Real vs. nominal dollars for discretionary spending

by on August 2, 2011 at 2:00 pm in Uncategorized | Permalink

Matt Yglesias tweets:

Did every libertarian in America suffer mass amnesia about the difference between real and nominal dollars yesterday?

Others complain as well.  Keep in mind a few things:

1. The spending forecast itself is made in terms of nominal dollars and that is what I, and others, reported.  Bloggers report nominal dollar magnitudes all the time, without pretending to be tricking anybody.  Reporting real dollars would mix in the base information with someone’s forecast of future expected inflation and in general that is not considered to be more enlightening, all the more during a period where people disagree radically about inflation forecasts.  Graph viewers can make their own real vs. nominal adjustments ex post, as indeed they are used to doing.

2. For the Keynesian argument, it is often nominal dollars which matter most.  And also, in Keynesian terms, it is the reaction of the Fed which will be of paramount importance.  Even a not very potent version of QEIII could easily undo whatever mild contractionary effects this spending change might have.

3. Inflationary pressures are not very strong and arguably there are deflationary pressures.  That’s bad, but it means the nominal is not going to be so far off from the real.

4. On top of all that, it is far, far from obvious that those specified spending changes are actually going to take place.  The tendency is for promised spending slowdowns to be ignored or reversed.

Some MR commentators raise the issue of per capita measures of discretionary spending and whether they will decline.  It might be nice to have growing public sector per capita quality with growing population and growing wealth.  But if the good in question is a public good (and is it not supposed to be?), adding extra people to the mix, ceteris paribus with no spending boost, is compatible with those additional people getting more or less the same services as the previous consumers.  Falling per capita expenditures on public goods, if it is not too big a fall, still means a greater real quantity of public goods enjoyed, given non-rivalry of consumption.

The correct response to all this information about future projected spending is still “I guess that’s not much of a spending cut, is it?”

By the way, entitlement reform is MIA.

Instead what I see is a lot of people adding up the entire fiscal gap — ignoring that the stimulus is ending anyway and was going to end anyway — and proclaiming that Tea Party extortion is causing the economic heavens to fall.  Ross Douthat nails it.

Here’s a big “ouch” for some of you:

Sixty five percent approve of deal’s spending cuts. But it gets worse. Of the 30 percent who disapprove, 13 percent think the cuts haven’t gotten far enough, and only 15 percent think the cuts go too far. One sixth of Americans agree with the liberal argument about the deal.

The final effects of the deal are hardly a Ron Paul world and so we are seeing massive exaggeration, driven by the fallacies of mood affiliation, excess sensitivity to social information (“who won the showdown?”) and us vs. them thinking.  What we have is a weak, vacillating postponement of all the hard decisions.  In hindsight, the decision to allow no revenue increases will be seen as a huge blunder, by conservatives most of all.

Chuck August 2, 2011 at 2:09 pm

“In hindsight, the decision to allow no revenue increases will be seen as a huge blunder, by conservatives most of all.”

I agree with that statement, and to put a fine point on why: Republicans politicians don’t care much about the debt or deficit, only tax rates on the wealthy. All the other noise about deficits, size of government, etc, is just silly.

(I also got your point about the cuts being just not that big if at all, but your post was fairly Mankiw-ian in it’s lack of explicit point.)

nnn August 2, 2011 at 4:21 pm

So by how much do you think they should increase tax revenues?

Alan Gunn August 2, 2011 at 5:13 pm

They’re right to object to higher tax rates. Back when we had rates over 50%, they raised very little additional revenue. Where the Republicans have gone off the rails is in objecting to any tax reforms that would increase tax collections by broadening the base. We give away vast sums to special interests (ethanol, for instance) through the tax code. This is the functional equivalent of spending, yet when people point this out the response is something like “these breaks just let them keep their own money.” This is nonsense. If I don’t have to pay a tax that everyone else does have to pay, just because the politicians like me, that’s giving me your money, not my own.

nnn August 2, 2011 at 5:37 pm

when you say “broaden the base” don’t you just mean to increase taxes on the poor and the middle class? this seems like a non-starter for the left and I would hope it’s a non-starter for the tea partiers, leaving only the big gov republicans like Romney and McCain.

Charlie August 2, 2011 at 5:53 pm

Curtailing the mortgage deduction is an example of broadening the tax base that falls primarily on the upper class. It increases the amount of taxable dollars, but it does not change marginal tax rates.

Tom Grey August 3, 2011 at 4:16 am

They should change the mortgage interest deduction into a mortgage payment, 30% tax credit, up to a max of $2000/month ($24,000/yr).

The rich and middle get the same max; all get the same rate (30%).

There should be a lifetime maximum credit of 10 times median tax payer income (slowly to increase as median wage increases), but this will support equity ownership in housing (good), rather than debt investment/ speculation (a major cause of the boom-bust).

Alan Gunn August 2, 2011 at 6:48 pm

I don’t mean that, though I do think it’s unhealthy for a society if half its members pay none of the tax that supports most of the spending programs. I mean closing loopholes. (I for one don’t see the mortgage interest deduction as a loophole, though many do.) Tax breaks for people who produce ethanol are just disguised spending on ethanol and should be abolished. “Broadening the base” is sort of a term of art among tax people: it doesn’t refer to getting more people into the base. It means if the base is income, include all income, not just income minus deductions for people who do particular things the government wants to encourage and don’t give people tax credits for things you wouldn;t support with a direct spending program.

Dan H. August 2, 2011 at 7:26 pm

Why should it be a non-starter? Almost every other western nation has a VAT of some sort, which is about the broadest tax you can apply. it’s crazy to top-load the tax burden in the U.S. the way it’s been done. For one thing, it creates large constituencies with no skin in the game who have nothing to lose from more government spending and will vote themselves goodies forever, and for another it makes tax revenues brittle and subject to the fortunes of the upper class. In a recession where large capital stocks are wiped out, that’s disastrous because your revenue falls when you need it most.

nnn August 3, 2011 at 5:33 pm

Well progressive taxation is not necessarily so bad it’s just that we’ve reached such a high level of taxation it’s become ridiculous.

A tax bracket of 5, 10 and 15 would be fairly palatable for instance.

PS: A “loophole” is just someone else’s tax deduction you don’t like.

Gabe August 2, 2011 at 2:27 pm

If the economy does badly this year can we blame it on the racist warmongering libertarians who are clearly turning this country into a model of laissez faire isolationism?

When will the tide shift back to the center?

jv August 2, 2011 at 4:30 pm

Honest question: Is this sarcastic? I think it is but I am not sure.

Andrew' August 3, 2011 at 9:45 am

Yes, it’s sarcasm and it’s great. I’m not sure where you are coming from, but sometime sarcasm is the only way to explain something that should be utterly obvious.

For example, it was Bush’s warmongering and overspending that caused the libertarian/tea party break with the Republican establishment and vice versa. I was running a libertarian party meeting when one of the members said he would quit if we didn’t support the Bush wars. He left. Bush got away with the spending partly because of the “with us or against us” mentality he engendered within the party. Democrats get a lot of chuckles now by throwing the Bush spending and tax cuts in everyone’s face now, but when it came to dealing with Bush at the time their establishment players were mostly worthless.

Former Beltway Wonk August 2, 2011 at 2:30 pm

First, revenue increases *are* allowed under the committee of 12.

Second, raising taxes during slow economic growth is a very bad idea. The tax raises under Hoover are probably the main factors that deepened and prolonged the Great Depression, whereas tax cuts under Kennedy, Reagan, etc. led to strong economic growth.

Andrew' August 2, 2011 at 2:41 pm

Now that the deal is done and certain death averted, we can chortle over its lack of ambition.

Former Beltway Wonk August 2, 2011 at 2:49 pm

Unfortunately, the “default!” hysteria created by Obama’s Treasury is the main cause of its lack of ambition.

