I gather that they’re still trying to claim that the recovery from the 1920-21 recession somehow vindicates austerity policies.

I’ve already dealt with that.

And let me be peevish: if you’re reading this blog, before demanding that I respond to some argument or other, why not use the little search box off to the right? Not always, but often, I’ve already done what you demand.

The big Times article on Apple manufacturing was excellent, and I’ll have more to say about it when I have the time. One thing worth noting right away, however, is that the piece is in large part an essay on the economies of agglomeration (pdf, wonkish):

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

The point is that manufacturing plants don’t exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand. This is the kind of stuff I emphasized in my own work on both trade and economic geography.

The policy implications aren’t as clear as you might imagine. But more about that when I have time to do it right.

The new McKinsey Global Institute report on debt and deleveraging has attracted a lot of attention, and rightly so. I have some quibbles with the way the data are presented, but they’re very useful data — and lead to some surprising conclusions.

So, a few notes.

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My Princeton colleague Kim Lane Scheppele has another post about Hungarian affairs, below the fold. Incidentally, she’s going to Budapest this coming week; she’ll be giving some public lectures and meeting with a number of people. Wish her luck.

Here’s her latest:

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A followup on my note about US deleveraging. It turns out that if you measure debt as a percentage of potential GDP (as estimated by the CBO) and use a stacked-area graph, you get a pretty clear picture. Here it is, using nonfinancial debt (for reasons explained in the previous post):

All data from FRED.

What we see here is that there was an explosion of total debt during the Bush years; since then debt has stabilized relative to potential output. But there has been a redistribution, with private debt falling while public debt rises.

Arguably, this is exactly what needs to happen: the federal deficit is sustaining the economy while balance-sheet constrained private actors deleverage. (By the way, reductions in the nominal level of private debt largely reflect defaults, but the much bigger fall relative to potential GDP reflects the swing from financial deficit to financial surplus).

Once balance sheets are sufficiently repaired, private demand should recover, and the federal government will no longer need deficit spending to keep the economy afloat.

Obviously (at least to me) we should have been stabilizing things at a higher level, with less unemployment. But this is a picture not of runaway borrowing, but of progress being made in dealing with an excessive level of private debt.

Kevin Drum sends us to Michael Kinsley, who is still worried about inflation despite its failure to explode the way he thought it would.

Kevin points out that Kinsley makes a claim that is just false: that economists have started saying that a little more inflation would be good are making excuses for a loss of control. As Kevin says, the case for more inflation was being widely made before the recent (and now fading) bump driven by commodity prices. Heck, I first made that case almost 14 years ago! And this false claim is the heart of Kinsley’s current argument.

But let me focus on something else Kinsley doesn’t seem to get: he protests that I offer no criteria for when it’s time to worry about debt again:

Another reason I remain worried about inflation is that for two years I have been waiting for Paul Krugman, the Nobel Prize- winning New York Times columnist, to tell us when we should reverse course. Krugman’s basic analysis of the situation is persuasive. He thinks President Barack Obama’s $800 billion stimulus package in 2009 was much too small to have the desired Keynesian effect of kick-starting the economy. And then somehow we wasted all of last year arguing about how to reduce the budget deficit, instead of realizing that reducing the deficit – - however you do it — amounts to reducing the stimulus, when we ought to be increasing it. When the economy is robust again, it will be time to start paying down the debt.

Hello? Right there he concedes that I have given an answer: when the economy is robust again.

More specifically: austerity is a self-defeating policy when you’re in the liquidity trap, so that the contractionary effects of deficit reduction can’t be offset with lower interest rates. And we’re in the liquidity trap as long as the economy is sufficiently weak that the appropriate monetary policy is pedal to the metal, zero Fed funds rate. When the unemployment rate falls below 7 percent, we can have this discussion (although there’s a good case for keeping rates very low even at that point).

I thought that I have been perfectly clear about this logic. If Kinsley can’t figure out what my criteria are, he just hasn’t been reading what I wrote.

