December 06, 2002
Paul O'Neill Resigns; Paul Krugman Congratulates Himself

Paul Krugman congratulates himself on his now long-ago judgment that Paul O'Neill was unlikely to be a good Treasury Secretary. I confess that Paul Krugman was right. The Treasury Secretary should (a) be a strong voice helping the U.S. pursue good economic policies, (b) understand what the economic policies of the United States are, (c) be effective at using his extremely prominent and powerful post to tell outsiders about the economic policies of the United States, and (d) know how to use his--truly excellent, dedicated, and very large--career staff inside the Treasury building. Paul O'Neill was zero for four.

This does surprise me. I was one of the people who back in the winter of 2001 was thinking that Paul O'Neill was likely to be a good Treasury Secretary. Everybody said he'd done a good job as Deputy Director of OMB in the Ford Administration. And you cannot do a good job as Deputy Director of OMB without knowing an immense amount about how and why the money flows through the U.S. government.

Yet once he was sitting in the Treasury Secretary's seat, he seemed to know appallingly little and to be remarkably unable to learn.

Put me down as one of the people who thinks that Marty Feldstein and Undersecretary Peter Fisher would be very good replacements for O'Neill...


DEPT OF SELF-CONGRATULATION: DEPT. OF SELF-CONGRATULATION (12/6/02)

When Paul O'Neill was chosen as Treasury Secretary, there was unanimous applause from the financial press. Well, almost unanimous. What I wrote two years ago looks pretty good right now ...

BUSH LOOKS BACKWARD

Optimists expected George W. Bush to take three objectives into account in choosing his secretary of the treasury.

First, most people expected him to choose someone with extensive experience of financial markets. There is every reason to believe that the series of financial upheavals that convulsed the world in the 1990's will continue. Robert Rubin and Lawrence Summers did a yeoman job of containing those crises; until a few days ago most people expected Mr. Bush to choose someone who looked like a Republican Bob Rubin, someone like PaineWebber's Donald Marron.

Second, some thought that Mr. Bush might choose a treasury secretary who could be a symbol of bipartisanship; one name floated was William McDonough, the president of the Federal Reserve Bank of New York.

Finally, given the troubling impression during the Florida fight that Mr. Bush was abdicating responsibility to Dick Cheney, and more broadly to his father's men, most people thought that Treasury would offer a good opportunity to show that the new administration would not be filled with Mr. Cheney's cronies.

Paul O'Neill, the former Office of Management and Budget official who became Alcoa's chairman, wasn't exactly what the optimists had in mind.

Indeed, Mr. Bush himself seemed oddly uneasy during the press conference at which he announced the selection. I'm not big on interpreting facial expressions; but anyone who watched Mr. Bush as Mr. O'Neill spoke can tell you that he was, well, shifty-eyed — his gaze darting frantically from side to side. Unless this is a characteristic nervous tic that Mr. Bush successfully concealed throughout the campaign, it was an indication that something was wrong.

What's wrong with Mr. O'Neill? He built his business reputation by reversing efforts to transform Alcoa into something more than an aluminum company, instead refocusing on the core business and engaging in ruthless cost-cutting. This is all very well — but overseeing world financial markets is nothing at all like running a large, very old-economy, command- and-control corporation (or, for that matter, working the details of the federal budget). Mr. Rubin excelled at the deft strategic intervention — persuading investors, when the situation was on a knife edge, not to pull their money out and turn a temporary loss of confidence into a self-fulfilling prophecy of collapse. Perhaps Mr. O'Neill will reveal a comparable talent, but nothing in his career to date suggests that this is his sort of thing.

And by the way: his long friendship with Alan Greenspan does not constitute a qualification. For all his qualities, Mr. Greenspan is not God. The Treasury Department doesn't need a Greenspan acolyte to second the great man's views; it needs a secretary who, like Mr. Rubin, has enough independent knowledge and gravitas to supplement Mr. Greenspan's judgment, and if necessary challenge it.

Despite Mr. O'Neill's long association with conservative causes, his appointment does not please the hard right. But given Mr. Bush's decision to cave in to the hard right on the crucial matter of the Justice Department, simply appointing a treasury secretary who isn't rabid isn't much of a bipartisan gesture.

And last but not negligibly, Mr. O'Neill is — surprise! — an old colleague of Mr. Cheney's. And one suspects they are kindred spirits: like Mr. Cheney before his own re-entry into politics, Mr. O'Neill belongs to the class of businessmen the Japanese call amakudari, "descended from heaven" — former government officials who later in life enter the business world at the top, not the bottom. None of this says that Mr. O'Neill will necessarily fail. But it does raise questions about what is going on in the Bush transition. Why did the candidate who was supposed to represent the aspirations of the "investor class" reject all the candidates proposed from the investment community?

Here's a guess: despite all the talk of being forward looking, Mr. Bush's people are fundamentally uncomfortable with the modern world. As my colleague Tom Friedman has pointed out, they seem to hanker for the lost certainties of cold-war diplomacy; perhaps they also hanker for the lost certainties of the old economy, where big companies were comfortably settled in stable oligopolies, and didn't have to worry about the shifting tides of financial markets.

In short, they want to pretend the world is still the way it was when some other guy was president — can't remember his name, began with a "B."

Originally published in The New York Times, 12.24.00

Posted by DeLong at December 06, 2002 10:57 AM | Trackback

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Comments

Put us down as one of the people who think all Marty Feldstein cares about is making life more pleasant for the rich and all Marty Feldstein will attempt will be in that guise. We have long followed "Marty" and find there is no sensitivity to the needs of middle class or poor Americans.

Posted by: on December 6, 2002 11:31 AM

This administration has shown only cosmetic concern for the economic needs of middle class Americans. Policy has been designed to enrich the rich. This mix of pretend compassion for the middle class and heart felt policy for the rich will continue. After all, the Wall Street Journal editorialists are on the watch.

Posted by: on December 6, 2002 11:39 AM

Well, that's way too harsh a commentary on Marty Feldstein, but he's not going to get the job.

