Asymmetrical Information

I agree completely that Paulson is an extremely accomplished individual.

But exactly what has he accomplished as Treasury Secretary that makes you rank him so high?

I marvel over the insipid writing that opens the article:

During the crisis in ’98, I attended a closed-door briefing given by a senior Federal Reserve official, who laid out the grim state of the markets. "What can we do about it?" asked one participant. "Pray," replied the Fed official.

Our prayers were answered. The Fed coordinated a rescue for L.T.C.M., while Robert Rubin, the Treasury secretary at the time, and Alan Greenspan, who was the Fed chairman, assured investors that everything would be all right. And the panic subsided.

Pray? How exactly did the Fed "coordinate a rescue" when its only option was to pray? Maybe the Fed official was just using that line to get that participant out of the way so real work could get done. Way to trumpet up the apocalypse, Paul...

Here is the link, just in case:

http://select.nytimes.com/2007/08/10/opinion/10krugman.html?hp

And of course, some (like Buffet) continue to argue that no "savior" should have stepped in back in '98 - and that we would have been better off if no one had.

As Megan implies, Krugman has predicted five of the last, um, zero liquidity traps.

By saying that the Fed "coordinated" the rescue of LTCM Paul implies that the Fed did more than get parties to the table. Wall Street cleaned out its own mess.

Interesting this comes around to Bear Sterns, who (that?) didn't pony up money for the LTCM fix. F them, let the company go under.

But when did the rot set in? Hoover? FDR?
LBJ? Nixon? Reagan? Clinton I? Bush II?

Krugman refers to "the current administration’s record of incompetence," to which Megan says:

[T]his is also a pretty nasty slur on Ben Bernanke and Hank Paulson, both of him are very, very good at their jobs.

That's ridiculous, and a willful misinterpretation of what Krugman said. If Krugman had called Bernanke or Paulson incomptent, sure, but he didn't -- he pointed to the administration's record. They joined that administration. If they can turn around its record, great, but until then, the record stands.

Uh, when the liquidity freezes capitalism turns into North Korea. The magic of the market stops working when nobody is buying out of fear. But hey, you've got an MBA, so you must be smarter than Krugman.

Tyrone, as far as this particular issue is concerned, "The administration" is Paulson and his team, and Bernanke. Both have so far done excellent work. I promise, neither Defense nor State will weigh in here, so "the administration"s record of incompetence in those areas is irrelevant. What is relevant is whether Bush will override his advisors, but he's shown no particular propensity to do so on issues like this, and indeed has worked very well with Paulson on things like China.

Maybe Paulson isn't up to the job, but the Bush administration's record on Iraq is no reason to think so.

Psychology is important. In financial matters confidence, or lack of it, has ramifications. The world's lack of confidence in Bush, the administration's missteps and demonstrated incompetence in a broad number of areas, has fed a growing perception of the US as weaker than formerly presumed. It's naive to assume that these changing perceptions of the US -- this new sense of formerly unimaginable American weakness -- won't have economic consequences.

Krugman is a very smart man, Chris, but that doesn't stop him from being much more of a partisan than an economist in his columns. Nor from caring far more about scoring political points against Bush than about telling the truth. Krugman has been going on and on about liquidity traps for five or six years...market up, market down, credit loosening, credit tightening...always with the liquidity trap. That's the issue, not whether or not Paul Krugman is a smart guy.

Tyrone, as far as this particular issue is concerned, "The administration" is Paulson and his team, and Bernanke. Both have so far done excellent work. I promise, neither Defense nor State will weigh in here, so "the administration"s record of incompetence in those areas is irrelevant. What is relevant is whether Bush will override his advisors, but he's shown no particular propensity to do so on issues like this, and indeed has worked very well with Paulson on things like China.

But Krugman didn't refer to the admininstration's record of incompetence as far as this particular issue is concerned. There are capable people working throughout the executive branch, but when the White House becomes involved, the track record of the last several years makes it very clear that politics trumps policy. Whether Bush has shown a particular propensity to override Paulson on "issues like this one" depends entirely on what issues are "like this one" -- matters where it would quite helpful to have a background at Goldman, Sachs, or matters that land at the top of the front page of major newspapers? On the former, yes; on the latter, the White House prefers to substitute its own judgment for those of the experts in other cabinet-level offices, and its judgment usually is informed by the sorts of considerations that lead to incompetence.

I share your hope that Paulson is allowed to manage the situation without interference, but the last six years more than justify Krugman's concern that this won't happen. Suggesting that Krugman was insulting Paulson is just silly.

I doubt that I like Bush any more than Krugman does, and when Krugman has a column that limits itself to economics (where he knows what he's talking about) I enjoy reading it. But I've learned to ignore Krugman whenever he starts in on politics, because he's both pig-ignorant and frothing -- his biases run away with him.

Who says a liquidity squeeze (or whatever) is bad? Hey, *I* will still make loans...

... if buying a secondhand bond at a significant discount counts as "making a loan" :-D

Oh, and LOL at Cohen :-) good one

And when Paulson resigns in 6 months in utter frustration what will Megan say?

Tyrone, as far as this particular issue is concerned, "The administration" is Paulson and his team, and Bernanke.

Um, no it's not. Krugman and Bernanke are colleagues. Paulson is widely respected. There's no reason Krugman would spontaneously decide to say that there are policies we could implement that would help the existing situation but they're too complicated for these two.

If you're reading a Paul Krugman column and you come across the words, "incompetent administration" it's fairly safe to assume he's talking about the guys he's always talking about: Bush, Cheney, and Rove. (And its hardly a nasty slur to suggest that no matter how awesome Bernanke and Paulson are the administration would still find a way to mess up the policy. Being competent and professional didn't do anyone in the justice department any good.)

And even if we're going to bracket out this common sense approach to interpreting what Krugman means by "incompetent administration" there's nothing in this column that should induce a person to think, on balance, that he's referring exclusively to Bernanke and Paulson.

Leaping to the conclusion that he is strikes me as weirdly obtuse.

"When Paulson resigns in 6 months"... are you serious? You've been hitting the glue too hard.

The ongoing criticisms, from both the left and the right, are that Bush delegates too much and doesn't provide ongoing supervision of his deputies. He sticks with people beyond what commentators would prefer and that he lets them run their own departments.

