A few quick thoughts on the likely pending S&P downgrade

by on August 5, 2011 at 5:19 pm in Economics | Permalink

1. The Republican Party made a big, big mistake passing up a chance for a “grand bargain” with Obama.  It’s time to be a realist about revenue increases, rather than signaling ideological purity.  And let’s get a better rather than a worse version of revenue increases, combined of course with significant spending cuts and a good, credible long-term fiscal plan, enforced by tough triggers.  A lot of Republican or conservative intellectuals know better on revenue increases, and have said as such, but corruption, intellectual and otherwise, prevented their voices from being heeded in the larger political context.

2. Democrats need to choose on entitlements.  Ross Douthat nails it.  It’s time for Obama to lead.

3. I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.  Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times.  We needed a big dose of inflation, promptly, right after the downturn.  Repeat and rinse as necessary.  But voters hate inflation and, collectively, we proved to be cowards.  Too bad.

4. As a simple rule of thumb, if at this point, in response to this news, a commentator attacks the ratings agencies for their previous mistakes and stupid, corrupt behavior, it’s a sign the commentator is trying to muddy the broader issues at stake.  Such commentators may well be correct in their criticisms, but probably they are not facing up to their recent mistakes and seeking to shift the blame.  Watch out for this.

5. I’m not sure how markets will respond, and I don’t think that an alarmist reaction about the market would be appropriate.  A letter grade is a letter grade and the facts on the ground did not change today.  It may or may not lead to a major sell-off.  Still, years from now today may well be seen as a turning point of significance.

6. If this really does happen, let’s hope it serves as the needed wake-up call.  If it doesn’t, well, back to…

John Thacker August 5, 2011 at 5:31 pm

I think that the Republican Party made a big, big mistake not accepting Bowles-Simpson the way that their Senators on the panel did, and made a big mistake not getting behind the Gang of Six plan. Both of those accept extra revenue. I’m also convinced that President Obama also made a big, big mistake not doing the same either, and instead choosing to attack cuts in entitlement spending (when he wasn’t proposing them himself.)

I think that both of those deals were a lot closer than any “grand bargain” during the debt ceiling talks. However, I understand those of you who think that the prospect of hitting the debt ceiling concentrates the mind– in which case you should want frequent times of hitting the debt ceiling limit.

Abe August 5, 2011 at 5:43 pm

John – I quite agree on Bowles-Simpson… Although I don’t think it’s fair to exclusively blame the Republicans. Both parties had the opportunity to approve Bowles-Simpson and I didn’t hear ANYONE pushing its plan.

We now live in a world where even AARP has acknowledged the need for some type of entitlement reform. It has to happen.

Ian Maitland August 5, 2011 at 6:45 pm

Amen. I agree with everyone in this chain.

Brent August 5, 2011 at 7:32 pm

Um, did you FOLLOW the Bowles-Simpson debate? A number of Republicans simply refused to participate if it included any revenue, despite the fact that it was way tilted toward cuts — definitely a “conservative” approach. Sound familiar? It’s great to blame “both sides,” but at some point that argument simply becomes ridiculous. Obama and the Democrats have negotiated in relative good faith — despite absolutely none from the Republicans.

Tom August 5, 2011 at 8:53 pm

We’re spending a TRILLION more dollars more than 4 years ago.. Pardon my French, but what kind of retard thinks it’s not all about the spending?

Bill August 5, 2011 at 9:30 pm


Answer this question: Is there anything Different between now and 4 years ago that accounts for spending, or even a deficit.

I’ll be the retard: We are and have been in a recession. Countercyclical policies kick in. Revenue decline in a recession.

You could have asked the same question in 2001 and asked what is the difference between spending and the deficit now than it was in 1997.

Jim August 6, 2011 at 7:55 am

It’s all about the spending.
It has always been all about the spending.
S+P knows this, even if Tyler does not.

The “deal” signed this week was an insignificant nothing. No tax hikes, no spending cuts. The alternative “grand bargain” that Tyler wants would have been tax hikes and no spending cuts. An absolutely disaster, in other words.

Anon August 6, 2011 at 8:57 am

Bill: The counter-cyclical spending has been going for three years now.

It has been funnelled to pork-barrel pet projects and paper-shuffling bureaucrats. It hasn’t worked because it doesn’t fix the fundamental problems with the economy, or forced failing businesses and antiquated industries to liquidate or reorganize.

It has been clearly demonstrated that spending is not the solution, at least in the way this government does it. The largest spending spree ever, for years, has failed to fix the economy, but has jeopardized the credit of the United States.

Bill August 6, 2011 at 9:26 am

Anon, Sorry. Facts wrong. Countercyclical spending stopped a year ago. Go back and look at MR postings a year ago April in which people predicted that because Obama had no guts to ask for spending there would be a drop in AD. What we have had in countercyclical in unemployment insurance and 2% employee contribution to SS.

John Thacker August 6, 2011 at 10:23 am

Um, did you FOLLOW the Bowles-Simpson debate? A number of Republicans simply refused to participate if it included any revenue, despite the fact that it was way tilted toward cuts — definitely a “conservative” approach.

Some of the Republicans, yes. The Senators endorsed the result. The House Republicans did not endorse the result– and neither did the President, nor all the Democratic appointees to the committee. However, Bowles-Simpson did get a majority to support it, which was a bipartisan mix of Democrats and Republicans on the committee.

I agree that House Republicans should be blamed, but they’re simply not any worse than the President.

The President combines rhetoric calling for a “grand bargain” with actually submitting a budget with no cuts whatsoever, and with refusing to support any of the grand bargains that actually appear. Instead, he falls back on the old DC standby of “let’s have another commission.”

The President’s rhetoric is exactly the same as Republicans calling for a Balanced Budget Amendment while not simply proposing budgets that would be balanced. It’s the same level of lack of seriousness.

Anon August 6, 2011 at 4:01 pm

Bill: You know half the “shovel-ready” stimulus bill hasn’t been spent yet? The stimulus created incompetently in 2009-2010 continues. Also, the Fed flooding the market with debt dollars stopped only a month ago.

Dean August 5, 2011 at 7:03 pm

Agreed John, but in response to you and Abe, I’d say that the earlier mistake was with the Bowles-Simpson commission itself. The original bill establishing the commission provided that its recommendations would get an up or down vote, but that bill was filibustered on a 53-46 vote. Instead we got a commission by executive order with no real power.

John Thacker August 6, 2011 at 10:27 am

And note that the 53-46 vote was bipartisan. 23 Republicans and 23 Democrats voted against.

I understand the reluctance to create these sorts of Super Committees, but I also dislike kicking the can down the road with time wasting committees with no real power.

Paul August 6, 2011 at 8:07 pm

We don’t know the REAL count. The party leaders get a true count in advance of the vote, then they always allow some members to vote the opposite in order to pacify constituents. Nothing is ever what it seems when it comes to Washington.

Frank youell August 5, 2011 at 10:16 pm


Scoop August 6, 2011 at 10:13 am

I’d also like Tyler to post some time, on behalf of the Grand Bargain supporters, about the big concern of Grand Bargain opponents.

Every Grand Bargain in the past has brought the promised tax increases but, when time came for the spending cuts, there were no spending cuts. Why did he believe this would be different? How can spending cuts be made credible? What’s the “Trust but Verify” solution?

Frank Youell August 6, 2011 at 1:54 pm


“How can spending cuts be made credible?”

In some cases, it is quite easy. If a political deal raises the retirement age to 70, you can be sure that the cuts are real. If a deal abolishes Medicaid grants to the states and lets the states fund and run the program, you can be sure that the cuts at the Federal level are real. I a deal requires that all Medicare and Medicaid drug reimbursements to be based on the VA price list, you can be sure the cuts are real.

I am not suggesting that these are the right spending cuts. However, verifiable cuts are definitely possible.

Jean August 5, 2011 at 5:32 pm

Well Tyler, you wanted Obama, you got him. You, of all people, should have known that a deficit at 10% of GDP would trigger Ricardian equivalence. Not to mention three years in a row! And while I’m venting to you autistic people, I’d like to point out that the war in Iraq ’caused’ a death toll of approx. 100,000, while sanctions ’caused’ a death toll of 500,000. Heck, the libertarian option, used in 1991 when Bush I called on the Iraqis to free themselves resulted in the death of between 120,000 and 180,000! Way to go!

