One of the oddest things to come out of the entire credit crisis, recession and muddling recovery has been the sudden re-emergence of deficit hawks.

While a few honest deficit hawks are out there — the Peterson Institute is a good example of a group looking at long term structural issues, not immediate fiscal concerns — the vast majority of born again fiscal hawks are political hypocrites. They voted for all manner of budget busting programs — unfunded tax cuts, new entitlement programs (i.e., prescription drugs), an expensive war of choice (Iraq).

How is it that they only learned of the evils of deficits after they lose power? How very convenient.

The current group of anti-deficit spenders are pro-cyclical, rather than counter-cyclical. This means that during an expansion, they have no problem with expanding deficits, running big spending programs, giving generous tax cuts. During a recession is where they suddenly rediscover fiscal prudence.

This is ass backwards. During an economic expansion, with employment gaining and GDP growing is when you should be thinking about saving for the next rainy day. Counter-cyclical spending means that governments should watch the budget carefully during the good times, but spend spend more freely during the downturns. What we are hearing from this crowd is the exact opposite of what should be.

Many people believe the government’s early withdrawal of depression stimulus after the early 1930s is what caused another downturn circa 1938-39. But few people realize that Japan made the exact same mistakes in 1997 and 2001.

That is the lesson SocGen’s Albert Edwards points to in Richard Koo’s book about Japan’s balance sheet recession, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession:

The crux of his analysis is that governments have no option but to stimulate
aggressively all the while the private sector is de-leveraging. ANY attempt at fiscal cuts simply results in renewed recession and a further loss of confidence, thus making it even harder and more costly to sustain any subsequent recovery and hence the budget deficit ends up bigger than before (e.g. see chart below). This is exactly the outcome I expect.

Koo argues that the premature fiscal tightening by Japan 1997 and 2001 weakened the economy, reduced tax revenue and ultimately made the fiscal deficit even bigger:

Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit

Source: Nomura Securities

>

There are few things more annoying the a drinker who just discovered sobriety: Hence, those who have spent the past decade getting drunk on government spending are now suddenly proselytizing a belated sobriety. These calls are occurring exactly when government largesse would do the most good.

I can’t tell what motivates these new deficit hawks — are they merely ignorant, unaware of the historical analogs? Or are they hoping for another recession as part of a debased power grab? (I don’t know).

What I am sure of is that calling for fiscal temperance RIGHT NOW is essentially calling for another recession . . .

>

Sources:
The Age of Balance Sheet Recessions:  What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005
Richard C. Koo, Chief Economist
Nomura Research Institute
Tokyo, March 2009

KOO’s “Good News”
Welling, September 11, 2009
http://welling.weedenco.com/newsletterdownload.aspx?newsletterpictureid=1803 (PDF)

Richard Koo books:
The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession
Wiley 2009

Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications
Wiley, 2003

See also:
Caving to Congress Creeps Into Market Views on Obama
Rich Miller and Mike Dorning
Bloomberg, Feb. 16 2010

http://www.bloomberg.com/apps/news?pid=20601109&sid=aDAeDq0lg0Rw&

Judging a Stimulus by the Job Data Reveals Success
DAVID LEONHARDT
NYT, February 16, 2010

http://www.nytimes.com/2010/02/17/business/economy/17leonhardt.html

Category: Economy, Really, really bad calls, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

85 Responses to “Deficit Hawks Want New (or double dip) Recession”

  1. This is the part of Keynes (and Bagehot) that I happily adopt —

    During a major credit downturn, it is the government that steps into the void and spends. Not minor recessions, but major collapses.

  2. The Curmudgeon says:

    Fiscal stimulus during demand contraction is really no different than central bank lending as a last resort when the liquidity of financial markets is endangered.

    But the question that must be asked in regards to fiscal stimulus is whether it would do any good. Just like the question to be asked of central banker lending is whether there is a liquidity crisis or a solvency crisis.

  3. Chief Tomahawk says:

    Sounds like someone’s posturing. Could there be an election coming up?

  4. globaleyes says:

    TO CUT TAXES is to raise deficits.

  5. Kort says:

    Not sure why they are worried about any of it. We’ll all be dead before our grandkids will have to figure out how to pay it off but maybe they’ll just hyperflate and write a 1 quadrillion check to China and call it even. We should eat, drink and be merry.

  6. krice2001 says:

    Well said, Barry.
    “There are few things more annoying the a drinker who just discovered sobriety: Hence, those who have spent the past decade getting drunk on government spending are now suddenly proselytizing a belated sobriety. These calls are occurring exactly when government largesse would do the most good. I can’t tell what motivates these new deficit hawks — are they merely ignorant, unaware of the historical analogs? Or are they hoping for another recession as part of a debased power grab?”

    I just had published a letter to the editor in my local Boston area paper that said nearly exactly that. Not to be too cynical but yes, I now lean towards “…they hoping for another recession as part of a debased power grab”. For now it’s politics as usual.

  7. jt1234 says:

    Well, just looking at the numbers and plugging for fiscal spending…
    1997: tax revs = 54, spending = 72, deficit = 18
    1998: tax revs = 50, spending = 85, deficit = 35
    1999: tax revs = 46, spending = 84, deficit = 38

    It’s true that the deficit went up, but I don’t understand how anyone can blame fiscal tightening when spending increased by 20%.

    It is very simple in my mind. The country overlevered and invested in non income-producing assets over the past decade (multi-decade). As those debts come due, consumption HAS TO BE NEGATIVE for awhile to return to sustainable levels of debt. The government has no wealth, only what it takes from citizens. More government spending = less private wealth.

  8. ashpelham2 says:

    Just another example of the blind leading the blind. Conservatives, they call themselves, will tell you that they believe in limited government intervention, and that during good times and bad, government should have a diminishing role in economies. Yet, who has to wage war in lands where we will occupy for the next 100 years? Government. Who must step in when lack of supervision and regulation creates large bubbles and inequities and nearly blows the worlds economy up? Government. It’s this reactionary mentality that causes so many problems, rather than anticipating what may be, and working to effect the future.

    We will always be running around putting out fires because pols cannot think ahead for 10 minutes. After all, it’s really all about getting re-elected.

  9. Take a name says:

    Over one trillion dollars in govt. spending, Fed’s balance sheet has doubled, FTHB program that cost taxpayers over $50k per home sold via pulling demand forward, C4C that cost US taxpayers over $20k per car sold via bringing demand forward, $5 trillion increase in the US equities market cap since March lows, US banks and corps. sitting on record cash reserves and over $13 trillion US tapayer dollars back stopping the debt/credit markets. How much more stimulus do you want?

    Forty years ago, $1.40 of govt. spending created $1 of GDP growth, now it takes $6 of govt. spending to create just $1 of GDP growth. Stimulus money going to the states is being used to pay the salaries of new hires in the private sector. Good roads being torn up just to be re-paved again.

    “These calls are occurring exactly when government largesse would do the most good.” The US govt. is too inefficent, corrupt and dysfunctional to spend money wisely, more effectively.

  10. pulaski says:

    This isn’t exactly surprising. I’d say it is not just a power grab.