There's a slight difference between a disgruntled career staffer at DoJ, State, or the CIA - who hasn't progressed as far as they expected and has to work for Rethuglicans - and Hank Paulson. Bush's macro mistakes happened for political expediency prior - steel tariffs, mainly. This despite everyone in the administration knowing they were bad, but hoping that they would be useful in key states.

On econ policy, Bush has been fairly good. Budget discipline has been horrible, pork has ballooned, and he only vetoed something after the Repubs lost congress, but you do need to separate out the different policy parts of the administration. Krugman and the commenters here are letting their political anger betray their sense - something that Krugman has been doing for almost a decade.

Krugman is just as respectable as Chomsky - serious contributors to their narrow academic specialties & bughouse nuts once they get one inch beyond that. This is a shame, since Krugman was a reasonable and sane person when Clinton was in office. Jane's aphorysm on partisan sanity can use Krugman as proof.

If you're reading a Paul Krugman column and you come across the words, "incompetent administration" it's fairly safe to assume he's talking about the guys he's always talking about: Bush, Cheney, and Rove.

Ah, I see. If you have the "Krugman Code Book of Convenient Freudian Partisan Slurs" in hand, you can decipher his column; otherwise, it really does look like he's taking a swipe at the people of the adminsitration who are actually responsible for addressing the topic Krugman is supposedly writing about.

The ongoing criticisms, from both the left and the right, are that Bush delegates too much and doesn't provide ongoing supervision of his deputies. He sticks with people beyond what commentators would prefer and that he lets them run their own departments.

The competence of Bush appointees seems inversely proportional to their individual desire and tenacity to hold on to the position no matter what. Think Rumsfeld & Gonzales vs. Christine Todd Whitman and Paul O'Neill. Or Eric Shinseki for that matter.

If you have the "Krugman Code Book of Convenient Freudian Partisan Slurs" in hand, you can decipher his column;

Nope. You just have to not be prone to willful misinterpretations.

Krugman brackets his shout-out about the incompetent administration with the comment: "There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis ... but ... we’d really rather not go there."

Krugman is saying that the Administration shouldn't act because of its incompotence? How does that not refer to the Treasury?

Logically it does, but I think Krugman is beyond logic. For him the incompetence of the Bush administration is like the wickedness of the Pharaohs. The current plague of frogs is divine retribution beyond hope of human response. Paulson and Bernanke aren't incompotent, just cursed by proximity to the evil king.

Oh great, I mispelled "incompetence".

Strike paragraph 2 and replace:

Krugman is saying that the Administration shouldn't act because of its incompetence. How does that not refer to the Treasury?

Krugman is saying that the Administration shouldn't act because of its incompotence? How does that not refer to the Treasury?

He means that the policies would be too complex or too ideologically unpalatable for the Bush administration not to interfere with.

Paul Krugman: Bernanke and the Bubble.

By Bush administration standards, the choice of Ben to succeed Alan Greenspan as chairman of the Federal Reserve was just weird.

For one thing, Mr. Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses.

Beyond that, Mr. Bernanke's partisanship, if it exists, is so low-key that his co-author on a textbook didn't know he was a registered Republican.

The academic work on which his professional reputation rests is apolitical. Moreover, that work is all about how the Fed can influence demand - there's not a hint in his work of support for the right-wing supply-side doctrine.

Nor is he a laissez-faire purist who believes that government governs best when it governs least. On the contrary, he's a policy activist who advocates aggressive government moves to jump-start stalled economies.

For example, a few years back Mr. Bernanke called on Japan to show "Rooseveltian resolve" in fighting its long slump.

He even supported a proposal by yours truly that the Bank of Japan try to get Japan's economy moving by, among other things, announcing its intention to push inflation up to 3 or 4 percent per year.

Last but not least, Mr. Bernanke has no personal ties to the Bush family. It's hard to imagine him doing something indictable to support his masters. It's even hard to imagine him doing what Mr. Greenspan did: throwing his prestige as Fed chairman behind irresponsible tax cuts.

All of this raises a frightening prospect. Has President Bush been so damaged by scandals and public disapproval that he has no choice but to appoint qualified, principled people to important positions?

O.K., seriously, many economists and investors feared that Mr. Bush would try to place a highly partisan figure in charge of the Fed. And even before the revelations surfaced about cronyism at FEMA and elsewhere, there was widespread concern that Mr. Bush would try to select a John Snow type - a businessman whose only qualification is loyalty - to run monetary policy.

The naming of Mr. Bernanke was a sign of Mr. Bush's weakness, and it brought a collective sigh of relief.

Obviously I'm pleased, too. Full disclosure: Mr. Bernanke was chairman of the Princeton economics department before moving to Washington, and he made the job offer that brought me to Princeton.

So should we all feel confident about the economic future, assuming that Mr. Bernanke is confirmed? Alas, no.

This isn't a comment on Mr. Bernanke's qualifications, although there is one talent, important in a Fed chairman, that Mr. Bernanke has yet to demonstrate (though he may have it).

Mr. Greenspan, for all his flaws, has repeatedly shown his ability to divine from fragmentary and sometimes contradictory data which way the economic wind is blowing.

As an academic, Mr. Bernanke never had the occasion to make that kind of judgment. We'll just have to see whether he can develop an economic weather sense on the job.

No, my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And while he is surely the best politically possible man for the job (all the other candidates I would have been happy with are independents or Democrats), coping with that day of reckoning without some nasty shocks may be beyond anyone's talents.

The fact is that the U.S. economy's growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

It's true that Mr. Bernanke has given speeches suggesting both that a "global savings glut" will continue to provide the United States with lots of capital inflows, and that housing prices don't reflect a bubble. Well, soothing words are expected from a Fed chairman. He must know that he may be wrong.

If he is, the U.S. economy will find itself in need of the "Rooseveltian resolve" Mr. Bernanke advocated for Japan. We can safely predict that Mr. Bernanke will show that resolve.

In fact, Bill Gross of the giant bond fund Pimco has already predicted that next year Mr. Bernanke will start cutting interest rates.

