The Free Thinker

If This is the Best Case They Can Make for Keynesianism...

... it must be even wronger than I thought. Krugman writes:

Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed, relative to what could have happened — an acrimonious failure to agree on anything — the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development.

But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

Krugman is conflating two quite different ideas here: (a) that the government (or the central bank) has to bail out banks to prevent a collapse of the financial system, and (b) that most governments need to retrench right now. Not only are the two ideas quite separable-- the government could bail out the banks and increase spending; or it could do neither-- but if anything, they are philosophically opposed. A comprehensive interventionist might advocate both; a libertarian would support neither. TARP is at this point not, I think, especially controversial among economists, so it's interesting that Krugman stakes out an anti-TARP position here. I'm glad of it: I think the anti-TARP view deserves more of a hearing than it has gotten. But how he would justify conflating TARP and austerity, I have no idea.

This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

Some economists weren’t convinced. One caustic critic referred to claims about the expansionary effects of austerity as amounting to belief in the “confidence fairy.” O.K., that was me.

But the doctrine has, nonetheless, been extremely influential. Expansionary austerity, in particular, has been championed both by Republicans in Congress and by the European Central Bank, which last year urged all European governments — not just those in fiscal distress — to engage in “fiscal consolidation.”

And when David Cameron became Britain’s prime minster last year, he immediately embarked on a program of spending cuts in the belief that this would actually boost the economy — a decision that was greeted with fawning praise by many American pundits.

Now, however, the results are in, and the picture isn’t pretty.

This is ridiculous. First, one distinction which it's essential to make is that between (a) countries that could have borrowed more, such as the United States, at least in the short run, or Germany; and (b) countries that lost access to financing or were on the verge of doing so, like Greece, Italy, Portugal, Spain, and Ireland. The latter were compelled to adopt austerity, not on their own terms but on those imposed by the markets, and the sovereign debt crisis hurt them in other ways too. The former had flexibility to design austerity in the way that would do them the least harm. So it's fair to use the example of Britain, but not Greece, Latvia, etc.

Second, the results are certainly not in-- yet. The European debt crisis seems to have been resolved, finally, but only just. There's been no time for it to take effect. And in general, austerity is a policy oriented towards the longer term. One doesn't expect it to help over the long term, but over three, five, ten years. In the East Asian crisis of 1998, austerity was pursued, and the recession was very deep and painful; but there was a strong rebound a couple of years later; in Japan after the crash of 1989, Keynesian stimulus was pursued, and the recession became more or less permanent.

It would be much more reasonable to say that "the results are in" on the path that was taken in America, namely, not-austerity, but Keynesian stimulus, "and it ain't pretty." Stimulus has had more time to work. The European sovereign debt crisis is much less of an issue here. And Keynesian stimulus is supposed to work in the short run; that's the whole point. Of course, Krugman claims that America has pursued austerity, but that just underscores the uselessness of this conceptual framework. With deficit spending at 10% of GDP for three years, this is as Keynesian a fiscal policy as we've had in decades. If we were deficit-spending 20% of GDP and it didn't work, the Keynesians could always say, hey, it should have been 30%. Of course, the Keynesians can also deny that it didn't work: they can say it did work, because things would have been even worse. If they were worse, they can say they would have been even worse than that. If we were deficit-spending 20% and unemployment were 15% instead of 9%, well, they could say that if we had been deficit-spending only 10% of GDP, unemployment would have been 20%. Why they expect anyone should believe their counter-factuals when none of them foresaw the crisis is a mystery. More conservative, free-marketeer, rational-expectations type economists are more epistemically modest. All we know is that the economy has a natural tendency towards full employment, and the best bet is that if policy had been neutral (admittedly that's hard to define) it would probably have reverted to trend (admittedly that's also hard to define) in a few years. By that standard, Keynesian stimulus seems to have made things worse, and certainly hasn't helped much; and the marginal effect of Keynesian stimulus would probably have been even more harmful, since the marginal benefit of just about anything falls, and the marginal cost rises, as you get more of it. But that's just the best guess.

Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.

Maybe the most telling thing is what now passes for a success story. A few months ago various pundits began hailing the achievements of Latvia, which in the aftermath of a terrible recession, nonetheless, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.

So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative? Well, that’s why I’m in Iceland, attending a conference about the country that did something different.

If you’ve been reading accounts of the financial crisis, or watching film treatments like the excellent “Inside Job,” you know that Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position.

But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

So how’s it going? Iceland hasn’t avoided major economic damage or a significant drop in living standards. But it has managed to limit both the rise in unemployment and the suffering of the most vulnerable; the social safety net has survived intact, as has the basic decency of its society. “Things could have been a lot worse” may not be the most stirring of slogans, but when everyone expected utter disaster, it amounts to a policy triumph.

And there’s a lesson here for the rest of us: The suffering that so many of our citizens are facing is unnecessary. If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.

"Iceland let the banks go bust and expanded its social safety net." OK. But far more importantly, to-the-exclusion-of-everything-else importantly, Iceland has a floating currency and could devalue. Real wages could fall. For a tiny economy like Iceland's, trade is crucial. We always knew that improving competitiveness by devaluation can help a lot in a crisis.The East Asians did it in 1998, too. That's monetarism, not Keynesianism.

One supposes Krugman would use the best available arguments in favor of "the path not taken." If this is it, I was right to be dismissive.

The Debt Ceiling Battle Pays Off

Good news on the economy this morning:

The U.S. economy expanded at a much faster pace in the third quarter, growing 2.5% as consumers spent more on big-ticket items such as autos and businesses investment surged. Growth almost doubled the 1.3% rate of the second quarter. The U.S. was forecast to expand by 2.8% in the third quarter, according to a MarketWatch survey of economists. Consumer spending climbed 2.4%, the highest rate since the end of 2010, and business investment shot up 16.3%. Inventories, which subtract from gross domestic product, rose 1.9%. Excluding inventories, final sales of goods and services increased 3.6%. Inflation, as measured by the price index for gross domestic purchases, fell to 2.0% in the third quarter from 3.3% in the second quarter. Excluding food and energy, the index declined to 1.8% from 2.7%.