    My view matches this analysis (http://amleft.blogspot.com/search/label/Vote%20or%20Die):

    “The bursting of a historically unprecedented speculative bubble has set the stage for an attempt to restructure the global economy along lines that predate the emergence of trade unionism and social democracy.”

  11. cognos says:

    Amen. Post of the year (so far).

    One cure… is everyone can always focus on eliminating waste. Spend more? Spend less? Either way… just spend it on good investments, stuff we actually want — education, well-built infrastructure, hard-working and accountable employees. If we spent the govt money 20% more effectively (eliminated the 20% waste and reallocated to better priorities)… thats >$500B/yr in better investments. Over time that will pay big.

  12. Steve Barry says:

    “During a major credit downturn, it is the government that steps into the void and spends. Not minor recessions, but major collapses.”

    The major collapse was due to excess leverage and the government is basically just creating money out of nothing to keep credit propped up.

    Your argument might work if the government wasn’t running massive deficits with massive debt already. The analogy would be if someone lost their job, ran up some debts and their rich uncle bought some things for them until they found another job. That would work fine. But what if the uncle was not rich, but was in debt himself and just borrowed more money to help you. That is what is happening here. Surely that will not end well in the long run unless a miracle happens. When the government is doing the borrowing, they are basically sticking every citizen with the debt tab, whether they want it or not. It is not direct debt of course, but will show up as higher rates or inflation. In this case, I think we have much higher rates coming and probably deflation. To make matters worse, you are probably wasting money, as government spending is so wasteful and filled with paperwork and red-tape.

    A lesser of these evils would be to cut business taxes and provide incentive for developing new technologies. Of course, we can’t afford to do that either, but it makes more sense than government spending.

  13. Take a name says:

    Here’s an OK website with an OK author with a post that refutes:

    Was the only problem that the financial sector was too leveraged? If so, the Great Recession returned the markets to sane debt levels. If not, then the government releveraging has prevented the correction and deleveraging needed to put the credit crisis firmly behind us. We fear the latter may be closer to the truth and the credit crisis is only partially complete. The next major deleveraging will occur in the government sector.

    Is this what widening sovereign CDS rates are telling us?

  14. vasco7777 says:

    BR wrote “There are few things more annoying the a drinker who just discovered sobriety:”

    Try a bloviating drunk opining with conviction. Actually evangelizing reformed smokers are far more irksome.

    BR wrote “What I am sure of is that calling for fiscal temperance RIGHT NOW is essentially calling for another recession.”

    Agreed and when guys like Bayh are quitting, doesn’t leave much hope for adult discussion.

  15. this: “This isn’t exactly surprising. I’d say it is not just a power grab.

    My view matches this analysis (http://amleft.blogspot.com/search/label/Vote%20or%20Die):

    “The bursting of a historically unprecedented speculative bubble has set the stage for an attempt to restructure the global economy along lines that predate the emergence of trade unionism and social democracy.””–from, pulaski, above

    shouldn’t be, too readily, overlooked..

  16. Steve Barry says:

    Bianco’s new post on this blog has a quote to back up my point:

    “It underscores a concept we detailed in a recent Commentary and Conference Call, namely the credit crisis was never solved. It was transformed from a reckless private sector borrowing binge to a reckless public sector borrowing binge.”

  17. MorticiaA says:

    Thank you. Thank you. Thank you… great post. Keep up the good fight.

    I am surrounded by people who swallow the “OMG, Dems are in control so NOW we give a damn about spending” meme hook, line, sinker. I need all the ammo I can get my hands on to counter this mindset.

  18. scharfy says:

    Reducing the deficits are needed, but the current approach is flawed.

    Many economists are warming to the idea that the BEST way is by moving expenditures into a new column on the balance sheet by using the “INSERT new column” function. Most versions of existing software have the function somewhere.

    By cutting and pasting any fiscal overruns into this column, then saving the changes into a new file – deficits can be reduced in a much simpler fashion, at incredible savings to the taxpayer.

  19. VennData says:

    Now that I’m sick from some odd-ball disease, NOW I want the government to allow stem-cell research.

    Now that my niece got knocked up by some brown-skin Lothario, NOW I want her to get a appt. at PP.

    Now that I lost my job, NOW I want an extension in unemployment benies.

    Now that the occupation of Afghanistan is approaching its tenth year, NOW I want the military to train to do “nation building.”

    Now that I’ve been watching mens figure skating all day, NOW I want to be able to marry whomever I wanna.

  20. [...] thoughts were sparked by something Barry Ritholtz wrote over at The Big Picture: While a few honest deficit hawks are out there — the Peterson Institute [...]

  21. poly says:

    I agree, when times are great, save. When the “business cycle” turns, spend it. But this wasn’t a normal business cycle downturn and as such it’s not deserving of our hard earned dollars.

    This was a Ponzi credit collapse induced recession which hasn’t correctly played out and not a single dime should be spent trying to prop it up. Sure people are really hurting, but we haven’t purged the system, cleaned the balance sheets and got credit flowing back to funding “real” (not Ponzi) projects and business that are reasonably valued or that have a real chance of succeeding, the real driver of wealth and jobs.

    Whatever happened to those toxic assets? It’s the poor sucker in the end that is being fooled into talk of real “recovery”, while these clowns make and cash out before the real wave comes.

  22. jucojames says:

    Hello Barry,

    I agree with you regarding the hypocrisy, but couldn’t disagree more about government spending. I find it ironic that you use a drinking metaphor to make your case, when I use a similar metaphor when discussing government “stimulus”. Loose money and excess credit results in the same as a weekend tequilla binge in Vegas. It is fun while it lasts, but it also must result in pain once it is over. Government stimulus is like having the hair of the dog on Monday morning in its modest form, or doing what an alcoholic does and re-start the cycle in its most aggressive form.

    Ultimately, what needs to occur is detox, which isn’t fun for anyone. The Keynsian view point is to argue that the boom/binge can be “managed” – tell that to a heroine addict hooked on methadone or subutex. The “stimulus” creates its own set of side effects that can make the outcome even worse than a straight hangover.

    The best test case we have for my preferred path is southeast Asia in the late 1990′s. It is ironic that it was the West+Japan that blackmailed the Asian countries into implementing harsh reforms and taking the pain in a relatively quick dose. Their economies contracted severely for a couple of year – i.e. suffered a terrible hangover. However, their economies restructured efficiently and their economies have been some of the strongest on earth since.

    The lesson of Japan or the US in the 1930′s isn’t that stimulus was misapplied – it is that the stimulus created unintended consequences which intervened with the natural “hangover” and simply created different problems.

    ~~~

    BR: We are discussing different stimulus — fiscal and monetary

  23. moneyearnin says:

    why any serious person would believe that 535 politicians with 535 different agendas would be capable of spending stimulus wisely and efficiently is beyond me? there is a proposal today in congress to build a railine between tampa and orlando with projected costs exceeding 8 billion, this is an idea generated from a politician who has never ever managed a company nor any sort of budget, why would we trust that this investment produces a healthy return? its ludicrous to think so as history has shown government to the most wasteful bunch of individuals to oversee any sort of investment.

