A Couple of Highly Muddled Arguments

June 8th, 2012 at 3:38 pm

It’s actually easier to argue with someone who gets a fact or two wrong than someone who’s so muddled that your head spins with their spin.

I’ve stumbled across of couple of recent conservative arguments that are so confusing that they’re downright confuzzled, which is just south of ridunkulous.

Let’s start with this editorial on the fiscal cliff (which I’ll have the honor of debating later tonight on the Kudlow Show) from the WSJ (who’d a thunk it, but both of these pieces are from the Journal).  The piece argues…actually, I’m not sure what it’s arguing.

They don’t think taxes should go up due to the fiscal cliff—they think they should go down.  But they do think the spending cuts should occur, though when it comes to the defense cuts, they’re a little squishy.

But the punchline is, when it comes to the fiscal cliff, the right policy set is…wait for it!…cut taxes and cut spending!

OK, I get it—their only tool is a hammer, so everything’s a nail.  But if your answer to every problem that comes up, regardless of the timing, the underlying economic conditions, the politics, or anything else is always the same, should anyone take you seriously?

And that there is one a them rhetorical questions.

The second piece is slightly less muddled but only slightly.  It’s an oped by Phil Gramm and Glenn Hubbard (note the extra ‘m’ and ‘n’ in those names—what’s up with that!?) on how a Romney recovery would be really great.

The argument goes like this…hmmm…again, I’m not really sure how it goes.  Something like this:

–Reagan and Obama both took office during recessions, but the Reagan recovery was much better.

–Why?  Because he spent less.

Except for the inconvenient facts that the causes and depths of the recessions were very different, with real GDP and jobs falling much more in the Great Recession—the one we’re still climbing out of.  Monetary policy was hugely different, in ways I’ll show in a moment.

And he didn’t spend less—Krugman, today:

I find it especially instructive to look at spending levels three years into each man’s administration — that is, in the first quarter of 1984 in Reagan’s case, and in the first quarter of 2012 in Mr. Obama’s — compared with four years earlier, which in each case more or less corresponds to the start of an economic crisis. Under [Reagan], real per capita government spending at that point was 14.4 percent higher than four years previously; under [Obama], less than half as much, just 6.4 percent.

The role of the Fed is also importantly misrepresented here.  Look at the figure below.  The Reagan recession was much more under the Fed’s control.   Volcker and Co. jammed interest rates up to almost 20%, a major factor in the recession, and could then bring them down from that very high perch.  And given that this wasn’t a finance/housing bubble recession, investors and households were poised to respond to the lower rates.  That’s all totally different to where we were and are in this case—note the zero lower bound at the end of the figure—and in ways that ensure a tougher recovery.

Then there’s the whole Romney policy angle.  I’ve argued that the Romney policy play book looks more like W Bush than Reagan.  Reagan actually raised taxes (11 times!) and was, as noted, not afraid to spend.  Gov Romney’s plans are for tax cuts and spending cuts that will grow the economy through trickle down.

In that regard, it’s conspicuous that GW Bush’s name doesn’t show up in this article, as the trickle down thing was a disaster on his watch.  Actually, the Bush name does show up in Hubbard’s bio—he was his chief economist for awhile.

OK, I feel better now.  Thanks for letting me shake those muddles out of my head.

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9 comments in reply to "A Couple of Highly Muddled Arguments"

  1. David R. says:

    The other part of the Glenn and Gramm piece argues that the Romney policy will promote profits, that profits are needed for business to invest and create jobs and that Mr. Romney gets this, Mr. Obama does not.

    Of course the only problem with this argument is profits themselves. They have gone from about $600 billion at the beginning of the Obama Presidency to $1.8 trillion today. So if profits are key Mr. Obama has done an outstanding job in producing them.

    Of course, profits without aggregate demand increases only leads to the accumulation of cash balances by businesses, or stock re-purchases, which is exactly what is happening.

    How exactly can people like Mr. Gramm and Mr. Hubbard with all their great credentials be so wrong?


  2. Fred Donaldson says:

    Professor William Domhoff http://www2.ucsc.edu/whorulesamerica/power/wealth.html
    notes in 2007 that:

    “In terms of types of financial wealth, the top one percent of households have 38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate.”

    Corporate profits mean nothing to the average person, unless one considers their paltry savings in pensions or 401ks, and much of those profit (dividend) gains are often erased by fees or poor investments by funds.

    When you sell financial philosophy today, you are not selling reality, you are selling a dream. Someday, you might hit the lottery and have to pay a high income tax rate, or you will find gold in your backyard and will face a huge capital gains tax.

    The fact that Romney was seen personally painting the fence on his new California property, shows what happens when the rich get their money. They don’t even spend it on a painter, because they are cheap.

