The Death Spiral of the Welfare State

Is death spiral an over-dramatic term? Robert J. Samuelson doesn't think so, and he explains why in this column.

How does the Greek crisis relate to us here in the United States? Well, we have an aging population. It isn't as bad as the situation in Greece or much of Europe, let alone China and Japan, but it's bad enough. One of the factors which has kept our population younger, and thus provided us with a broader base of working-age people to support the welfare state, has been our relatively high immigration rate. And a lot of people want to kill that particular golden goose.

One way to look at it is that we need to encourage lots of young people from other countries to move to the U.S., get jobs, and contribute to Social Security and Medicare, or those programs will go broke.

And at least we have that option.

You Can't Get from Here to There Via a Tea Party

As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.

"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."

In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.

So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?

It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.

Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.

We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.

(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)

A Feel-Good Column on the Economy

Economics has been called "the dismal profession," and economists are prone to shed an atmosphere of gloom and doom. In this column, Daniel Gross is all sunshine and rosebuds. Spring is here, and so are some good signs for the economy. That is to say, for the real economy, if not for the epiphenomenal world of high finance.

I particularly liked the part about Big Belly Solar. This is a new company which makes solar trash compactors. This is great! Because it compacts the trash, each refuse can holds a lot more and doesn't have to be emptied as often. This saves the city on labor for trash pickups. And I suspect it diminishes the problem of the overflowing wastebasket surrounded by trash.

Spring is here, and it's time for some good news about America.

The Anniversary of the Stimulus: Is It a Success?

Daniel Gross is in no doubt, and neither are a lot of economists. The stimulus has been successful, at least in averting the worst consequences of the financial crisis of 2007-2008.

Why are the Republicans so determined to portray the stimulus, the Recovery Act, as a failure? First, this is the Obama administration's only major legislative accomplishment of 2009. If this was a failure, then the administration has had no successes at all.

Second, these people are trying to reject the judgment of Richard Nixon that "we are all Keynesians now." John Maynard Keynes had a couple of profound and very useful insights, but the main idea for which he is both praised and condemned is that the government can become the spender of last resort. Some of the voices on the right are trying to destroy the concept of government as a useful tool for dealing with human problems. If the stimulus worked, then Keynes is somewhat vindicated, and the government role in the economy is legitimized. That's what they mean by "socialism," these people who have no idea what socialism might be, a system in which government activity is a vital part of the economic life of the country.

John H. Makin had a pretty good article in the October 2009 issue of Commentary, in which he concedes that Keynes was right, while asserting that there was something to the doctrine of efficient markets. It's a far more reasonable presentation than one usually sees from the right side of the aisle.

Good News or Schadenfreude?

It's another column by Daniel Gross. I really need to start adding more original content. For one thing, I'd like to take off on Agim Zabeli's comment on an earlier post and get into questions about taxes and deficits. But, for the moment, Gross has some good comments about how the Japanese superiority in quality manufacturing, and the European superiority in social solidarity may have been just as illusory as the American economy that could grow forever. I'm not sure this is so much good news for the United States as it is glorying in the misfortunes of others.

The thing is, the EU is doing to the profligate nations in its ambit what the U.S. probably ought to be doing to profligate institutions: cutting them off and forcing them to make hard choices. But the EU has the advantage of national boundaries. For all the work that's been done on unification, they can still force Greece into an austerity program and limit the damage to other countries in the union. If the U.S. gets too tough with California or General Motors, the effects will come around and bite the rest of us in the ass.

Don't Bank On Bankers!

Am I trying to start a financial panic by undermining confidence in the geniuses who run our big financial institutions? Well, no, they already did that. In the Paul Krugman article I posted earlier today, Jamie Dimon, the head of JPMorgan Chase, was quoted as telling the Financial Crisis Inquiry Commission that a crash "happens every five to seven years. We shouldn't be surprised." Isn't that nice? Reminds me of the guys who say that anthropogenic global warming isn't possible because God created the world with the temperature He wanted, and we're not capable of undoing His work.

