If Mr. Easterbrook Didn't Live in D.C., maybe he'd know how bad things actually are

Today, we're gonna give the treatment to Gregg Easterbrook. Easterbrook's day job is at Brookings and his night job? ESPN.com columnist during the NFL season. For the most part, I like Mr. Easterbrook but...

If Teenagers Borrowed to Spend the Way Washington Borrows to Spend, Adults Would Call Them Irresponsible:

This is true.

Since the taboo against serious deficit spending in peacetime was shattered under Ronald Reagan, presidents and Congress have borrowed lavishly to give constituent groups and special interests whatever they want -- then handed the debt to our children and grandchildren, all the while wagging their fingers about how somebody else must do something about the federal deficit.

Yes, yes, tell me more! I'm one of those children! What happened next? Will the next sentence be as long as the first? I'm at the edge of my seat here.

George W. Bush added the wrinkle of simultaneously cutting taxes and borrowing to increase spending, all the while wagging his finger about the deficit. The result was that the national debt nearly doubled in eight years. But Bush will never have to deal with that, since he will be retired when the bill comes due. Bush took the easiest possible path, cutting taxes and increasing spending... Tax cuts and spending increases are candy.

I agree! I agree! This is right! I like candy also! And tax cuts! And spending! Why can't this work? So what if W was a cut revenue and increase spending President! No one said anything for years and year, so why are we pointing this out now?

Barack Obama was right last week to call Bush's handling of the country's finances "profound irresponsibility," though, of course, Democrats in Congress went along with it.

What? No. Not really. See the GOP controlled both the Senate and House from 2002-2006. It wasn't until 2007 when the Bush spending spree was some what slowed, thanks mainly to the Democrats taking control of Congress. And then 2008 came around and we had to spend.

The soaring debt is worrisome for many reasons, not least because it represents headlong borrowing when there is no national emergency.

Interesting... where is he going with this?

Terrorism is a concern, but not an emergency.

Good way of putting it.

The economy is a concern, but recessions are cyclical and all previous postwar recessions cured themselves.

WHAT? The economy is just a concern? Did Mr. Easterbrook miss September and October? Did he not realize that the credit markets came to a stand still and we were looking at the economic abyss? I know is was only, THREE MONTHS AGO, but the entire system almost broke. And when I say broke, I mean it in the 'people weren't going to get paid' kind of way. The economy is more than a concern and what happened back in the fall wasn't going to correct itself. This wasn't 1992 or 2002. This was 1929/1930, and pretty much every economist agrees with me.

Though life is mainly normal, we're borrowing as if the whole world were at war. If the United States borrows like mad even when things are under control, what's in reserve for a genuine emergency?

Point taken, only life isn't mainly normal. Life may be normal in the L.A. of the East (D.C. is FantasyWorld to L.A.'s FantasyLand), but for most of American—New York, the Midwest, California—things are pretty bad.

Considering the slack economy, some short-term deficit spending may be a lesser evil...

May be? May be a lesser evil? That's an understatement. When banks aren't lending money that's kind of, sort of, a major problem.

Obama said last week, "We're going to have to stop talking about budget reform and totally embrace it" in order to "make a change in the way Washington does business" on the budget. Genuine budget reform will require either deep spending and benefits cuts, or tax increases, or both.

True.

Little of the federal budget is discretionary; most is entitlements (Social Security, Medicare and Medicaid), defense and payments on the debt. If you ended agriculture subsidies, shut down the National Park Service, abolished NASA and the Environmental Protection Agency, stopped all federal support for education, and canceled all pending Pentagon weapons programs, there would still be federal deficits.

Yawn... So what?

There just isn't any way out of the debt mess that does not involve long-term tax increases;

Falling asleep... Everyone knows this.

or Social Security cuts (perhaps eliminating benefits to any senior whose household income is above $50,000 annually);

Yeah, yeah, only that doesn't matter since Social Security is really just a Ponzi scheme with transparency. Birth rates rise and fall. In 30 years, with just a few tweaks, we could even lower the Social Security threshold.

or Medicare reduction (perhaps requiring seniors to pay for half their care).

