Representative Paul Ryan continues to push for contractionary fiscal policy, with the addition today of contractionary monetary policy on top of that. Thankfully, The Economist has a nice entry on why this is a Bad Idea:

The spending cuts Republicans seek for this year and next would not doom the American economy to disaster, but they would place a meaningful drag on a recovery that continues to chug along at or just under trend growth, and that's risky. The literature suggesting that austerity can be expansionary has faced a great deal of criticism, and that literature itself suggests that expansionary austerity is most likely when interest rates are high—which they aren't—and when the currency is allowed to depreciate considerably—which Mr Ryan opposes. Short-term spending cuts are unambiguously contractionary, and Mr Ryan wants them in spades.
Now, if that weren't bad enough, he's pushing for much tighter monetary policy, at a time when core inflation is barely pushing the needle: 

And then there's the money issue. It wasn't so long ago that both parties supported countercyclical monetary policy. Top economists from across the ideological spectrum—from Milton Friedman to Christina Romer—point to tight monetary policy as a major factor exacerbating and prolonging the Great Depression. Mr Ryan claims he's worried about inflation. But based on what markets are saying, 10-year expected inflation is just 1.94%. That is, according to the Cleveland Fed, "the public currently expects the inflation rate to be less than 2 percent on average over the next decade". Mr Ryan said that he wished the Fed would drop its mandate for full employment and focus on price stability. Well, current inflation expectations indicate that tighter policy would maintain inflation below the Fed's implicit target of around 2%, which is the level of inflation most rich-country central banks have decided is conducive to stable prices and growth. Moreover, Mr Ryan's suggestion that high inflation is imminent cuts directly against the prevailing market view. That's a fine belief to have, provided you aren't spending your time arguing that markets know best and need to be free to guide the economy.

It seems to me that Ryan is simply calling for tighter policy in an effort to take advantage of rising gas prices, since many associate any price increases in gas with 1970s style stagflation. However, the price of crude collapsed today, in what turned out to be a record sell-off:

Crude oil plunged 10 percent as startled investors unloaded their positions and a weeklong decline accelerated into an outright freefall. The price of U.S. crude went from triple digits to double digits, falling below $100 after opening at close to $110. Brent crude, a European benchmark, lost $12 at one point in a sell-off that exceeded the one following Lehman Brothers' collapse, Reuters reported.
So, my question is: how much longer can the hysteria over inflation last if there's... no inflation?
 
 
It's fair to say that the problems in American education are well known. Every few months Time or Newsweek features another article about how far behind we are as a nation when it comes to education in math and the sciences. But every now and then a story comes out on the subject that is straight up embarrassing. The Associated Press's Karl Ritter brings us this another of the latter:

James White, of the University of Colorado at Boulder, told fellow researchers to use simple words and focus on the big picture when describing their research to a wider audience. Focusing too much on details could blur the basic science, he said: "If you put more greenhouse gases in the atmosphere, it will get warmer."

Prominent U.S. climate scientist Robert Corell said researchers must try to reach out to all parts of society to spread awareness of the global implications of the Arctic melt.

"Stop speaking in code. Rather than 'anthropogenic,' you could say 'human caused,'" Corell said.


Now, it might just be me, but the fact that someone has to come out and say "use smaller words" seems pathetic. While I agree with the idea behind those words - people really do need to understand the significance of climate change - it's really a shame that the solution isn't "let's have a media blitz, get this into all of the papers and local television stations" but instead "dumb it down, these people won't understand you otherwise!"

 
 
Lately, I've been noticing that the United States economy seems to have a sense of irony. Maybe it's just me, but right after Republicans enact contractionary fiscal policy, economists and economic forecasters lower their predictions for GDP growth in the first quarter. Surely they were in the middle of formulating these numbers a few days ago. Didn't anyone think to say, "Hey, you know it looks like the economy is slowing down again, right? Maybe we should boost spending temporarily, while working in some medium-term cuts for good measure? As far as we can tell, it doesn't even look like the bond vigilantes will mind!" 