  24. Lupin says:

    All this emphasis on spending and yet no direction as to where to spend the money. While it is noble to want the government to spend more during a downturn, giving more to the banks doesn’t help all the unemployed. Maybe some infrastructure spending, some education investments, some research investments would yield greater long term dividends to then American people…

  25. TakBak04 says:

    @ Mark E Hoffer Says:
    February 17th, 2010 at 9:56 am

    this: “This isn’t exactly surprising. I’d say it is not just a power grab.

    —————

    And, why the Petersen Foundation is worrysome. The needed reforms may go in a different direction. From your link…

    —–
    Holders of economic power can make use of this power outside of the electoral arena. Capitalists can make threats. They lay off politically active workers that are ‘trouble makers’, they can move their operations to other places, they can close factories, they can threaten democratically-elected governments with disinvestment, layoffs, etc. They may purchase and privately control and own media institutions. Economic power is not relinquished without a fight. And even when regulations and limits are imposed upon capitalists, they will relentlessly deploy their economic power to game the system and find ways to get the limits and regulations repealed. Witness the slicing and dicing of the regulatory apparatus put in place in the 1930s over the period from 1973-present. It took a while, but their incessant pressure and efforts eventually paid off.
    It is also crucial to point out here that the struggle to reconfigure economic power via electoral institutions never occurs on a level, fair playing field. This struggle always occurs within a social formation already organized around concentrations of class power. Moreover, even when a progressive left-wing government is elected, it runs up against the entrenched extra-electoral power of capitalists.

    -snip-

    If the attempt succeeds, as it has to date, it will cause generations of future leftists to wonder whether the creation of the bubble and its subsequent collapse was by design. A conspiracy theory of sorts, for those leftists that ascribe events more to human agency than to the interrelated structures of capitalist society. Life is messier than that, and not reduceable to a linear narrative along a straight line, but one could understand why they might consider the apparent cause and effect relationship as indicative of a calculated effort, especially when one looks at the persistence of the effort to cut Medicare and Social Security benefits here in the US, as expressed by Treasury Secretary Geithner last Sunday. For those of us living through this nightmare, the most important aspect of the situation remains the failure of any effective opposition to emerge.

    http://amleft.blogspot.com/search/label/Vote%20or%20Die

  26. Scott F says:

    Amity Shlaes — with no economic background or training — claims that “Government Jobs Crowd Out Real Job Creation.”

    Why she still gets published is beyond me — she is astonishingly clueless. . . .

  27. You may recall that she not only defended Phil Gramm’s “mental recession” comments, but demonstrated she did not know what a recession was — at least in July 2008:

    Amity Shlaes Does Not Know What a Recession Is
    http://www.ritholtz.com/blog/2008/07/amity-shlaes-does-not-know-what-a-recession-is/

  28. theorajones says:

    It’s worth pointing out that if you’d taken a mainstream orthodox liberal Democratic position on the major deficit-impacting bills of the past 10 years, you would have:

    –Voted against the Medicare Drug benefit because it was un-funded and because there was no negotiation over the price of medications with drug companies (NB: you would have supported a half-dozen much cheaper bills);
    –Voted against the Bush tax cuts which disproportionately favored the wealthy and blew up the debt;
    –Voted against the invasion of Iraq.
    –Supported stimulus spending in 2008 and 2009, with a desire that more be spent more quickly, and more be spent on infrastructure

    When it came to other key predictors of this crisis, you’d have also been on the right side of history. You would have been up in arms about predatory lending by 2004 or so, and you’d have been extremely upset about the Wild West nature of Wall Street and pushing for regulation. Right now, you’d be supporting a major overhaul of Wall Streeet along Volcker’s suggestions. When it came to healthcare, you’d be supporting a bill that costs roughly what the Republican drug benefit cost but which helps millions more, you’d be furious that it doesn’t have a cost-cutting public option (and you’d be taking massive incoming flack from Republicans for other cost-cutting measures in the bill); and you’d also be shouldering the incredible political fight of responsibly PAYING for it, unlike the Republican drug bill.

    And to be clear, I’m not doing the liberal equivalent of pointing to Ron Paul. This isn’t some utopian “but true liberalism has never been tried by those pigs in Washington!” position. I’m basically pointing at the voting record and frequently articulated positions of Ted Kennedy, Carl Levin, Russ Feingold. This is a very, very, very mainstream liberal set of positions.

    If we’d implemented mainstream liberal positions on these major issues, we might (might!) have prevented this economic collapse. In an absolute worst-case scenario, we would have entered this crisis in a position of much greater fiscal strength. We’d also be implementing the policies to end this crisis more quickly, and to prevent it from recurring in the future.

    At this point, it’s incredible that basic, effective, responsible governance is being painted as some kind of ideological extreme–a leftist plot. The plain fact is that the mainstream liberal position on every major fiscal issue of the past decade has been utterly vindicated by subsequent events.

    Yet somehow, it means absolutely nothing in our discourse! In Washington, they are still fetishizing “centrists” who are dangerously ignorant or wrong on policy. The same people who dangerously misguided our policy focus in the 00′s are now leading us down the path of deficit-mongering to a double-dip recession. And on the blogs we’re still reading postings by idiots who think macroeconomic policy is the same thing as a rich uncle.

    Isn’t it about time to put aside cheap Washington characterizations and actually listen to the people who were RIGHT about every major decision for the past 10 years?

  29. sparrowsfall says:

    >I can’t tell what motivates these new deficit hawks

    The same thing that’s motivated them for thirty years: The Reaganomics Strategy.

    Briefly put:

    Scream about fiscal conservatism and the deficit while simultaneously:

    Borrowing money from our kids and from abroad, and using the money to buy votes here with the world’s oldest political pander: “I’ll cut your taxes.”

    When Cheney said “Reagan proved that deficits don’t matter,” he wasn’t making an economic statement, (deficits obviously “matter”), but a political one.

    Voters love to wrap themselves in virtue by complaining about the deficit/debt, but when they hit the voting booth, they flip the switch for the one who promises to cut their taxes.

    It’s a brilliant strategy that’s worked spectacularly well for thirty years.

  30. flipspiceland says:

    BR: Why do you borrow and use this kind of politically correct obfuscation: ” unfunded tax cuts”.

    Taxes are taxes and you don’t fund them or unfund them. Knock it off.

    ~~~

    BR: I disagree: Spending is either paid for (or not) with revenues from taxes.

    Remember PAYGO ?

    If you want more spending, you need more taxes.
    If you want less taxes, you need less spending.

    Anything else negatively impacts the deficit.

  31. Steve Barry says:

    Obama made two statements in his speech today:

    1) We are rescued
    2) A depression is now “not possible”

    He will eat those words IMO.

  32. bsneath says:

    “This is ass backwards. During an economic expansion, with employment gaining and GDP growing is when you should be thinking about saving for the next rainy day. Counter-cyclical spending means that governments should watch the budget carefully during the good times, but spend spend more freely during the downturns. What we are hearing from this crowd is the exact opposite of what should be.”

    Amen. I only wish this necessary spending had been for long term investments that would provide future economic returns.

  33. Moss says:

    The mis-application of Keynesian philosophy, by politicians who claim deficits do not matter, either out of ignorance or convince can’t be understated. Tax cuts w/o spending cuts of some relevant proportion do not work. Similarly spending increases w/o subsequent spending cuts do not work. It is not difficult to see that funding wars and other massive defense spending coupled with tax cuts have dug a whole that is very deep.

