The budget battles

[Winstonm]

I read that already, and on teh one hand I do not disagree. I suspected a fall in demand. The difference is whether you thought demand was "on trend" prior to the crisis. Time to pull out a favourite chart:

http://dshort.com/charts/guest/2011/GDP-excluding-debt.gif

you can see that in the the 7-8 years from 2000 to 2008 the US ran a budget deficit of about 3% GDP, all of which is in essence borrowed prosperity from the future. This means that compounding it, the GDP as measured, and the GDP excluding "borrowed prosperity" included, must have differed by about 10% come the crisis. Ideally One would like to repeat this analysis with consumer debt figures. Whenever you choose to balance the budget, that is the level of "demand correction" that one is probably expecting.

 

Data on consumer debt is found here

 

the key data for me is

 

 

Even more than government debt, consumer debt is borrowing against future proseperity. People have started to try to control this, and the loss in consumer demand is a lot. That number represents some 15% of US GDP, and while I have no data on what it was, I suspect it was mostly racked up recently (i.e in the last decade). All this is demand that is lost and most importantly it is not coming back. Krugman is suggesting propping up demand at a level that I do not beleive it will ever be returned to. The output gap here has become structural, rather than cyclical, and thus Government spending can at most soften the blow, and at worst saves up a worse problem for a rainy day. Moreover, since trend GDP will be structurally lower, so will trend government revenue, and that makes the deficit projections even worse.

 

Phil,

 

What these charts really do is to show magnificentally the affect of the wage-productivity gap on debt and GDP.

 

Healthy economies have a steady (over time) relationship between wages and productivity. As productivity increases, wages rise. This keeps demand up.

 

Beginning with the 1980s, U.S. wages began to lag productivity. To keep up demand, debt was used to plug the gap. Eventually, a debt peak was reached and then the collapse occured.

 

The long range solution is to increase wages and reduce debt. However, in the short range, it may be necessary to increase government stimulus (debt) in order to break out of the negative feedback loop we are in.

[phil_20686]

Phil,

 

What these charts really do is to show magnificentally the affect of the wage-productivity gap on debt and GDP.

 

Healthy economies have a steady (over time) relationship between wages and productivity. As productivity increases, wages rise. This keeps demand up.

 

Beginning with the 1980s, U.S. wages began to lag productivity. To keep up demand, debt was used to plug the gap. Eventually, a debt peak was reached and then the collapse occured.

 

The long range solution is to increase wages and reduce debt. However, in the short range, it may be necessary to increase government stimulus (debt) in order to break out of the negative feedback loop we are in.

 

In the US your demand is already higher than your wages. Hence private debt. Also, a lot of your demand is satisfied by imports rather than domestic production, so even stimulating demand might do more for China than the US (an exaggeration). Finally, there are plenty of countries that run high productivity low consumption models, like Germany.

 

Secondly, it is not at all clear that US wages have lagged productivity. One classic error is too look at wages while forgetting about the ever increasing share paid by companies in pension and medical insurance. According to Feldstein, wages now make up only 80% of total compensation down from 90% in 1970. Felstein thinks that productivity and wages have a correlation "not significantly different from one" since 1970. A summary of his analysis is here.

 

Government spending is only the correct medicine to prop up demand to its trend line. A good idea in short sharp recessions. However, if the new level of structural demand is less than pre-crisis levels, you cannot avoid a contraction in demand in the medium term, and putting it off does not gain anything as it is impossible ever to wean the economy of deficit spending without eventually suffering the contraction in demand.

[Winstonm]

Secondly, it is not at all clear that US wages have lagged productivity. One classic error is too look at wages while forgetting about the ever increasing share paid by companies in pension and medical insurance.

 

Phil,

 

This sounds to me very much like the same type of justification for an ideological belief that

I hear from varied apologists when I point out a paradox of the religion. Are you certain you are searching for accuracy in your position and not allowing confirmation bias to cause you to search out sources that support your beliefs?

 

http://www.bls.gov/opub/ted/images/2011/ted_20110224.png

 

It seems other sources do not agree that wage-productivity gap has not changed. From the U.S. Bureau of Labor Statistics:

 

Growth of productivity and real hourly compensation in the nonfarm business sector (which accounts for three-fourths of output and employment in the total U.S. economy) was robust until 1973, at which time growth slowed in both measures. During the 1947–73 period, the annual change in productivity averaged 2.8 percent, while real hourly compensation growth averaged 2.6 percent. Over the 1973–79 period, the averages were 1.1 and 0.9 percent, respectively.