Particularly good news here is the spike in business investment. And note the timing: it seems to have been just as the debt ceiling battle was heating up, and then ending in a Republican semi-victory, that businesses decided to invest. It could be a coincidence, but my tentative interpretation would be that businesses saw the government finally getting its act together on long-term debt, and swung into investment mode.

Don't Soak the Rich

"We are the 99%."

The protests on Wall Street have succeeded in creating doubt about whether the degree of wealth and income inequality in this country is politically sustainable. Wealth and income in capitalist societies, and I think in non-capitalist societies as well, is invariably distributed so that the median voter is poorer than the average voter. This isn't a mathematically necessity but it's a strong empirical regularity. The large majority always has a certain brute force on its side, and in a democracy it has the votes too, to take from a small, wealthy minority and redistribute to itself. Ignoring the costs of the redistribution process itself (but those can be very very very large!), the median voter always stands to benefit in the very short run from a general redistribution of wealth. So how is it possible for there to be so many millionaires, and even some billionaires, without them getting mugged by the majority?

It's actually better, by and large, to let the rich keep (most of) their money, but the reasons why are subtle. First, the general case for property rights. Property rights are essential to freedom because they give individuals a certain range of freedom of action in which they can do what they like without worrying about what authorities or superiors think. Property rights also help to create the right incentives for people to work, save, invest, take calculated risks, start entrepreneurial ventures. I think people understand that in everyday life, but they have trouble applying the same principles when the amounts of money at stake are increased by three orders of magnitude or so. To have, say, $10 billion, seems like absurd excess. It's hard to see how any sane person could be motivated by money at that point anyway. (Actually, I think they're usually not, except as a way of "keeping score," so to speak.) Why let them keep it?

One reason is justice: they created a lot of value, they should enjoy the fruits of it. This applies more to some rich people than others. It may explain why there's so much anger at the big Wall Street banks and, at the same time, so much adulation for another uber-rich guy, Steve Jobs. People think that Apple really did a lot of good for the world, so they don't resent Jobs' wealth. People don't think the banks did so much good. Another reason is incentive: crazy as it seems, big money seems to motivate some very rich, talented people to work hard. And we want them to work hard, inventing, planning, inspiring, making decisions. Again, this argument seems more convincing in the case of Steve Jobs than of Wall Street banks. The trouble is that it's hard to tackle the undeserving rich without tackling the deserving rich too. More importantly, there's a trade-off between progressivity and efficiency in taxation, with the taxes that fall on the rich generally being the taxes that most distort the economy.

Since labor is more evenly distributed than capital, capital taxation seems, on the surface, an appealing way to redistribute from rich to poor. Yet a lot of economic research (e.g., Chamley and Judd) finds that the optimal rate of taxation on capital (corporate income, capital gains, and dividends) is zero. Why? One reason is that capital taxation reduces the incentive to save, and savings finance the investment that is crucial to economic growth. Less capital formation means less capital for workers to use on the job means lower wages. Capital taxation also tends to distort the way companies make decisions. For example, suppose Company A makes $1000 of profit one year, and Company B takes a $500 loss. Suppose further that the capital taxation rate (corporate income tax plus capital gains or dividend taxes) is 30%. If A and B remain separate companies, their total after-tax earnings are:

Company A    $1000 * (1 - 30%) =     $700
Company B    -$500                        -$500
Total                                            $200

Now suppose that the companies merge into one company, AB. Its after-tax earnings are:

Company AB    $1000-$500=$500    * (1 - 30%) =    $350

So the companies can reduce their tax bill and increase after-tax earnings by merging. Bear in mind that there may be no business advantage to the merger at all, no synergies to be exploited, no costs to be shared. If it's sufficiently obvious that the merger is just a tax dodge, the authorities might be able to stop it. However, in other cases a merger might actually make business sense. It will be hard for regulators to tell whether a merger makes business sense or not, if the companies themselves have an incentive to mislead them. Another problem is that companies may manipulate their income streams so as to "smooth" income inefficiently, to avoid taking losses one year and making profits the next, and paying positive taxes on the profits that are not offset by negative taxes on the losses, since the government doesn't reimburse companies for losses.

Capital taxation also distorts firms' capital structure. When firms pay interest on debt, that's not counted as income and not taxable; but when they pay dividends, those are taxable. That creates an incentive for firms to finance investment with debt rather than equity.

If we want zero or low capital taxes, we could still impose high taxes on high-end labor incomes. After all, the notorious salaries of the highest-paid CEOs are labor income. If you look at the history of tax rates, there were long periods when the top tax rates were over 70%, or even as high as 90% or more. Of course, in those days, CEO salaries were far lower than they are now, and you can see why: if you're going to be giving the vast majority of your high earnings to the government, you don't have much incentive to negotiate for a high salary. What will you negotiate for, then? I knew a professor who did empirical research on firms in Britain, and met with several CEOs. In one of the most appalling cases (but not atypical), the CEO had to stop the interview because the questions-- about production processes, accounting and profits; basic stuff a boss should know-- were too hard for him. But, as if to redeem himself, the CEO walked across the room and opened a cabinet full of whiskey and other alcoholic beverages, plus a TV with a huge screen. He boasted, when the board meets, they all sat around and watched sports and drank. And why not? If the government's taken away your incentive to work, and your competitors' incentives to work, too, you'll get lazy. I also get the impression that some bosses back then thought attractive and biddable secretaries were one of the perks of the job.

Conservatives used to look back to the 1950s as a golden age. Now that theme seems more common among liberals and progressives. For example, Paul Krugman writes in The Conscience of a Liberal that that time "stands revealed as a paradise lost, an exceptional episode in our nation's history." Those were the times when taxes on the rich were very very high. And the economy seemed to do fine, better than fine. It grew strongly throughout the 1950s and 1960s. Incomes were a lot more equal than now. Shouldn't we try to get back to that?

