As Krugman says we’ve ready seen this movie. Let corporations avoid taxes on foreign revenue and they’ll do what they did before, which does not include creating jobs here.   I know why politicians believe it, they”re paid to. The puzzling part is is why voters still believe it.

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The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

via Mugged by the Debt Moralizers – NYTimes.com.

If I hear another person say something as stupid like “if I have to live within a budget so should the federal government”, I swear the idiot gets it.

The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.

For those who would say that progressive polices failed, I reply they weren’t really tried.

OK, even by contemporary standards, this is rich: the official Republican stance is now apparently that Bush left behind a budget that was in pretty good shape. Mitch McConnell:

The last year of the Bush administration, the deficit as a percentage of gross domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent.

They really do think that we’re idiots…

…I’d like to think that the raw dishonesty of this latest Bush defense would be obvious to everyone. But after the past decade, I’ve stopped believing such things. They think we’re idiots — and they may be right.

If it’s not so obvious, check the chart in the NY Times link. It’s an old trick, they use fiscal years (which end Sept 30) instead of calendar years. McConnell conveniently leaves out the last quarter of 2008 and the first quarter of 2009, both of which are before Obama’s stimulus package went into effect. It also cuts out the TARP bank bailout that Bush signed into law in the last quarter of 2008. By the end of first quarter of fiscal year 2009 deficits were already at 9% of GDP, before Obama’s stimulus went into effect!

I think this gets to heart of what irritates me so much about the modern republican party. They really do think the American public is as dumb as truck load of bricks. I believe most people simply aren’t interested enough to follow the ongoing national political conversation. Perhaps their too busy trying to make ends meet, working and raising families. Maybe they think the whole thing is a corrupt game where the scum rises to the top. All three (and more) are probably true to some degree. The press is horribly complicit in amplifying false narratives to curry favor and all important access to policy makers. They’re so caught up in hawking stories that drive ratings and advertising revenue, they often miss the truth. The recent Shirley Sherrod affair is a good example of what I mean. It was exceptional in one way: they got caught in a blatant effort to smear her. Usually no one notices.

Op-Ed Columnist – Myths of Austerity – NYTimes.com.

Which brings me to the subject of today’s column. For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

I’m no New York Times columnist with a PhD in economics and a recent Nobel Prize, but I did do a significant amount of undergrad course work in economics. I think I understand most of the basics in macroeconomics. If you reduce federal spending in the midst of severe downturn, you make it worse.

It really is pretty simple. There are no private sector dollars out there waiting to replace those federal dollars and consumers are not optimistically spending what they have either. This leads me to believe that policy makers have some other agenda. If it’s not restoring healthy economic growth and full employment, then who are they carrying water for?

The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.

Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

via Op-Ed Columnist – Budget Deficits – Spend Now, Save Later – NYTimes.com.

This is really depressing. The stimulus package passed early in the Obama administration helped a bit, but not enough. It was scaled back in size and watered down by turning 40% of it to tax cuts, the least effective means of stimulus. This was done in an effort to win support from Republicans who voted against it in lock step, and to please so-called deficit hawks like Blanche Lincoln. Have a look at the graphs in the Calculated Risk blog post linked above. If it weren’t for census hiring unemployment wold be flat. State counties and municipalities continue to scale back and fire workers.

What we need is another round of stimulus. Yes, that will increase the deficit in the short term. But other than the federal government there is no one else who can intervene. The alternative is a lost decade much like Japan in 90′s:

Lost Decade Here We Come

But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

Austerity measures in the midst of our economic situation is, as Krugman closes with, “utter folly”.

Op-Ed Columnist – The Fire Next Time – NYTimes.com.

In his speech, Mr. McConnell seemed to be saying that in the future, the U.S. government should just let banks fail. We “must put an end to taxpayer funded bailouts for Wall Street banks.” What’s wrong with that?

The answer is that letting banks fail — as opposed to seizing and restructuring them — is a bad idea for the same reason that it’s a bad idea to stand aside while an urban office building burns. In both cases, the damage has a tendency to spread. In 1930, U.S. officials stood aside as banks failed; the result was the Great Depression. In 2008, they stood aside as Lehman Brothers imploded; within days, credit markets had frozen and we were staring into the economic abyss.

