December 07, 2003

The Jobless Recovery Continues

The Economist's take on the latest labor market news:

Economist.com | America's labour market: ...On Friday December 5th, the Bureau of Labour Statistics announced that another 57,000 Americans were added to the (non-farm) payrolls in November.... [T]he labour market is still far from strong.... With output roaring away, analysts had expected hiring to move up a gear, adding 150,000 to 200,000 people to the payrolls. Instead, the labour market remains in neutral. There may be a few more jobs than a month ago, but there are also more people to find jobs for. About 140,000 people enter the labour force on average every month.... Output often recovers before employment, because firms hesitate to add to workforces they have just finished cutting. But in most recoveries, this hesitation lasts only about three months. This time round... it lasted a year and a half.... [P]ayroll employment is still 700,000 lower than it was when the recession ended in November 2001....

It may be little consolation to Mr Bush junior, but strong growth coupled with tepid hiring is doing marvellous things to the productivity numbers.... The problem with creative destruction is that the destruction seems to arrive long before the creation.

A puzzle for economists, jobless recoveries are also a conundrum for psephologists, who study presidential elections. We know it's the economy, stupid, but is it growth or jobs that have most bearing on the way people vote?.... Professor Michael Lewis-Beck of the University of Iowa and Charles Tien of Hunter College think unemployment is a more decisive factor. In every election since the second world war, falling unemployment in the spring of election year has foretold victory for the party in charge of the White House...

Posted by DeLong at December 7, 2003 08:21 AM | TrackBack

Comments

When I have simply followed DeLong's rule on economic and productivity growth, I have been completely right in projecting monthly job loss or creation. GDP grew at about 8%, while productivity grew at about 9% in the lasy quarter. So, do not expect enough job creation to keep up with population based hopeful labor force growth. We need to create about 150,000 jobs a month to keep up with population growth.

Well, GDP growth has not been high enough relative to productivity growth to spur demand for singificant numbers of workers. We need high GDP growth quarter after quater given the fine productivity growth to spur demand enough to create job opportunities.

The Administration has simply wasted a monster amount of fiscal stimulus by not focusing the stimulus in ways that would most spur demand and create jobs.

Posted by: anne on December 7, 2003 08:43 AM

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"Falling unemployment in the spring before an election..." ?

Methinks I smell data mining.

Posted by: David Lloyd-Jones on December 7, 2003 10:29 AM

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The strong productivity numbers coming out of the US are very impressive (9% !) indeed and can explain, in part, the slow employment growth in the US. However, I am still wondering why we are not seeing such figures in other industrialized countries. The productivity growth in the US is mainly attributed to the huge investments in IT. Nevertheless, countries with similar economies (like Canada) and countries which have invested even more in IT and are even more "wired" (like Finland and Sweden) have far less impressive productivity numbers than the US. How can these huge differences in productivity growth be explained ? Is retail productivity the answer (according to Mr Gordon) or is it the differences in measurement (according to Mr Jorgensen) ?

Posted by: Nescio on December 7, 2003 10:29 AM

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Regarding the claim that the Bush stimulus package was not as stimulative as it could have been, I reiterate my challenge to anyone to run it and the Democrats' stimulus packages through reputable econometric models and find a difference in the unemployment rate outside the models' margins of error. The only fiscal stimulus which could have returned the economy to full employment is a much, much larger one. The inegalitarian nature of the tax cuts is an issue separate from the effectiveness of the fiscal stimulus.

The way I see it, defenders of the welfare state are angry about the Bush tax cut because it forces a deficit-reduction debate to occur when (and if) the economy returns to full employment. The Democrats' stimulus packages included automatic tax increases which would short-circuit that debate. With no deficit (or a small deficit), the electorate would not have the opportunity to pressure Congress to respond to the deficit problem with the "wrong" solution. The "wrong" solution being spending cuts.

I think most Keynesians would agree that temporary tax cuts are less stimulative than permanent ones. In my humble opinion, Prof. DeLong supported temporary tax cuts because losing that extra stimulus was a price he was willing to pay to short-circuit the deficit-reduction debate we will probably have in 2004 or 2005.

Posted by: Ann Nonymus on December 7, 2003 10:46 AM

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"I am still wondering why we are not seeing such figures in other industrialized countries."

So am I. Could it be in part that many workers are putting in longer hours than recorded and working more fearfully hard than in other countries? Usually, I think no. Then I wonder.

Compare the actual hours worked in America, and find that we put in more time to begin with. How much time do French or German lawyers spend in the office each week? Swedish doctors or investment bankers? Can you imagine a German sales worker being subjected to the pressures of an American Wal-Mart or Sears sales worker?

Posted by: anne on December 7, 2003 10:56 AM

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Can anybody here spell "pitiful helpless giant"?

Just pointing out the obvious.

-dlj.

Posted by: David Lloyd-Jones on December 7, 2003 11:00 AM

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Please comment further. What is this productivity surge about?

Posted by: anne on December 7, 2003 11:02 AM

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What do people including Prof DeLong think of Stephen Roach's analysis of 'global labor arbitrage'? He posted a paper on this
at http://www.morganstanley.com/GEFdata/digests/20031006-mon.html#anchor0
which includes a table of Outsourcing vs. Headcount Reductions: The Case of India. Actual figures for actual companies, quite dismal for American workers. I'm in the high tech field and looking for ways out, because on the ground, from what I see, the field is collapsing. My last boss prided himself on payscales a few dollars more an hour than payscales in India (and I was terminated for demanding better compensation). Economists (including Roach) talk about how protectionism is bad... but if the cure (free-markets) is as bad as the disease (protectionism), why will the voters want to stick with the program? Clearly people have supported Bush, which means voters are stupid, but at some point they will get angry, desperate, resentful.

That beggars the deeper question... What exactly prevents the current economic trends from becoming a race to the bottom? What I read from economists seems, from this outsiders view, to be, well, faith-based. "Something will happen, we are so creative, new fields will open up." This is hope, not analysis. Are we going to be a nation of nurses, tending an ever increasing population of unproductive elderly? If not that, what? Can anyone exprapolate from current trends? I don't want to hear faith-based assertions, as I am really trying to get an accurate picture of the situation. The high tech boom of the 90's was in the making for many years. What's on the horizon now? Biotech? That is a small sector, employment wise, and I don't think anyone can argue it will become a large one.

Please share your serious insights with me.
thanks.
Camille Roy

Posted by: camille roy on December 7, 2003 12:06 PM

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Ann Nonymous:

The flaw I see in your taunt is that there should not be a deficit debate in the first place. We should not have a deficit; possibly a smallish one that nothing that points to the future problems created by Bushy. Bush's masters are manufacturing the debate. Stockman tipped us off in the Reagan administration. The Let-Them-Eat-Cake brigade of the Republican Right has systematically set out to manufacture fiscal crisis in order to do away with social programs. Krugman has no great insight on this. Stockman spelled it out for everyone twenty years ago. It's an extension of the we'll spend the Soviets into submission mentality applied to their fellow citizens. Now, before you spout off one mealy mouthed word about Bushy, do one thing first: Defend, with the historical rhetoric and stated philosphy of the Republican Party's get government off of our backs and especially out of our wallets, Tom Delay's $1 million subsidy to a company that is packed into the budget to teach golf to suburban Dallas younsters. Now, defend it without contradicting Delay's craven opposition to Midnight Basketball for inner city youths as a waste of tax payer money. Don't forget to spell hypocrites with a capital H.

Posted by: cal on December 7, 2003 12:09 PM

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"... but is it growth or jobs that have most bearing on the way people vote?..."

Which people?

It is the aggregate voting that determines who gets elected. Therefore it is growth, rather than jobs, that determine who gets elected. After all, the unemployed is a small fraction of the voter body and even they, the unemployed themselves, develop higher hopes if they see economy is growing.

The capitalists / Republicans are pretty aware of all that. They know their business.

I understand from Yahoo news that Dubya would even consider to "put a man on the moon" again, if it would help him stay in Office and further guarantee keeping privileges (spell?) of capitalists for another decade or two. I don't think he'll go for it (Apollo missions costed USD 150 billion in 2003 dollars, I understand), but he is considering even THAT!

And I'm afraid the Democrats are just sitting on their hands so far -- they are not even producing IDEAS about how to win the election in 2004, let alone making plans.

And that's because they have not yet understood what's at stake:

When is the world going to start a new Revolution equivalent to Industrial Revolution and 1789 and 1917 and the American Independence War and American Civil War? A new Revolution to further reduce privileges (spell?) and expand "equal rights for all"?

Reducing privileges ( I give up spell thing) and expanding equal rights for all is what left wing politics is all about.

And you just can't do it without radical improvement in productivity.

And once you have enough accumulation of productivity increase, then nothing can prevent the Revolution and subsequent change in structure of political economy - not for long, any way.

Hey, I am not expecting 17th, 18th Century kind of revolutions and wars again. But I'm afraid there IS going to be some violence, somewhere, sometime -- in fact, THERE IS already violence, being comitted for no reason other than keeping capitalist privileges for another decade or two... all for keeping budget deficit with defense spending rather than social expenditures and borrowing rather than taxation.

As long as people don't wake up to that game, they'll get away with it too.


Posted by: Bulent Sayin on December 7, 2003 12:11 PM

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Looks like cartoonist Mark Fiore did the right analysis on this several months ago:

http://www.markfiore.com/animation/jobless.html

Posted by: Mats on December 7, 2003 12:31 PM

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I think Camille has pointed to the core problem here. I'm not an economist (as will be obvious). But it seems to me that shipping what I'll call mid-process jobs overseas is fundamentally, deeply, different than making something outside the country and shipping it in.

The latter case is our traditional thinking about imports, in which people make stuff somewhere and bring it over the border at some point. There's a definable process that begins and ends, and we can compare discrete labor markets and infrastructure and other things, and, importantly, there is a transaction at the border that the state and its statisticians know how to deal with.

