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

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…


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.

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.

Amen. I agree with everyone in this chain.

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.

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?


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.

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.

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.

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.

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.

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.

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.

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.

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.


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?


"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.

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!

"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.

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.

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.

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.)

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

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

"Whatever extra comes in doesn’t have to be spent"

but it will be.

"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.

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

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

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.

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.

"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'.

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?

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.

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.

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.)

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.

The Fed can stimulate an economy by printing money.

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.

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.


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

"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.

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?

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.

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.

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.

@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?

"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.

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?

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

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.

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.

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

Ring, Ring.

Telephone Call from S&P For You

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.

"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.

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.

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

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.

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?

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

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.

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.

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.

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.

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.

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.

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.

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

Surely someone here has read Friedman:



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.

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.

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[1][id]=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.

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.

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.


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

2. is why 1. is true.

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.

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

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.

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.

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.

Matt, Go out and load up on gold.

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.

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.

God, you are annoying!

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?

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.

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."

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

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.

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

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?

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).

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.

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?

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.

Hopefully annoying the right people, like twits like you!

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.

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.

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.

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.


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.

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.

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

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?

Voucherizing actual health care expenditures would change it immediately.

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

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).

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.

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.

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.

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?

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

"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.

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.

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.

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.

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.



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

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

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.

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

Nancy Pelosi doesn't count?

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

Cause he's got a clue?

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.

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.

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.

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"?

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.

"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).

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

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.

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

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.

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."


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.

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.

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.

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.

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

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.

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.


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.

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.

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

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?

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.

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.

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.

All of it, then borrow more.

Bingo at 2.25%

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

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

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.

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.

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!

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.

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

"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.

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

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.

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.

Well, inflation did tick up noticeably.

> 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!

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.

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


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

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..."


> 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.


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

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

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

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."

"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!

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?

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


Who does S&P still call AAA?

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.

No businesses? Financial institutions?

Geithner: No Risk U.S. Will Lose AAA Credit Rating


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

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

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.

I was switching back and forth between CNN and Foxnews tonight to hear more about the debt downgrade. I was watching Greta Van Susteren and she had Neil Cavuto on to discuss the downgrade. One thing he said was very interesting. He noted that the ratings agencies had been telling us for a long time that we needed a deficit reduction deal of at least 4 trillion dollars over 10 years in order to avoid a likely debt downgrade; so we had ample warning. Neil Cavuto then said that he had previously spoken with Mitch Mcconnell and Mcconnell had told him "the only way you can get to 4 trillion is by increasing revenues and raising taxes." I thought this was a very interesting point (wonder how this got by the censors at Fox!) The top senate republican has thus admitted that you cannot get 4 trillion dollars in deficit reduction without more revenue. So Mcconnell KNEW of the 4 trillion dollar requirement of the ratings agencies to avoid a downgrade ahead of time, and he KNEW the only way to get there was to increase revenues, but he and the other republicans were still hardline against raising revenues and so the deal that we did finally end up with because of the republicans' intransigence on raising revenue caused this downgrade today. So basically it really is all the republicans' fault. Flawed as they may be, they should have just accepted the president's "grand bargain", the gang of six plan, or the Bowles-Simpson plan; but, no, there could be no new revenues! So the republicans cannot now argue that we somehow have to find 4 trillion dollars in cuts only as Mcconnell admitted that that is not possible (of course, we know that is exactly what they will do anyway --- later in the broadcast Michele Bachmann was on and of course blamed it all on Obama and said he needs to immediately demand Timothy Geithner's resignation and immediately propose 4 trillion in cuts and pass a balanced budget amendment).

you cannot get 4 trillion dollars in deficit reduction without more revenue

I can't tell you how shocked I am to learn our budget is actually less than $4T. Someone at Treasury is guilty of terrible exaggeration.

Our ten-year budget, no less! I demand an investigation.

How much money do you think you are going to get raising taxes right now? I know taxes are part of the left-wing mantra, but do you really think that a significant increase in revenues are a real possibility, let alone the impossible level of taxation required to actually balance the budget?

It depends on the type of taxes, and how the revenue is spent. As a policy matter we need to divert $$ from financial speculation and back into the real economy. Transaction taxes in the financial markets, marginal income tax increases (or just stop adjusting the AMT, really), let the W. taxes expire (sorry, upper-middle class) -- these all have the effect of increasing revenue and pumping that revenue back into the economy where it can help the recovery.