Though a bright economist, he had a knack for frequently inserting his foot in his mouth in public during the Reagan Administration, and one of a Treasury Secretary's foremost responsibilities is speaking carefully in measured tones. Just say no to Feldstein, but almost no one is as mean-spirited as the first poster suggests.

O'Neill always came across as a weak speaker and not-very-authoritative leader of the American financial system. Perhaps he's better in person than on TV but he was a controversial choise at first and only went downhill from there. Not unlike that Brady character that Bush Sr. was so overly fond of.

Not a prediction, but if they're smart, the Administration will appoint someone with very good relations with the Democrats in Congress. There are a lot of possible policy initiatives(Medicare drug reimbursement, honest simplification of the tax code, maybe even a combination of reducing the payroll tax PLUS an elimination of double-dividend taxation) coming up that Bush is going to need help from his Treasury Secretary to sell to Democrats.

Posted by: Anarchus on December 6, 2002 11:41 AM

Yes, anonymous, Feldstein would be a good fit with Bush43 policy models.

Brad, my pre-game rundown had O'Neill picked for Cabinet MVP. I thought he'd be the straight-talking numbers guy who would sit down with Dubya, explain how those campaign numbers were campaign numbers, further explain that there were plenty of real numbers left to work/play with, and get on with the job. My error.

I'm not sure the picture gets any brighter with the next round of suits.

Posted by: RonK, Seattle on December 6, 2002 11:44 AM

'.....coming up that Bush is going to need help from his Treasury Secretary to sell to Democrats.'

This implies Bush is interested in getting the Democrats on board, which I don't think he is. Other than the Kennedy education bill, has he really tried to get the Democrats on board a thing?

Hopefully I'll be surprised, but I'm expecting 2 years of party-line votes.

Posted by: Jason McCullough on December 6, 2002 12:06 PM

Conservatives are determined to dismantle the programs that have served middle class Americans since the New Deal. Economists who have no concern for middle class America will be heard by this administration and Congressional majorities, other economists will be ignored.

Paul Krugman -

"Some people — moderate Republicans who aren't ready to admit what has happened to their party, and Democrats who think their party can appease the right by making its own promises of smaller government — still don't get it. They imagine that at some point the right will decide that it has gotten what it wants.

But the right's ambitions have no limits, and nothing moderates can offer will appease it. Eventually the public, which actually benefits from most of the programs the right is determined to abolish, will figure that out. But how fast voters figure it out depends a lot on whether moderate politicians clearly articulate the issues, or try to escape detection by sounding like conservatives."

Posted by: on December 6, 2002 12:13 PM

After all, conservatives are in control of the Administration and Congress. Those of us who do not care for what will be an increasingly fierce conservative agenda had better make darn sure we are heard.

Ann

Posted by: on December 6, 2002 12:35 PM

“Eventually the public, which actually benefits from most of the programs the right is determined to abolish, will figure that out.”

Many more Americans are realizing that the government is a producer of nothing. There is no such thing as “free” healthcare or other benefits. Our elected officials and civil service protected bureaucrats can only act as middlemen dispersing money collected from the citizenry. We must constantly ask the practical question: “Isn’t there a better way of doing this?”

Posted by: David Thomson on December 6, 2002 12:41 PM

Jason: On the domestic front, what has the Bush Administration done beyond the Education Bill? And the level of Administration co-operation on that legislation was so great that some observers thought it was really just a Kennedy-Democrat creation.

When Krugman write stuff such as this: "But the right's ambitions have no limits, and nothing moderates can offer will appease it. Eventually the public, which actually benefits from most of the programs the right is determined to abolish, will figure that out. But how fast voters figure it out depends a lot on whether moderate politicians clearly articulate the issues, or try to escape detection by sounding like conservatives.", it seems clear he's ceased being a serious economist.

What major Federal Government program of the past 100 years has EVER been abolished in its entirety? How many years has it been since Federal Government spending declined as a percentage of GDP? How long has it been since Federal Government spending declined in dollars? What PLANET does Dr. Krugman live ON?

Krugman's extremist rhetoric would have us believing that conservatives in the federal government have sharply reduced the level of spending and social programs, but nothing of the sort has happened, except perhaps in the man's warped mind.

Posted by: Anarchus on December 6, 2002 01:02 PM

Uh... the level of government spending as a % of GDP has been declining sporadically since the mid-1970s, especially sharply after the end of the Cold War?

Julian Elson

Posted by: Julian Elson on December 6, 2002 01:09 PM

Would somebody buy Krugman a stiff drink of whiskey? Government at all levels consumes around 40% of national income, but the Dear Perfesser is convinced that anarchy is just one more legislative act away, due to to the vast majority of his fellow citizens being utter idiots, and not being blessed with the Dear Perfesser's Deep Political Insights, regarding dastardly, nefarious, devious, Republican Hobgoblins with limitless ambition, who (fright music) actually passed a tax cut which reduced revenues by about 2% of GDP, which can be reversed in short order if the electorate desires to. Guess what, Perfesser? If Congress actually attempts to repeal a government program that large numbers of voters wish to keep, Congresspeople, being motivated by career preservation above all else, will in short order change their minds. I swear, sometimes Krugman sounds like a 7 year old who thinks the world was invented yesterday and every development is A Monumental and Portentous Event, the Likes of Which the World has Never Seen Before, and is Cause for Great Forboding and Gnashing of Teeth .... Jesus, somebody put some Percocet in the Perfesser's whiskey, too.

Posted by: Will Allen on December 6, 2002 01:18 PM

"how long has it been since Government Spending declined in dollars?" Indeed, how long has it been since government spending declined in pounds, or marks, or rubles? Seems about as relevent to your point.

I'll just have to take your word for what a serious economist is or is not allowed to think about social and political issues.

Posted by: on December 6, 2002 01:30 PM

Funny. Economics students at Princeton simply adore Paul Krugman. We do. We do. Gripe away, and never bother to seriously think about the columns, but the columns are superb superb!