Buster August 5, 2011 at 5:34 pm

“And let’s get a better rather than a worse version of revenue increases, combined of course with significant spending cuts and a good, credible long-term fiscal plan, enforced by tough triggers.”

You see, the problem a lot of us have is that you never get the combination expressed above. You don’t get a credible long-term fiscal without entitlement reform (which Dems repeatedly have said will never happen, why don’t you chide them Tyler?). You don’t get significant spending cuts because… (do I have to?).

I’m not against taxes rising qua taxes rising. I just don’t see how it would help.

Neal August 5, 2011 at 7:24 pm

Well, if the Bush tax cuts expire, the AMT isn’t pushed up, and so forth, the problem gets much, much smaller. Check out the CBO’s current-law baseline, which has absolutely zero debt problem, partly because tax increases are written into the law. Congress just keeps pushing them off indefinitely and piling up the debt in the meantime.

The issue there is that the size of government goes from 20% to 30% over two decades.

Bill August 5, 2011 at 7:41 pm

Why does the size of government go up because Bush tax cuts expire. The deficit goes down. Whatever extra comes in doesn’t have to be spent.
I don’t get it.

Neal August 5, 2011 at 8:31 pm

Under current-law, the size of government goes up and taxes keep pace. (It’s not just the Bush cuts, though that’s a big part of it, it’s also things like Congress not hiking up the AMT every year.)

Bill August 5, 2011 at 9:04 pm

Neal, Under that definition, if we ran a surplus the size of government would go up too.

Cliff August 5, 2011 at 9:32 pm

Bill, The surplus or deficit has nothing to do with the size of government obviously.

Laserlight August 5, 2011 at 9:28 pm

“Whatever extra comes in doesn’t have to be spent”

but it will be.

Sebastian August 5, 2011 at 5:43 pm

“the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.”
Why is that? I think it’s pretty clear that given both the size of the demand gap and the contraction at the state&local level the stimulus was quite small. So we really don’t know. I’d say one of the lessons would be that more automatic stabilizers would be great, but I don’t see that happening politically.

Tom August 5, 2011 at 8:55 pm

How about that continued digging will not get you out of a hole?

Tom August 5, 2011 at 9:01 pm

Because we spent a shit load of money and only got the bill. Where do you sit that this isn’t bad?

Phill August 6, 2011 at 2:15 pm

To extend your silly analogy, just because we dug a six foot hole and gave up doesn’t mean there isn’t oil underneath.

From what I can tell, we just don’t know whether it would have worked – tons of people said right from the start that the stimulus that got passed wasn’t going to be enough.

Bill Dalasio August 7, 2011 at 1:55 am

Except even more people said the stimulus wasn’t going to work at all. Many of us noted that the stimulus package seemed much more structured to serve as political spoils than actual spending to spur economic growth.

Boonton August 8, 2011 at 1:37 pm

“Because we spent a shit load of money and only got the bill. Where do you sit that this isn’t bad?”

This makes no sense at all. What bill? The debt? The market rate on our debt is 0%. There is, in reality, absolutely no ‘bill’ at all for the stimulus. In return we at least stabalized the economy and ceased the absolute free fall.

So once again the question is why not a larger stimulus? Yes I know the Tea Party would rather see 20% unemployment and the US in ruins than recovery but turn to theory. Stimulus would have worked, could still work…if only ‘we weren’t cowards’.

Jacob August 5, 2011 at 5:45 pm

Points 1 and 2 make sense.

Why are you (still) so convinced about point 3? Haven’t the people who called for bigger stimulus been right on the rest of the analysis (liquidity trap, lack of inflation, bond yields)? You’re confusing household and public sector balance sheets again; the fact that the private sector is deleveraging means the public debt should increase to make up the difference.

Points 4 and 5 are contradictory. The reason people will rehash the stupidity of ratings agencies is as you point out, that alarmism is inappropriate. There has been no change in the facts on the ground and therefore there is no reason to downgrade. It is further evidence of shoddy analysis. Deficit hysteria is manufactured. Obsession over the 90% debt/GDP regression coefficient (could we get a confidence interval on that?) in one well-timed book does not make for great policy.

Point 6: who’s sleeping? It’s now universally acknowledged that the deficit is a long-term problem. Do you suggest bringing forward more of the austerity?

John Thacker August 5, 2011 at 5:56 pm

Haven’t the people who called for bigger stimulus been right on the rest of the analysis (liquidity trap, lack of inflation, bond yields)?

Everything except for the effectiveness of fiscal stimulus, particularly when monetary policy is the last mover.

Bill August 6, 2011 at 7:21 am

Half of fiscal stimulus was tax cuts.

I spent mine on buying a Korean tv and the rest went into savings.

Not all stimulus is created equal. The stimulus effect of tax cuts for consumers is different than the effect of direct spending. The problem was that there were no programs in place to absorb needed stimulus, other than aid to the states, so tax cuts were a second best. Non-observable tax cuts–where people get money and don’t know it and hence continue to spend–such as a reduction in SS tax, are different.

John Thacker August 5, 2011 at 6:00 pm

What Scott Sumner says (and Tyler is endorsing here, it seems) about point 3 is that fiscal stimulus is unnecessary if the Fed does its job, and fiscal stimulus is ineffective if the Fed is determined to negate it.

As Sumner notes, conservative economists are likely to believe that the Fed still has powers, but don’t think that it should use them, whereas liberal economists now are likely to believe that the Fed lacks powers (at least in the NGDP stimulative direction.)

J Thomas August 5, 2011 at 8:35 pm

As Sumner notes, conservative economists are likely to believe that the Fed still has powers, but don’t think that it should use them, whereas liberal economists now are likely to believe that the Fed lacks powers (at least in the NGDP stimulative direction.

Hasn’t it always been that way? The Fed can slow an economy by not letting people borrow money. The Fed can’t stimulate an economy by forcing people to borrow money and spend it, that stimulus doesn’ t work unless people with good credit ratings want to borrow.

Cliff August 5, 2011 at 9:34 pm

The Fed can stimulate an economy by printing money.

J Thomas August 5, 2011 at 10:44 pm

Cliff, does the Fed spend the money it prints? Or does it only lend it?

If the Fed can’t find anybody who banks trust to lend money to, who wants to borrow money, then aren’t they kind of stuck?

It doesn’t do much good to have a lot of money to lend, if everybody you trust to pay back a loan is too sensible to borrow right now.

Loren F. File August 6, 2011 at 7:07 am

And how, exactly, is the Fed supposed to do it’s job once it has lowered rates to 0%? At that point conventional macroeconomics has only stimulus to fall back on and I still have seen nothing that refutes the too small stimulus position.

The states cutting spending as the federal government increases surely play off against each other and even Friedman would agree that you cannot expect much stimulus from the tax cuts that made up almost a third of the stimulus packages.

I cannot understand how serious economists continue to discount the “we should have had a much bigger stimulus” argument with little or no rational explanation for the arguments that it was too small.


bluto August 6, 2011 at 2:35 pm

Isn’t that when the helicopters are supposed to be deployed?

Foster Boondoggle August 5, 2011 at 5:46 pm

“It’s time for Obama to lead too.” Translation: it’s time for Obama to give up more ground to a completely intransigent GOP, getting nothing that he favors in return.

Obama led in 2009-2010 on numerous issues, most notably on the PPACA, a real if insufficient approach to improving the structure of payment and delivery of healthcare – the dominant driver of projected deficits. For their pains, the Democrats who pushed this through were tarred by the GOP with proposing “death panels” and threatening to kill grandma, and lost 60 seats in the House last November.

Douthat is utterly wrong about why Democrats are defending Medicare in an unnuanced fashion. There’s nothing complicated about it. It’s because, as we just saw, any effort by the Dems to improve the system (to “bend the cost curve”) is met with demagoguery. If the lies are successful (as they were last year), their purveyors, once in power, will turn around and try to gut Medicare – not improve it – leaving untouched the cost structure driving healthcare inflation, but putting its burden on the part of society least capable of adjusting.

John Thacker August 5, 2011 at 5:55 pm

Obama led in 2009-2010 on numerous issues, most notably on the PPACA, a real if insufficient approach to improving the structure of payment and delivery of healthcare – the dominant driver of projected deficits.

Which then immediately spent all the money it may have saved on new entitlements. So congratulations, even if your savings come true, all you’ve done is shuffled around what is the dominant driver of projected deficits, not actually reduced them.