Mailing out checks and building debt (the W. approach to stimulus) is indeed one of the more foolhardy ways to boost the economy.

I think you are in serious denial if you think kicking up the tax rate on financial markets a few percent, let the Bush tax cuts expire, will come anywhere close to doubling tax revenue needed to balance the budget.

That, of course, is ignoring the cost of unfunded future entitlements.

Oh good, we'll replace the wasteful free markets with the legendary efficiency of government spending. That should work. After all we've doubled spending in nominal dollars since 2001 and as a result the economy is doing great.

In any case that revenue will only decrease the deficits as we're already spending far more than we tax.

For the GOP this whole debt ceiling exercise was about fulfilling McConnell's and Limbaugh's stated goal of denying re-election to Obama. That is the only rational explanation for their behavior.


Or, they corrrectly believe the government is already spending too much, and giving it more revenue will only encourage it to spend more.

How did the truth slip out. I'm sure the McConnel statement will be requoted, just as the "We got 98% of what we wanted."

Must be a leak - probably not Scooter this time.


Maybe the government should pay a fee to S&P to rate their bonds and get a AAA rating like the subprime mortgage people did.

Why would a sovereign currency issuer ever default?

Why would legislators of a sovereign currency issuer ever say that a default doesn't mean anything.

" likely pending" can now be dropped from the title.

If I remember correctly Boehner was willing to go with 800B in revenues, and Obama wanted more. Libs will say see! it is Boehner's fault.

Well, there's another way of looking at it. Let's say that you are President. Let's say that your guy at Treasury is worried about S&P...like tick tock worried. So what do you do. You work with Boehner. He says I can only get 800B out of my guys, maybe with a little help from your guys. You say, well, I'd like more, but given the tick tock from S&P I may have to settle for that. But, John, how about we do a NO DRAMA deal here with the 800B and some cuts. We both need to SAVE FACE. And, maybe we can work again with NO DRAMA in 6 months to get another deal, call it phase 2.

But, sadly no. That's not Obama's style. His style is to trash Ryan. His style is to trash the SCOTUS in a SOTU speech. His style is to get agitated and tell Cantor "don't call my bluff"

Now we have Dems routinely calling conservatives terrorists. Now we have Capehart calling for Dems to out crazy the TP. Yeah. Those are negotiators we can work with....right.

Boehner didn't have the votes for $1 of revenue much less $800 billion.

Like the Federal Glioblastoma doesn't already consume enough of the Nation's treasure already.

So, you're saying Boehner couldn't get any Democrats on board with a bill that had spending decreases and revenue increases? Because the Tea Party is a minority of House Members...and there are more than enough Democrats to offset the handful of Tea Party votes.

Raising taxes during a credit crunch recession is insane. That's what Herbert Hoover did.

Depends how its done and under what circumstances (ie, do you have more borrowing capacity).

Ask yourself this question: What is 1-MPC for a person earning $500k. Now, ask yourself: if you give the government a dollar to spend, will they spend it.

"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."

Most of the "much bigger stimulus" people have also supported higher inflation targets, nevermind that a bigger stimulus would have generated some inflation. And you only came around on cramdowns about a year or two after the effort to put them in crumbled.

When half of stimulus is tax cuts, and I bought a korean tv and saved the rest, what did you expect as to effectiveness of that portion of stimulus, particularly that portion that is redistributed to a segment that has a high propensity to save.

Very little if anything, but I guess I'm on the fence about that portion that is redistributed to a segment that has a high propensity to pay off debt.

If it doesn't, well, back to...... Groundhog day ?

Warning: I'm asking this question out of pure curiosity, because I have a tentative comprehension of basic macroeconomic concepts. What exactly would have caused the blast of inflation that Sumners called for? A large stimulus and low interest rates would have (in theory) caused this, right? And how is that at odds with an even larger stimulus plan?

And the Fed's monetary policy post crash?

I guess that if you anticipate that the value of your dollar will be worth less in the future, you spend now, and not save it in vehicles that give you less than the rate of inflation. If you plan to buy a car in three years, and car prices and car financing decline, and you know car prices will increase in 3 years, what is the rational choice.

The end of the NYT article:
the popularity of universal entitlements makes Republicans loath to touch them as well
means that this is NOT YET the time to accept any tax increases.
a. The tax increase will be real, spending "cuts" will not be real -- as has been the case so often before.
b. The Reps will accept any entitlement reform spending reductions Obama+Dems are willing to put out for -- but the Dems need to choose. First. And take the political heat for the political decision.