Posted by: on December 6, 2002 01:30 PM

Another superb column -

http://www.nytimes.com/2002/12/06/opinion/06KRUG.html

December 6, 2002

Digital Robber Barons?
By PAUL KRUGMAN - New York Times

Bad metaphors make bad policy. Everyone talks about the "information highway." But in economic terms the telecommunications network resembles not a highway but the railroad industry of the robber-baron era — that is, before it faced effective competition from trucking. And railroads eventually faced tough regulation, for good reason: they had a lot of market power, and often abused it.

Yet the people making choices today about the future of the Internet — above all Michael Powell, chairman of the Federal Communications Commission — seem unaware of this history. They are full of enthusiasm for the wonders of deregulation, dismissive of concerns about market power. And meanwhile tomorrow's robber barons are fortifying their castles....

Posted by: on December 6, 2002 01:37 PM

Thank you Julian for providing some facts against Anarchus' rantings. I might also suggest that subtracting "defense" expenditures from the fed budget and then calculating % of GDP would be informative...
I appreciate that David Thomson is generally reasoned and respectful, but his constant Randian chanting grows more and more tiresome.
He claims, on the basis of no evidence, that "more Americans are realizing that the government is a producer of nothing." If he points to Republican successes as evidence for his claim, I would simply point out that Bush (who lost the popular vote anyway) in fact claimed (dishonestly) during his campaign that hundreds of billions of dollars would be available for new gov't programs. In other words, you can't even come in second in the US without acknowledging the real value of gov't contributions to society.
Free market economies are very good at distributing physical resources; they even do a decent job with less tangible resources, when there are mechanisms for pricing them. But the endless ranting that, contrary to all evidence, unfettered free markets give us the best society and engaged governments give us the worst is tiresome at best and intentionally deceptive at worst.
Oh, and just to make one comment on-topic: as an architect and a Pittsburgher, I had high hopes for O'Neill; he seemed to have some thoughtful, even visionary ideas. But it took all of 2 months for me to realize that his closest spiritual ancestor in that job was another Pittsburgher - Andrew Mellon. Thank God we're rid of Paul in 2 years, instead of the 10 Mellon inflicted on us.

Posted by: JRoth on December 6, 2002 01:39 PM

Julian, your assertion doesn't include State and local govt. spending, much of which is mandated (unfunded, naturally) by Congress. In 1947, all levels of Govt. spending consumed (working from memory) somewhere in the low 20s% of GDP, compared to about 40% today. Believe me, a country which has recently seen fit to reinstitute mohair subsidies is in no danger of tumbling anarchic despair, for wont of state activity. Geez, what a bunch of sound and fury, signifying nothing.

Posted by: Will Allen on December 6, 2002 01:41 PM

Lines inspired by Private Eye's glorious teenage
poet upon the departure of Paul O'Neill


So
Farewell then
Paul O'Neill
Much maligned Treasury
Secretary
"Achtung baby"
As your pal Bono
might have said.
But you will always be
My favorite right fielder.


for the real thing see
http://www.private-eye.co.uk/thribb

Posted by: elegist on December 6, 2002 01:43 PM

Julian: ummm. yes, it's true, Federal Spending as a percentage of GDP has declined from about 36% in 1992 to 33% today, but that's only because defense spending fell from 6% of GDP to 3% of GDP.

I didn't think that Dr. Krugman considered defense spending to be a social program that the populace would benefit from. I should have been more precise.

And yes, it does matter in dollars. Krugman would have us believe that social programs are being reduced in size by radical right wing conservatives, and it's absolutely and verifiably untrue.

Posted by: Anarchus on December 6, 2002 01:50 PM

[must ... stifle ... urge ... to ... feed ... squirrels]

OK, what happens if they change horses but keep the same roadmaps?

Or is there a short list of "no-we-did-not-change-our-gameplan-next-question-please" policy shifts available to the next batter?

BTW -- given the thin bench and mediocre recruiting prospects -- how about Evans for Treasury and O'Neill for Commerce? Throw in LaFalce at SEC and Biggs on Oversight? (a Dem and a capitulation, yes, but distancing the WH from all that sorry squeal and stink)

Posted by: RonK, Seattle on December 6, 2002 02:04 PM

Remember kids, Robert Feldstein will show us all what compassionate conservatism is really about and Karl Rove had best make way for Feldstein liberalism. Remember. Feldstein thinks we would all be better off with no social security net to keep us from saving ever so much more and investing ever so wisely for our retirements. Feldstein will be there for us. Hope your all rich.

Posted by: on December 6, 2002 02:22 PM

I also hear Feldstein kicks small puppies, and sits up late at night, playing the pipe organ in his gothic mansion, while cackling maniacally. Goodness,it is a good thing we have elections ( but what about The Evil of Florida!? The Horror! The Horror!) so when Feldstein the Impaler kicks in our door, and tries to bake our children in a pie, we can elect Good and Noble Democrats, like Robert Byrd or Tom Harkin, who always make sure that the collective corn goes to the neediest, and make promises that are always kept.

Posted by: Will Allen on December 6, 2002 02:36 PM

"almost no one is as mean-spirited as the first poster suggests"

--Uh, would that be because they are less mean-spirited? Or more? And since when is indifference to the general welfare "mean-spirited?" Recall Harriet Martineau: Men who pass most comfortably through the world are those who possess good digestions and hard hearts.

Posted by: jda on December 6, 2002 02:56 PM

Sure he was an incompetent Treasury Secretary, but everyone will have to admit that he had a lot to do with the Yankee's winning all those World Series.

Posted by: John McKinzey on December 6, 2002 04:19 PM

Will Allen:
The Burea of Economic Analysis says all government spending added up to $2,951.6 billion in 2001. Since the US GDP is greater than $10 trillion, government spending as a percentage of GDP is less than 30%.

Here's the BEA chart.

Posted by: Mitch on December 6, 2002 06:31 PM

Nice squirrel kibbles, Mitch ... but for the proper measure of what "Government at all levels consumes ... of national income", refer to BEA NIPA Table 3.15, "Government Consumption Expenditures and Gross Investment", where we see that 2001 consumption was $1,858B, or ~18.5% of national income, which excludes transfer payments ultimately spent on private sector consumption.