  34. Lugnut says:

    BR says: “This is the part of Keynes (and Bagehot) that I happily adopt —

    During a major credit downturn, it is the government that steps into the void and spends. Not minor recessions, but major collapses.”

    The problem as I see it is 69% of the stimulus is going to the control of the states who are mostly using it as a means of covering tax revenue falloffs so they can avoid laying off high priced tax dollar sucking state and county workers with expensive bennies and exhorbitnat defined benefit pensions.

    Having Timmy G sell T-bills to meet government payroll at cost plus interest on 10 year notes so my kids can pick up the tab down the road isn’t my idea of prudent economic policy. YMMV. Time for the politicians to stop kicking the can on dealing with public union contracts. If your going to spend money on stimulus, make sure the states and counties can’t earmark it to pay their bills.

  35. jonpublic says:

    Thanks for the post, it’s brought out the trolls. You must be doing something right.

  36. KidDynamite says:

    is Hoenig crazy, then, Barry?

    http://www.kc.frb.org/speechbio/hoenigpdf/Washington.DC.Fiscal.02.16.10.pdf

    is he a “deficit hawk” ???? as i said to you previously – i totally agree that hypocritical politicians should be held accountable for their conflicting views. HOWEVER, that doesn’t mean that concerns about deficits/debt are unfounded.

    ~~~

    BR: I specifically mentioned the newly hatched deficit hawks. Hoenig has been fairly consistent over the years . . .

  37. DL says:

    Obama’s strategy is to talk like a centrist, even a conservative (at times), but to spend like a far left-wing liberal.

    A good politician can fool most of the people most of the time.

  38. TakBak04 says:

    ENTITLEMENTS: 1994 all over again? The more things change the more they are the same. And we see that once again the blame for deficit falls is on SS and Medicare. In 1994 we didn’t have two wars going and financial collapse that we tax payers are footing the bill for. Some hypocracy once again. Same cast of characters lather, rinse, repeat.
    ————

    April 05, 1994| By Robert Kuttner
    A Word for Entitlements

    Mr. Peterson admits that thanks to the Clinton deficit-reduction program the deficit will decline to just 2.2 percent of gross domestic product in 1998. But he uses very pessimistic economic assumptions to show the deficit rising to an improbable 10 percent of GDP by the year 2010, and the debt rising to 112 percent of GDP by 2020.

    In truth, nobody has a clue what the national debt will be 25 years into the future. There are simply too many variables — including whether Congress passes health reform. But while Mr. Peterson acknowledges that inflation in health costs is a prime culprit in the rising deficit, he opposes universal health insurance even though countries with universal coverage spend less on health care.

    Mr. Peterson’s main remedy is to dramatically slash entitlements by taxing all benefits received by households with incomes over $35,000. Mr. Peterson calls this policy an “affluence test.”

    What we have here is really an ideological assault on social insurance, masquerading as budgetary concern. If we value Social Security and Medicare but desire greater deficit reduction, there is an alternative to singling out social insurance benefits for extra taxation. Let’s just raise top tax rates on high income taxpayers generally — like Mr. Peterson!

    Social insurance — most notably Social Security and Medicare — is part of what binds us together as citizens rather than as merely winners and losers in a free-market lottery. Since FDR, social insurance has also helped bind the Democrats to the wage-earning electorate, and in a way that transcends divisions of race and class. Not even Ronald Reagan dared attack Social Security, though his aides wanted to privatize it.

    more from archives at…..

    http://articles.baltimoresun.com/1994-04-05/news/1994095201_1_entitlement-programs-clinton-national-debt/2

  39. jonathanb says:

    One of the chief hypocrites, Greg Mankiw, is out today on his blog arguing that Democrats are not serious about cutting the deficit. He thinks that they would prefer to expand the social safety net and raise taxes than take the deficit seriously.

    If only I were back in Sanders Theater, with a bucket of tomatoes.

  40. In theory, I agree that it sounds good to have the government step up spending when the private sector contracts. However, it doesn’t work in reality. Koo points to Japan as the model to keep us from experiencing the 1930s again. Japan has been in a funk for over 20 years with no sign of correction. Their market has done nothing, and real estate is selling for what it did in the 1970s. Granted, they may have had a bigger bubble, but their bust has been nothing short of unbelievable. They are at or below the pre-bubble levels, and this is 20 years later. The US would not be able to afford even a flat market for the next ten years. Pensions are already grossly underfunded, and pension managers are assuming 8% returns again.

    Another reason government deficit spending won’t work is it is inefficient. The government wastes capital compared to the private sector. A couple folks posted how the government should become more efficient, which I would love to see, but it won’t happen.

    All government spending does in a balance sheet recession is move the debt from the private sector to the public sector. It also absolves those who invested unwisely at the expense of those who were wise or the taxpayer. I would rather see us have a big recession and see the malinvestment liquidated than slog through for 20 years as I subsidize those who made bad decisions. This is what they did in the 1920-1921 recession. It was painful, but they were through it in 18-24 months.

  41. dead hobo says:

    So, It’s now GOOD to have a Bailout Nation?

  42. thetruthseeker says:

    I completely agree that these people are hypocrites; however, I disagree with the Richard Koo’s thesis on government stimulus. There have been times of economic distress where instead of spending, we have done nothing. Look at the early 1920s. We actually let the free market work and the economy did just fine. We cannot escape the natural downturn as a result of our excesses so the best bet is to let things work themselves out naturally without interfering and making things worse. I have no problem with these people finding religion now, and I know that they will more than likely revert to their spending ways down the road. The way I see things, anytime that we can get even a hint of fiscal restraint is a good

    In my opinion, the biggest hypocrites of all are the people who work in the investment industry and claim to believe in free markets, who in times of economic slowdowns call for government intervention. These individuals are far more dangerous than the politicians. The reason is that these are the guys that the politicians often turn to for advice. Think Larry Kudlow, etc.

    Personally, I abhor Keynes and his philosophies. If they were actually followed to the letter of the law, then I might at least be able to stomach him. As it stands, given that humans are imperfect creatures, his philosophy has single-handedly done more to destroy once free markets and societies than anyone I can think of, including Marx. Then again, I am of the Austrian school and abhor governmental intervention in the economy generally.

  43. call me ahab says:

    dh-

    no doubt-

    so . . . BR . . .you tell us when to turn the spigots off-

    ok-

    since you got it all figured out-

    zero Libertarian cred

  44. [...] Barry Ritholtz, “One of the oddest things to come out of the entire credit crisis, recession and muddling recovery has been the sudden re-emergence of deficit hawks.”  (Big Picture) [...]

  45. tawm says:

    Why are you so enraged about the idea of cutting taxes? Yes, the politicos are hypocrites, but that does not mean the IDEA is wrong. Many blanket slogans may be too broad to be meaningful, but if the general concept of cutting taxes is to force wiser spending on the part of government, why is that a bad thing? Why so hostile to this idea?

    ~~~

    BR: UNFUNDED is the part I am — and you should be — concerned with.