The thing is, Kinsley doesn’t offer any evidence for his case besides the fact that he thinks that economists like me or Ken Rogoff are being slippery or evasive, or that we’ve been changing our story — none of which is true.

I like Mike Kinsley — he gave me my first punditizing job, and I’ve enjoyed much of his writing over the years. And it’s perfectly OK for lay writers to take on economic issues — as long as they’re willing to do some homework. Unfortunately, in this case he hasn’t, despite going on about the subject for two years.

People have been asking me about Steve Rattner’s op-ed, which does seem to be aimed at me. My initial reaction was sheer bafflement: Rattner first attacks a view that, as far as I know, nobody holds, then makes his case by saying in as many ways as he can think of that the debt is huge, huge I tell you. What’s going on here?

Luckily, Dean Baker seems to have figured it out.

As Dean says, the key piece is here:

Debt doesn’t matter? Really? That’s the most irresponsible fiscal notion since the tax-cutting mania brought on by the advent of supply-side economics. And it’s particularly problematic right now, as Congress resumes debating whether to extend the payroll-tax reduction or enact other stimulative measures.

Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off.

Maybe there’s someone in America who believes this; it’s a big country. But what makes Rattner think that anyone with influence on the policy debate believes this?

Here’s what I think happened. Rattner read my article, saw that I was denying that debt imposes the kind of burden on the next generation that people say, and immediately threw down the paper and began composing an indignant reply to what he assumed I must have been saying.

What I was actually saying, of course, is that debt is a liability that we pass to the next generation — but it’s also an asset that we pass to the next generation. It can cause problems, but it doesn’t impoverish the country the way an excessively large mortgage impoverishes a family.

But Rattner didn’t get that far in his reading; he apparently assumed that I (or somebody) must have been saying something completely stupid.

Reading his piece, I found myself remembering an old cartoon showing two guys drinking at a bar, with one of them yelling, “Throw that man out! He just said that patriotism is the least refuse of a squirrel!”

By the way, I do think that debt, both public and private, can be a problem. I think that Antonio Fatas (via Mark Thoma) goes too far here in saying that there is no need to deleverage gross debt at all. Debt is a particular way of allocating risks, and it can be (and has been) pushed too far when people underestimate those risks. That realization is what a Minsky moment is all about.

But Rattner is trying to make his case by attacking views that aren’t even a caricature of what those of us arguing for less obsession over debt right now are saying.

Or that’s what it sounds like to me!

Several commenters have recommended that I trawl through the videos from KEXP in Seattle, and I have been gradually doing that when I can’t stand any more economics for the day. Now, the truth is that most of the groups they feature don’t grab me; de gustibus non whosit whatsit, or something. But every once in a while I find something strange but wonderful, like this:

OK, that’s not what I believe. But it’s apparently what Scott Brown believes.

Via Steve Benen, Brown’s campaign is going all out on the proposition that Elizabeth Warren is a big hypocrite. You see, she has been crusading to help the endangered middle class — but she herself is a well-paid Harvard professor, who would end up paying higher taxes as a result of the policies she advocates. See the hypocrisy?

Neither do I.

I’ve written about this before; somehow the notion has entered our politics that supporting a cause that isn’t in your personal financial interest makes you a hypocrite. It’s really bizarre.

As I suggested in the title of this post, think of what this says about Washington. The fact is that he personally was doing very well under British rule — he was a big landowner, a man of stature in the colonies. His life was just fine; yet he took huge personal risks to lead a rebellion for the cause of liberty. He was a hypocrite!

Or, maybe, he was a man of civic virtue, who placed the needs of his nation above his own comfort.

Part of the reason this plays on the right is that the right’s response to any attempt to talk about inequality and the tax system is met with claims that it’s all about envy; supposedly, anyone who thinks that the capital gains tax should be higher only says that because he or she hates rich people. So how can they be affluent themselves?

