January 28, 2004

Jeffrey Frankel (and Others, Including Me) Lose It and Find Ourselves Off in the Alpha Quadrant

Jeffrey Frankel, my friend and high Clinton administration economic policymaker, is bitter and angry. He's not Joe Stiglitz or Ken Rogoff angry: he's not out there in the Gamma Quadrant. But he is definitely out there: the Alpha Quadrant, perhaps.

What is he bitter and angry at? The Bush administration, of course. Why? Because:

The [Bush] Administration has flubbed its [task of]... international leadership... there were alternative feasible policies that would have made a lot more sense than what they have done... across the board of issue areas: trade, management of crises in emerging markets, management of the dollar, fiscal policy, energy policy, and so on.

The fact that the Bush administration flubbed it in a critical situation--for the post-911 situation was and is a critical one--compounds the seriousness of the Bush administration's policy crimes:

The war on terrorism should have presented George W. Bush with the same opportunity for international leadership [as] the Cold War... the American people were primed to be told what difficult steps would have to be taken... what economic sacrifices.... It would have been relatively easy after September 11 to explain to the American public why we needed to free up imports of textiles and apparel from Pakistan... why we needed to... [tax] fossil fuels to reduce dependence; why we needed to support multilateral negotiations.

Jeffrey Frankel is not, by nature, a bitter or a partisan person. Yet today a huge number of people who--like me--do not think of themselves as by nature bitter or partisan neverthless find that we are bitter, very bitter, and have become partisan, very partisan. Consider that back before the George W. Bush administration even a figure like Paul Krugman was careful to stay even-handed: to balance a criticism of the supply-siders in the Republican Party with one of the strategic traders in the Democratic Party, to balance a condemnation of the Republican establishment for thinking that boosting corporate profits solves all ills with a condemnation of the Democratic establishment for thinking that neoliberal reforms in developing countries solve all their ills.

Why do so many of us who worked so hard on economic policy for the Clinton administration, and who think of ourselves as mostly part of a sane and bipartisan center, find the Bush administration and its Republican congressional lapdogs so... disgusting, loathsome, contemptible? Why are we so bitter?

After introspection, the answer for me at least as clear. We worked very hard for years to repair the damage that Ronald Reagan and company had done to America's fisc. We strained every nerve and muscle to find politically-possible and popularly-palatable ways to close the deficit, and put us in a position in which we can at least begin to think about the generational long-run problems of financing the retirement of the baby-boom generation and dealing with the rapidly-rising capabilities and costs of medicine. We saw a potential fiscal train wreck far off in the future, and didn't ignore it, didn't shrug our shoulders, didn't assume that it would be someone else's problem, but rolled up our sleeves and set to work.

Then the Bush people come in. And in two and a half years they trash the place. They trash the place deliberately. They trash the place casually. They trash the place gleefully. They undo our work for no reason at all--just for the hell of it. Reading Suskind's The Price of Loyalty shows just how casual and unthinking it was. As the Economist writes:

Economist: On the other side of the Atlantic, the budget is even less balanced--thanks in part to three rounds of tax cuts enacted since President George Bush took office--and the controversy just as bitter.... Paul O'Neill, Mr Bush's former treasury secretary... laments Mr Bush's style of leadership (disengaged), his case for invading Iraq (disingenuous) and his fiscal record (dismal). The last of those flaws has excited the attention of the International Monetary Fund, which gave a warning in a report last week that America's deficits, if left unchecked, posed a gathering threat to America and the world. Mr O'Neill says that when he raised his concerns about fiscal profligacy with Dick Cheney, the vice-president, he was told "deficits don't matter." The IMF insists they do. The decade of deficits that lies ahead for America will put upward pressure on interest rates, crowd out private investment and erode longer-term productivity growth...

And every single senior Republican economic policy appointee comes out of a look back at the past three years looking very badly. X fails to organize meetings so that the long-run budgetary consequences of short-run policy moves are properly considered. Y pirouettes in midair and transforms from a deficit hawk into a deficit dove so as not to offend White House Media Affairs. Z lowballs the interest rate effects of higher deficits--and manages not to talk about the savings and investment effects at all. W mutters in the privacy of his own office about the importance of maintaining a surplus--but doesn't have the nerve to say "Boo!" to a goose (let alone to George W. Bush) once he steps outside his office door. V remains silent while the clown show that is the Bush economic policy process--a process he cannot view with equanimity--rolls forward. U cuts his own agency staff off at the knees and shows no interest in the very important and interesting work on the long-run fiscal options that they have done. Outsiders like R who assured me back in the fall of 2000 that Bush understood and would tackle the long-run problems of funding entitlements and the social-insurance state manage not to emit a public peep of complaint. Q talks about how much the president wants to reduce the deficit without daring to put his own position on the line within the administration by demanding that words like "deficits are bad" be accompanied by an actual plan to reduce the deficit. Every one. Every single last one.

And it is worth pointing out that it's not just the economic policymakers. The same holds true of all the other executive-branch Republican political appointees: defense, international affairs, science policy, social policy. Is there anybody (with the exceptions of John Donaldson and Mark McClellan) who has emerged or well emerge from this administration like a reputation? And it's all the Republican senators and members of congress as well. People who used to have some claim to respect--paging Pete Domenici, anyone?--have simply rolled over and played dead.

"Is George W. Bush the worst president ever?" is the question that George Akerlof asks. A fish rots from the head, yes. But this fish is rotted all the way down to the tail.

So we sit here out in the Alpha Quadrant, bitter.

Posted by DeLong at January 28, 2004 02:16 PM | TrackBack | | Other weblogs commenting on this post
Comments

they're not rotten -- they're just being good Republicans. rhymes with a similar, almost-but-not-quite-homonymous phrase folks may have heard. yes -- that one.

if the shoe fits, kids.

"There is a time when the operation of the machine becomes so odious, makes you so sick at heart, that you can't take part; you can't even passively take part, and you've got to put your bodies upon the gears and upon the wheels, upon the levers, upon all the apparatus, and you've got to make it stop."

Posted by: wcw on January 28, 2004 02:41 PM

____

"The [Bush] Administration has flubbed its [task of]... international leadership."