And I don’t believe that the cuts will come true, for the simple uncomplicated fact that both parties demagogue honest attempts to improve Medicare because such demagoguery works.

Have you ever considered that Republicans consider the Democratic changes “gutting” and their changes “improving,” just the opposite of your opinions? Have you read any of the Republican policy wonks behind their ideas Or do you always assume bad faith on your opponents?

Jean August 5, 2011 at 6:03 pm

Yo, dingbat! Obamacare takes $500 billion from medicare and increases taxes by $500 million. This is why we have’t had a budget from the Dems in two years. They can’t have the elderly realize what the dems have done.

John Thacker August 5, 2011 at 6:31 pm

PPACA is actually worse than nothing, since it immediately spent all the money on a new entitlement. Now we can’t make those cuts to reduce the deficit, and presumably those were the most obvious and easiest Medicare cuts to make.

PPACA, far from improving the deficit and debt situation, made it worse.

Dean August 5, 2011 at 7:10 pm

Not so sure about that. Given that the GOP campaigned against cuts to Medicare Advantage in 2010, I don’t think they would’ve later voted to cut it, and Democrats only voted for the cuts because they got something in return. The case that those cuts would’ve been made in a vacuum is even more speculative than the likelihood of the PPACA’s cost controls actually working. At least IPAB and the pilot programs are a place to start. In a perfect world, fiscal conservatives would work on making those elements bigger and the spending smaller, instead of just trying to scrap the whole thing.

Foster Boondoggle August 5, 2011 at 7:26 pm

@John – My point wasn’t about any specific cost reduction in PPACA. It was that it promoted various “experiments” on alternative approaches whose ultimate goal is to reduce delivery costs. And I’m not at all sure what you’re talking about when you say Republicans think that PPACA has gutted Medicare. Can you explain? Finally, I do assume bad faith based on the substance of the “arguments” that got the most and loudest airtime before passage of the bill. To have Tyler then say that “Obama must lead” is ironic.

@Jean – Yo dingbat, learn to read your posts before you hit “submit”. I think you meant to write $500 billion. What are you talking about? And what exactly are you arguing for? That nothing should be done to fix the cost structure of healthcare delivery in the US? That the entire cost should eventually be dumped on the elderly (the Ryan plan)? That none of it should (what I infer from your complaint about cutting medicare)? Is there a coherent viewpoint here or just an insult?

Tom August 5, 2011 at 9:00 pm

“Obama leading” = “flushing the economy down the toilet”
Why is this a good thing? Lucky he hasn’t lead on anything, except Obamacare – the grandest fuckup of all time.

Scott August 5, 2011 at 5:47 pm

How does one get inflation in the face of 0% short term interest rates? Seems like we need something like a helicopter drop, which would suggest having the Fed simply give money to governments (or some type of entity) to spend. Maybe an infrastructure bank? Any ideas?

Bill August 5, 2011 at 6:03 pm

Here’s a non-monetary idea. Unlike a corporation, we do not show some assets on the governement balance sheet.

Government sells assets to bidders based on the number of US jobs they create with the assets, as well as based on the bid price. Might be inefficient, but not a government expenditure since we do not list or value government assets on our balance sheet (intellectual property from government sponsored R&D, minerals, western lands, OCS, spectrum, intellectual property from government sponsored R&D, etc. do not show up on

dirk August 5, 2011 at 7:02 pm

Why doesn’t the Fed just print money and send checks to every adult citizen instead of buying bonds? It would be less efficient but more transparent.

dirk August 5, 2011 at 8:21 pm

Is it because they wouldn’t be able to soak the money back up by reselling bonds later? If so, at least it would be a “credibly irresponsible commitment” to inflation, in Krugman’s words.

Bill August 5, 2011 at 5:48 pm

We got 98% of what we wanted without raising revenue.

Ring, Ring.

Telephone Call from S&P For You

John Thacker August 5, 2011 at 5:51 pm

The President has his glamour, as Virginia Postrel puts it, that means that when remains silent (and even when he doesn’t!) people instinctively think that he really agrees with them, and is just giving that other impression to the bumpkins. So in this case, some people think that he’s really a budget wonk that wants to cut entitlements, but has to play the Democratic defender of FDR occasionally to the crowds. Others believe him when he defends entitlements.

So long as he remains silent, or refuses to publicly put out a plan, only negotiating in private and occasionally not endorsing other plans, people can continue to believe this and project all their own beliefs and desires onto him. So, sure, it’s politically smart.

But I don’t think it’s good for the country. I don’t buy these arguments from Ezra Klein and others that it’s so brilliant to refuse to actually endorse a plan or put out one of your own, that that leads to a better backroom deal. I think it leads to nothing.

It is, indeed, time for President Obama to lead too. Endorse Bowles-Simpson or Gang of Six, present his own plan, whatever. Just fill in the details, and don’t let everyone bewitched by his glamour assume that his secret “grand bargain” is really exactly what they themselves would favor.

Tom August 5, 2011 at 9:04 pm

“The President has his glamour, as Virginia Postrel puts it, that means that when remains silent (and even when he doesn’t!) people instinctively think that he really agrees with them,”

Bing! Then he opens his big stupid mouth and people are finally getting a clue. See election year 2010.

Yancey Ward August 5, 2011 at 5:52 pm

For those who want/ed a bigger stimulus, describe for me the mechanism by which a larger stimulus would not just have left you with a bigger drag on GDP when it also inevitably ran it’s course. And if your answer is going to be “a larger stimulus would have given a stronger self-sustaining recovery”, then describe for me how large this stimulus would have to be, and show your work for where that point of “stronger self-sustaining recovery” is to be found.

As for the inflation idea, voters hate it because they know whose pockets are being picked, and they know whose pockets are being lined.

lemmy caution August 5, 2011 at 6:51 pm

Pump up deficit spending in a recession; pay it off in good times. You don’t think that the US will boom again?

l.a.guy August 5, 2011 at 7:37 pm

Define “boom”. It appears to me that most of the growth for the past decade was a fiction built on (in order) Dot Com bubble, Fed low interest rate bubble and eventually the real estate bubble. The real estate bubble in particular created the illusion of an economy that was never sustainable and is not readily achievable any time soon. I think the last real boom was the tech sector. We also have world wide competition now in a way that we never imagined 30 years ago.

My concern with using more stimulus to return us to boom times is that is seems like doubling or tripling down on a bet that, if it doesn’t payoff, has only exacerbated the problem. Looks like we’ll never know.

J Thomas August 5, 2011 at 9:42 pm

I have to agree.

“From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points.”

The “financial sector” was growing faster than the rest of the economy — how much of the increase in GDP was from that? And how much of it was “real”?

If we could get government stimulus to “prime the pump” so that we got full employment and jobs with regularly increasing pay, people would feel confident and buy lots of stuff. But if it just increases imports, what then? We buy more junk from china, the chinese keep the money or put it into T-bonds, what good is it?

So, what alternative proposal could bring us to prosperity?

Bill August 6, 2011 at 7:28 am

Make something China doesn’t by developing an educated workforces and having in place a modern infrastructure to do it.

J Thomas August 7, 2011 at 4:01 pm

Make something China doesn’t by developing an educated workforces and having in place a modern infrastructure to do it.

Well, that’s a little more detailed than “Buy low, sell high”.

But at this point, we’re looking at 12+ years to get an educated workforce, and china’s education will be a moving target. The modern infrastructure could come quicker, but again we’re competing against a moving target, and they have a lot more money available to invest in innovation, if they choose to do that. Ours is mostly tied up in financial instruments.

The Anti-Gnostic August 5, 2011 at 9:22 pm

Why do people keep buying this Keynesian snake oil? This is not Joseph’s seed corn; this is pure fiat money ginned up out of thin air. The Keynesian ‘green shoots’ are bought at the expense of future prosperity. Eventually, you run out of future.

Fiat WTF August 6, 2011 at 10:54 am

I love people who talk about “fiat money” as if they are showing the emperor has no clothes. We should all be trading chicken eggs and harvested rainwater instead. Anarchy is so romantic.

Phill August 6, 2011 at 2:21 pm

Or better yet the notion that the value we associate with an asset backed currency is somehow any less fictional than that of a fiat currency.

