mendeleev

It's even more dishonest to keep some things off-budget to produce fake rosy numbers.

Bush funded the wars through emergency supplementals and not the regular budget process. I believe Obama is doing the same thing.

Mawlison, you can believe as you wish, but one mistake Obama is *not* making is keeping the financing of the wars off budget. They are in the budget -- as they should be in any honest budging exercise. And that's part of the reason that the budget deficit forecasts have increased so much -- because the war expenditures are explicitly in his budget estimates.

We had higher debt compared to GDP after WWII -- and we grew our way out of that. Well, OK, part of the reduction is debt was from growth and partly from the compounding effects of a decade of 3-6% inflation. But I don't see any need for profound pessimism.

It will require capitalists to remember that capitalism is about risk taking, not hoarding money like scared little girls. After a while, they'll get it. But for now, the consumer and government are leading this recovery, and business remains on strike.

It is interesting, puzzling, and sobering, that presidencies that began with tax hikes in their first two years, were characterized by much more robust growth than those that sought to grow the economy only through tax cuts. I'm not sure what explains the trend -- it has been suggested that presidents who raise taxes are putting business and the wealthy on notice that they won't tolerate corruption.

While its true that Q2 growth was only 2.4% and 2008 numbers were revised downward, OP fails to mention that Q1 growth numbers were also revised up to 3.7% and end '09 was close to 5%. It is normal for GDP numbers to be revised, sometimes repeatly, as time proceeds and better data become available.

As the stimulus fades, it does indeed appear we face a square root recovery. Anemic recoveries are unfortunately typical results of severe financial crises. Bolder action in early 2009 would have been much more helpful than what we got.

Agreed, though, this report is disappointing. And it does encourage business to remain on strike.

The two charts show wages and median household income, neither one of which has to do with overall economic growth.

The main statement out of all that story was "GDP in 2004 was highest in 20 years." You can spin it however you like, but things were moving during Bush's years.

Ummm, to quote a famous president, "Facts are stupid things". But the fact is that total GDP growth in the 2000-2008 was not particularly good compared with the previous 20 or 25 years. On average, it was the worst performance in that time frame. Things weren't moving for the economy as a whole or for the middle class. (The source for my GDP data is the St. Louis Fed, an unimpeachable source.)

Alien, perhaps, represents one of those with reading or contextual challenges.

He seems to think that anyone who comments on US politics does so from the inside. Wolf is by no means inside the US political dialogue. That's part of the point of the post.

Wolf, a Brit with pretty moderate tendencies, given their polity, makes observations across 30 years of Republican delusion. It is concerning that delusion that Wolf asks, where, if anywhere, is he wrong.

It would be refreshing if Alien and his ilk could address the criticism head-on.

I don't expect it -- I don't expect the ability for intellectual engagement -- I'm just hoping.

Alien: take up the challenge if you can. Read Wolf's post carefully and tell us where, if anywhere, he is wrong.

Its interesting that none of the wingnuts have come out to condemn this well thought out, fact driven criticism, from a very well informed fellow from the other side of the pond, that rips to shreds the economic basis of the modern Republican party.

Maybe our local wing nuts can't read that many words at one time, so are powerless to see the strength of the argument.

Crosspost from a recent column at Financial Sources. Source: http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

The political genius of supply-side economics

July 25, 2010 4:18pm

The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today’s extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O’Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator, has just said:

“[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans”

What conclusions should outsiders draw about the likely future of US fiscal policy?

First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).

Second, the White House will probably veto these cuts, making itself even more politically unpopular.

Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.

Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

Its a great thing that two Republican senators finally said No to their Grand Old PARTY OF NO.

Let's see if I understand what some people are saying here.

USDA has an obligation to fire this black woman because "she did enough", in a former job at a different organization, as opposed to everything possible, in order, successfully, to help some white guy save his family farm.

I don't know how to break it to you, but "doing enough" to get a job done successfully is generally considered wise use of an organizations resources. (And it transpires that in this case "enough" was quite a lot of work.) One wants to do only what is necessary to get a job done satisfactorily and not waste time or money doing more than is needed.

But when the successful woman is black, and a white racist demagogues her remarks, lots here mindlessly say "Yeah, that's the way it should be."

It would be interesting to see firm, factual information on how much undocumented immigration has declined during the Great Recession. It might put the current anti-immigrant hysteria into an interesting perspective.

Of course those tax cuts should expire.

They were an experiment with a predictable outcome. Those who predicted the better part of a decade of sluggish growth, low levels of personal income growth, burgeoning federal government deficits, and roughly flat governmental tax receipts were correct.

As the economy improves, taxes will need to increase in order to address the long-term fiscal outlook of the nation. It will be least contractionary to increase taxes on the rich. So, as long as inflation is in check, taxes on the rich should be increased. Should inflation become a threat the Fed cannot handle, taxes on the middle class should increase, too. But the chances of inflation becoming a threat in the near term are only a little greater than the earth being hit by an asteroid large enough to do significant damage.

Nope, the October Surprise was an idea Gary Sick came up in the Carter White House but never could prove. Carter unfroze Iranian assets in return the hostages.

The hostages were in Lebanon not Iran so you're got all of your hostages mixed up. It had nothing to with American hostages in the U.S. embassy in Iran. Like I said you're more than a little confused but you got Contra side of the deal.

http://en.wikipedia.org/wiki/Iran%E2%80%93Contra_affair

Some us were the prime age for the draft (should it a wartime situation) back then so we remember netter than than the old timers like yourself.