But that may not be enough. When all is said and done, the Fed controls only one thing: the short-term interest rate. And it will be a long time before we have competent, public-spirited people controlling taxes, spending and other instruments of economic policy.

This is frustratingly blithe. Krugman doesn't spell it out, but it's kind of an open secret that Bob Rubin frequently spoke to analysts and other Street-men when the markets acted spooky, talking to them off the record to allay their concerns, which usually stopped panicky selldowns. Rubin couldn't force traders to hold instead of sell, but he made effective use of his opportunity to persuade them that there wasn't need to panic. It's a very slight disparagement to say of Paulsen that he's no Bob Rubin. But he's certainly no Bob Rubin.

But what's with the sneering at Paul Krugman? Yeah, he's predictably disappointed with the Bush Administration. That's because any reasonable observer is perpetually disappointed with the Bush Administration. It's just as dim for reflexive rightists to sneer at any criticism of the Administration's not-so-benign neglect of the financial markets (Bush famously steered away from bankers like Rubin when picking his first Treasury Sec'y, choosing instead an aluminum company exec) as it was heartless to dismiss criticism of the response to Katrina as mere partisanship. It remains the case---and this is just obvious to anyone with eyes in his or her head and frankly inarguable---that if the previous Administration, with its Bob Rubins and James Lee Witts, were still in power, the response to problems would have been better. Because the previous Administration actually gave a tinker's dam about doing their jobs.

So sneer at Krugman all you want. Yeah, maybe he's just shrill. Or maybe he's so assuming that he still believes good governance is something Americans have a right to expect.

MrT, you make your point.

Krugman believes that a true financial crisis requires Rooseveltian intervention in the economy.

The Bush Administration is too incompetent to be trusted with Rooseveltian policies.

Therefore we're screwed.

I actually agree with Krugman here. I wouldn't trust the Bush Administration with Rooseveltian meddling either.

Nor would I trust Roosevelt, actually.

Hopefully the Bush Administration is weak enough at the moment to let Paulson and Bernanke alone with their limited powers. Maybe Paulson can talk to analysts off the record and stuff like that.

Nope. You just have to not be prone to willful misinterpretations.

Unless you're suggesting that Krugman has a character flaw that everyone should know about, therefore requiring no handbook, then there is no willful misinterpretation by Jane here. The column says what it says.

"The previous administration actually cared about doing their jobs"? LOL! The administration that said "we're doing this for the children" (re Waco), then massacred all of them? and bulldozed the evidence? The previous administration that wasted hundreds of millions of dollars on an unconstitutional foray into nationalized health care? The previous administration that pardoned hundreds of convicted drug dealers? Wow, what a great administration. I'm sure Krugman admired them profusely.

Waco was a mistake, no doubt about it. The rest of lol's post is lunacy. Does he also think that Bill Clinton murdered Vince Foster? Or was it Hillary? And is she really a lesbian witch? Have I left anything out? Please advise.

The ongoing criticisms, from both the left and the right, are that Bush delegates too much and doesn't provide ongoing supervision of his deputies.

To be more specific, the criticism is that he delegates to a few trusted people who are more effective at politics or empowering themselves than governing, and allows them to direct the actions of other appointees. The question is whether Paulson has the kind of access and trust that Rove, Cheney, Miers, Karen Hughes et al. enjoy or whether Bush would overrule Paulsen if Cheney or Rove asked him to. I think we know the answer to that one.

I'm with Jane Galt on this. Paul Krugman is full of bile and vituperation. Once upon a time, he wrote intersting and thoughtful columns for Slate--now he writes trash for the Times... It's a sad fate for a man who won the John Bates Clark medal in his younger and wiser days...

And his analysis here is poor. There is little danger of a liquidity trap (a personal obsession for Krugman). The Federal Reserve was injecting liquidity into the market today and will continue to as needed. As his work on the Great Depression attests, Ben Bernanke understands very well how bad the consequences can be when a central bank fails to fulfill its obligations as a lender of last resort to basically sound financial institutions facing a short term liquidy crisis.

"Paul (Krugman) is on shaky ground when trying to explain rising income inequality by politics (as opposed to technology, demography, and so on). Policy choices such as tax rates and minimum wages have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue."-Harvard Economist Greg Mankiw on Krugman's dubious analysis of income inequality.

I offer this as an example of Krugman's sophistry--so often lamented by his fellow economists. As Mankiw, Gary Becker and many others have argued, technological change has been the principal cause of increasing inequality in recent decades as the wages of high skill workers have been rising at a rapid rate. Yet Krugman dismisses the abundant evidence for this thesis because it doesn't fit his general theme--that all the evils of the world can be blamed on George W. Bush and, to a lesser extent, Ronald Reagan.

Regarding the insult to Paulson:

I think the key concept is the other, exotic things the executive branch could do, but shouldn't because of the current occupant. I think he's referring to the New Deal, Alphabet Soup approach to a crisis. That just goes to show that Krugman is not opposed to a police state per se, just against a police state with the wrong Maximum Leader.

I confess I don't know much about economics, and I really don't care what you think of Krugman. Two general principles will always hold true--1. The Bush Administration will find a way to screw things up, no matter what the issue 2. When you're inclined to give them the benefit of the doubt, they will invariably pull off something more cynical than you could possibly have imagined. It doesn't matter whether Bernanke and Paulson are good, competent men, any more than it matters whether Petraeus or anyone else is--they don't get the final say. Whether the current financial woes are the fault of the Bushies or not, they won't fix them. Depend on it.

I have to admit I'm a little preplexed that Jane chooses to attack Krugman for being too predictably anti-Bush.

I find Jane's writing intelligent and agree with her on many issues ... but just like Krugman I see her as bending over backwards at times to stay on her preferred side of red-blue issues. See for her example her endorsement of Bush (for his foreign policy instincts!) when more, shall-we-say unpredictable, conservative bloggers like Dan Drezner had already jumped ships.

I am an occasional reader, and my memory may be playing tricks on me, so I'll ask other commenters: when was the last time Jane surprised you on a hotly contested partisan question?

Tom

when was the last time Jane surprised you on a hotly contested partisan question?