Not so fast. First, we have to remember the process by which incomes got so equal. It was terrible. The 1929 stockmarket crash and the Great Depression had a leveling effect, destroying many of America's great fortunes, but of course everyone suffered. It would be bizarre to suggest that the sky-high taxes of the 1930s, and the gangsterish experimentalism of the Roosevelt administration, didn't have something to do with why the Great Depression was so long and deep. And then World War II, though presumably necessary, was hardly an experience we would want to repeat.

Second, the strong growth of the 1950s and 1960s partly reflected favorable demographics: the population was a lot younger than now, more people were working. It was also a process of recovery from the 1930s. Contrary to popular belief, recent research finds that the Great Depression was a time of rapid technological progress, which slowed down in the 1950s and 1960s; the latter decades experienced faster growth, of course, but that was because the economy was using more of its capacity, not because capacity was increasing faster. That helps to explain why the 1970s went so badly: by that time, the country had lost its innovative momentum.

The 1950s and 1960s were indeed an exceptional time in the nation's history, and not entirely in a good way. We should not expect to be able to repeat them. We should not really desire to do so. To stay vibrant and innovative, capitalism needs to be a high-stakes game, and that demands tolerance for a very high degree of inequality in income and wealth. We should always remember too, that hardly any of the real poor, the poor by global or historical standards, live here. They live in Africa, in India, in Pakistan, in Bangladesh, in Egypt, in China, in Central America and Mexico, and so forth. In global terms, redistributing from the "1%" to the "99%" is redistributing from the very-rich to the quite-rich. There's no moral merit in that. If the "Occupy" protestors were demanding taxes on the rich to finance more foreign aid, that would be a perhaps misguided but morally creditable cause. Demanding handouts to the American middle class is not.

That's not to deny that the Occupy protestors might have, or might inspire, some good ideas. Megan McArdle proposes a debt jubilee for student loans. And the Fed probably should stop paying interest on banks' reserves at the Fed, even though that will hurt the banks which are struggling anyway. Interest on reserves just gives banks a reason not to do their job, which is to lend money out into the economy. It's these kinds of subtle policies that can sort the deserving from the undeserving rich, that can get the incentives for talented people right. But it's a bad idea to think about what we want income inequality to be, and then to try to get there through the tax code. It's better not to think about it too much at all.

John Taylor, and is Spending Really Better than Tax Cuts and Transfers?

An excellent article on by John Taylor, entitled "An Empirical Analysis of the Revival of Fiscal Activism in the 2000s," in the JEL. His conclusion:

In sum, this empirical examination of the direct effects of the three countercyclical stimulus packages of the 2000s indicates that they did not have a positive effect on consumption and government purchases, and thus did not counter the decline in investment during the recessions as the basic Keynesian textbook model would suggest. Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases towards transfers.

Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view. According to the empirical estimates of the impact of ARRA, if there had been no temporary stimulus payments to individuals or families, their total consumption would have been about the same. And if there had been no ARRA grants to sttes and localities, their total expenditures would have been about the same. The counterfactual simulations show that the ARRA-induced decline in state and local government purchases was larger than the increase in federal government purchases due to ARRA...

Others argue that the stimulus was too small, but the results do not lend support to that view either. Using the estimated equations, a counterfactual simulation of a larger stimulus package-- with the proportions going to state and local grants, federal purchases, and transfers to individuals the same as in ARRA-- would show little change in government purchases or consumption, as the temporary funds would be largely saved. Of course, the story would be different for a stimulus program designed more effectively to increase purchases, but it is not clear that such a program would be politically or operationally feasible.

More generally, the results from the 2000s experience raise considerable doubts about the efficacy of temporary discretionary countercyclical fiscal policy in practice. In this regard, the experience with the stimulus packages of the 2000s adds more weight to the position reached more than thirty years ago by Lucas and Sargent (1978) and Gramlich (1978, 1979).

Elsewhere, Taylor points out that these results are quite consistent with the permanent income hypothesis of Milton Friedman. Essentially, it pays to take rationality seriously.

What I'm thinking about is: does it make sense to say that a stimulus that consisted of direct government purchases, rather than of tax cuts and transfers, would have stimulated the economy more? How can we make sense of this?

The first thing to note is that direct government spending would still put money into the hands of the private sector, specifically, into the hands of workers, suppliers of materials, etc. To the extent that a transfers-and-tax-cuts stimulus transfers money to the private sector, a stimulus emphasizing new spending would have done the same.

The difference is that a boost to federal spending would mean that the private sector-- the workers and suppliers of materials with whom the government did business-- would have to do something in exchange for the money. For starters, assume that the government projects have no value in themselves. In that case, the private sector gets the same thing but has to jump through hoops to get it. Presumably they would do the same thing with the money-- save it. Worse, they might save more of it, because jumping through hoops for the money would have made them poorer.

Remember, ~90% of those who want to work are still employed. Considering how much job churn there is, and considering that the most energetic and resourceful people, who would be most useful on new federal spending projects, also tend to be those currently employed, it is a safe assumption that most of those who would work on stimulus-related public projects would be diverted from private sector jobs, not out of unemployment. So federal spending would depress other private sector activity in a way that tax cuts and transfers don't.

It's a different story if stimulus money were spent on projects with significant economic value. But here we get into the game of "picking winners," of which we've just seen the results in the Solyndra scandal. The truth is that allocating capital and labor to the most productive uses is a very difficult task, and the people, and maybe even more importantly the institutions and information networks, that are good at it, are high up in the commanding heights of the private sector. If there's no special reason why the private sector can't handle it, it's crazy to get the government involved. But there are such things as public goods, and if more spending on defense, or highways, contributed to the productivity of the private sector, stimulus might pay off.

I still like the idea of patent buyouts as stimulus. Patents are a second-best solution; it would be more efficient, in theory, to just pay the inventor and let anyone make the good, since the marginal cost of using a patent is zero. In a recession, let the government buy out lots of patents and release them into the public domain. That gets money out there and raises the productivity of the private economy in the long run.