Okay, Medicare is a problem. But no one wants to do anything about it. Why? Because old people vote and for many of them it's the only way they can get health insurance. What private company is going to insure an eight-one year old male with a long list of problems? With private health insurance, there are going to be some losers—children and the elderly in this case.

The question should be about cutting Medicare, it should be how to we reduce medical costs on the whole? That would save billions.

Someone in Congress should introduce the Future Dramatic Spending Cuts Act, which would require big spending cuts, but only once everyone who voted for the bill has left office.

The jokes write themselves people! The joke write themselves... sigh.

With each passing year that the United States refuses to deal with its deficit, the problem gets worse, owing to the compounding of interest... For the past three George W. Bush budgets and at least the first Obama budget, the country is borrowing, borrowing, borrowing as if tomorrow will never come.

And with this he goes back to the N.F.L. Look, part of the reason the U.S. is able to borrow, borrow, borrow is because the U.S.A. has more assets than anyone else. To compare it to the financial crisis is flat out wrong. What happened there was that people with few assets were given homes or credit lines they couldn't afford. What's happening with the federal government is much different. Should we be concerned with government spending? By all means yes, but it doesn't work the way Mr. Easterbrook wants it to work. The Federal government can borrow because Americans and non-Americans want to lend their money to the U.S. And when these people buy Treasury bonds, the U.S. usually don't lose too much money (if any) on the deal because interest rates on those bonds are so low.

[END]

Not surprisingly Joesph Stiglitz has Some Good Ideas on How To Fix Everything

Nobel Prize laureates Joesph Stiglitz has been busy over the last two months writing about the economy. But of interest for us here, is his 'State of the Economy' piece in Vanity Fair "Reversal of Fortune." Let's break it down... Dr. Jack style.

The real meat of the essay is towards the end, but he does pick apart the policy decisions that got us into this mess. And he places much of this blame on George W. Bush. This is a tad harsh—there were fundamental policy problems prior to Bush taking office. But Stiglitz is correct to place more blame on Bush's handling of the economy (if you can call it that) than other non-critics:

...the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.

He is on the mark with this assessment. What is happening today is a result of the spend today worry about tomorrow... tomorrow ways of the last five plus years. The Bush administration encouraged everyone to spend, spend, spend. Aside from cutting the capital gains taxes, Americans weren't encouraged to save money.

I haven't railed against it too much here, but I am against our current policies towards corn ethanol. Giving any sort of tax credits or subsideis to corn ethanol production is silly as Stigliz sums up:

Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy.

And on to fixing the current housing mess:

Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.

A ways back I was critical of the Feds handling (or lack there of) concerning inflation. Stiglitz points out that I was off base:

The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.

It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.

This makes total sense. Worrying about inflation during a recession or depression is silly, and when the cause of inflation is not a result of domestic economic forces, attempting to control it is only more difficult for central bankers.

Finally, like any good economist, Stigliz believes that American economic policy should follow:

Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.

If growth is the goal of capitalism, then techonology is probably the biggest force in economic expanision. And techonology and innovation comes about though strong education. We could have a debate about how big of a role the government should play in the building and maintaining infrastrucutre; but I think the government should play a bit, if not the biggest role, in infrastrcutre projects.

Anyway, I highly suggest checking out the entire essay, there are some really good ideas, sorry common sense, in there.

McCain's Economic Plan

I covered Obama's play the other day, check it out here.

No intro today—reread the Obama one if you're dying for an intro—here is McCain's economic policy in his own words. I'll try to make it easy.

-- McCain will keep Bush's tax cuts on wages, capital gains, and dividends all of which are supposed to expire in 2010 (the top tax rate will stay at 35% and capital gain and dividend income will be taxed at 15%). This plan, while it would not discourage saving, would increase the gap between the rich and poor. The Tax Policy Center believes that the top 1% would see their incomes rise 2.2%. As I wrote while disusing Obama's plan, the Gini Index in the U.S. has continued to grow at a fairly quick pace over the last twenty years; slowing this down isn't the worst policy idea.