But the former case is, unless I've lost track of something, a brand new thing in this world. Keyboarding, programming, call centers, all part of the actual flow of processes required to do something billable here in the US, are done in other labor markets without there being any distinct point at which something is imported or any transactional event that can be aggregated or even effectively tracked-- if that's wrong, please enlighten me. (I don't believe this is the same thing as setting up capital equipment overseas at all, the usual thing people mean by "exporting jobs.")

This nature of this new thing is why I have asked, certainly naively, about whether the productivity numbers (and GDP growth numbers, come to that) are actually happening in the real world with real people here in the US. While a good deal of it could be from the kind of thing Camille and others have mentioned-- lower pay and benefits, longer hours, more fear as a management tool-- it seems to me that part of it must be an artifact of what we can measure and what we can't in the process of creating billings.

I do somewhat share Camille's long-term pessimism about whether we can actually produce new wealth here. One naive way to read the trade deficits of the last 30+ years, together with rising fiscal and personal debt over the same period, is that since about 1973 we've basically been living off the capital and wealth we accumulated earlier.

Whether there will be political ramifications, who can say? It all depends whether the winners can convince the losers that it's all the responsibility of individuals rather than a system of political economy.

Posted by: Altoid on December 7, 2003 12:47 PM

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http://www.nytimes.com/2003/12/07/international/asia/07CHIN.html

Ruse in Toyland: Chinese Workers' Hidden Woe
By JOSEPH KAHN

SHENZHEN, China — Workers at Kin Ki Industrial, a leading Chinese toy maker, make a decent salary, rarely work nights or weekends and often "hang out along the street, play Ping-Pong and watch TV."

They all have work contracts, pensions and medical benefits. The factory canteen offers tasty food. The dormitories are comfortable.

These are the official working conditions at Kin Ki as they are described on paper — crib sheets — handed to workers just before inspections.

Those occur when big American clients, like the Ohio company that uses Kin Ki to produce the iconic toy Etch A Sketch, visit to make sure that the factory has good labor standards.

Real-world Kin Ki employees, mostly teenage migrants from internal provinces, say they work many more hours and earn about 40 percent less than the company claims. They sleep head-to-toe in tiny rooms. They staged two strikes recently demanding they get paid closer to the legal minimum wage.

Most do not have pensions, medical insurance or work contracts. The company's crib sheet recommends if inspectors press to see such documents, workers should "intentionally waste time and then say they can't find them," according to company memos provided to The New York Times by employees.

After first saying that Kin Ki strictly abides by all Chinese labor laws, Johnson Tao, a senior executive with the privately owned company, acknowledged that Kin Ki's wages and benefits fell short of legal levels and vowed to address the issue soon.

He said that the memos might have reflected attempts by factory managers to deceive inspectors, but that such behavior "did not have the support of senior management." ...

Posted by: anne on December 7, 2003 01:18 PM

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China and India have been far tougher in bargaining for foreign investment than other developing countries. They have asked for technology transfer to go with investment, so there are top notch jobs opening in China and India as investment and trade expand as they gain technology and educate a top notch labor force component.

Rapid development of poorer countries is wondeful, but production transfered to China and India and Vietnam, and competition from these economies means we must assist workers who are trade displaced in America in finding other jobs and we must insure there is enough demand to generate more jobs in the American economy as a whole.

Posted by: anne on December 7, 2003 01:28 PM

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China and India have been far tougher in bargaining for foreign investment than other developing countries. They have asked for technology transfer to go with investment, so there are top notch jobs opening in China and India as investment and trade expand as they gain technology and educate a top notch labor force component.

Rapid development of poorer countries is wondeful, but production transfered to China and India and Vietnam, and competition from these economies means we must assist workers who are trade displaced in America in finding other jobs and we must insure there is enough demand to generate more jobs in the American economy as a whole.

Posted by: anne on December 7, 2003 01:32 PM

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There is no theoretical reason to worry about our gains from freer trade and ability to create enough rewarding jobs, but there is real reason to worry. America's lack of private saving, declining attraction of foreign direct investment, and public deficit may be making it harder to stimulate enough employment. Are we losing competitiveness? Warren Buffett fears so.

Perhaps we are going through a period of creative destruction of manufacturing jobs which will be succeeded by just as rewarding service jobs, but I am doubtful. Not only are too few jobs being created, but workers are finding wages and benefits squeezed. Service jobs being created are not on the whole the equal of manufacturing jobs. Middle class households are squeezed in a way that I fear compares poorly with other countires.

Where is our labor policy?
Are you kidding? There is no labor policy.

Posted by: anne on December 7, 2003 01:48 PM

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If anything, cal, we should have a much larger deficit right now. If a $500 billion deficit can't get people employed again, it should be $800 billion. Maybe even $1 trillion. In a deflationary world economy, too much stimulus is barely enough.

There are two things we can do about structural deficits. First, cut spending. Second, raise taxes. Democrats would like to take the first option off the table. Republicans would like to take the second option off the table. I'm a moderate, and I'd like to do a little of both.

I'm not going to defend Delay, nor am I going to "spout off one mealy mouthed word about Bushy." I didn't even vote for him, so call off the attack dogs.

Posted by: Ann Nonymus on December 7, 2003 02:05 PM

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>>There are two things we can do about structural deficits. First, cut spending. Second, raise taxes. Democrats would like to take the first option off the table. Republicans would like to take the second option off the table>>

The republicans clearly want to take both options off the table. As John McCain said, they're spending like drunken sailors.

Compare spending and fiscal responsibility during the first three years of Clinton to the first three years of Bush.

Posted by: richard on December 7, 2003 02:31 PM

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"Are we losing competitiveness? Warren Buffett fears so."
Speaking of Buffett: He made a highly original proposal how the U.S. might get a grip on the trade deficit - one that is orthogonal to the entrenched confrontation any discussion of trade usually turns into. A proposal that is purely pragmatic and doesn´t require waiting for when the final word is in about whether "the Gordon Tullock move" or "the Cumby-DeLong move" expresses a correct understanding of the economics of trade. I had expected that his "Fortune" article would lead to animated debate. His idea of looking at the trade deficit in the same way as at carbondioxide emissions is a genuinely new concept. Why has it been greeted with silence?

Posted by: Joerg Wenck on December 7, 2003 02:46 PM

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Richard, the fiscal responsibility of the Clinton years was the emergent result of a combination of three things:

1.) A Republican controlled Congress which kept blocking spending proposals.

2.) A debt to GDP ratio which was uncomfortably high.

3.) Clinton's belated commitment to deficit reduction, which may not have happened without 1 and 2.

It's also worth adding that the stock market bubble added to the surplus, though there probably still would have been a smaller one without the bubble.

That said, the feds are, indeed, spending like drunken sailors, and I hope the next election gives executive control to one party and legislative control to the other. That should gridlock government enough to stop the fiscal profligacy.

Posted by: Ann Nonymus on December 7, 2003 03:01 PM

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Ann,

1) Democrats controlled congress for the first two years.

2) It's bad now and getting worse. Deficit/GDP is now the second worst in a long time, and soon to be the worst.

3) Remember republican criticism of clinton for raising taxes to balance the budget?

4) How does a soaring stock market explain minimal increases in spending?

Posted by: richard on December 7, 2003 05:29 PM

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A top tax rate of 39.6% and collecting over 20% of GDP as revenue did wonders for the deficit under Clinton. The thought that a $500 Billion deficit is not enough stimulus is BS. $500 billion could buy over 10 million $50,000 per year jobs if the money was just handed out.

The Bush tax cuts are not a short term stimulus. Even his first tax cut was backloaded and the $300 checks would never have been mailed if not needed to buy Democrat votes. By giving most of the tax break to the wealth, Bush is funding the restructuring of the upper class investments. Much of that restructuring involves relocating US manufacturing overseas.

Meanwhile, the US treasury has had to suck in over $600 billion in bonds issued to cover the new debt which is now at $1.3 trillion and counting. That $600 billion amounts to a direct transfer of tax dollars from the treasury to the wealthy who now have an interest claim on the US government. Also working against the stimulus is spending cuts by states. States are eliminating projects, jobs, freezing salaries, increasing class sizes, etc. The trickly down is not kicking in fast enough to stop the immediate job loss from state cuts.

Ann, you are absolutely wrong. The stimulus amount is enough. How it is directed is completely wrong. Mr. Bush in his crony political payoffs to his political supporters has run up deficits without enacting a competent economic policy that truly stimulates jobs.

State spending on infrastructure, schools, public safety, etc cannot be easily exported. A direct infusion of money to the states to be spent on projects and salaries NOW would do far more to stimulate the economy that cutting Bill Gates taxes 5%. He does not have enough time to spend all the money he makes now. How is giving him more money supposed to stimulate the economy Does he hire an additional financial consultant

Posted by: bakho on December 7, 2003 05:32 PM

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anne quotes the Times: "After first saying that Kin Ki strictly abides by all Chinese labor laws, Johnson Tao, a senior executive with the privately owned company, acknowledged that Kin Ki's wages and benefits fell short of legal levels and vowed to address the issue soon."

It's stuff like this that makes me question the statements that manufacturing jobs have been lost worldwide, including from China. I expect some of the 'lost' manufacturing jobs have actually become 'invisible' manufacturing jobs. The manufacturing still happens, but it's off the books and unregulated.

That'd be a primary strategy, I'd think, for a company under pressure for even cheaper production. The production could move somewhere cheaper, but that might be expensive and disruptive to supply. Better to stay where they are and pay the requisite bribes to make it possible to cut wages and benefits below legal minimums.

Posted by: Jon H on December 7, 2003 05:39 PM

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One important part of the productivity gains not commented on enough is the contribution of the digital technology sector.

Moore's Law and similar effects (as in disk drives, for instance) have created almost unbelievable productivity gains, and as the technology sector has become a larger percentage of GDP its impact on aggregate productivity has increased.

And some of the technology sector benefits from network effects and from almost unlimited scaleability. How many additional copies of Windows XP could Microsoft produce before incurring uneconomical marginal costs? Many more than billions, I think.

DIGITAL IS DEFLATIONARY. And great for productivity to boot.