Mark August 5, 2011 at 6:58 pm

Rather than some 40% of the stimulus being tax cuts (which is among the least effective forms of stimulus), the money should have been directed towards actual shovel ready work and aid to the struggling States for an extended period of time.

According to some, we really need almost $2 Trillion in infrastructure spending to be competitive in the future. Those include better roads, bridges, broadband, power grids, airports and more. Doing it right now actually means it is significantly cheaper for us to do it than to wait just two years before we start. Not only would this put people to work on the actual construction of these things, but there is a whole support network that benefits as well. The suppliers to the construction companies now have demand for their product and/or services. If they laid off some workers due to lack of demand in the recession, they may need to bring them back because the demand is there. These people now have jobs and will buy goods that they held off on due to not have a job. So now, the demand for consumer goods starts to increase.

Eventually, the economy will get to a level where the private sector can sustain itself again. As these infrastructure jobs wind down slowly, these jobs can be absorbed by a healthy economy. Bonus: at the end of all of it, the infrastructure that is used by all businesses is now there and not crumbling away.

The second part of this is the aid to the States. The reason that the economy bottomed out is because States that were hemorrhaging due to the recession got relief. States can’t run deficits, so when people lose their job, they lose revenues AND need to pay unemployment benefits. Revenues decrease, so they have to shrink services in their States, which puts more people out of work. The last jobs report had 117,000 new jobs after the 39,000 jobs lost (mostly in the State & Local gov’t level) is taken into account. Now THAT is a huge drag on the economy.

And as the economy picks up, the deficit picture gets better in the short term. One of the reasons for the high federal deficit is because the revenue is 15% of GDP. Increasing the economic activity means people pay taxes at all levels (local, state, federal), which will reduce the deficit issue. The long term deficit issue needs to be addressed, but that can best happen when the economy is back on its feet.

Bill August 5, 2011 at 7:44 pm

You’re right about tax cut stimulus money.
I bought a Korean made TV with mine and saved the rest.
There have been studies on the multiplier for tax cuts v. direct spending, and direct spending wins.

Cliff August 5, 2011 at 9:39 pm

Not in all the studies. And who cares where your TV came from? That’s just ignorant. The dollars come back one way or another.

J Thomas August 5, 2011 at 9:44 pm

Yes, the dollars come back when foreigners buy T-bills.

Loren F. File August 6, 2011 at 7:14 am

Surely someone here has read Friedman:



Micheal Gauss August 6, 2011 at 7:17 am

1. Borrow $90 billion at 1.2% per year for three years.
2. The government can hire a million people, pay them $30k per year and
– paint our schools
– clean up our parks
– help in nursing homes
– assist in our schools
– tear down condemned houses
– protect our neighborhoods
– do a zillion other things
and it would cost only $30 billion per year.
3. In three years the program terminates.
4. If in three years the construction industry has recovered, it could absorb at least 1.0 million workers.

Yancey Ward August 6, 2011 at 11:55 am

And, if in 3 years the construction industry hasn’t recovered (as it hasn’t despite enormous resources devoted to propping it up)? Do you repeat, repeat doubled, or what exactly?

And, I will note this- you are not borrowing $90 billion at 1.2% for 3 years. You are borrowing it indefinitely.

Michael Gauss August 7, 2011 at 8:47 am

I don’t know many people that think the current status of the construction industry is the “new normal”, perhaps it is. But it you look at statistics of the industry at for example here: http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=USCONS
you may conclude that an increase of that magnitude is not unreachable.

And if you want to get just a little technical (not much, it’s Sunday morning and I haven’t had coffee yet), as $90B flows through our economy approximately 20% comes back to the govt in taxes, even if it doesn’t “take”. And if it does work…

Finally, the real annual cost of this is the interest charge on the $90b, which apparently would be less than what our military spends on air conditioning in Iraq and Afghanistan in a month. This is not to disparage our military, just to put costs in perspective.

l.a.guy August 6, 2011 at 6:30 pm

Accept that’s not how it works. It will be subject to the Bacon-Davis act which will make it more expensive and political pressure would undoubtedly push the jobs towards union workers. Additionally they would likely have to submit any projects for approval in order to get funding which would add months if not years longer to the start dates. Ultimately a job that could have been done by a few people making $30K is done by twice as many people making $60K.

Micheal Gauss August 7, 2011 at 8:53 am

I will admit that I have little understanding of how Washington works. But I do believe that you, me and Yancey (see above) could put together and run a program like this. Roosevelt certainly made it work.

If both political parties wanted this to work the impediments you listed would be marginalized.


Micheal Gauss August 7, 2011 at 11:17 am

Correction, from the ghost of my mother: it is you, Yancey and I. I can’t believe I wrote that.

IVV August 5, 2011 at 5:57 pm

2. is why 1. is true.

Morgan Warstler August 5, 2011 at 5:58 pm

New revenues are not happening piecemeal. So if liberals want them, they better understand who must gain and lose – in the end wealthy Tea Party small businessmen will be getting a tax cut…. the corporatists and banksters will be paying more.

Liberals should sell it that way, since the Tea Party will ensure the only grand bargain is a rewrite of the tax code… and once a re-write is on the table, if the SMB owners get the upside, the Tea Party will go along.

John Thacker August 5, 2011 at 6:29 pm

You seem to think that liberals would prefer teaming up with small business owners instead of the corporatists and big banks. Why?

Morgan Warstler August 5, 2011 at 10:41 pm

I don’t think they prefer it, I think they are going to be forced to do it. And I think I can convince you – its their only way out.

Here’s a quick primer: The “A power” are the 30%+ of the population who spend part of their earning years in the top 90-99% – they are the Tea Party, they vote constantly, own hard assets, and have $. The “B Power” are those who live basically in the top 1% most of their lives. They have money and no votes. The “C power” are everyone else. No $, have votes.

In ANY rational universe the correct game strategy for a C POWER is to play both A and B back in forth. Note: Progressiveness HATE thinking of themselves as the C power. And they prefer the kind of wealthy in the top 1%.

But facts are facts, and the numbers prove it out – while the top 1% have gained during the rush to technocratic neo-liberal policies, the C power have lost, and a A power – the Tea Party (the 90-99%) have kept their wealth and earning share even.

Basically problems with capitalism are caused by too few capitalists – it is called distributism.

My argument is there is NOTHING the C power can do with the B power to topple the A power. The tea party are like the asshole of the body, they shut down, and nothing happens until they get their way. If the banks go under, and valutations plummet, there will still be land and buildings and the A power will own them. OWNERSHIP of hard assets is key.

Here’s a real strategy example: The left suddenly adopts a tax preference that treats small business income AS CAPITAL GAINS, in return for increasing capital gains taxes on everybody else 5%.

Suddenly ALL those $250K+ SMB owners are no longer declaring income AND the investor class / Fortune 1000 management is fucked.

The policy is revenue neutral – maybe a LITTLE more revenue – like no more than $5B a year.

Tea Party LOVES it. Huge amounts of capital surge into SMB, the Fortune 1000 are forced to spend all their cash fighting off the piranha now in the water.

States rights is another form of distributism. And I know some liberals who are finally starting to consider keeping their $ and building california they way they want.

JTapp August 5, 2011 at 6:04 pm

I disagree with some of this assessment. Gold also fell, stocks also fell, so it seems to me that people dumped longer-term Treasuries for cash. A yield curve could steepen like this if people had very low inflation expectations in the short-term and high skepticism about fiscal solvency in the long-term. So, more than half of that is a monetary policy problem.

Matthew C. August 5, 2011 at 11:07 pm

Let’s see. Gold has been setting record highs all year, is up 30% YTD, and is now less than 1/2% off its highs reached earlier this week.

The S&P is down 10% YTD and has been on a tear — in the downward direction.

BIG difference.

Bill August 6, 2011 at 7:29 am

Matt, Go out and load up on gold.

Matthew C. August 6, 2011 at 8:54 am

I have been and will continue to do so until my Reichsmarks oops sorry Zims oops Assignats oh sorry I mean dollars won’t buy any gold any more. Won’t be long.

E. Barandiaran August 5, 2011 at 6:05 pm

Tyler, please tell me exactly how you propose to get the big dose of inflation that the economy needs. Once you identify the instrument and how much you will use it, please tell me how it would work to produce what you want.

As long as you don’t answer the question, I will assume you don’t know what you’re talking about. Of course, this also applies to Rogoff and Sumner.