    I am in favor of tax cuts — BUT YOU HAVE TO BE ABLE TO PAY FOR THEM

  46. ottnott says:

    While a few honest deficit hawks are out there — the Peterson Institute is a good example of a group looking at long term structural issues, not immediate fiscal concerns

    While Pete Peterson (financial industry billionaire and funder of the Peterson Institute) has been consistent in voicing concern over long-term structural deficit issues, what he has consistently fought for is killing Social Security and Medicare. He wants to turn Social Security into welfare, which eventually will destroy support for it.

    He has not fought for pay-go. He has not fought for repeal of irresponsible tax cuts. He has not fought for healthcare or health insurance reforms that would make our healthcare spending more effective and reduce the growth rate of medical spending. He has not fought to prevent Congress from spending the Social Security surplus on current consumption (quite the opposite – he was denying that the Trust Fund was of any value, even as Social Security has been running $100+ billion surpluses).

    What Peterson really wants to do is to keep taxes low and to privatize retirement income insurance.

  47. Graphite says:

    During a major credit downturn, it is the government that steps into the void and spends. Not minor recessions, but major collapses.

    It was EXACTLY this ideology which laid the foundation for the moral hazard needed to build a multi-decade asset bubble, arguably the biggest in mankind’s history. For if speculators have to fear only minor recessions, why *wouldn’t* they bid the prices of assets to the moon?

    What I am sure of is that calling for fiscal temperance RIGHT NOW is essentially calling for another recession . . .

    Perhaps it is rather a recognition that the losses created by 20 years of bubbles will not be magically conjured away by paying workers to dig holes and fill them back up again, and throwing sops and tax credits to favored business entities. It’s a recognition of the fact now made quite obvious by the ARRA that the political process is unlikely to steer stimulus funds to projects and investments that build genuine long-term wealth, thus making the debt they leave in their wake even more difficult to service.

    Of course, the great thing about advocating stimulus and pimping for more public debt (and the post hoc ergo propter hoc logic used to support it with examples like 1938/1939) is that if things do turn back down again, you can always just say, “we weren’t aggressive enough.” It’s the ultimate non-falsifiable hypothesis. For example, if Japan’s debt today were now 300% of GDP instead of 200% and they had paved over even more of their country and built more empty airports … why, they’d be an economic miracle! (If not that, then what should they have spent the money on? This is of course the question deficit doves like Richard Koo never bother to answer ….)

    There are some hypocrites in the GOP who were all too willing to vote for deficit spending, and they deserve to be called out. This post smacks of trying to paint all deficit hawks with that brush, an obviously unjust characterization.

  48. torrie-amos says:

    not disagreeing with the theory, it’s been used many times, yet, this time states and muni’s are so fckd up, and then when you add all the numbers up they are skewed bad, avg income 50k, govt 75k and they are 23% of workforce, law of large number land imho, approaching a tipping point, u got 1/3 of workers producing supporting 2/3 rd’s………now add in the fact alot of those govt workers work to extract even more money thru fines and fee’s, and teeter, tooter

  49. bman says:

    Tax the rich. End of story.

  50. DL:
    Far-left liberal? Please!! He’s no where near as left as Bernie Sanders. Secondly, a far-left liberal would have forced all the TBTF banks into bankruptcy and given money to the peeps, not the banksters.

    TakBak04:
    Right you are!! The Peterson Institute wants to do away with the social safety net. Do they ever mention how irresponsible BushCo was? Of course not!! Do they talk about two unfunded wars? Of course not!! Peterson(and his spokespeople) always go into hiding when a Republican is in the WH, and all the sudden, the Beltway gasbags give him all the time he wants once a Democrat is in the WH.

  51. Graphite:
    So you prefer to believe in Andrew Mellon?

  52. ottnott:
    Bingo!! Or as Digby says, make all the old people eat catfood.

  53. One of the chief hypocrites, Greg Mankiw, is out today on his blog arguing that Democrats are not serious about cutting the deficit. He thinks that they would prefer to expand the social safety net and raise taxes than take the deficit seriously.

    He’s actually telling the truth. At least for Democrats that give a damn about their constituents. And it is a smart move considering the structural unemployment that looks to be here for the foreseeable future. besides, why worry about the deficit when the Republican will just run it up again like they did the last time they were in power?

  54. Graphite says:

    Calvin:

    To the extent he helped drive the speculative boom of the Twenties, no. To the extent he had essentially the right remedy for its subsequent bust, yes.

    “Secretary of the Treasury Andrew Mellon, whose only formula, says Hoover, was: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ Hoover says that he rejected Mellon’s advice, acted promptly after the crash, and was the first President ever to make full use of his powers to cushion a national economic shock. (emphasis added) He promoted federal works projects and expanded the federal employment service. Calling in business leaders, he got their promise that capital expenditures would go on and that wages would not be cut. But they often were. Nevertheless, says Hoover, such “indirect relief” measures sufficed to provide a ‘comparatively mild . . . readjustment’ and he assured the country that ‘we have passed the worst.’ ”

    http://www.time.com/time/magazine/article/0,9171,935714,00.html

    Sounds exactly like what the deficit doves like Krugman, Stiglitz, etc. are saying today. History shows that a deflationary liquidation was the only solution which was able to purge the excess of bad debts from the system, and it will show the same again in our case.

    The Peterson Institute wants to do away with the social safety net. Do they ever mention how irresponsible BushCo was? Of course not!! Do they talk about two unfunded wars? Of course not!!

    Actually they talk about these very things quite often. It should be possible to disagree with the Peterson Institute’s proposed remedies (or even its motives) without unfairly tarring it as a partisan outfit.

  55. RPL says:

    Excellent post Barry. Though I note that many of your readers, (those making comments anyway) are confused about the role of deficit spending. The real point of the spending, as Keynes explained (as opposed to post-Keynesian macro models, is to force the government to borrow in order to raise interest rates off the zero bound and get us out of the liquidity trap. Therefore, the money doesn’t have to be spent wisely, it doesn’t have to be targeted at anything other than spending. That is the math of the quantity theory of money (see Irving Fisher and Hicks, all of whom understood this 75 years ago.) And the argument that it doesn’t work is just plain silly. Consider WWII. From the perspective of the economy, it knows nothing about the political merit of defeating National Socialism in Europe. From the economies’ perspective WWII is nothing more than buying a bunch of boats, a bunch of tanks and a bunch of planes, hauling them out to the middle of the ocean and sinking them. But done on a large enough scale it certainly will end the recession/depression. So well in fact that they had to institute wage and price controls. Concerning modern deficit hysteria, it is worth noting that at the end of WWII the deficit of the US as a percentage of GDP is much larger than anything currently forecast. And that was the solidification of the American empire, not its demise. Finally, our current deficits are primarily driven by the collapse in revenues, not a lot of incremental new spending. The incremental spending by the way has been quite beneficial, anyone who thinks we would have ended the recession at the end of Q2 or Q3 without the ARRA is dreaming. See Delong’s post today for a hard headed analysis of the rate of return on spending so far. We are beyond question flirting with a Japanese decade here. And I see no end in sight. After all, we can’t even get a modicum of financial reform in sight, which should not even be that ideological and that difficult since most of the issues are practical, not religious. (Unless I guess if you follow the Austrian economists, which basically is the same thing as being in a religious cult.) Keep up the good fight, the absolutely silly noise coming out of most of the investment-focused commentators is just flat out depressing. Thanks.