Until the Dems are ready, with a written plan/offer that Reps can demagogue against, there is no need for Reps to accept any tax increases.

#2 is exactly why #1 is wrong -- Dems must accept and choose entitlement reform first, before tax increases.

#3 is half right -- the stimulus needed was 2 or 3 times bigger tax breaks for companies AND no bailouts; a freeze on all new other federal regulations would have reduced uncertainty too. But the Dems have been demonizing tax cuts since Bush's highly successful anti-dot com bust helped. All bank support should have been oriented at helping households reduce their own debt. (little discussion of Out of the Box type possibilities, like Tax Loans -- letting people borrow the amounts they paid in tax from the gov't to pay off their private debts, with higher tax+loan repayments to the gov't later).

#4 the ratings agencies are right, now, to downgrade -- after being wrong so much during the housing bubble AND not being held more liable nor even more transparent in their ratings. Another private-gov't partnership which fails.

#5 the markets, i.e. rich investors with money looking for a safe haven, don't have a better Euro investment, nor Chinese nor Indian nor Brazilian nor Russian nor African. And probably gold isn't great now -- there is a bubble pop coming, tho nobody knows at what level (today still might be 2 or 3 years away from top).

#6 -- the US voters need to know that long term sustainable entitlement reform is needed. Tyler, in supporting tax increases before real entitlement reform, tho claiming (#2) that Dems should do so; Tyler is actually helping Obama remain in denial about the need for reform.

Tyler the wrong-headed tax increaser, for no real good reason (lots of great fantasy reasons).

The USA is unlikely to get real entitlement reform before Obama loses re-election. The job of honest pundits should be to prepare voters for which gov't promises need to be broken for the country to be growing again.

You don't understand why gold is going up. It is not going up because it is in a bubble. The bubble is government paper and debts denominated in dollars and other fiat currencies.

Gold is rising because those with foresight are leaving the current doomed financial system and purchasing money that will retain its value in the future, as it has for the past few thousand years.

Our massive, global US dollar fiat financial system, stumbled into in 1971 when Nixon defaulted on our international obligations by shutting the gold window, looks to be ending its run shortly (maybe by 2013?) This fiat will be going to the place where all fiats eventually reside, in the graveyard where hundreds of previous attempts to give value to pieces of paper with ink on them have gone. So long dollar, sayonara, say hello to the Continental, the Zim, the Assignat, Pengo, Ruble, Reichsmark and all the others for us! You had a good run in the sun but now you lie in the hospital bed, kept alive (for the nonce) with massive injections of ZIRP, quantitative easing, and continuous bailouts. But we don't have much longer together.

Matt, Go out and buy more gold. Mortgage your house to buy more gold. You got a winner here, but don't tell anyone.

Matt, before you mortgage your house, you might want to go back and look at what happened during the mid to late 70's to gold and silver when the dollar was being revalued relative to other currencies. (It was around the time when another constitutional amendment to balance the budget was under discussion.) I remember a friend who went out and bought alot of silver and gold on his three credit cards. Boy, was he unhappy later. That is not to say gold may not be having an increasing role as a reserve currency now rather than then, but, just remember, if you believe the Fed and others who manage monetary policy are fools, those are the same fools who decide what is their reserve currency. So, if they do use it, what does that say. Or, maybe you ARE betting that they are fools and will increase their gold reserves. I don't know, but its worth a thought.


The difference then is that it was possible to save the system with a dose of strong medicine via Volcker who stopped the money printing (for a period of time), raised rates through the roof, producing strong positive real interest rates, attracting money from other currencies and from gold. It is completely impossible to save it today due to the immense quantities of debt at every level. That is why we have ZIRP, QE and the like despite raging inflation in food and commodities -- these monetary drugs are being used to keep the zombie's heart pumping.

The Fed and ECB are in a box, there is nothing they can do except keep QEing until the patient expires (don't worry, we don't have much longer). At that point we will get a monetary reset, all dollar denominated debt will go to heaven, and the world will be back on a gold standard because gold, silver and tangibles will be all that people will accept in exchange for goods and services.

