In an interesting contrast between Western Europe and the US, German Chancellor Angela Merkel said today that financial markets need more regulation. Her party, the Christian Democratic Union, is the more conservative German party, yet gives at least some minimal commitment to the notion that the government should keep markets in check. Merkel said,
“Crises have blown up because the rules of the social market have not been observed…We have made progress but we are nowhere near a point where we could say that the kind of derailment that leads to market crises could not happen again and so the issue will again play a central role at the G20 meeting this year.”
Also interesting that she notes that markets have a social purpose and are not simply to be praised for their own sake.
“It is true that economies are there to serve people and that has by no means always been the case in recent years.”
Paul Krugman was on Morning Joe (video below) this week and put forth his standard arguments about job creation needing to take priority over deficits. (I encourage people to watch it for a thorough run-through of the basic Keynesian arguments.) The co-host, Joe Scarborough, wrote an opinion piece on Politico blasting Krugman. What strikes me is that the opinion piece is shoddy ranting that uses little evidence and mischaracterizes Krugman’s positions. Yet deficit scolds Simpson-Bowles praised the article. I don’t have time to run through everything, but a few key points:
“Mr. Krugman suggested Medicare and Medicaid shortfalls should be ignored…saying that no one could predict the future of entitlements so there was no need to worry until the programs became insolvent.”
If you watch the show, while Krugman says he thinks it can’t be predicted with absolute certainty that Medicare/Medicaid spending will be unsustainable in the future, he does say it’s a “good bet.” Nowhere did he say that we need to wait until the entitlements can’t be paid out. He simply says that it is not something that needs to be addressed immediately given unemployment as a more pressing problem. Krugman may be right or wrong, but how does someone get taken seriously when they make silly oversimplifications?
Watching Krugman’s appearance though made me think that is important to make some major distinctions when discussing the debt issue. Future entitlement spending problems and the US debt are related issues, but are not the same. It is important to separate them, because it seems like the average person may think that unless we cut spending on entitlements our economy is going to tank, when in fact the situation is more complex. There is an issue of the sustainability of entitlement spending related to an increase in the size of the population dependent on Social Security and Medicare/Medicaid. This issue is about whether or not the government will be able to fund those programs.
When deficit hawks scold Krugman by misrepresenting his position and dire fears of interest rate increases are put forth when Japan as a counter-example is hardly discussed, it makes it hard to believe that people are making serious arguments.
I just watched a great interview with Paul Krugman by Bill Moyers from a couple days ago (see below). Last summer I read Krugman’s book they mention, End This Depression Now, so this is all pretty familiar to me, but I still can’t help but feel furious that Republicans, and some centrist Democrats, are so intent on focusing on the issue of government debt while the suffering of actual human beings is given second tier status (and often negative status).
Point #2: College graduates are likely to be permanently impacted by their lack of job experience. This recession/depression means people who can’t get jobs now are going to earn less and have more difficulty getting good jobs even when the economy returns to full employment. (The Economic Policy Institute has a good report on this).
Via Democracy Now, I came across a truly horrid finding by a British organization, Institution of Mechanical Engineers. In a new report, they find that half, yes half, of the world’s food may not actually be consumed. This is truly unbelievable that the problem in the US is we have too many overweight kids, while people throughout the world (and for that matter in some poor parts of the US) people are malnourished. According to UNICEF(see the bottom right bullet of page 1), malnutrition contributes to the deaths of 2.6 million children under 5 every year. Somehow this is all tolerable.
Peter Singer, the famous ethics philosopher, has a very good project underway, based on his book The Life You Can Save to encourage people to give part of their incomes to organizations working to end extreme poverty. One reason I trust that it is a good project is that I emailed them once asking why the UN World Food Programme was not on their list of good organizations to give to. I received a reply (not sure if it was actually from Peter Singer) stating that they think the World Food Programme doesn’t actually help build infrastructure to help poor people be self-sustaining, but instead gives food as emergency aid, acting as more of a band-aid. Below is the table showing how much they recommend people to give based on their income. Their site also has a list of organizations they suggest give to.
