Digby:

I am definitely naming my next cat after Paul Krugman. And the first mouse he brings in will be named Paul Ryan.

Aha — I just realized that I should probably post my predictions about Rep. Paul Ryan’s response to today’s column before I see the inevitable letter to the Times.

So, I predict a double-talk response similar to his response to the Tax Policy Center analysis. In that response, he declared that

The tax reforms proposed and the rates specified were designed to maintain approximately our historic levels of revenue as a share of GDP, based on consultation with the Treasury Department and tax experts. If needed, adjustments can be easily made to the specified rates to hit the revenue targets and maximize economic growth.

In other words, we think the tax part of the plan would leave revenue unchanged. But in that case, why not ask CBO to score the revenue, to see if it agrees? The answer given is that CBO refused to do an analysis beyond 10 years; OK, but why not at least have the 10-year analysis?

Oh, and about “adjustments can be easily made” — when, exactly? Based on a careful look at the numbers? In that case, why tell the CBO not to do that careful look? After the tax cuts are enacted? On my planet, Republicans never consider it advisable to undo tax cuts once they’re law. And notice the weasel phrase “to hit the revenue targets and maximize economic growth.” In practice, this would surely mean no increase in rates, ever.

Ryan engaged in similar double-talk — a cloud of words, never actually addressing the criticism — after he said something really dumb about monetary policy in his interview with Ezra Klein.

So I think we can expect some world-class obfuscation.

Oh, and let me make another prediction: not one of the self-proclaimed centrists who have hailed Ryan for his truthtelling will admit that they were taken for a ride.

I have no insight into Christy Romer’s departure from the administration. But I do think it’s worth going to the tape over the critical discussion, early on, about how strong a policy response to offer. Here’s Ryan Lizza:

Read more…

This is disgusting: Senate Republicans holding up Peter Diamond’s nomination to the Federal Reserve Board on the grounds that he may not be qualified to make monetary policy. Aside from the fact that the same Senators cheerfully confirmed Bush nominees who didn’t know much about economics of any kind, this is especially stupid right now.

Why? Because right now one of the hot topics is whether the apparent shift in the Beveridge curve signals a rise in structural unemployment — and Diamond wrote the seminal paper on the whole subject — the top result on Google scholar.

Diamond is exactly the man we need — which, given the way things have been going lately, probably means he won’t get confirmed.

Update: Some commenters note, correctly, that there’s an ongoing dispute over what the rise in vacancies without a corresponding fall in unemployment means. But that’s precisely the point: we want Peter Diamond, who pioneered the whole study of this subject, in the Fed, where he can help make sense of the situation.

One thing that has been overwhelmingly obvious in the discussion of Paul Ryan’s roadmap is that lots of people who should know better — including, alas, reporters at the Washington Post — don’t know how to read a CBO report. They think you can just skim it and get the gist; and people like Mr. Ryan have taken advantage of that misconception.

Read more…

Why, you ask? To go with tomorrow’s column.

The new Medicare Trustees Report is out. Comparing Table IIIA-2 in this year’s report and last year’s report, we get this:

Medicare Trustees

In other words, the Medicare actuaries believe that the cost-saving provisions in the Obama health reform will make a huge difference to the long-run budget outlook. Yes, it’s just a projection, and debatable like all projections. And it’s still not enough. But anyone who both claims to be worried about the long-run deficit and was opposed to health reform has some explaining to do. All the facts we have suggest that health reform was the biggest move toward fiscal responsibility in a long, long time.

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending. Unfortunately, that’s not going to happen. Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.

Why?

It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.

The basic framework we have for thinking about consumer spending goes back to none other than Milton Friedman, whose “permanent income” hypothesis says that people will save most of any income change they see as merely transitory. Telling rich people that we’ll keep their taxes low for a couple more years is, for them, a transitory income gain; they’ll save the bulk of it.

Isn’t the same true for lower-income people? Not to the same extent. Permanent-income reasoning doesn’t fully apply when some people are “liquidity-constrained” — they have depressed income, which would make them want to spend more than they earn right now, but they’re out of assets and unable to borrow, or unable to borrow except at relatively high interest rates. People in that situation will spend much or all of any temporary windfall.