Andrew' August 2, 2011 at 3:25 pm

I heard Jack Spirko say that you can rest assured that the people they tell you will be the first to miss their checks will in the event be the last to miss their checks.

I would have taken zero spending cuts if we would have just had the President and Congress sign a note saying “Entitlements are the problem.”

Adam August 2, 2011 at 3:35 pm

“whereas tax cuts under Kennedy, Reagan, etc. led to strong economic growth”

Ugh.

Dan Dostal August 2, 2011 at 3:50 pm

Couldn’t have said it better myself. Such a simplistic statement. Those tax cuts changed the economy for certain. Can’t say I agree with the generalization about their effectiveness.

Silas Barta August 2, 2011 at 5:38 pm

Good point, Adam, there’s no reason why anyone would engage in any additional economic activity because of the increased return on it from lower tax rates.

Adam August 2, 2011 at 6:10 pm

Of course they could, but the statement was so horribly oversimplified as to be worthy of no more than a grown.

Especially as it included Reagan, a major tax raiser, as evidence of the growth effects of tax cuts. You can’t get to a coherent view of the relationship between taxes and growth while ignoring the fact that growth was stronger after the Reagan and Clinton tax increases, and weaker after the Bush tax cuts. Perhaps there are other things going on?

Silas Barta August 2, 2011 at 6:13 pm

Yeah, perhaps you shouldn’t be so ignorant of the effects of taxation.

Former Beltway Wonk August 2, 2011 at 9:53 pm

By the Reagan tax cuts, I’m obviously talking about the 1981-4 deep cuts in marginal tax rates that got the economy out of a very deep stagflation. The very high inflation and interest rates combined with very high unemployment in the late 1970s through 1981 turned into the low inflation, high real growth, and low unemployment of the mid 1980s. Kennedy’s deep cuts in the marginal rates in the early 1960s also greatly boosted economic growth. The Hoover/Democratic Congress massive tax hikes of 1931-32 (both tarifffs and income taxes) on the other hand played a dominant role in deepening and prolonging a credit crunch recession into the Great Depression.

The 1986+ tax reforms (what folks are referring to as “Reagan’s tax increases”) were mostly taking out loopholes and wasteful deductions. The productivity benefits from reducing malinvestments caused by these deductions made up for the productivity loss from the higher effective tax rates that resulted from removing those deductions. Since we have since re-accumulated a bunch of wasteful tax subsidies, such reform would again be useful, but since we are at practically zero economic growth it should be revenue-neutral or a net cut in effective tax rates (by cutting nominal tax rates) and accompanied by very substantial cuts in government budgets.

Paul August 2, 2011 at 6:16 pm

Good point Silas. There’s no reason why anyone would engage in additional economic activity so that they can maintain the same after tax income after a tax increase. Or how about there’s no reason I’d want to reinvest any of my profits if I can just pocket them as income at a low rate. See what I did there? The fact is real gdp growth was higher during the Clinton era of higher tax rates than the Bush II era of lower ones (even when ignoring the Bush years after the housing bubble popped) and real growth was higher post WWII than under Reagan. Now I’m not arguing that higher taxes means higher growth, but rather higher taxes than we have now are not some huge impediment to long run growth. If they were then even tiny differences in tax rates among wealthy nations would result in drastically different growth paths which is not what we see in the real world http://www.romania-central.com/wp-content/uploads/img/regional-integration/convergence-in-the-eu.gif

Adam August 3, 2011 at 11:37 am

“By the Reagan tax cuts, I’m obviously talking about the 1981-4 deep cuts in marginal tax rates that got the economy out of a very deep stagflation.”

Yes, and you are ignoring the Fed actions on both ends of the relevant recession, and thereby attributing all economic outcomes to taxes. That’s silly, even if common.

Hershell Bryant August 2, 2011 at 3:48 pm

Where’s the (what must be wild) growth following the Bush tax cuts?

The Anti-Gnostic August 2, 2011 at 4:37 pm

Let’s flip the question around: where were all those huge tax receipts under Clinton tax rates? With the exception of 2003, tax receipts were higher during everyone of the Bush years than Clinton’s.

Remember income tax rates of 60, 70 even 90%? Do you think anybody ever actually paid 60% or more of their income in taxes?

Zephyrus August 2, 2011 at 4:51 pm

That’s worthy of an eye roll.

Obviously tax receipts are going to be bigger, because people are more productive and because there are more people. The relevant metric is tax receipts as a proportion of GDP.

Where, obviously, you see Clinton tax rates led to higher revenues.

Adam August 2, 2011 at 5:13 pm

As did growth.

txslr August 2, 2011 at 6:15 pm

Due to the tech bubble.

The Anti-Gnostic August 2, 2011 at 9:44 pm

And you are never going to get around 20% of GDP, which still doesn’t get us out of the hole. Why should I work harder to support overseas wars and a huge net-consuming class?

TallDave August 2, 2011 at 5:48 pm

Spending as a percent of GDP was probably more relevant. The GOP Congress kept a lid on spending under Clinton.

http://www.usgovernmentspending.com/us_20th_century_chart.html

Since 2001 we’ve doubled federal spending in nominal dollars, which helps explain why we’re now struggling to create growth.

Charlie August 2, 2011 at 6:01 pm

I’m so tired of the GOP congress getting credit for keeping a lid on spending during the 1990s. As soon as Bush was elected, discretionary spending exploded. The Congress not only was still Republican. It was mostly exactly the SAME people.

TallDave August 2, 2011 at 7:58 pm

Hence the qualifier “under Clinton.”

Former Beltway Wonk August 2, 2011 at 8:27 pm

The best results occur when the GOP holds the Congress and Democrats the Presidency. The worst results occur when the Democrats hold the Congress, regardless of which party holds the executive. Examples include the LBJ, Nixon, Ford, and Carter presidencies and the last two years of the Bush presidency. Republicans holding the Presidency and at least one house of Congress is an in-between case: it worked well in 1981-87 but not so well during 2001-2006.

Andrew' August 3, 2011 at 9:46 am

Maybe there is more than one variable.

TallDave August 3, 2011 at 10:04 pm

I think it depends on the politicians, really.

The 1994 class was gung-ho about spending cuts, but by the time Bush took office, they’d become big gov’t Republicans, compassionate conservatives. They went to change DC, but instead DC changed them.

2010 returned the spending cutters to power.

Andrew' August 2, 2011 at 2:32 pm

HFS! “Deciding that your first priority is to play on Team Republican (or Team Democrat) rots your mind.”

BDL finally says something funny!

So, I guess I’ve missed a bunch of memos, what is our thoughts on the kind-of-sort-of, not really, but actually a little rising graph supposed to be?

Chuck August 2, 2011 at 2:57 pm

It’s not huge cut Armageddon, it’s piffle.

Tony August 2, 2011 at 2:33 pm

Former Beltway Wonk,
But cutting spending during slow economic growth is a GOOD idea?

Former Beltway Wonk August 2, 2011 at 2:46 pm

Tony, yes, because government borrowing competes with private borrowing for scarce credit, and private investment is generally far more productive and conducive of future economic growth. During recessions governments should balance their budgets by cutting expenditures, not by raising taxes. Indeed tax cuts a la Kennedy and Reagan, which result in less capital being drained from the private sector, are also indicated. A combination of less government borrowing less government taxation are what is needed for the private sector to recover from a recession, whereas the opposites will dig their holes deeper.

Richard August 2, 2011 at 3:03 pm

There is no evidence of crowding out going on now. Credit is not scarce. There is a lot of money sitting on balance sheets. So, this theoretical “crowding out” argument is not going on now. The private sector has a huge amount of capital is not competing with the public sector. I would be delighted if you could point me to any macro indicators that support your view that crowding out is occurring now.

Former Beltway Wonk August 2, 2011 at 3:19 pm

Cash is not credit. There is a lot of cash sitting on balance sheets, but credit is scarce.