But unless federal spending can provide a large boost to private sector productivity, its effects would be worse than the stimulus: equally ineffective in stimulating spending, but with extra distortionary effects on the economy. Taylor's piece is good news in a way though: it suggests at least that the stimulus didn't do much damage.

Analysis: Obama, Bernanke out of ammo to boost jobs, growth:

The United States has a jobs problem and there's not a lot President Barack Obama or Federal Reserve Chairman Ben Bernanke can do about it.

In the face of rising risks of a recession that could imperil his re-election chances next year, Democrat Obama wants Congress to extend a payroll tax cut and emergency unemployment benefits that are due to expire in December.

But the Republican-controlled House of Representatives is emboldened by budget concessions it made Obama swallow to lift the country's debt limit this week and he has little political leverage to win significant fresh spending to aid growth.

"Obama does not have much presidential persuasion left. He is running out of capital," said James Thurber, of American University's Center for Congressional and Presidential Studies.

Obama's political opponents have been openly scornful of the impact of two previous stimulus packages, which were accompanied by extraordinary measures by the Federal Reserve to kick-start the U.S. economy.

"It seems we've thrown everything at it. We've had QE1 and QE2, Stimulus 1 and Stimulus 2, and the unemployment rate is still 9.2 percent," said John Makin, an economist at the American Enterprise Institute in Washington. "Maybe there are just not many options here at this point," he said.

No, no, there's plenty we can do. First, we still haven't done enough of what we should have done at the beginning, namely, combine (a) deficit spending (but we've had plenty of that of course) with (b) strong action to bring the long-run fiscal situation under control, so that investors won't worry so much that profits from projects undertaken now will be confiscated. Adopt Paul Ryan's plans on Medicare. Raise the retirement age. Index Social Security benefits to inflation rather than wage growth, and maybe means-test them at the high end. Repeal Obamacare. The debt deal may help there, but we need to go further. And tax reform too.

Second, reform immigration already! Naturally when you're waging war against millions of productive workers, that's bad for the economy. The crisis started with a drop in housing prices, and a rise in housing prices would end it. And it's easy to get that: boost demand. Let in more home buyers. Give the people who are already here and living in homes-- and might buy them-- assurance that they can stay. I'll throw out a third one, borrowed from Charles Krauthammer, not to advocate it but just to show that there are options:

Charles Krauthammer: "An index of how spent he is sort of intellectually on the issue of jobs is the campaign speech he gave today, the fourth in 10 days, in which he pivoted, he did his pivot, and he announced five initiatives. Listen to them. Payroll tax extension: We already have that. Unemployment insurance extension: Already have that. Trade deals: He's had it for two and a half years and done nothing. Spending on more infrastructure: a perennial -- you know, more dams, more bridges and roads. And the last one, I love that. Here's the real new one that will get us out of our doldrums: patent process reform. Now that I think is the key to economic explosion, getting us out of 9 percent unemployment.

"He's out of bullets, he's out of arrows, he's looking for stones on the seashore. And it shows that he may want to have a jobs agenda, he may want to do a pivot -- there's nothing left in the cupboard. He did a huge Keynesian gamble, and it failed."

I don't know if the patent process reform I have in mind is the same as what Krauthammer/Obama are thinking of-- actually I'm sure it's not-- but I think the best form of fiscal stimulus would consist of patent buyouts. Let the government run auctions to buy a whole lot of patents (to make the auction genuine they only buy some of the patents people bid for), and then retire them, so that anyone can make the products in question. Prices of lots of goods drop, helping consumers. There are lots of opportunities for start-ups to make stuff that was proprietary before. And former proprietors of intellectual property find themselves losing revenue streams, and need to invest to get new ones. Now, I'm hesitant to actually endorse this approach, since it involves government spending. But it's not true that the government is out of options to stimulate the economy.

White House, Congressional leaders reach debt limit deal (Washington Post):

President Obama and congressional leaders sealed a deal to raise the federal debt limit late Sunday that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a potentially disastrous government default...

The agreement would raise the $14.3 trillion debt limit in two stages by as much as $2.4 trillion. It represents a victory for Obama, in that it would allow him to avoid another politically grueling and economically damaging debt-limit fight in the heat of the 2012 presidential campaign.

However, Obama failed to secure other top priorities, including fresh measures to revive the flagging recovery and an end to tax breaks for corporations and the wealthy. Obama said he would pursue those priorities later this year, when a new congressional committee would begin the search for a broader debt-reduction plan, under the terms of the deal.

“The ultimate solution to our deficit problem must be balanced,” Obama said Sunday. “That’s why the second part of this agreement is so important.”

Republicans, by contrast, won severe cuts to agency budgets over the next decade and the prospect of deeper cuts to come, delivering on the campaign promises that helped them gain control of the House in last fall’s congressional elections. Democrats also agreed to stage a vote on a balanced-budget amendment, which has become a rallying point for tea-party-aligned conservatives.

For days, the chief obstacle to a deal was the design of a mechanism to force the committee to act — or to make sure spending cuts were adopted if the committee failed. In the end, negotiators settled on a trigger that would force automatic across-the-board cuts of $1.2 trillion to agency budgets, split half and half between domestic programs and defense.

Hmm. As far as I can tell, entitlements have not been touched. That's very bad. And the potential defense cuts sound dangerously deep, too. And $2.4 trillion is a huge debt ceiling hike, enough to raise debt well over 100% of GDP if I'm not mistaken. Oh, but this sounds better:

By all accounts, it looks like a deal is about to be announced in which the debt ceiling is hiked in exchange for the promise of major spending cuts, including to entitlements, totalling at least $2.4 trillion.

Anything can happen, but it apppears the GOP is on the verge of pulling off a political victory that may be unprecedented in American history. Republicans may succeed in using the threat of a potential outcome that they themselves acknowledged would lead to national catastrophe as leverage to extract enormous concessions from Democrats, without giving up anything of any significance in return.