Posted by: Anarchus on December 7, 2003 05:46 PM

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Ann Nonymus wrote, "There are two things we can do about structural deficits. First, cut spending. Second, raise taxes. Democrats would like to take the first option off the table. Republicans would like to take the second option off the table. I'm a moderate, and I'd like to do a little of both."

OK, so where are you going to cut spending?

Don't forget that Social Security isn't running a deficit--it's running a surplus. (So that the deficits for the rest of the government are far, far worse than they appear). Part of Medicare is also funded with payroll taxes.

So if you look at those parts of the government *not* funded by payroll taxes, it becomes a different situation.

Moreover, I second bakho's comments about the size of the stimulus.

Also, note that much of Bush's tax cuts are backloaded, and the tax cuts for the wealthy are the *most* backloaded. So much of the stimulative impact of Bush's fiscal program will occur after the recession is over.

Posted by: Stephen J Fromm on December 7, 2003 06:41 PM

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Ann Nonymous wrote, "I think most Keynesians would agree that temporary tax cuts are less stimulative than permanent ones."

In an obvious sense, yes, since they run longer. But then such cuts are no longer coupled to the business cycle, and they might provide stimulus when one is no longer needed.

If you mean some kind of rational expectations argument, whereby a temporary tax cut isn't stimulative because the recipients realize that their taxes will rebound later, that's not so clear, especially in the case of the middle class and poor. If that's what you mean, do you have a citation to back up your claim?

Posted by: Stephen J Fromm on December 7, 2003 06:45 PM

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Increase taxes or cut spending. Why not do a little of both. In spite of the GDP increasing every year from 2000 to present, revenues have declined every year since 2000. It is one thing to say that the tax cuts are backloaded. However, it doesn´t hurt to point out that revenue declined by 3.5% between 2000 and 2002, in spite of a GDP increase of about 6% between 2000 and 2002. There is a LOT of tax cutting-revenue loss currently.

Ideologues can be effective if their ideology is the correct solution for the current problem. If the ideology is not the correct solution, then the current problem receives a non-solution. We have a non-solution that is burning a hole in the budget.

Posted by: bakho on December 7, 2003 07:39 PM

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Y'know, cooked books are undoubtedly contributing to the GDP figures and, therefore, the computed growth in productivity. I wonder how much?

Posted by: Randolph Fritz on December 7, 2003 07:52 PM

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Richard,

1.) Clinton's presidency lasted much longer than two years.

2.) I was talking about debt to GDP, not deficit to GDP.

3.) Remember republican criticism of Bush Sr. for raising taxes to reduce the deficit?

4.) I never said the bubble reduced spending. I said it enlarged the surplus. And it did.

Posted by: Ann Nonymus on December 7, 2003 08:54 PM

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"The thought that a $500 Billion deficit is not enough stimulus is BS. $500 billion could buy over 10 million $50,000 per year jobs if the money was just handed out."

The money couldn't just be handed out, it's already committed. Moving that $500 billion from one place to the other just moves the stimulus from one place to the other. In any case, I reiterate for a second time my challenge to you or anyone else to find a reputable econometric model which will show, in an ex-post simulation, an economy significantly closer to full employment with less red ink than we've seen so far. I doubt there will be any takers. I've spent a lot of time crunching the numbers, folks, and it looks . . . difficult.

Posted by: Ann Nonymus on December 7, 2003 08:55 PM

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"OK, so where are you going to cut spending?"

In the short run, I would make the deficit much larger, but I think we're more concerned with the long run structural deficit.

In the long run, I would begin means-testing Social Security and Medicare. This seems less difficult to me than raising the retirement age. It would probably take a major crisis to make it politically possible, but a major crisis looks inevitable. While Social Security could probably be saved by a tax increase, Medicare cannot (unless a miracle occurs). The Medicare time-bomb will detonate unless benefits are cut or something (a miracle) causes medical costs to collapse. It doesn't really matter how good or bad the government's fiscal situation looks when we reach that day. The beneficiaries will simply have too large a claim on output for everyone else to keep their standard of living from crashing.

I'm 24. I don't want to pay for Bill Gates's Social Security or prescription drug benefits. I don't think may other people my age want to, either. When the crisis comes, I think non-rich Baby Boomers will also come to realize that means-testing is in their best interests.

Means-testing would be an egalitarian redistribution of wealth, and some Democrats will probably support it when it becomes clear that there's no other way to save Medicare. But I believe many will bite, scratch, and claw to prevent it from happening. Medicare and Social Security are untouchable right now because benefit cuts would affect most, if not all, recipients, and those recipients will vote as a bloc to halt reform. Means-testing would break that bloc. Then it would become possible to cut benefits, just like means-testing made it possible to cut Medicaid and AFDC benefits.

And, as we all know, the welfare/social insurance state has been under siege worldwide since the 1970s, when both a productivity slowdown and increasing inequality struck the economy at the same time. Propping it up will become much more difficult with means-tested Social Security and Medicare benefits.

It's just too bad that the architects of these programs didn't think to include safeguards against demographic inversions, like a retirement age indexed to the relative sizes of the age cohorts. That's all it would've taken to avoid this mess.

"Moreover, I second bakho's comments about the size of the stimulus."

I reiterate my challenge a third time.

Posted by: Ann Nonymus on December 7, 2003 08:58 PM

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"If you mean some kind of rational expectations argument, whereby a temporary tax cut isn't stimulative because the recipients realize that their taxes will rebound later, that's not so clear, especially in the case of the middle class and poor. If that's what you mean, do you have a citation to back up your claim?"

Hey, I wasn't saying I believed it, but this is what my economics professor told me was Keynesian orthodoxy. If this is incorrect, then I will retract my earlier statement.

Posted by: Ann Nonymus on December 7, 2003 09:02 PM

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"However, it doesn´t hurt to point out that revenue declined by 3.5% between 2000 and 2002, in spite of a GDP increase of about 6% between 2000 and 2002. There is a LOT of tax cutting-revenue loss currently."

Don't forget that the stock bubble produced a capital-gains tax windfall. The bear market ended that.

Posted by: Ann Nonymus on December 7, 2003 09:06 PM

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I read the Steve Roach Morgan Stanley paper cited above on global labor arbitrage. I've survived 3 layoffs in a software company bankrupted when the internet bubble burst and purchased by one of the global corporations mentioned in the report--one that has a very aggressive offshore outsourcing policy. Roach concludes that the knowledge worker jobs we are bleeding will not be replaced without a standing wave of job creation provoked by some as yet undreamed of revolutionary shift in technological innovation and entrepreneurialism. He seemed confident that we'll eventually figure something out. Which is fine for him, because the pain of getting there will probably never impact his bottom line.

I have watched all but one of our IT and other services people leave, replaced by unintelligible Help Desk workers in India who are not allowed to tell us their real names, but are given fake names like Barb Holden and Jerry Smith. We work for the same company--but we cannot know their names. And recently our software engineers were told that a substantial chunk of the work needed for the next release will be done somehow in coordination with a cadre of Indian engineers. Now a year and a half after we were absorbed, excellent engineers who left for better opportunities are out looking for work again. And those of us who remain are working like demons to try to keep our jobs. So what Roach says rings true to me.

But an hour after reading it, the other shoe dropped for me....I realized that not only would existing jobs go away, but new jobs would also be located offshore. I am not an economist, so correct me if this is an inappropriate assumption, but if as he says it is inevitable that companies must shift a large percentage of production and services offshore to remain competitive, what would be the point of starting a business in the US and relying on American workers? How could such a business succeed competing against global giants that have already made the shift offshore? These offshore facilites have now the infrastructure and the technology to provide efficient economical services and they are growing. To be competitive any new businesses would have to use the same low cost resources. So I'm guessing that even if some brave new technology emerges here, it wont be built or serviced by American technologists. What would be the point? Somebody please tell me the outlook is not this bleak....

Posted by: scylla on December 7, 2003 09:12 PM

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Ann Nonymous says, "In the long run, I would begin means-testing Social Security and Medicare. "

There was a political reason these programs were designed to be universal, Ms. N. FDR did that with Social Security quite deliberately, knowing that that was the primary means of making the program politically untouchable. Making the program universal prevents it from becoming a form of welfare that can be systematically underfunded and destroyed.

Many people who are 24, for one reason or another, don't see the importance of Social Security. It's a long way off in their lives. Or perhaps they expect to become so rich they won't need it. Or they believe they could invest it more wisely and do better.

The reality is that for about three quarters of retired people, Social Security is their primary livelihood. All those plans for saving went up in smoke when the wife got breast cancer or when the son wanted to go to an Ivy League School or when a layoff wiped out the savings or when the stock crashed.

When a program is so vital for so many people, wisdom suggests leaving it alone. Social Security has been in existence longer than most blue chip stocks. It works.

Posted by: Charles on December 7, 2003 09:14 PM

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Ann Nonymous, it's too late this evening for me to go through all of your comments and questions, but your 9:06 posting is just too easy.

After i'd heard enough from enough people trying to deny Clinton any credit whatsoever for the turnabout in fiscal status in the '90s, including the line you're pushing here that it was really the bubble and the associated capital gains taxes that did the trick, i bothered to, like, look it up. You're welcome to do the same.

You'll discover that even if we had zero capital gains for FY 2000, the surplus would have been quite healthy. Now, we can argue into the night about how to discount total capital gains for bubble-induced capital gains, but we're certainly not going to end up assuming that the bubble produced all of the capital gains the IRS collected.

So please don't push that line any further, because it stimply doesn't hold up.

Posted by: howard on December 7, 2003 09:14 PM

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There is a fundamental difference between "productivity increase", as in "better, faster, cheaper", on one hand, and on the other hand "increase in productivity statistics", which is arithmetic average and can happen even when GDP goes down if employment goes down even faster at the same time.

When left wing economists simply echo the Administration drums about productivity statistics, they just play into the hand of the Administration.

I have posted about 300 hundred words on this on ArgMax (URL below) but I'm not sure if it would be proper to reprint it here.

http://www.argmax.com/mt_blog/archive/000410.php

Posted by: Bulent Sayin on December 7, 2003 09:26 PM

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Bulent Sayin, thanks for getting toward what I want to know. I read your linked post, and your distinction between real productivity and productivity statistics is worth making.