As a point of discussion - we don't hire the President to be an international leader, they're hired to be a national leader. Yes?

Posted by: Brian on January 28, 2004 02:44 PM

____

Why do you harbor such bitter, irrational hatred for George Bush?

Seriously, though, you'd think that the administration's policies would have forced at least one high level official to resign in disgust, like that Edelman guy from HHS who resigned to protest welfare reform. Or Cy Vance. It's almost as if the Republican party today is some sort of tribe, requiring exceptional loyalty.

Posted by: Amitava Mazumdar on January 28, 2004 02:54 PM

____

Don’t be bitter--if it weren’t for the irreparable loss of wildlands, and the children stepping on unexploded ordnance, it’d be a total hoot.

I think we are at a completely fascinating moment. We’ve proven to the world that they cannot count on us for intelligent leadership (yes, we elect the President to lead the world’s greatest power, and therefore lead the world, or at least the West). We’ve demonstrated that a democracy may advance stunning mediocrities to power, as monarchies and dictatorships once did. We’ve shown them that unbridled capitalism leads to gaps between rich and poor unlike any yet seen. All this, at around the historical moment that the rest of the world has largely accepted the principles of free markets and democracy. We’ve given them all some good laughs, and a cautionary lesson. They cannot count on us to do the right thing. Maybe knocking ourselves down a few pegs is a good idea lest any others catch the hubris.

The next step will be whether and how our own democracy takes corrective measures, and after that, how we publish our corrections to the world.

So: election, education, information.

You and others are fighting the good fight. May well be the vanguard.

Posted by: Lee A. on January 28, 2004 02:55 PM

____

He is doing exactly what Ron Reagan did. He played the defense card, while gutting all of the social and environmental parts of every department.

In the end the American people will pick security over these programs every time.

Posted by: Greg Hunter on January 28, 2004 02:57 PM

____

Brian,

We hire a president to serve our national interests. To the extent that providing international leadership serves our interest, we hire a president to provide international leadership. If the president fails in that regard, then he has failed, in some measure, to do what we hired him to do.

More specifically, since Bush promised a "humble" foreign policy, he has failed to provide what he himself said he would provide in the way of international leadership. That was true even before going to war with Iraq. The "Bush doctine" notions of preemptive war and of making sure that every other nation remains in a position of risk relative to US military capabilities is just about as far from humble as one can get. He at least thought that humble foreign policy was what some people were hiring him for, or he wouldn't have bothered to say it.

There are plenty of failures to do what we hired him to do on the domestic front, as well, but that wasn't your question.

Posted by: K Harris on January 28, 2004 03:01 PM

____

But seriously, tell us how you REALLY feel... :)

There are two possibilities:

* They are blithering idiots.

* They are deliberately sabotaging the country.

I would go with the 2nd.

When Norquist makes comments about drowning the federal government in the bathtub, he's serious.

They also realize that it is politically untenable.

The solution is to create an Argentina style meltdown, and then you have no choice but to slash Social Security, Medicare, Medicaid, etc. This is deliberate.

They also intend to destroy internation conflict resolution systems because they are simply opposed to them.

The way to do this is to make the rest of the world so pissed off at us that they are unwilling to work with us on ANTHTING.

After a few years of this, you can say, "Well we tried", and leave the UN, World Court, etc.

They are not vandals, destroying for its own sake, but rather more like the extremist anarchists of the early 20th century who believed that society would have to be razed in order for a new world to be formed.

Posted by: Matthew Saroff on January 28, 2004 03:02 PM

____

what is the source for prof. frankel's comments? i.e. recent op-ed, personal communication, etc.?

Posted by: anon on January 28, 2004 03:12 PM

____

I haven't worked on a campaign since the early 1970s. Voted, sent a check, had the occasional heated back-and-forth in some saloon -- but generally I trusted in representative democracy -- that even though I often disagreed with many policies of my representatives, that most of them would be making some effort to craft legislation and policies that attempted to contribute to the common good.

No longer.

The Republicans are dismantling representative democracy. And it goes deeper than Congress and the feds. I live in a state (Virginia) where Medicaid services are imperiled -- after the state spent its MSA money as general revenue, has the lowest cigarette tax in the nation, and still has a body of Republican delegates who pledge no tax increases whatsoever, including the cigarette tax. One of them just stated publically that cigarette price increases have no effect on youth smoking. Here we have yet another long run fiscal mess: a Medicaid program that will continue to be burdened with smoking-attributable expenditures -- forever -- with no attempt to be made either to reduce smoking or raise revenues from cigarette sales to alleviate or address Medicaid's needs.

I live in a county (Loudoun) in which the recently elected Republican majority on the Board of Supervisors stripped the only supervisor elected county-wide (an independent) of all powers. One of the new supervisors (whose campaign was developer funded) just announced that West Nile virus is caused by excessive wetlands, and that based on his experience in the military in Panama, bulldozing works well as an insect control method.

I have pledged myself to do something concrete every single day from now until November -- even if it's just writing a check or a letter, or making a phone call -- to ensure a Republican electoral defeat. Do I want to devote this time to politics? No. But I believe this to be the most important election of my lifetime.

Howard Dean has been criticized for displaying excessive rage. Maybe so. But rage is really the only appropriate response to what is going on in America. We could stand to exhibit a little more rage, in a lot more places.

Ya Basta!

Posted by: Timothy Wyant on January 28, 2004 03:14 PM

____

WM, are you sure you aren't coming from some alternative universe? The moderate, deficit hawk republicans wrote a whole bunch of whitepapers around 1995. Clinton implemented 70% of them. And then you come in with an unsupported assertion like this?

After all, the Republican legislature were eager to take credit for various economic policies of the late 90s. Are you now disavowing them all?

Posted by: p mac on January 28, 2004 03:21 PM

____

Would it be possible to get a notional mapping of the various quadrants (Alpha, Gamma, etc)? I must have missed it

thanks for the clear statements

Posted by: David on January 28, 2004 03:30 PM

____

Brad, according to the Star Trek mapping system (which I'm assuming you're using), we are in the Alpha Quadrant. The Beta Quadrant is closest, then Gamma and Delta. Didn't you see the last three seasons of Deep Space Nine?