Ed August 5, 2011 at 6:22 pm

God, you are annoying!

JP White August 5, 2011 at 7:03 pm

He’s not annoying to me. The questions he asks here has never been answered by any of those advocating such a policy. Their macro approach glosses over the problems such an approach entails. Namely, you are never, ever, going to get uniform inflation. You can make asset bubbles, though. I might add to his list: how do you know that the benefit you envision will outweigh the damage caused?

Ed August 5, 2011 at 7:33 pm

He is annoying to me. He is a nobody attacking others personally. If he has a point then he needs to learn to make it without insulting others.

Bill August 6, 2011 at 7:30 am


Sean Brown August 6, 2011 at 11:59 am

Well, I think it’s a good question. And Mr. Barandiaran has been an economist at the U of Minnesota, the World Bank, and La Catolica (Chile’s top university), so he’s not exactly a “nobody.”

Bill August 6, 2011 at 8:30 pm

Just as I thought. Always worked for the gov’mnt.

E. Barandiaran August 5, 2011 at 7:33 pm

Sorry to be annoying but I think that there is a fundamental error on how Sumner, Rogoff and now Tyler approach monetary policy and it is not enough to say that a big dose of inflation is needed. It’s not so simple to generate such a dose and quite difficult to justify it. Mobutu and many other dictators that have relied on hyperinflation to finance their spending did it just by printing a new fiat currency and paying their soldiers and suppliers with it. From the many Latin American experiences of high inflation and hyperinflation, I have learned that none of the people that collected the seignorage (that is, the revenue from issuing fiat currency) cared at all about how big the dose of inflation was and about any other consequence –they just needed to finance some expenditures. I don’t think my colleagues can achieve any particular inflation target, and in addition they know little about the unintended costs of inflation. If fraudulent clowns are going to play with gasoline, I want to be sure their advisers know what they are doing.

dirk August 5, 2011 at 8:24 pm

Why couldn’t the Fed just print money and send checks to every American? Wouldn’t that instrument work?

Thad August 5, 2011 at 8:39 pm

This is rather off-topic, but I indirectly came into contact with your work on banking/financial crises after reading a paper published within the Prescott/Kehoe Minneapolis Fed Book “Great Depressions of the Twentieth Century”, the specific paper involved a comparison between Mexico and Chile.

What is your opinion on that volume in general and that paper specifically? You were mentioned in the footnotes of the title page if I recall correctly, hah.

Do you think the volume carries any implications for the current global situation?

E. Barandiaran August 5, 2011 at 9:42 pm

Sorry, I haven’t read the book. If I remember correctly a colleague familiar with my work on Chile and other LA countries in the 1980s prepared a paper for that book and perhaps he cited one of the few papers that I wrote for circulation (most of my work was as an adviser and it was not circulated).

Anyway, I doubt that an academic book can provide good guidance on the design and implementation of effective policies to restore fiscal discipline and to solve banking crises. It may be good to understand some critical factors that caused the crises and others that were critical for policies to fail or succeed, but most academic work can hardly guide policy-making. And this is why I’ve been asking Tyler for details about the policies that he is proposing.

Let me give you the simple example of most experiences of hyperinflation: it was the only way to finance wars and therefore either you stop the war or you find some other source of funding the war. What can an economist say about stopping the war or even about finding sources of financing? Read Gordon Tullock’s old paper about China’s hyperinflation in the 1930s and 1940s (JPE, around 1950).

Ed August 5, 2011 at 10:24 pm

Fine if you disagree, but you need to do so without insulting everyone.

As for inflation it’s not an either/or, either 2% or hyperinflation.

E. Barandiaran August 6, 2011 at 7:21 am

I don’t think I’m insulting Tyler by saying that talk is cheap. Economists are used to be told that talk is cheap. And regarding inflation you miss my point –none can promise you that he will use an appropriate dose of inflation (this is why Tyler wrote “repeat and rinse as many times as necessary”, although he preferred to ignore the terrible consequences of repeating a silly policy many times). I have seen many politicians and economists promising low inflation but then spending a lot of time about what was wrong.

This is an extraordinary time and if you don’t know well how things work you cannot promise to fix them. If you were dying from cancer, would you call a winner of the Nobel Prize for Biology? If you were broken, would you call a winner of the Nobel Prize for Economics?

Yancey Ward August 5, 2011 at 8:23 pm

He asks precisely the right questions. And it is illuminating that none answer them, almost certainly because they don’t have a clue. This is the difference between an idea and practical application.

Tom August 5, 2011 at 9:06 pm

Hopefully annoying the right people, like twits like you!

derek August 6, 2011 at 1:26 am

It is awful, terrible when theoretical discussions face reality.

I believe that economists, when they get around to it, are going to recognize a different inflation than the one they expect. This isn’t the 70’s. What we have seen, even before the crisis, is inflation where assets and commodities increase in price, but wages don’t. For the simple reason that except for some exceptions, workers in developed countries are now in competition with a couple of billion people in China and India.

So if Sumner and Rogoff and Tyler get their way, all we will see is an impoverishment of the majority of working people.

Already happening.

Bill August 6, 2011 at 7:37 am

Yeah, real wages could decline with inflation, assuming the company they work for, an exporter, can remain in business, and assuming the company they work for, a domestic manufacturer, doesn’t face even more competition because the price increases from inflation made him less competitive.

I don’t get the story. All you are doing is deleveraging for real estate trusts, but you are not strengthening the competitiveness of US manufacturers when you advocate inflation and those companies compete in an international marketplace.

One way you could inflate that would target foreign competitors would be to do a VAT tax. Good luck.

Andrew Edwards August 5, 2011 at 6:14 pm

To my view, great post, and you are right on all but #3 – I don’t think this is conclusive at all – nor is a big dose of inflation mutually exclusive to a larger fiscal stimulus – they’re actually consistent with each other.

My concern with a downgrade is that there may be a lot of funds with mandates to specifically be in AAA-rated debt, which this could push into a forced selloff. That scares me.

Loren F. File August 6, 2011 at 7:25 am

Yes, it is hard to see how you get inflation without increasing government spending. (Maybe a Friedman helicopter if you are not a Keynesian?) You could print money but what do you do with it? Lending to the banks has not worked. They are very careful about who they lend to and the prudent are smart enough not to take on debt for expansion when they can hardly sell what they produce now.

Given the conditions creating inflation without stimulus seems to be an oxymoron.


Paul August 5, 2011 at 6:16 pm

Number 2 is an interesting political perspective, but ultimately misguided. The discussion about health care in this country should not be primarily focused on what is the impact on the federal budget, but rather what system provides the best outcomes for the best cost because whether its through higher private premiums or higher taxes Americans will have to foot the bill. The fact is that projections of increased Medicare spending are not due to Medicare alone, but rather increasing costs in the entire system. Despite the fact that Medicare insures the oldest segment of the population and it cannot cherry pick customers like private insurance its costs have still grown more slowly. Unfortunately most of the talk about “choosing on entitlements” from conservatives is not about trying to control costs, but rather to shift them by forcing people off of Medicare by raising the age limit or giving them vouchers for private insurance. Furthermore any calls for reforms that do not involve these kinds of cuts, but rather attempt to increase the bargaining power of Medicare or increase the efficiency of payments (i.e. paying for things that are actually cost effective) are drowned out with conservative claims of “death panels” and rationing (the latter I find particularly amusing because what do you think private insurers are doing when they deny to pay for something) or are killed by pharmaceutical lobbyists. Yes liberals who call for no changes to the program are misguided as well, but given how even the smallest changes such as IPAB are misconstrued for political gain is it really that surprising? Ultimately even if we were to get rid of Medicare and Medicaid the problem of rising costs will not be contained exhibiting a drag on the economy and worsening our long run fiscal position.

John Thacker August 5, 2011 at 6:26 pm

I find the claims of death panels ridiculous, but I find your claims equally ridiculous. Your mocking of the idea that consumer choice could possibly control costs, and denying that it’s about anything other than “forcing people off” is exactly the same logic as calling Medicare denying more treatments “death panels.”

Both are attempts to control costs and increase the efficiency of payments. One does so through private choice, one does so through expert boards. I can certainly see reasons for arguing that one will work but not the other, but your assumption of bad faith and evil is *just* as irresponsible for political gain as that of the conservatives you decry.