 

Real hourly compensation growth failed to keep pace with accelerating productivity growth over the past three decades, and the gap between productivity growth and compensation growth widened

[Winstonm]

BTW

 

Romer said, “The basic idea that if you increase government spending or you cut people’s taxes that stimulates the economy and lowers the unemployment rate, is a very widely accepted idea. It’s in every economics textbook, that’s what we teach our undergraduates, and I certainly try to teach them the truth.

 

“It is a very known and accepted idea and fact and the empirical evidence is definitely there, and people just want to say the sky is green.”

 

Just to make sure we are being "fair and balanced", I thought it a good idea to post the whole of Romer's comments. From the Bill Maher t.v. show:

 

Maher asked Romer, "How uncontroversial is Keynesian economics?"

 

Romer said, "The basic idea that if you increase government spending or you cut people's taxes that stimulates the economy and lowers the unemployment rate, is a very widely accepted idea. It's in every economics textbook, that's what we teach our undergraduates, and I certainly try to teach them the truth.

 

"It is a very known and accepted idea and fact and the empirical evidence is definitely there, and people just want to say the sky is green."

 

 

Obviously, what she meant that is taught in every economics textbook is Keynesian economics, and it is the people who try to oppose Keynesianism who "say the sky is green."

 

Furthermore, Keynes was not talking about income taxes but specifically payroll taxes, which he thought should be lowered in a downturn:

 

…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased

expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfull in bad times.

(July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

[phil_20686]

Phil,

 

This sounds to me very much like the same type of justification for an ideological belief that

I hear from varied apologists when I point out a paradox of the religion. Are you certain you are searching for accuracy in your position and not allowing confirmation bias to cause you to search out sources that support your beliefs?

 

 

Did you read Feldstein's note that I linked to? It is precisely these statistics that he disagrees with. Also, it is not clear what is included in "real hourly compensation" without a key-please provide a link. I have tracked down the link, as pointed "real compensation" seems to just be inflation adjusted compensation. Different people use the term to mean different things. Some people seem to include all benefits, some people want to include taxes whose incidence falls on employees, like the payroll tax, even if it is supposedly paid for by the companies. (The rational being that government provides benefits to workers so extra tax paid by the companies is a part of a workers total compensation). Some seem to think the BLS hourly wage data is restricted to those occupations paid by the hour. It definitely includes medical benefits, but not necessarily pension benefits. None of my usual sources seem very sure on this point.

 

However, some general criticisms of your link might go like this

 

(1) It is not clear in isolated cases that productivity should lead to a wage increase. The classic example is farms, where increased profits have put farms under increasing pressure due to falling prices, i.e. you now need a bigger farm to support a living wage than you did previously.

(2) On a national scale, the argument goes, that productivity should be linked globably to wage increases as increased productivity leads to a fall in prices. I.e. an increase in the purchasing power of a wage.

(3) As the world becomes more globalised what you consider as "global" and "local" can change.

 

However, I don't beleive that has much to do with the graph. For one thing, the gap, such as it is, up to 2000 has been entirely driven by differences between the retail price index and the consumer price index. If inflation rises faster for consumers it appears as a productivity gap. This explains all of the `gap' up to 2000, whereas prior to 1970 these tracked each other. Following that there has been a decline in "labour share", i.e. the cost of labour as a % of total costs. Productivity does not have to go into wages, if there is competition for resources then it can go into the hands of commoditites companies. If there is competition for capital it will go to bankers via higher interest rates. This appears to be what has happened. The commodities boom has been very expensive for the manufacturing sector, most of the productivity has gone into buying the raw materials it needs at ever higher prices. When commodities fall and labor share increases, you can expect a sharp rise in wages. This is a usual economic phenomenon, where whoever holds the rarest resource gets the profits. Materiel share is up 7% since 2000, which has nearly all come out of labour share, with a small increase in capital share (interest on debt that kind of thing).

 

All of this is clearly stated in the BLS report that this graph came from. You can find it here. Key exhibits are figures 6, 9 and 11.

 

In summary:

(1)there was no productivity gap prior to 2000.

(2) Since 2000 the gap is virtually entirely due to rising commodity prices. It is probably temporary as prices fall will probably fall.

(3) There is no conspiracy[\b] to defraud the average worker and enrich the rich. Just Economics as normal.

 

In short what we have is another example of the fact that apparently simple statistics can be very misleading in something as complicated as economics.

[PassedOut]

In short what we have is another example of the fact that apparently simple statistics can be very misleading in something as complicated as economics.

I think that this complexity creates both frustration and fascination. Economic forecasts are like weather forecasts and -- in business anyway -- we look at them that way. A cold front might be on the way, but no one can promise an exact temperature for your city. Summer will be warmer than winter, but no one can promise how much.