Posted by: Kangaroo Jack on January 28, 2004 03:32 PM

____

But I bet people like Timothy above goes to dinner with Repubs, says good morning to them at work, talks with his repub relatives on the phone.
Without consequences this is just childish whining

We are headed to the likes of the Civil War or Great Depression, and people beat each other on outside of Congress in the 1840's. I bet you have friends who think Rush is funny. Punch them in the face, or soon you may be shooting

Posted by: bob mcmanus on January 28, 2004 03:46 PM

____

WM, who knows what a president gore would have done?

but we know what he wouldn't have done.

He wouldn't have cut taxes so substantially as to return us to structural deficit, then passed a (flawed) medicare drug entitlement.

He wouldn't have pretended that partial privatization of social security has no costs.

He wouldn't have violated the "lockbox" to cover the scale of the deficits his tax cuts wouldn't have produced anyhow.

In short, we would be much closer to dealing with the long-term issues of entitlements (and particularly medicare, as social security can be "fixed" relatively easily) under president gore than we are under president backbone.

It was a nice "blaming the victim" card that you tried to play though!

Posted by: howard on January 28, 2004 03:47 PM

____

Continuing on a positive note, I want to point out how much sorrier we'd all be if the internet hadn't provided new forms like this blog to find out real facts, and thrash out better arguments.

Just look five items down at the Washington Post's policy impostures today, vaporized instantly by our host and his posters, working hard at the truth.

But there’s going to be a lag time, and that will require patience.

Still, I’ve read some pieces in the dailies that seem to show that good journalists are in fact researching things on the internet--perhaps even coming to this site--and writing better accordingly.

May be this will be the first Presidential campaign where ideas presented in this new medium will make a difference.

It could be that democracy sometimes lets the cretins win because the smart people get too cushy, or distracted or waylaid. But theoretically, FREEDOM OF SPEECH should eventually provide the antidote.

Some writers here may find this quaintly simple, or risibly naive, but of course Thomas Jefferson put it top of the list.

And it's still all we've got.

Posted by: Lee A. on January 28, 2004 03:50 PM

____

Civil war! Civil war!

Let's get rid of the South once and for all.
It's the Southern Dixiecrats gone Republican who are still stinging from Reconstruction that explain why 18,000 people died last year from lack of health insurance. It's the Southern Republicans that will be the wedge group pushing MY (and your) social security off the cliff.

Posted by: camille roy on January 28, 2004 03:59 PM

____

camille roy: I wonder if you would cite source evidence that 18,000 people died last year from lack of health insurance?

Posted by: Lee A. on January 28, 2004 04:05 PM

____

You're wrong about when Krugman lost it. His descent into lunacy began during the campaign and not after Bush had governed a single day.

It was during the campaign that Krugman began critizing only Republicans, and that I slowly began to wonder what happened to the engaging columnist he had became. Does anyone know?

Posted by: Kevin on January 28, 2004 04:14 PM

____

Lawrence: you apparently never read "Peddling Prosperity" by Mr. Krugman in which he takes all candidates to task (Bush (41) and Clinton) for their economic gobbledeegook.

Brad: you guys (former Clinton officials) have some pull/connections. Can't you get George Soros to underwrite an advert. in NY Times, WSJ, The Economist, LA Times, Chicago Tribune, Boston Glode, Miami Herald, Washington Post, San Diego Union, SF Chron., Philadelphia (Examiner?), St Louis Post Dispatch, Minneapolis Whatever, Dallas-Houston-San Antonio-Fort Worth-Austin Apologists, etc. signed by all of you Alpha Quardrant types and other prominent economists and business people and just let it rip on Bush and his economic team. Plain facts. Show how the long term economic position has deteriorated and just quote your piece above. Then make the media stand up and take notice and force them to press the Bush Administration on the points raised in the full page ad? Get Moveon.org types to innudate the television networks and newpapers emails with the ad by email and ask that these issues be examined in print. To a certain extent it is grandstanding, but why not. Quote from Mankiw's text book and ask why the Bush Administration is doing things 180 degrees from its own policy adviser's book? Krugman does it in his editorials. I'm getting tired of simply yapping on blogs. There needs to be a call to action, and action by people who are certainly more knowledgeable than me on these issues.

Posted by: Cal on January 28, 2004 04:15 PM

____

Can we get Kevin Philips in here?

Posted by: K Harris on January 28, 2004 04:16 PM

____

Ur, make that s/became/been/g.

Posted by: kevin on January 28, 2004 04:18 PM

____

Did he campaign on a humble foreign policy? I'm pretty sure he said that, if elected, humble policies would be foreign to his administration.

Guess I'll have to look that one up.

Posted by: djs on January 28, 2004 04:30 PM

____

Somebody mentioned to me the other day that it just doesn't make sense - the oil in Iraq isn't worth that much compared to the amount of effort expended, and a lot of other arguments about the Bush admin policies in that context.

My answer was something like this: "Remove concern for the welfare of the rest of the nation, and look at how the Bush administration has used our country, at taxpayer expense, to effect policies which greatly enrich members of the administration or friends of the administration. When you look at that goal as the measurement by which Bush's policies are judged, then his policies begin to make a lot more sense. They generally aren't so good for the nation as a whole, but it's a great time to be a friend of Bush."

Posted by: Thane Walkup on January 28, 2004 04:32 PM

____

camille roy: I wonder if you would cite source evidence that 18,000 people died last year from lack of health insurance?

No problem:
"The committee estimated that roughly 18,000 unnecessary deaths happen annually because of the lack of health insurance," said Mary Sue Coleman, co-chairwoman of the committee responsible for the report and president of the University of Michigan.

This committee was a part of
The Institute of Medicine, which is a private, nonprofit institution that provides health policy advice under a congressional charter granted to the National Academies of Sciences.

Posted by: camille roy on January 28, 2004 04:36 PM

____

Kevin, George Bush ran in 2000 on tax-related arguments of such surpassing dishonesty that the only amazing thing is why did only Krugman notice?