Dean August 5, 2011 at 7:14 pm

But John, debating the proper rules and regulations for organizing insurance markets is boooooring. Calling people evil is much more fun.

Foster Boondoggle August 5, 2011 at 7:32 pm

Have you tried to discuss costs with a hospital or doctor ahead of a procedure? It’s completely impossible. “Consumer choice” does not exist for healthcare costs, and that has NOTHING to do with Medicare or PPACA. It’s a broken market. Voucherizing it won’t change that in any way. And if the must-issue requirement of PPACA goes away (as it will if a R gets elected P in 2012), we’re back to a system where many people CANNOT get healthcare. You’ve made a bunch of objections to PPACA in this thread. What do you think is the solution?

Cliff August 5, 2011 at 9:41 pm

Voucherizing actual health care expenditures would change it immediately.

Veridical Driver August 5, 2011 at 11:14 pm

You can discuss costs with a hospital or doctor if you pay cash.

Marian Kechlibar August 6, 2011 at 5:32 am

I had a LASIK operation and yes, I discussed the price quite extensively beforehand, and I chose the facility carefully (not based only on cost, of course).

J Thomas August 5, 2011 at 9:57 pm

Your mocking of the idea that consumer choice could possibly control costs

I have never heard an idea how consumer choice could control medical costs. I would be very interested to hear an explanation about that. Is there a link?

Usually, people pay for whatever medical care they think they need. You can’t bargain with your MD — often the MDs claim they don’t even know about the costs. Have you tried being uninsured, and finding out about your bargaining position with hospitals etc?

Usually, people don’t do very well bargaining with their insurance companies, either. You can get a cheaper policy. Can you read the fine print and see what you give up? Insurance companies know the odds, and the costs. You don’t.

A great big information imbalance. A great big power imbalance. And you think you need them, but they don’t think they need you. There are lots of customers to choose from, and no big competition to make cheap policies for the uninsured.

How would private consumer choice work? What I’ve seen, is private consumer who didn’t have insurance have chosen not to get medical treatment. They hope they’ll get better on their own, and often they do.

derek August 6, 2011 at 1:29 am

How about the simple fact that there is less money to be spent, so different options are discussed with an eye on the cost?

I have seen the dynamic with dental coverage. With coverage, everything is an option. Without, the dentist presents alternatives.

Yes there is the difficulty in emergency situations, or others where there aren’t lower cost alternatives.

Marian Kechlibar August 6, 2011 at 5:31 am

From what I know, Singaporean healthcare system controls its costs precisely through consumer choice. People are forced to save money for healthcare, then pay for their healthcare from those saved money; and it seems that they are better than insurance houses in driving the costs down (if you have 5000 USD on your account and you can get the same treatment for 1000 USD or 950 USD, you will choose the latter, while the insurance company operates in such huge balances that it may not care).

Look at LASIK and other treatments paid in full. Or look at veterinary care. Comparable treatments paid by the consumer are visibly cheaper than those paid from the insurance pool.

Rahul August 6, 2011 at 11:43 am

That’s all fine and dandy but the ethically tricky situation arises when you have 5000 USD in your account and need a 50,000 USD surgery for your pancreatic tumor. What then?

Henry August 6, 2011 at 1:34 pm

How long will you be shopping next time you have a heart attack?

GinSlinger August 6, 2011 at 10:43 am

“Have you tried being uninsured, and finding out about your bargaining position with hospitals etc?”

I have. My position was surprisingly strong. Savings of 50% or more over what they billed insurance companies. My trips to the GP’s office were only slightly above the posted co-pay ($30 vs $25, considering the office billed Blue Cross $95 for a visit, not bad). Hell, they even offered to set me up on an interest-free payment plan.

J Thomas August 7, 2011 at 4:27 pm

Congratulations! My experience was not quite that good. GPs told me they were charging me less than they charged Blue Cross, but they didn’t show me their books. They did give me a nice discount off list price, though. And sometimes they gave me sample medications that listed for close to $100.

My experience with dentists was not as good. Some of them already gave a 5% or 10% discount off list price just for not burdening them with insurance, Beyond that, it tended to be more like “That’s going to cost $1200, but for $200 I can put in a temporary support so you’re less likely to lose the tooth before you get the money together.”. More total cost for a worse result, and a chance to lose big.

I tend to discount claims that prices are below list, unless I get to see the list. And when a car salesman says he’s charging less than he charges Hertz, I don’t take that very seriously either.

Bill August 5, 2011 at 6:19 pm

Re: “We needed a big dose of inflation, promptly, right after the downturn. Repeat and rinse as necessary.”

That might have worked in the 30’s when there was no integrated world economy.

But, ask yourself, how would it work today: If you are a business, manufacturing for export to the world market, or one who could lose your domestic market to imports, domestic inflation is not a pleasant prospect.
You can look at this a different way as well: if you compete with China, and they surpress their inflation by controlling prices, you eventually lose to them as well.

Dean August 5, 2011 at 7:15 pm

China can’t suppress both its currency and inflation. They’ve been doing the former at the expense of the latter. Inflation would be a nice little boost for the export sector.

Bill August 5, 2011 at 7:37 pm

OK, what if China just surpresses its currency. Its been doing all along, probably at 20%. Same thing as surpressing its export prices.

And, why can’t it surpress its prices otherwise at the same time. We did it in the 70’s with WIN buttons and price controls.


Dean August 5, 2011 at 8:01 pm


No one gets away with suppressing prices, not even China.

Bill August 5, 2011 at 9:06 pm

Dean, That’s different than saying they can’t do it. True or not?

Jim H August 5, 2011 at 6:24 pm

Douthat nails it? That column was one of the best examples of a Strawman argument that I have ever seen. Please find some liberals with actual political power who espouse the principles that Douthat claims they do. I suggest you look at some of the comments to that article for examples of Douthat’s logical fallacy-mongering.

And it’s quite a bit of cynicism to question the motives of someone who might not trust S&P to be unbiased, considering S&P’s performance rating the financial instruments (credit default swaps and such) associated with this crisis.

I thought you were an intellectually honest freshwater economist, but I guess I was mistaken.

John Thacker August 5, 2011 at 6:27 pm

Please find some liberals with actual political power who espouse the principles that Douthat claims they do.

Nancy Pelosi doesn’t count?

Thad August 5, 2011 at 8:40 pm

Since when has Tyler Cowen ever, ever, ever been a freshwater economist?

Tom August 5, 2011 at 9:08 pm

Cause he’s got a clue?

Matt August 5, 2011 at 6:25 pm

Who cares what the ratings agencies think? The sovereign CDS market tells us that French government bonds, also rated AAA, are 2-3 times riskier than US government bonds (a fact which remained true throughout the debt ceiling debate, by the way), yet the ratings agencies are considering downgrading the US?

What a joke. Anybody who thinks that ratings agencies have anything substantive to say about credit risk needs to have their head examined.

John Donnelly August 5, 2011 at 6:41 pm

1. Our debt is denominated in dollars and we print dollars. Is there any doubt that we will not be able to pay our debts in dollars? If not, would Moody’s be rating whether or not we are despicable enough to pay our debt in so inflationary a manner?

2. Even though Tyler is against it, these ratings agencies have proven to be wrong, corrupt whatever, but more importantly irrelevant….especially for a sovereign with its own currency.

3. If we get health care costs in this country under control we won’t need to cut Medicare. The Douthat point is moot if we address the wound and not the bleeding.

When the people vote out the obstructionists and vote in some intelligent “unsponsored” politicians with some economics education we will get the country in fine shape! I can’t wait.

derek August 6, 2011 at 1:31 am

You ignore the fact that much of the debt is short term, so buyers are needed quite regularly to maintain the debt, and oddly are somewhat touchy about the value of the investments they purchase.

John Donnelly August 6, 2011 at 10:28 pm

So S&P is warning of a change in the yield and hence a change in value? Not the ability of the issuer to “make good”?

E. Barandiaran August 5, 2011 at 6:45 pm

Tyler, in addition to my request on monetary policy, I have a request on fiscal policy. As before, I’m talking about what the government has to do in the next few months. The Congressional committee established by the debt ceiling deal will play a critical role in determining fiscal policy for FY12 and FY13. Please tell me exactly what kind of grand compromise the committee must aim at. You may rely on Krauthammer’s WP column to detail your own proposal and to argue why it may be accepted by both parties, but please add some estimates of both the measures you propose and the expected consequences.