Dan Dostal August 2, 2011 at 3:52 pm

So credit means “trust in repayment as stated under contract (written or handshake)” rather than a dollar amount?

Silas Barta August 2, 2011 at 5:40 pm

Not for people who have realistic business plans.

Charlie August 2, 2011 at 6:20 pm

This is totally backwards. Cash is sitting on balance sheets, because companies aren’t demanding credit. Companies aren’t demanding credit because they don’t see many profitable opportunities. They don’t see many profitable opportunities, because demand across the entire economy is down.

Credit is not scarce. The A rated 10 yr corporate bond is trading at 3.04 only 29 bps higher than gov’t debt. Cash is on balance sheets, because credit demand is low not credit supply.

Adam August 2, 2011 at 3:38 pm

“government borrowing competes with private borrowing for scarce credit”

Ugh, again. Rates are at or near zero. Where is the shortage of supply of loanable funds?

“Indeed tax cuts a la Kennedy and Reagan, which result in less capital being drained from the private sector, are also indicated”

What about tax increases ala Reagan and Clinton?

“A combination of less government borrowing less government taxation are what is needed for the private sector to recover from a recession”

If there was room for increases of loanable funds to do any good (i.e., non-zero interest rates), you might have a point. But unless you find away to make rates go lower still (which the fed could do in real terms), I don’t see how “freeing up” capital is going to do anything.

Former Beltway Wonk August 2, 2011 at 4:18 pm

Credit is not for the most part a spot market. The scarcity of credit is primarily reflected in (a) lower credit ratings, which have raised average interest rate charged on loans, even as the interest rate for any given credit rating has gone down, and (b) much higher credit standards, including the fact that many businesses and individuals are practically being excluded from credit. Since low-risk government bonds are so abundantly available, there is much less incentive for banks and investors to take relatively more risks by loaning to the private sector.

Fed-caused inflation doesn’t solve the problem, it makes it worse. It lowers the real return on loans and even presents substantial risk that the real return on long-term loans could be quite negative. Introducing even more risk into credit is the worst thing to do. That causes people to invest in commodities and precious metals instead of loaning money (and indeed we’ve observed a great deal of that over the last 3 years). The only real solutions to the problem is to lower government borrowing so that private sector investors have more incentive to invest in loans that are riskier than government bonds, and lower taxes so that private sector balance sheets of potential _borrowers_ improve, and thus their credit ratings, and their access to credit and the interest rates they are charged. We have to cut both government borrowing _and_ taxes, and that requires substantial reductions in government budgets.

Chuck August 2, 2011 at 4:29 pm

“Since low-risk government bonds are so abundantly available, there is much less incentive for banks and investors to take relatively more risks by loaning to the private sector.”

“Fed-caused inflation doesn’t solve the problem, it makes it worse. It lowers the real return on loans and even presents substantial risk that the real return on long-term loans could be quite negative.”

If we need to encourage banks/investors to make loans, raising inflation is a good way to do that – it gives incentive to investors to take their money out of low yield govt bonds and other safe instruments, and, instead, invest it in higher yield, private loans.

I submit they are not doing that now because overall demand remains low because overall employment remains low.

Former Beltway Wonk August 2, 2011 at 4:41 pm

No, inflation makes credit more risky and thus reduces the real amount of credit, as it did in the 1970s. When the risks substantially rise that the real return on loans could fall below zero, bankers and investors as an alternative investment or a hedge put much more of their money into precious metals and commodities and much less into loans. The resulting higher commodity prices lead to all sorts of inefficiencies in the economy, leading to poor productivity growth. This happened in the 1970s and is happening now.

Adam August 2, 2011 at 5:22 pm

“Since low-risk government bonds are so abundantly available, there is much less incentive for banks and investors to take relatively more risks by loaning to the private sector.”

Sorry, I don’t follow your logic. This would make sense at high (or at least non-zero) interest rates, but not now. How are people and businesses that can’t get credit now, at any price, going to benefit from lower interest rate to a shift in supply of loanable funds?

You’d be on better footing talking about the deflationary effects of the Fed paying interest on excess reserves.

“he only real solutions to the problem is to lower government borrowing so that private sector investors have more incentive to invest in loans that are riskier than government bonds”

Where do those incentive come from when rates are at zero? Government borrow less just means rates stay at zero. If the market-clearing rate is below zero, reducing supply isn’t going to have any effect. If I’m a lender, and I’d rather get nothing from the government than lend to your business, why is that going to change if you government borrows less so that I get nothing from the government?

Former Beltway Wonk August 2, 2011 at 8:13 pm

Adam, it’s quite straightforward. At the margin, if, say, $10 trillion less AAA or AA government bonds are added to the world markets next year, then more money will be available to pool into investing into higher risk bonds or loans. Less supply at the top of the ladder (government bonds) creates more demand for bonds at the next rung down the credit quality, lowering their interest rates, and so on, all the way down the ladder until we get to marginal decisions to lend credit or not to the marginally too risky parties. The more important effect, however, is to lower the interest rates on the way down, not marginal decisions to loan or not to risky borrowers at the bottom rung.

Whereas an easy return at the top of the chain sucks all the credit up the ladder, leaving nothing left for the most risky loans at the bottom of the ladder, but more importantly lowering demand and raising interest rates at each rung. The “flights to safety” that cause recessions are just such a movement from the bottom to the top of the ladder, whereas the more productive investments, and especially the ones that create new businesses to replace the old ones in the “creative destruction” of recessions, tend to be the riskier ones towards the middle and bottom of the ladder..

“This would make sense at high (or at least non-zero) interest rates, but not now.”

In this environment, investors are often willing to take negative real returns as long as they are low risk. They are paying a haircut to securely store their wealth. If you disagree, please suggest a way besides government bonds that they could invest their wealth for low-risk positive real returns. Other than inflation-indexed Treasuries it doesn’t exist.

So if investors desire to store wealth in order to pay for their child’s college education or save for their retirement, they aren’t getting positive real returns, they are paying a potentially substantial haircut for the preference benefits they gain from this saving. That’s just the nature of a credit crunch in the private sector: no low-risk positive real returns. Preserving principle in the current environment is not nearly as easy as it looks. And it would be even more difficult, in a good way, without such a huge supply of government bonds.

Reducing supply of government bonds also has very good effects both in terms of distributional fairness and efficiency. Low-risk bonds with positive real returns are a massive transfer of wealth from taxpayers to (generally much wealthier) low-risk bond investors. Left-wingers actually get a two-fer from reducing deficits and thus the growth in supply of government bonds: taking revenge on the wealthy and recovering the economy.

During a credit crunch the wealthy, like most other economic actors, should have to take a haircut from negative real returns, and in the absence of government bonds they would have to do that. Productive wage and profit earners and our children and grandchildren win from lower tax burden going to pay interest Under a reduction in the relative supply of government bonds, a productivity-damaging transfer of wealth from income earners to wealth hoarders would be reversed. The only people who lose from reducing deficits by cutting government budgets are our government employee friends (alas, here we lose most of the left-wingers, rendering their rhetoric about distributional fairness quite hollow) and the wealthy on the government bond dole.

Adam August 3, 2011 at 11:56 am

“it’s quite straightforward. At the margin, if, say, $10 trillion less AAA or AA government bonds are added to the world markets next year, then more money will be available to pool into investing into higher risk bonds or loans. Less supply at the top of the ladder (government bonds) creates more demand for bonds at the next rung down the credit quality, lowering their interest rates, and so on, all the way down the ladder until we get to marginal decisions to lend credit or not to the marginally too risky parties. The more important effect, however, is to lower the interest rates on the way down, not marginal decisions to loan or not to risky borrowers at the bottom rung.”

That might be right in a world where investors could not hold cash, which as a store of value is functionally equivalent to government bonds paying zero interest. Ours, however, is not that world.