This is what happens when your entire financial system is based on lies and bullshit (end of mark to market accounting, off balance sheet treatment of liabilities like Social Security and Medicare, the entirety of the MBS market being fraudulent, banks holding underwater seconds on their books at face value that haven't seen a payment in two years, armies of people no longer paying their notes, pissant "settlements" by governments of the banksters who perpetrated all this fraud, etc. We also face a demographic disaster regarding the baby boomers, and of course I haven't mentioned the enormous, constantly increasing regulatory burden of government. Nor have I brought up the complete capture of government and Federal Reserve policy by the TBTF banksters where ZIRP and QE to infinity means the ability to siphon vast quantities of the national income. Look at the way our current system funnels virtually all the (paper) wealth to the top 10%, half to the top 1%. Look at the trends of approval ratings and trust in government. Look at the employment ratio, look at wage levels, food stamp usage, etc.

In the words of our previous "great leader": "this sucker's going down". Fasten your seat belts.

Regarding Volcker, his remedy was for inflation and excess demand (more money chasing goods).
Not what we have today.
I really do not know what to say about the rest of the statement, but have a good day.


I was comparing why gold crashed in 1980 to what is going to happen to gold today.

There is no possibility of positive interest rates today, versus the 1980s. I was not suggesting that the Fed should hike rates to 18%.

They saved the financial system in 1980 but they will not be able to save it today, due to the amount of debt that can never be paid back without massive, unrelenting inflation (which will make a gold investment worthwhile in its own right) or a financial system hyperinflation and collapse (which will make gold the primary base money again). There is not really any downside to gold here.

As for a "bubble", that requires massive and widespread participation. The participation level in gold today is tiny (but beginning to increase quickly from that tiny base as more people realize that the gig is up).

Expect to see 1700+ gold tomorrow evening when the spot market opens, thanks to the S&P downgrade.

The real bubble, if it is a bubble, is a safety bubble. That includes both low risk debt and commodities (including precious metals), since the safest portfolio is a mixture of those two. If we are in Tyler's Great Stagnation in the US and EU, then the debt will need more inflating away, and commodities are probably under-priced in dollars and euros. This will be especially exacerbated if the BRICs countries continue to grow faster, since their growth is far more commodity intensive. If economic growth in the US and EU resumes at historical norms (as it did in the 1980s), and meets or exceeds BRICs growth, then as then we will probably see an extended downward slide in the dollar and euro prices of commodities, as in that case US and EU debts can be paid off without the inflation the expectations of which are currently built in to commodity prices.

The real bubble, if it is a bubble, is a *safety* bubble. That includes both low risk debt *and* commodities (including precious metals), since the safest portfolio is a mixture of those two. If we are in Tyler's Great Stagnation in the US and EU, then the debt will need more inflating away, and commodities are probably under-priced in dollars and euros. This will be especially exacerbated if the BRICs countries continue to grow faster, since their growth is far more commodity intensive. If economic growth in the US and EU resumes at historical norms (as it did in the 1980s), and meets or exceeds BRICs growth, then as then we will probably see an extended downward slide in the dollar and euro prices of commodities, as in that case US and EU debts can be paid off without the inflation the expectations of which are currently built in to commodity prices.


"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"

I don't think that's exactly true. One little-noted (I should say, UN-noted since I haven't seen it mentioned a single time in the fifty or so media reports I've watch or read) element of S & P's statement is this:

"Our revised scenarios also take into account the significant negative
revisions to historical GDP data that the Bureau of Economic Analysis
announced on July 29. . . . the revisions show that the recent recession was
deeper than previously assumed, so the GDP this year is lower than previously
thought in both nominal and real terms."

The "correct" view as intellectual history sees it will be based in part, I hope, on the actual history. Since 4Q 08 turned out to have been not not just bad but Great-Depression-rivalling bad, I don't think you can say the "stimulus was too small" crowd has been defeated yet.

"If I remember correctly Boehner was willing to go with 800B in revenues, and Obama wanted more."

I think you remember incorrectly. Please find us a link where Boehner states he'll support $800bn in revenue increases.

I don't think you're going to see any tax increases without a major overhaul of the tax system. The Democrats keep singing the same song, "The Rich Must Pay Their Fair Share". But the top two quintiles are already paying ~95% of the taxes. I don't see how the system can be fixed using the current tax framework.