So if we give money to people likely to be liquidity-constrained, they are likely to spend it. That’s why aid to the unemployed is an effective stimulus; it also suggests that tax cuts for lower-income workers will be relatively effective at raising demand. But the affluent, who typically have lots of assets and good access to borrowing, are much less likely to be in that situation. So tax cuts for the lower 60 or 80 percent of the population are an OK, not great but OK, form of stimulus; tax cuts for the top 2 percent, not at all.

So: let the high-end Bush tax cuts go.

Via Ezra Klein, I see that the latest thing on the right is to compare the economic recovery from the 1981-2 recession with our current state and claim that it proves the superiority of conservative economic policies.

This shows why I can’t maintain the pretense that we’re having any kind of intelligent, or remotely honest, discussion.

The 1981-2 recession was a very different kind of event from the 2007-9 recession: basically, it was a recession deliberately created by the Fed to bring down inflation. The Fed raised interest rates sky-high, causing a plunge in home construction, which was the main driver of the slump. When Paul Volcker believed that we had suffered enough, he cut rates, housing sprang back — and it was housing that mainly drove the recovery. Reaganomics was basically irrelevant.

The 2007-9 recession was driven by the collapse of a huge housing bubble, and the resulting financial fallout. The Fed couldn’t cut rates sharply, because they weren’t all that high to begin with; there couldn’t be a housing boom, because housing was already overbuilt. Here’s the picture:

Is Dan Mitchell unaware of all that? My guess is not — he knows, but he hopes you don’t. There’s a lot of that going around.

I always give sources for data in these posts; I don’t always link, because time is short. You can get a lot of data from the St. Louis Fed; other things you sometimes need to go to www.bea.gov or www.cbo.gov. Lots of European data at Eurostat.

On potential GDP: stlouisfed has the CBO numbers. It’s in real terms; to get dollars I multiplied by the GDP deflator.

Peter Beinart has an excellent piece on how the Israeli occupation of the West Bank inexorably led the Anti-Defamation League into abandoning its principles, culminating in the awful decision to call for banning the Islamic Center in lower Manhattan.

Let me add two thoughts.

First, this has been building for a very long time. I remember my first visit to Israel, in 1981; even then older Israeli academics, veterans of an earlier era (literally — many of them had fought in 1967 and 1973), would talk grimly about the Likud government and its harsh policies, saying things like “I feel as if we’re living under a foreign occupation.” And it’s only gotten worse since then.

Second, Beinart doesn’t talk as much as I’d like about how this relates to U.S. politics. As he says, American liberals, while they fiercely support Israel’s right to exist, can’t bring themselves to support the policies of Israel’s current government. So the Israel-is-always-right crowd has gravitated to people who don’t have any problem with the occupation — which means the American hard right, including the Christian right. And they seem oblivious to the fact that they are thus making an alliance of convenience with the enemies of tolerance.

Anyway, it has been gratifying to see how many people understand just how wrong the ADL was; and special props to Mayor Bloomberg, who said exactly the right things.

I’m a little late getting to this report on Hungary’s loss of patience with austerity wrong link — use this one; it should be read in conjunction with this terrific Fistful of Euros piece from a few weeks ago that I meant to link but never got around to, Scenes from an internal devaluation.

Basically, Hungary is pursuing a harsh, seemingly endless austerity program, and keeping interest rates relatively high, in an effort to support its currency. This in turn is considered essential because (a) Hungary wants to join the euro (b) there’s great fear that a devaluation of the forint would cause big debt problems, because so much Hungarian private-sector debt is in other currencies — euros, and even Swiss francs.

About (a), I guess the question is at what price? About (b): there’s a major logical fallacy in this whole line of argument. I tried to point it out in a post last year about Latvia; let me quote myself:

Hugh puts his finger, in particular, on one gaping hole in the logic of the opponents of devaluation. We can’t devalue, they say, because the Latvian private sector has a lot of debts in euros, and a devaluation would make it very hard for borrowers to service those debts. As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

This looks like events repeating themselves, the first time as tragedy, the second time as another tragedy.