Strange to say, however, it’s possible to have no special animosity toward rich people as people, and still believe that they should pay more in taxes, that their workers should have more bargaining power, and in general that policies that would make them not quite as rich would make this a better nation.

But then as a liberal, well-paid professor/journalist myself, I would say that, wouldn’t I?

Ryan Avent points out an important fact: if you look at total debt, public and private, the United States is doing better at deleveraging than countries that talk much more about the evils of debt than we do. I thought I would redo the calculation for the US so that I understood it. I focus on nonfinancial debt — that’s because money that banks owe to each other is more a reflection of the structure of the financial system than of the degree of overborrowing more broadly. So here’s nonfinancial debt, public plus private, as a percentage of GDP:

What you see here is a gradual decline in overall debt — not at all what you hear in the public debate. Now, the composition of that debt is changing: rising public debt, falling private debt. But that’s exactly what you need to deal with the aftermath of a Minsky moment: you need to reduce the debt of balance-sheet-constrained players, so that the drag on the economy is reduced over time, eventually getting us to the point where deficit spending is no longer needed to sustain the economy.

It’s a crime that we aren’t doing more, that unemployment is as high as it is — and sustained high unemployment is itself taking a toll on our future as well as our present. But as far as debt is concerned, America’s situation is getting better, not worse.

A further thought about the proper calculation of tax burdens on very high income Americans: if you remember past debates, it’s kind of peculiar to see conservatives jumping up and down to say that Mitt Romney does too pay reasonable taxes if you include the profits taxes on the corporations in which he invests. Because if memory serves me, just a few years ago conservatives were denouncing the “flypaper theory” of tax incidence, arguing that much of the burden of corporate taxes really falls on labor, not on stockholders. Is it just my imagination?

No, it isn’t. They really did make this argument. Repeatedly.

And the truth is that I always took this argument semi-seriously; enough to make me hesitate about placing too much emphasis on the Piketty-Saez calculation (pdf) showing a huge cut in taxes on the rich since the 1960s.

The point is that there is a strong sense of trying to have it both ways. When people raise questions about big tax cuts for corporations, we’re told not to worry, because corporate taxes mainly fall on labor, not on stockholders. When people raise questions about low taxes on the very rich, we’re told not to worry because once you include all the taxes corporations have paid on their behalf as stockholders, their taxes aren’t really that low.

Funny how that works.

Some readers have asked whether the picture of very low taxes on the very rich changes once you take taxes on corporate profits into account, and impute them to stockholders. The answer is that yes, it does, somewhat — but there are a number of implications of such an imputation, and if I were a conservative, I really wouldn’t want to go there.

On the question of how profits taxation plays into tax burdens, the CBO has already done those calculations. In particular, it did a special version of its usual tax shares analysis that looked inside the top 0.01 percent, taking the data up through 2005 (pdf). According to this analysis, in 2005 the top .01 percent paid only 17 percent of income in income taxes — but they faced an overall federal tax rate of 31.5 percent, with almost all the difference being imputed corporate taxes.

But is this really where the right wants to go? I thought corporations were people — by which Romney meant not that they eat and sleep, but that they employ people, and by being nice to corporations we’re being nice to workers. If you say instead that corporate profits benefit only the stockholders — which is what you’re implicitly saying if you impute all profits taxes to the stockholders — so much for the warm and fuzzy feelings.

More than that, however, if we do the imputation, the historical story becomes one of a simply huge reduction in tax progressivity over time. Piketty and Saez (pdf) tell the tale:

A gigantic tax cut for the top 0.01 percent, mainly coming from lower corporate taxes (with an assist from lower estate taxes). And do you really want to claim that the U.S. economy in 1960 lacked dynamism?

So if you want to factor in those corporate taxes, that’s an arguable case — but it carries with it the implication that regressive tax policy has been a major culprit in rising inequality.

I’ve had several people ask for a followup on my piece about David Frum and capital gains taxes — namely, what is the case for special treatment, and the case against?