But I forgot! There have been economists yelling this. For months. From the rooftops of the blogosphere. On the left, we've got Paul Krugman, Brad DeLong, and Christina Romer calling for basically anything - QE2 (and now 3, I suppose), fiscal policy (as if that was going to happen - unless you consider the Bush tax cut extensions fiscal policy), or even just leaving interest rates low, which is a feat in itself due to all the inflation hawks (who can't tell the difference between headline and core inflation) in office today. On the right, there's Scott Sumner and Tyler Cowen advocating for stronger monetary policy, aiming for higher nominal GDP and inflation, respectively, with essentially the same means to each end. 

With such strong support from both sides of the aisle, it's bizarre that Republicans are pushing sop hard against seemingly anything. And on that note, from Scott Sumner:

"Lars Svensson showed that monetary policymakers need to equate the policy goal with the policy target. If the captain of a ship hopes to reach New York, but expects (given wind and currents) to end up in Norfolk, then he needs to adjust the steering. If the Fed hopes for 5% NGDP, but expects a decline in NGDP (as was the case in late 2008) then they need to radically adjust monetary policy until their internal forecast unit expects NGDP to grow at the desired rate.

Rumours of QE2 in the fall of 2010 boosted all sorts of asset prices, and depreciated the dollar, in direct contradiction to the late 2008 and early 2009 predictions of the "liquidity trap” Keynesians. The programme should have been done 2 years earlier and in much larger amounts. And it should have been combined with a switch to level targeting (of prices or NGDP) and a lower interest rate on bank reserves. The Fed should have done whatever it took to ensure on-target NGDP growth expectations. I.e. they should have done what Bernanke recommended that the Japanese do in 2003."


And a response to the article, by Ryan Avent:  

"This is why it's a problem to be obsessively cutting short-term government spending. And this is why it's a problem when regional Fed presidents start recommending that the Fed end QE2 early. Real output growth may have clocked in at 1.5% in the first quarter, and Dallas Fed President Richard Fisher is going around giving speeches about how the American economy is overstimulated. I'd hate to see what Mr Fisher considers to be an appropriately-stimulated economy."

Think I might as well quote myself on this one. What should we be doing? I'll let me from a few days ago explain:
"The fact that interest rates on short term U.S. Treasuries have fallen all the way to the zero lower bound shows that the market considers them safe assets. So what should the government do? Increase short term stimulus. Bring spending from the future into the present, finance it by issuing new debt, and don't stop until the market no longer demonstrates significant demand for safe assets."

 
 
Via Mark Thoma: 

"After months of criticism that he has not led on budget talks, Mr. Obama will urge bipartisan negotiations toward a multiyear debt-reduction plan that administration officials said would depart sharply from the one proposed last week by House Republicans.

The Republican plan includes a shrinking of Medicare and Medicaid and trillions of dollars in tax cuts, while sparing defense spending. Mr. Obama, by contrast, envisions a more comprehensive plan that would include tax increases for the richest taxpayers, cuts to military spending, savings in Medicare and Medicaid, and unspecified changes to Social Security. ...

Several presidential advisers interviewed in recent weeks said Mr. Obama has been torn between wanting to propose major budget changes to entice Republicans to the bargaining table, including on Social Security, and believing they would never agree to raise revenues on upper-income Americans as part of a deal. ..."


I will be thoroughly impressed if Obama actually rolls out a plan that does the things he says, but calls for them to be implemented incrementally and over the medium-term. What I expect is a proposal to cut Social Security and a statement that Medicare is on the table as well. Heck, while he's at it he might as well propose further lowering tax rates while "broadening the tax base". Maybe he can remove the mortgage tax deduction, and further cripple the housing market. Yeesh. The coming months are not going to be fun for progressives...
 
 
From Ezra Klein, a look at how even employer-provided health insurance is heavily subsidized by the government:

"Most of the people who have health-care insurance and don’t get it from Medicare, Medicaid or the military/veteran’s systems are getting it from their employer. And the reason they’re getting it from their employer is that health-care benefits — unlike wages — are tax deductible. That ends up being a huge subsidy for people who get health care through their employers. Between 2010 and 2014, the Joint Committee on Taxation estimates that this break will cost the Treasury about $660 billion. It’s the single most expensive tax expenditure in the entire tax code.