There are other revenue sources available, but I don't see ANWR being opened anytime soon. The US has been very restrictive on allowing the resource development. Transactional taxes on stock trading will drive rapid trading to other markets and just hurt the mutual funds that we've packed our 401Ks with. I'd like to see some asset sales from the US. The Federal Government owns large swaths of the Western states, surely something can be sold off there.

I think that was the hope, but a short crisis may give you less time than it takes to overhaul the tax code, so what you will get is a tax increase AND a promise to overhaul the tax code later.

Have you ever read the tax code and seen how long it is. I'm a lawyer and I even don't do my taxes.

My teenage son gets a $2000 monthly allowance, plus he has a credit card. He always makes the minimum payment,
and he's always maxing it out. Every 10 months or so I just get him a higher limit.

Last week it was time to apply again, and I said no. He called me a terrorist and said I was obsessed with
ideological purity. He demanded a raise to make up for it (above and beyond his regularly scheduled one).

Finally, we compromised. I applied for a higher limit that should cover him for two years. We agreed that
some time over the winter, Mom will make suggestions about saving money so that he might even be set for as long
as 26 months. But -- NO RAISE. Unless of course Mom says he should have one after all.

Just when I was basking in my victory, we got a note from Visa. Due to our balance, they want a higher
monthly minimum payment. So now he probably really does need a raise.

When will our bad luck ever end???

My son, who has the capacity to pay his bills, back in 2001 decided he needed a loan to get his business through a tough patch. He was offered a short term loan, but took a long term loan that expired in 2010 and has renewed it, even though my son could repay it. My son also likes to play war games, and decided to take out additional loans for those. He also liked a new ring, an encrusted Part D ring, which he gave to his girl friend who had been flirting with his aging girlfriend, and decided to take out a loan to finance that.

My sons business is diverse. He has many fine people working for him, but he had once again hit a soft patch and has asked for money.

I told him, son, I know you don't want to give me some money for your past $6 Trillion in expenditures, and I am willing to lend to you because you have an AA+ rating, but I would like you to consider taxing yourself a little bit before I give you a loan. I know that you have great potential, in fact others are willing to lend to you at 2.29%, but I would like you to offer me a balanced plan: a little out of your 401k, a little more taxes, and a better oversight on what you spend for medical services, which seems to be way out of line for what your peers are paying.

Got a deal?

If, as this post recommends, we were to use monetary policy to raise inflation levels in the US, what would that signify, or how would that effect, the role of the US dollar as a reserve currency, and would the effect offset any stimulative effect presumed by this action, or would it lead to an even bigger problem.

My guess is that you can't be credible as a reserve currency if you threaten or consciously commit to create domestic inflation.


I'm not sure I agree with that. First of all, inflation is both below trend and below target, and the reserve currency status hasn't been affected for, oh, the sixty years or so we were at or above trend and target. Second of all, there's nothing even close as a replacement reserve currency. Bet on the Euro surviving? Hand things over to the yuan? Third of all, if we need inflation to re-boot growth and we can't be a reserve currency if we inflate, then maybe we shouldn't be a reserve currency.

My portion of my health care premiums have gone up 40% since 2008, my gasoline price has tripled, grocery bill up 40%, propane bill a clean double. Please stop volunteering me for any more inflation, I've had all I can stomach. . .

Regarding the S&P downgrade, I would also be interested in how S&P macro models differ from the CEAs, CBOs or the Feds. I suspect not by much. But what may be different is the assumptions made in each model as to what Congress will or won't do (e.g., baselines, etc.) If that is the case, is S&P putting itself in the role of a political prognosticator, or is it saying you are not being realistic about what your political assumptions are in your model (eg., continuation of tax cuts, baselines, etc.).

Sometimes you agree on the model, but not the variables that go into it, although S&P does seem to have an auditing problem if they miss approximately $2T.

By macro models, I mean to include US budget models as well.

Bill, you really ought to get an honorarium from the Democrats. I don't know about who's right; but Bill gets an A+ for zealous representation.

Sorry to disappoint, but I have voted for moderate Republicans, to the horror of my wife, but it is hard to find them. Without getting into my background, in my youth I advised democrats and republicans in what was an area of bipartisan agreement and at a time when people worked together. I got more respect and following from moderate republicans than knee jerk democrats. I respect both r & ds and like to bust through the rhetoric that is put in place to fog the masses. My best friend in DC is a former republican lead staffer of the senate finance committee The more things change, the more they stay the same

The Fed spends the money it creates on financial assets. It can set an interest rate and make loans to banks, and it did a lot of that in 2008, but before and since, it has been spending the money--again, on finanical assets.