Let's take this hypothetical situation. Retailer imports merchandise, sells by phone, bills X as result. Retailer downsizes domestic call center by half and opens call center in, say, India, which employs the same number of people downsized at significantly lower wages. If retailer maintains same billing X with same level of imports (so its the fundamental business hasn't changed in any other way), will its smaller US-based payroll, or its smaller overall payroll, or some combination of the two, produce an increase in the productivity statistics?

If it does, recent "productivity increases" are at least partly trash, mere statistical snow or static at best. And dangerous because they mask a very destructive underlying process that produces them.

If the productivity stats would not show an increase in this situation, then we have genius statisticians and we really *can* know what's going on. So which is it?

Posted by: Altoid on December 7, 2003 10:05 PM

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Howard, I never, ever said there wouldn't have been a surplus without the bubble. I said it would have been smaller. You're imagining the "line" I'm "pushing."

Posted by: Ann Nonymus on December 7, 2003 10:06 PM

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Charles, forget about Social Security for a second. It's utterly trivial in comparison to the Medicare time-bomb. Nothing can save unreformed Medicare but a miracle.

These kinds of programs, because of the political untouchability designed into them, always face the possibility of falling over when stressed. Social Security is going to be stressed by a demographic problem, but that may be manageable. Medicare is going to be stressed by that plus changes in medical technology which increase capability and utilization without increasing productivity fast enough to keep the cost of state-of-the-art care from exploding out of control. Medicare benefits will be cut, one way or another, or it will fall over. There is no hope of increasing tax revenue enough to avoid benefit cuts.

Unless, as I said, a miracle occurs. But hope isn't a plan.

Posted by: Ann Nonymus on December 7, 2003 10:27 PM

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Ann Nonymous wrote, "The money couldn't just be handed out, it's already committed. Moving that $500 billion from one place to the other just moves the stimulus from one place to the other. In any case, I reiterate for a second time my challenge to you or anyone else to find a reputable econometric model which will show, in an ex-post simulation, an economy significantly closer to full employment with less red ink than we've seen so far. I doubt there will be any takers. I've spent a lot of time crunching the numbers, folks, and it looks . . . difficult."

It's not difficult. Give aid to state governments. Budget cuts at the state level lead to cuts in state government employment, with what I presume is a very high "elasticity". AFAIK, the states are in a hole to the tune of about $80 billion---about the cost of our little war over in Iraq (for less than one year, IIRC).

Furthermore, you're looking only at the benefit side of the equation. Perhaps it would be difficult to move the economy much closer to full employment than Bush's fiscal stimulus did. But most of the red ink due to Bush's cuts comes in the out years.

Posted by: Stephen J Fromm on December 8, 2003 01:02 AM

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A number of the above posts touch upon a question that has been perplexing me for some time: what is the relationship between the standard argument for "free trade" based on comparative advantage and what Stephen Roach calls "labor arbitrage"? Comparative advantage will raise productivity in both trading economies by concentrating production in those sectors having the highest relative rates of productivity, which, by definition, means those sectors which produce more output with less labor, so that something of what we are now seeing with higher productivity rates and low employment levels could be attributed to the comparative advantage effect of "free trade" policies. But increased productivity does not simply mean lower monetary costs. On the one hand, deploying competitive advantages and pressures to shift the burden of costs, ( in old fashioned language, increasing the degree of exploitation), does not amount to any real increase in productivity, ( but rather, to the contrary, may shift the cost-effectiveness of production to lower capital intensity/ higher labor input production), while, on the other hand, deploying means of production of the same quality in lower wage venues does nothing to increase actual productivity, though it may lessen competitive pressure to raise the level of productivity, but it does increase the downward pressure on wages and thus alters the distribution between returns to capital and returns to labor, which, in turn, effects the level of aggregate demand. When neo-classical economists claim that the unalloyed benefits of "free trade" and productivity gains "must" necessarily lead to a higher standard of living, since, obviously, there is a mathematical identity that "must" be fulfilled, I always want to ask: please, what are the specific routes and pathways by which such gains are distributed and then re-distributed, and, as well, do distributive issues have nothing to do, not just with whether such "growth" is a "good thing", but with whether and to what degree such gains will lead to growth at all?

As to the questions about how productivity statistics are calculated, though I am not an economist, I would guess that if, e.g., a call center is outsourced abroad, the labor involved is subtracted from the total and the overall expense in listed as a cost, such that the boost in overall productivity results only from the absence of such relatively low value-added labor in the calculation. Similarly, though not privy to the secrets of the temple, I would guess that changes in nominal prices for the same real output are also adjusted for in the productivity calculations. I don't think economists and statisticians as a group are stupid, nor dishonest and thus prone to miss the obvious. If they are wrong, a higher-order level of motivation would be required to explain their error, such as, e.g., ignoring the cognitive limitations to which we are all prone. My best guess is that the current productivity paradox is real and needs quite some explaining.

Posted by: john c. halasz on December 8, 2003 01:04 AM

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Ann Nonymous wrote, "In the short run, I would make the deficit much larger, but I think we're more concerned with the long run structural deficit.

"In the long run, I would begin means-testing Social Security and Medicare. This seems less difficult to me than raising the retirement age. It would probably take a major crisis to make it politically possible, but a major crisis looks inevitable. While Social Security could probably be saved by a tax increase, Medicare cannot (unless a miracle occurs). The Medicare time-bomb will detonate unless benefits are cut or something (a miracle) causes medical costs to collapse. It doesn't really matter how good or bad the government's fiscal situation looks when we reach that day. The beneficiaries will simply have too large a claim on output for everyone else to keep their standard of living from crashing.

"I'm 24. I don't want to pay for Bill Gates's Social Security or prescription drug benefits. I don't think may other people my age want to, either. When the crisis comes, I think non-rich Baby Boomers will also come to realize that means-testing is in their best interests."

Social Security isn't going to go into the red until roughly 2040. And the projections that show it doing so assume that the average GDP growth over the next 75 years is 1.5% per annum (IIRC). If that's true, we're going to have other, bigger problems than SS going belly up.

Other posters already pointed out that it's important not to means-test SS and Medicare because that will erode its universality, so I won't repeat that.

Furthermore, however, you have to ask how much the program costs go down if you means test, because benefits are not proportional to the recipient's other income or wealth (since they're ultimately capped).

The future for Medicare is much cloudier than that for Social Security. But that's because of health care cost inflation, which is rampant in the non-Medicare sector also. The problem of health care cost inflation *will* be solved, because it cannot go on at the current rate of geometric increase.

Finally, Bush's tax cuts are at least as much of a threat to future revenues as Social Security and Medicare. See "THE ADMINISTRATION'S TAX CUTS AND THE LONG-TERM BUDGET OUTLOOK" ("The 75-year Cost of the Administration's Tax Cuts Is More than Three Times the Long-term Deficit in Social Security and Larger than the Long-term Deficits in Social Security and Medicare Combined"), at
http://www.cbpp.org/3-5-03bud.htm

Finally, why not cut the military budget?

Posted by: Stephen J Fromm on December 8, 2003 01:20 AM

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Hi, Altoid. I'm neither economist nor statistician - I do like to think I am about ten percent of a good economist (micro) - and I'm afraid I would not count even a ten percent of a good statistician without a refresher. Having said that:

1- I can't say whether the situation you describe would add to an increase in aggregate productivity statistics figures, because you are talking about imports and there is the difference between GDP and GNP (and I don't even know exactly what that difference is!).

2- Measuring "real productivity" is a tough proposition. Simplest way is "value added per capita employed" and that is very rough, e.g., it does not fully show increase in "real productivity" when every new model of computer gives the consumer better value for the dollar than the previous model. On the other hand statistics would show an increase when low productivity operations are shut down, even if there were no innovation and investment, no increase in "real productivity" were taking place elsewhere.

3- There is one thing, however, which is sound and solid about value added per capita employed measure: It is anti-inflationary, therefore stock markets love to hear "productivity up".

4- The situation you describe is part of the new economy, i.e., the structure of the economy is changing with advances in technology, especially in communications technology, and it is changing more quickly than economists and statisticians can get up to speed with.

5- So the key is to keep in mind the difference between productivity and productivity statistics and look at the story behind those statistics, that is, try to see the new shape the economy is taking, both at national and global level, try to see the trends, the changes, that are emerging in the structure of the economy. Productivity levels do have a significant impact on economic structure, even structure of political economy.

6- Whether or not those changes constitute a "destructive process" would be a matter of subjective judgment - political judgment, I should say.

Posted by: Bulent Sayin on December 8, 2003 01:47 AM

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What causes a $500 billion deficit? A major part is decreased revenue collection. Revenue has dropped from over 20% of GDP to around 16% of GDP. For the last quarter economic expansion was around 8% so it is not the economy that needs stimulus, we need jobs.

Ann nonnymous wrote: "The money couldn't just be handed out, it's already committed. Moving that $500 billion from one place to the other just moves the stimulus from one place to the other."

Ok. If we move $150 billion from tax cuts to the wealthy and put that $150 billion into money for the states to spend now on jobs, then we are replacing a program with very weak job creation potential to one that would create 3 million $50,000 per year jobs, about the number of jobs lost. It is as if there are not 3 million jobs in state services and infrastructure that need doing.

Immediately, the states could take 3 million people off welfare and onto tax paying jobs. That would save the states well over $10 billion in payouts. Those 3 million would go from tax sinks to tax payers. At 20% rate, $30 billion would be returned in taxes. Since those workers would have more income, they would stimulate businesses that provide services to workers. The other $150 billion in decreased revenue could go to deficit reduction. It obviously is not producing enough jobs for the dollar anyway.