Not only that, but Republicans — in perhaps the most remarkable example of political up-is-downism in recent memory — cast their willingness to dangle the threat of national crisis as a brave and heroic effort they’d undertaken on behalf of the national interest. Only the threat of national crisis could force the immediate spending cuts supposedly necessary to prevent a far more epic crisis later.

Under the emerging deal, President Obama can hike the debt limit in two stages — the first in exchange for equivalent cuts; the second after a Congressional committee comes up with second round of yet more cuts, including to entitlements. The talks appear close to resolving the spending cut“trigger” that would force the committee to act — without giving the GOP an incentive to deliberately sabotage its work. The remaining question is how to get it through the House. But a deal seems immiment.

So maybe there are entitlement cuts in the pipeline as part of the negotiation for the second part of the debt ceiling hike. Very good then. Still, it's sobering to think that the debt can rise to nearly $17 trillion now. A reminder of the urgency of changing fiscal course.

Pundits on the right are converging on a story. Here's John Podhoretz:

By now it is clear to everyone that the Obama administration bungled the 2009 stimulus package. The dispute now is over the reasons for its failure. The conventional wisdom is coalescing around a view crystallized in a column by Mr. Conventional Wisdom himself, Charlie Cook of the National Journal: “The administration’s initial response, the much-maligned economic-stimulus package, was far too modest and unfocused.”

Cook is a rational analyst, so it is striking that he is able to advance an argument that is, on its face, nothing short of demented. The idea that the 2009 stimulus, which cost $840 billion, could have been less “modest” and more “focused” does violence to the facts of very recent American history and to the arugments made for the stimulus by its advocates at the time.

Even at its “far too modest” size, the stimulus was, by leagues, the costliest such effort in American history. Its astounding price tag was justified during the debate over its passage by the fact that there was a genuine economic emergency that had to be addressed. And the mere fact of addressing it with enormous public resources was, we were told, enough to do the trick almost on its own. The central point of taking emergency measures, we were told, was precisely not to focus them but to cause them to wash over the economy as a whole.

How many times during that emergency were we reminded of the supposed wisdom of John Maynard Keynes, who wrote in 1930 that it was enough to employ a man to perform any task at hand to create the conditions for macroeconomic growth? Simply “to dig holes in the ground,” Keynes wrote, “paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.” This is the famous “multiplier effect” we also heard so much about, according to which $1 in government spending would blossom into $3 of value for the entire economy. In effect, we were told by the most enthusiastic believers in the magic of the multiplier effect, that for $840 billion in spending, we’d get more than $2 trillion in economic activity.

It’s also important to remember that the stimulus wasn’t the first bite at the apple... The notion that Congress could have passed a stimulus bill twice the size of the one that did—Paul Krugman’s idea—was then and is now preposterous. Obama’s stimulus was as large as it could possibly have been, and the parlous results indicate it was vastly larger than it should have been.

The growing consensus is that Obama’s economic policies have failed, and precisely in the ways that those skeptical of the stimulus predicted.

And Martin Feldstein is blunt but, I think, fair:

The policies of the Obama administration have led to the weak condition of the American economy. Growth during the coming year will be subpar at best, leaving high or rising levels of unemployment and underemployment.

The drop in GDP growth to just 1.8% in the first quarter of 2011, from 3.1% in the final quarter of last year, understates the extent of the decline. Two-thirds of that 1.8% went into business inventories rather than sales to consumers or other final buyers. This means that final sales growth was at an annual rate of just 0.6% and the actual quarterly increase was just 0.15%—dangerously close to no rise at all. A sustained expansion cannot be built on inventory investment. It takes final sales to induce businesses to hire and to invest.

The picture is even gloomier if we look in more detail...

How has the Obama administration contributed to this failure to achieve a robust and sustainable recovery?

The administration's most obvious failure was its misguided fiscal policies: the cash-for-clunkers subsidy for car buyers, the tax credit for first-time home buyers, and the $830 billion "stimulus" package. Cash-for-clunkers gave a temporary boost to motor-vehicle production but had no lasting impact on the economy. The home-buyer credit stimulated the demand for homes only temporarily.

As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than $500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than $700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of $400 billion in 2010 wouldn't have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.

In fact, each dollar of extra deficit added much less than a dollar to GDP. Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future. But the Obama stimulus had nothing for the Defense Department. Instead, President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth.

A second cause of the continued economic weakness is the president's emphasis on increasing tax rates. Although Mr. Obama grudgingly agreed to continue the Bush tax cuts for 2011 and 2012, his budget this year repeated his call for higher tax rates on upper-income individuals and multinational corporations. With that higher-tax cloud hanging over them, it is not surprising that individuals and businesses do not make the entrepreneurial investments and business expansions that would cause a solid recovery.

A third problem stems from the administration's lack of an explicit plan to deal with future budget deficits and with the exploding national debt. This creates uncertainty about future tax increases and interest rates that impedes spending by households and investment by businesses. The national debt has jumped to 69% of GDP this year, from 40% in 2008. It is projected by the Congressional Budget Office to reach more than 85% by the end of the decade, and to keep rising after that. The reality is even worse since ObamaCare alone will cost more than $1 trillion in its first 10 years. The president's boast that his health legislation would not "add a dime" to the national debt was possible only by combining that increased spending with proposed new taxes and with projected cuts in Medicare spending that will never occur...

The economy will continue to suffer until there is a coherent and favorable economic policy. That means bringing long-term deficits under control without raising marginal tax rates—by cutting government outlays and by limiting the tax expenditures that substitute for direct government spending. It means lower tax rates on businesses and individuals to spur entrepreneurship and investment. And it means reforming Social Security and Medicare to protect the living standards of future retirees while limiting the cost to future taxpayers.

Martin Feldstein seems to have more faith in stimulus in general than Podhoretz, but thinks the "multiplier" is less than one (or less than zero, depending on how you define it). Which also looks bad for Keynesian theory. And Jonah Goldberg piles on:

"Now, my administration has a job to do as well, and that job is to get this economy back on its feet," President Barack Obama declared on July 14, 2009, in Warren, Mich. "That's my job, and it's a job I gladly accept. I love these folks who helped get us in this mess and then suddenly say, well, this is Obama's economy. That's fine. Give it to me."