The determined squirrels will probably begin scolding about distortionate effects of taxes and transfers, costs of regulation, and so on, ... but that wasn't the question, was it? **sigh**

Chase 'em out of the garage, you'll find 'em five minutes later cavorting on the picnic table.

Posted by: RonK, Seattle on December 6, 2002 07:51 PM

To the poster of the "Digital Robber Barons" piece:

Let's hope the Feds don't emulate the Interstate Commerce Commission. In the "robber baron" era, people complained that the cost per mile for short hauls was greater than that for long hauls. The ICC "solved" the problem by forcing railroads to raise the long-haul rates to equal the short-haul rates. I don't wanna pay DSL rates for dialup access.

Posted by: Alan K. Henderson on December 7, 2002 12:17 AM

Having been a student of Feldstein's for a couple of impersonal undergrad classes as well as (more importantly) a friend of one of his research assistants. . . . let's just say that one can be objectively bright and well-informed and have written some important stuff and still use fuzzy math to advance a political agenda, ESPECIALLY after honesty caused one such difficulties in the early 1980s. . . .

Posted by: Jeff Hauser on December 7, 2002 05:20 AM

""Some people ? moderate Republicans who aren't ready to admit what has happened to their party, and Democrats who think their party can appease the right by making its own promises of smaller government ? still don't get it. They imagine that at some point the right will decide that it has gotten what it wants.

But the right's ambitions have no limits, and nothing moderates can offer will appease it."

That's funny. One could say the same thing about the left. No matter how much money the government spends on social programs, it's never enough. They insist that it would be "irresponsible" to cut taxes, but not to raise spending. Having seen Medicare grow beyond the wildest predictions of its original opponents, they insist that we must add new benefits to it. They seem every bit as unappeasable as anyone on the right could possibly be.

"Uh... the level of government spending as a % of GDP has been declining sporadically since the mid-1970s, especially sharply after the end of the Cold War?"

So what? Why does the mere fact that our GDP is growing indicate that government spending should grow along with it? If we're producing twice as many goods and services, I don't see how that means we need twice as much government. I'd figure that government spending in relation to our population would be a useful measure, but government spending in relation to GDP doesn't really tell us anything useful.

"Feldstein thinks we would all be better off with no social security net to keep us from saving ever so much more and investing ever so wisely for our retirements."

Yes, actually we would.

Posted by: Kenneth Uildriks on December 7, 2002 07:35 AM

Nice use of the ad hominem, Ron; it is one of the more consistently charming aspects of having a dialogue with you. I suppose if transfer payments are to be excluded from government consumption, anyone can see that we are in great danger of the impending anarchy that Krugman warns us of, and certainly when citizen X pays his taxes, he excludes that portion that funds transfer payments from being part of his tax burden. My larger point stands, that Krugman is a brilliant economist who is a very silly political polemicist, with his alarmist language about political opponents with limitless political ambition who seek to destroy government programs that a large percentage of the public wishes to continue. In case you and Krugman haven't noticed, the way politicians further their careers is by pleasing the people who vote for them, which usually translates into horse-trading with each other to facilitate the distribution of cookies to people whose votes they desire. Thus, the reinstitution of mohair subsidies (right, that doesn't constitute govt. consumption, it just allows our dear mohair producer to consume more). No popular government program is going to be eliminated, at least not popular in the relative sense, because when it comes to self-preservation, Congressmen are actually quite intelligent, and will be certain to fund those activities that are essential to their continued success in attracting votes. Now, this may mean that mohair subsidies may be funded instead of activities that Krugman prefers, but Krugman ought to take that up with the electorate, and not those Republican Hobgobins (to be fair, there are likely Democratic Hobgoblins that give relative preference to mohair subsidies) with limitless ambition. People in this country get pretty much the government they desire, which often is different from with what I would prefer, but I don't attribute that difference to opponents with limitless ambition, who successfully snooker folks who aren't blessed with my tremendous insight. Krugman is really no sillier than the other hacks that grace the editorial pages, from all parts of the political spectrum, but he is a hack who is given much deference due to his deserved reputation in the academic world.

Posted by: Will Allen on December 7, 2002 07:43 AM

As an aside, did anyone see the NYT piece today, in which O'Neill is descibed as being angry and hurt regarding his dismissal? What a strange guy. He fosters the reputation of being a different sort of cabinet officer; one who can take it or leave it, in terms of holding a position of political importance. However, when they guy who hired him, for the political utility he would offer, decides that he no longer has political utility , and thus tells him to return to a very comfortable private life, O'Neill decides that he is angry and hurt. Did O'Neill think he was joining some sort of social club, in which the consideration of people's feelings and sense of fellowship was paramount? Being a cabinet officer is like being manager of a professional baseball team; the moment it is decided that there is more utility in having somebody else in the job, you're gonna get fired, and it ain't personal, it's just business. Anybody who takes such a position with expectations of fairness or equity is seriously deluded.

Posted by: Will Allen on December 7, 2002 08:22 AM

I think you're wrong on most things Will, but RonK is surely wrong to not include transfer payments in government spending? Although I can see good reasons to exclude them, if we were to do that then European countries government spending is much closer than that of the US. And that would upset many people who comment on this site.

Obviously David T, before you get over excited and feel the need for a rant , I also realise that European spending is artificially low because they also parasite of the US. But by now we all know that as a FACT, so take it as given.

Posted by: Matthew on December 7, 2002 02:28 PM

I think you're wrong on most things Will, but RonK is surely wrong to not include transfer payments in government spending? Although I can see good reasons to exclude them, if we were to do that then European countries government spending is much closer than that of the US. And that would upset many people who comment on this site.

Obviously David T, before you get over excited and feel the need for a rant , I also realise that European spending is artificially low because they also parasite off the US. But by now we all know that as a FACT, so take it as given.