During the Clinton economy of the 1990s, the very rich did very well. They were able to make excellent profits in the booming economy. Why not take away their tax cut, create jobs for people that need them and let the wealthy earn their money the old fashion way by investing in the economy. Everyone would win. Under plan Bush, selected wealthy buddies get huge government handouts and everyone else gets next to nothing. This is occurring because this administration is focusing our government resources on providing maximum help for its crony friends, and not paying enough attention to the global economy. We have already wasted 3 years on this failed policy. We are stuck for at least one more year. We need to make sure are economy does not get stuck with this failed ideology for an additional 4 years.

Posted by: bakho on December 8, 2003 05:59 AM

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scylla-

The outlook is not that bleak because of competitive advantage. There are still things that can be done more efficiently and cheaply in the US than elsewhere. Part depends on maintaining a high level of education and infrastructure. These areas have been neglected for the past 20 years. We have been underfunding.

Part of the advantage comes from having centers of expertise. Silicon Valley became the computer location of choice because of the availability of trained workers. As the lower levels of training become more widespread, then lower level tasks are more free to relocate anywhere, while those difficult tasks must continue to occur in locations that center around the expertise. Computer networks have made location less important, but companies still relocate their employees for a reason.

Unfortunately, this administration is backward looking not forward looking in their emphasis, especially in areas such as energy. Many believe that the future lies in renewable energy technology. However, this adminstration is investing in oil and gas and shorting alternative areas. If Japan invests much more money in solar technology than the US, should anyone be surprised if in ten years the epicenter of solar technology is somewhere in Japan and not the US? Chicago, the windy city, has made a commitment to get 20% of its power from wind energy in 20 years. If it follows through on its commitment, does anyone doubt that Chicago would be the center of wind power technology in the US and would start to rival the Dutch?

This administration is dropping the ball. They said they would put adults back in charge. Instead, they have given us dinosaurs committed to living in the past that are less able to connect with the future. Tech/networks/communications is now a mature industry that will not be rapidly expanding. New areas of rapid expansion are alternative energy, transportation restructuring and new pharmaceuticals/biotech/biomed and new materials. Nanotech may produce some pleasant surprises.

Posted by: bakho on December 8, 2003 06:15 AM

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AnnNonnymous-

Your Social Security comments are not correct. There is currently $2.8 trillion in the SS trust fund. That number will double before the boomers retire. SS is completely solvent through 2040 without making any changes. Slight changes such as raising the maximum tax limit could extend SS even further.

The problem is not SS. The problem is the rest of the budget. The Federal Government has borrowed all of the money in the SS trust fund PLUS another $4 trillion or so. The problem is that the government will have to start PAYING BACK the SS trust fund in the 20teens. Mr. Bush was wrong to give tax cuts to his rich buddies when the government already owes so much money. Deficits are a TAX on future generations. Mr. Bush has raised taxes on future generations by $1.3 trillion and counting. You should think about that when you think about spending cuts. SS is already paid for by taxes collected on the working class expressly for that purpose. Ask why are we spending $400 billion per year on defense? Do all those programs work? Are they necessary? Why are we spending $10 billion per year on missile defense that does not work, when our troops in Iraq are unprotected due to a lack of body armor? Why is military spending penny-wise and pound foolish? Why did Ike warn of the military industrial complex? Why are we giving massive ag subsidies to very large profitable corporations? Why are we giving huge subsidies to coal gas and oil extractive industries? Yes Presidents and Congressmen could vote not to fund these programs, but who would pay their campaign expenses?

Posted by: bakho on December 8, 2003 06:32 AM

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Bulent Sayin: I read your other posting and I am still trying to figure out if you said anything.
Sorry. But productivity is much more complex and
there are many different aspects to it. First, all
of the discussion seems to be assuming the procuctivity gain are in traditional manufacturing and that is just not true. In Manuf over the past year semiconductor production was up 50%. this is a virtually all fixed costs industry so you probably got something like 40% to 50% productivity growth in the semi sector. While in the auto sector productivty growth was 1% to 5%. The productivity growth in manuf is largely the product of very strong productivity growth in a naturally high productivity sectors and virtually no growth in low productivity in other sectors. This is in line with theory, and historic experience that productivity results largely from shifts in growth between sectors.
Second, the growth in productivity is much more unusual in the non-manufacturing sectors. Over past year productivity growth for nonfarm econ was 5%,and for manuf was only 4.5%.The 4.5% growth in manufacturing productivity over past year was not at all unusual, and for an early cycle environment was actually weak. The
unusual development was in non-manufacturing productivity. Trade, and outsourcing probably did not have much to do with that. It is much more the Roach argument that hours or output is not measured that well -- measuing real output in finance especially is a farce. But there is
really a productivity revolution going on in
service sectors. Last week I heard a speaker talk about what his firm is doing in portfolio management of taxable accounts. Managing taxable portfolios is very difficult and complex and consequently is labor intensive. They are using
operation research methods to develop computer programs to completely reorganize the management of taxable accounts . They are actually increasing the number of accounts that an individual portfolio manager can manage by a factor of ten.

I find it impossible to accept that the massive investment in technology by financial and service sector firms over the past decade was a complete waste of resources. There has to be a pay-off even if there was a lot of waste. The pay-off
is showing up in better productivity in the non-manufacturing sector.

Since 1995 retail productivity has been greater than manufacturing and is one of the sectors that is really having a productivity revoluttion. And
as much as you want to put down WMT, they are really using the new technology to improve true productivity and forcing other retailers to follow suit. Retailers otsourcing call centers to India may be true, but it can not be large enough to make any difference in the total productivty
data -- try puting some numbers to some of the points you are making and you will find that even if you make heoric assumptions the results will be lost in the rounding errors.

In conclusion, I believe the productivity gains come from three primary sources. One, faster growth of more productivity sectors. Two, the pay-off from the massive investment in technology over the past decade. Three, the Roach argument that hours or output in services are not correctly measured.

The outsourcing abroad is lost in the rounding.
Moreover, the output measure is of value added.
Consequently, the value added by foreign workers
is not included in the measure of domestic output.
Thus it has no impact on domestic productivity.

Posted by: spencer on December 8, 2003 06:36 AM

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"It's not difficult. Give aid to state governments."

That's easy to model. And I have modeled it. You can model it, too. I assure you, the results are disappointing.

"Perhaps it would be difficult to move the economy much closer to full employment than Bush's fiscal stimulus did."

I was only addressing the claim that the fiscal stimulus seen so far would've been enough to get the labor force fully employed if only that money had been spent in a different way. I don't believe it, and I haven't seen even a half-hearted attempt to model the results of alternative spending proposals.

"But most of the red ink due to Bush's cuts comes in the out years."

That's the point. Leaving a structural deficit forces people to at least *consider* spending cuts. I don't think a lot of that projected red ink will actually occur, (even Bush Sr. raised taxes, after all), but I'm sure hardly anyone here agrees with me on that point. We'll just have to accept that disagreement.

"Social Security isn't going to go into the red until roughly 2040. And the projections that show it doing so assume that the average GDP growth over the next 75 years is 1.5% per annum (IIRC). If that's true, we're going to have other, bigger problems than SS going belly up."

As I said, Social Security is trivial compared to the Medicare disaster, but even faster GDP growth would do little, if anything, to solve Social Security's problems. Benefits are indexed to wages rather than prices (as I believe they should be). Insofar as productivity improvements raise wages (which is consistent with economic history so far), they will be utterly unable to help.

"The future for Medicare is much cloudier than that for Social Security. But that's because of health care cost inflation, which is rampant in the non-Medicare sector also. The problem of health care cost inflation *will* be solved, because it cannot go on at the current rate of geometric increase."

Oh yes it can. Maybe not forever, but easily long enough to obliterate Medicare. You need to understand that this is really a social problem. If the cost explosion were happening in, say, the luxury goods sector, we could handle it. Imagine there were a pill which could cure all illness, but it cost $10 million a dose. We may never have such a pill, but it illustrates the nature of the problem. That is the trend taken to an extreme. Technology is raising the price of state-of-the-art care because capability is increasing faster than productivity. We can't mass-produce surgery yet, and it would be a miracle if we figured out how to do that. The gods of technological progress are being unspeakably cruel to people with egalitarian ideals. Unless there are massive improvements in medical sector productivity, we will be forced, kicking and screaming and biting and scratching and clawing, to come to terms with the fact that we can't afford state-of-the-art care for everyone.

I don't know how we, as a society, will respond to this bad news. But I'm certain, under these circumstances, that Medicare cannot possibly survive unless we find a way to cut benefits. Means-testing seems to me to be the least cruel way of doing it.

Yes, means-testing would erode its universality. But if the electorate is unwilling to support it without the crutch of political untouchability designed into it, then it doesn't deserve to exist. This is supposed to be a democracy, and Medicare isn't supposed to be a suicide pact.

"Finally, why not cut the military budget?"

We could cut it to zero. It wouldn't be enough.

Posted by: Ann Nonymus on December 8, 2003 06:57 AM

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"Social Security Trust Fund"

LOL,
Now, that's the funniest thing I've read here in days! And to think I was worried, when social security goes into deficit they can just withdraw the cash from the trust fund. Woo Hoo...

Posted by: William on December 8, 2003 07:14 AM

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"Oh yes it can. Maybe not forever, but easily long enough to obliterate Medicare. You need to understand that this is really a social problem."

1. Does means-testing produce enough revenue if the incentive structure remains unchanged? What difference does it make to reduce the number of receivers by some fraction if the remaining fraction still demands effectively infinite support?

2. Given that, wouldn't it make more sense to put the proper incentives in place by giving everyone full coverage with a very large deductible and also providing a negative income tax which amptly covers the deductible?

Posted by: Russell L. Carter on December 8, 2003 08:21 AM

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The Roach argument that "hours or output in services are not correctly measured" doesn't hold water as an explanation for the productivity growth we've seen in the last three years. Roach's argument is that we're underestimating the number of hours white-collar workers work, and therefore overstating their productivity (which is, crudely, output/hours).

But productivity growth measures the change in productivity (annualized) from the previous quarter. There is no way that the number of hours white-collar workers work changes dramatically from quarter to quarter. Who really believes that white-collar workers worked a lot more hours in in August of 2003 than they did in June of 2003, or a lot more in 2003 as a whole than they did in 2002? The same is true for the output numbers. The numbers may be flawed measures, but the flaws are not getting bigger month-by-month, as Roach's account implies.