Posted by: howard on January 28, 2004 04:38 PM

____

I think the presidential campaign is eminently winnable this year. Whichever Democrat becomes president should have no illusions about the nature of the Bolshevik threat.
And in order to get to the White House, we need a candidate with great fortitude and courage.
Do you really imagine that Bush won't start a war, or that we won't coincidentally start a terrorist attack, etc., in October if the election looks lost for W?
Look, the timing about the Iraq war was all about the 2002 elections---nothing else mattered.
We know from past experience in 1968 and 1980 that the Republicans are willing to resort to manipulating foreign policy, at high cost of lives, in order to win office.
I just hope John Kerry will know what to say if Bush discovers an emergency in Syria, Iran(I hope not) or Pakistan (better remember how to duck and cover for that one) this coming fall and we go to war. I think Dean could handle that situation, and Clark as well. Edwards I don't know well enough to say, but being pretty and well-spoken won't be enough to handle this campaign.

Posted by: marky on January 28, 2004 04:41 PM

____

Quote:

"One of the most disturbing and extraordinary aspects of life in this very wealthy country is the persistence of hunger. The U.S. Department of Agriculture (USDA) reports, based on a national U.S. Census Bureau survey of households representative of the U.S. population, that in 2002 11.1 percent of all U.S. households were "food insecure" because of lack of resources. Of the 12.1 million households that were food insecure, 3.8 million suffered from food insecurity that was so severe that USDA's very conservative measure classified them as "hungry.""

Link: http://www.frac.org/html/hunger_in_the_us/hunger_index.html

Posted by: bulent on January 28, 2004 04:46 PM

____

"As a point of discussion - we don't hire the President to be an international leader, they're hired to be a national leader. Yes?"

No, not if your country generates one third of the world's economic output and keeps by far the most powerful armed forces of all countries.

P.S: Just in case it is not clear, I have resumed posting.

Posted by: bulent on January 28, 2004 04:55 PM

____

You know the consistent theme is that the current crowd in the white house is really, really different and new. Yet y'all seem to think that Bush and Rove will just calmly walk out and say "Well, the people have spoken." The people have spoken on Medicare and Social Security, and the Newest Right thinks the people are wrong.

And these guys will be there in January, or you have no ability to see how ugly this country can get. Watch late summer.

Posted by: bob mcmanus on January 28, 2004 05:03 PM

____

I agree with Matthew Saroff. Even pure stupidity could not produce the current admin policies that so consistently have the effect of destroying the fiscal, institutional and foreign policy infrastructure of the federal government.

Although Iraq was certainly a case of wilfull ignorance producing a postwar unfolding fiasco, on the domestic front their actions are clearly part of a deliberate, focused plan, supported with mendacious, Straussian rhetoric designed to divert/confuse the electorate long enough to get a 2nd term.

If one ignores what they say they're doing, and focus on what they've done, the pattern is obvious:

a) Pay off the >$300K/yr base with the largest politically feasible tax cuts possible, thereby massively reduce gov't revenues
b) Buy off the middle class with much smaller tax cuts
c) Fool seniors with a medicare drug plan which only begins around ~2006, and promise to "save" and "preserve" Soc Sec and Medicare
d) roll back or create loopholes in regulatory regimes(e.g. Clear Skies, clean water act revs and new source provisions),
e)eliminate data gathering functions that enable effective gov't and which they can then use the lack of data as a rationale to subsequently eliminate programs that "there is no data to justify".
f) Spend on anything in sight, especially on GOP corp. sponsors, to create a short term stimulus to carry the economy through Nov 2004

The resulting current year and future expected gigantic deficits are "good" news, since it means that shortly after Nov 2004 they can claim that they're being forced to cut back spending (esp. sr. drug plan, social security, medicare/caid) to bring it into line with revenue. They will say they can't raise taxes because the economy is still in delicate condition. It's important to note they just finished running the same scam in Texas, where they massively cut state spending, resulting in throwing >50,000 kids off CHIP (despite 5:1 matching federal funds), cut medicaid, cut UT funding, and other assorted atrocities, with no widespread unrest.

What they're trying to do:

a) "privatize" major entitlements, with initial subsidies that will subsequently "have to" be dramatically cut back
b) dramatically scale back or eliminate most gov't departments except defense, intelligence and law enforcement
c) Create large tax exempt "savings" vehicles that improve short term tax revenues but have massive out-year revenue costs, making the tax system regressive and making any subsequent attempt to raise spending or taxes fall mainly on the bottom 90% of the population.
d) continue to run less huge, but significant budget deficits that severely constrain any attempt to raise spending or roll these changes back.
e) Privatize as much of gov't as possible to recreate a spoils patronage system to entrench their fundraising and political power
f) finish media deregulation, enabling large multinationals to consolidate control of the media
g)Finish stacking the judiciary with ultra conservative corporatist judges

At that point, regardless of whether Dems get back in or not, they've achieved their objectives, and, as a bonus, permanently damaged people's trust in government in general to act in their interest.

Bottom line:

1)They aren't worried about outyear deficits due to entitlement or program spending ***because they have no intention of ever paying them***.
2) They aren't worried about fiscal stability of the federal goverment since they are deliberately trying to cripple it.

Posted by: raidman on January 28, 2004 05:12 PM

____

Brad, three questions for you:

(1) Does there come a time when big capital starts voting with its feet? Not just re the imbalances but really asserting itself re the whole dismal spiral down to a low-invention economy intent on levelling itself with India?

(2) This eat-your-peas stuff of the Clinton team that you describe - really lights a thousand lightbulbs of understanding out there in the hinterland does it?

(3) What to do about the pernicious bubble meme and the you-caused-it-on-your-watch meme?

Posted by: Fast Pete on January 28, 2004 05:29 PM

____

To further amplify Fast Pete's 1st question: If the situation is clearly as bleak as you describe it (and most other sane economic observers agree), why do the financial markets seem so unconcerned about it?

Do you think it's because:

a) collectively disbelief in GOP rhetoric, and that it will all somehow work out in the end?
b)short-term greater fool theory at work?
c) ???

And another question: What do you believe would be the kind of events or triggers that would precipitate a crash/crisis?