So, the follow-up to Krugman's piece in The New York Times is this David Gross essay from Slate.com. Gross's key statement is this:

"Rule No. 1: The banks have no idea what kind of regulation is good for them.
"Rule No. 2: If you ever think the banks have a point, remember Rule No. 1."

There's an old saying. "If you believe the doctors, no one is healthy. If you believe the police, no one is honest. If you believe the soldiers, no one is safe." (There's a nice double-edged quality to that line.) So, if you believe the bankers, no one is solvent.

Another Subsidy

I, personally, think we ought to abolish all subsidies. Farm subsidies, business subsidies, housing subsidies, even student loan subsidies. The basic effect of a subsidy is to encourage people to stay in a business that cannot support that number of participants. Subsidies distort the market by steering resources to business that ought to be allowed to die. Here's an article on a subsidy that most of us had probably forgotten about. I don't think that anything about this particular case would lead one to doubt the general principle that subsidies are bad.

A House Is Not a Home

Daniel Gross entitles this article "Homeless." Actually, it's not about homelessness, or even the effects of the housing market crash on homelessness; it's about the economy recovering without the housing market making a big comeback. On the one hand, Gross cites figures to indicate that more houses were sold in November 2009 than in November 2008, so that's a good sign for the market. On the other hand, prices are still dropping, which is good for buyers but not so good for sellers or would-be sellers. From a couple of sources, Gross finds that prices of existing houses were down a little over 7 per cent in October 2009, compared to October 2008.

Key quote: "Mortgage rates are likely to head higher as the Federal Reserve seeks to pull some of its support from the economy. So those hoping that soaring Toll Bros. stock will replenish their 401(k)s are going to be waiting a long time. ... The thing that gets you into a bubble never gets you out."

For many years, we've been putting too much of our investment capital into building houses and apartment buildings. This is, to put it bluntly, as unproductive as military spending. While factories can be used to make furniture, cars, textiles, and so on, and power plants make electricity, houses don't make anything. They just sit there tying up capital and depreciating.

Now that the crash has helped cut the overspending on housing, maybe the government should make a move to encourage that trend. Abolishing the housing interest deduction would be a good start, and restoring the capital gains tax for personal dwellings would also be a big help. Why should we be subsidizing people for putting their money into nonproductive uses?

More Expensive is the New Cheap

Do you have cable TV? Of course you do! Everyone does!

Daniel Gross thinks that your rates are going to be going up this year. Read it and weep.

Like A Thief in the Night ...

Daniel Gross writes these nice columns for Newsweek and Slate, and he is often a pretty good corrective to what passes for economic analyis on the nightly news. Here, he follows one of the rules of economic reporting: Be contrarian!

This column does, for all its virtues, remind me of the weatherman's 30% chance. That's the CYA position taken when the weather pattern isn't clear. 30% is a low enough number that the weatherman can claim he didn't commit to snow, when no snow eventuates, but high enough that he can claim that he did, in fact, anticipate the snow, if it does fall.

Similarly, the statement that the economy may unexpectedly improve, is pretty much an act of hedging one's bets.

What Hath the 2000s Wrought?

Daniel Gross's piece is really, really depressing. It confirms my wife's feeling that the economy, at least as far as ordinary people are concerned, has been spinning its wheels for a long time. Gross is asserting that America's "lost decade" isn't the next ten years, but the decade that began with January 1, 2000, and will end in six weeks. He gives lots of examples of economic and market indicators that are, today, at the same levels they were at in 2000.

I think it's worth reading, even if it isn't exactly cheerful. I also think that it may, just may, reveal a deeper problem. There's a tendency to measure performance by the measures you have, the ones that are convenient to collect. Sometimes that leads you to overestimate the importance of easily-determined indicators, and to ignore problems that don't show in the metrics you're using. A lot of companies have gotten into trouble trying to manipulate the markets to elevate their stock prices. The Bush administration got into trouble trying to elevate the home ownership numbers.

From Gross's piece, I'd have to say that such efforts to game the markets were not only misguided, but futile. We're back to square one.