If Roach is right about either output being overstated or hours being understated (and I don't think he necessarily is), what it would it mean is a one-time revision of U.S. productivity downward (as we redid the way we calculated how many hours people work, for instance). But it would not change the narrative of the last seven years, which is that productivity has been rising sharply.

Posted by: James Surowiecki on December 8, 2003 08:52 AM

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Ann Nonymous says, "Charles, forget about Social Security for a second. It's utterly trivial in comparison to the Medicare time-bomb. Nothing can save unreformed Medicare but a miracle."

I would disagree. The real "problem" that Medicare faces is that people are living longer.

This is not a problem, but something to be celebrated! We need to make budgetary adjustments, but with $200B of corporate pork in the budget, ca. $100-$200B of unnecessary Pentagon spending and the United States as the least heavily taxed industrial nation, there's room. And as bakho says, the IRS is not collecting a lot of the tax that is legitimately owed.

In the early 1980s, Social Security faced a shortfall as serious as that that Medicare faces now. We addressed the problem. Now the Republicans have to use 50 and 75 year projections to try to gin up fear.

I don't agree that high technology is a problem. Yes, leading edge treatments tend to be more expensive. The same is true with any innovation. But after time, they almost have to be more cost-efficient than the old technology.

And, as Mr. Fromm points out, we don't have a problem just with Medicare. Costs in the whole health care sector are rising faster than inflation.