She agreed with her employer, The Economist, when they said Rumsfeld should go well before the right side of the blogosphere was willing to accept that he was both a failure and an electoral liability, not just a stud who could stand up to Democrats. I forget when that was. 2005?

Those irresponsible Bush tax cuts contributed to the following: Years of steady economic growth, a reduction in the deficit, stocks are up, but in closer line with earnings than they were under the 1990's bubble, interest rates are down, which means bonds are up, and unemployment is low. Spreads are down, which means even shakier companies have had a good run. And small-caps have outperformed large-caps, which means that all the wealth didn't just flow to the mega corporations.

It's funny to think about how many of the same people who regard the Bush tax cuts as "irresponsible" were also fans of Jimmy Carter and Mondale voters in 1984.

Well, scratch that. After what Carter did to the country, there were hardly ANY Mondale voters in 1984.

Jason,

You write "Those irresponsible Bush tax cuts contributed to ... a reduction in the deficit."

Is your belief the deficit today is lower because of the Bush tax cuts than it would otherwise have been. If so, how did you arrive at that conclusion?

Tom

"Is your belief the deficit today is lower because of the Bush tax cuts than it would otherwise have been. If so, how did you arrive at that conclusion?"

Tom, I can't answer for Jason but I can answer for myself. While I wouldn't claim that the tax cuts caused the deficit to be lower than it would have been without them, I would point out that it has been shrinking much more rapidly than those who opposed the tax cuts predicted. This means that the opponents--like Krugman--grossly underestimated the positive affects the tax cuts would have on incentives.

So yes, the tax cuts probably cost the government some revenue. But the goal of economic policy is not to maximize revenue but rather to maximize the welfare of the people. And the tax cuts have improved our standard of living, just as any decent undergraduate economics textbook would have projected.

Isocrates,

First off, thank you acknowledging a basic truth that eludes seemingly most major Republican politicians (assuming they believe what they say).

Second, how did you conclude the tax cuts had those benefits? The deficits were worse than expected after the first round of tax cuts. Did that prove they had negative effects? Or that we are not that good at forecasting taxes. To take another example, the US fiscal situation improved far faster than expected under Clinton. Did his tax policy cause that?

"And the tax cuts have improved our standard of living, just as any decent undergraduate economics textbook would have projected."

Um no. Can you point to any textbook that believes that deficit financed tax cuts improve long-run growth? Textbooks would support deficit financed tax cuts to get out a recession but I doubt that's what you are thinking of.

Tom

Hey, I was just responding to the idiotic notion that it's prima facie evident that the Bush tax cuts were "irresponsible."

Such a statement tells me a lot more about the biases of the commenter than it does about the Bush tax cut. The fact remains that the economy has been strong since the end of the recession that was already underway in 2001, unemployment has been low, corporate earnings have been high, asset prices have appreciated without a general runaway inflation (except in housing costs, and the worst I can argue about the Bush economy, if Presidents ought to have namesake economies, is that homeowners have done too well.).

Yes, deficit reduction has indeed been greater than anticipated. Yes, it was less than anticipated after the first round of tax cuts. But, you know, you don't bother mentioning that we were still in a recession at that time, the financial markets were recovering from the 9/11 shock on top of that, corporations were paying the "security tax," meaning they were forced to up their investments in security technology and assets rather than in dividends to shareholders or by hiring employees that created wealth rather than protected it.

There was also the small matter of increased expenditures due to a large mobilization of deployed troops, two wars, and the beginning of the the reconstruction of Afghanistan and Iraq, which would also take billions and billions out of the Federal treasury.

Yes, it was the Bush Administration, with the ok of Congress, to go ahead and spend the money on the wars and the reconstruction. But they may yet pay off over the decades. I don't recall the Marshall Plan being thought of as that bad an investment today.

Lastly, I'd like to address the ridiculous practice of regarding deficit reduction as if it were the only applicable metric. That's absurd.

Tax cuts are a good thing in and of themselves. Granted, Government needs a base of revenue in order to maintain basic services and defense and security functions, so the tax rate needs to be somewhere above zero, obviously.

But even if the deficit reduction benefit through economic stimulation is zero, tax cuts have a beneficial effect on the people themselves.

I know it's hard for libs to wrap their brains around this concept, but here it is: All else being equal, a family that pays lower taxes is wealthier and has a higher standard of living than a family that pays higher taxes.

But we already know that the tax cuts had a stimulatory effect. How? Because the deficit went down faster than expected. Even with a war that still consumes more resources than anyone expected it would by now back in 2002.

You're asking me to address the hypothetical, "how do you know that the deficit reduction wouldn't have been greater without the tax cuts."

That's a stupid question. How do you know it wouldn't have been worse?

The results are what they are. Perhaps the Bush plan was only 95% optimal as opposed to the 75% optimal plan pushed by opponents.

Meanwhile, I benefited from the tax cuts at the time, and so did everyone else I know who was actually working for a living.

I rather think I was able to spend my own money for my benefit more wisely than Steven Young and Congress would have. But perhaps you hold the Republican Congress at that time in high regard?

The economic stimulus resulting from the Bush tax cuts could have been obtained by structuring them so as to benefit all social classes or by spending money on our health problems, for example our crummy rankings in life expectancy and infant mortality. As for Jason Van Steenwyk's remarks, I suggest he read Isaiah 3:15.

Jason,

I believe your answer is that yes you believe the tax cut raised revenue, and that the proof is that revenue rose faster than projections at some point. Please let me know if that is wrong.

We have to answer hypothetical questions whenever we make a decision. Would it better if I did X or Y? We can never know the answer, but we can look at historical examples for guidance. Any particular example will always have many factors that make it different for the current situation. I can't say exactly what would have happened if Bush had not cut taxes. I can say that when you looks at large numbers of tax cuts/increases, you do not see a growth response anywhere near sufficient to raise revenue.

I'd be careful writing about others have trouble grasping simple concepts. Your close indicates that you believe that cutting taxes somehow prevents Congress from spending. The last few years (as do more systematic studies) make it clear that it does not. All the tax cuts do is pass on the expense to another generation.

Tom

Krugman's articel may be an usual ad hominem attack.

However, what of the real issue. Billions of dollars printed to save the banking liquiidty market that will push up inflation at a 1970's style rate.

