Mike the Mad Biologist

Sure, there were some nice parts in Obama’s State of the Union speech. But this part is the equivalent of flat-eartherism and creationism (italics mine):

Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.

We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work.

Look, I think Larry Summers is an idiot–and I’m not alone. But even Larry Summers knows that a household budget is not like the federal budget. To start with, your family can’t print up a global reserve currency if it feels like it. What matters is the ratio of debt to GDP. It’s an inane argument, and everyone–certainly, every single one of Obama’s economic advisers–knows it. And what happens if we have more spending needs than available cuts–particularly when the most bloated part of the budget, defense spending, is of the table?

Then there was this about housing:

That’s why we’re working to lift the value of a family’s single largest investment – their home.

Yes, let’s reinflate the bubble, instead of doing what needs to be done: mortgage cramdown. Instead, we are artificially keeping housing prices high–which not only reduces resources available for other purposes, but also increases the likelihood of default. This policy has nothing to do with helping families, and everything to do with helping banks avoid their day of reckoning by overstating the value of their assets–to a bank, a loan to you is an asset.

I hope Obama is right, that by 2011, unemployment will have dropped (really, I would love to be wrong). But I would be stunned if the unemployment rate dropped from ten to even nine percent. Why. First, there is a massive ARM recast beginning towards the end of 2010. Second, commercial real estate really has begun to implode. Third, there are many more foreclosures waiting in the wings–we have a backlog of unprocessed foreclosures. Fourth, we need to put people to work through government spending (banks aren’t loaning, and private spending has decreased), and there isn’t enough political will to do that. We are going to need much more government spending to lower unemployment.

All this speech has done is made it more difficult to fund the things we need funded–do you really think that agricultural subsidies are going to be cut? Of course not. Like faux-tough guy Rahm Emanuel is going to take on farm state senators Nelson and Conrad: hell, they already have his balls floating in a jar. Women and children will get the axe first, followed by science and infrastructure.

In the short term, this speech will do well: Obama used all of the correct Pavlovian stimuli. But, as I keep saying, ultimately people have to like this crap. And they won’t, because it won’t put them back to work, it won’t fix the problems that need fixing.

Not feeling hopey or changey right now…

Update: The Krugman:

The saving grace, such as it is, is that administration officials know better; they’re well aware that the spending freeze will make no difference to the long-run budget outlook. This is just a sop to public prejudices and/or centrist Democrats in the Senate.

But it’s a spectacular demonstration of Obama’s failure to change the narrative. Not only is he accepting the general Republican world view, he’s parroting their dumb attacks on his own policies.

Comments

#1 Willard
January 29, 2010

To start with, your family can’t print up a global reserve currency if it feels like it.

So print up 2000 million billion trillion dollars. There. Problem solved. What? Inflation? What’s that?

The proper way to get more revenue is a healthy, unshackled economy that generates wealth. Taxing 15 trillion at 20% is better than taxing 10 trillion at 25%.

Yeah, maybe someone who makes more than you will get a tax cut. Get over yourself.

Fourth, we need to put people to work through government spending

You have a pool. If you take buckets of water from one end of the pool and pour it back into the other end, do you expect the level of the pool will increase? Oh, and the bucket has a hole in it.

The tax money you use to make a job was taken from somewhere else that will now *not* be creating a new job. Given the inefficiencies involved, that one government created job will cost *at least* one job in the private sector.

What you need is the cool, fresh rain of people starting new businesses. Small business and people comfortable with taking risks is the true engine of job creation. Credit situation a problem? OK, then fix *THAT*. Put all your effort into that instead of these bloated band-aid efforts that keep falling over dead.

particularly when the most bloated part of the budget, defense spending, is of the table?

But, wait… Didn’t you say you want the government to make jobs? At least aerospace spending supports a huge scientific and technological job infrastructure. At least the jobs there are technically private sector and the players need to competitively bid. I worked on some military space projects in the past. Lots of good bleeding edge stuff happening there.
#2 sinz54
January 29, 2010

Defense spending is hardly the “most bloated part of the budget,” when you consider we’re fighting two wars with just 4% of GDP. (How often in the past have we been able to do that? We’re doing it now because the advanced technology we have acts as a force multiplier.)