Former Beltway Wonk August 5, 2011 at 12:40 am

Adam, most “cash” on balance sheets is in short-term and low-risk instruments, mostly Treasury bills. They sit at the top rung of the ladder, and thus also provide another alternative that lowers demand for high-risk investments. But since they are held for their liquidity they compete less directly with private lending and investment than longer-term Treasuries do.

However, cash as an alternative to long-term loans and investments is a good argument for mild inflation during a credit crunch, so that the real return on cash does not exceed the real return on high risk investments plus a risk premium. (Both real returns in a credit crunch being negative, of course). However, this can only work if the inflation is very predictable, as it otherwise adds to credit risks, and I’m not convinced that central banks can reliably achieve predictable inflation. (For among other reasons, because the credit crunches they react to are unpredictable).

OTOH, an Austrian would probably argue that an investment with negative real returns, even in an environment where the typical investment has negative real returns, is worse than no investment at all. I’m not convinced that this is true, but I’m willing to be persuaded.

TallDave August 2, 2011 at 8:41 pm

FBR — I think we need to cut spending, but not to free up credit.

There was a Harvard study some months back that looked at what happened to districts where federal spending increased. Much to the authors’ surprise, they found it actually reduced private sector activity in those districts. Government activity was replacing private.

The problem with government spending is that it isn’t very good at growing efficiencies. You can tweak AD for some short term gain, but real growth comes from efficiencies and innovation. This is basically why everyone abandoned state Communism last century.

Over the past few decades we’ve myopically dug ourselves into a serious long-term hole by growing gov’t spending at the expense of private dynamism. For the last several recessions the rebound has been getting shallower and shallower. Now we’ve reached a point where the private sector is really struggling to economy out of the hole at all.

I do think this is partly a low-hanging fruit problem as per TGS, but government needs to get out of the way rather than piling up ruinous debt for illusory short-term gains,

Former Beltway Wonk August 2, 2011 at 9:13 pm

At a very abstract level, a dollar spent on government is generally less productive than a dollar spent on the private sector. At somewhat less abstract level, one of the consequences of this is that investing in government bonds is a less productive activity than investing in the private sector. But another reason government bonds are less productive than private investment is similar to why living on welfare is less productive to the economy than having a job. In both cases government is paying a subsidy for doing nothing: for the investor to not bother to research productive opportunities but just take part in a low-risk, taxpayer-funded cash flow, and for the welfare recipient to stay at home instead of work. Government bond investors, in sharp contrast to private bond investors, generally don’t about how the money they are loaning is spent; they only need to care about whether the tax collectors will take enough from taxpayers in the future to pay it back.

When one takes into account both the TGS _and_ the risks involved in productive private sector investments, especially during the credit crunch we have been experiencing for the last three years, one consequence is that anybody who wants to store their wealth in a free market must accept negative real returns in exchange for low risk. The idea that one can reliably grow their wealth through compound interest has always been part mythology, but it was more true in the era of high and monetized (internalized) economic growth in contrast to the current environment of practically zero per-capita GDP growth.

In such an environment, low-risk government bonds with positive real returns, no matter how small (most obviously inflation-protected Treasuries) are a massive forced transfer of wealth from taxpayers (mostly income earners, people keeping the economy moving and growing) to the wealthy, taking advantage of these massive government subsidies to preserve their wealth rather than taking the risks of investing it in a low-growth and high-risk free market. Government bonds paid back through an income tax are a forced subsidy of hoarders by money movers — the exact opposite of what we want for a more productive economy, especially during a recession. And they are a subsidy of generally less productive government at the expense of the generally more productive private sector.

TallDave August 3, 2011 at 10:09 pm

True, low-risk returns are negative, but while I’d like to believe that’s a function of debt, it’s supposed to work the other way around. The gov’t is competing for the debt — that should raise interest rates.

I think one could perhaps make the argument that deflationary pressures are actually so high that negative returns should be even more negative, and that if they were we would see more pressure to invest. Of course, then you have to deal with the nearly atavistic fear of a deflationary cycle…

Former Beltway Wonk August 5, 2011 at 12:14 am

TallDave, government competing for credit does raise interest rates. If a substantial portion of the AAA and AA bonds in the world were redeemed and not rolled over, halving the supply of such bonds, we’d see interest rates fall substantially across the board.

Former Beltway Wonk August 5, 2011 at 11:49 am

In another thread “a” and I have observed or proposed some useful ways to make holding cash less attractive:

* Fed charge its member banks to hold their cash, instead of paying interest on it
* FDIC charge more for insurance
* Negative nominal interest rates on short-term Treasuries.

Jeff August 3, 2011 at 7:50 am

“Tony, yes, because government borrowing competes with private borrowing for scarce credit, and private investment is generally far more productive and conducive of future economic growth. ”

Former Beltway Wonk is either a Turing test or a human who hasn’t checked interest rates in, oh, say, three years…..

Former Beltway Wonk August 5, 2011 at 12:16 am

I check them daily, actually. Anybody else want to make silly ad hominem attacks instead of thinking about the issue?

TallDave August 2, 2011 at 2:57 pm

It depends. If gov’t is only spending 10-15% of GDP and you can build the Hoover Dam for some very efficient hydropower, spending more might not be a bad idea.

If the Hoover Dam was long ago built, you’re already spending 40% of GDP, a doubling of federal spending (nominal) in the last decade has resulted in the worst recession and weakest recovery since TGD, and the best suggested uses of gov’t spending are inefficient high-speed rail and “green” technology, it might be time to rethink the whole Keynesian stimulus thing.

Andrew' August 2, 2011 at 4:30 pm

“Ugh, again. Rates are at or near zero. Where is the shortage of supply of loanable funds? ”

I would think in a flight-to-safety environment the answer is “everywhere else.”

Zephyrus August 2, 2011 at 4:53 pm

“a doubling of federal spending (nominal) in the last decade has resulted in the worst recession and weakest recovery since TGD”

Giant eye roll.

TallDave August 2, 2011 at 5:34 pm

I see your eye roll and raise you a contemptuous glare.

Attorney at Flaw August 2, 2011 at 5:41 pm

/troll gaze

Attorney at Flaw August 2, 2011 at 5:47 pm

/just kidding

Boonton August 2, 2011 at 2:35 pm

Running some fast numbers: $1.043T in 2012 rising at 2.5% becomes $1.302T in 2021. Rising at 2% becomes $1.246T and rising at 1.5% becomes $1.193T.

The deal has it at $1.234T which means if inflation over the next decade is a tad less than 2% we have no real spending cuts. But if its a over 2% we do in fact have real spending cuts.

Likewise the argument that “these cuts are just imaginary because they are from Congress’s ‘baseline’” fall flat to my ears. All the hoopla over the need to limit future projected deficits are made from those very same baselines! If the baseline was for spending to be $1.5T in 2021 then a real cut has in fact happened, at least in the sense that the projected deficit in 2021 is based on an assumption of $1.5T spending which is now less.

PrometheeFeu August 2, 2011 at 3:07 pm

“Likewise the argument that “these cuts are just imaginary because they are from Congress’s ‘baseline’” fall flat to my ears. All the hoopla over the need to limit future projected deficits are made from those very same baselines! If the baseline was for spending to be $1.5T in 2021 then a real cut has in fact happened, at least in the sense that the projected deficit in 2021 is based on an assumption of $1.5T spending which is now less.”

Well, some of us wouldn’t be happy even if we just stuck with the current nominal deficit. So it is a pertinent argument. If anything, when you say “cut” most people understand “next year we spend x less than this year.” So there is definitely so lying involved.

Boonton August 2, 2011 at 9:59 pm

Well actually it doesn’t necessarily mean that. If for example next year 5% of flights are cancelled because there’s not enough FAA inspectors, most people will say that’s a cut because this year no one ever hears of a flight getting cancelled for that reason. Yet the FAA may respond that they have the same number of inspectors next year as this inspecting the same number of flights, it’s just that due to population and economic growth more flights were booked therefore some couldn’t get inspected. Likewise if the Justice Dept. starts an early release program from federal prisons they could reply this isn’t a cut as the actual number of those incarcerated has remained constant….but most people would see that as a cut.

