Clinging to the theory...

Dean Baker compares the faith-based economics of "deficit reduction" to creationism:

Sometimes, it can be fun to get inside a crazy worldview to ask how it deals with contradictory evidence. For example, how do creationists reconcile their view that all plants and animals were created in their current form around 10,000 years ago, with fossil evidence of life forms dating back hundreds of millions of years?

In this vein, it's worth asking how the proponents of deficit reduction think that lower deficits will lead to increased growth and job creation in an economy mired in a severe slump? There is not an easy answer.

There is a standard "econ 101" story about how reducing deficits can boost the economy. The theory goes that if the government reduces its deficit, and therefore borrows less, it will reduce interest rates. Lower interest rates will, in turn, give firms incentive to invest more.

Lower interest rates should also cause the dollar to decline, since it will make US government bonds and other dollar assets less attractive to foreign investors. If the dollar falls in value, then our goods will be more competitive on world markets. This will cause us to import less and export more, thereby creating jobs.

However, is this what the deficit hawks believe will happen now? The interest rate on 10-year Treasury bonds is already down to 3.0%. Assuming a 2% inflation rate, this translates into a real rate of about 1%. How much lower do the deficit hawks think interest rates will fall if we were to sharply cut the deficit? Furthermore, how much more investment do they think we can induce even if we got a large reduction (for example, 0.5 percentage point) in real interest rates?

Do they think that this sort of decline in interest rates will send the dollar tumbling and thereby improve our trade balance? Against which currencies will a lower interest rate cause the dollar to fall sharply?

Neither of these stories really passes the laugh test. At best, we may hope to see modestly lower interest rates if cutting the budget deficit slows growth further. But there is no reason to expect any future decline to have any more impact than the recent decline in the 10-year Treasury rate from 3.6% in the winter to near 3.0% present this month.

There is another story that the deficit hawks occasionally push. This one says that if we lay off workers in the public sector, that will increase employment in the private sector. The story here is, presumably, that mass layoffs of public sector workers will depress the wages of workers further, thereby making it more profitable for employers to hire them. There's a simple problem in this picture. In order for wages to actually fall, the additional employment in the private sector must not be as large as the job loss in the public sector.

"The Sickness Beneath the Slump"

Economist Robert Shiller of Yale offers some thoughts - and data - on the roots of the financial crisis, the long-term effects on consumer spending, "rational market expectations" and a major failure of his profession in recent decades:

THE origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused.

News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect.

But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.

The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness.

Tim Pawlenty confuses "belief in the American people" with his foolish fantasies of tax cut pixie dust

One of the more desperate candidates for the GOP's presidential nomination, former Minnesota Governor Tim Pawlenty, has doubled down on the party's Tax Cuts Uber Alles dogma and equated his crank faith-based economic strategy with belief in America.

Actually he's "tripled down" on massive tax giveaways structured to further enrich the economic elite:

According to Bloomberg/Businessweek:

Pawlenty’s $11.6 trillion tax-cut plan, which reduces rates on income, capital gains, interest, estates and dividends, is almost three times larger than the proposals endorsed by House Republicans...Almost half of the benefits would flow to taxpayers in the top 1 percent of income distribution, or those earning more than $593,011 in 2013...

Pawlenty...said 5 percent annual average economic growth would help make up the revenue gap... (S)uch growth would be driven by the tax plan as well as by spending cuts, regulatory overhaul and monetary policy changes that Pawlenty is proposing.

So we're getting a version of the "tax cuts pay for themselves" mantra on steroids.  Paul Krugman, NYT's columnist and Nobel Prize-winning economist at Princeton, looks at Pawlenty's "plan" and the promise - 5% economic growth driven by massive reductions in taxes:

Tim Pawlenty — who has turned out to be a much bigger fool than I or, I think, anyone imagined — replies to criticism of his claim that he can get 10 years of GDP growth at 5 percent:

Obama’s economic team doesn’t have a plan, so their spokespeople attack ours. The idea that they don’t believe in the American people enough to say that we can grow the economy at 5% GDP really says everything. You have to wonder if in fact Obama’s grand plan is that we don’t grow at all — and if so — he and the central planners are doing a great job of that.

Well, here are 10-year growth rates starting with 1929-39:

   

Bureau of Economic Analysis Data here.

Except for the big jump from the depths of the Great Depression to the height of World War II, we have never had a decade of growth at 5%.

What’s also notable in this figure is the invisibility of all the supposed economic miracles we hear about. Saint Reagan was supposed to have revitalized the economy; can’t see it here. All you can really see is that the 60s were very good, and the recent slump has been very, very bad.