Posted by: Matthew on December 7, 2002 02:28 PM

Well, Ron's point is that government spending is not synonymous with government consumption, and I suppose I may be in technical error by conflating the two, but the point remains that, Krugman's silly alarmist columns aside, no vital government programs are in danger, unless one defines all current government activity as "vital".

Posted by: Will Allen on December 7, 2002 02:43 PM

'"Feldstein thinks we would all be better off with no social security net to keep us from saving ever so much more and investing ever so wisely for our retirements."

Yes, actually we would.'

I've never seen a good explanation of why, if this is the case, the elderly so poor before the institution of social security.

Posted by: Jason McCullough on December 7, 2002 04:20 PM

The simple explanation would be that we'd be better off with a smaller safety net for only the poor elderly who really needed help.

The genius of Roosevelt's social security net is that it COVERED EVERYONE - so the program got wide support because everyone paid into the system and everyone got paid out of the system. Very big base of support politically.

But. The very first recipient of a monthly social security check was Ida May Fuller. She worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits. A good deal, that.

Longer-term, the problem is that big, broad and deep government social security programs reward citizens who consume actively and save little, and penalize citizens who save actively. In the aggregate, the present structure of social security contributes to societal undersaving and underinvestment. And it's grossly unfair, besides.

Posted by: Anarchus on December 7, 2002 07:41 PM

I know the theoretical argument where a fully-funded social security system improves investment. What I'm curious to see is an explanation of why the pre-FDR elderly were so desperately poor; you wouldn't think this would be a necessary component of a fully-funded system (or retirement without government involvement at all; they're mathematically identical, more or less.)

A quick lap around Google turns up this bit from EPI.

Posted by: Jason McCullough on December 8, 2002 02:38 PM

Whoops, wrong study; that uses the "why, if you subtract SS benefits from their income, then lots of old people are poor!" argument, which is kind of inane.

This is more useful.

'The best estimates are that in 1934 over half of the elderly in America lacked sufficient income to be self-supporting.'

Ok, it's in the middle of the Great Depression, but still, I don't think there's a lot of disagreement on this point.

Posted by: Jason McCullough on December 8, 2002 02:44 PM

'he genius of Roosevelt's social security net is that it COVERED EVERYONE - so the program got wide support because everyone paid into the system and everyone got paid out of the system. Very big base of support politically.'

The other genius was the requirement that you have to work, and work a lot, to qualify for full benefits. Like unemployment benefits, the program's popular because it satisfies the "did they contribute to society" test for benefits, as opposed, to say, the old AFDC.

The universal nature helps, but I think it's practically a footnote to the earned nature of the program.

Posted by: Jason McCullough on December 8, 2002 02:49 PM

The great depression exposed lots of shortcomings in the financial system. Without deposit insurance, "runs on the bank" bankrupted a lot of financial institutions that held the savings of the elderly. Also, much of the residential and farm mortgage debt was structured with short-term balloon terms - so if the bank that gave you the mortgage failed, or decided not to renew at maturity, you lost everything. In deflationary depressions asset values can quickly fall below the value of the mortgage outstanding.

Last, in 1933 unemployment peaked at 25%. Lose the farm, lose your savings, can't get a job - it's no wonder that the elderly were so poor.

The earned nature of the program has societal appeal, no question, but Ida May only worked three years and paid $24.75 into the system for $22,888.92 in cumulative benefits. She didn't do much to earn what she got out of the system.

Posted by: Anarchus on December 8, 2002 05:50 PM

Slight chnage of subject, but I thinkI am still on topic.

Krugman:

When Paul O'Neill was chosen as Treasury Secretary, there was unanimous applause from the financial press. Well, almost unanimous...

A fellow blogger digs up comments from the Wall Street Journal and the Financial Times which suggest that the applause was less than universal. Perhaps they are not part of the financial press.

Here is a summary of the FT reaction:

The Financial Times, for example, greeted the appointment of Alcoa Chairman Paul O'Neill to Treasury by complaining that "businessmen, or, perhaps more accurately, industrialists, do not have a glowing record in government." They would have preferred an academic economist, Martin Feldstein perhaps, like departing secretary Larry Summers.

Well, that does not change my estimation of Krugman's credibility.

Posted by: Tom Maguire on December 8, 2002 08:11 PM

Anarchus, Ida May was a corner case, and I don't say how she has any real relevance today.

'Well, that does not change my estimation of Krugman's credibility.'

Really? Your open-heart surgery on every goddamn throw away comment he makes doesn't make me think a lot of yours. No doubt his writing would be more concise (and immune to your spin-doctoring) if every sentence was buried under a metric ton of qualifiers.

Pretending that Grover Norquist and Robert Bartley are part of the "financial press" is pretty funny, though.

Posted by: Jason McCullough on December 9, 2002 12:15 AM

I've been a professional investor since 1983, and watching the interaction between wall street, the treasury secretary and the fed chief is a small part of my job. From the very start, O'Neill was viewed as a weak choice for treasury.

Industrialist CEOs don't typically understand the nuances of how capital markets work., which is a critical aspect of the job. Even worse, because they've been successful heading up a major corporation, CEOs generally think they do understand the nuances of how capital markets work. A very bad combination, that.

Snow has a doctorate in economics reportedly, but he's not going to be enthusiastically received by wall street, either. At first blush, he looks a lot like an O'Neill clone. Friedman would be better respected by wall street, but it'll be interesting to see whether he has the silken persona needed to keep from ruffling feathers (which Rubin had in spades).

Posted by: Anarchus on December 9, 2002 06:21 AM

Jason: "Throw-away comment"? Krugman being right about O'Neill when everyione else was wrong seems to be the central point of this post.

As to Bartley of the Wall Street Journal not being a part of the financial press, well, whatever.

I do thank you for the comparison to "open heart surgery". It suggests an expertise and dexterity (not to mention a familiarity with "having a heart") that I would be delighted to posess.

I would be more inclined to think of my attacks as comparable to a blindfolded lumberjack swinging an ax, but perhaps I underestimate myself.