I say this because a certain Party recently won a large number of seats in the House running on the premise that very modest cuts in the rate of Medicare spending was ‘putting grandma before a death panel’. Forgive me if I’m a bit less sympathetic now to hearing about how tough minded they all are and will not score any spending based on inflation or population or economic growth!

Silas Barta August 2, 2011 at 10:15 pm

Yep, that’s it, the FAA is what’s driving the deficit. It’s not like they can charge airlines for the costs of having extra inspectors or something.

Boonton August 3, 2011 at 10:25 am

Didn’t say that, but it is an illustration of how our ‘common sense’ understanding of cut is not always just about the nominal figure. And actually if the FAA raised fees to hire more inspectors I suspect that would score as a “tax and spend” increase technically putting it out of bounds of Republican ideologues.

Regardless, the fact is when analysing spending we could all do with a bit fewer analogies to household budgets. The fact is you have to look at spending from all different types of metrics (real, nominal, per person, per unit of GDP, per trend, trend, etc.) when you are dealing with anything larger than a small bank account.

nnn August 2, 2011 at 2:39 pm

Even if they DID raise taxes, what are we really talking about here ? A 5% raise to the highest bracket? We all know it will raise less than 5% of what is being earned now, by some degree. A massive, socialist level tax increase is not possible and we all know that would not increase revenues as much anyway.

The bottom line is they CAN’T increase revenues by very much and certainly not by enough to put a big dent in the deficit anyway.

Andrew Edwards August 2, 2011 at 11:26 pm

Return to the tax rates paid under Clinton. Hardly a socialistic nightmare (unless your 90s were very different from mine) and provably consistent with a balanced budget.

Bill August 2, 2011 at 11:28 pm

nnn, You have to take into account the 15% cap gains and 15% ordinary income cuts as well and not just the marginal rate.

In 2001, top .1% paid 28% of AGI in taxes; in 2008, 20%. Difference accounted for in not only rates, but cap gains and OI, which would not change under most proposals, but only marginal rate at high end.
As to revenue amount, it actually is pretty substantial. I think more than half of the cuts went to the top 5%.

This is from the NYT:
Families in the middle fifth of annual earnings, who had average incomes of $56,200 in 2004, saw their average effective tax rate edge down to 2.9 percent in 2004 from 5 percent in 2000. That translated to an average tax cut of $1,180 per household, but the tax rate actually increased slightly from 2003.

Tax cuts were much deeper, and affected far more money, for families in the highest income categories. Households in the top 1 percent of earnings, which had an average income of $1.25 million, saw their effective individual tax rates drop to 19.6 percent in 2004 from 24.2 percent in 2000. The rate cut was twice as deep as for middle-income families, and it translated to an average tax cut of almost $58,000.

In its report, the Congressional Budget Office estimated that the overall effective federal tax rate edged up to 20 percent in 2004, from 19.8 percent the year before.

Bush tax cuts will account for $3.6T of the next ten years deficit, meaning the deficit efforts still haven’t recovered what was lost with the cuts.

nnn August 3, 2011 at 5:37 pm

You are making the mistake of believing employment GDP growth and income growth happens in a vacuum. Undoing the Bush tax cuts would absolutely NOT return 3.6T to the revenues ti would be some lesser amount.

Also this all presupposes that current spending levels are anywhere near sane, which any sane person will disagree with.

nnn August 3, 2011 at 5:41 pm

And yes I’m actually taking into account that dropping cap gains rates resulted in an explosion of cap gains revenues. Raising cap gains is virtually certain to reduce cap gains tax revenues.

nnn August 3, 2011 at 5:44 pm

Looks like according to your quoted data the middle class had their tax burden cut nearly in half while the upper quintile had their tax burden cut by about 23%.

Returning tax rates on the upper quintile will increase revenues somewhat by not linearly and how much can they get away with really raising them? Back to bush tax cut levels? Does this include only the upper brackets or all brackets? If we just raise the upper bracket by 5% it’ spitting into the ocean based on current budgets.

Neal August 2, 2011 at 2:48 pm

“Of the 30 percent who disapprove, 13 percent think the cuts haven’t gotten far enough, and only 15 percent think the cuts go too far.”

Is that 15% of the population or 5% of the population?

TallDave August 2, 2011 at 2:49 pm

Was Yglesias the font of this nonsense?

This is really a very silly complaint. Did Yglesias or anyone else who made this objection ever make the same objection to the CBO estimates of the spending cuts, which are subject to the same exaggeration in nominal vs real dollars? I think not.

Konstantin August 2, 2011 at 5:43 pm

Thing is, CBO does not use misleading graphs for driving some political agenda. Cause it does not have one (contrary to Cato). So why should anyone complain?

TallDave August 2, 2011 at 8:00 pm

Yet another commenter who does not appear to understand the CATO graph is of CBO numbers.

Konstantin August 3, 2011 at 7:34 am

Yet another commenter who pretends to not be able to differentiate between a set of numbers and various ways of their graphical representation. Some ways being more misleading than others.
Srsly, yawn..

TallDave August 3, 2011 at 10:12 pm

Yet another commenter who did not read the title of the post. Sigh.

l.a.guy August 2, 2011 at 2:59 pm

Maybe the budget cutting targets should have been negotiated as percentages instead of dollars? That way a 1.5% cut to program ‘X’ would have had the desired effect whether it was in 2011 or 2020 dollars.

PrometheeFeu August 2, 2011 at 3:00 pm

Apparently, De Long is more interested in bashing the numbers than in discussion and commentary. I tried to post this underneath his post:

“””
Let’s adjust for inflation with the commonly accepted federal reserve’s implicit inflation target of 2%. Here is what it looks like in 2012 dollars.

2012 1043
2013 1026
2014 1025
2015 1023
2016 1023
2017 1024
2018 1026
2019 1029
2020 1031
2021 1033

So we are talking about savings of 146 billion real dollars over 10 years as compared with just letting spending go up with inflation. (Or about an average of 14-15 billion per year which is otherwise known as 0.4% of the total budget) Of course we don’t know what inflation is going to be so this is a somewhat silly exercise.

But while we’re on the subject of making these numbers look more realistic let’s look at it this way. What is the actual spending going to be?

2012 1043 billion
2013 whatever congress wants
2014 whatever congress wants
2015 whatever congress wants
2016 whatever congress wants
2017 whatever congress wants
2018 whatever congress wants
2019 whatever congress wants
2020 whatever congress wants
2021 whatever congress wants

It is very well established that a previous Congress cannot bind a future Congress. So Congress will do whatever they want to do spending and borrowing however much they want constrained only by political forces as usual. (And the real world if they are in the mood to share power)
“””

Maybe he just hasn’t gotten to it yet, but I’m doubtful.

PrometheeFeu August 2, 2011 at 3:02 pm

Well, if his comment system also strips end of line characters, maybe I understand a certain reluctance to post. Here are the numbers

2012 1043

2013 1026

2014 1025

2015 1023

2016 1023

2017 1024

2018 1026

2019 1029

2020 1031

2021 1033

Bill August 2, 2011 at 3:00 pm

Since everyone seems to be thinking the reduction was in nominal dollars as of today, based on Tyler’s and others comments, as well as Tea Party legislators,

Then, it would appear from this legislative history of the debate in nominal dollars that the future deficit dollars and cap smust necessarily be inflation adjusted in dollars in future years to retain their nominal dollar value. Afterall, they were nominal dollars at the time of the debate and at the time of the graphs.

Everyone was looking at this in terms of todays dollars, and the only way to enforce the intent of the law is to inflation adjust the dollars in future years to maintain the intent of the commentators.

Wonks Anonymous August 2, 2011 at 3:16 pm

Very little of public sector activity is devoted to public goods. Most are private good redistribution and could be replaced with a negative income tax (or voucher scheme).