If you’re against the wars we’re fighting, that’s one thing. If you don’t like the idea of the U.S. being the world’s sole superpower, that’s also debatable.

But to claim that the defense budget is highly inflated beyond the needs of fighting two wars while simultaneously retaining our commitments to Japan, South Korea, Europe, etc., is just plain wrong.

Whenever there’s trouble in the world, whether it’s an invasion of Kuwait, ethnic cleansing in the Balkans, a tsunami in the East, or an earthquake in Haiti, the U.S. military is the only force on earth capable of answering the call in time. We should be grateful for it–and want to preserve it.
#3 A
January 29, 2010

Willard says (in error): “The tax money you use to make a job was taken from somewhere else that will now *not* be creating a new job. Given the inefficiencies involved, that one government created job will cost *at least* one job in the private sector.”
That is true only if there is full employment, and the economy operates at capacity.
However, if you follow recent news, you might learn that there is ~10% unemployment, and much unused capacity, due to lack of demand (you know, the unemployed consume less).
So right now the government should make up the lack of demand by deficit spending. Currently, this spending will not cause inflation (as it would during times when there is enough private demand, which government spending would add to). And also, with additional government spending, the economy will grow again, and people will pay more taxes. In addition, right now the government can borrow at rather low interest rates, which makes it intelligent to repair America’s long-neglected infrastructure now, subsidize education etc.–
At some time in the future, of course, you can worry about deficits and inflation again.

Willard says also:”Taxing 15 trillion at 20% is better than taxing 10 trillion at 25%.”
It is a myth to think that reducing the marginal tax rate from 25% to 20% would make the economy grow by 50% (or even 5%). Historical decreases in the marginal tax rate have DEcreased the tax yield.

I suggest reading Krugman’s columns and blog in the NYT, and Brad DeLong’s blog to learn economics.
#4 Willard
January 29, 2010

@A

OK, so print the zillion dollars. Just wait until I get overseas and convert my currency away from dollars, OK?

And why would I read a loon like Krugman when I can Nobel laureate economists like Ed Prescott, Robert Lucas, James Heckman and Gary Becker- all of whom disagree with you. Krugman is the antivaxxer of the economic world.

Historical decreases in the marginal tax rate have DEcreased the tax yield.

They *increased* total tax revenues, which is what matters at the end of the fiscal day and you need to balance the budget.

Just look at the three of the biggest tax cut events in the past century.

1920s: Rates were cut from the high 70%s to the low 20%s. Revenues in the decade increased from low $700 billion to over $1.1 trillion.

1960s: Kennedy did the across the board cuts, and federal revenues went up again. (Roosevelt had pushed the rates to an insane 90%. Granted the tax code had more deductions back then, but 90% is Bizarro universe time.)

1980s: Under Reagan’s tax cuts, revenues nearly doubled.

I’ll let you in on a secret. I’m not an ideological person. I have no use for any of the major political parties. The GOP is lost to religious madness. The Dems have forgotten who they really work for. The Libertarians sit around worshiping Ayn Rand… who hated libertarians- go figure.

I don’t take my POVs from some Party playbook, but I can read history and read the works of experts who seem to not be completely insane and come to some conclusions based on what I think will actually work, and the ideologies in any camp be damned.

People like me really don’t mind paying taxes, even fairly high taxes. We just want to get something for it. We want an end to the waste and the corruption and utter, endless bullshit that goes on every day. You should come to California if you aren’t here. Every *day* there’s a story about endless millions in state tax money are just frittered away to a huge assortment of useless black holes. Or sometimes away to nothing- the money is simply unaccounted for.

Can the progressives understand this? What many of us truly don’t understand about you guys is how you can see this gigantic and corrupt broken machine, and all you seem to advocate is feuling the machine more and ever more. It’s like the classic cliche about insanity being doing the same thing over and over and expecting a different result.
#5 Troublesome Frog
January 29, 2010

OK, so print the zillion dollars. Just wait until I get overseas and convert my currency away from dollars, OK?

I don’t think you’re reading A’s position correctly. Not by a long shot.

And why would I read a loon like Krugman when I can Nobel laureate economists like Ed Prescott, Robert Lucas, James Heckman and Gary Becker- all of whom disagree with you.