At least we can thank Pawlenty for erasing any doubts that he's one of the biggest fools out there - even by GOP presidential aspirant standards (or lack of them.)

Dreaming of Unicorns - when folks on the Right get "philosophical" about the issues

Ezra Klein wrote an excellent piece that examines the care-effective results delivered at low cost by the Veteran's Health Administration hospitals.  He references the column David Brooks recently published on the difference between Republican and Democratic approaches to the health care problem with this insight:

One way of thinking of health-care reform is, as David Brooks put it in his Tuesday column, that it presents “a basic philosophical choice.” I disagree. I think it’s a policy question.

Various models present us with substantial evidence of the benefits and drawbacks to the different choices we can make. Unfortunately, those models don’t present us with substantial evidence as to the benefits of the choices we would like to make. And that’s when we get philosophical.

Brooks gets "philosophical" in discussing health care reform because the empirical evidence doesn't back up his private market biases.  That's largely where the GOP is coming from these days.  Ideology and wishful thinking trumps reality-based problem solving.

Read Klein's entire column on the VHA below - "When socialism works in America" - it's a breath of fresh air in a stale and increasingly dishonest debate between pragmatic policy choices and promises of unicorns that exist in a land of dreams:

The dangerous politics of the debt ceiling

The Financial Times' conservative columnist Clive Crook warns:

Tea Party true believers may be salivating at the prospect of the coming Battle of the Debt Ceiling, but the GOP’s leaders are dreading it. Shutting down the government is a button they dare not press – not if they retain the least grip on reality. They did it once before, during the Clinton administration, and were slammed: the shutdown rescued the Clinton presidency. To do it in 2011, with the economy laid low and financial markets still twitchy, would be the limit of irresponsibility. It would be betting the recovery to make a point. This time, political annihilation might follow, and the party would deserve it.

The fraud and fallacies of "Ryancare"

Jared Bernstein, former chief economic advisor to Joe Biden, offers this critical commentary on a Paul Ryan Youtube touting the GOP's plan to kill Medicare:

The basic flaw is that Ryan and his video pretend that the R’s Medicare plan gives consumers the power to negotiate directly with health care providers, who can thus use their voucher-driven bargaining clout to hold down prices.  But, in fact, that’s not how his plan works at all.  Under his plan, seniors get to negotiate with insurance companies, not service providers (doctors, hospitals, etc.).

Ten years ago - George W. Bush launches his pre-emptive attack on budget surplus...

Lest we forget, it's been a full decade since George W. Bush went on the offensive against the threat to our nation of the Democrats' weapons of fiscal responsibility.  From an AP report shortly after George W. Bush entered the White House in 2001:

Mission Accomplished -June 7, 2001

(AP)  President Bush said Saturday that the most important number in the budget he sends to Congress next week is the $5.6 trillion surplus it projects over the next 10 years.

That huge projected surplus provides the underpinning of all the administration's tax-cut and spending plans, Mr. Bush said in his recorded weekly radio address.

"A surplus in tax revenue, after all, means that taxpayers have been overcharged," the president said. "And usually when you've been overcharged, you expect to get something back." The surplus figure "counts more than any other" in the budget, he said.

Democrats cautioned that surpluses projected over so long a period can turn into elusive fool's gold. And they continued to insist that as it stands the Bush tax-cut plan unfairly favors the wealthy over those of more modest means.

Deep thinker David Brooks fails to tell the truth about health care costs

In his Monday New York Times column titled - apparently without irony - "Where Wisdom Lives",  David Brooks discussed health care systems and the future cost-effectiveness of Medicare, posing Democrats as believing in "top down centralized planning" while Republicans favor "the decentralized discovery system of the market."

Brooks characterizes the Republican Ryancare alternative dishonestly because he doesn't mention that the CBO has projected costs - out-of-pocket and aggregate - as skyrocketing under the scheme to end Medicare in favor of capped vouchers:

Republicans point out that Medicare has tried to control costs centrally for decades with terrible results. They argue that a decentralized process of trial and error will work better, as long as the underlying incentives are right. They suggest replacing the fee-for-service with a premium support system. Seniors would select from a menu of insurance plans. Their consumer choices would drive a continual, bottom-up process of innovation. Providers could use local knowledge to meet specific circumstances.

Of course, Medicare as it stands is the most cost-effective piece of our health insurance puzzle.  It's been more successful - as a "volume buyer" negotiating prices - at controlling costs "centrally" than the multiplicity of private insurers have been.  Based on Medicare's current performance versus private insurers the CBO has rated and projected the difference in future cost of privatized Ryancare over Medicare, and it doesn't look good for Brook's "consumer choices" system. (See chart at right.)