That will be a disaster for all mortgage owners as interest rates shoot up.

I am not sure the likes of Paulson care about the people, they are more interested in saving their friends and associates at the banks from their own mistakes?

"Can you point to any textbook that believes that deficit financed tax cuts improve long-run growth?"

Tom, every decent textbook recognizes that some taxes cause significant distortions--the income tax, the capital gains tax and the corporate tax for example. These taxes carry with them large deadweight losses and cutting them reduces those deadweight losses. As Mankiw's textbook says, the deadweight loss rises with the square of the tax, so that deadweight losses can become very large indeed. None of this is a matter of serious debate.

So, the question becomes whether the advantages of the tax cuts (in terms of enhanced incentives) outweighed the costs of "crowding out" due to deficit finance. I believe they did and I would point to three different bits of evidence. First, we have had a strong economy in recent years as productivity has risen nicely--this despite the deflation of the tech bubble of the late 90's, terrorist attacks and costly overseas wars. Second, crowding out works through rising real interest rates, but real interest rates have not been higher under President Bush than they were under his predecessor, implying that any crowding out effect has been relatively minor. Finally, the deficit is currently 1.2% of GDP which is pretty small--meaning that the tax cuts did not cause the kind of fiscal deterioration that Krugman and his ilk predicted.

All of this means to me that the tax cuts were, on balance, quite successful. And I am hardly alone in this. Many first rate economists like Mankiw, Bernanke and Becker all agree.

Another economist who supported the tax cuts was Milton Friedman--probably the greatest economist in the last sixty or seventy years. As he wrote, "I never met a tax cut I didn't like, and I like President Bush's a lot."

Many liberals like to give the impression that President Bush's tax cuts were "reckless" and "irresponsible" and that , therefore, no serious economists could have approved of them. But clearly that's wrong. Many very fine economsts endorsed the tax cuts with enthusiasm.

Isocrates,

I appreciate your fuller explanation, but I believe you are still thinking in the ST. This year is the deficit tolerable, yes. But our long-term fiscal condition is not. The Bush tax cuts will have to be repaid with future tax increases.

The textbooks aruge for smoothing taxes to reduce deadweight loss. Bush has done the opposite. The current tax levels may be more than sufficient to fund Milton Friedman's desired government. They are clearly insufficient to fund the American people's desired government. Conservatives had their shot to cut entitlement spending and failed miserably. They ate their desert before discovering they could not handle the vegetables. And that is irresponsible.

As for references to authority, the Economist magazine did a poll of major economists in 2004. Bush did miserably vs. Kerry, after doing ok in 2000 vs. Gore.

Tom

Tom,

1)"This year is the deficit tolerable, yes. But our long-term fiscal condition is not."

Our debt as a percentage of GDP is much lower than that of other developed countries like Japan and Italy. And it is roughly the same as that of France and Germany. So it seems strange to imply that we are currently in some sort of fiscal crisis.

Moreover, if we were in a crisis, then that would be reflected in the bond markets. If George Bush's policies have been as reckless as you seem to think, then we should have had very high real interest rates over the last few years. But real interest rates have not been higher than they were during the Clinton years. How do you explain that?

2)"Conservatives had their shot to cut entitlement spending and failed miserably."

While I don't think we face a fiscal crisis any time soon, I admit that there is a long-term problem concerning the growth of entitlement spending. It seems strange, though, to blame this on conservatives, since the programs that are causing the problems were established by Franklin Roosevelt and Lyndon Johnson.

If it were up to me we would make substantial cuts in these programs. Unfortunately that is not politically feasible at the moment. But I don't think conservatives and libertarians should simply surrender and accede to permanently higher tax rates and government spending.

Paying for the big entitlement programs as they are currently structured would require crushing tax increases, as Laurence Kotlikoff has shown. But such tax increases would have terrible distorting effects on the economy. Clearly then the answer is to fix these programs by cutting their rate of growth. It will take time to persuade the public to accept the changes that are necessary, but that isn't a good reason to raise taxes and thereby discourage work, saving, innovation and entrprenuership.

And if we do eventually need to raise taxes, we ought to raise taxes that are not so distorting--consumption taxes, for example, and especially Pigouvian taxes. If you are interested in promoting growth, you ought to oppose the sort of taxes that retard growth, as I do. And you ought to favor keeping the Bush tax cuts in place.

Isocrates,

The fiscal problem is in our off-the-books liabilities. Our combined fiscal deficit well-into an expansion is a poor measure of our fiscal health.

On tax efficiency, I do support Pigouvian taxes, most notably, a carbon tax. The only time we got close it got shot down by conservatives. Has any conservative politician ever proposed a pigouvian tax?

I do not blame conservatives for growth in entitlement spending, although you should include Bush with Johnson and Roosevelt. I do blame them for refusing to face the reality of it.

In the future, there surely will be steps to reduce the growth on entitlement spending. But there is no way the public will cut the spending so heavily as to maintain taxes at their current levels. There will be a compromise, but taxes will be higher than current levels.

Finally, I have never understood the argument that consumption taxes are particularly efficient. Over a person's lifetime a consumption tax is identical to an earned income tax with the same effects. A consumption tax is only preferable if what you really want to do is end taxation on capital. I have not seen empirical evidence to support a major gain from doing so.

Tom

The economic stimulus resulting from the Bush tax cuts could have been obtained by structuring them so as to benefit all social classes or by spending money on our health problems, for example our crummy rankings in life expectancy and infant mortality. As for Jason Van Steenwyk's remarks, I suggest he read Isaiah 3:15.

Two points of response:

1. You haven't provided any evidence that the tax cuts were structured against the interests of any social class; and a notable counterpoint is, if the economy improves, all social classes benefit. Furthermore, life expectancy and infant mortality cannot be reduced to a glossy soundbite as you have done here.

2. I don't think you understand Isaiah 3:15 for the same reason you don't understand the points I have objected to in (1): you completely omit the context in order to press the sound bite into some useful service. Moreover, if you had read a bit more of your Bible, you would find that giving to the poor is primarily an individual action (though the individual gifts are sometimes, but not exclusively, administered through collective actions of the church). If you believe there are unhelped poor in your sights, then go out immediately and help them with a cheerful heart -- instead of haranguing others for not supporting a (in your opinion) suitable political adjucation of the problem.