  56. DL says:

    CJ & the 13th @ 2:33

    I grant you that Bernie Sanders is even further out there than Obama.

    But as far as the TBTF banks, I have found little correlation between the economic philosophy of various pundits, and their stance on bank bailouts. A number of otherwise conservative pundits have argued that we should be libertarians on fiscal matters, EXCEPT when large banks are facing failure. After all, we wouldn’t want to inconvenience the bondholders, now, would we?

  57. fromthedeepersouth says:

    well I’m a deficit hawk and personally i think a true recession that allows the free markets to clean out the garbage is what’s best in the long run. I take issue with a couple of premises in this post.

    The first is that you are correct that the government should run surpluses during economic expansions and pay down the debt. But how often do they do that? As long as we have a system where re-election of government officials depends upon votes, and voters will vote based on how much bacon they bring home, it will and has been a rare event indeed when the government runs surpluses. The second issue is that the “recovery” is an illusion.

    The government has limited choices when it comes to deficit spending: 1) keep it up until the government goes bankrupt (and yes, this IS a possibility. The government is already having to use sleight of hand to sell its treasuries). 2) Print money to pay the bills, which of course threatens runaway inflation but even more insiduously is a hidden tax that people are not prepared for. No matter which keynsian course the government takes, it all basically means declining standards of living over the longterm.

    Let’s allow the rot in the system to be rooted out and generate a new economy. One with much less debt, less government interference so private enterprise can be unleashed to create new solutions to old problems, and one without corporations running our government. Allowing a true correction to occur does create an opportunity for big money to grab more, but the path the government is on now guarantee’s it. Just look at how much more the big banks have grown as they’ve absorbed the failed, smaller banks. Yet look at how much tax money has been pumped into them, with no real benefit to the economy other than what would happen if they failed!! Look at how big oil has highjacked our energy policy, and coupled with the military industrial complex depletes american wealth on un necessary foreign wars.

    How much money would be saved by bringing all the troops home and cutting the defense budget? If oil imports declined, wouldn’t unfettered american ingenuity develop new forms of energy and ways to conserve? But with us borrowing or printing money to feed the military-industrial complex, we really have no hope of it declining, do we? What about domination of health-care by the insurance companies, the AMA and big pharma. Nothing like an economic collapse to force them into a healthier form, one that delivers care more efficiently to patients, rather than figuring new ways to bleed taxpayers via government programs. The debt we’re creating, is going to enslave our children and grandchildren to our excesses, because we won’t bite the bullet and restructure our economy. Instead, we fret about how horrible it will be if we do the right thing, and don’t saddle our children with the debt from our own greed.

  58. Graphite says:

    anyone who thinks we would have ended the recession at the end of Q2 or Q3 without the ARRA is dreaming

    This should have read: “anyone who thinks we ENDED the recession at the end of Q2 or Q3 BECAUSE of the ARRA is dreaming.”

    And the argument that it doesn’t work is just plain silly. Consider WWII.

    post hoc, ergo propter hoc. We have no parallel universe economy in which there was no war-driven deficit spending to which we can draw comparisons, so there is absolutely no foundation whatsoever for the assumption that economic growth would have been worse had industrial production been devoted to autos and refrigerators rather than tanks and rifles.

    Concerning modern deficit hysteria, it is worth noting that at the end of WWII the deficit of the US as a percentage of GDP is much larger than anything currently forecast. And that was the solidification of the American empire, not its demise.

    It also happened to be the end of a period in which the rest of the industrialized world had largely destroyed its productive capacity through a mix of war and collectivist policies., leaving the U.S. as the last man standing. Yes, if we somehow miraculously find ourselves in a similar position within the next 5 years, we might be able to handle a large public debt burden quite easily. We do have a lot of unused nuclear warheads lying around ….

    “We are beyond question flirting with a Japanese decade here. And I see no end in sight.”

    Actually we’re guaranteeing a Japanese decade *at best* by following exactly the same policies which they pursued and which you and DeLong are advocating now.

  59. willid3 says:

    not sure. but for those who stop the spending! if the government had done that how bad would the unemployment rate have been? 50%? and just who is going to right the economy? consumers? nope they did their part in phase 1 of this mess back in 2001. business? please they haven’t invested in the US much since ..2000. trade? please we cost too much,

    so just what is going to get the economy of the floor this time? none of the previous version are available any more.
    and while you thinking about that, consider that if UE gets to 70% what are the odds that capitalism as practiced in US doesn’t change radically? and so far most of what has been proposed is let the thing collapse. let the banking system collapse (last time that happened was the 30s. how did that work out for us? and it didn’t cover the majority of depositors as this one could have. and the FDIC couldn’t have fixed them up either. at that point I suppose we nationalize them since its either that or total collapse. and they take almost all of every ones customers with them as some of your own largest customers will go with them.

  60. call me ahab says:

    “I am in favor of tax cuts — BUT YOU HAVE TO BE ABLE TO PAY FOR THEM”

    illogical- becasue a tax cut is a reduction in tax receipts- how do you pay for a reduction? Akin to taking a pay cut and then saying you need to pay for the amount that was cut.

    possibly you mean that tax cuts should be met with corresponding cuts in expenditures-

    what most people do instinctively when less money is coming in-

    too bad common sense doesn’t extend to the USG

  61. willid3 says:

    I think the pay for it means you have to cut spending, which wasn’t done for the last tax cut. instead we got into 2 wars, without paying for those either. so is there little wonder that we cut revenue and increased spending. and viola we have huge deficits!

  62. call me ahab says:

    RPL-

    have you considered that a depression is brought on by deflation that is brought on by credit destruction-

    a process that wrings out the stranglehold of debt?

    Japan has tried to battle their RE crash for 20 years- your assumption is that if the Japanese government just spent more- all would be solved-

    even though they now have a debt ratio of 200% of GDP-

    what is acceptable? 500%? 1000%- when do they cross the Rubicon- where there is no turning back and the destruction of their entire economy is assured by succumbing to the ponderous burden of debt.

  63. call me ahab says:

    willid-

    I agree w/ you- just stating that saying “paying for a tax cut” is nonsensical

    akin to saying I am going to pay for a pay cut by spending less on groceries-

    when what is meant is that because my pay was cut I must spend less on groceries

  64. soloduff says:

    @ TakBako4 and ottnott: Barry Ritholtz refers to the Peterson Institute as “honest deficit hawks.”

    There is nothing honest about claiming that social security is broke when it isn’t.

    There is nothing honest about claiming that medicare is broke without mentioning the extortionate pricing imposed by the medical oligopolies and their stooges in the US Congress.

    There is nothing honest in the Peterson Institute’s longstanding push for a “bipartisan commission” to circumvent Congressional responsibility for the spending at issue.

    Peterson, like the Wall St. that spawned him, is all about looting Main St. This cannot be done honestly.

  65. Graphite says:

    consider that if UE gets to 70% what are the odds that capitalism as practiced in US doesn’t change radically

    I guess if the sun stopped coming up then yes, it would radically change the way we practice capitalism in the U.S.