As for the point that large deficits will force future Congresses to consider cutting spending, this is in the same vein as "We had to destroy the village in order to save it." Perhaps ordinary citizens can be deceived by this rhetoric, but as practiced by the Congress, it is hypocrisy of the highest level. Tom DeLay & Co. are demagogically buying votes, acting against the best interests of the nation. In a just world, this would be a capital offense.

~~~~~~~~~~~~~~~~~~~~~

John Halasz and Bukent Sayin, "multifactor productivity" is used to address the issues you raise. See http://www.bls.gov/mfp/home.htm

Posted by: Charles on December 8, 2003 09:57 AM

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Russell, that sounds reasonable to me, but that also sounds like means-testing by another name.

Congress could also levy a steeply progressive tax on benefits. That would amount to means-testing as well.

Posted by: Ann Nonymus on December 8, 2003 11:04 AM

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Charles, we could eliminate *all* government spending besides Medicare and we still wouldn't be able to raise enough tax revenue to pay for it. Longevity isn't the problem. The problem is that it's horrifically expensive for a Medicare beneficiary to die. If I recall correctly, 60% of all medical expenditures are made for people over 70 in their last six months of life. That massive concentration of resources in the final months of life has nothing to do with the incremental increases in longevity we've seen in the past few decades. It happens because the state-of-the-art in medical technology advances so fast, and productivity can't keep up, and most people can't stomach the idea that we're going to have to start picking and choosing the people who get state-of-the-art care. Add to that the pathological notion in this culture that people are never supposed to die, no matter what.

"Yes, leading edge treatments tend to be more expensive. The same is true with any innovation. But after time, they almost have to be more cost-efficient than the old technology."

But that's only true if we subject some people to an obsolescent standard of medical care. Achieving a 1950 level of medical care is probably cheaper today than it was in 1950, but if we could stomach that, there would be no health care cost problem at all. The cost of state-of-the-art care is high, and will only rise further.

Technological progress is forcing our hand, whether we want to admit it or not. This is where the "dismal" in "dismal science" comes from.

Posted by: Ann Nonymus on December 8, 2003 11:07 AM

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Ann Nonymus wrote, "'"It's not difficult. Give aid to state governments.' That's easy to model. And I have modeled it. You can model it, too. I assure you, the results are disappointing."

BS. If you've published your model in a peer-reviewed journal, or somewhere else where people can look at what you've done, provide a citation or a link. As it is, your claim is worthless. Furthermore, while I agree that given the bubble burst, it might be difficult/pointless to return the economy to full employment, there's always the bang-for-the-buck issue.

"As I said, Social Security is trivial compared to the Medicare disaster, but even faster GDP growth would do little, if anything, to solve Social Security's problems. Benefits are indexed to wages rather than prices (as I believe they should be). Insofar as productivity improvements raise wages (which is consistent with economic history so far), they will be utterly unable to help."

You avoided bakho's points that the non-SS budget is bleeding red ink like crazy. You also never replied to my similar point, in which I actually cited something published on the web (the CBPP piece, which claims that the non-SS deficit problem is at least as bad as the SS shortfall in the long run).

"'The future for Medicare is much cloudier than that for Social Security. But that's because of health care cost inflation, which is rampant in the non-Medicare sector also. The problem of health care cost inflation *will* be solved, because it cannot go on at the current rate of geometric increase.' Oh yes it can. Maybe not forever, but easily long enough to obliterate Medicare. You need to understand that this is really a social problem."

I understand that. What *you* don't understand, or fail to acknowledge, is that this problem isn't just a problem for Medicare, it's a problem for the non-Medicare, non-government health care sector as well, as Charles reiterated.

Posted by: Stephen J Fromm on December 8, 2003 11:33 AM

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Ann Nonymous wrote, "'But most of the red ink due to Bush's cuts comes in the out years.' That's the point. Leaving a structural deficit forces people to at least *consider* spending cuts. I don't think a lot of that projected red ink will actually occur, (even Bush Sr. raised taxes, after all), but I'm sure hardly anyone here agrees with me on that point. We'll just have to accept that disagreement."

What basis do you have for supposing that the red ink won't occur, given the magnitude of the Bush tax cuts? Looks like more faith-based economics, just like your assertion about the impact of revenue sharing with the states.

About forcing the issue of spending cuts, there was a back-and-forth in the comments section to one of BDL's posts. It doesn't appear that at least in the medium run, there's any relationship between deficits and spending--in fact, there might be a positive relationship.

Furthermore, you're missing the *political* point, which is tax cuts for the wealthy now, and tax hikes for who knows later.

Posted by: Stephen J Fromm on December 8, 2003 11:41 AM

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Ann Nonymous wrote, "As I said, Social Security is trivial compared to the Medicare disaster, but even faster GDP growth would do little, if anything, to solve Social Security's problems. Benefits are indexed to wages rather than prices (as I believe they should be). Insofar as productivity improvements raise wages (which is consistent with economic history so far), they will be utterly unable to help."

But you've pointed out that that can be dealt with by tying benefits to prices rather than wages.

On the other hand, you've provided no argument or evidence that the Federal funds deficit, which is much higher than the unified budget deficit, won't be bleeding red ink.

Posted by: Stephen J Fromm on December 8, 2003 11:49 AM

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Ann Nonymous wrote, "If I recall correctly, 60% of all medical expenditures are made for people over 70 in their last six months of life."

For the *entire* health care system? Searching the web, I saw estimates from 15% to 60%.

Posted by: Stephen J Fromm on December 8, 2003 11:58 AM

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Spencer:

I am not very much surprised that what I posted didn't read like I was saying any thing; perhaps I am looking for an answer to a question, rather than trying to say something. And that question is this:

About one percent of US population can now produce all the foodstuff the nation needs and then some for exports and that's with all the bribery not to work a portion of land available and sometimes doing things like burning peanut stocks. This kind of productivity will eventually be attained in manufacturing and service sectors too - technology for workerless factory is already there. Now then; when productivity in agro, manuf and services becomes so high that any one who works in any job for a year or two inadvertently produces all the food and shelter that he or she would need for the rest of his or her life, what happens to structure of political economy? What happens to capitalism?

Add to that the circumstances in which the bureaucrats both in public and private sectors would have all been replaced by (a) computers and (b) elected councils, at all levels (not too many levels anywhere any way, all flat organizations), council members unpaid, short terms of duty (generally considered sort of like jury duty is considered today), and drawn from an extremely well educated population -- in other words direct democracy instead of representative democracy.

What kind of political economy and political regime would go with that kind of productivity?

BTW, you said many things that I would like to say myself and thank you for that.

--- -- -- --

Charlws:

Thank you for the BLS link; I've looked at it briefly and a question occurred to me:

In computing poverty lines and things related to standards of living, they compute the total price for a "standard basket of consumption", say for a household with four members.

Would it not be interesting to compute productivity in terms "years of consumption of the standard basket produced for each year worked"?

I think BLS should be looking into that. If they won't, then I guess the Democrat economists should.

Posted by: Bulent Sayin on December 8, 2003 12:20 PM

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"Who really believes that white-collar workers worked a lot more hours in in August of 2003 than they did in June of 2003, or a lot more in 2003 as a whole than they did in 2002? The same is true for the output numbers."

It's really easy to get high output numbers if you cook the books.

Posted by: Randolph Fritz on December 8, 2003 12:37 PM

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If you use a standard of living that existed 50 years ago the country has long been at the stage of productivity where all the food, shelter and other things we thought of as necessary back then could be produced in just a few years of work.

But demand changes as does the econ and political
organization. What we consider a basic standard of living is very different now. But the political system and economy are also very different now than they were 50-100 years ago.

Things evolve, and my problem with the right wing nuts is that they thing we would be better off
going back to a system of primitive capitalism
that existed 50-100 years ago.

I do not know how things are going to evolve, but
I would feel a lot better about our country if we had people in charge that had a different vision of the way it ought to evolve.

75-100 years ago if you were a money manager in London you could get into a very serious lunch debate whether the long run prospects for the US
or Argentina were better and where should you but your money. Can we make the bad decisions like Arg did to severly damage our prospects?
Of course.

Posted by: spencer on December 8, 2003 01:15 PM

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"BS. If you've published your model in a peer-reviewed journal, or somewhere else where people can look at what you've done, provide a citation or a link. As it is, your claim is worthless."

Okay, fine, my claim is worthless, if publication is the only standard that matters. I'm not a published economist. But I wasn't the one who claimed that changing the way the Bush tax cuts were allocated would've increased bang-for-the-buck without backing it up with any econometric analysis whatsoever. If it's so obvious that giving aid to the states would increase bang-for-the-buck, somebody should accept my challenge and embarrass me. My claim was a disputation of the first claim. So why is the burden of proof on me? Why is the first claim presumed correct until proven incorrect? That is not scientific.

I reiterate my challenge a fourth time.

"You avoided bakho's points that the non-SS budget is bleeding red ink like crazy. You also never replied to my similar point, in which I actually cited something published on the web (the CBPP piece, which claims that the non-SS deficit problem is at least as bad as the SS shortfall in the long run)."

I believe that the structural deficit will be reduced to a manageable size. You can call this faith-based economics if you like, but I find it hard to believe that Bush or Congress has done anything which can't be undone. Given the historical unpredictability of tax policy (like Bush Sr. raising taxes), I don't see how anyone could make deficit forecasts that far into the future with a straight face.

"What *you* don't understand, or fail to acknowledge, is that this problem isn't just a problem for Medicare, it's a problem for the non-Medicare, non-government health care sector as well, as Charles reiterated."

I understand that, and I acknowledge it, too. So what? It doesn't change the fact that Medicare is on a collision course with economic reality, nor does it change the fact that when Medicare tangles with reality, reality wins.

Posted by: Ann Nonymus on December 8, 2003 02:44 PM

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"What basis do you have for supposing that the red ink won't occur, given the magnitude of the Bush tax cuts? Looks like more faith-based economics, just like your assertion about the impact of revenue sharing with the states."

My basis for supposing that the red ink won't occur is the fact that taxes can be raised, too (e.g. Bush Sr. tax hikes), and spending cuts are not unprecedented, even if you may think they're unconscionable.

"About forcing the issue of spending cuts, there was a back-and-forth in the comments section to one of BDL's posts. It doesn't appear that at least in the medium run, there's any relationship between deficits and spending--in fact, there might be a positive relationship."

What about the long run relationship? Why doesn't that matter? Sweden's experience in the 1980s suggests a strong one.

"But you've pointed out that that can be dealt with by tying benefits to prices rather than wages."

It would help, but do you really think it will solve the problem?

"On the other hand, you've provided no argument or evidence that the Federal funds deficit, which is much higher than the unified budget deficit, won't be bleeding red ink."

The argument is that the government can raise taxes or cut spending or both until the budget is balanced. If you believe the government is incapable of this, even though it has occurred before, that's fine. You're entitled to that article of faith.

Posted by: Ann Nonymus on December 8, 2003 02:48 PM

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Ann Nonymous wrote, "Okay, fine, my claim is worthless, if publication is the only standard that matters. I'm not a published economist."

You just don't get it, do you. The most important point is that there's no way anyone can verify your claims about modeling. If you had your own website with the results posted, others could do that. If you posted it on USENET, others could do that. Neither of those involves publishing in journals.

Posted by: Stephen J Fromm on December 8, 2003 03:30 PM

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Ann Nonymous wrote, "Okay, fine, my claim is worthless, if publication is the only standard that matters. I'm not a published economist. But I wasn't the one who claimed that changing the way the Bush tax cuts were allocated would've increased bang-for-the-buck without backing it up with any econometric analysis whatsoever. If it's so obvious that giving aid to the states would increase bang-for-the-buck, somebody should accept my challenge and embarrass me. My claim was a disputation of the first claim. So why is the burden of proof on me? Why is the first claim presumed correct until proven incorrect? That is not scientific."

*You're* the one who touted a scientific model supporting your arguments, and then couldn't/refused to supply any details.

bakho argued by a back-of-the-envelope calculation, which is a reasonable way to go about things at the beginning of an argument, especially when the orders of magnitude are so striking.

So, no, I haven't done any modelling that shows that spending money on the states is more effective. But it stands to reason, if talk about differential fiscal stimuli, multipliers, etc, have any meaning at all. When states are in the red, they cut their budgets. Those reductions in dollars are mostly going 1 for 1 in reduced aid to the poor and working poor, who spend almost all their income, and state employees.

There's no reason to believe that federal tax cuts to the wealthy, on the other hand, provide near as much fiscal stimulus.

Furthermore, tax cuts backloaded to the future, as most of Bush's cuts are, provide no fiscal stimulus in the current recession whatsoever, apart from increased spending due to anticipation, which ought to be a second order effect.

Posted by: Stephen J Fromm on December 8, 2003 04:42 PM

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Ann Nonymous wrote, "My basis for supposing that the red ink won't occur is the fact that taxes can be raised, too (e.g. Bush Sr. tax hikes), and spending cuts are not unprecedented, even if you may think they're unconscionable."

But then there's nothing to discuss. Social Security? No problem; we can always cut benefits or raise taxes. Ditto Medicare.

Posted by: Stephen J Fromm on December 8, 2003 04:44 PM

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Ann Nonymous wrote, "Given the historical unpredictability of tax policy (like Bush Sr. raising taxes), I don't see how anyone could make deficit forecasts that far into the future with a straight face."

What happened to Bush after he raised taxes? He was practically crucified by the Right. What happened to the Democrats after Clinton raised taxes in 1994? They lost control of the House for the first time in decades.

Speaking of making forecasts, all the doom and gloom about SS concerns predictions made about trends *decades* in the future.

Posted by: Stephen J Fromm on December 8, 2003 04:48 PM

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Ann Nonymous wrote, "'On the other hand, you've provided no argument or evidence that the Federal funds deficit, which is much higher than the unified budget deficit, won't be bleeding red ink.' The argument is that the government can raise taxes or cut spending or both until the budget is balanced. If you believe the government is incapable of this, even though it has occurred before, that's fine. You're entitled to that article of faith."

You're dodging the question: which taxes, and which spending?