Posted by: Tom Maguire on December 9, 2002 09:20 AM

Way up top, Will Allen got some folks going by suggesting Krugman sees voters as more sensitive to government spending changes than they really are. Well, I guess we get to do a test. If conservatives really are in charge of both the White House and Congress, things ought to go "pop" at some point. The conventional wisdom in the old days, when the general election was up for grabs in lots of places, was that you had to fight for the middle to win because the public is mostly in the middle. Now that the general election in many places seems already settled, the battle is over the primary, where running away from the middle is the winning strategy in strongly GOP or Democrat districts. So far in this primary-determined era, divided government has saved right and left from themselves, and us from them. If the people now in charge are conservative in any meaningful sense, then something ought to change from when government was ruled from the middle. Unless the public has changed right along, then a shift of policies ought to draw a response. Certainly, one ratio, spending to GDP, cannot be the whole story. Who benefits, how policy effects the economy, stuff like that, can all change even if the ratio doesn't. So Krugman can be right about his conclusion, but only if he is right in his assumptions. These people have to prove that they are "conservative" or "right-wing" or "supply-siders" or something other than just turf protectors. If they are crafty (Brad likes "medacious"), it may take some time. Passing an elderly drug benefit might get some people re-elected, even if it doesn't help the elderly much. In time, spin wears off and policies will be judged by their real impact. So will politicians.

Posted by: K. Harris on December 9, 2002 10:16 AM

KH: I wouldn't hold my breath on this: "If the people now in charge are conservative in any meaningful sense, then something ought to change from when government was ruled from the middle . . . . . " They don't call them "Republicrats" for nothing. Bush/Cheyney don't dislike big government anymore than Bush 1 did . . . . . they just favor emphasizing different areas of bigness than the Democrats do.

And one ratio such as spending to GDP doesn't tell the whole story, but it does tell a lot. If it's not enough, then just look at spending on a major program by major program basis and find an area where there's been major cutbacks (real cutbacks, not a reduction in increase from "baseline"). I don't know of any - with the possible exception of Welfare reform - but that was a Clinton action and shouldn't be blamed on conservatives cutting back popular programs.

Or, just look at the actions of this Administration to-date. The Education Bill could have been (or was?) written by Ted Kennedy. THAT's a big increase, not a decrease. And the next major legislative move isn't going to be a cutback, it's going to dramatically expand an existing expensive program (Rx drugs for Medicare). And whatever the estimated cost of the new benefit, you can be sure that the real cost will be much higher.

Posted by: Anarchus on December 9, 2002 10:42 AM

Krugman is silly becasue he posits bogeymen with limitless ambition, who are able to force through unpopular measures, to the detriment of the majority of voters who desire otherwise. Now, it may be true that measures detrimental to the majority of voters can be passed, due to the inevitable limitations of any centrally planned economic policy, but these measures sure as hell aren't going to be widely unpopular, or if they are, they will be reversed in short order, for the very simple reason that politicians value career preservation above all other considerations. This phenomena is particualrly strong in the area of government spending, since voters threatened with a potential cut in their favored spending program are in turn much more threatening to incumbents than those voters who may in theory favor such cuts. The Senator from Archer Daniels Midland will be quite happy to lend his support to the Senator from Free Prescriptions for All Old People, who in turn will be happy to horse trade with the Senator from Don't Even Think About Closing More Unneeded Military Bases, leaving the Senator from Let's Not Spend Tax Revenue on Items Unneeded for the Broad Public Welfare or On People Capable of Supporting Themself an endangered species. I remember the South Carolina Senatorial race of 1998, when an incumbent Republican Congressman ran against Fritz Hollings, and given the trend in SC, a popular incumbent Republican Congressman was given a chance by many pundits. The Republican made it a habit on the stump of saying that if South Carolinians thought the major role of a Senator was to grab as many Federal dollars from citizens outside the Palmetto State, and get it funneled to SC, they should vote for Hollings, and not for the candidate who had the quaint notion that Senators were to sagely assess what was best for the general welfare the country. Guess what? The voters of SC took the advice to heart, and returned Hollings to office by a wide margin, and not unreasonably so, given that the experience of taking a shot to the kisser, out of a sense of noble obligation, can be a very painful.

Posted by: Will Allen on December 9, 2002 01:04 PM

'Jason: "Throw-away comment"? Krugman being right about O'Neill when everyione else was wrong seems to be the central point of this post.'

That's not what you criticized; you critiqued his statement that "the financial press almost universally approved of O'Neill." This is a way silly way to criticize someone *even if they were wrong*, which Paul wasn't. It's, to modify an amusing line from Bush, "gotcha economics."

I can't remember the last time I saw an interesting criticism of the *content* of a Paul Krugman column; it's all misinterpretation of grammar, manfactured conflicts-of-interest, and selective quoting & torturing of past statements to make them conflict with the current. Call it the triumph of the Novak & Sullivan model.

An entertaining diversion for the residents here: when was the last time you saw a critique of a Krugman column on the merits? For example, here's the interesting parts in the referenced old column:

'What's wrong with Mr. O'Neill? He built his business reputation by reversing efforts to transform Alcoa into something more than an aluminum company, instead refocusing on the core business and engaging in ruthless cost-cutting. This is all very well — but overseeing world financial markets is nothing at all like running a large, very old-economy, command- and-control corporation (or, for that matter, working the details of the federal budget). Mr. Rubin excelled at the deft strategic intervention — persuading investors, when the situation was on a knife edge, not to pull their money out and turn a temporary loss of confidence into a self-fulfilling prophecy of collapse. Perhaps Mr. O'Neill will reveal a comparable talent, but nothing in his career to date suggests that this is his sort of thing.'

'And last but not negligibly, Mr. O'Neill is — surprise! — an old colleague of Mr. Cheney's. And one suspects they are kindred spirits: like Mr. Cheney before his own re-entry into politics, Mr. O'Neill belongs to the class of businessmen the Japanese call amakudari, "descended from heaven" — former government officials who later in life enter the business world at the top, not the bottom. None of this says that Mr. O'Neill will necessarily fail. But it does raise questions about what is going on in the Bush transition. Why did the candidate who was supposed to represent the aspirations of the "investor class" reject all the candidates proposed from the investment community? '

Interesting stuff; old-economy vs. new economy, government access vs. innovation, managing vs. investing. O'Neill's transformation of Alcoa was pretty nice, but is it really relevant experience?