Posted by: raidman on January 28, 2004 05:49 PM

____

Citing _The Economist_, Prof. Delong writes:

..."Mr O'Neill says that when he raised his concerns about fiscal profligacy with Dick Cheney, the vice-president, he was told "deficits don't matter." The IMF insists they do. The decade of deficits that lies ahead for America will put upward pressure on interest rates, crowd out private investment and erode longer-term productivity growth... "

I've been accused of many things, but never of being sympathetic to Dick Cheney, GWB, or especially to the neo-cons. But...

I'd just like to ask if someone, in relatively simple language, could explain why deficits at the Federal level matter. I could understand it if the US--or any other country in the world--was on a commodity-based monetary system. (Then it's a matter of simple arithmetic to figure out how a deficit degrades the value of the currency.)

But for the life of me, I can't figure why the Federal Government, which has the exclusive power to create money, should ever be without.

I don't understand why the US government ever needs to "borrow" money. And I really don't see why the US government needs to pay interest on money that it creates.

The value of the USD, and all other currencies in the world, is what someone will give you for them. There is no exact formula for determining this. That is because there are intangibles involved, and intangibles, by definition, are indefinite.

As best as I can determine, the value of currencies is dependent mostly on what the holder can get for it. Amorphous, yes, but true.

Then what's the big deal with the government creating money? If the money is used to blow up things, and the only residual is a hole in the ground, then I can easily understand how such a deficit is bad.

But if it is spent on things of lasting value, then what is the problem?

Posted by: James Hogan on January 28, 2004 05:54 PM

____

"And these guys will be there in January, or you have no ability to see how ugly this country can get. Watch late summer."


Perhaps Democratic candidates should reinforce their appeal to the nation in matters of security, working on the fact that America does not have to choose between security on one hand and freedom, prosperity and equity on the other --- unless one is either (a) completely idiot and incompetent or (b) intends to serve narrow special interest at the expense of the entire nation.

And perhaps the Democrats should do it NOW and do it vigorously enough to prove that any "late summer" smoke-screen attempts would not only be pointless, but also would probably boomerang badly back on the perpetrators.

Posted by: bulent on January 28, 2004 05:55 PM

____

" Federal Government, which has the exclusive power to create money"

No, they don't.

A) Money is not created by the Federal government, it's created by the banks, by loaning your deposits out at the same time you still have them in the bank.

B) In those nations where the government DOES create money, they've tried to solve fiscal crises by printing more money. Never works, it just drives down the value of the currency, at a rather rapid rate (see Germany, late 1920's).

Defecits matter. Just one instance: every dollar lent to the government (in the form of a purchase of Treasury securities) is one less dollar available to be lent to businesses creating economic activity.

Econ 101, at your local community college. Or Brad can recommend you a textbook or two.

Posted by: Chuck Nolan on January 28, 2004 06:25 PM

____

I was struck by figures given on the Wall Street Week with Fortune program last Friday to the effect that stock market returns have averaged 12% per annum under Democratic administrations, and just 2% under Republican. Is it possible this is one more manifestation of the fact that Republicans are unfit custodians of the economy?
Is the devotion of Wall Street to the Republicans really best described as canine?

Posted by: Bob H on January 28, 2004 06:25 PM

____

Surprising to see the name of Ken Rogoff. He is a chess grandmaster and once was one of the leading players in the United States, playing in the 1976 Biel Interzonal (a tournament on the road to the world championship). Yes, it's the same guy -- http://www.chessdryad.com/articles/mi/article_140.htm

Posted by: Frederick on January 28, 2004 06:46 PM

____

" Federal Government, which has the exclusive power to create money"

>No, they don't.'A) Money is not created by the Federal government, it's created by the banks, by loaning your deposits out at the same time you still have them in the bank.B) In those nations where the government DOES create money, they've tried to solve fiscal crises by printing more money. Never works, it just drives down the value of the currency, at a rather rapid rate (see Germany, late 1920's).Defecits matter. Just one instance: every dollar lent to the government (in the form of a purchase of Treasury securities) is one less dollar available to be lent to businesses creating economic activity.Posted by Chuck Nolan at January 28, 2004 06:25 PM <

Posted by: James Hogan on January 28, 2004 07:09 PM

____

Okay. My second simple-minded question in two days.

"We saw a potential fiscal train wreck . . . [and] rolled up our sleeves and set to work. B. de Long

"Some of you here think I raised your taxes too much last year. [pause] Well, I agree with you." W. J. Clinton

What did we do about the current accounts deficit? Did we move to lower our dependence on foreign oil? Did we bring light trucks under CAFE? Did we put any brake on consumption?

If we didn't have a nice big fat deficit, how would we ever finance our current accounts deficit? What? Foreigners would invest their dollars in Enron, Tyco, and Global Crossing?

Posted by: Ellen1910 on January 28, 2004 07:19 PM

____

" Federal Government, which has the exclusive power to create money"

No, they don't.

A) Money is not created by the Federal government, it's created by the banks, by loaning your deposits out at the same time you still have them in the bank.

B) In those nations where the government DOES create money, they've tried to solve fiscal crises by printing more money. Never works, it just drives down the value of the currency, at a rather rapid rate (see Germany, late 1920's).

Defecits matter. Just one instance: every dollar lent to the government (in the form of a purchase of Treasury securities) is one less dollar available to be lent to businesses creating economic activity.

Econ 101, at your local community college. Or Brad can recommend you a textbook or two.

Posted by Chuck Nolan at January 28, 2004 06:25 PM

The US Constitution, the supreme law of the land, says that the "Congress shall have power to..coin money, regulate the value thereof, and of foreign coin."

It also prohibits the states from "emitting bills of credit."

There is no way to read this document and come to any other conclusion than that the US Congress has the exclusive power to create money. Period.

Banks make loans. They don't create money. They create credit, from which they earn interest. But loans aren't money. I didn't take Econ. 101, but even I understand that


Weimar Germany was caught up in a system of commodity-based currency.

But no country on the face of the Earth today is in a commodity-based currency regime.

Why does the government need to borrow money in the first place, if it can create money?

Posted by: James Hogan on January 28, 2004 07:47 PM

____

James, the government can "print" money to its heart's content. The result is known as inflation.

If it chooses to avoid inflation, then it has to borrow money and pay interest.

Borrow enough money and you start to press the supply of capital in the world, which, while huge, is not infinite.