For years, the Fed has targetted the overnight interbank lending rate. The Fed decides what it wants it to be, and then, the they buy (or sell) finanical assets however much is needed to manipulate supply and demand conditions on the inter-bank lending market so that the overnight interbank lending rate is where they want it.

If you interpreted that as setting an interest rate the Fed charges and then making loans to banks, then you just were mistaken.

The notion that targeting the overnight interest rate at .2% means the Fed can do nothing more is just false.

The Fed can quit paying interest on reserves and purchase financial assets that currently have yields greater than zero. (That is most of them, though some are close to zero and could be driven to zero.)

Remarkably, if they give a clear message as to what they want money expenditures on output to be, and must commit to buying whatever amount of finanical assets are necessary, then, they might actually need to sell some, and there may be no need to make exceptionally large purchases. But that does require on expectations.

The Fed could have done this at any time. There was never any need for fiscal simulous.

Of course, if the Fed was going to hold only T-bills (which they didn't anyway) and was going to make small periodic changes in the Fed funds rate, (like they have been doing for years,) then keeping that method of operation (what they like to do) "requires" fiscal stimulous, if the recession isn't going to be to deep. Well, it makes sense in theory. And maybe the recession would have been deeper. But the recession is too deep and lasting too long. They need to change their procedures.

I highly appreciate that you don't participate in the usual smearing between pundits - something I feel regularly undermines some of Krugman's point. But there is a difference between smearing and naming the ones one is talking about. Who are the “we should have had a much bigger stimulus” guys? Who's entirely predictable reaction are you talking about in point 4?

Come on, if you want to take on Krugman, do it. And if it's not him, who is it you are talking about? You pointed to Douthat and Rogoff. Why not name the commentors you disagree with?

Making vague allusions without quite calling names gives much more ammunition to the smear guys than simply being honest about who and what exactly one is thinking of. Read the comments - the "Hahaha! Krugman is a dork!" guys have already surfaced. And I don't believe you didn't expect that. Which gravely undermines what I most appreciate about your commenting style.

S&P wants more cuts.

If we can just rid of some more of these Democrats in 2012, we can get our triple-A back in 2013.

"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."

Not a particularly hard prediction to make, but certainly a good one.

Since we should (and do) think about the equity and efficiency of tax increases, shouldn’t we also think carefully about the equity and efficiency of “a big dose of inflation?”

The obvious welfare costs of inflation derive, of course, from the fact that randomly rising prices makes the information conveyed by relative prices more difficult to interpret. In addition to distorting saving/consumption choices and portfolio allocation choices, noisy prices complicate other decisions as well. It seems to me that these distortions are so serious and hard to measure that we should be very careful in casually calling for some level (“big dose?”) of inflation.

The equity of inflation also troubles me. I have no love for my mortgagor, but I am not sure that a special tax on their assets is appropriate. Even lendors have mothers and employees and shareholders and potential new customers and …… I prefer to know who I’m taxing when I support a tax.

Which, finally, raises the public choice question. Inflation is an incredibly sneaky way to conduct policy. Even if it solves a short term problem it undermines the culture of democracy necessary for our system to work.

Great points, Mike.

The truth is, saving fiat money which can (and will!) be diluted at the issuer's whim is for suckers and the sooner we escape the collective manifestation of Stockholm syndrome that leads us to accept being pilfered from in this manner the better.

I don't see any evidence that a good "grand bargain" was in the offing. From a "health of the polity" perspective, it seems quite a bit more reasonable to have such a thing just after an election rather than when everyone is gearing up for one.

Tyler, please explain further on this:

"The Republican Party made a big, big mistake passing up a chance for a “grand bargain” with Obama."

you really should say monetary stimululus - not inflation.

if theres too little money (a la sumner) and underutilised resources (eg labour) there may not be inflation even with a big injection of cash.

agreed sumner proposes NGDP growth but if this is matched with real GDP growth prices don't have to rise.

stop focussing on inflation and interest rates. its the money that matters first.

"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,"

Why do people persist in confusing tax rates with revenue? Increased tax rates = decreased revenue (if you wait long enough, time depending on the exact rates). It is an immutable law of maths - the exponential effects of reduced economic growth will always eventually exceed the geometric increase of higher tax rates.

It is as unsound as the "bigger stimulus" argument.

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