And it’s not surprising that Hungary wants out.

Apparently there’s a lot of discussion about the sources of the miraculous resilience of Texas in the current slump, with the usual suspects claiming that it proves the virtues of capitalism red in tooth and claw, or something.

Except that a quick look at state unemployment rates doesn’t suggest anything especially miraculous going on:

Unemployment in Texas has, in fact, risen sharply; not as much as in Michigan, Nevada, or California, but more or less comparable to New York and Taxachusetts. Strangely, though, we aren’t hearing about how the wonderful policies of the Paterson administration spared New York from harm.

What is true is that the Texas budget is in relatively good shape. That’s because recessions don’t do as much fiscal damage if you have a weak safety net, so expenses don’t rise much as people are plunged into poverty (because they don’t get any help), and a regressive tax system, so that revenues don’t fall much when incomes collapse.

Some miracle.

Whenever I point out that bond markets are not, in fact, demanding immediate fiscal austerity, I get comments along the lines of “So now you believe markets are perfect?” That’s missing the point. The starting point for the argument people like me make is that markets shouldn’t be demanding immediate austerity, because the long-run fiscal effects of short-run deficits are relatively small; the burden of proof is therefore on the other side to show that markets will demand something they shouldn’t.

Think of the dialogue as going like this:

Stimulist: Yes, long-run fiscal issues matter — but what we spend now is virtually irrelevant to those issues. A trillion dollars of spending will raise real interest costs by less than 0.1 % of GDP, and might even help the long-run position by avoiding a permanent loss of potential output.

Austerian: No, we must cut immediately to satisfy the bond market!

Stimulist: But the bond market isn’t demanding immediate cuts — it seems quite unworried by current deficits.

Austerian: But I know what the bond market will want, never mind what it’s saying now.

So the stimulists are saying that the fundamentals look OK, and there’s no obvious reason to disregard those fundamentals; the austerians are saying that we need to pursue economically irrational policies in order to satisfy demands that markets shouldn’t make and, in fact, aren’t making.

But they’re Very Serious People.

One of the things everyone knows right now is that Obama has presided over a huge increase in government spending. But like so many of the things everyone knows, it isn’t true.

A few considerations to bear in mind:

1. You don’t want dollar amounts, especially when comparing over time; you really want to scale spending by the size of the US economy.

2. But even dividing by GDP isn’t quite enough, because we’re still a deeply depressed economy, so government spending as a share of GDP will look high even if actual spending hasn’t risen at all, simply because it’s divided by a smaller number. So a better guide is spending as a share of potential GDP, for which I use the CBO measure.

3. You really want to consolidate federal spending with state and local — especially because a significant part of the stimulus was aid to state and local governments designed to help them limit spending cuts.

So what do the numbers look like when you look at total government spending as a percentage of potential GDP?

At first sight, it depends on how you measure government spending. If you consider government consumption and investment spending — that’s the government actually hiring workers, building roads, employing bureaucrats, and all that — it looks like this:

BEA, CBO

Feel the surge!

What’s going on here? Basically, the Obama stimulus didn’t contain a lot of public works — and those works, such as they are, have only partially come on line. Meanwhile, aid to state and local governments wasn’t enough to prevent substantial cuts. So by this measure, government spending has gone nowhere.

Now, the picture looks a little different if you look at all government spending, a number that includes Social Security, Medicare, and other transfer payments:

BEA, CBO

This has gone up — but why? There haven’t been any large new social programs — health reform, which actually isn’t that big anyway, won’t start spending in earnest until 2014. As best as I can tell, the main cause of the rise in total spending is a surge in spending on safety net programs, which are spending more because more people are in distress. Unemployment insurance alone seems to account for almost half the rise:

In short, the giant increases in government spending we keep hearing about are a myth; if there had been more truth to that myth, the economy wouldn’t be as depressed as it is.