This is interesting history. I remember Iranians taking as hostages people in the US embassy in Tehran and holding them hostage for over 400 days in the Carter adminstration. The were released on the day Reagan was inaugurated. It came out later that Reagan's team, afraid Carter would succeed in negotiation their release in October, 1980, negotiated on their own behalf to make sure the hostages stayed put until Reagan was safely elected. It was a really, really slick political trick. And put Reagan in debt to the Iranians.

It would appear Reagan paid the Iranians back with money at the time of Iran-Contra, a few years later. And that was slick, too.

So, we would both of us been of draftable age had the draft, or even registration for the draft, have been in effect. But, Alien, surely you remember that in the 70s there wasn't even registration for the draft after the early part of the decade, if in fact you were of age to worry about such things then!

the People’s Republic of China, the source of 97% of the world’s rare earth minerals,

97%? What a bunch of #######.

Just to be clear, Mawlison, I've reproduced as best I can your ignorant statement. Live with it. Lithium isn't a rare earth. I don't expect any scientific expertise from you, just as you've demonstrated I shouldn't expect any economic expertise.

The question is - have they made the same mistake Canada did? Legalizing gay marriage without making it possible for gay divorce? I support gay marriage, but with marriage, comes a whole host of other legalities - including common-law and divorce.

Indeed, it is probably through sorting out divorce case across state lines -- and perhaps associated custody cases -- that we will find whether or not the Constitution is upheld. There has already been limited progress in this regard.

Indeed - a failure that will be corrected when the available supply grows scarce.

Mawlison, you remain convicted of the ignorance you displayed in agreeing that lithium is a rare earth. That you cannot abide with the consequences of seeing your ignorance exposed and resort to name calling -- it is about what I expect from you.

And as I pointed out previously in this thread, it appears that the mine formerly owned by Unocal may reopen soon. I expect additional rare earth mines and refineries throughout the world will open later -- and the closing of the Unocal mine, previously the largest rare earth mine in the world, remains a failure of American capitalism.

On the bold. Had government officials inspected the wells and not approved it to begin with, then this wouldn't have happened.

Yes, had BP done their job this wouldn't have happened as well, but I'm pointing out the fact that regulation is only as good as the regulators who enforce the rules.

P&V -- does the same hold in general for the police and the courts?

Or are the police somehow to blame when a criminal breaks the law?

You are comparing apples and oranges. Homosexuality is a behavior...not a race.

This is the classic statement of bigotry. An assertion that human rights has merely a racial basis. At its core, human rights derive from the fundamental dignity of all human beings. It is this that bigots cannot abide.

Anyhow, the fact that 95% (or even 97%, although that's a bogus number) of the world's rare earth elements is sourced from China doesn't mean that China is the only remaining source of these elements.

Mawlison, you were precisely the ignorant individual who could not distinguish the difference between lithium and rare earth elements. You need to read more carefully before you say such stupid things.

As I've tried to teach subsequently in this thread, US capitalists have ceded this market to the Chinese by shutting down mines and refineries that were profitable, since they sought to improve their profit margins elsewhere in the face of foreign competition rather than stand and fight.

You are correct, though, that the current state of affairs where the Chinese own the rare earth markets is not a state of nature -- it is a failure of American capitalists.

The "bigot" label is totally lame and adds nothing but lame self righteousness to the debate. You either buy into homosexual parity with heterosexuality and embrace it as a societal norm or you are a bigot? Name calling and labels are a lazy and cowardly way to debate the merits of your point of view. It pretty much shows a lack of merit and a bankrupt point of view.

peejay, I am convinced that there is righteousness here, just as there is bigotry. The situation is rather analogous to that of States a century ago that sought to deny validity of certain marriages under the gise of denouncing miscegenation.

And it remains to be seen whether the USA is a nation of laws, or a nation where bigots prevail.

Really? Why the shift in just the last 10 years? Never heard a reasonable answer for that and I'm sure you'll come up empty-handed as well. Anyone else want to take a stab at it on this "historic" day?

Alien, sorry to break it to you, but its a fact. Times are changing. It is legal in several states for couples of the same sex to marry. It remains for the Constitution to be upheld and for those marriages (which are, in fact, under civil law, contracts) to be held valid in States under the sway of bigotry.

Either that, or we are not a nation of laws, but something else. As I indicated above, the Constitution is quite clear on this point.

You're more than a little confused here. The American hostages were released the day Reagan took office. Iran/Contra was years later.

As I remember, Reagan made a deal with the Iranians to get the hostages relaesed as soon as he became President (the real October Surprise) and he paid them back with Iran-Contra. It was a cool pair of deals for Reagan, first arranging to be paid by Iranian fundamentalists and then repaying the debt while doing dirty deal on Democrats in Congress who labored under the naive opinion that the US was a nation under law.

Alien, maybe you are too young to have seen the events unfold -- some of us have the benefit of memory.

Then your marriage is null and void and you better get used to being a bachelor again because them's the brakes. It's very sad, but it's true.

Oh. Yeah. Right...

Anyway, what the Argentines did is great.

And it would be great if marriage were not treated as some sort of inferior contract, not endowed with Constitutional protection. Some States, overcome by bigotry, believe themselves empower to impair obligations of marriages of which they disapprove. Decades ago, many of these states did the same regard miscegenation. Perhaps Article 1, Section 10 of the US Constitution should not apply to these sort of contracts, the bigots seem to believe. And bigots have believed this for a long time.

The answer is clear: breedin'.

... but we're too old for that, just like my grandpa was when he remarried after grandma died.

So, anyone think BP has earned a right to a 4-year holiday from corporate income tax?

Yup, breedin'.

Glad you got it figured out, maven.

Now, if only I could remember why I got married again ...