Brandon Berg August 3, 2011 at 7:00 am

Right. There’s the military…research…and that’s about it, isn’t it? Highways are rivalrous and not public goods; expenditures on them should more or less scale with population. And of course the majority of federal expenditures are full-on private goods. If we can get real per-capita cuts in total government expenditures, or even just keep them flat long enough to grow the economy back to 5-6x total federal expenditures, I’d be happy.

Bradley August 4, 2011 at 12:27 pm

Indeed. Most so-called “public goods” are not public in the economic sense at all, but merely private goods the government has decided to fund for one reason or another.

bleh August 2, 2011 at 3:32 pm

If there is deflation, then government spending will be lower than projected as well. The future estimates assume inflation drives costs up.

It’s unreasonable to use nominal values of a projection which was constructed assuming inflation.

Adam August 2, 2011 at 3:34 pm

Inflation expectations differ? Among whom? Is there anyone who doesn’t either have financial interest in gold and/or isn’t a nut bag that thinks hyperinflation is coming?

Former Beltway Wonk August 2, 2011 at 4:27 pm

Even Ben Bernanke knows and has admitted that gold prices, which have swelled from $600/oz. to $1,600/oz over the last three years, reflect an increasing “tail risk” of hyperinflation. I’d add that it also reflects risk of more normal inflation: precious metals and commodities are an alternative investment vehicle and hedge when there is substantial risk, as there has been for the last three years, that the real return on credit could be less than zero.

Adam August 2, 2011 at 5:25 pm

Honestly, I say this with as much respect as possible, but that thinking, while common, is total garbage. The only people who make money (or hedge successfully) on gold are those who get commissions buying and selling it.

Silas Barta August 2, 2011 at 5:45 pm

And me. I bought Canadian Maple 1 oz Au’s two years ago for ~$900 and now I can sell them for ~$1650.

If I had ignored my financial advisor’s advice and diversified into gold in mid-’06, I’d have made even more on gold.

Speaking of “more on”…

Adam August 2, 2011 at 6:12 pm

All due to hyperinflation, no doubt.

Silas Barta August 2, 2011 at 6:14 pm

No, by my “crankish” paranoia that gold was going to jump 50% in two years would have been completely justified, don’t you think?

D August 2, 2011 at 8:57 pm

Did you sell it? As someone who made and lost millions in the dot-com bubble, I advise you do so now.

Former Beltway Wonk August 2, 2011 at 9:30 pm

Adam, when you’ve gotten over your fit of taboo-mongering about gold you should try thinking about it. In the current environment (credit crunch on top of TGS), positive real returns can generally only be had by taking substantial risks. One can only get low risk through very small positive but taxpayer-subsidized real returns (government bonds) or very small negative real returns (e.g. gold).

Both bonds and gold retrain risks in the fluctuation of the fiat currencies they are denominated or traded in, but in opposite ways. So the lowest-risk portfolio is a mixture of government bonds and precious metals. CPI-indexed Treasuries are almost as good as this portfolio, but not quite, for reasons that will be left as an exercise for the student.

PrometheeFeu August 2, 2011 at 4:48 pm

You know, inflation expectations can differ even when nobody believes hyperinflation is coming. For instance, someone could believe in 2% inflation, some other people believe in something closer to 5%, some people even believe we could see some mild deflation. None of these are crackpots.

Adam August 2, 2011 at 5:28 pm

I guess so, but anything ranging between mild deflation and 5% would seem to be an admission that the Fed has a pretty good handle on inflation going forward, and thus little reason to worry much about differing expectations.

Personally, my expectation is that inflation will be what the Fed let’s it be, and that means around 2%, erring primarily on the lower side, unless Bernacke and company decide to actually do something.

Former Beltway Wonk August 2, 2011 at 10:07 pm

Wow, so an uncertainty of 5% or more in the real return on securities that nominally earn 3% and are supposed to be “low-risk” (and indeed some formerly known as “risk-free”!) is just easily ignored trivia?

Matthew C. August 2, 2011 at 11:14 pm

Would be this be the Fed whose chairman famously said “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained”. The same week he was saying that I was selling off most of my stock holdings because it was clear to me from my readings that the collapse of the real estate bubble would lead to a cascade in stock prices. I have bought and am buying gold because it doesn’t come out of a printing press and thus provides a much better store of wealth.

As for the inflation rate, it largely depends on quantity (a terrible negative for the dollar, which is increasing at double-digit quantities every year in a no-growth regime) and velocity (likely to explode to the upside with a failure in sentiment, easily foreseeable in the near future given the economic failure we are living through).

Curt F. August 2, 2011 at 9:59 pm

What, we are supposed to take the cumulative opinion of disinterested experts as determinative of future inflation trends? When has the cumulative opinion of disinterested experts ever predicted sudden and dramatic shifts in the status quo?

You might want to read or reread “The Black Swan”, “Being Wrong”, or “Bozo Sapiens”. I understand that Philip Tetlock’s book “Expert Political Judgement” is also very good, but I haven’t read it yet. Let me know if you read it and like it.

derek August 2, 2011 at 10:53 pm

I’m seeing 20 to 50% increases in my inputs from last year. My customers saw price increases of up to 600%, more broadly about 80% a year ago.

Among the comments included in the latest manufacturing report was some saying the inflationary pressures are decreasing along with a softening of demand in Asia.

If you get away from government, central bankers and economists you will find people dealing with increasing prices. Like generals fighting the last war, the brilliant among us won’t see inflation until wages start to show it. Anyone in the real world knows that wage earners are in competition with a billion or so Chinese workers and another billion or so Indian workers. There won’t be any wage increases except in certain high demand sectors. So you can continue in your conviction that there isn’t any inflation because it doesn’t fit the pattern of the last bout of inflation we saw a number of decades ago.

The end result of course is the impoverishment of the middle class. I’m sure they will thank the brilliant economists running the Federal Reserve when they get the chance.

Matthew C. August 3, 2011 at 6:55 am

Excellent comment, derek.

This is the difference between the viewpoint of cloistered academics and the observations of people who actually produce the surplus we all rely on.

Adam August 3, 2011 at 11:46 am

“dam, it’s quite straightforward. At the margin, if, say, $10 trillion less AAA or AA government bonds are added to the world markets next year, then more money will be available to pool into investing into higher risk bonds or loans. Less supply at the top of the ladder (government bonds) creates more demand for bonds at the next rung down.”

Increasing prices are not increasing price levels.

“Anyone in the real world knows that wage earners are in competition with a billion or so Chinese workers and another billion or so Indian workers. There won’t be any wage increases except in certain high demand sectors.”

Yup. Another reason that hyperinflation isn’t coming.

Maurice de Sully August 3, 2011 at 2:15 pm

Or, perhaps, a reason that your understanding of “hyperinflation” is a bit dated or largely incomplete.

I’m dealing with the issues that derek raised. The price of copper (which is critical to my business) is way higher than it should be considering the demand for that commodity. If you stop by my office this afternoon, I can give you the names of 30 people who are currently unemployed becasue of the price of that commodity. Should I ignore that inflationary impact becasue it doesn’t fall under the traditional understanding of inflation?

More importantly, didn’t we (as in the US specifically, the whole world generally) just have something of an issue with massive asset inflation? Thank goodness we’ve all learned from those mistakes.

Maurice de Sully August 3, 2011 at 3:16 pm

That should read “demand for that commodity in its practical applications is largely flat.” Obviously, the actual demand for that commodity is substantial.

ApeMan1976 August 2, 2011 at 3:39 pm

“Even a not very potent version of QEIII could easily undo whatever mild contractionary effects this spending change might have.”

This is probably the most desctructive idea in economics right now. It is operationally false. QE and deficit spending are not interchangeable this way. They operate in completely different ways in the finance system and do not produce the same effects, at all.

derek August 2, 2011 at 10:58 pm

When Canada tamed it’s fiscal demons the Bank of Canada was able to have a loose monetary policy to offset some of the negative pressures from cuts in spending. This was a short while after the Volker years; the monetary system was very stable and robust enough to handle the loosening.

