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February 10, 2010

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Amanda

McCain was the one who led the fight against health care and kept it from being rammed down our throats and has been fighting against Obama's attempt to take over health care and the entire economy. How effective was JD in Congress? A big-spending blowhard. Now, all JD is trying to do is pay off his legal bills from his involvment with his convicted henchman friend. There’s no way McCain loses he loses here. Be careful of jd – he’s a trickster.

nato

I guess I should make my obligatory point that things Obama and the Dems have done are responsible only for a tiny fraction of the ongoing deficit: almost all of it is due to three things: 1) growth of existing entitlements 2) the astonishing economic contraction of 2007 to early 2009 and 3) existing tax cuts. I have no problem with the complaint that Obama and the Dems have a responsibility to act to reduce the deficit, of course, but the continued pretense that it exists because of measures of which they were the primary advocates is irritating and sometimes dishonest. No one wants to be the one bearing bad news, and the American people are always ready to punish those bearing it. The GOP (with some exceptions) have been content to decry the deficit without taking any responsibility to explaining what they would cut. That's good politics, but it doesn't lead me to believe that in power they would actually do the heavy lifting. Bob Dole isn't in the building, and neither is Reagan. Maybe Paul Ryan will prove to be it for the next generation? I don't know, but the signs don't look good to me.

Nathan Smith

Well, first, if we're talking about blame for the deficit, you need to distinguish "Obama" from "the Dems." Nato's #1 cause of the deficit, entitlements, is almost wholly the fault of Dems, albeit Dems going back to FDR who created a system of intergenerational transfers that has proven to be a fiscal cancer in the long run. Dems have been half the political establishment, more or less, for decades, and bear rather more than half the blame. It is no accident that the one time we got surpluses was 2-3 years after the Dems lost control of Congress. On the other hand, a lot of principled left Democrats really do want to raise taxes to pay for the spending they want, which excuses them a bit as far as the deficit is concerned.

Obama hasn't been on the political scene long enough to bear the main responsibility for the Republic's wretched fiscal state. But he's achieved an astonishing degree of culpability for fiscal havoc given his short time in office. He bears some responsibility for the problem of long-term entitlements, since he was part of the Dems' successful stonewalling in 2005 when Bush tried to do something about that. Then he ran against the most bona fide fiscal conservative to run for president in decades, and won. He ran on a platform of complete fiscal irresponsibility: tax cuts + new spending. Once in office, he immediately signed a massive spending bill. If you want to cast the blame for the current fiscal problem on politicians of the past, fair enough, but Obama's been as irresponsible as any of those, or worse. But since he doesn't seem to have a clue about economics, maybe he can't really be blamed, like if a six-year-old crashes a car it's the fault of the person who gave him the keys. And who gave Obama the keys? The American people.

"Bob Dole isn't in the building, and neither is Reagan..." Uh, Reagan was very much not a paragon on deficit matters. *John McCain,* on the other hand, is a paragon on deficits, but Americans, in an act of egregious civic negligence, failed to elect him... so I guess the real blame. Paul Ryan is also excellent here, but will the rising conservative populism embrace his ideas?

nato

I definitely think we need to raise taxes somewhat (I say this knowing it will affect me disproportionately) as well as reform entitlements (primarily medicare; social security isn't really the main problem because of the fix performed in Reagan's first term). Dems historically certainly bear more of the blame for the Medicare problem, of course, and I will grant that they haven't been any better than any other political party when it comes to dealing honestly with the need to reform Medicare - certainly not under Bush, at any rate. That said, the GOP has become astonishingly intransigent about the opportunity to cut Medicare costs, instead scolding Democrats about their putative intent to cut Medicare. This sort of failing is obviously not unique to Republicans, of course, but it is entirely unhelpful.

As for Obama's "massive spending bill," the biggest chunk was tax cuts. Further, polls of economists do not find them overwhelmingly against the stimulus: generally they seem to approve:
http://www.usatoday.com/money/economy/2010-01-25-usa-today-economic-survey-obama-stimulus_N.htm

Meanwhile, Clinton and McCain's temporary gas tax holidays were close to universally panned. When Nathan says that Obama doesn't have a clue about economics, he's just saying "I don't agree with Obama so I think he's ignorant." Maybe mainstream economists are wrong and Nathan is right - and in at least a few matters I would agree - but I think his visceral dislike of Obama the man/myth drives his rhetoric and perhaps his reasoning right off the rails.

Nathan Smith

Even if it were true to say that the bulk of the stimulus bill was tax cuts, that wouldn't make it less of a massive spending bill. Let's suppose that I propose to move $50,000 from by checking account to my savings account and withdraw $10,000 to go on a spree. It wouldn't be much of a defense to say, "But it's not irresponsible; most of the money was just being transferred from one account to another."

I don't think it's true, anyway, that "the bulk," in the sense of a majority, of the stimulus was tax cuts. Tax cuts were a substantial part but definitely a minority. They may have been a majority of the fiscal stimulus in early 2009 or even 2009 as a whole, but that just underscores the point that stimulus was used as a pretext for unsustainable budget increases across the board.

When I say that Obama seems to be economically illiterate, I don't mean that his *policies* are economically illiterate. They're pretty bad, but they could and do get a good deal of support from economists. But of course, the policies aren't just designed by Obama himself; they're designed by all sorts of committees of advisers. Frankly he doesn't seem that interests in the nuts and bolts of them, less so than Bush I'd say. My judgment that Obama is economically illiterate is based on hearing him speak. He just seems incapable of understanding the ideas of trade-offs and no free lunch. Possibly he understands it and is just pandering, but it doesn't seem that way to me. At least Bush and McCain have some sound instincts on economics.