You’ll find a lot of fine economists on both sides of this debate, usually broken down by their political leanings. Surprise surprise. What I find interesting in this case is that economists like DeLong and Krugman are making arguments based on models and numbers, and people like Lucas are mainly just fondly reminiscing about how they totally won all of the arguments in the 70′s.

Krugman is the antivaxxer of the economic world.

You may want to consider reading some of the opinions of experts who don’t agree with you in addition to the ones of those who do. I get the impression that you don’t have your finger on the pulse of the world’s economic chatter quite as squarely as you think you do.

They *increased* total tax revenues, which is what matters at the end of the fiscal day and you need to balance the budget.

Try this experiment:

1) Plot the log of real GDP growth in the US over time.
2) Decide on the appropriate lag to use between the time of the tax cut and the response of economic growth.
3) Using that lag, try to find a statistically significant correlation between economic growth and tax cuts.

Hand waving stories of post hoc reasoning are fun, but look at the real data and see what it tells you. You’ll find out why most economists (including people like Greg Mankiw) will tell you that while tax cuts can increase growth, they almost certainly don’t pay for themselves in overall revenues. Except for pathological cases, the tax fairy doesn’t exist.
#6 dean
January 29, 2010

“1980s: Under Reagan’s tax cuts, revenues nearly doubled”

Not quite, and misleading. Federal revenues rose 80 percent in dollar terms from 1980 to 1988, but real revenues per capita grew only 19 percent – from 1972 to 1980 (a horrible time) they rose 24%. The office of management and budget stated “when adjusted for inflation to constant fiscal year 2000 dollars, receipts (revenues) grew only from $1.077 trillion to $1.236 trillion during Reagan’s term in office.”

Further, the Center on Budget and Policy Priorities (CBPP) has documented ( figures cited are from from OMB), “Income tax receipts grew noticeably more slowly than usual in the 1980s, after the large cuts in individual and corporate income tax rates in 1981.” A good deal of the increase in revenues seems to be due to a 25% increase in the FICA rate.

It would not be a surprise to see Willard trot out the fraudulent and discredited Laffer Curve argument next.
#7 Willard
January 30, 2010

“Income tax receipts grew noticeably more slowly than usual in the 1980s

That’s nice. I was arguing against the idea that they went down.

*shrug*

So raise taxes to 98%. I really don’t care because I’m 4 years from retiring comfortably at age 48, and I’ll definitely be retiring overseas. Most things are already in place.

the tax fairy doesn’t exist.

So do you care that the system is broken or not? That was my main question. Or will the revenue fairy fix that? Just toss more money on it. Maybe it’ll eventually smother the fire. You all have fun with that.
#8 BaldApe
January 30, 2010

Willard said:

If you take buckets of water from one end of the pool and pour it back into the other end, do you expect the level of the pool will increase?

But stimulating the economy isn’t like raising the level of the pool, it’s more like circulating the water, which that would do nicely.

1980s: Under Reagan’s tax cuts, revenues nearly doubled.

Baloney. Reagan cut taxes just before he raised them. And don’t forget the Alternative Minimum Tax.
#9 Troublesome Frog
January 30, 2010

That’s nice. I was arguing against the idea that they went down.

And we’re arguing that lowering tax rates does not result in increased revenue when compared to the option of not lowering them. You seem to be arguing something slightly different: that revenues go up after a tax cut. Revenues go up after tax cuts, after tax increases, and after I have a hamburger. The reason is that the economy is very large and it grows at a relatively steady rate overall. Marginal tax cuts and increases tend to be rather small by comparison.

That’s why I asked you to check your assumption against a simple log plot of real growth over time. See how many 10 year periods you find when revenue *doesn’t* go up noticeably. Assigning credit or blame to minor tweaks in fiscal policy is seeing the face of Jesus in your morning toast.

Also, you seem to be using nominal dollars for some of your calculations. You should stop that.

So do you care that the system is broken or not? That was my main question.

Yes, I care that the system is broken. My response to that is to try to fix it rather than burning it to the ground.

Just toss more money on it. Maybe it’ll eventually smother the fire. You all have fun with that.

On one hand, you seem happy to call certain (very accomplished) economists cranks. On the other hand, you don’t seem to have the foggiest idea what you’re arguing against, much less the principles driving the argument. Good luck with that.