OK. It's yours.

The unemployment rate then was 9.5 percent. It's now 9.1 percent, well above the 8 percent cap that the administration advisers projected under the stimulus bill. But that's not the amazing part. According to a White House report written by economic advisers Jared Bernstein and Christina Romer in January 2009 in support of the bill, if we had passed no stimulus package at all, the unemployment rate would have topped out at around 8.8 percent in the last quarter of 2010.

If only.

Instead, we got Obama's vital "investments." Since his speech in Warren, we've spent another $2.8 trillion in borrowed money. Presumably, we could have cut the unemployment rate by four-tenths of a percentage point more cheaply than that?

Meanwhile, we've accrued a total of $3.7 trillion in debt on Obama's watch, while losing 2.8 million jobs. That doesn't sound ideal either.

But what do I know?

The more salient point is that Obama acts like he knows everything. From Day One, this White House has been cocksure about how to get us out of the economic ditch. In every major relevant speech, Obama has stuck with a consistent message: We know what to do and the Republicans don't. "I will not sacrifice the core investments we need to grow and create jobs," Obama insisted yet again in his April budget speech...

No president "runs" the U.S. economy, but this president talks like he does more than any I can remember. And yet, none of his economic promises or predictions has panned out.

Obama deserves all this for his failure to deal with the long-term budget deficit if nothing else. But Keynesian theory also deserves it. In particular, the "multiplier" idea needs to bite the dust. Keynes argued that if the government spends $1, someone will get that $1, save say 10%, spend $0.90, someone else will get that $0.90, save say 10%, spend $0.81, so the total spending will be a lot more more than the original $1. Wrong. (a) Savings don't just disappear, in a healthy economy they will be invested. (b) Savings rates are endogenous, and if people see that the government is borrowing on an enormous scale, they'll save more to offset the anticipated tax increases. In the short run, since some people are credit-constrained, more government spending may raise total spending, in the short run. But it might leave it constant, or even-- because other people, who are not credit-constrained, anticipate paying more than their fair share of the extra future taxes and raise savings by more than the government raises spending-- reduce it. In any event it is not likely to raise it by much. And in the long run it just distorts the economy and makes us poorer. If there are ways to spend that raise long-run GDP, fair enough. It might be a good idea to concentrate that spending in bad times. But generally, fiscal stimulus just doesn't work. We shouldn't really have expected it to.

It Would Be a Hard Survey to Design

Nato argues in a response to my last post:

The constant references to sentiment don't seem to include links to actual surveys, but rather to people the author talks to. The counterfactual asseverations don't seem to come with any actual support. Krugman et al. can (and do) claim that the stimulus was much smaller than it should have been according to their calculations, and that seems to be a plausible and natural defense of the mismatch between claims of benefit and results. There's a significant chance that the defense is wrong, but it's not special pleading.

Now, I think this is quite wrong, and let me see if I can explain why. For conservative critics of Obama's economic policy, the counter-factual is some kind of mean reversion. The idea is that the economy has a sort of equilibrium state or equilibrium trend, and that when the economy deviates from trend, it tends to move back to it, if policy does nothing. If policy seeks to prevent deviations from trend, and deviations from trend do not occur, that suggests that maybe policy is preventing them, that is, policy is helping to smooth the business cycle, to make the economy more stable. That might have seemed true, say, in the 1990s. If, on the other hand, the economy stays a long way below trend for a long time, the counter-factual is that the economy would be on or returning to the trend, and the first hypothesis to consider for why it is not doing so is government policy. So the main basis for the counter-factual presumptions is simply the historical trend, though other evidence is nice, too, if it is available.

By contrast, it's difficult to express the kinds of assumptions that must underlie Krugman's argument for a bigger stimulus without undermine its plausibility. Thus, you might say that if there had been no stimulus, we would have been even slower to get out of the recession. To claim that, one must either deny that the economy has any inherent tendency to revert to trend, or claim that something has suddenly made that tendency inoperative. That claim is destitute of the kind of historical induction which underlies the conservative position. If one does accept that there would be a natural reversion to trend, then the counter-factual presumption has to be that the economy would have been recovering if government policy did nothing, and it's not recovery but the feebleness of the recovery that must be regarded as the result of the stimulus policy. If this is granted, one might still argue that the effects of stimulus are non-linear, that a relatively small (though still quite large!) stimulus had a negative result, but a larger stimulus would have had a positive result. But if the effects of stimulus are non-linear, it seems more likely that the effects of stimulus get worse at the margin, that the "low-hanging fruit" are picked first, and more spending means less valuable public-sector prrojects and more displacement of private sector activity. So I think Nato is quite to think that the critics of Obama's policies are more to blame for unsupported counter-factual asseverations than Krugman, it's the other way around. All Krugman has to support his claims that a bigger stimulus would have worked are deductions from a Keynesian theory that has not fared well theoretically or empirically in recent decades, and which the apparent failure of a smaller Keynesian stimulus further undermines.

However, what prompted this post is the following:

I have not yet encountered any that weren't based on assumed counterfactuals and dubious claims of sentiment. I have sometimes argued with these, and sometimes not, but it seems each time I've challenged them, the writer either retrenches somewhat or doubles down on the 'sentiment' point without offering additional evidence.

When I responded to this with a link to a survey showing pessimistic sentiment among households, Nato objected that it was "household sentiment about the economy, not businesspeople about the government." Well, but businesspeople are householders too, no? Still, it got me thinking about what the ideal instrument would be to test the hypothesis that businesses' reluctance to hire reflects heightened political risk.