The US Government will always be able to borrow money, but the price it pays in interest is by itself potentially highly expensive (on current trendlines, by 3 or so years from now, we'll be paying $300B - $400B/year in interest), but also produces crowding out effects.

Ellen1910, not all problems can be solved simultaneously. Clinton/Rubin/DeLong and anyone else you care to name solved the primary problem: the structural deficit.

Now, i have no idea what you mean by "finance" our current accounts deficit. There is nothing to "finance." We import more than we export; dollars end up in foreign hands. The dollars finance the deficit. If we didn't have a federal deficit, but had the same current account deficit, foreign dollar-holders would think of something to do with the money, likely buying US assets.

Posted by: howard on January 28, 2004 08:56 PM

____

DJS wrote: "Did he campaign on a humble foreign policy?"

Yes.

"...I think one way for us to end up being viewed as the ugly American is for us to go around the world saying, we do it this way, so should you. I think the United States must be humble and must be proud and confident of our values, but humble in how we treat nations that are figuring out how to chart their own course."

--------------

"If we’re an arrogant nation, they’ll resent us. If we’re a humble nation, but strong, they’ll welcome us."

Posted by: PaulB on January 28, 2004 09:27 PM

____

I was going to send this article to an infuriatingly deluded Republican friend of mine until I read this:

"Is there anybody... who has emerged or well emerge from this administration like a reputation?"

Posted by: please proofread better on January 28, 2004 09:45 PM

____

>James, the government can "print" money to its heart's content. The result is known as inflation.

If it chooses to avoid inflation, then it has to borrow money and pay interest.

Borrow enough money and you start to press the supply of capital in the world, which, while huge, is not infinite.

The US Government will always be able to borrow money, but the price it pays in interest is by itself potentially highly expensive (on current trendlines, by 3 or so years from now, we'll be paying $300B - $400B/year in interest), but also produces crowding out effects.

posted by HOWARD<

Everyone knows the meme: print money and you get inflation. It is not true.

Why? Because we aren't on a commodity-based monetary system anymore. The meme is a left-over effect from about 30 years ago. Unfortuantely that is so ingrained in the minds of some that it will never go away, but that's life.

Let me say this again: the value of a currency is what someone will give you for it. That's it. IF holders of the currency think that they can get something of like value for your currency, then it will stay stable. If not, it won't.

Some very, very smart people got their heads handed to them trying to figure this out. A couple of them even had Nobel prizes in economics.


I'll be the first to admit that it's a helluva way to run a railroad, but that's the way it is in the real world.

Let me run this by you: Suppose that the government simply printed $100 billion and used it to build power plants. Then it sold the power from the plants to the public. It then used the money to "repay" the money (now it didn't really borrow the money, but I use this terminology for convention.)

Wouldn't the national account have new power plants in its list of assets? And most of all, wouldn't the economy have new sources of power?

Would there be any inflation as a result of this?

There is, of course, a limit to this practice, as there is a limit to everything else in this world.

Posted by: james hogan on January 28, 2004 09:49 PM

____

James Hogan:

> Banks make loans. They don't create money. They create credit, from which they earn interest. But loans aren't money. I didn't take Econ. 101, but even I understand that.

In Econ. 101 (the only one I have taken), they teach you that bank loans create money. This page and the one that follows it are a very clear version of the Econ 101 presentation. http://ingrimayne.saintjoe.edu/econ/Banking/Commodity2.html. I never found the argument too compelling, but you'll probably have to believe it for the economists to take you seriously in their little club.

At any rate I wouldn't expect the authors of the Constitution to have known anything about economics and monetary policy. It's like citing the Bible to prove something about astronomy.

Posted by: gautama on January 28, 2004 10:10 PM

____

Alexander Hamilton.

Posted by: jml on January 28, 2004 10:35 PM

____

I hate to pick nits, but Earth is in the Alpha quadrant; you probably mean that we find ourselves in the Delta quadrant, on the opposite side of the Galaxy. :-)

(I have the feeling that our lives have turned into something out of a Cyberpunk novel, or even something Philip K Dick wrote)

We now return to our regularly scheduled economics programming.

Posted by: Jose Silva on January 28, 2004 10:54 PM

____

"After introspection, the answer for me at least as clear. We worked very hard for years to repair the damage that Ronald Reagan and company had done to America's fisc. We strained every nerve and muscle to find politically-possible and popularly-palatable ways to close the deficit, and put us in a position in which we can at least begin to think about the generational long-run problems of financing the retirement of the baby-boom generation and dealing with the rapidly-rising capabilities and costs of medicine. We saw a potential fiscal train wreck far off in the future, and didn't ignore it, didn't shrug our shoulders, didn't assume that it would be someone else's problem, but rolled up our sleeves and set to work."

Gee, does anyone know if any of Frank Capra's DNA is extant? Let's clone him and make this into a movie. Might lack for drama though - idealistic yokel from the sticks comes to DC, discovers the good guys are in charge, goes home happy. Maybe Scarlett Johanson could play the yokel....

As excellent as the Clinton administration's economic policies were, isn't it difficult to do much about the baby-boom retirement problem in advance? The goods and services that they will consume after their retirement, will be produced after their retirement, and all that. I mean reducing the national debt will help, but all that much?

And "getting into position" to deal "with the rapidly-rising capabilities and costs of medicine" isn't quite the same thing as actually doing something about it. I think BD is giving something away there....

It would be lovely to think that a Democrat could run in 2004 on the Clinton record. Do we hear any of the candidates doing that? I fear we hear a very much different tune, alas. (I guess since even Gore didn't run on the Clinton record, what should I expect?) So my fallback position is, it would be lovely to think that someone like Kerry, if elected, would appoint talented people that would then pretty much roll him on economic policy and entitlement reform.

Maybe the Clinton administration was a one-time thing, where people of good heart and good will came together to put aside their personal ambitions, and simply do what was best for the country. Or maybe we had gridlock....


Posted by: Joe Mealyus on January 29, 2004 12:51 AM

____

> There is, of course, a limit to this practice, as there is a limit to everything else in this world.

Quite: look at the dollar exchange rate.

You seem to be combining vaguely sensible Keynesian ideas (that's to say, short-term deficit spending on infrastructure creates stimulus) with rather, um, esoteric ideas on money supply.