That is what I don’t understand about the current situation. We have massive monetary stimulus and massive fiscal stimulus at the same time, and the exigencies of reacting to the downsides of either policy are going to happen at the same time. A perfect storm, the Treasury contracting and cutting spending, raising taxes, and the Fed having to run a tighter policy to maintain the currency and stabilize prices.

showsword August 2, 2011 at 3:52 pm

The final effects of the deal are hardly a Ron Paul world and so we are seeing massive exaggeration, driven by the fallacies of mood affiliation, excess sensitivity to social information (“who won the showdown?”) and us vs. them thinking. What we have is a weak, vacillating postponement of all the hard decisions. In hindsight, the decision to allow no revenue increases will be seen as a huge blunder, by conservatives most of all.
said good!!

ron August 2, 2011 at 4:09 pm

feeed meee!

Paul August 2, 2011 at 4:09 pm

“One sixth of Americans agree with the liberal argument about the deal.”
The poll referenced in making this assertion is misleading. First of all I think it is fairly clear that the public perception about “cutting government spending” and cutting specific programs is pretty different because of misinformation about the budget that is so widely disseminated (remember when people thought a huge portion of the federal budget was foreign aid). I’d imagine the results would be different if the implications of the initial cuts were spelled out explicitly. More importantly however this poll specifically tells people to only consider their opinion of the initial cuts and not the contents of the entire deal. Since it is obvious that Republicans on the new Congressional committee will refuse any revenue increases and Democrats will favor defense cuts over discretionary cuts the trigger in the deal is very likely to be implemented meaning deeper cuts than the ones measured in the poll (if you have a compelling argument as to how Congress can or would want to get out of this arrangement I’d be happy to hear it).

“Entitlement reform is MIA”
This link continues the basic fallacy of SS being a driver of future deficits by combining it with Medicare and Medicaid and referring to them collectively as entitlements. Considering that rising health care cost projections are the source of future deficit projections including SS is highly misleading. Social Security can be fixed easily by increasing the cap on the payroll tax to cover 90% of wages as it was meant to do in the reform in the 80′s (amusingly the trustees and the reform committee did not anticipate the rise in wage inequality that ensued so the cap now is insufficient) but Republicans are against tax increases of any kind. As for the health programs Obama’s bill introduced the IPAB (a first step to be sure, but still a step) and the right screamed death panels. The point is that one side of the debate is totally against any actual reforms that have been proposed meaning all that is left is cuts which most politicians and pundits interested in “entitlement reform” conveniently fail to mention (perhaps because it’s a politically unpopular position).

I think the perspective in the last few sentences of your post are interesting, but I’d imagine a huge problem that liberals have that you haven’t mentioned is that by making the deal Obama has set a very bad precedent for future debt ceiling impasses (no revenue all cuts) and if this happens again and again those cuts start to add up real fast. It’s the principal as much as the result that has the left so infuriated.

John Thacker August 2, 2011 at 4:15 pm

One sixth of Americans agree with the liberal argument about the deal.

That’s not quite fair, because I believe they did get a majority of Americans to agree that someone else’s taxes should have been raised as well. I believe that the liberal argument is partly about the spending, partly about raising taxes.

John Thacker August 2, 2011 at 4:17 pm

“They” in the above comment being the pollsters.

Of course, from the Keynesian perspective raising taxes has problems as well, even if one thinks that the multiplier is better for spending than taxes, it’s still contractionary.

Craig August 2, 2011 at 4:21 pm

Look, professor–it was a mistake. We all make them. Laugh it off and move on. I myself was in the position of correcting Felix Salmon on a real-versus-nominal chart some months ago, and he very thanked me, corrected his post, and fine-tuned his argument, all in the most gentlemanly way. It actually increases your credibility to do that sort of thing.

But whatever you do, don’t pee on our legs and tell us it’s raining.

The Internet is, after all, a powerfully democratizing medium. No one knows if you’re a dog, and no one much cares if you’re lofty and powerful–unless you happen to be in a compromising video. But, really, no one can give you good advice when that happens.

J Thomas August 2, 2011 at 8:44 pm

Craig, how would Tyler correct to real dollars this time?

When you’re looking at past stuff, you can calibrate everything to one year’s dollars. When you’re making predictions about the future, what does it mean?

It makes sense to me to report the results in nominal dollars. And then when you try to say what it means, you guess what the inflation will be and use what you imagine the real dollars will be. Maybe make several predictions and see how they change the results.

But to me it looks like Tyler is right about his claims.

1. It wasn’t big promises.

2. It was promises for the future, not much about now. Promises between people who are likely to be out of office before they are supposed to do the things they promise.

3. As I understand it, Obama has arranged that this particular form of blackmail will not be done again until after the elections. Since he might very well be out of office by that time, this is a big deal for him. If he is in office next time around, the Republicans might have lost the House by then. Of course, they will find other ways to make a big uproar in the meantime.

Craig August 3, 2011 at 8:31 am

Well, if you dislike the whole idea of “making predictions about the future,” then perhaps you should have an even bigger problem with the graph than I do…

In any event, CBO does inflation projections for the next ten years, and we can look to historical averages past that.

E. Barandiaran August 2, 2011 at 4:27 pm

Tyler, you’re wasting time with sore losers.

Just remind to everyone that what matters today with government in advanced economies is waste –the lot of waste that has been ruining advanced economies. It’s not just a question of bridges to nowhere and $1,000 toilets and the “Robert Byrd” buildings and the “USS Ronald Reagan” super-carriers, but also the huge resources wasted by fraudulent clowns struggling to obtain and retain power, by bureaucrats chasing people to collect bribes and to tell them what to do and not do, by lobbyists entertaining those bureaucrats and clowns, by mercenary armies of journalists and pundits manipulating knowledge as servile accessories of those clowns and bureaucrats, and last but not least by all people protecting themselves from the clowns and the bureaucrats and their many cronies.

Hope soon Keynesians will understand that modern governments are largely in the business of redistributing income and regulating people’s behavior imposing in both cases a huge cost to their economies. Hope soon they understand that modern governments are hardly producing –in terms of quantity and quality– more than 50 years ago, that the accounting of government in national accounts is a terrible indicator of goods produced by government, and that governments’ financial statements still do not apply sound accounting principles (the ones that the fraudulent clowns and bureaucrats claim that private corporations must apply).

Scoop August 2, 2011 at 4:42 pm

I’ll be happy to take any bet with any Liberal who feels that Small Government advocates won big about the size of federal spending in five years. I say it will be larger in real dollar terms. I say it will also be larger per capita. Liberals won, just not as much they wanted.

Rich Berger August 2, 2011 at 4:49 pm

Look on the bright side – Obama gets to hit the links again and he has that big birthday fundraising date in Chicago. How sweet it is!

He probably gets a free membership in AARP, too. Those little brownnosers!

Orange14 August 2, 2011 at 5:15 pm

Can all the smart people who respond to Tyler (and maybe Tyler also) explain to me why the 10 year Treasury bond is now at 2.64%? If this nation is going to hell in a hand basket, shouldn’t we be at least as high as the rate in Italy? Inquiring minds want to know.

Ron Potato August 2, 2011 at 10:58 pm

The U.S. is still far better off than every other bankrupt country, and the most reliable place to put huge sums of money — for now.

Invisible Finger August 2, 2011 at 5:19 pm

Sounds to me like the argument now is “my side lost”. No matter which side you are talking about, each side is claiming they lost.

Bottom line is the debt ceiling WAS RAISED which means the government CAN SPEND MORE. The only curb on government debt will be interest rates. And as we have seen in Europe, the market will set the interest rates and when it doesn’t like where the debt is heading the market can administer a short, sharp shock.