So let’s say you eliminated it tomorrow. Poof, gone. The day after that, tens of millions would lose their health-care benefits, as the only thing that makes those benefits affordable for employers is that tax break. So I’d suggest that those Americans also have a form of government-provided health care. But because we’ve hidden their subsidy in a way we haven’t hidden Medicare or Medicad, they get to continue thinking that they’re the sort of hardworking folks who get no benefits from the government and instead get taxed to support all these old and poor people. In reality, they’re getting a massive tax break that’s being paid for by the uninsured, the unemployed, the self-employed, and people whose employers don’t offer health-care insurance."


Whether you are for or against this subsidy, I think that this is a prime example of how taxes can alter behavior through incentives. If it weren't for the tax deductibility of employer provided health insurance, we wouldn't be as likely to have it. If we didn't have it, perhaps more Americans from both sides of the political aisle would see Medicare and think, "Why do seniors get health care like that and I don't?" Or, perhaps 
those suggesting a move towards a voucher-based Medicare system would be confirmed in their beliefs that people would search out more cost-effective health care. While I assume the former is more likely than the latter (simply because Medicare has already proven to be so popular and it's hard to find "cheap" solutions to things like cancer), it would be interesting to see how the American people reacted to such a change to a system they probably didn't even realized affected them,
 
 
From CNBC, Donald Trump has made a few more bizarre statements on his obvious move towards running for President. First, he blames the price of oil on President Obama:

"Real estate developer Donald Trump blames President Obama for the rising price of oil, warning, "this country can never, ever recover" if oil prices continue to go up.

"That's really the life's blood of the country," Trump told CNBC in a phone interview on Monday. The Trump Organization chairman, who says he's considering running for president, plans to decide "before June" on the matter.

He contended that Obama is not a leader and is "in bed with these (OPEC) people. He doesn't speak the way you have to speak to them.""


Now, I know his area of expertise is real estate development, but surely the man has some training in economics. Now, it might just be me on this one, but there appear to be at least three things that seem more likely to raise oil prices: speculators, Libya, and demand from developing nations, specifically India and China. I could see how arguments could have been made that the stimulus package would bring up the price of oil (because it would increase domestic aggregate demand) or that QE2 was doing it, but the stimulus has essentially run its course and there is no evidence that the Fed's actions have raised inflation expectations. So as far as I'm concerned, Trump's comments make no sense. Now, on to his next statement:

"Although he blames China for "ripping off our country," Trump gives them credit for using US funds to rebuild airports, bridges and other infrastructure.

"When was the last time you saw a bridge being built in the United States? You see them falling down all the time. When was the last time you saw an airport being built? We're like a third-world country.""


I have to wonder, does Trump know what he's suggesting here? He talks about Obama spending us into a hole that we can't climb out of, then argues that we should follow China's lead in infrastructure spending financed by debt. While I certainly agree with this, I really doubt that these are the kinds of policies he would push for. Maybe, if he keeps this up, we can start talking about jobs again...

 
 
From Matthew Yglesias, an image that shows how much we spend on our military in comparison to other nations around the world:
Picture
Does anyone think that maybe we're overdoing it a bit? I wish I could have an honest discussion's with the leaders at the Pentagon about what exact strategic benefits would be lost by letting this number fall to even, say, 35%. My gut feeling is that our level of spending is useless against the tactics we're facing anyways, so letting it fall would only help our nation's finances.
 
 
A few things from the blog of Brad DeLong. First, Larry Summers says that it became apparent to him that there were specific categories of research that he knew would be useful to him to deal with our current crisis: 

"Mr Summers was more measured, refusing to be drawn into making blanket statements for the sake of being controversial.... But in its own way, his assessment of recent academic research in macroeconomics was pretty scathing.... [H]e talked about all the research papers that he got sent while he was in Washington. He had a fairly clear categorisation for which ones were likely to be useful: read virtually all the ones that used the words leverage, liquidity, and deflation, he said, and virtually none that used the words optimising, choice-theoretic or neoclassical (presumably in the titles or abstracts). His broader point--reinforced by his mentions of the knowledge contained in the writings of Bagehot, Minsky, Kindleberger, and Eichengreen--was, I think, that while it would be wrong to say economics or economists had nothing useful to say about the crisis, much of what was the most useful was not necessarily the most recent, or even the most mainstream. Economists knew a great deal, he said, but they had also forgotten a great deal and been distracted by a lot."
Next, DeLong examines two ways of looking at the cause of the financial crisis, and finds that they are in essence the proposals that Walter Bagehot put forth in Lombard Street, which came out in 1873: 