    Reminds me of a fellow in the 1960s, who fell off his ladder while painting his barn. His inherited, approximate stock portfolio then exceeded $100 million, but boy, was he cheap. I suppose that’s an example of fall down, rather than trickle down, economics.


  3. davesnyd says:

    Your problem is one of vocabulary. When you say “economic crisis”, you’re referring to the past five years of declining GDP, evaporating jobs, and a cratering of the economy for the middle class.

    When they say “economic crisis”, they mean that they have to pay taxes which are being transferred to individuals whom they believe to be undeserving of assistance. Hence, cut taxes on the rich and cut non-defense spending.

    The fact that they use vocabulary incorrectly isn’t a coincidence. It is how they’ve sold these policies for a generation plus now.


  4. perplexed says:

    -”The idea that spending cuts will curtail the recovery is the same fiscal multiplier nonsense that gave us the $830 billion stimulus in 2009. That bender raised federal spending to a post-World War II record of 25% of GDP and it hasn’t fallen below 24% since.

    This was the liberal fiscal playbook in action, and we now see its economic results. The unemployment rate was supposed to be closer to 6% today, not 8.2%. The recovery in jobs, output and income is about half the strength of a normal recovery, according to Congress’s Joint Economic Committee.

    Instead of a positive multiplier from the spending, the impact was close to zero. Harvard’s Robert Barro reports that in many cases the multiplier from government spending is less than 1.0, meaning that “greater spending tends to crowd out other components of GDP,” mostly private investment.” -unknown authors @ WSJ.com

    When “stimulus spending” isn’t precisely defined, all spending becomes “stimulus spending” and multipliers become hard to distinguish from zero. We only add to the muddle by trying to make sure “liberal” oligarchs benefit as much as “conservative” oligarchs by calling any of these income tax breaks stimulative. Keynes tried to tell us its mostly about MPC. An added column in their table showing the dollar amount of tax “gifts” given to these various income groups would have quickly revealed how little of it goes to anyone with a high MPC. In fact, given that our tax rates are well below optimal levels, and that almost all with a high MPC pay no income taxes at all, there’s a strong case to made that eliminating all of the Bush tax cuts will have a negligible effect on spending. The amount of money we are diverting from government revenues to pay down debt of the fairly well-off and add to the wealth of the extremely wealthy with no public benefit whatsoever is obscene. That we do we this in spite of the fact that more than 20% of the Nation’s children now live in poverty is child abuse.

    It appears that it is only historians now that are concerned with the legacy of the choices we made. This will be a sad chapter indeed for future students to have to learn about.


    • DonB says:

      WOW! What a mish-mash of misinformation!

      The ARRA was a total of $787 billion, which included a $70 billion adjustment to the AMT, which was going to happen ANYWAY! See Wikipedia:

      http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

      So total stimulus was about $707 billion to fill a more than $2 Trillion hole over a two-year period.

      The amount was spread over TWO YEARS, with authorized projects/programs required to be STARTED within that time.

      To get Arlen Spector’s vote (which required votes from Olympia Snow and Susan Collins, for “cover”) the originally proposed amounts for unemployment and state “Revenue Sharing” were reduced and the tax cuts were increased. Here the government spending of tax cuts, with a “multiplier” of $0.45 per $1 of cut, were increased at the cost of provisions with higher multipliers such as unemployment insurance with an increase in GDP of $1.60 per $1 spent. Thus the ARRA was made less effective by Republicans. You are right in that Republicans made sure to increase the amount of the stimulus that went to people with low MPCs. Great!

      A number of Robert Barro’s articles that I have seen have been totally discredited for having conveniently left out important details.


      • perplexed says:

        _”So total stimulus was about $707 billion to fill a more than $2 Trillion hole over a two-year period.”

        Paul Krugman estimated the actual “stimulating part” of the “stimulus” to be in the neighborhood of $500 billion and he was likely being generous with his estimates of how much of these tax gifts were actually spent instead of saved (or used to pay down debt). I’m not really sure what to call the non-stimulating part of the “stimulus,” “extortion payments” seems to be the best descriptor.

        If the Republican Supreme Court decides to kill the ACA it may be that Obama’s most significant domestic accomplishment could be the elimination of the Bush tax cuts; if he musters the will to actually get it done.


  5. Larry says:

    We all went through the spin-infested argument about spending growth under Obama a couple of weeks ago. I drew the conclusion that that number is much less meaningful, because in the year prior to Obama, Bush surged spending during the panic phase of the GR.

    If you compare spending as % of GDP under the first three years of Obama with the first three years of Reagan (or Bush, who also came in during a recession – the tech bubble pop) i.e., leaving out the anomalous year, you see a notable difference in the figures. Obama averaged around 24% of GDP, while Reagan was 22.5%. By comparison, Bush was around 19% in his first term and 20% in his second.


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