Jay August 5, 2011 at 6:46 pm

“a commentator attacks the ratings agencies for their previous mistakes and stupid, corrupt behavior, it’s a sign the commentator is trying to muddy the broader issues at stake.”

Credit rating is the result of a forecast. The credit rating agencies got MBS wrong because their real estate price forecast were wrong. If a commentor wants to point to the bogus forecast that unjustly led to the credit downgrade of UST be my guest.

My hunch is these commentors will not bother reading the details of why a credit rating action is taken (if one is made).

derek August 6, 2011 at 9:53 am

Yes. Those who complain about the credit rating agencies are missing the point that they always overestimated the stability of the debt.

Bernard Yomtov August 5, 2011 at 7:13 pm

A lot of Republican or conservative intellectuals know better on revenue increases, and have said as such, but corruption, intellectual and otherwise, prevented their voices from being heeded in the larger political context.

I call BS. There may be some who know better, but the claim that “lots” were speaking up is nonsense.

Lots of dissonance reduction going on here.

Tom August 5, 2011 at 9:11 pm

I call BS that ANY real intellectual would want a revenue increase to fix a spending problem.

Bernard Yomtov August 5, 2011 at 10:46 pm

And I call BS that you parrot the stupid talking point about “a spending problem.” I know it sounds great when Rush or someone says it, but I expect people with brains to actually think about what they’re saying. Try it.

Laserlight August 5, 2011 at 11:50 pm

Bernard, go ahead and try that yourself. Find someone who’s living way beyond his means and give him more money. Sure, there’s a chance he’ll pay off his debt; but it’s likely that he’ll spend all the new money too and just be in a bigger hole. Given our government’s record of doing precisely this, I think it is either horribly naive or blatantly dishonest to say “more revenue will fix the problem.”

Bernard Yomtov August 6, 2011 at 10:20 am


Oh really? Go look at the 90’s, when revenue increases, pushed through by H.W. Bush and Clinton, led to a consistent reduction in deficits over a period of nearly a decade. Of course this trend was quickly reversed when the younger Bush took office.

Don’t tell me. I know. Republican Congress!! Market bubble!! Tax fairy on vacation!! Whatever. Don’t let reality intrude, whatever you do.

Dredd August 5, 2011 at 7:17 pm

Who cares when we have a 60,000 man assassin army to intimidate them?

stochastic disequilibrium August 5, 2011 at 7:29 pm

Voters hate rising wages to compensate for rising prices? Voters hate having the relative value of their debts decline? These are things employers and creditors hate, not voters. Inflation may be a dirty word, but if it gets results (reduces misery) you will not hear a peep out of the electorate. And as for a mechanism, can’t we just engage in a sort of competitive devaluation with the printing press? China gets to manage its currency- why not us? And unlike a lot of places, we have the basics we need to grow or make just about all the stuff we need right here. Devaluation is bad for importing, but not so much for domestic goods. Voters may think that the interest of their creditors are their interests too, but as a rule we vote with our guts- and if inflation works, it will get re-elected. Just watch out for the bake-in or you won’t make enough of a dent in unemployment… But hey- we aren’t making a dent in unemployment anyway.

David August 5, 2011 at 8:50 pm

But do wages rise fast enough to compensate for rising prices? Wouldn’t there be a lag, so that people would notice paying more at the grocery store, gas station, etc. before they every got a raise? That’s what would make people angry.

FE August 5, 2011 at 8:52 pm

Please explain your assumption that wages will rise in tandem with prices. With unemployment at 9.1% and unions in decline, employers have plenty of leverage to hold the line on wages and thereby deliver real wage cuts.

David Wright August 5, 2011 at 10:29 pm

which is precisely what we need in order to reduce unemployment.

prognostication August 6, 2011 at 1:40 am

I think the lower and middle classes would disagree with your view that what they need after the past several decades is further cuts in real wages.

J Thomas August 7, 2011 at 5:36 pm

Of course the lower and middle classes disagree that they need less stuff to buy and fewer privileges.

And they get a vote.

But when it happens, all they can do is vote against whoever they think is responsible. They can’t do anything at all to keep it from happening.

The US economy is not competitive. The obvious way to improve is to become more like China. Reduce our standard of living a whole lot (except for the rich, who can have anything they want to pay for). Get a whole lot of people who are desperate to work, who will gladly do whatever they are told. Then we can compete with other countries who are like that.

This is not necessarily a goal. But it’s the default outcome unless we find something that works better than that.


Bill August 6, 2011 at 7:41 am

Forget about wages for a minute. Think about the company that employs the workers. If there is inflation and the employer competes with a company in another country with lower inflation, what happens to the employer–he goes out of business.

Dan August 5, 2011 at 7:29 pm

With population in much decline and many able bodied folk in prison, here’s a thought:
Let’s take a new approach to colonizing the oceans. Lets create a supply/demand engine via limited multi-country ocean going haciendas (self sufficient aqua-culture farms) . With what is now public domain alternate energy science and the knowledge of the carefulness with which the oceans need to be protected there should be opportunities galore to make such work farms to help rehabilitate many corrigible incarcerants. I’ll buy some shrimp and crabs.

All countries should contribute to financing and manning such work vessels even at minimum to capture and recycle floating debris. 24/7365 3 shifts with a 6 hr work detail and 2 hr education detail on each shift. The pay going to thier families or victims. When they graduate they can move to one of the more commercially rewarding craft like the one that has the restaurants and the large telescopes. In the meantime we learn a bunch (acquire intellectual property) about cultivating the oceans.

jrm August 5, 2011 at 8:00 pm

Your point 4 seems moot now. The ratings agencies are still stupid and incompetent.. missing 2 trillion dollars?

Jack Goldstone August 5, 2011 at 8:00 pm

Fine, I agree. But how do you just turn on inflation when flooding the market with liquidity and QE 1 and 2 didn’t produce significant inflation? It’s also hard to get inflation going in a hugely undersold housing market — will the government buy houses by the millions to put a floor on the market and then rent them out? I don’t think getting inflation rates up is as easy as you make it sound — what is the plan?

Andrew' August 5, 2011 at 8:09 pm

I can very well accept that the government needs more revenue for them, but that doesn’t mean that I believe I’m going to “get paid” in the sense that late bond buyers hope to get paid by later bond buyers.

TallDave August 5, 2011 at 8:22 pm

I haven’t seen any convincing evidence that new revenues make sense.

Here’s the thing: if you imposed a 100% marginal tax rate at $100K, it would still not close the deficit. But if we tax the middle class, we’re taking spent dollars out of private hands and putting them in government hands, which is unlikely to be helpful.

The logical solution in our situation is to cut spending to match current revenue.

Bill August 5, 2011 at 8:57 pm

Re: “The logical solution in our situation is to cut spending to match current revenue.”

What is 1-MPC?

If I give you a dollar, how much will you spend.
If I give the government the dollar (or not take it away), how much will it spend.

The Anti-Gnostic August 5, 2011 at 9:26 pm

All of it, then borrow more.

Bill August 5, 2011 at 9:32 pm

Bingo at 2.25%

The Anti-Gnostic August 5, 2011 at 11:28 pm

Thus a sovereign debt bubble, which will be liquidated in its turn.

Bill August 6, 2011 at 8:28 pm

What? Please explain. If you know it will decline, why do you buy.

TallDave August 5, 2011 at 10:52 pm

Yes, the point was that the marginal propensity to spend is much higher at incomes below $100K. Even for purposes of short-term stimulating of spending, it makes little sense to seize and repurpose those dollars that would been spent more efficiently anyway. This is one reason why the poor have been given a negative tax rate.

Bill August 5, 2011 at 8:30 pm

Math Error by S&P

From the WSJ:

S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the debt, a government official said, and the firm presented its report to the White House. S&P has previously warned such a downgrade might come if Washington didn’t move to comprehensively tackle its long-term fiscal woes.

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials back to say they agreed about the mistakes, though they didn’t say whether it would affect the rating. White House officials remained waiting Friday evening to see what the company would do.

An S&P spokesman didn’t return calls for comment.

Bill August 5, 2011 at 8:31 pm

Sell S&P short.

Veridical Driver August 5, 2011 at 11:24 pm

S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the debt. S&P has previously warned such a downgrade might come if Washington didn’t move to comprehensively tackle its long-term fiscal woes.