Tom,

1. "I have never understood the argument that consumption taxes are particularly efficient."

If we were to reduce income taxes and impose a consumption tax that would offset the revenue loss the effect would be to encourage work and saving and discourage consumption. This would have a couple of benefits. First, if people are saving more they will be less reliant on the government to fund their retirement or to pay their medical expenses. Second, the increased saving would increase the supply of loanable funds, reducing interest rates and increase investment--leading ultimately to higher productivity and a higher standard of living.

2. "Has any conservative politician ever proposed a pigouvian tax?"

Not that I can think of. But I can't think of many liberal politicians who favor a carbon tax either. The truth is that politicians of all stripes tend to favor policies whose costs are hidden (like raising CAFE standards).

Incidentally, I don't really consider myself a conservative--more of a libertarian really, or a classical liberal.

3. "I do not blame conservatives for growth in entitlement spending, although you should include Bush with Johnson and Roosevelt."

Yes, I admit that the prescription drug entitlement Bush pushed through earns him a place along with big spenders like FDR and LBJ. I support his tax cuts, but lament that he didn't show more spending restraint.

4. "The fiscal problem is in our off-the-books liabilities. Our combined fiscal deficit well-into an expansion is a poor measure of our fiscal health."

I agree, but it's important not to exaggerate America's difficulties. We are in better shape than Japan and Western Europe. Moreover, there is a great deal of uncertainty in the sort of projections involved in "generational accounting." As I wrote above, if our long-term budget problems are as severe as some (like Kotlikoff) say, then that should be reflected in the bond markets--specifically by high real interest rates and a steep yield curve. But real interest rates are not high and the yield curve is flat. I don't think you can explain that.

The Bush tax cuts benefited high income taxpayers far more than anyone else, particularly people with investments in equities and the heirs of people with large estates. I regard this as class warfare carried out by the rich against the poor. I understand anony-mouse's annoyance at having to shell out money for what he regards as giveaways to the unworthy, but I think he should realize some of the results of his attitude. I sincerely feel that we would have a stronger economy, more respect in the world, and more internal unity if we could improve the lot of the poor and give them some hope. Besides this, I think it's the right thing to do.

Dude,

I hope your grasp of fiscal policy is better than your grasp of scripture. And that was a really wierd thing to bring up, anyway.

For the benefit of the casual reader, Isaiah 3:15 reads as follows:

What do you mean by crushing my people
and grinding the faces of the poor?"
declares the Lord, the LORD Almighty.

Now, if I were out to crush the people and grind the faces of the poor, cutting the 15% tax bracket to 10% seems like an awfully stupid way to do it, don't you think?

If that's grinding their faces, I could use some more face grinding like that, myself. But if you can't think of a more productive way to use that marginal income that would be covered by that bracket, feel free to send it my way. I can only assume I'd be more competent at spending it than you are.

And wow - to add insult to injury, Bush is giving away prescriotion drugs!

No. You want to point to someone who was into grinding the faces of the people, I would suggest you look no further than bastard who came up with and enacted a retroactive tax and a tax on social security benefits (!!!)

I mean, if tax cuts are irresponsible, then why is it that Clinton himself admitted he had raised taxes too much in the 1990s?

Stan:

@@@The economic stimulus resulting from the Bush tax cuts could have been obtained by structuring them so as to benefit all social classes@@@

I would argue that they were. Name a tax bracket in existence prior to 2001 that was not cut.

Unless you're one of those twits who think we can lower income taxes for people who pay no income tax?

@@@@We have to answer hypothetical questions whenever we make a decision. Would it better if I did X or Y? We can never know the answer, but we can look at historical examples for guidance. Any particular example will always have many factors that make it different for the current situation. I can't say exactly what would have happened if Bush had not cut taxes. I can say that when you looks at large numbers of tax cuts/increases, you do not see a growth response anywhere near sufficient to raise revenue.@@@@

For any given family that receives an income tax cut - which in 2001 was EVERY family that paid income taxes - that family experiences a net increase in revenue equal to the tax cut, dollar for dollar, PLUS interest earned on the money, AND/OR PLUS the value of any lifestyle improvements that money can finance.

This is before you factor in one iota of economic growth.

After that, any stimulatory effect on that money is gravy.

I know it's hard for liberals to wrap their brains around that concept, but I wouldn't think it ought to be very hard. The presumption ought to be in favor of the enterprising individual who earned the money in the first place.

The notion that maximizing revenue to the government ought to be the sole criteria for evaluating a tax cut is ridiculous. You also have to give the benefits to the wage earner and his or her family some weight. As in, above zero.

@@@@Your close indicates that you believe that cutting taxes somehow prevents Congress from spending.@@@

Well, now you're just going off the reservation.

I never said that at all, or even implied that.

What I said was that I could spend MY money more efficiently than Stevens and William Jefferson.

Obviously, your mileage varies. In that case, I encourage you to voluntarily send extra money to Washington next time you file your tax return.

But have the decency to keep that preference personal, you know?

Or are you anti-choice, on top of everything else.

All classes got something from the Bush tax cuts, but some people got a lot more. The cut in the inheritance tax was the most egregious example of Bush's brand of class warfare, followed closely by his cuts in the capital gains and dividends taxes. The small tax cuts for people at lower income levels were just camouflage. They fooled people who wanted to be fooled. As a result of Bush's low tax policy, and those of previous administrations, including Clinton's, we're in a sad way as a country. Forty-one countries have higher life expectancies, forty have lower infant mortalities, and our infrastructure is falling to pieces. We can't continue on in this way and continue to be a world leader.

Dude. Learn a thing or two about statistics. For example, because of superior American medical technology, we're able to save thousands of babies that otherwise would be stillborns. We don't always succeed, and in those cases, they count against you in the child mortality column. But we succeed in many cases where the healthcare systems in other countries are totally outclassed.

Ditto for life expectancy figures. You're using life expectancy as a proxy for availability for social services. Someone in this thread already warned against that.

Life expectancy statistics are buffetted by a lot more variables than just economic policy. For example, automobile accidents are a HUGE killer, especially among younger people.