[blackshoe]

Economics as normal is a conspiracy to defraud the average worker and enrich the rich.

[hrothgar]

Economics as normal is a conspiracy to defraud the average worker and enrich the rich.

 

Back when I taught college econ, defrauding "the average worker" was covered in week eight of the syllabus.

And, of course, we were trying to enrich the Jews (however, we didn't let the rubes in on that)

 

Seriously, Ed... You're starting to wander well off into cloud cuckoo land.

 

FWIW, I think that its worthwhile distinquishing between "Economics" as a formal discipline and whatever it is that you've been reading.

 

The concept of profit maximization is almost axiomatic within economics.

Just about everyone is assumed to be trying to screw over someone else.

I'd argue that this is just an axiom within economics, but a pretty fair reflection of reality.

 

I certainly agree that the concentration of power in the hands of the rich is a major cause form concern.

 

I'm part of the East Coast liberal establishment.

I believe that a strong central government is both necessary and desirable.

 

And, while I admit to the concept of regulatory capture.

I also recognize that life isn't perfect and the pendulum is going to swing back and forth.

[luke warm]

I certainly agree that the concentration of power in the hands of the rich is a major cause form concern.

 

I'm part of the East Coast liberal establishment. I believe that a strong central government is both necessary and desirable.

do you not see a dichotomy between those two statements? it seems to me that the stronger the central gov't is, the more the concentration of power will flow toward the rich

[phil_20686]

do you not see a dichotomy between those two statements? it seems to me that the stronger the central gov't is, the more the concentration of power will flow toward the rich

 

No, because you do not have to vote for rich people.

[helene_t]

No, because you do not have to vote for rich people.

True, but you have to be rich to buy the advertisement time to make people vote for you :)

[luke warm]

No, because you do not have to vote for rich people.

do you really believe that?

[PassedOut]

it seems to me that the stronger the central gov't is, the more the concentration of power will flow toward the rich

It would help to understand your position if you'd elaborate on your reasoning some. If you are saying that a strong central government will always act to destroy labor unions, for example, I don't see why that must always be the case. Nor do I see that Teddy Roosevelt's "trust busting" moves would have been more successful with a weaker federal government.

[blackshoe]

Whether you vote for rich people or not, with a strong central government, the rich will always be "the rich and powerful".

 

Unions serve a useful purpose, but like all such things, they accumulate power, and then they become corrupt. Not in the sense of "these are bad people", but in the sense that they use their accumulated power to accumulate more power, and for purposes far beyond collective bargaining.

 

The NLRB is going after Boeing. Why? Because, according to the NLRB, although Boeing already has two (union) F-35 plants in Washington state, they built a third non-union one in South Carolina specifically as an act of illegal "union busting". There's your 'strong central government' at work. :rolleyes:

[mike777]

Keep in mind in many ways we dont have a "strong" central government compared to many other countries.

 

We have checks and balances with 3 equal branches of a central government and we have 50 states that act as a check and balance against the central govt. We have a quasi/ind Federal Reserve System.

 

On top of that the "out of power" party can still act as a check and balance.

 

Remember how hard it is to pass anything even when one party controls the govt.

---

 

 

Many say it results in a disfunctional govt unable to get "big" things done.

 

--

 

 

I just think that is how we are built, to do things in an incremental/compromise manner.

[awm]

do you not see a dichotomy between those two statements? it seems to me that the stronger the central gov't is, the more the concentration of power will flow toward the rich

 

This seems backwards to me. Back in the 1920s the US had a much weaker central government. Power and wealth were incredibly concentrated in the hands of a few. Today, the US has a stronger central government than it once did, but still quite a bit weaker than the socialist regimes of Europe. Again, power and wealth are much more concentrated here in the US than in Europe.

 

When someone accumulates huge amounts of wealth, what is to stop that person from doing whatever they like, basically screwing over other people with impunity? The only way for "regular people" to stand up to this sort of power is to band together.. and that's precisely what government (and, for that matter, unions) are: a forum for large numbers of "regular people" to enforce their rights when a wealthy and powerful few would prefer to screw them over.

 

Of course there are cases where the government can be corrupted, basically "captured" by corporations or groups with disproportionate wealth or time or motivation. However, all that does is get government "out of the way" so those same groups can screw people over just the way they would without government. Better to reduce the corruption through a combination of more oversight/transparency and legal remedies for the worst abuses than to just give up and let the few have their way at the expense of the many.

[mike777]

Side note but I was really disgusted by the cowardice shown in the rep debate on the question of ten to one budget cuts and they all said Hell no!

