End of an Era? – Call me credulous, but after a week of listening intently to the talk from Washington, I am prepared to believe the US has indeed reached the end of an era. That long strange journey began in the mid-1960s, with a binge of Keynesian guns-and-butter spending unaccompanied by tax increases. It took a new twist in the mid-1970s, when a handful of policy entrepreneurs began to argue that large deficits were a reasonable strategy for governing the country. And now, nearly fifty years after it began, the era has finally ended. The original policy of cavalier deficit spending evolved two versions in the last thirty years, depending on the context: the “Two Santa” theory and “Starve the Beast.” As the late Jude Wanniski explained it in a memo in 1999: I began arguing the “Two Santa Claus Theory.” If the Democrats are going to play Santa Claus by promoting more spending, the Republicans can never beat them by promoting less spending. They have to promise tax cuts in order to grow the economy — not “starve the government of revenue,” which is Milton Friedman’s rationale. (Columnist Bruce Bartlett reproduced the entire essay here.)
Polls Lie About Votes – In a poll last month, 848 US folk gave a median guess of 25% for “what percentage of the federal budget goes to foreign aid.” In 2009, US “bilateral foreign aid” was 0.6%. The survey’s median “appropriate percentage of the federal budget to go to foreign aid” was 10%. Polls have found similar answers for many decades. (more; HT Rob Wiblin) Jason Kuznicki comments:Clearly, then, it’s not enough. But just you try running on a pro-foreign aid platform. Yeah, that’s a winner. But if the public actually believed what they said, that 10% should go to foreign aid, pro-more-foreign-aid would be a winning platform when combined with explaining how low is the current fraction. Yet politicians clearly believe otherwise, or they’d eagerly adopt such a platform. The obvious conclusion: in polls the public lies about how much foreign aid they’ll support via votes.
African poverty: Falling faster than you think – The picture of Africa as a place of collapse, hunger, disease and death is slowly fading. Both official statistics and the popular press acknowledge a nascent “African Renaissance”, as the continent is enjoying its longest and strongest growth spurt since independence. Sub-Saharan Africa has made little progress in reducing extreme poverty, according to the latest Millennium Development Report. This column presents evidence from 1970 to 2006 to the contrary.
A big-bang solution to Eurozone problems –Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.
Not Crass, Class – Paul Krugman – Karl Smith sort of takes issue with my point about how Social Security is a favorite target of the Beltway crowd, because it’s not important to anyone they know. “I doubt anyone thinks about it in such crass terms,” he writes. Actually, there’s more crassness in this world than is dreamed of in most professors’ philosophy. But still, Smith is right that this is mostly not an explicitly cynical calculation, more a matter of tout le monde, as Tom Wolfe would say — meaning a narrow circle of People Like Us — doesn’t care about Social Security, so it’s hard to grasp how much it matters to others. Yglesias points us to a chart:Social Security is crucial to most Americans — but not at all to the elite.But Smith has another point: Social Security is easier to discuss than Medicare. True. The story about an aging population and how it burdens the system is easy to explain; explaining that this story is mostly wrong, that we already did the big adjustments for the baby boomers in the 1980s, is a lot harder. And the problem with health care costs is especially hard to explain.
Sensible Deficit and Debt Reduction – Maxine Udall – A government can stimulate aggregate demand by accelerating investments in infrastructure, research, and defense. By borrowing at record low rates, it can bring those necessary investments that it would have made in the future forward to the present, thereby maintaining and also creating jobs that otherwise would be lost because of the current downturn. Such investment has the effect of stimulating demand now and keeps the economy from sinking deeper into recession or depression. It has the added advantage, if done wisely, of creating better health, education, and economic infrastructure that benefits our grandchildren and their grandchildren. The historically low cost of borrowing means that the cost to our grandchildren of repaying the loans for these investments are likely to be lower than the benefits they will realize from the investments, if they are made wisely. It took us at least 30 years to dig the hole we’re in. Pretending that we can fill it up in two years or ten is not only silly, it’s dangerous. We need a long-term perspective that combines strategic deficit reduction and strategic policies aimed at output growth and expenditure reductions that over the long-run reduce the debt. A willingness to incur new debt that contributes to future output growth and efficiency by increasing human and health capital, infrastructure, and energy efficiency, must be part of any such plan.
Let’s Not Make a Deal. by Paul Krugman, Commentary, NY Times: Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010. The plan, of course, was to come back later and make the thing permanent, Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. … It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do? The answer is that they should just say no…, saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.
The Zero Lower Bound Does Not Bind – There are two respects in which standard theory tells us the zero lower bound on nominal interest rates matters. First, when short-term nominal interest rates are zero, conventional open market operations do not matter – there is a liquidity trap. If the central bank swaps zero-interest-rate reserves for zero-interest-rate Treasury bills, this should be irrelevant, in that no prices or quantities change. Further, a liquidity trap is also a feature of regimes like the one we currently have in the United States. When there is positive supply of excess reserves in the financial system, and reserves bear interest, then the interest rate on reserves (IROR) is determining all short-term interest rates. If the central bank swaps reserves for Treasury bills, that will also be irrelevant under current circumstances. Of course (again, under current circumstances), if the central bank lowers the IROR, this will not be irrelevant. The problem for the Fed is that, with the IROR at 0.25%, there is little room to move. As Ben Bernanke stated in his Jackson Hole speech, a decrease of the IROR to zero would have little effect and "could disrupt some key financial markets and institutions." It certainly seems correct to say that lowering the IROR to zero would have little effect, but arguing that this would be disruptive seems wrong.