Why are there so many accidents? Because our economy - our capitalist economy which has eschewed French style socialism - is so overwhelmingly successful at generating wealth that even our poor can afford cars, and can afford gas to drive them with.

Moreover, duh...it's kind of hard to cut taxes by a huge when someone pays very little in taxes in the first place. You can't cut taxes by MORE than someone pays. I don't think you would have been satisfied by any tax cut program, because ANY tax cut program, in terms of dollar amounts, would save more dollars for those who paid more in taxes than it would for those who paid less.

In terms of a percentage decrease in marginal tax brackets, the lower taxes got a bigger break.

The wealthy are still paying higher marginal income taxes than the poor. If the regular tax program doesn't see to that, then the AMT system does.

Which you should love, because it's beginning to stick it to the middle class in many areas. You know the middle class, don't you? It's that group of hardworking people that tax-hungry liberals like to refer to as "the wealthy."

Jason, if you don't think that Europeans own cars and have traffic accidents, you need to get out more. If you don't think that poor people pay taxes, you've forgotten about social security and medicare. And if you don't think that life expectancy and infant mortality are important indicators of public health, you're living in an alternate reality.

I understand anony-mouse's annoyance at having to shell out money for what he regards as giveaways to the unworthy, but I think he should realize some of the results of his attitude.

Oh, no you don't. Don't pretend that you know enough about me to make those kinds of assessments.

I sincerely feel that we would have a stronger economy, more respect in the world, and more internal unity if we could improve the lot of the poor and give them some hope.

You "sincerely feel". There's the problem right there; you feel your feelings, but your performance to date suggest you don't really know your facts. That's a problem, because good intentions are only half of the solution; good actions are the other half. Good actions rarely happen where there is little respect for factual data and pragmatism.

Besides this, I think it's the right thing to do.

Then do it. The saying "charity begins at home" was coined for a good reason; you are therefore in possession of all resources necessary to begin realizing it. Trying to crack a whip over the political process is merely wasting valuable time, seeing as how the other end of that whip is tied to a sofa.

Isocrates,

Do you understand that a consumption tax is the same over the long-run as an earned income tax? If not, I'll be happy to explain.

Here's the core point on taxes.
1) Stable tax rates are more efficient that oscillating ones.
2) There is a low probability the level Bush has set tax rates is sufficient. They are not sufficient right now well into an expansion; they certainly will not be in the future.
3) As a result taxes will have to rise, even if entitlements are severely cut.
4) The Bush tax cuts represent inefficient tax shifts. See for example, libertarian economist, Alex Tabarrok's commentary on them: http://www.independent.org/newsroom/article.asp?id=1143

Note that none of that argument implies an oncoming crisis or risk of default.

Best,
Tom

Jason,

I wrote: "Your close indicates that you believe that cutting taxes somehow prevents Congress from spending."

You wrote "I never said that at all, or even implied that.

What I said was that I could spend MY money more efficiently than Stevens and William Jefferson."

When you say that, you imply a trade-off between your spending your money and Congress spending your money. You do so in the context of arguing for tax cuts. What can that mean other than that tax cuts enable you to spend your money other instead of Congress?

I am also intrigued to learn more about Steven Young. What has his role been in spending.

Tom

Tom,

I. "Do you understand that a consumption tax is the same over the long-run as an earned income tax?"

Much of what you have written has been sensible but this is not. Cutting income taxes and raising consumption taxes would encourage work and saving and discourage consumption. You don't seem to believe me, so perhaps you'll believe Greg Mankiw:

"Many economists—and I include myself among them—believe that consumption taxes are better than income taxes because they do not discourage saving."--Greg Mankiw, on his blog on 8/16/06

Or perhaps you'll listen to Alan Greenspan:

"Federal Reserve Chairman Alan Greenspan nudged President Bush's tax reform panel today in the direction of taxing consumption rather than income, arguing that a consumption tax would encourage the savings that the economy needs for investment... 'I believe that, as the baby boom generation begins to retire in a few years, it will become increasingly important for the nation to boost resources available in the future through greater national saving and enhanced incentives for participation in the labor force,' he said."--chicagotribune.com, 3/3/05

And what Mankiw, Greenspan and I are saying is commonly accepted among economists: taxing earned income discourages work, taxing consumption discourages consumption and encourages saving.

II. As for your argument above, I accept part 1 but not 2, 3, and 4. The key point is that there are two ways to address the problems with entitlements--one is to raise taxes, the other is to cut the growth of these programs. I prefer the latter. If it becomes necessary to raise taxes again at some point, though, I would do it through a consumption tax, just as Mankiw and Greenspan would.

(Sigh.) Yes, Stan. Europeans own cars.

They just don't own nearly as many of them, per capita, as Americans do. Which of course has an impact on longevity figures, due to lower accident mortality rates per capita.

Jason -
Google "auto deaths Europe" and you'll find they run about 60,000 per year in the European Union. Google "auto deaths USA" and you'll find about 42,000 per year. Googling the populations shows that the EU has 1.63 times more people than we do. Doing the math shows that there are about 8000 more auto deaths here per year than there would be if we died at the European rate. Now google "death rate usa". You'll find that this is 8.26 deaths per 1000 population. Multiply 8.26 by 301,000. This gives about 2.5 million deaths per year in the US. Auto deaths are not a significant fraction of the total death rate, and they have no appreciable effect on American health statistics. A problem with many of the posters here is that they have a blind attachment to theory and no feel for numbers. This leads them to make silly arguments, like the one you posted about auto deaths.

I don't mean to interrupt things between Jason and Stan, but let's get back to the issue. Raw statistics like life expectancy and infant mortality aren't the best indicators of healthcare, especially between developed nations. Infant mortality, for example, is calculated differently in Europe than in the US, which has a large effect. But life expectancy is the big issue. Life expectancy for a 65 year old male in the US is around 18 years. In Europe, it's around 15. Those figures are more comparable, and gives you a better picture. Namely, it is better to be old in the US than Europe.

Or would you like more numbers?