 

I understand they are all running to the right in the primary and running to the center in the general election but the pandering went too far for me.

[hrothgar]

The NLRB is going after Boeing. Why? Because, according to the NLRB, although Boeing already has two (union) F-35 plants in Washington state, they built a third non-union one in South Carolina specifically as an act of illegal "union busting". There's your 'strong central government' at work. :rolleyes:

 

NPR's On Point had a decent enough program on this yesterday

http://onpoint.wbur.org/2011/08/18/nlrb

 

The reason that the NLRB is taking action against Boeing is that Boeing's own management was stupid enough to go on the record and make statements like the following

 

But again, the overriding factor was not the business climate and it was not the wages we're paying people today. It was that we can't afford to have a work stoppage every three years. We can't afford to continue the rate of escalation of wages as we have in the past. You know, those are the overriding factors. And my bias was to stay here but we could not get those two issues done despite the best efforts of the Union and the best efforts of the company.

 

Like it or not, it is illegal to retaliate against workers for striking and there is strong evidence suggesting that this is what Boeing is doing

[luke warm]

It would help to understand your position if you'd elaborate on your reasoning some.

i'm saying that, with few exceptions, only those with some amount of wealth can afford to run for office (where, once in, they become even more wealthy)... that means power rests, for the most part, in the hands of those who can afford to wield it... i don't see how a more centralized gov't would result in less power flowing to the rich

[Winstonm]

Side note but I was really disgusted by the cowardice shown in the rep debate on the question of ten to one budget cuts and they all said Hell no!

 

I understand they are all running to the right in the primary and running to the center in the general election but the pandering went too far for me.

 

This isn't simply political posturing, unfortunately. These dogmatists actually believe their own nonsense, and they proved it was more than political posturing during the recent standoff over the debt ceiling.

 

When this group decries taxes, what they mean is "government money". This must be the case as not all taxes are equal. Regressive taxes like the FICA take the most money out of the hands of those who consume 98-100% of their wages, and the money is supposed to be returned in later life. Capital gains taxes, on the other hand, tend to affect those whose consumption is unaffected by increased taxes, and that money goes into the general budget. FICA and general budgetetary are not supposed to be comingled funds.

 

Lower taxes (or higher for that matter) by themselves is not the answer - it just happens to be the current "evil" that can be sold to the masses with minimal effort.

[hrothgar]

i'm saying that, with few exceptions, only those with some amount of wealth can afford to run for office (where, once in, they become even more wealthy)... that means power rests, for the most part, in the hands of those who can afford to wield it... i don't see how a more centralized gov't would result in less power flowing to the rich

 

This completely ignores the role of those damn government bureaucrats who are rarely drawn from the ranks of the idle rich...

 

(And also explains why said bureaucrats get demonized so much)

[Winstonm]

Thus, I do not think one can really do economics without some idealology.

 

Phil,

 

This IMO is the problem with economics and the reason so many economists were denying the U.S. would go into recession even after the U.S. had already entered a recession.

 

IMO the most effective means to determine reality is to analyze data and form an opinion based on that data - ideologists, however, tend to look at the same data and try to pick out pieces that justify their models while downplaying or discrediting data that does not fit.

 

If the data does not fit the ideological model, shouldn't the model be questioned first?

[luke warm]

This completely ignores the role of those damn government bureaucrats who are rarely drawn from the ranks of the idle rich...

 

(And also explains why said bureaucrats get demonized so much)

i suppose one could make the argument that it's actually the bureaucrats who are "in power"... it wasn't the one i was making

[kenberg]

Real world data, it seems to me, has to be selected and has to be interpreted.

 

Example:

I was speaking with someone who reads job applications and interviews prospective employees. Apparently the number of applications from people who clearly lack the skills for the job has grown considerably. Why?

 

Explanation 1: People are really desperate for jobs and will apply anywhere.

 

Explanation 2: To keep receiving unemployment benefits you must apply for a job. You can see where applying for a job that you know that you will not get might be just what is needed.

 

Quite possibly one could test these matters to see what is going on. For example, if it turns out that many people find their next job just around the time that unemployment benefits run out, that could plausibly regarded as evidence that their intention was to get their new job offer later rather than sooner. Plausible, but not conclusive.

 

 

Data speaks, but like oracles from Delphi, not always clearly.

[hrothgar]

i suppose one could make the argument that it's actually the bureaucrats who are "in power"... it wasn't the one i was making

 

I know what point you were making

I was pointing out why you are wrong

 

It's probably worth noting that civil service reform was one of the most significant reforms enacted during the original progressive era.