Invisible Finger August 2, 2011 at 5:20 pm

If this nation is going to hell in a hand basket, shouldn’t we be at least as high as the rate in Italy?

For now, we are considered a “safe haven”. How long that lasts is anyone’s guess.

Orange14 August 2, 2011 at 5:35 pm

…a relatively long time because there is no other place to put money these days except if you are a gold bug (anyone going to buy Yuan backed bonds???). In that case and everything goes south, how are you going to spend all the gold when you really don’t have physical possession of it?

E. Barandiaran August 2, 2011 at 5:27 pm

Tyler, watch out!

As Tom Maguire concludes:
If you can’t get positive about your guy, get negative about the other guy. The Dems are out of ideas and out of people to love, so they need people to hate.
Read http://justoneminute.typepad.com/main/2011/08/bringing-the-hate.html

Orange14 August 2, 2011 at 5:34 pm

This is all nonsense and a product of the instant gratification Internet blog age. If you go back more than a century to the post-Civil War era there was just as much vituperation and madness; it just took a while to filter down because all of us blog readers with little else to do did not have computers. Look at the newspaper wars that began about 1880 or a little after; they make Fox/MSNBC/WaPo/NYT etc look like little kids in a sandbox who can’t get along.

My bottom line on what happened (and I’m a liberal) is that Obama really ended up coming close to winning a multi-level game of chess after a pawn gambit.

Rich Berger August 2, 2011 at 5:46 pm

What, is he a Vulcan?

E. Barandiaran August 2, 2011 at 6:59 pm

History is full of people that were close to winning big. They didn’t make it, however. Once they failed, their servile accessories and fans had to deal with their frustration, and one way to ventilate it was to hate their real or imaginary enemies.

Attorney at Flaw August 2, 2011 at 8:22 pm

Borg. Those communists.

Adam August 2, 2011 at 5:44 pm

FBW: “This happened in the 1970s and is happening now.”

This is what’s so frustrating. That some have learned the lesson of the 1970s, which was notable for being an aberration, so well that every situation looks like the 1970s to them. Stagflation is not our problem.

Moreover, your argument, that higher inflation means greater risk of negative real returns, is wrong. Less stable and less predictable inflation has that effect. A Fed-controlled upward adjustment to higher (as in somewhere around historic average) levels of inflation, doesn’t increase uncertainty in the way you claim.

Put differently stable inflation at 4% carries no greater risk that a loan I make today will have negative real returns than does stable 2% inflation. But it does increase my cost of holding cash instead of investing it.

Former Beltway Wonk August 2, 2011 at 10:31 pm

“Stagflation is not our problem.”

Depends on how we measure inflation. If we measure CPI like they did in the 1970s, including the weights they put on energy and food, then we certainly do have a substantial degree of inflation along with our stagnation (thus “stagflation”). We resemble more strongly the 1970s than the 1930s in that regard. (BTW, real GDP growth was _lower_ during the 1970s than the 1930s, for those who are keeping track of their disastrous decades).

If OTOH we do “hedonic adjustments” they didn’t do back then, to reflect the productivity gains said to come in entertainment when TVs get bigger and flatter, the Internet and smart phones become cheaper, and the like, then inflation looks pretty tame. But still nothing resembling the massive deflation of the 1930s.

BTW, ignore the fact that far less money flows from the Beltway folks who generate these statistics and into the hands of i-bond investors and Social Security recipients under the new measures than the old. That can’t be relevant right?

Adam August 3, 2011 at 11:48 am

“If we measure CPI like they did in the 1970s, including the weights they put on energy and food, then we certainly do have a substantial degree of inflation along with our stagnation (thus “stagflation”)”

You need to update your data.

Former Beltway Wonk August 5, 2011 at 12:43 am

My data is fully updated. You might want to try responding with something better than mindless ad hominem.

Former Beltway Wonk August 3, 2011 at 12:20 am

BTW, under a floating currency the 1970s is our only model of a bad economic decade. The 1930s, by contrast, started under a gold standard — and in the U.S. also ended under one, albeit a different somewhat inflated one. Despite the atavistic obsession of many economists with the New Deal and the Great Depression, the 1970s are far more relevant to what we are going through now.

Bernard Yomtov August 2, 2011 at 6:32 pm

You know, I very much doubt that 65% approve of “the spending cuts.” They may approve of spending cuts in a general way, but I’ll bet that if you laid out specific cuts you’d have a hard time getting anywhere near that level of approval.

The whole game here is to as vague as possible. Remember that a substantial number of people think foreign aid is 10% or more of the budget, that a big percentage goes to “welfare loafers.” When you start to talk to the public about actual, named, cuts, I bet you’ll get different answers.

Matthew C. August 3, 2011 at 6:58 am

Given that the system is collapsing under no growth and increased money printing it doesn’t matter if the “free goodies crowd” wants more of the same. It isn’t going to happen.

Robert Simmons August 2, 2011 at 8:49 pm

By his own definition, DeLong is either not an economist, or is trying to trick us –

TC: Bloggers report nominal dollar magnitudes all the time, without pretending to be tricking anybody…
BDL: Bloggers do. Economists don’t.

http://delong.typepad.com/sdj/2011/07/fiscal-policy-during-the-great-depression.html

Mike August 2, 2011 at 9:50 pm

Why do people need to be pedantic?

Yes, of course real spending is what economists reall care about. But as was pointed out ad nauseum, the growth is in the neighborhood of 2% per annum. So apply whatever inflation expectations suit your fancy, and you get real spending growth.

And yes, government spending projections are usually wrong because there will be policy and economic changes in the meantime. We still want to know what the plans are, as of today.

Yes, the growth in revenues will make all the difference whether this growth will result in a rising or declining deficit.

Per capita spending is ambiguous, so there’s no sense talking about it.

And we all know nondiscretionary spending is the major problem and also the toughest political nut to crack. So 100 posts later, we are back to nothing new.

Anon August 2, 2011 at 11:00 pm

It’s scholasticism of the most idiotic order. They can score points by quibbling over minutiae, and confuse otherwise straightforward issues.

Tom Grey August 3, 2011 at 4:25 am

so we are seeing massive exaggeration… the decision to allow no revenue increases will be seen as a huge blunder, by conservatives most of all.

Not by real conservatives; by those, increasingly like Tyler, who want to call themselves conservative or almost so, but continue to support higher tax collection, and thus higher gov’t wasteful consumption.

And it is Tyler who seems to be exaggerating, since it seems likely to me that there will be tax increases, despite the justified political opposition to it (from the Joint Committee in the next year).

I’d be willing to accept a VAT to get a balanced budget — where the VAT goes up to cover the prior year’s deficit. So as to get more people hurt by taxes, and thus willing to cut less desirable programs.

Tom Grey August 3, 2011 at 4:54 am

See Am Thinker:
http://www.americanthinker.com/blog/2011/08/we_the_stupid.html

“Have you also forgotten the so-called “Bush tax cuts”? Yeah. Those rates are going to expire on January 1, 2013. Obama will presumably still be occupying the Oval Office at that time assuming that he is not forcibly removed or that the Republic is still intact at that time. Taxes will increase significantly at that point, and the Congressional Budget Office has scored everything put before them given the fact of the massive tax increases on 1/1/2013. Do you understand that?”

Seems like a big tax increase to me. But I also read that the expiration of Bush-Obama tax cuts is not to be considered, from Keith Hennessey
“Question 1: What does a current law baseline mean for hypothetical tax increase proposals in the Joint Committee?

Administration: We want to let current rates expire for those earning more than $250 K.

Joint Committee: Sorry, that doesn’t score as reducing the deficit. Under current law, those rates would expire for everyone. You can include it if you want, but it won’t help you meet your deficit reduction target.

Administration: OK, then, we want to impose a new surtax on sugary breakfast cereals.

Committee: OK, that counts as reducing the deficit.”

To me it looks like the Tax Cuts end, so the agreement includes big tax increases.

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