McCain would also cut the corporate tax rate from 35% to 25%, but would also get rid of some deductions. Corporate taxes are always somewhat miss leading... there are so many loopholes and deductions for corporations that it's hard to know what rate companies turely do pay.

Finally, McCain would allow companies to immediately write off the cost of new equipment. This would incourage investment and theoretically lead to higher producvity and thus growth.

Overall, McCain's tax policy is a pretty good plan for long term growth. But with the U.S. government already in debt and then involved in a costly war and now handing out over a trillion dollars to save Wall Street on top of this, McCain's plan does or says little about slowing down this debt. McCain has hinted at reducing spending (even talking about cutting defense spending in the second debate), but he hasn't provided any proposals to reduce spending. The Tax Policy Center estimates that McCain's policies would increase the debt by $758 billion in the next ten years.

-- McCain would increase the exemption for dependants from $3,500 to $7,000.

-- McCain has promised to balance the budget in his first term, but I'm not sure how he would do it with this policy and hasn't offered a credible means of doing so either. Plus, the Federal government doesn't really need to balace the budget for a bunch of macro reasons that I won't go into right now.

-- McCain has been a supporter of free trade while in the Senate and there is little reason to believe that he would stop being a supporter as President.

-- McCain's economic advisors are not as highly reguarded as Obama's team (here is some harsh treatment or if you have time here is a debate between advisors for both candidates). McCain's advisors, unlike Obama's team, does not feagure as many economists from academia. His team is headed by Carly Fiorina the former head of HP and Nancy Pfotenhauer who was a former director at Americans for Prosperity Foundation and has worked for Koch Industries, which does a little bit of everything but oil and energy are the biggest areas of focus in the past.

-- Like Obama, McCain has yet to say much about Medicare or Social Security.

Sadly, neither McCain or Obama has said too much about simplifing the tax code, which is currently a mess. Personally, I think tearing up the current tax code and rewriting it (like Congress did in 1986) would be a wonderful undertaking and something I would get behind.

-- Quick editorial note on McCain and his economic policy. McCain's economic proposals haven't hit home with the American voter. Obama's policies have a more populist tone them—but the reality is that they aren't all that poulist. McCain needs to do the same. If I were him or on his campagin, I would have been working hard over the weekend to roll out a new set of idea and proposals. Maybe concede to raising taxes on the rich, keep corporate taxes low, and find a deduction or two for the American worker. Oh and maybe get Micheal Phelps to pitch the plan for you.

Obama's Economic Plan

A Presidential candidate with an economic plans in a free market liberal democracy would seem like an oxymoron. After all, a free market has limited government intervention so how exactly could the President—or any politician—affect the economy?

If the last month has taught us anything it's that the United States is not a totally free market. Sure we aren't like the former Soviet Union or Cuba with a central planner who decided how many shoes to make, but government intervention in private corporations does exist. So while the President does not have as much control over the economy as voters may believe, he certainly does have tools that he can use that have some sort of influence over the economy.

To make this easy, I'll do each candidate's policies/proposals separately starting with Obama.

Obama has called himself a "pro-growth, free-market guy" and judging by his past and economic advisers there is little reason not to believe him. For starters, Obama taught at the University of Chicago Law School, which doesn't sound like a place that has anything to do with economics, but it has given the world a Nobel Prize winner in Economics—Ronald Coase. Obama has also surrounded himself with highly respected economists from academia—Austan Goolsbee, 37, a University of Chicago professor, Jeffrey Liebman, 39, a pension and poverty expert at Harvard University, and David Cutler, 41, a Harvard health economist.

The Economist ran a story last week about an (unscientific) survey of top economists in the U.S. and who they think would handel the economy better. Obama won hands down as most economists feel that "Obama has a superior economic plan, a firmer grasp of economics and will appoint better economic advisors."

