who has no legal requirement to accept your currency as payment. MMT states that they can make the USD the standard currency simply by making it the specie required to pay taxes.

Note that this doesn't' work when buying oil from SA or Russia. They are free to require payment in any terms they wish, be it yen, renminbi, gold, or wheat. And if your debt causes them to question your currency, then you are subject to their whims, MMT notwithstanding.

Of course you are "free" to do without their oil....

Burk said...

Stuart- Perhaps you are overreacting. Existing bonds will probably increase in value if no new bonds can be issued. The politicians would have to be truly certifiable not to find a way to keep spending either way as per existing budgets and laws, through accounting tricks, or through straight-forwardly eliminating the superfluous legal requirement to issue bonds to match deficit spending.

But on the longer term, there are no economic principles that limit the damage that idiotic politicians can do to our society. So yes, this is worrisome. But really, it is all about power, with the Republicans looking for continued Democratic appeasement (think Neville Chamberlain). The question is whether they are hanging themselves politically, and the answer lies with the economic sophistication of the electorate, which comes back to our job as bloggers.

What kills me is that Obama repeats the Republican talking points.. about spending cuts, debt is bad, etc... He is never going to win the debate by giving up, and deserting the very sound theory on which his stimulus was based, though it was insufficient.

Eric Thurston said...

As far as Burk's thesis goes (basically that 'deficits don't matter), it might work in an economic environment of growth fueled by cheap energy. After peak oil, and peak energy in general, I don't see how this can work. Now I know that one could produce graphs showing theoretical availability of energy continuing to rise, but, given the gross inefficiencies of human civilization, I think we are going to be squeezed by a combination of economic collapse and shrinking available energy per capita, if not shrinking available total energy.

Then there is the simple fact that the US govt. deficits will soon get to the point at which total revenues will have to go toward servicing the interest on the debt. I don't know how this can be gotten around, except by inflating our way out of the bind.

bordoe said...

>Then there is the simple fact that the US govt. deficits will soon get to the point at which total revenues will have to go toward servicing the interest on the debt.

It's important to note that the UST tends to borrow on the "short" end of the yield curve, and this added significantly to Federal budget tailwinds, along with Social Security demographics, during the 80s, 90s and 00s, as we experienced a very long and steady bond market bull run all along the curve.

The Federal Governments of both the US and (especially) Japan are basically highly leveraged borrowers; tiny incomes, massive debts, massively expanding commitments, and (for now) low interest expenses.

What happens when these rates start rising and the interest expense portion starts to crowd everything else out?

We havent had to think about it, because the last time UST headed into a higher inflationary/bond bear cycle was 1951-1981; and the US wasnt very levered at all.

I think this interest rate expense issue is the one the big ignored topic; I havent heard a single commentator on the "serious" news channels mention interest expense.

But if rates start rising, it'll be the biggest thing in the budget via the 'magic' of exponential growth.