Do conservatives disagree with the above? I don't know, do you? Krugman's critics appear to be too busy spinning to ever get around to content critiques.

To be fair, a few people (Megan McArdle, for one) have done a fair job (though I think she still does a little too much spindoctoring) of this; why doesn't Musil, Sullivan, et al?

Posted by: Jason McCullough on December 9, 2002 02:36 PM

NOT A CONSERVATIVE here. But I do appreciate facts, and Krugman does not. SO.

1. 'Tis true that O'Neill was an old-style CEO without capital markets experience. And Rubin was a good Treasury Secretary. But if Rubin were a Republican and not a Democrat, Krugman would have lambasted the $20 billion 1994 Mexican loan guarantee program as the bail-out of wealthy Wall Street investors and institutions that it in fact, was! And it was most definitely NOT a deft intervention, it was simply a $20 billion bail out of the rich and powerful. I would further note that Goldman Sachs, the firm Rubin headed before joining the Clinton Administration, was positioned to lose a small fortune had the Mexican bail-out not taken place. Also, both Rubin and Summers ignored a multitude of problematic signals emanating from Indonesia prior to the enormous 1998 currency crisis of SouthEast Asia. But at least there was no notable conflict of interest there.

2. This grandiose statement is verifiably FALSE: "Mr. O'Neill belongs to the class of businessmen the Japanese call amakudari, "descended from heaven" — former government officials who later in life enter the business world at the top, not the bottom."

If Krugman had bothered to check any facts, he could have learned that Mr. O'Neill left government service to join International Paper in 1977 as a vice president, a position he held for four years. He was then promoted to Senior Vice President in 1981, a position he held for another four years. So he didn't start right at the bottom, but in 1977 he had an undergraduate degree in engineering and a masters in administration, plus over ten years of work experience. People with those credentials do not begin working in the mailroom. And no one on earth, except Paul Krugman, apparently, would ever consider launching a management career as a vice president at IP to be "descending from heaven".

No spinning, just the facts. And c'mon. CAN you imagine what Krugman would say about Rubin's bail out of Mexico and Goldman Sachs if Rubin was a heartless Republican?

Posted by: Anarchus on December 9, 2002 06:52 PM

'But if Rubin were a Republican and not a Democrat, Krugman would have lambasted the $20 billion 1994 Mexican loan guarantee program as the bail-out of wealthy Wall Street investors and institutions that it in fact, was!'

Evidence for this statement would be nice. As near as I can remember, Krugman has supported bailouts for every run on a 3rd world currency.

Is there something inaccurate about the statement that O'Neill was a "former government official who later in life entered the business world at the top, not the bottom"? By all accounts, O'Neill is a great manager. That doesn't change that his career has a long co-incidence with access to political influence (especially when you reflect on the amusing conservative/business disdain for what's involved in a public sector job.)

Oh, and I found this interesting line from an old Krugman Slate column on LTCM:

'A similar process of self-reinforcing movement in asset prices when Long-Term Capital Management got into trouble drove interest rates on virtually everything except the most plain-vanilla of U.S. securities to dizzying heights, or in some cases led markets simply to close up shop. And more was at stake in these asset-market collapses than the money of hedge-fund investors: The sharp rise in the yen last fall threatened to send Japan into a deflationary spiral, the drying up of liquidity in the United States briefly seemed to threaten a general financial collapse.'

Can Japan's travails be traced back to LCTM?

Posted by:
Jason McCullough on December 10, 2002 01:15 AM

well, on the issue of O'Neill descending from heaven IS NOT A QUESTION of being a good manager. Krugman states that O'Neill went straight from government into a top-level job in the private sector. He did not.

Maybe Krugman has never seen a currency bail-out he didn't love, but he spoke wistfully of how Rubin "excelled at deft strategic intervention". What happened with Mexico in '94 and Russia/Indonesia in '98 was not skillful strategic intervention for forestall a crisis, it was more like throw money at a crisis in full panic mode.

LTCM from '98 has nothing to do with Japan's problems. Their economy had tanked long before LTCM and the LTCM crisis ran no longer than 12 months. Japan is sinking on its own merits.

The problem with bailing out countries and hedge funds when they run into big problems is that the markets don't learn the full lesson of how painful the downside of risk can be . . . . so there's a tendency over time for investors to take larger risks, so the crises to get progressively larger. Hyman Minsky's written some good stuff on this in the past. "Theory of Systemic Fragility", for example.

In the short-run, it's clearly better to take the Krugman approach and bail everybody out aggressively when crisis threatens. But NOTHING HAPPENS IN A VACUUM. Future investor behavior is ABSOLUTELY AFFECTED by the bail-out. And from a long-term perspective, the risk of a much larger crisis occuring someday down the road is clearly increased.

Posted by: Anarchus on December 10, 2002 06:25 AM

Maybe Krugman has never seen a currency bail-out he didn't love, but he spoke wistfully of how Rubin "excelled at deft strategic intervention". What happened with Mexico in '94 and Russia/Indonesia in '98 was not skillful strategic intervention for forestall a crisis, it was more like throw money at a crisis in full panic mode.

Let me just interject that it also created moral hazard and the expectation in the financial community and among debtor countries that these bail-outs would continue. Since at some point you do have to say stop - and O'Neill to his credit did so - this means that countries which were counting on bail-outs but now are not getting them, such as Argentina, are in dire straits. This is Rubin's fault - give him credit where credit is due.

Posted by: Andrew Boucher on December 10, 2002 09:18 AM

'well, on the issue of O'Neill descending from heaven IS NOT A QUESTION of being a good manager. Krugman states that O'Neill went straight from government into a top-level job in the private sector. He did not.'