I don't think you'd find many mainstream economists to endorse Obama whole-heartedly at this point. You'd find some saying he's moving us in the right direction, approving of this or that. You'd find plenty, maybe a majority, saying he's better than Bush, though scratch the surface and you'd probably find that much of the anti-Bush animus is just campus snobbery and is disproportional to whatever justification for it there might be. You'd find hardly anybody, I suspect, willing to say that Obama's fiscal plans are adequate in the medium to long run.

By the way, yes the gas tax was panned, and in the long run the more fools the panners, as the high gas prices turned out to have been a bubble and a brief gas tax holiday would just have smoothed the ride a little bit. This would have been hard to foresee, but even at the time the hullabaloo was out of proportion. The thing is, economists have a very clear theory about Pigovian taxes, so they liked to trumpet it when they had the chance. The arguments made would have been more appropriate critiques of a *permanent* gas tax cut than of a holiday. Maybe it was a dumb idea, fine, but it was not very important. A better critique would have been to say that McCain was thinking too small to be campaigning on such trivialities at all; and that was a real problem with McCain: he didn't always have ideas big enough to deal with the nation's problems.

nato

"...the high gas prices turned out to have been a bubble and a brief gas tax holiday would just have smoothed the ride a little bit..." Because refineries were maxed out for summer and thus the supply curve was essentially vertical, the money would just have gone in producers' pockets without providing almost any measurable relief for anyone. Meanwhile, it would have increased the deficit by almost $10 billion for just the summer. It was idiotic economics.

Nathan Smith

To refute Nato's extreme hypothesis that the supply curve was vertical, all that's needed is to mention that I had a can of gas in my garage in the fall of 2008, and if gas prices had risen to, say, $15/gallon, I would have been willing to walk down to the nearest gas station and make a deal. If *anyone* has stocks they're not using, the supply curve is non-vertical.

Beyond that, Nato is taking the Econ 101 supply-and-demand model too literally. In reality, there are lags, there is slack, there is price stickiness, even in the markets that most closely approximate the perfectly competitive model. It is, after all, possible that not every single gas station owner in America is a hyper-rational *homo economicus* who would instantly raise prices exactly enough to offset a gas tax cut. Economics doesn't really have a scientific proof that markets clear always and instantaneously, even if they sometimes sound a little that way. Mix economic theory with a little common sense and it's a safe bet that a gas tax cut in summer 2008 would have given consumers at least a little bit of relief from high prices at the pump.

As for "the money would just have gone in producers' pockets," well, what's wrong with that? At least it isn't wasted! To say this is "idiotic" economics seems to me to be grading politicians' ideas on too harsh a curve, but whatever, fine, let's just note in passing that this was *harmless* idiotic economics. If we're going to use terms that way, we'll need some stronger term-- "psychopathic economcis"-- to describe Nixon's wage and price controls in the 1970s, or the minimum wage hikes that have occurred in the past couple of years in the middle of high unemployment and a recession. The idea that pouring massive government subsidies into health care to insulate people from health care costs is going to *reduce* the chunk of GDP health care eats up is also, at the end of the day, pretty implausible, even if it's too complicated to be merely dumb. The difference between McCain's dumb economic ideas, if that's what they are, and Obama's, is that McCain's are small and harmless.

I have to say: After what's been going on the past couple of years, the idea of a politician proposing a policy that exacerbates the deficit by merely $10 billion-- only $30 per American!-- is so benign as to be laughable. What a wonderful world it would be if we could substitute that kind of idiotic economics for the kind we have now!

nato

I'll mostly drop my argument here, having gotten far away from my original point, which was itself a digression from the thrust of a blog post with which I mostly agree (of course). That said, I'd like to note that my original words don't exaggerate: I didn't say "the bulk" of the stimulus was tax cuts, I said, "the biggest chunk" (the three main chunks being tax cuts, new infrastructure spending, and temporary entitlement extensions for the unemployed). Also I said the supply curve for summer gas was "essentially" vertical and that gas holidays would not provide "almost any measurable" benefit for consumers. If consumers received, say, a hundred million dollars in price reduction, that would jibe with Nathan's objections to the "extreme hypothesis" he invented for me without changing the fact that $30 in taxes generating $0.35 in relief isn't a great ROI. It doesn't mean my position is right, but it does mean that Nathan's response has little to do with what I actually said. It's sad to see that Nathan would assume a long-time interlocutor and one-time econ major from a family of professional economists and industrialists would so blithely take "the Econ 101 supply-and-demand model too literally".

Nathan Smith

Oh... sorry about the misquoting, yes, I read too fast. But in what I said about taking the Econ 101 supply-and-demand model too literally, I was mainly talking about the assumption that markets clear instantaneously. The Econ 101 model of markets contains a powerful and true insight which is highly general, but it can operate with lags and delays, and these as well as the probably significant non-verticalness of the supply curve would likely deliver some price relief to consumers. Not much, perhaps, but that leads to the more important point that the policy *wouldn't involve welfare losses* to society, at least none that have been cited so far and probably in reality few or none. Nato's suggested ROI calculation is incorrect. If $30 in tax cuts led to $0.35 of price relief at the pump, most of the rest of the $30 would go out, say, in profits to Exxon shareholders. It wouldn't simply be value destroyed outright, like the thwarted would-be labor effort of a worker unemployed because of a minimum wage hike. That's why the temporary gas tax cut, though I'd agree that it was probably ill-advised, was so harmless. If there are going to be bad economic ideas in the political arena, we should be so lucky as that they should be like this one.

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