August 16, 2011
Fitch Confirms U.S.'s AAA Rating

make that 2 ratings agencies who disagree with S&P.

August 15, 2011
"[I]n 1982 Ronald Reagan was willing to sign what was then the largest tax increase in American history (TEFRA) because he believed he’d get three dollars in cuts for one dollar in tax increase. Reagan came to regret his tax increase — but not because the ratio was wrong but because Democrats never delivered on the spending cuts. If Reagan had gotten the cuts he asked for — and the York/Baier question pre-supposes the spending cuts would be real – he would have taken that deal. Are Republicans in 2011 saying that a deal that would be far better than one Reagan expected and agreed to is simply beyond the pale? If so — if taxes cannot be raised under any circumstance — then we have veered from economic policy to religious catechism,"

Pete Wehner

h/t Sullivan

August 11, 2011
Keynes And Fiscal Folly

Tony Crescenzi gives us a lot of great info in this article, and I recommend that all of my readers click through and read it in full.  But I want to focus on the following snippet:

Politicians and the beneficiaries of their fiscal illusions for the past 80 years abused the Keynesian philosophy, relentlessly and dangerously pursuing the use of debt for self-aggrandizement. Today, the citizens of indebted nations bear a heavy burden and must begin repaying the debts. It is a herculean task, because the debts are mountainous. Yet, there is no choice, because investors have become intolerant of fiscal follies. They are saying no to Keynes, in other words. 

Central bankers in the United States and Europe are also saying no to Keynes, pressuring their respective fiscal authorities to get their fiscal houses in order. They recognize that it is reckless to use their printing presses to monetize sovereign debt.  Central bankers know that history is strewn with countless examples where the ravages of excess coinage debased currencies have wrecked economies. 

Today, in a world where excessive debts are forcing nations to throttle back their spending, central bankers are once again under pressure to loosen further their stance on monetary policy. This is a condition that makes central bankers uncomfortable, as it further reduces their independence, which to some extent has been lost in the battle against the financial crisis. Central bankers would rather sideline their balance sheets and reserve their use for more pressing times, to put pressure on the fiscal authority to end its fiscal illusions and go back to the sort of fiscal prudence shown before the Keynesian era.

I think Crescenzi makes a mistake by misusing the phrase, “abuse the Keynesian philosophy.”  Indeed policymakers have abused it: by time and again failing to observe the wisdom of Keynes himself.  Ilyagerner elicited a quote from Henry Farrell and John Quiggin not too long ago that explains this perfectly:

Contrary to the beliefs of nearly all anti-Keynesians—and, regrettably, some Keynesians, too—Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU.  John Maynard Keynes argued that surpluses should be accumulated during good years so that they could be spent to stimulate demand during bad ones.

Running up structural deficits makes it more difficult for the government to provide stimulus for various reasons.  Running high structural deficits means there is less real money and political will to actually implement Keynesian solutions on the scale where they would actually make a difference.  Not only that, but every unit of debt has to be serviced by interest payments.  That is money for which the taxpayer gets back nothing.  Zero.  Which is part of the reason why Keynes did not actually advocate the type of abuse which Crescenzi is accusing politicians of over the last century.  For no better reason that a failure to observe the kind of fiscal rectitude that Farrell and Quiggin spoke of would make Keynesian solutions less viable in the long term, and lead essentially to long, drawn out, painful recessions, which is very likely what we’re headed for now.

A Sullivan reader made the point even more crystal clear:

[H]ere is the problem with Keynesian solutions. We’re a debtor country. Every $ of additional spending is an additional $ of debt creation. The marginal utility of each new dollar of debt has been negative for a couple years now. The multiplier effect is negative.

So yes, people have been abusing the philosophy of Keynes for a long time.  And if Keynes were alive to see it, he’d no doubt have some choice words for the policymakers who have strayed so far from his recommendations.

August 11, 2011
"The debt crisis as it crests ultimately gives way to these growth-inhibiting, spending-contractionary secular forces. Having run up our credit card to keep on spending, we have reached market-enforced limits that force deleveraging. It is not the debt, however, but the lack of global aggregate demand that is at the heart of the crisis. As the entire world strives to put its own people to work before other nations do, policymakers constructively lower interest rates and delay sovereign, corporate and household defaults to provide breathing room. Fiscally, however, an anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not."

Wow. There’s a very good reason this guy managed to found the largest bond investment firm in the world. This is basically spot-on. (via jakke)

Keynesians.  Founding largest bond investment firms in the world since 1971.

(Source: Washington Post, via jakke)

August 11, 2011
23 Separate Polls Show Heavy Majorities Favoring Tax Increases As Part Of A Deficit Reduction Plan.

My earlier comments notwithstanding, who does the GOP honestly think they’re kidding?

August 10, 2011
Negative Real Yields

The government can borrow money for cheap at the moment. Indeed, the government can borrow money at negative real rates over a five or seven-year time horizon:

The appropriate policy implications of this are, I think, obscured by the fact that Americans have some deep disagreements about the appropriate size and scope of the state. It’s important to try to put your view of what the government should be doing out of mind for a second and just keep in mind that you presumably think it should be doing something. Under conditions of negative real interest rates, “taxing productive activity to pay down debt is really obviously the wrong thing to do, and borrowing money to employ currently unemployed resources is really obviously the right thing to do.” The short-term budget deficit, in other words, should be much higher. If you genuinely think it’s the case that there are no projects with a positive rate of return that the government could undertake, then we could just radically reduce taxes on a temporary basis. But either way, we should be borrowing more money. When someone offers to lend you money at a negative interest rate, you don’t turn him down.