Well, Greg Anrig at the Century Foundation has a good summary. Let me leave the distributional issues on one side; even if we don’t care (or neglect for the moment) the fact that low capital gains taxes overwhelmingly benefit a tiny minority, and leave us having to raise more taxes from everyone else, there are still good arguments against this preferential treatment.

So, the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving: if you spend your income now, you pay taxes only once, while if you invest for the future, you pay taxes twice, so eat, drink, and be merry.

There is, however, no evidence that this effect is at all important.

Meanwhile, by taxing income at very different rates depending on how it manifests itself, we create huge incentives to manipulate income to make it come out in the favored form. And this has real economic costs. Anrig:

The tax-favored treatment of capital gains is a notorious source of complexity in the tax code, diverting the energies of highly paid accountants and lawyers into wasteful efforts to shelter the incomes of wealthy clients from taxes. The elaborate tax forms known as Schedule D (“Capital Gains and Losses”) and Form 8949 (“Sales and Other Dispositions of Capital Assets”) provide a superficial glimpse at how the differential tax treatment of capital gains can suck up enormous quantities of time and money for the well-heeled and their tax pros. But much more costly and wasteful than the tedious forms are the strategic energies engaged in manipulating income flowing to the wealthy in ways that minimize tax liabilities.

A recent IRS study showed that the primary source of capital gains income has shifted from stocks to “pass-through” entities (gains on assets sold by partnerships, S-corporations, and estates and trusts). In 1999, corporate stock constituted 42 percent of total capital income while pass-through gains amounted to 25 percent; by 2007, those numbers had essentially reversed with pass-through income comprising 40 percent of the total while stocks accounted for 25 percent. Money managers who oversee the assets of private equity partnerships are among those who benefit from beneficial treatment of capital gains.

That transformation has required an enormous investment of brainpower, administrative work, and other energy that has profited individuals engaged in those activities without any discernable payoff to the rest of society. Little of that unproductive work would continue if capital gains were taxed at the same rates as earnings from work.

So we have a dubious gain in the efficiency of intertemporal allocation, weighed against an obvious and major waste of resources in rent-seeking.

There is, I think, a kind of economistic myopia that applies here: we tend, all too often, to think in terms of a perfect, undistorted economy, and worry about anything that prevents all the marginal whatevers from being equalized. But in the real world, governments must collect taxes, and given that necessity, making that tax collection as simple and efficient as possible can easily trump more rarefied notions of efficiency.

In short: the low tax rate on capital gains is bad economics, even ignoring who it benefits.

In correspondence, Mark Thoma notes a double standard in the conservative outcry over the Keystone XL decision. As he notes, when it comes to the question of whether government spending can create jobs, the usual suspects claim that it’s logically impossible: income has to be spent somewhere, so all the government can do is divert funds from other uses. But when it’s a private investment, somehow that logic no longer applies.

The truth is that the logic is wrong in all cases — spending isn’t fixed. But it’s still interesting to note this double standard; it’s more evidence of lack of good faith.

Oy. Ari Fleischer is using Twitter to repeat the old zombie lie about how the tax burden on the rich has risen, because they’re paying a higher share of federal taxes than they used to. Mark Thoma handles this fine, no need for me to weigh in. Basically, if the income of the 1 percent has tripled relative to the income of the middle quintile, how are they suffering if their tax burden relative to the middle class rises by a substantially smaller amount?

Let me instead go meta; this is an example of why policy debate is so frustrating, and why I’m not polite. The key thing about how the conservative movement handles debate is that it never gives up an argument, no matter how often and how thoroughly it has been refuted. Oh, there will be more sophisticated arguments made too; but the zombie lies will be rolled out again and again, with little or no pushback from the “respectable” wing of the movement.

In comments and elsewhere I fairly often encounter the pearl-clutchers, who want to know why I can’t politely disagree, since we’re all arguing in good faith, right? Wrong.