You're being willfully obtuse about this. A VP position is a top-level job. Q.E.D.

'And from a long-term perspective, the risk of a much larger crisis occuring someday down the road is clearly increased.'

So because, theoretically, moral hazard will keep growing and cause something bad in the future, you need to make the third-world suffer now. Also, in the relevant crises, was it really the fault of the government, or just a panic? What did Mexico do to deserve 1994, anyway? Argentina's problems are all pretty much its own fault, but they're kind of the giant exception in all this.

The moral hazard line for currency crises has a bit too much of Austrian hangover theory in it for my tastes.

Back on topic, you've provided no logical argument for your assertion that the neo-Keynesian Krugman on moral hazard grounds would have disapproved of a Republican administration supporting the 1994/98 bailouts.

Posted by: Jason McCullough on December 10, 2002 02:36 PM

well, first of all it's not obtuse. I have an MBA and an undergraduate engineering degree, and almost 20 years of corporate work experience. And barely 5 years out of grad school I was a Vice President. And nobody has EVER accused me of descending from heaven, and rightly so. The fact is, vice president is NOT a top level position anywhere on earth, and it's not descended from heaven and nobody with both feet on the ground looks at it that way. nobody.

the problem with mexico and argentina and most (though not quite all) of the panic-sensitive foreign nations is that they have very large external debts carrying interest and denominated in . . . . . . . . dollars. as a financial structure, it has never, ever made any sense to me.

1. the currency of developing countries such as mexico, argentina, brazil, venezuela etc, is deservedly considered unreliable. no one on earth will lend them money denominated in their native currency, because their central banks have rarely been independent of their treasuries, and their records of appalling inflation from printing money are legendary.

2. so when they want to borrow money externally, they must borrow in some other currency than their own, and as the key currency, the dollar is generally the currency used (that's more-or-less the definition of a key currency anyway). Now, I may be a mindless cretin, but I've never understood why any investor or institution in their right mind would loan money to a developing country denominated in dollars. in fact, they probably would NOT. reason being that if that country's policies are such that it's currency begins to decline in value to the tipping point where its wealthy individuals, government officials and institutions start moving their savings out of the country into other currencies, the country almost automatically defaults on its dollar debt because the real cost of servicing the debt very rapidly rises to unconscionable levels as the exchange value of its currency collapses. the whole structure is just dumb, stupid and vulnerable to panic, the whole dang structure. and personally and professionally I doubt that the structure could exist as is without the good intentions of the World Bank, the IMF and prize-winning economists such as Paul Krugman claiming that bailing out investors and countries is good policy.

Posted by: Anarchus on December 10, 2002 06:15 PM

Without the implied potential of bail-out, what would a lender charge for the risk involved in allocating capital to such locales? It would be astronomical, so much so that the it might never happen.

Posted by: Will Allen on December 11, 2002 07:33 AM

Oddly enough, that happened to RJR/Nabisco a year or two after the LBO.

A very big slug of their high yield debt had a "reset" feature to guarantee that the bonds didn't initially trade too far below par. After a fixed period (one year, or two, I forget), the reset provided for an increase in the coupon paid such that the bonds would trade at par. The idea was that maybe rates go up a little, or the RJR credit rating deteriorates a bit, so adding 50 or 100 bps to the coupon would move the bonds up to par so the bond investors wouldn't lose money.

But the environment deteriorated dramatically, and it became clear that if the reset was forced through at the rate needed to reach par (22%, or 30% or somewhere up in the yield stratosphere), the company couldn't pay and would default. Great chicken and egg situation.

Posted by: Anarchus on December 11, 2002 10:04 AM

Re: "nobody" thinking VP of International Paper not being a top level position: You travel in interesting circles.

Here's a description of third-world currency crises: 'A panic drives down the value of assets securing loans relative to reliable currency, making everyone default, because their loans for assets are denominated in reliable currency, and as the asset value drops, everyone starts calling in the loans to get some of their principal back. These crises are dealt with by big institutions (IMF) handing out enough reliable money to keep the system going until the crisis passes.'

Here's a description of early industrial crises: 'A panic drives down the value of assets securing loans relative to currency, making everyone default, because their loans for assets are denominated in currency, and as the asset value drops, everyone starts calling in the loans to get some of their principal back. These crises are dealt with by big institutions (J.P. Morgan) handing out enough reliable money to keep the system going until the crisis passes.'

I think there's a big similarity in the market failures. Now how to get the equivalent of banking regulations and the federal reserve for international money flows.....

Posted by: Jason McCullough on December 11, 2002 03:17 PM

"Here's a description of third-world currency crises..."

Third world currency crises are caused more often by socialist economic policies. On top of that, the leaders are stealing these countries blind. I don't think that's the reason for the troubles during the earlier industrial crises. The United States during the J.P. Morgan era was still a stable democracy. That is definitely not the case in most Third World nations today.

Posted by: David Thomson on December 11, 2002 08:11 PM

David, the balance sheets of the asian tigers were perfectly fine before the last crisis. Krugman's been all over this.

Posted by: Jason McCullough on December 12, 2002 12:45 AM

Anarchus, Krugman has written extensively about the very problems of foreign currency borrowing you mentioned.
He was also one of the most prominent critics of IMF policy at the time of the Asian financial crisis. He's also been somewhat skeptical of the recent IMF bailout packages in South America. You can look it up...

Posted by: RC on December 12, 2002 10:39 AM

Reply to Will Allen (Dec. 9): What makes Krugman mad as hell is that he thinks the majority of the people are not reacting against policies that are seriously to their detriment, simply because no one is TELLING them about the destructive effects of those policies -- not the Republicans, not the Democrats (who are now also, to a large extent, bought and paid for by the rich because of the modern need for bigger campaign contributions, thanks to the advent of broadcast media), and not the press (thanks to the fact that the broadcast media, in particular, are total jokes when it comes to covering any political issue to any degree whatsoever -- and most people nowadays get their news from the broadcast media).

Posted by: Bruce Moomaw on December 26, 2002 05:44 AM
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