"Richard argued that--just as in Japan in the 1990s--the collapse of asset values had created a world desperately short of financial assets, in this particular case savings vehicles of moderate and long duration. The impairment of balance sheets thus left households and businesses anxious to cut back on their spending in order to rebuild their balance sheets. Since the interest rate could not fall any further to clear the market for savings vehicles, recession followed. The recession would, he said, last until and unless the supply of financial assets to serve as savings vehicles rose to levels consistent with financial-market demand. And government could materially accelerate this process if it stood up while the private sector was standing down: if it spent, invested, and borrowed in order to boost the market supply of savings vehicles.

Carmen by contrast argued that the world was desperately short not of savings vehicles but rather, due to overleverage, of safe financial assets. We had an excess supply of risky and leveraged financial assets and an excess demand for safe financial assets. Hence households and businesses cut back on their spending to try, in vain, to build up their holdings of safe financial assets that just were not there. Hence recession."


The common neoclassical/Efficient Markets argument against the idea that we could learn a thing or two from the economists of the past is something along the lines of: "But we know so much more now!" My response is: "Do we really?" Is there evidence for a supply (technology) shock causing our current crisis? Is there any evidence that Ricardian Equivalence is relevant to discussions of temporary stimulus? Is there any evidence that we are on the wrong side of the Laffer Curve? I would like to believe that anyone thinking rationally would respond to the above questions with "no", but that seems like too much to ask for in modern economics. Meanwhile, Walter Bagehot on why there can be sudden demand for safe assets: 

"Such a reserve as we have seen is kept to meet sudden and unexpected demands. If the bankers of a country are asked for much more than is commonly wanted, then this reserve must be resorted to. What then are these extra demands? and how is this extra reserve to be used? Speaking broadly, these extra demands are of two kinds--one from abroad to meet foreign payments requisite to pay large and unusual foreign debts, and the other from at home to meet sudden apprehension or panic arising in any manner, rational or irrational."

Walter Bagehot on dealing with fears of the safety of their assets: 

"In opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. The first instinct of everyone is the contrary. There being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. But every banker knows that this is not the way to diminish discredit. This discredit means, 'an opinion that you have not got any money,' and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. The time for economy and for accumulation is before. A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. "

Economists like Brad have been saying things like this for years. All you have to do is replace "bank" with "The United States Federal Government". There has been significant demand for safe assets. The fact that interest rates on short term U.S. Treasuries have fallen all the way to the zero lower bound shows that the market considers them safe assets. So what should the government do? Increase short term stimulus. Bring spending from the future into the present, finance it by issuing new debt, and don't stop until the market no longer demonstrates significant demand for safe assets.

 
 
While there's been much discussion in the Blogoshpere about Paul Ryan's joke of a budget proposal, Ezra Klein shows how the Affordable Care Act is far more likely to reduce the long-term deficit than the Medicare vouchers Ryan is proposing:

"The Affordable Care Act has taken a lot of hits. It’s not popular, and though very few of the political actors confidently attacking or advocating it can explain the many things it’s doing to try and control costs, people have very strong opinions on whether it will succeed at controlling costs. But the irony of everyone demanding Democrats come up with a vision for addressing the drivers of our deficit in the years to come is that, on the central driver of costs and the central element of Ryan’s budget, Democrats actually have something better than a vision. They have a law, and for all its flaws, their law actually makes some sense. Republicans don’t have a law, and their vision, at this point, doesn’t make any sense at all."
 
 
I can't help myself. This weekend, I did a live-blog of the Tallahassee Southern Model UN conference for FlaglerLive, a local online newspaper. Check it out:

FPC’s Delegates Win 2nd Place and Score Hat Trick at Tallahassee Model UN