First, what you'd really want to do would be to write a questionnaire and then go back in time and ask people the same questions in 2007, then ask them in 2011, and compare answers. If you just have the answers today, they would be hard to interpret. Suppose 95% of businesspeople say they are worried about higher taxes. Well, maybe businesspeople always know there's a chance taxes will rise, and always try to be ready for it. If, on the other hand, 25% of businesspeople say they're worried now, but only 10% did in 2007, that would provide strong support for the political risk hypothesis. Unfortunately, you can't do that, and it's very likely that many of the questions you would want to ask now, no one would have thought of asking in 2007, because the politico-economic environment has changed in such unanticipated ways. For example, we might now want to ask: "Do you sometimes take into account the possibility of future government bailouts when you make business decisions? How?" Who would have imagined in 2007 that that could be an important question to ask businesspeople?

Second, what is your sample, and how do you weight it? If your sample is of "firms," represented by, say, CEOs, a big problem is that firms vary hugely in size and are not of anything like equal importance. So, do you interview the bosses of Fortune 500 companies, or mom-n-pop stores, or something in between? If you interview firms of different sizes, do you give firms of greater size greater weight? Once you do that, though, your statistics start to become strange. What are you actually reporting? You can't say "55% of bosses said that..." Your number might accurately be stated as "55% of firm value is represented by bosses who said that..." Worse, there will be so many different weird schemes you could adopt to deal with the problem that people could suspect you of manipulating the results, and someone else using the same data but adopting a different, and equally defensible, weighting procedure, might find a different result. And yet, if 95% of bosses don't think at all about government bailouts, but 5% have switched from productivity-maximization to rent-seeking in the past five years, and especially if those 5% are highly placed, that might explain much of the deterioration of the economy.

Or is it businesspeople you want to interview at all? Maybe the businesspeople are as confident as ever, but they can't get credit to expand because the people with the money are worried about political risk. How would you find that out? You'd need a sample of bankers or investors. Also, remember that the sample of businesspeople is endogenous. Some people might be businesspeople now because they got thrown out of jobs by the recession and so tried self-employment instead-- or because they are politically well-connected and found that a more useful asset in a more interventionist time. Others may have been businesspeople two years ago and aren't now because their businesses went bust in the recession. More subtly, some people would have been businesspeople but for the recession, that is, they had business ideas but didn't pursue them because the environment seemed unfavorable. Or conversely, they might have planned to abandoned self-employment, then decided to stick with it because the times were unfavorable to looking for a salaried job. In short, if businesspeople are your sample, the sample is endogenous. How do you deal with that? (Some of these people might not even be in the country: immigrants who went home, or didn't come, because of the bad economy.)

There might be clever ways to deal with these statistical problems. But I think the demand for "evidence" in the form of polls or surveys might be a little hasty. There's merit in just grabbing stylized facts and thinking about them. The economy's performing way below trend. Why? Obamacare and the removal of the Bush tax cuts are going to cause substantial tax hikes for the rich, and Obama still seems to think there's room for more. How does that affect the incentives of entrepreneurs and investors today? No one seems to understand Obamacare, what obligations it places on employers and individuals, how it's going to affect prices. How is that going to affect hiring decisions? Corporations have been making big profits in the past couple of years, and P/E ratios are low. If capital's earning a lot, why don't people want to make more of it by investing? Political risk makes a lot of puzzle pieces fit together.

The Obama Economy

Last month, a CNN poll found that while 80% think the economy is bad, only 33% blame Obama for it. I think they're mistaken. Even in 2009, I think it's likely that the shadow that the victory of Obama and the Democrats cast over the future-- higher expected taxes, regulation, and spending-- deepened the downturn. But two-and-a-half years in, the "it's not Obama's fault" argument is getting obsolete. Fred Barnes makes the case ("The Obama Economy," Weekly Standard):

The Obama administration is 0-for-3 in meeting economic expectations. In 2009, President Obama and his advisers believed the bountiful stimulus package would give the economy a strong jolt. It didn’t, and still hasn’t. In 2010, Obama declared Recovery Summer and predicted a surge in employment. The economy lost 283,000 jobs over the summer. This year, Obama expected a significant ratcheting up of jobs and growth. There’s been a ratcheting down.

The White House always has an excuse. Obama’s economic policies are never at fault. The problem in 2009, according to Obama? The economy was in worse shape than he’d feared when he took office. In 2010, economic adviser Christina Romer said the dip in jobs was unexpected. No doubt it was, but that’s a lame explanation. And Obama stubbornly refused to express regret for having proclaimed Recovery Summer in the first place.

Now, two years after the recession officially ended, the excuses for economic stagnation and puny job growth are stale and implausible. Obama didn’t offer any in an economic speech in Toledo a few hours after bad job numbers for May were released last week. Romer’s replacement, Austan Goolsbee, dismissed the 9.1 percent jobless rate as a bump “along the road to recovery.” House Democratic whip Steny Hoyer blamed the Bush administration—really, he did.

Yet Obama labors on as if his policies are working, only a bit more slowly than he’d anticipated... Rather than a midterm course correction, Obama wants more of the same, lots more.

And he’s not reticent about saying so. Obama’s desire to raise taxes is undiminished. He’s obsessed with the notion that more tax revenues can be wrung from rich people with money to spare. In Obamacare, he’s already got a hike in the Medicare tax. Last week he told House Democrats he won’t tolerate another extension of the current tax rates for high earners (more than $250,000 a year). If he had his way, the top rate on individual income would be 45 percent. Oblivious to economic history, he doesn’t see a rising tax burden as a disincentive to entrepreneurship, investment in job-creating enterprises, and a booming economy.

It’s not just Obama. Treasury Secretary Tim Geithner spoke last week to Republican House freshmen. One Republican summarized his message as “revenues, revenues, revenues.” Obama, by the way, told Democrats he’ll insist on a tax increase as part of any deal on raising the debt limit.

Obama’s economic panacea is government spending. If you thought the meager results from the stimulus would change his mind, you’re wrong. He told House Republicans that he favors “investing” in the economy. Republicans drew the reasonable conclusion he was talking about more spending by Washington.

Obama was clear about this in his April budget speech. “I will not sacrifice the core investments we need to grow and create jobs,” he said. “We’ll invest in medical research. We will invest in clean energy technology. We’ll invest in new roads and airports and broadband access. We’ll invest in education. We will invest in job training. We will do what we need to do to compete, and we will win the future.”