If you want to blur all government spending and taxing together, that's not necessarily unreasonable, but then you have to acknowledge that a large amount of federal revenues are based on a regressive tax of 6.45% (IIRC) on employment (12.9% with employers' contributions and the standard assumptions about the incidence of taxes on labor). Those taxes have been *increasing* in the past two decades.

If, on the other hand, you want to say (in accordance with the rather stalinistic Republican party line) that only income tax payers deserve "tax relief," because people paying into SS are going to get the money back (crumby return aside), then those moneys aren't truly available for the rest of the government to spend in the long run.

You can't have it both ways.

Posted by: Stephen J Fromm on December 8, 2003 05:04 PM

____

Ann Nonymous wrote, "'What *you* don't understand, or fail to acknowledge, is that this problem isn't just a problem for Medicare, it's a problem for the non-Medicare, non-government health care sector as well, as Charles reiterated.' I understand that, and I acknowledge it, too. So what? It doesn't change the fact that Medicare is on a collision course with economic reality, nor does it change the fact that when Medicare tangles with reality, reality wins.

No, you *don't* acknowledge it, as witnessed by your comment "So what? It doesn't change the fact..." Let me spell it out for you.

I claim that Medicare is "on a collision course with economic reality" to the extent that the entire health care system is, no more, no less.

If we can fix Medicare, we'll have a fix for the entire health care system. And vice versa.

Posted by: Stephen J Fromm on December 8, 2003 05:08 PM

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Ann Nonymous'

You should look more closely at some of the analyses of the CBPP. They lean left, but they use good numbers to support their arguments. For instance see-

http://www.cbpp.org/2-18-03sfp.htm

That is an exec summary with linkto economic analyses.

Really, this is just textbook stuff. How to provide fiscal stimulus in a downturn like ours is not difficult. Mr. Bush is not reading the textbooks or listening to his economists that wrote them.

Posted by: bakho on December 8, 2003 07:17 PM

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Stephen Fromm is correct. Ann makes a valid point that trends do not continue to infiniti (duh). However, the political capital necessary to make a tough decision such as raising taxes IT WILL COST VOTES requires a LOT of political capital. That capital could be spent on something else. The costs cannot be ignored. Reagan ran up the deficit so fast and so big that the debt service costs alone ensured that his successors would have net deficits during their terms of office. Mr. Clinton fixed the fiscal situation so that Mr. Bush had a chance to be a net surplus president. However, like so many other opportunities presented to Mr. Bush during his priveledged life, this one was also squandered.

If budget deficits are some political game of fiscal chicken, then Mr. Bush should be thrown out of office for merely entertaining such irresponsible notions. Anyone who suggests that the fiscal solvency of the US is nothing more than a pawn to be used for partisan purposes is undeserving of the office of president.

Posted by: bakho on December 8, 2003 07:28 PM

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Spencer writes:


"Things evolve, and my problem with the right wing nuts is that they thing we would be better off going back to a system of primitive capitalism that existed 50-100 years ago."

U-uh. They think THEY themselves would be better off going back -- they don't care about the rest.

Productivity is there, as you say, Spencer. And half a trillion surplus proved that massive social programs could be financed with non-deficit budget and taxation while continuing to attract investment and continue to grow.

"In retrospect", it appears to me that THAT state of affairs, manifesting itself in that half a trillion budget surplus, was perceived by Republicans as super duper number one "present and clear danger" (did I get that right?) and not Mr. Bin Ladin or Mr. Hussein.

And so they resorted to election tricks to get the Office (God knows what else they were prepared to do if that trick didn't work) and once in Office, they attacked and axed and ate up and evaporated that budget surplus with a vengeance.

That budget surplus was really social programs funds and it was hard earned money of ordinary folks. In effect, they, the Republicans, stole it from people. They stole half a trillion dollars of public money!

And that was not enough. They invented this hoax of WMD in Iraq and used it to invade Iraq, at the cost of x billion a week, and used that for justification to borrow from arms manufacturers to buy arms from them.

And I'm afraid, given the structure of world economy, not just today's American children, but today's children all over the world, or many places in the world, will be paying that debt.

The Republicans effectively put away for a decade and probably for two decades any chance of a better life for all, any chance of transition to what would naturally follow capitalism, as would be both allowed and dictated by increased productivity, a regime in which there would be less privileges and more equal rights for all, more freedom.

That's the nature and extent of the Republican deed and they are getting away with it becasue people have been snowed with security and war things and so they are not aware what the Republican's are doing.

Posted by: Bulent Sayin on December 8, 2003 10:10 PM

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Spencer writes:


"Things evolve, and my problem with the right wing nuts is that they thing we would be better off going back to a system of primitive capitalism that existed 50-100 years ago."

U-uh. They think THEY themselves would be better off going back -- they don't care about the rest.

Productivity is there, as you say, Spencer. And half a trillion surplus proved that massive social programs could be financed with non-deficit budget and taxation while continuing to attract investment and continue to grow.

"In retrospect", it appears to me that THAT state of affairs, manifesting itself in that half a trillion budget surplus, was perceived by Republicans as super duper number one "present and clear danger" (did I get that right?) and not Mr. Bin Ladin or Mr. Hussein.

And so they resorted to election tricks to get the Office (God knows what else they were prepared to do if that trick didn't work) and once in Office, they attacked and axed and ate up and evaporated that budget surplus with a vengeance.

That budget surplus was really social programs funds and it was hard earned money of ordinary folks. In effect, they, the Republicans, stole it from people. They stole half a trillion dollars of public money!

And that was not enough. They invented this hoax of WMD in Iraq and used it to invade Iraq, at the cost of x billion a week, and used that for justification to borrow from arms manufacturers to buy arms from them.

And I'm afraid, given the structure of world economy, not just today's American children, but today's children all over the world, or many places in the world, will be paying that debt.

The Republicans effectively put away for a decade and probably for two decades any chance of a better life for all, any chance of transition to what would naturally follow capitalism, as would be both allowed and dictated by increased productivity, a regime in which there would be less privileges and more equal rights for all, more freedom.

That's the nature and extent of the Republican deed and they are getting away with it becasue people have been snowed with security and war things and so they are not aware what the Republican's are doing.

Posted by: Bulent Sayin on December 8, 2003 10:21 PM

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Well, I just read some of the CBPP report posted by bahko.

The part that really stuck in my mind was the quote by "Nobel prize winner" Solow on the reasons why the feds should "share" federal revenue with the states- "There is urgent need for substantial federal revenue sharing..."

I don't argue with the guys sentiment, I agree with it.

However, it really fries my shorts when we are talking about a commie socialist state, you know, the kind that GENERATES LOTS OF BUCKS FOR THE FEDS with our STATE GENERATED FEDERAL REVENUE created from the fact that we are a people-caring COMMIE SOCIALIST STATE and a Nobel prize winning economist thinks that WE SHOULD GET BACK SOME OF OUR COMMIE SOCIALIST FEDERAL INCOME GENERATING TAX DOLLARS.

That is just super, and I think if Mr. Solow argued it FROM THAT PERSPECTIVE I would most heartily recommend that he be given ANOTHER NOBEL PRIZE, since he hasn't had a new one since the 80's, and his philosophies could probably USE A LITTLE UPDATING!

Posted by: northernLights on December 8, 2003 10:43 PM

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"You just don't get it, do you. The most important point is that there's no way anyone can verify your claims about modeling."

I think you misunderstand the nature of my challenge. I don't have a result to publish. I'm trying to tell everyone that I *can't* make any model produce a result consistent with the disputed claim. I'm looking for something, and I can't find it. I conjecture that there's no way to make a reputable model behave that way. I'm looking for a counterexample which would falsify that conjecture. Why can't anyone come up with one? The challenge just seems to enrage people, and that makes me suspicious. Why should I believe this is anything but "faith-based economics?" If I had claimed, for example, that Keynesian stimulus is ineffective because crowing out is total (the old monetarist argument), I'd have studies contradicting that argument dumped on me by the ton.

To be clear: I believe money given to the poor is more likely to be spent than money given to the rich, but the difference is so small that, when dealing with a stimulus package of this (insufficient) size, any difference it might have made is lost in the noise. Thus, an equal sized package created by a Democrat would show no significant difference in stimulative power in an econometric simulation.

One could make the utilitarian argument that the Democrats' packages would've made the poor less miserable, and that would have increased overall welfare more. I wouldn't object to that argument, because I think it's true. But that's not the same argument.

The Fairmodel is publicly accessible on the web. It's easy to use, as far as these things go. There is a variable for federal grants to state and local governments (TRGS). The progressivity of the income tax can be manipulated with the variable TAUG (and TAUS for state governments). The model is complicated, and I don't understand everything about it. Maybe someone who knows more than me can find a way to make it support the disputed claim. But I haven't been able to do it, and I've made an honest effort. I didn't even doubt the claim at first, until an economist told me it was "debatable."

http://fairmodel.econ.yale.edu

"But then there's nothing to discuss. Social Security? No problem; we can always cut benefits or raise taxes. Ditto Medicare."

Why can't we discuss all the new discretionary spending? You act like there's been no change on that front. And you already know my proposal for SS and Medicare.

"Speaking of making forecasts, all the doom and gloom about SS concerns predictions made about trends *decades* in the future."

Tax policy is unpredictable, so it's hard to base a long-range forecast on it. Demographics are extremely predictable for decades. Trends in technological progress are less so, but still more predictable than tax policy. Clearly, the technological trends which have been increasing health care costs have been at work for decades. They are very, very long term trends. Thus, the doomsday prediction for Medicare can be made with more confidence than long term deficit forecasts. For the latter, unpredictable tax policy is crucial. For the former, unpredictable tax policy is irrelevant.

"You're dodging the question: which taxes, and which spending?"

Any taxes, and any discretionary spending in the short run, and any spending whatsoever in the long run (when the Medicare crisis makes reform possible).

For the record, I believe payroll taxes should be abolished, and entitlement programs funded by general taxation.

"I claim that Medicare is "on a collision course with economic reality" to the extent that the entire health care system is, no more, no less.

If we can fix Medicare, we'll have a fix for the entire health care system. And vice versa."

I do not accept the premise that an outcome which leads to the destruction of Medicare must break the entire health care system. I believe that the price of state-of-the-art-care will spiral out of the reach of practically everyone eventually. It will be difficult to accept the idea that we can't afford state-of-the-art care for everyone, but I think we can survive that challenge. Societies have faced far greater challenges than that, and survived. I think the health care system can survive that challenge, or that we can create a new system consistent with economic reality. I'm certain unreformed Medicare cannot survive that challenge, for all the reasons I've stated before.

Posted by: Ann Nonymus on December 8, 2003 11:08 PM

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"Really, this is just textbook stuff. How to provide fiscal stimulus in a downturn like ours is not difficult. Mr. Bush is not reading the textbooks or listening to his economists that wrote them."

bakho, I reiterate my challenge a fifth time.

I own two textbooks by Mankiw, by the way. I read nothing in them which suggested that grants to states are a more effective fiscal stimulus than the tax cuts which have been passed.

Posted by: Ann Nonymus on December 8, 2003 11:17 PM

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Hoy! This time it ain't my fault that my post appears twice; this is what happened this morning: I post once, wait wait wait and I get "can't open page" message. I post again, wait wait wait and get the same message -- gave up cause needed to go out. And now I come back to try and post it and I see it is already - twice!

Sorry any way.

Lesson: Once I click that "post" button, it is posted, and I probably don't even need to wait.

Posted by: Bulent Sayin on December 9, 2003 04:52 AM

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Ann Nonymus-

The last recession and current economic situation are characterized by overcapacity in mfg and other sectors of the economy.

Giving money (tax cuts) to the investor class and businesses is supposed to stimulate the economy by stimulating investment to expand supply. This is a fine way to stimulate an economy that is not producing enough goods to meet demands. However, if there is already overcapacity, where is that tax cut going to go??? Since it cannot be productively spent on increasing capacity, it will be saved. In fact, corporations have been sitting on piles of investment capital waiting for demand to increase. This is why the Bush tax cuts failed to create very many if any jobs.

In a situation where there is overcapacity, the fiscal solution is to increase demand. Demand can be increased by giving money (tax cuts, unemployment benefits, etc.) to those who will spend the money and not save it. Demand can be increased by funding infrastructure projects that utilize the excess capacity. This is why giving money to the states would be more stimulatory and produce more jobs than giving the money to people who would save it.

I suggest you take a look at Krugman

http://www.wws.princeton.edu/~pkrugman/fiscal.html

then read the chapters he references in Mankiw. Revenue to the states will create a short term increase in jobs because it pushes the AD line to the right. However, tax cuts to wealthy investors has no affect on demand. It has no effect on supply either because we are already at overcapacity.

This is why mainstream economists have said all along that the tax cuts are not a jobs stimulus program.

Posted by: bakho on December 9, 2003 09:34 AM

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Bulent, do never wait! Except for the first time, my repeat posts have been due to my forgetting to choose another comment thread or closing the comment windows.

If what you wrote is important enough to you, paste it, before posting, in a file.


Ann Nonymus,

Maybe the reason you don't find how States stimulus would work better is due to some deep-seated belief that is not borne out by reality. Like Euclid's fifth postulate.

DSW

Posted by: Antoni Jaume on December 9, 2003 10:07 AM

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bakho, I believe there is a serious problem with the capacity utilization figures. If we believe them, then capacity is as underutilized as it was during the Volcker Disinflation. That begs the question: "Where is the disinflation?" Inflation has stopped falling. In 1982, inflation was crashing. A lot of the unused capacity will never be used, in my opinion. Many factories are closed in America, and they will never open again. But much of the machinery is still there, idle.

Regardless, I disagree with Krugman because I have a relative who does financial planning for "rich" people. There are many people who earn $200,000 a year who go bankrupt because they think psychologists for their pets aren't a discretionary expenditure. It's sad, and I don't endorse such irresponsibility, but it underscores the fact that the "rich" (which really means "high-earners" rather than people who are truly wealthy) have an enormous propensity to consume.

So, I reiterate my challenge a sixth time.

Posted by: Ann Nonymus on December 9, 2003 05:40 PM

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Hi there, Antoni Jaume. Thanks for advice. I past'em to get a successful posting, and usually don'tsave em once posted. If they are important, I usually remember them any way, if and when the time comes to remember.

Posted by: Bulent Sayin on December 10, 2003 06:55 AM

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