How about this explanation:

f bank loans are used to create new productive capacity - loaning money to business or government for new factories or roads - then both money supply and productive capacity are growing together. But if banks create money that is used to speculate on land or silver or even tulip bulbs -as occurred in Holland in the 1630s - then new money enters circulation but no new productive capacity is built. This can set the stage for an inflationary surge followed by an economic crisis as bank loans have to be written off when the speculative bubble finally bursts.

(http://distance-ed.bcc.ctc.edu/econ100/ksttext/money/MONEY.htm#logic)

The point being that Bush-logic economics does not appear to be having much impact on productive capacity.

Posted by: ahem on January 29, 2004 01:29 AM

____

Joe Mealyus at 12:51 AM: "It would be lovely to think that a Democrat could run in 2004 on the Clinton record. Do we hear any of the candidates doing that?... I fear we hear a very much different tune, alas."

Joe: Nice. My take on this. Brad’s is a fine honest moving statement, and his team did a 90% brilliant and correct job. But the 10% they fell short on did allow the bubble, crashed businesses, stockmarket losses, recession, and then Bushonomics to “correct” the situation. Suggestion: Brad & Co and the candidates MUST get to grip with what that elusive, hard-to-see 10% actually was to win through for the long term.

Bob H at 2004 PM: "I was struck by figures given on the Wall Street Week with Fortune program last Friday to the effect that stock market returns have averaged 12% per annum under Democratic administrations, and just 2% under Republican... Is the devotion of Wall Street to the Republicans really best described as canine?"

Bob: Great. My take on this. Democrat policies are good for the ECONOMY and investors as a whole (though they are not yet FULLY good, see my suggestion just above - a less than perfect model) and Republican policies are good for CEO’s and CERTAIN CORPORATIONS. The candidates are doing a horrible, horrible job of making this distinction clear and of presenting what is actually required.

Seems to me that Brad’s REAL frustration (and ours too) is actually NOT that the Republicans are disassembling a perfect model. It’s that it was not a perfect model - and that elusive 10% that would make it complete, stable and self-sustaining is STILL elusive.

Posted by: Fast Pete on January 29, 2004 03:58 AM

____

"In Econ. 101 (the only one I have taken), they teach you that bank loans create money. This page and the one that follows it are a very clear version of the Econ 101 presentation. http://ingrimayne.saintjoe.edu/econ/Banking/Commodity2.html. I never found the argument too compelling, but you'll probably have to believe it for the economists to take you seriously in their little club."

You'll have to believe it because it's the unvarnished truth. If you learn hjow the Federal Reserve system works, you'll find that this is the ONLY way money is created. The Constitution states that the Congress has the power to coin money. This is construed as stating that currency and coinage are under the control of the Federal government, but currency and coinage are a very small (never more than 10%) part of the dollars in existence, and currency and coin are only issued by the Federal reserve to the banks in exchange for dollars the banks already have, either in worn-out currency or in electronic form, as bookkeeping entries. Currency is NEVER released on its own.

Sorry, that's how it really works. The Fed NEVER just prints money. See Russia, early 1990's. It just doesn't work.

Posted by: Chuck Nolan on January 29, 2004 05:43 AM

____

It is all spelled out in PNAC (Project for a New American Century) at http://raytal.com/gate.html.
Only they don't really mean american, they mean
republican. And they don't really mean republican,
they mean themselves.

They explained what they wanted to do and they
are doing it via any convenient means.

Posted by: hello on January 29, 2004 06:50 AM

____

Re: the realization that we have been undone. Welcome to the monkeyhouse.

Posted by: currus on January 29, 2004 06:52 AM

____

Camille,

I'm with you but I'm not so sure the South wants to leave. many of those states have a pretty good deal getting back far more Federal tax than they contribute, at the expense of many other states, mine (NH, 69%) included:
http://www.taxpayfedil.org/images/fedspend.gif

As for the printing money deal; It has a history of very bad consequencesin other nations. I thought "actions have consequences" was a conservative value. At least the old style conservatives.

Posted by: Chuck Taylor on January 29, 2004 07:31 AM

____

James, the answer to your little example, just as it was the last time you used it, is yes, this would produce incremental inflation. What makes you think it wouldn't? The economy is a large, interconnected whole. Dump an extra $100B of "printed" money into it and it will respond, in various ways (such as reflecting the fear that the government will keep doing this, reflecting the multiplier effects of building $100B of power plants, and similar ways that more skilled macroeconomists can outline for you), which will lead to inflation.

Posted by: howard on January 29, 2004 08:01 AM

____

" Why do so many of us who worked so hard on economic policy for the Clinton administration, and who think of ourselves as mostly part of a sane and bipartisan center, find the Bush administration and its Republican congressional lapdogs so... disgusting, loathsome, contemptible? Why are we so bitter? "

Too much self-esteem.

Posted by: Patrick R. Sullivan on January 29, 2004 08:09 AM

____


The basic point that banks create money by
making loans is a lot easier to see and understand
if you include one more step. When a bank makes a loan to you they create a demand deposit in
your name. That demand deposit is the money you then have to spend. When you take out a loan -- get credit -- from a bank you receive money in the form of a bank demand deposit that the bank has created out of thin air. If you include that step in the process you are taught in Econ 101 I think the misunderstandings expressed in earlier comments will be a lot less.

Posted by: spencer on January 29, 2004 11:05 AM

____

The reason the constitution limits the ability of govt to create money grew out of how we financed the revolutionary war. We financed it largely by printing money called the continental. it was a pure fiat money with no backing and led to major inflation. This is where the old phrase "not worth a continental" came from.

This was done at a time when modern banking as we know it was just starting to emerge. But over the first 50 years of US economic history regulation of banks and the existence of a national bank
was a major political issue.

Posted by: spencer on January 29, 2004 11:13 AM

____

I understand. Today, however, is Bo Diddley Day.

Posted by: John H. Farr on January 29, 2004 11:41 AM

____

Hrrmm. I am way out of my league with all the Econ phd's posting here, but I don't see anyone bringing up a couple of problems with Mr. DeLong's indignant outburst.