So what is Obama's economic plan? You can look it up here, from his website, and I'll break it down bellow.

-- The first thing that jumps out is the $25 billion that Obama wants to spend on improving public infrastructure (think of roads, water pipes, rail roads, even broadband Internet, etc) arguing that doing so will also create jobs. There is a lot of truth to this, federal investment in infrastructure over the last decade has declined to the lowest levels since 1950. Hopefully there are not any more bridge collapses, like the I-35 bridge in Minneapolis last August, on the horizon, and the U.S. cannot afford a crumbling or outdated public infrastructure system. The U.S. economy, in part, runs on a fast, open, safe, and modern infrastructure . Investment in infrastructure to ensure that it continues to be the most efficient and a world class system isn't a bad idea. And yes, it will create jobs also.

-- Obama also wants to offer each family a $1,000 tax rebate (because of high energy costs). Personally, I'm a little more lukewarm on this proposal... but if you compare 2nd quarter spending in the United States to the soon to be released 3rd quarter figures, you'll see a growth in spending in the 2nd quarter and a huge decline in 3rd quarter spending (if August is any indication). Say what you will about those tax rebates back in the late spring, but they did have some effect on the economy—a good effect. Policy like this is not limitless and does stink of populism, but there are worse policy ideas out there.

-- Obama will keep taxes (i.e. the W tax cuts) at there current rate for anyone making less than $250,000 a year. For those making more, the income tax rate will rise from 33/35% to the Clinton Era 36/39.6%. According to economic theory we should see those who make over $250,000 to not work as hard, but there was little evidence of this being true during the 1990s.

I should also mention that the Bush tax cuts of the first half of this decade widened the gap in after-tax income between the rich and poor. The U.S. has seen its Gini Index increase in recent years (the Gini index is a coefficient that measures the gap between the rich and poor). The current gap is probably higher than most policy makers and economists would like to see. I personally would like to see the gap fall to where it was in the 1980s (or even lower) and Obama's tax policy should bring about a decrease in the U.S.'s Gini coefficient.

-- However, despite his claim of being a free market guy, Obama has opposed many of Bush's free trade agreements in the Senate. He has also had a protectionalist platform during the primaries and general election. More on this another day however.

-- Maybe the most interesting proposal is that Obama will keep the current rate of 15% in dividend and capital-gain taxes for anyone making less that $250 thousand. He would raise the rate to 20% for the "rich".

For a second pretend the stock market isn't falling tanking, keeping the tax rate low on investments is a good thing. For far too long the government has not encouraged Americans to save money, and while Obama is not proposing anything that would be an incentive to increase savings, keeping the tax rate at 15% for most Americans also would not be a disincentive.

As for how you feel about the increase on the wealthy, well that's up to how you take your politics. It's a disincentive to the rich to invest, but at the same time spending probably would not increase too much and we would most likely see the rich just shifting their investment patterns. (Also, let's face it, unless you put a ton of time and energy into the stock market, you're pretty much guessing; don't let anyone tell you other wise. So making money in the stock market is a little luck, should you be taxed for being lucky? Again, personal choice...).

-- Any senior citizen who makes less than $50 thousand a year would not pay income taxes under Obama's proposal. I'm not sure what percentage of senior citizens pay income taxes as it is, but this appears to be an obvious political poly to get seniors (who vote) to vote for Obama. I won't call it bad policy, but it's definitely not good policy.

-- Odds and ends... Obama will cut spending but he hasn't told us how... sadly, Obama has not reveled any plan on how to deal with Social Security, and the even bigger problem in the years to come, Medicare.

Over all, Obama's economic policy seems fairly level headed. It leans a bit to the left, but it is light on the side of bad policy and filled with some good ideas. And maybe the best thing about Obama's economic plans are the people he has surrounded himself with—these are economists than even those on the right will have a hard time disliking, let alone disagreeing with.