    The idea that deflationary crashes will lead to a perpetual downward economic spiral, absent government spending, just makes no sense. It didn’t happen during the panics of the nineteenth century, nor during that of the 1920s. Assuming that economic contractions will inevitably yield more economic contraction without government intervention makes the exact same amount of sense as assuming that economic growth will inevitably yield more economic growth without government intervention.

    The solution being advocated by deficit opponents is not “let it collapse,” but rather to take some pain in the short term, so that in the long term “let it collapse” doesn’t become the only option available.

  66. willid3 says:

    so far i can’t tell the difference between those you say are deficit opponents claims and arguments as nothing but let it collapse. since they don’t have any arguments for what will stop the pain from becoming a collapse. and just saying it won’t happen because it never has before, is no different than saying will a miracle will fix it

  67. [...] to comments Barry Ritholtz speaks in plain language that everyone can appreciate. Here’s his take on the new pseudo prudence that’s hitting the blogosphere and the mainstream media. [...]

  68. DL says:

    willid3:

    My plan: instead of all the bailouts and stimulus plans, I would have done both of the following, but nothing more:

    (a) eliminated the payroll tax for 2 years and

    (b) provided financial support to the unemployed.

  69. call me ahab says:

    sorry DL-

    too simple-

    and what of incentives- such as homebuyer tax credits and cash for clunkers-

    we’ve seen that those have been wise uses of taxpayer money-

    well- maybe not

  70. TakBak04 says:

    @fromthedeepersouth Says:

    How much money would be saved by bringing all the troops home and cutting the defense budget? If oil imports declined, wouldn’t unfettered american ingenuity develop new forms of energy and ways to conserve? But with us borrowing or printing money to feed the military-industrial complex, we really have no hope of it declining, do we? What about domination of health-care by the insurance companies, the AMA and big pharma. Nothing like an economic collapse to force them into a healthier form, one that delivers care more efficiently to patients, rather than figuring new ways to bleed taxpayers via government programs. The debt we’re creating, is going to enslave our children and grandchildren to our excesses, because we won’t bite the bullet and restructure our economy. Instead, we fret about how horrible it will be if we do the right thing, and don’t saddle our children with the debt from our own greed.

    ———–

    Answer: From the Mid-Atlantic South….

    I sure can agree with you on this that I “snipped” from your post here. Why do we go after SS/Medicare and Healthcare in general when these two wars are bleeding us dry. Where is the benefit when we make ourselves slaves to Nation Building?

    ???

  71. Nope says:

    We’ve already saved or created millions of jobs. The recession is over (per the administration). All the stimulus is pork that really doesn’t / didn’t help.

  72. rktbrkr says:

    A large number of “win at any cost” Republicans will do anything to discredit O’B and the Dems, the abuse of the filibuster, and now the deficit bomb after their silence during the 8 years of record Bush deficits.

    No good deed goes unpunished and O’B’s continuation of terribly flawed Bush economic policies ,I guess to maintain continuity during a time of panic, will now be used against him and the Dems running in 2010. A huge rookie error by O’B.

  73. Danny K says:

    Big cheers here for this! Of course the smartest of them know exactly what they’re doing; Martin Feldstein et al have filled them in. This is Pastor Ted party–the public line is all bullshit. It’s the Tom Delay party: what interests them is money and power–a jobs program for Washington Republicans. Pretty much as the “bond vigilantes” want higher yields–shocking! The topper is that while saying and doing anything for their own selfish interests, they always manage to stick the corrupt label to super-earnest types like Al Gore. The most serious deficit we face is one of decency. It won’t be filled anytime soon. Pity Obama has chosen to triangulate rather than take on the past ideologies. We’ve probably lacked sufficient redistributive measures and fiscal spending for fifteen years.

  74. MRyder says:

    I guess Fox “news” and the GOP are wrong…

    “Just look at the outside evaluations of the stimulus. Perhaps the best-known economic research firms are IHS Global Insight, Macroeconomic Advisers and Moody’s Economy.com. They all estimate that the bill has added 1.6 million to 1.8 million jobs so far and that its ultimate impact will be roughly 2.5 million jobs. The Congressional Budget Office, an independent agency, considers these estimates to be conservative.”

    “… For that, the stimulus package, flaws and all, deserves a big heaping of credit. “It prevented things from getting much worse than they otherwise would have been,” Nariman Behravesh, Global Insight’s chief economist, says. “I think everyone would have to acknowledge that’s a good thing.”

    http://www.nytimes.com/2010/02/17/business/economy/17leonhardt.html

  75. RPL says:

    Graphite,
    since I gather you have a love of unfettered markets the question you and others with your beliefs have to answer is if the forecast level of borrowing for the US is such a burden why is it not reflected in the current yield curve. It is possible, of course, that rates will rise and government spending will crowd out private investment but those most likely to be damaged by such, today’s bond investors are not very concerned. Re: your other points.

    The standing of the US after WWII might be interesting to talk about in the context of say, why one could pay people the equivalent of six figures today to bolt together cars, but there is no financial or economic theory or model I can think of where it has an impact on the ability to service debt.

    Japan has in fact had very stop and go fiscal stimulus but their biggest mistake, and I might add the one we are in the process of copying, is failing to get their banks healthy quickly so they could make needed loans. Also, if you want to talk about differences in an economy that do matter, being an export driven economy with weak internal demand and high savings rates does make a difference compared to the US as an import driven economy with a low savings rate when it comes to optimal recovery strategies. The US should be able to convince the world that we will have a slightly above average inflation rate in the future (which is what is required to get off the zero bound in interest rates) and yet has failed to do so, either by policy or because nobody believes it. Japan has a much tougher time doing that given years of policy of curtailing internal demand.

    At any rate, if you want to get long-term deficits down what you need to focus on are entitlement costs ,particularly the cost of health care, recovering revenue as quickly as possible in the current environment, and convincing Americans that they can no longer afford to police the world and engage in expensive wars of choice vs. necessity. That would be real deficit fighting. Bitching about the ARRA is sound and fury signifying nothing. It may be politically useful to the opposition party but it isn’t going to fix anything. Which was clearly the point of Barry’s post.

  76. kansascitypothole says:

    The scenario you’re describing – save during the good times and spend during the bad – would be great if it’s realistic to believe that Congress could be trusted to act in such a manner. We can lockbox, PAYGO, or create whatever rule, the numbers will be rejiggered so Congress can spend it (this reflects as more on the American electorate than it does on government in general). Given that, I agree that deficit spending makes the most sense at this moment even though we’re screaming towards a very real tipping point on sovereign debt.

    At some point in the next 5 years – recovery or not – our hand will be forced, and I’m guessing that our entitlement programs will be adjusted in extremis to make room for debt payments (in addition to any tax increases or reductions in military expenditures on and off budge balance sheet). To everyone under 35, America thanks you for your tax payments to an entitlement system to which you will have very limited access. To me, the evisceration of such programs will be the eventual true cost of this mess, but better to kick this can a little farther down the road and avoid a possible depression, right? Even if these entitlements are untouchable in the mind of most Americans, we will soon be in a position where there will be no other reasonable/rational alternative.