Regarding Dtech's argument that life expectancy at 65 is greater in the US than in Europe, is this due to the superiority of our system, or to the fact that low income Americans at 65 can afford preventive health care for the first time in their lives because of Medicare? Regarding infant mortality, I accept his argument that reporting standards here and in Europe are different, but I don't know if the difference is significant. Regarding Dtech's main point, that life expectancy is not a good measure of the health of a country's population, what is? When Nick Eberstadt wrote his informative studies on the truly awful health of the Soviet population in the 80's, his results were based in part on life expectancy and infant mortality statistics, and people rightly took them as indications that Soviet society was sick in more ways than one. If we give up life expectancy and infant mortality as measures of public health, what should we use?

...and life expectancy for the young can be compromised by lifestyle decisions not directly related to the overall quality of healthcare, such as diet/obesity and complications therefrom(heart disease, diabetes).

Summarily put, infant mortality and life expectancy statistics are usually not good proxies for quality of healthcare in industrialized nations because the baselines are almost never equal. Unfortunately, the raw numbers do make for extremely useful propaganda tools, because the average person who hasn't looked into the issue can be readily persuaded to latch onto them and then declare a crisis.

Somebody once put it that "text without context is pretext". These recurring infant mortality and life expectancy debates, and those who try to drive an argument purely by the uncontextualized numerical data, are all too good an example of that statement.

If we give up life expectancy and infant mortality as measures of public health, what should we use?

I don't think we need to give them up. Numbers can be useful, but only as far as they go. For example, "3000 people died last month in Anytown" has two completely distinct and wholly disparate meanings if last month Anytown was leveled by a tornado, versus last month Anytown had a massive disease outbreak due to an inadequate supply of clean water.

That's obviously an extreme example, but it does illustrate that the numbers ONLY tell us that something interesting has taken place, and ought to be looked into more deeply. The second step is to identify the causes. Then -- and only then -- can anyone make meaningful claims about the problems and solutions.

Persons who jump from the first to the third step are often as destructive (if not more so) then whatever problem they hoped to solve, by virtue of wasting resources in targeting the wrong thing. Anytown won't benefit much from $350k of reverse osmosis plant and septic upgrades if what they really need are community bunker-shelters and a big siren, or vice-versa.

Isocrates,

You appear to have misunderstood my comment. I wrote "earned income" tax. All of your quotes refer to total income taxes. Earned income is direct compensation, as opposed to dividends, capital gains, interest ...

In case you think I am making this up, see, for example, http://www.investorwords.com/1614/earned_income.html

Arguments for a consumption tax over our current (total) income tax entirely rely on the idea that taxing income from capital will reduce savings. This may be true, but as I noted several posts ago, I have not seen empirical evidence that taxing capital is worse than taxing labor. But that was never covered in my economics classes so I am open to belief it may be.

Let me know if you still are unsure why a consumption tax over the long run is the same as an earned income tax.

Tom

I agree with anony-mous that health statistics tell us that something is interesting and should be looked at further. Take infant mortality, for example. In a recent article, Vol 95, No. 1, American Journal of Public Health pp 86-90, I see that infant mortality is strongly correlated with income level in New York City, but not in Tokyo, Paris, and London. Is there any income related effect present in New York but not in Tokyo, Paris, and London? Obesity of the mother? Maybe, but I'd have to see some proof that infant mortality is higher in babies born to obese women. Smoking by the mother? Might be important, but they smoke more abroad than in the US. How about prenatal care? Bingo! Low income people are much more likely to get good prenatal medical care and counseling in Tokyo, Paris, and London than in the US because they have universal medical insurance and we do not. If anony-mouse can give another reason why income affects infant mortality more here than abroad, I'd be glad to hear it. If he has some compelling moral reason why it's OK for poor babies to die, I'd be interested in that also. [Hint: Don't just attack the article. There are others backing it up, e. g. http://gateway.nlm.nih.gov/MeetingAbstracts/102275303.html]

Riiiiiight. The number one killer of Americans between age 1 and 33 has no significant effect on longevity figures.

Wanna buy a bridge?

Here's a challenge for defenders of Paul Krugman: Collect his economic predictions during the Bush administration. Compare those to the predictions made by the administration economists. Then tell us which set of predictions was more accurate.

It's my impression that Krugman has been an extremely useful indicator, that he has been wrong so consistently that you could make large amounts of money by betting against him. For instance, when he said that the economy might be stuck in a permanent "quagmire" a few years ago, that was a good time to bet on a solid expansion.

Finally, different people have different definitions of competence. But if we are judging scientific thought, we should give some weight to successful predictions. And if Krugman's prediction record is as bad as I think it is, then he may not be the right person to call anyone else incompetent.

"Let me know if you still are unsure why a consumption tax over the long run is the same as an earned income tax."

Okay Tom, I'm letting you know right now. You seem to be ignoring intertemporal substitution of consumption, which is the crucial point...

Regardless, I thought you were arguing against the Bush tax cuts. President Bush cut taxes on dividend income, not just "earned" income. So this dispute is not really germane. Even you now seem to be conceding that the Bush tax cuts enhanced the incentives for private saving--and in doing so, benefited the economy.

Isocrates,

What does intertemporal substituion have to do with this? Consider a world, where a man earns $100 and then spends it over multiple periods. Let's say we have an earned income tax upfront of 20%. The man then has $80 to spend. Alternatively, let's say the tax is on consumption. The man then has $100 to spend but the goods that cost $80 now cost $100. What's the difference? Specifically, how do the different tax systems effect his spending pattern?

There are implications in the transition from one system to another and there are implications if you are uncertain that the tax system will stay the same. Is that what you're writing about?

Your comment on the Bush tax cut is incorrect. I said it "may be true" that cuts in taxes in capital could stimulate growth, but I have seen no empirical evidence for it. As I said in the beginning, I believe that deficit financed tax cuts are damaging under the current circumstances.

Tom

"when was the last time Jane surprised you on a hotly contested partisan question?"

Never does - she's a former liberal with reformed smoker syndrome. Can't admit that there is any thing right coming from the progressive side.

That said, she's a sharp logical thinker and I really enjoy her reasoning although I often disagree. Her arguments are usually very well thought out.

Space Captain,

I agree with the sentiment, although she was a socialist not a liberal. That lessens my confidence in her judgement and suggests some tendency towards ideology.

Tom

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