And that's leaving aside any questions about the proposition that seniors - nearly all with pre-existing conditions, most with deep concerns about allocating out-of-pocket expenses within the limitations of a fixed and likely very modest income, and inevitably facing increased physical and mental frailty as they age -  would be more interested in ongoing participation in a "continual bottom up process of innovation" rather than security and systemic integrity - the "known" over a "process of discovery."

But Brooks truly goes off the deep end with this allegation:

Asymmetric warfare

Ezra Klein, at "Wonkbook", on the deficit debate:

(W)e’re not having a balanced argument over the deficit. We’re having an asymmetric argument over deficit reduction. Republicans see the deficit as an opportunity to push for dramatic and permanent changes to the state — including some that would technically increase the deficit... 

As for the Obama administration, they’re proposing a much more modest package that doesn’t use the deficit to push for long-term priorities, and in fact looks like a slightly more conservative version of the Simpson-Bowles report. It’s fallen to liberal think tanks to promote plans that see the deficit as an opportunity to push for major progressive policy changes. But without the support of the White House, those plans aren’t going to get very far...

In the end, Ryan’s plan has made a deal a lot harder than it would’ve been if the two parties had decided to do negotiations first and come out with a final plan together. But from the perspective of Republicans, it’s probably made a good deal a lot likelier. 

"A slightly more conservative version of the Simpson-Bowles report" is being negotiated versus GOP Budget Czar Ryan's anti-government radicalism.  The Republicans - despite the deep unpopularity of their "plan" that includes killing Medicare - couldn't ask for a playing field tilted much farther to the right. Whatever compromise comes of this can't be good. Except, as Klein notes, "from the perspective of the Republicans."

Is the most popular person in Washington also the most hated?

James Surowiecki, at The New Yorker, on Elizabeth Warren:

Elizabeth Warren may well be the most popular person in Washington.

When she was head of the Congressional Oversight Panel on TARP, her willingness to go after Wall Street, the Treasury Department, and the Fed made her a liberal icon. And her folksy, Midwestern air and her ability to express complex financial issues in simple language turned her into an unlikely media superstar.

Warren is now working to set up the Consumer Financial Protection Bureau, a new government agency inspired by her own work on consumer credit, and in the past couple of weeks almost a quarter of a million people have signed an online petition asking President Obama to nominate her as the official boss of the agency.

Yet Warren may also be the most hated person in Washington.

Behind the GOP facade - "deficits don't matter"

Grover Norquist and John Boehner

"Lapsed Republican" Bruce Bartlett, commenting to the Washington Post on the power of the extremist  right-wing anti-tax "enforcer," Grover Norquist, who has extracted a pledge never to raise taxes from  all but 13 of the 288 GOP elected reprsentatives in DC:

(E)ven though tax increases may be justified economically, they are never justified politically if you’re a Republican...it’s been Republican dogma that deficits don’t matter and the only thing that matters for the economy is cutting taxes.

"Winning the Future" - A slogan or an agenda?

Noting the dismal jobs picture that just came out - a 54,000 net jobs gain  in May when we need at least five times that each month just to keep the hole from getting deeper - Robert Kuttner at American Prospect sounds the alarm and offers a strategy. According to Kuttner, with the economy still sputtering and no end in sight, a massive infrastructure investment program is the surest path out of the Great Recession:

Winning the Future!  Are we?

(W)hat the economy needs to fully recover is a massive -- and I mean massive -- infrastructure and jobs program financed by surtaxes on wealthy individuals and on windfall financial-sector profits, including taxes on profits from short-term financial trades. We could also get upwards of $200 billion a year from tax enforcement, mainly on trans-national evasion used by America's wealthiest. Some of the funds for this program could also come from winding down the gratuitous wars we're currently engaged in. And some could even come from a modest increase in short-term deficits.

The order of magnitude of the public investment program should be at least half a trillion dollars a year, for at least five years, and more if that doesn't solve the problem. We would not hesitate to spend this kind of money and levy surtaxes if America found itself in a serious war. It was the economic side-effects of the massive WWII program of tax, borrow, and invest that finally pulled America out of the Great Depression -- and powered the postwar boom.

Real wage growth over the past decade was lower than during the Great Depression

Investor's Business Daily:

The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economywide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).