UPDATE: Ten year yields now negative as well.

I’m wondering if the S&P downgrade will have any impact on these negative real interest rates, or if that’s been factored into this analysis already.  I don’t completely agree with Yglesias’ analysis here, but the whole idea of negative real interest rates on public bonds is fascinating to me, as I think it completely changes the game for what is both advisable and possible in the realm of public finance.

August 10, 2011
Poll: 63 Percent Want Super Committee To Raise Taxes On Wealthy

There’s more to this poll than meets the eye though.  Here’s TP elaborating on the poll numbers:

 Nearly two-thirds of those polled want no major changes to entitlement programs like Social Security and Medicare, and “nearly nine in ten don’t want any increase in taxes on middle class and lower income Americans.

And yet the poll also found:

by a 57 to 40 percent margin they say the committee’s deficit reduction proposal should include major cuts in domestic spending.

In other words, we once again have a situation where the American people, while not so "Center-Right" as Media Conservatives like to claim, nonetheless have a type of cognitive dissonance where they believe government is spending too much money, but they want the largest, most significant, and expensive pieces of domestic spending (Social Security and Medicare) to remain untouched.  Healthcare services alone constituted the largest percentage of Federal Spending in the 2010 FY budget, followed by Pensions and Education spending.

Even Medicaid wouldn’t be significantly touched here, since A Significant chunk of Medicaid spending provides care to the Elderly, Blind, and otherwise disabled; and in these tough economic times, more formerly Middle-Class families are now receiving Medicaid assistance than ever.  So we are not just talking about a program that pays for “lazy poor people’s” medical care anymore. 

So if we don’t take cuts from Social Security, Medicare, or Medicaid, where do you think these “Domestic spending cuts” going to come from?  The only other areas of domestic spending that can be cut are Education, Pensions, and all other forms of discretionary spending.  Cutting education funding, while a popular trope in Conservative and Libertarian circles, would probably be one of the worst things we can do right now, since States are already struggling to keep their schools open without making massive cuts in quality of service.  Pension cuts would be counter-productive since many of these pension obligations are contractual, which would no doubt result in countless and costly lawsuits.

That means, once again, we are back to all other forms of domestic spending, which include every program that doesn’t fit neatly into another category but which Liberals tend to view as critical to improving the living conditions of the poor.  Things like heating assistance, funding for health clinics, transportation funding to States, not to mention other areas which Liberals tend to view as vital to the National Interest, such as Science Grants and Clean Energy Research.  This is all domestic spending.

And guess what?  If we cut every last dollar of it?  You still wouldn’t close the budget gap.  That’s right.  If you remove Defense Spending from the picture, you end up with a roughly $400 billion gap between discretionary spending and our budget deficit, based on FY 2010 numbers.  If you cut Defense spending by roughly 66%, though, you’d probably get there.  (Liberals and Libertarians just wet themselves).

So in essence what this poll reveals is that we continue to have an American public that wants the fiscal security that Social Security, Medicare and Medicaid provide, but doesn’t really understand how public finance actually works.  My suspicion here is that when these folks think of “domestic spending” they think of the mythological Cerebus of “Pork-Barrel Spending” which has proven time and again to be virtually negligible when it comes to our deficit.  Indeed, what most people view as earmarks are not actually earmarks in the sense that they don’t constitute new spending.  NRO’s Ramesh Ponnuru explains this rather well:

most of the time, getting rid of earmarks saves taxpayers no money. A lot of people who cheer on the porkbusters are under the impression that cutting a dollar of earmarks will yield a dollar of budget savings. In most cases, however, “earmarks” are congressional directives that federal agencies spend some of their allotted money in a specified way. If the money isn’t earmarked, the agency is free to spend it as it sees fit. Federal spending stays at exactly the same level.

So do we take this poll at face value as truly reflecting the convictions of the American people?  Or is this just another example of why running the country by Referendum would be a terrible idea? 

August 9, 2011
Sign Of The Times of the Day

Sign Of The Times of the Day

Sign Of The Times of the Day: “Midwestern mom” Lucy Nobbe, a VP at private equities and investment firm Wedbush Morgan Securities, paid an aerial advertising company ~$1,200 to fly over Wall Street today with a banner that reads “THANKS FOR THE DOWNGRADE. YOU SHOULD ALL BE FIRED.”

“I originally wanted to fly it over Washington, D.C., but learned that you can’t do that,” Nobbe told Fortune‘s Dan Primack. “So I chose Wall Street instead, but didn’t specifically intend it to fly over S&P. I’m just a mother from St. Louis who feels the only reason we got downgraded was people in politics.” A friend of Nobbe told the New York Observer the message was directed at both Republicans and Democrats.

Nobbe asked The Daily to make it clear that her views did not reflect those of her employer.

August 9, 2011
"[Eric Cantor’s] attempts to extrapolate from [Harvard Economists] Alesian and Ardagna an appropriate ratio of revenue to spending in fiscal consolidations all wind up concluding that cuts should account for about 83% of the deficit reduction. That’s about equal to the deal that Obama and Boehner agreed on, and that House Republicans refused to sign. Cantor is advocating a paper that advocates for exactly the kind of bargain he killed."

Jon Chait

August 5, 2011
BREAKING: Credit rating agency S&P downgrades U.S. debt from AAA, the first debt downgrade in U.S. history



The United States lost its top-notch AAA credit rating from Standard & Poor’s on Friday, in a dramatic reversal of fortune for the world’s largest economy.

In case you want to read it from a source that doesn’t have a robot with a smiley face and fedora as its avatar.

This is really, really, reallyreally, really bad.

(via shortformblog)

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