After two hours of analysis, Treasury officials decided that S&P officials do not want to die, nor have their families die, and even if they did they probably are afraid of torture. It immediately notified the company to let them know their mistake.

S&P officials later called administration officials back to say they agreed about the mistakes, they agree with the administrations attempt to revive the economy, they agree with anything, just please – I beg you – don’t hurt my kids!

derek August 6, 2011 at 10:16 am

These are 10 year projections. From what I’ve seen of the CBO numbers, they project relatively high growth rates. They are projecting 2.7% growth for this year.

The error or mistake is to take any projection past maybe a year or two as anything more than a waste of good trees.

dirk August 5, 2011 at 8:36 pm

I’m guessing we saw a lot of insider trader action this week.

Hattip August 5, 2011 at 8:59 pm

“reveue relaist”? This is just code for “raising taxes”, and the least you could do is be honest about and stop using euphemisms. As usual with Liberal speak, there s nothing “relativistic” about it.:
!) New taxes will just be spent on more spending sprees. The Democrats will just sped it on buying yet more votes, rewarding their pals and punishing their enemies, starting with the dread Mddle class,. and we wll be right back again where we are right now in a year or so, and it will be worse.

2) Raising taxes in the middle of a recession–likely a Depression–is the very height of stupidity.

“Revenue realists”, indeed. You should be ashamed f yourselves.

FE August 5, 2011 at 9:05 pm

It’s been said endlessly that we needed more stimulus spending in the short run, more deficit reduction in the long run. But no one has plausibly explained how the transition from stimulus to frugality would have taken place. How could we prevent an extra trillion (two? three?) from becoming part of the permanent baseline? As we just saw with the debt limit, our current politics deems any diminution in the projected growth rate of government spending to be austerity of the harshest kind. Alex had it right with his post about how true-believer Keynesianism just can’t be executed in our political system. http://marginalrevolution.com/marginalrevolution/2011/02/the-failure-of-keynesian-politics.html

Kara Patterson August 5, 2011 at 9:20 pm

To your point 4 (“the agencies previous mistakes and stupid, corrupt behavior”), Tyler, it would be a tremendous mistake for any public figure to discuss _any_ pronouncement by S&P without a continuing and clear reference to their towering corruption and stupidity.

It is most emphatically not a diversion from the issue at hand. All of the heft of a ratings agency’s pronouncement is born of the trust one places in their ability to honestly, fairly, and intelligently assess an entity’s creditworthiness. S&P has never come clean on their spectacular corruption and stupidity. Ergo, trust cannot be given to them at no cost.

bakho August 5, 2011 at 9:21 pm

How do you get wage inflation with unemployment at 10 percent? Don’t you first have to have stimulus? Or do you do wage supplements to create inflation?

The problem with the liquidity trap is it is very difficult for the Fed to create inflation. The opposition to QE has been from people who believed it would be inflationary. It has not been.

Cliff August 5, 2011 at 9:48 pm

Well, inflation did tick up noticeably.

Bill August 6, 2011 at 7:43 am

From what base.

bxg August 5, 2011 at 9:22 pm

> As a simple rule of thumb, if at this point, in response to this news, a commentator attacks the ratings agencies for their previous mistakes and stupid, corrupt behavior

Indeed, if someone influential suddenly, _now_, starts to attack the rating agencies where they have never done so before, please call them out!

But I have read over the last few years many, many, people cogently argue that the ratings agents were truly incompetent at rating
even regular commercial instruments, and that their sovereign ratings (even less frequently put to any kind of test) were substantially
less justifiable. Different people attribute this to various mixes of: incompetence/corruption/”who cares how good I am”/”who exactly is paying me to say AAA?”

But if some commentator who has previously opined on the issue cares to “remind” people now that:

– the ratings agencies have no deeper insight into US politics or US economics than any other source

– their special insight/analyses have been decisively proven over the last few years to be verylow-quality; these
companies are now unequivocally proven to be comprised of either low quality or corrupt hacks

– and then, to sum it up, they have: _no_ special data we didn’t all know months ago, and _ no_ special ability
to interpret it,

– and therefore there downgrade is at best an informationless event…

I think that’s totally fair. And would not think less of someone who reminds us so!

derek August 6, 2011 at 1:36 am

Except for the fact that the value of anything is simply the opinion that a number of buyers think it is, and that the rating agencies have been somewhat influential in the process of forming opinions, you are right.

Loren F. File August 6, 2011 at 7:30 am

Unfortunately their opinions are marketable and I have seen little to indicate that this situation has changed.


derek August 6, 2011 at 10:17 am

Obviously the White House didn’t pay enough. Or maybe they got what they paid for hoping to discredit the Republicans.

Loren F. File August 6, 2011 at 11:02 am

Looks like S&P did it for them. From their press release:

“… our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues…”


babar August 5, 2011 at 9:32 pm

> I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.

maybe, but the S&P action was probably based on dysfunctional politics and its effect on long term dynamics of the debt and not on the level of the debt. sure there is a connection, but it’s not so that 10% of GDP plus or minus is going to make a difference in long term govt solvency. 2 or 3 or 4% per year over 20 or 30 years, much bigger issue.

SAMANTHA August 5, 2011 at 9:50 pm


Bill August 5, 2011 at 11:08 pm

How much you want to bet that with S&p rating change that revenue enhancement will be part of a package?

Rahul August 6, 2011 at 11:45 am

It’s an interesting observation that the only Tea Party cheerleader on here is the one using ALL CAPS…………..

economist1 August 8, 2011 at 4:14 pm

Is this serious or not? I honestly can’t tell.

Bill August 5, 2011 at 9:54 pm

From S&P downgrade and food for thought

“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”

dirk August 5, 2011 at 9:54 pm

“As a simple rule of thumb, if at this point, in response to this news, a commentator attacks the ratings agencies for their previous mistakes and stupid, corrupt behavior, it’s a sign the commentator is trying to muddy the broader issues at stake. Such commentators may well be correct in their criticisms, but probably they are not facing up to their recent mistakes and seeking to shift the blame. Watch out for this.”

Ha ha! You predicted Krugman’s current post perfectly!

bxg August 5, 2011 at 11:04 pm

You might have read a different “current Krugman post”?

I read one that starts by acknowledging that it’s a “strange situation” and ends with “not because America is A-OK, but because these people are in no position to pass judgment.”.

The S&P downgrade is, like it or not, big news. Someone like Krugman is fully entitled to take one short blog post to address the news and to remind people that these people have no insight or credibility and their downgrade is not economically interesting. He’s allowed to react briefly to what everyone is talking about! How is this trying to muddy up the issues?
Perhaps (I doubt) TC can chime in here … did you anticipate and fairly criticize Krugman’s post in your view?

Imagine another blogger wrote an article entitled something like “A few quick thoughts on the likely pending S&P downgrade”
and yet used half the article, and all the actual content of it (that is, the remainder being vague ad-hominens and “gee I don’t know” aphorisms)
to talk about his view of the overall macroeconomic and political situation – in respects which basically do not mention and are independent
of whatever S&P did today? He gets the “topical headline” but remains pure by not commenting on it except for a preemptive dismissal
of whoever else points out the obvious? But the headline-whoring is a-OK right? You can pay homage to the news of the hour, but only thus far?

jtg August 5, 2011 at 10:11 pm

Maybe having a socialist traitor as President wasn’t such a great idea.

IVV August 5, 2011 at 10:43 pm


Who does S&P still call AAA?

RR August 6, 2011 at 12:11 am

An old list, some may no longer be correct:

Australia, New Zealand, Austria, Denmark,Germany, Finland, France, Isle of Man, Principality of Liechtenstein, Luxembourg, Norway, The Netherlands, Sweden, Switzerland, the UK , Canada and Singapore.

IVV August 6, 2011 at 8:02 am

No businesses? Financial institutions?

TallDave August 5, 2011 at 10:59 pm
Justin August 5, 2011 at 11:26 pm

I was with you until you advocated inflation. Now I think I’ll have to remove this blog from my list of regular reads.

The Anti-Gnostic August 5, 2011 at 11:34 pm

We could make inflation advocates walk the walk by imposing an additional 5% sales tax on purchases by academic economists.

babar August 6, 2011 at 2:37 pm

makes no sense. inflation would mean that these people not only pay more for things, but that they are paid more for what they do. so it would be a wash.

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