Average length of unemployment is at an all-time high

Catherine Rampell at NYT's Economix: The average unemployed person in America has been looking for work for 39.7 weeks, or more than nine months. That is the longest average unemployment spell since the Labor Department started keeping track in 1948:

"Republicans Are Intentionally Driving Our Economy Into a Ditch"

Winning Progressive:

In his Friday New York Times column entitled “The Mistake of 2010,” Paul Krugman cogently explained how the conservatives’ obsession with invisible bond vigilantes, fearmongering about non-existent inflation, and overwrought sky-is-falling rhetoric about deficits are serving to distract us from the real problems facing our country – joblessness and poor economic growth. 

Professor Krugman described how the conservatives’ focus is wrongheaded and threatens to repeat in 2011 the mistake of 1937, when President Roosevelt temporarily sidetracked the recovery from the Great Depression by instituting austerity measures designed to curb inflation, rather than continuing to use government spending to create jobs:

As the stimulus has faded out, so have hopes of strong economic recovery. Yes, there has been some job creation — but at a pace barely keeping up with population growth. The percentage of American adults with jobs, which plunged between 2007 and 2009, has barely budged since then. And the latest numbers suggest that even this modest, inadequate job growth is sputtering out.

So (in 2010) we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.

Yet worse things may soon happen.

"This is why the United States is doomed"

Andrew Leonard at Salon:

The Hill reports the House Republican response to Friday morning's distressing jobs report.

House Republicans pinned the blame for Friday's disappointing jobs report squarely on the White House, saying the Obama administration's "over-taxing, over-regulating and over-spending" has stifled economic growth.
"One look at the jobs report should be enough to show the White House it's time to get serious about cutting spending and dealing with our ailing economy," Speaker John Boehner (R-Ohio) said.

How many blatant untruths can a Republican speaker of the House stuff into one sentence? Quite a few!

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."

Greg Sargent at WaPo:

The battle over whether it’s true that the Republican plan (to replace single-payer medical insurance for seniors with capped vouchers in the private market) would “end Medicare” is about to play out in a critical way in New Hampshire.

The National Republican Congressional Committee, which oversees House races for the GOP, has written a sharply-worded letter demanding that a New Hampshire TV station yank an ad making that claim.

Whether the ad gets taken down could help set a precedent for whether other stations will air Dem TV ads making this argument, which is expected to be a central message for Dems in the 2012 elections.

Atrios:

When We Replace The Marines With A Pizza, We Will Call The Pizza The Marines.

On the GOPers who claim "We didn't create this mess!"

Titanic noted the GOP congressman who told Tres. Secy. Geithner "We didn't create this mess!" during the recent White House meeting over raising the debt ceiling.  James Kwak at Baseline Scenario has this reaction:

The frightening thing is, he probably believes it. When people hold certain ideological beliefs strongly enough, no amount of facts will get in their way. If you believe that the current deficit is the result of excessive government spending (passed by Democrats, even though they only controlled Congress and the White House for four out of the past thirty years*), no pile of charts will be big enough to convince you otherwise — just like if you believe that tax cuts increase tax revenues, that the deficit has produced high interest rates, or that Barack Obama was born on Mars, no amount of evidence will convince you otherwise.

This is just fine if you are my daughter, who is four years old — although, actually, she admits it when she makes a mess (and helps clean it up). But if you are a legislator in the most powerful country in the world –and the one whose debt is the definitionally risk-free asset against which the yield of every other financial asset in the entire world is measured — it’s not good enough.

Terrible job news

From the Financial Times (UK):
       
          US jobs data escalate fears of double dip

The US economy added just 54,000 new jobs in May, confirming fears that the recovery has hit a soft patch as the unemployment rate ticked up to 9.1 per cent.

Non-farm payrolls rose far less than the 165,000 that economists polled by Bloomberg had expected and were well below the average 220,000 gain in the previous three months, the US labour department said.

The unemployment rate rose by a tenth of a point from 9 per cent in April, disappointing hopes that it would fall back to 8.9 per cent, but the increase was due to an expanding labour pool as more Americans searched for jobs. Out of a workforce of 153.7 million, 13.9 million people are unemployed.

"Are you talkin' to me?"

"I got some bad ideas in my head!"

During yesterday's dismal White House budget meeting, Paul Ryan complained to the President about the "demagogy" of describing as  "vouchers" Ryan's plan to end Medicare in favor of...uh...vouchers. 

Then there was this zinger.

"We didn't create this mess," a Republican Congressman reportedly told Treasury Secretary Tim Geithner

Ryan's whining aside, on the larger issue of who created "this mess" - of course, they did.  The Republicans advocated for the policies and/or oversaw the calamities generating the red ink that's scaring voters.

"We didn't create this mess - blame Obama!" (or Medicare) are the Big Lies of the GOP's phony deficit hysteria and a shameless evasion of responsibility.