The president wasn’t referring to the private sector. He once told a group of money managers that incentives for private investment were old hat. His administration’s massive spending on clean energy, environmental technology, and green jobs, he said, would attract a wave of private investment sufficient to spur growth. So relax, prosperity is on the way.

Whether by design or happenstance, President Obama is the greatest proponent of crony capitalism since FDR proposed cartels under the National Recovery Act. He does big favors for corporate supplicants and recipients of government subsidies while largely ignoring small business...

Obama is a regulatory zealot, even as the administration is supposedly weeding out damaging regulations...

Even where Obama seemed to agree with Republicans, he didn’t really. The president is a master of lip service. When Republicans mentioned free trade agreements, medical liability reform, and cutting the corporate tax rate, the president said amen. He’s with them. But there’s always some reason he can’t act. On trade, for instance, Obama is waiting for Congress to pass assistance to alleged victims of foreign competition before pushing to ratify deals with Panama, Colombia, and South Korea. It’s a sop to unions, nothing more.

And all this is a big reason for businesses to avoid hiring.

 

Thoughts on Macroeconomics

One of the things that distinguishes the Keynesian left in macroeconomics-- Paul Krugman, Brad DeLong, etc.-- from the more skeptical, and diverse, right, is the weird cocksureness of the Keynesians. Hardly anyone predicted this crisis. The exceptions, like Nouriel Roubini, are few enough that luck rather than insight seems the likeliest explanation. Just because macroeconomists didn't see it coming doesn't mean they don't have some idea of how to fix it. But you would expect some self-doubt, some "Hmm... it seems we didn't understand the economy as well as we thought, maybe we should question our old models." Which seems to be the reaction of the right. The Keynesian left, by contrast, is sure they know the answers, and the only problem is a lack of political will, and irresponsible free-thinking by some economists that weakens the profession's unified voice, and the resistance of the public to somewhat counter-intuitive arguments.

Moreover, there seems to be little recognition that Keynesianism has already been tried on a huge scale. What were the Bush tax cuts, and their renewal, and the major upswing in spending in the past decade, and ARRA, and the Federal Reserve's flooding the economy with money, but a lot of Keynesian stimulus. We've been deficit-spending some 10% of GDP for the past three years. Yet unemployment is still 9%. You can spin counter-factuals about how unemployment would be 16% without the Keynesian measures taken. But how do we know? If the economics profession, or even just the Keynesian left wing of it, had unanimously predicted disaster in the run-up to 2008, they might have some credibility in making these counter-factual predictions. As it is, the public is entitled to conclude that when Keynesian stimulus has been pursued on such a massive scale and the economy is still in such bad shape, it probably isn't working.

That's not to say there's no merit in the Keynesian story, however, and I should mention here that this post is inspired by listening to the first few lectures from Brad DeLong's Econ 1 course at Berkeley, published at iTunes U. DeLong argues (channeling Malthus, Keynes, and others) that Say's Law does not hold, and a general glut is possible, because there can be excess demand for financial assets. If everyone wants to reduce present consumption in favor of future consumption, resources just end up unemployed, and government has to step in to provide the financial assets. He says there might be excessive demand for different kinds of financial assets: cash, government bonds, high-quality private bonds, etc. In 2008, the market learned that mortgage-backed securities, which had been deemed safe, were not. They lost faith in those and all sorts of other private-sector assets, and turned to government bonds.

So far, this story makes sense.  But it's a bit incomplete.  First, why does demand for financial assets suddenly surge?  DeLong has a story.  It's basically that there was a certain financial innovation-- mortgage-backed securities-- that seemed smart, but didn't work out in the end.  But that seems like a supply-side story-- there was a technological shock to the efficiency of financial intermediation-- which is dressed up as a demand-side story and thereby becomes ad hoc. 

Second, it doesn't deal explicitly with investment.  After all, if you want to consume less today and more tomorrow, there's an alternative to buying financial assets.  Make stuff.  Build machines, build houses and offices and infrastructure, invest in R&D.  Stuff that costs you today and pays off tomorrow.  Now, admittedly it takes a little while to mobilize investment.  The people who are in a position to make the plans are probably not the people with the money to lend.  It takes time for them to find each other and to design suitable contracts.  If in the meantime deflation takes hold, that makes such calculations far more difficult.  So it might make sense for the Federal Reserve to flood the economy with cash in the immediate aftermath of a financial crisis, to keep prices stable for the convenience of those planning new investments.  But Keynesian stimulus should be an affair of months rather than years.

Third, since the Federal Reserve did flood the economy with cash, DeLong argues that cash wasn't (or not for long) the kind of asset for which there was excess demand.  Rather, the economy wanted safe long-term bonds.  That doesn't make much sense.  Cash should be a very good substitute for safe long-term bonds.  It's safe, it just pays a zero interest rate.  So to satisfy the market's demand for safe long-term bonds can only mean giving safety-seeking investors a better interest rate.  But that's exactly what you don't want to do.  If there's excess demand for safety, you should raise the price of future consumption relative to present consumption as much as possible.  You should force investors to settle for cash, or else to put their money into physical capital investments that will earn a return by being productive.  Ideally, you would want to drive real interest rates on safe assets below zero if there are still unemployed resources at a zero interest rate. 

My hunch is that the real secret of prolonged economic downturns is that it's all about political risk.  Political risk is hard to observe.  But suppose that the odds that a long-term investor in illiquid physical capital will face confiscatory taxes have risen 20% in the past five years.  That could induce a steep fall in investment indeed!  Money that would have been invested instead seeks safety, so demand for safe financial assets surges.  And it's not hard to see why political risk has risen, given the surge in soak-the-rich rhetoric, the election of a president who wants to raise taxes on the rich, Obamacare, the surging deficit that will have to be paid for somehow, the defeat of immigration reform that would have increased the number of people around to pay it, etc.  People want to transfer income from the present to the future, but they are afraid to invest it, so it's hard to find things to do with all the resources in the economy.