So it’s crucial to avoid disorderly bank collapses, just as it’s crucial to avoid out-of-control urban fires…

…Since the 1930s, we’ve had a standard procedure for dealing with failing banks: the Federal Deposit Insurance Corporation has the right to seize a bank that’s on the brink, protecting its depositors while cleaning out the stockholders. In the crisis of 2008, however, it became clear that this procedure wasn’t up to dealing with complex modern financial institutions like Lehman or Citigroup.

So proposed reform legislation gives regulators “resolution authority,” which basically means giving them the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks. Who could object to that?

Well, Mr. McConnell is trying. His talking points come straight out of a memo Frank Luntz, the Republican political consultant, circulated in January on how to oppose financial reform. “Frankly,” wrote Mr. Luntz, “the single best way to kill any legislation is to link it to the Big Bank Bailout.” And Mr. McConnell is following those stage directions.

It’s a truly shameless performance: Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite. In recent weeks, he and other Republican leaders have held meetings with Wall Street executives and lobbyists, in which the G.O.P. and the financial industry have sought to coordinate their political strategy.

And let me assure you, Wall Street isn’t lobbying to prevent future bank bailouts. If anything, it’s trying to ensure that there will be more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.

What has been really striking has been the eliminationist rhetoric of the G.O.P., coming not from some radical fringe but from the party’s leaders. John Boehner, the House minority leader, declared that the passage of health reform was “Armageddon.” The Republican National Committee put out a fund-raising appeal that included a picture of Nancy Pelosi, the speaker of the House, surrounded by flames, while the committee’s chairman declared that it was time to put Ms. Pelosi on “the firing line.” And Sarah Palin put out a map literally putting Democratic lawmakers in the cross hairs of a rifle sight.

All of this goes far beyond politics as usual. Democrats had a lot of harsh things to say about former President George W. Bush — but you’ll search in vain for anything comparably menacing, anything that even hinted at an appeal to violence, from members of Congress, let alone senior party officials.

No, to find anything like what we’re seeing now you have to go back to the last time a Democrat was president. Like President Obama, Bill Clinton faced a G.O.P. that denied his legitimacy — Dick Armey, the second-ranking House Republican (and now a Tea Party leader) referred to him as “your president.” Threats were common: President Clinton, declared Senator Jesse Helms of North Carolina, “better watch out if he comes down here. He’d better have a bodyguard.” (Helms later expressed regrets over the remark — but only after a media firestorm.) And once they controlled Congress, Republicans tried to govern as if they held the White House, too, eventually shutting down the federal government in an attempt to bully Mr. Clinton into submission.

Mr. Obama seems to have sincerely believed that he would face a different reception. And he made a real try at bipartisanship, nearly losing his chance at health reform by frittering away months in a vain attempt to get a few Republicans on board. At this point, however, it’s clear that any Democratic president will face total opposition from a Republican Party that is completely dominated by right-wing extremists.

via Op-Ed Columnist – Going to Extreme – NYTimes.com.

Bush can pass tax cuts guaranteed to lead us down the road to fiscal suicide, while enriching the wealthiest and he’s a hero to the GOP. Obama passes HCR which actually reduces the deficit while helping millions and the death threats fly. The true (evil) genius of the right is in convincing workaday Americas to vote against their economic interests over and over. My favorite recent example is this Militia Leader who was calling for breaking the windows of Democratic offices:

Vanderboegh, who lives in the Birmingham suburb of Pinson, described himself as a “Christian libertarian” and said he has long been a gun rights advocate. He said he joined a clandestine militia group called the “Sons of Liberty” and later became a public leader of the First Alabama Cavalry, Constitutional Militia..

…Vanderboegh said he once worked as a warehouse manager but now lives on government disability checks. He said he receives $1,300 a month because of his congestive heart failure, diabetes and hypertension. He has private health insurance through his wife, who works for a company that sells forklift products.

I guess he doesn’t see the irony. What the hell is a “Christian Libertarian” anyway? Is that they don’t believe in government intervention unless it’s an attempt to ram their oddly slanted form Christianity down your throat?

Jonathan Chait and Robert Waldmann, in slightly different ways, highlight a crucial dynamic in American political debate: the extent to which public figures are punished for actually knowing what they’re talking about.

It goes like this: Person A says “Black is white” — perhaps out of ignorance, although more often out of a deliberate effort to obfuscate. Person B says, “No, black isn’t white — here are the facts.”

And Person B is considered to have lost the exchange — you see, he came across as arrogant and condescending.