(or, if you are not currently receiving an income, what you spend each year)
Less than 105 000 USD
At least 1% of your income, getting closer to 5% as your income approaches 105 000 USD
105 001 USD – 148 000 USD
148 001 USD – 383 000 USD
5% of the first 148 000 USD and 10% of the remainder
383 001 USD – 600 000 USD
5% of the first 148 000 USD, 10% of the next 235 000 USD and 15% of the remainder
600 001 USD – 1 900 000 USD
5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD and 20% of the remainder
1 900 001 USD – 10 700 000 USD
5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD, 20% of the next 1 300 000 USD and 25% of the remainder
Over 10 700 000 USD
5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD, 20% of the next 1 300 000 USD, 25% of the next 8 800 000 USD and 33.33% of the remainder
A December Forbes magazine piece states, “If the United States no longer needs access to Middle East oil under any foreseeable circumstances, then the priority Washington assigns to the region will plummet. “ Really? Looking at some basic stats seems to show a different picture. US consumption of Middle East oil is not the issue, but rather control over the world’s largest oil reserves, with the Middle East holding a majority of the world’s oil. Does anyone really think the US will let China, Russia or Europe have control over the the majority of the world’s oil?
A think tank in the UK has pointed out (as the IMF did in less vocal tones about Europe as a whole) that focusing on reducing government deficits is actually leading to greater debt. The UK has taken an approach of tax increases and spending cuts to keep debt from going too high. But the reduction in consumer spending from taxes and reduction in government spending has slowed economic growth, meaning that there is a smaller tax base from which to generate revenue. The typical Keynesian picture seems vindicated: the government should spend in hard times, and save in good times. Important to keep in mind here in the US when conservatives (and many Democrats too for that matter) talk about cutting government spending. Granted Republicans won’t raise taxes, but as I have repeated over and over on this blog, they aren’t serious about cutting deficits either. But for the sake of argument, let’s assume they did cut spending significantly. Especially if the economy is in its current state, then that would slow down growth, decreasing the tax base…you get the idea.
I feel like I never stop learning from Paul Krugman. His latest blog post discusses the fact that the “fiscal cliff” of automatic spending cuts and tax hikes should be welcome to conservatives if they are consistent. After all, they will significantly reduce the government deficit and all we hear from Romney/Ryan is how debt is such a big problem. Krugman makes another important observation: Republican agreement that the fiscal cliff will hurt the economy is actually agreement with the Keynesian view, i.e. reduced gov’t spending and increased taxes reduces aggregate demand. Why won’t Republicans go along with this deficit reduction? First, because it doesn’t reduce the deficit in a way that gives the lion’s share of the benefit to the super-rich. Second, and this is me not Krugman talking (although I imagine he’d agree), conservatives don’t actually care about the deficit, as deficits have increased under Republican presidents during the last 30 years. If you can cut taxes for the rich and cut spending on everyone else, who cares about the deficit?
Paul Krugman often states his opinion that consumer demand, held back by large debt, is what is keeping the US economy from recovering fully and that government stimulus is in order. I am frankly not the best at economic statistics, but I did a little research that seems to support this. First, total household debt payments took a nosedive starting in 2009. This can mean two things: 1) people have less debt to pay off or 2) people do not have enough income to pay off their debts.
It is evident that there is less debt in the economy, but that is because the willingness to lend and ability to pay have created a credit crunch since the 2009 recession began. So gross household debt declined…
but real disposable income per capita is still struggling to maintain pre-2008 levels and is below what it would have been if growth had remained constant (to be honest, I don’t understand the short term 2008 spike):
There is a definite trend for periods of higher incomes to lead to higher debt payments (and the reverse as well.) So if household debt is holding back consumer demand, then government stimulus could help people dig their way out of debt. And just in case you think that excessive government is the problem, the growth rate of government expenditures is about what it was pre-2008 and is actually levelling off (Blue is government spending, Red is taxes collected).