1) Assuming supply side is utterly BS (although the current data would seem to indicate otherwise), even if you reversed every penny of tax relief, you would only add $130 billion to federal revenues. Why? Because of the recession, not because of any Bush policies (and neither because of any Clinton policies). It looks to most people (non Econ-phd's) that Bush's policies are helping bring us out of recession, and increase fed revenues.

2) The plunging dollar has its benefits: smaller trade gap and influx of foreign capital to dollar denominated assets.

Of course, supply side will only work if we can keep the current account deficits down, and the Pubs are laughing all the way to multiple terms about that. So, if you want to criticize the W for lavish spending, OK I'll agree, but I won't give credit to Clinton for controlling spending in the 90's; I credit gov't gridlock of different parties in the spending branches. And please tell me what in the hell Clinton's economics team did w/r/t entitlement spending other than the welfare bill. I am dying to hear this. If Bush gets another term, he will at least try to do SOMETHING to save S/S (although if it is anything like his fix for Medicare, we would be better off with a Dem). Since Congress will remain Rebublican, we will probably be better off with a Dem anyhow.

Posted by: Econo-dunce on January 29, 2004 11:48 AM

____

Must proof read...

...Reversing tax relief would only add $130 billion to revenues...why do we have a $500 billion deficit? Because of the recession....

Posted by: Econo-dunce on January 29, 2004 11:52 AM

____

Econo-dunce, there are two issues.

Issue 1: there is nothing wrong with a deficit during a recession (although, of course, the recession has been over for quite a while now). Our complaint on that score is that the deficit was very poorly structured from a stimulus standpoint, which is why Bush's claims about the job-producing benefits of his tax cuts have, like so many of his claims, failed the test of reality.

Issue 2: In the long term, we should be roughly in budgetary balance over the full business cycle. The Bush tax cuts, especially if made permanent, make that impossible (well, not theoretically impossible - we could imagine cutting government spending from roughly 20% GDP to 16% GDP to match anticipated revenues post-Bush tax cuts being made permanent, but there is no political constituency for what those cuts would require). Ergo, we're irritated beyond measure that Bush is simply ignoring this.

Additional notes: 1.) Honest supply-side thinking has nothing to do with what Bush has done. Honest supply siders cut taxes in a specific way and also cut government spending to reduce the government's role in the economy. What Bush has done is cut taxes and increase government spending. The irresponsibility is staggering; 2.) A bipartisan consensus agreed upon an approach to the oncoming retirement of the baby boomers, which, crudely, was called the "lockbox." Bush promised to support this consensus. He hasn't. We're just about out of time to repair the damage.

Posted by: howard on January 29, 2004 01:30 PM

____

" we could imagine cutting government spending from roughly 20% GDP to 16% GDP to match anticipated revenues post-Bush tax cuts being made permanent, but there is no political constituency for what those cuts would require). Ergo, we're irritated beyond measure that Bush is simply ignoring this."

Some find it irritating (perhaps even W) that it is casually ignored that there is even less of a political constituency for increasing federal spending to 30% of GDP.

Posted by: Patrick R. Sullivan on January 29, 2004 03:32 PM

____

For once, Patrick, i won't disagree with you at all.

Posted by: howard on January 29, 2004 03:58 PM

____

If you have a taste for black humor (very black, I think), check out npr.org's All Things Considered for Wednesday, Jan. 28. Jay Bryant of theoptimate.com confidently assures us that the deficit is nothing to worry about.
"Deficits happen. Surpluses happen. No one really knows why." Even in a world drowning in condescending prattle, this bit of shilling is a classic.

Posted by: Mike Barnas on January 29, 2004 04:57 PM

____

I know that I'm the amateur in this crowd but I have a question for Mr. Hogan:

If all we have to do is print more money, why are we borrowing so much from the Asians?

Posted by: Karen Underwood on January 30, 2004 09:56 AM

____

There are two possibilities:

* They are blithering idiots.

* They are deliberately sabotaging the country.


They're not mutually exclusive.

---
1) Assuming supply side is utterly BS (although the current data would seem to indicate otherwise),
"Supply side" is, very roughly, the idea that tax cuts for the "supply side" -- the very rich, corporations -- have a bigger stimulus effect than tax cuts for the "demand side" -- the poor, the middle class.

Supply-side is total BS and all the data shows this. Stimulus on the demand side is way more effective than stimulus on the supply side; there are no reputable economists who disagree any more.

Bush's phony "tax cuts" contain a small middle-class tax cut and an enormous tax cut for the obscenely rich. The shallow recovery we're getting could have been achieved with a fraction of this tax cut, by targeting the tax cut to the poor and lower-middle-class. In fact, a *bigger* recovery could probably have been achieved with a fraction of this tax cut.

Meanwhile, Bush's sharp reductions in state aid spending are causing large increases in state and local taxes, which are putting a nasty drag on the economy.

even if you reversed every penny of tax relief, you would only add $130 billion to federal revenues. Why?
Bush's massive expansion of spending, of which more than doubling (!) the federal payroll was the least (!) of his sins. (The greatest are the unbelievably massive, unjustified corporate giveaways, IMO. The unnecessary war in Iraq, not to be confused with the necessary war in Afghanistan, qualifies as well. Or how about the enormous spending on Cold-War-era military projects?)

Because of the recession, not because of any Bush policies (and neither because of any Clinton policies).
Partly because of the recession, but don't forget Bush's *massive* spending increases. Really, really, massive. And with minimal stimulus effect due to being targeted at the richest people -- those least likely to spend their money.

It looks to most people (non Econ-phd's) that Bush's policies are helping bring us out of recession, and increase fed revenues.

"Most people" aren't looking at the facts, I guess.

Posted by: anon on February 6, 2004 01:54 AM

____

Be wiser than other people if you can; but do not tell them so.

Posted by: Boie Pat on March 17, 2004 10:25 PM

____

It is never a mistake to say good-bye.

Posted by: Pike Scott on May 2, 2004 02:44 PM

____

Make sure you still have something worth wishing for.

Posted by: Hubbard Cristin on May 20, 2004 08:46 AM

____

Nice site. Keep up the good work.

Posted by: phentermine online on June 6, 2004 08:21 PM

____

Post a comment
















__