    To be more optimistic, I think there is a genuine chance for a true bio-engineering boom in the coming years that could help offset some, but not all, of the misery. There are too many exciting possibilities out there. I hope America will be positioned to exploit them when the time comes. While we’re blowing through money, why not set up some kind of student loan reduction or forgiveness program to students who receive degrees is the computer/life science fields?

  77. [...] his Big Picture blog, highly respected market analyst Barry Ritholz lays it out there: “… the vast majority [...]

  78. HEHEHE says:

    BR,

    I’ll agree the hypocritical loudmouth NEOCON’s railing against Obama’s spending need a big wad of money stuffed in their mouths. However, there is nothing good that will come of the largesse of government deficit spending over the past 30 years. You are working on the assumption that a government can manage an economy via fiscal spending. The reality is the government can’t manage the f’g DMV efficiently. Moreover as they remove all the programs they’ve started up we will end up in a second recession followed by more stimulus followed by removal followed a deeper recession. We’d have been better off just letting the entire phony banking system go bankrupt and starting over. Now we are going to visit deeper and darker places.

  79. [...] Pointing out Republican hypocrisy on the deficit, as Barry Ritholtz, does is shooting fish in a barrel, but that doesn’t mean the fish should be spared. [...]

  80. theorajones says:

    “The first is that you are correct that the government should run surpluses during economic expansions and pay down the debt. But how often do they do that?”

    Bill Clinton. In 1998, 1999, and again in 2000. His administration made paying down the debt a priority. And they turned around more than a decade of profligate deficit spending to do so. (To his credit, the first George Bush took steps to bring the budget back into balance. But this was stymied by a recession and his party’s core belief that we should have a low-tax, high spending government.)

    “The scenario you’re describing – save during the good times and spend during the bad – would be great if it’s realistic to believe that Congress could be trusted to act in such a manner. We can lockbox, PAYGO, or create whatever rule, the numbers will be rejiggered so Congress can spend it (this reflects as more on the American electorate than it does on government in general).”

    Compare the Republican health care bill of 2003 to the Democratic one of 2010. It’s indisputable that the Democratic bill adds less to the deficit while delivering much more to many more people. And the Democratic party is taking _significant_ political risks to pay for the program in the short term, and to implement policies that we have good reason to believe will decrease costs over the long term. It’s not perfect, but it’s the absolute mirror image of the credit-card approach taken by the Republicans.

    I know it’s terribly fashionable to hate all politicians, but it’s not being a good citizen to refuse to see that there is a significant difference between the way these two parties approach fiscal policy. It’s lazy, it’s dumb, and it’s not based on the facts.

  81. zebov says:

    BR:

    In a world without corruption and a world where those in charge were omniscient about the country and world’s economies, I would agree with you. However, I think what we’ve just experienced over the past year will turn out to be one of the greatest scams in the history of the world. Trillions of dollars literally just handed over to those who were completely incompetent at their jobs BECAUSE they were completely incompetent at their jobs. In addition there are huge sums of money flowing all over the place, sourced from the printing press, with no real checks or balances on who it is going to or why. We will likely never know the true extent of all the fraud and corruption that has been going on during this stimulus, I mean when your talking stimuli in the trillions of dollars, who cares if Mr. CEO got an extra $200,000 somehow, right? So, yes, in an ideal world government stimulus would work… in the real world what you get is what we got over the past year, surreptitious stealing and back-room bargaining.

  82. kansascitypothole says:

    @theorajones

    “and to implement policies that we have good reason to believe will decrease costs over the long term.”

    That is the biggest IF ever. Not to say that it shouldn’t be tried, but pardon me if I continue to doubt the government’s ability to control costs. Have the Dems been better than the Repubs on this? I think so. I was on the Hilll in 2003 (as an intern) when that bill went thru. It was sad and disgusting. But even if this current bill passes and works, we are still in very big trouble. Democrats and Republicans are going to need to enact far bigger changes to produce real deficit reduction. As I said before, I think it will reach a point where their hand will be forced and entitlements will be gutted. But before we even get to such problems, we have to get out of the current one. This means maintaining or increasing stimulus in the near term. And the pressure to pull back as we stagger forward will make this a much more difficult task.

    A pretty good synopsis of the senate health care bill (but I think is generally applicable to either bill) linked below ends with this:

    “It’s a relatively modest contribution to reducing the long-term debt overhang,” said Senate Budget Committee Chairman Kent Conrad, D-N.D., in an interview with C-SPAN.

    Here’s what modest means. The so-called fiscal gap is estimated to be anywhere from 4% to 8% of GDP, Marron said. That’s a measure of how much spending would need to be permanently cut or taxes permanently raised if lawmakers were to put the federal budget on a more sustainable track long-term.

    The Senate bill could move the needle by 0.5% of GDP in CBO’s best-case scenario.

    While that doesn’t seem like a lot, it’s far from nothing, especially given how hard the goal of curbing health costs is. And it’s an indication of just how hard the fight will be next year when lawmakers are expected to consider proposals for how to address deficit reduction long-term.

    http://money.cnn.com/2009/12/23/news/economy/health_care_bill_cost/index.htm

  83. [...] reading this morning’s discussion “Deficit Hawks Want New (or double dip) Recession,” a friend emails the following: “Let’s say I buy your argument that expenditures [...]

  84. DeDude says:

    When people and businesses are scared sh!tless that financial Armageddon is coming then taxcuts are a waste of stimulus; unless they are tied directly to spending. Most effective way to do that, is to give some kind of rebate so people have to put some of their own money into the deal. Cash for clunkers and appliance rebates were great for that, especially because they could be tied together with another useful society goal of energy independence. When you are coming out of a recession regular taxcuts are effective again – especially if they are given to the consumer class (who spend it rather than invest).

    Public works projects are probably better all around because almost all of that money ends up in the domestic economy (not foreign produced cars and appliances). They should be targeted to infrastructure that can be considered good investments in the future. The debt from deficit spending has to be paid back, so it is not enough that the project has given someone a paycheck, it should make society more competitive (increase our ability to grow the economy and pay back the extra debt).

    Another type of investment in the future is education. Massive support for education and training gives unemployed people the opportunity to improve their skills and society a better work force for when things get better. It probably is the cheapest way to get an unemployed person out of unemployment, but also the most complicated thing to implement. A lot of people would get education anyway, so some of the investment is not affecting unemployment but simply making education easier to afford. Personally I think that unemployed people should get a certain number of free classes at trade schools, but I am not sure it could be counted as stimulus. It is just that any day a person who want work is doing nothing represents a permanent loss of wealth (the wealth he/she could have created).

    Ultimately any deficit spending is spending borrowed from the future, but so is any spending (private or public) as long as there is any debt in society. So to the extent that you can use the money to enhance the size of the future economy (that will have to pay it back), you will make it much easier to pay back when that time arrive. Similarly it is completely moronic to pay back debt and reduce spending when the economy is weak. A $14 trillion debt is a lot harder to pay if you sink the GDP down to 10 trillion than if you grow it to 18 trillion.

  85. Jo says:

    Thoma, Harrison, DeLong and Auerbeck are delighted to invite you to a cricle-jerk.