I had, I have to admit, hoped that the nation’s experience with George W. Bush — who got within hanging-chad distance of the White House precisely because Al Gore was punished for actually knowing stuff — would have cured our discourse of this malady. But no. Why not?

Chait professes himself puzzled by the right’s intellectual insecurity. Me, not so much. Here’s how I see it: in our current political culture, the background noise is overwhelmingly one of conservative platitudes. People who have strong feelings about politics but are intellectually incurious tend to pick up those platitudes, and repeat them in the belief that this makes them sound smart. (Ezra Klein once described Dick Armey thus: “He’s like a stupid person’s idea of what a thoughtful person sounds like.”)

Inevitably, then, such people react with rage when they’re shown up on their facts or basic logic — it’s an attack on their sense of self-worth.

The truly sad thing, though, is the way much news reporting goes along with the condescension meme. That’s Waldmann’s point. You really, really might have expected that the Bush experience would give reporters pause — that they might at least ask themselves, “Isn’t it my job to ask whether a politician is right, as opposed to how he comes across?”

via Economics and Politics – Paul Krugman Blog – NYTimes.com.

It’s worth just for the line about Dick Armey, but on a more serious note it does say a lot about our political system. It has to all come back to the educational system. It’s harder to get away with obfuscation when dealing with people capable of critical thinking. Maybe people of good conscience will come to different conclusions as to the best course, but hopefully they have the internal resources to sort out obvious (if pleasant sounding) bullshit. It does seem the American people are addicted to truthiness

Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over.

But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?

It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.

Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

via Op-Ed Columnist – Good and Boring – NYTimes.com.

I’ve said this many times and it bears repeating, markets are only as good as the framework they operate within. They are not magic. They may produce efficient allocation of resources under a specific set of conditions, but are prone to manipulation by powerful players and are prey to many forms of market failure. They can be gamed and abused in ways that put the larger economy at risk. Our banking disaster is a case study in regulatory capture, where the industries to be regulated came to control the agencies designed to oversee them.

Since we still have Ben Bernanke at the Fed, Tim Geitner at Treasury and Larry Summers as director of the National Economic Council, we have apparently learned nothing. These are people who were directly part of the the failure and came from Wall Street or were part of the effort to deregulate banking that was the part of the reason we are where we are today. We are:

1. Rewarding massive failures
2. Failing to learn from past mistakes
3. Listening to those who’s advice got us to where we are

Couple that with a recent political history of being institutionally incapable of making hard choices and the road ahead doesn’t look pretty. I’m not optimistic that we can do what’s necessary, particularly in light of the recent Supreme Court decision to strike down campaign finance laws designed to limit corporate influence in federal elections.  Look for Wall Street to dump money into and provide advertising support for Congressional candidates who oppose new regulation on banks. They’ll probably use some Orwellian named astroturf front goups with names like “Citizens for Responsible Banking”. Candidates might mouth the right words in front of cameras, but who do you think they’ll listen to? The public or those who have the power to ensure they maintain their position of privilege and power in Washington?

Maybe there should be a truth in advertising law for front goups and the names they chose. Would you believe an ad if it was paid for by “Billionaires for Bank Failures” or “Citizens for Future Taxpayer Bank Bail Outs”? While we’re at it can we re-name the TARP (Toxic Asset Relief Program) and call it something more appropriate, like BARF (Bad Asset Relief Fund). That’s much more evocative of how it makes me feel.

Op-Ed Columnist – Do the Right Thing – NYTimes.com.

A message to House Democrats: This is your moment of truth. You can do the right thing and pass the Senate health care bill. Or you can look for an easy way out, make excuses and fail the test of history.

Krugman tries to talk sense to reflexive Euro-bashers.  Adopting a more humane attitude by taking steps to ensure everyone in the richest nation on earth has access to health care isn’t going to turn us into some kind of socialist dystopian nightmare. And the idea that Europe is economically stagnant because workers get certain mandatory benefits like vacation and (GASP!) sick leave and health benefits just isn’t true. It sticks in the craw of conservatives who prefer what feels true to what’s actually true.

Krugman suggests that some protectionism against the Chinese may be a good thing:

Recently Wen Jiabao, the prime minister, dismissed foreign complaints: “On one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” Indeed: other countries are taking (modest) protectionist measures precisely because China refuses to let its currency rise. And more such measures are entirely appropriate.

Or are they? I usually hear two reasons for not confronting China over its policies. Neither holds water.

First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage.

Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.

Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full … all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

It sure feels like someone has been “steal(ing) jobs” from the US recently. While the lack of domestic financial oversight certainly had an impact on our economic meltdown, there was also an impact from cheap money, which was a result of Chinese mercantilism. The fix is to slowly turn the screws on protectionist policies to encourage a re-thinking of fixed dollar-yuan exchange rate. The Chinese can dump dollars in response, but that will cause them massive loses  and drive down the dollar against other currencies, making US exports more competitive.

The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.

And the really bad news is that “centrists” in Congress aren’t able or willing to draw the obvious conclusion, which is that we need a lot more federal spending on job creation…

…What I keep hearing from Washington is one of two arguments: either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus was too little of a good thing — that it helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.

But can we afford to do more? We can’t afford not to.

via Op-Ed Columnist – Too Little of a Good Thing – NYTimes.com.

Serious students of health care have known for a long time that the magic of the marketplace doesn’t work in health care; the United States has the most privatized health-care system in the advanced world, and also the least efficient. The pale reflection of this reality in the current discussion is that reform with a strong public option is cheaper than reform without — which means that as we get closer to really doing something, rhetoric about socialism fades out, and that $100 billion or so in projected savings starts to look awfully attractive.

It has also been clear from international evidence that universality is cheaper than leaving a few people expensively without care. That’s reflected now in the projected savings from a strong employer mandate.

The point is that reality is pushing for a more progressive reform than the Baucus bill. Truly, the facts have a liberal bias.

via The facts have a liberal health-care bias – Paul Krugman Blog – NYTimes.com.

Given all that, it made complete sense to distrust anything the Bush administration said. That wasn’t reflexive, it was rational.

via Reflexively anti-Bush – Paul Krugman Blog – NYTimes.com.

Are people in the south really that stupid? Apparently they are…

Op-Ed Columnist – An Incoherent Truth – NYTimes.com.

So what are the objections of the Blue Dogs?

Well, they talk a lot about fiscal responsibility, which basically boils down to worrying about the cost of those subsidies. And it’s tempting to stop right there, and cry foul. After all, where were those concerns about fiscal responsibility back in 2001, when most conservative Democrats voted enthusiastically for that year’s big Bush tax cut — a tax cut that added $1.35 trillion to the deficit?

But it’s actually much worse than that — because even as they complain about the plan’s cost, the Blue Dogs are making demands that would greatly increase that cost.

There has been a lot of publicity about Blue Dog opposition to the public option, and rightly so: a plan without a public option to hold down insurance premiums would cost taxpayers more than a plan with such an option.

But Blue Dogs have also been complaining about the employer mandate, which is even more at odds with their supposed concern about spending. The Congressional Budget Office has already weighed in on this issue: without an employer mandate, health care reform would be undermined as many companies dropped their existing insurance plans, forcing workers to seek federal aid — and causing the cost of subsidies to balloon. It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate.

So what do the Blue Dogs want?

Maybe they’re just being complete hypocrites…

…Now, however, they face their moment of truth. For they can’t extract major concessions on the shape of health care reform without dooming the whole project: knock away any of the four main pillars of reform, and the whole thing will collapse — and probably take the Obama presidency down with it. Is that what the Blue Dogs really want to see happen? We’ll soon find out.

The basically want to complain about costs while opposing, you know, actual provisions that would control costs. The real question is if the President will allow them to destroy health reform.

The other option would be a closed door meeting where he explains to them that opposition will have a price:

• Expect well-funded primary challengers.
• Expect no money from the national party to help with re-election campaigns.
• Expect no help at all from the President.
• If you hate the legislation all we ask is you vote to prevent a filibuster in the Senate, then vote your conscience on the legislation when it comes to the floor if you think it will help keep you seat.

In short, the Democrats need something approximating party discipline. What’s more important here? Mollifying the Blue Dogs or the best chance at reforming health care since Roosevelt, Truman, Johnson and Clinton all failed before the corrupting influence of powerful moneyed interests? Is effective legislation more important than inclusiveness in the process? The President as done a lot to reach out to players in health care, to offer them a seat at the table. He’s tried to learn the lessons of the Clinton failure by allowing Congress to write the legislation instead of running the reform effort from the White House. He needs to take more of leadership role now and begin setting out the perimeters of reform. Congress will not craft legislation that’s good for the nation, they’ll craft something that’s good for lobbyists and large campaign contributors.