g Theory Coming'>Empirical Test of Piketty’s r > g Theory Coming

Bernie Sanders forced the issue of wealth inequality into the presidential campaign, which presented a real problem for neoliberals of the Democratic persuasion. They want us to believe that the market rewards people in accordance with their merit and hard work. It doesn’t. They want us to believe everyone can get ahead if they get a good education and work hard. Not so. So the neoliberal dems fall back on their version of trickle-down: economic growth is the cure. So what is the future of economic growth?

Earlier this year Gerald Friedman did a study of the potential impact of Bernie Sanders’ economic ideas, saying they would create enormous economic growth. That drew fire from many liberal economists, including Paul Krugman who wrote several blog posts saying Friedman’s numbers were ridiculous, and using that as a opportunity to bash Sanders supporters for naiveté and for encouraging impossible expectation. On February 23, he put up a post with his own predictions of growth: a fraction over 2%. And that, he says, is good enough.

And let me say that the great thing about a progressive agenda is that it doesn’t require big growth promises to make it work, because the elements of that agenda are good things in their own right. Conservatives need to promise miracles to justify policies whose direct effect is to comfort the comfortable (cutting taxes on the rich) and afflict the afflicted (slashing social insurance); progressives only need to defend themselves against the charge that doing good will somehow kill economic growth. It won’t, and that should be enough.

But what about inequality in this scenario? Thanks to Thomas Piketty and his book Capital in The Twenty-First Century, we can say with some certainty that it isn’t going to get better with this kind of thinking. Remember Piketty’s basic finding: if r > g, wealth inequality will increase to a very high level. In this formulation, r is the rate of return to capital, and g is the growth rate of the economy. Here’s a chart from the St. Louis Fed showing the rate of return to capital in the US:
real returns on capital
With the exception of the immediate post-Great Crash years, the All capital after tax line doesn’t sink below 5%, and the most recent figures show it near 7%. Here’s the definition, found in Note 5:

“Business” capital includes nonresidential fixed capital (structures, equipment, and intellectual property) and inventories. “All” capital includes business capital and residential capital.”

Piketty’s definition of capital is broader than this definition of “all”, but there isn’t any reason to think that will have a material effect on the overall number. In other words, r is about 5% higher than g, so we can expect a steady increase in wealth inequality.

The Republicans couldn’t care less: they nominated a billionaire. What’s on offer from the Democratic Party? Here’s Hillary Clinton’s webpage on economic issues. It’s mostly neoliberal ideas, from cutting taxes to deregulation to trade (see the part on small businesses), and some liberal ideas: investment in infrastructure and research, equal pay, paid leave and affordable child care. Her new idea? Let’s give tax breaks to companies that share profits with workers. Also, raise the minimum wage to $12 some day, and some tiny steps to increasing taxes on the rich by closing loopholes and making sure rich people pay more taxes than Warren Buffett’s secretary.

We are going to get an empirical test of Piketty’s idea, but we already know how it will turn out. The rich have nothing to fear.

The Problem of the Liberal Elites Part 3 on Trade

Paul Krugman has been walking back his nearly unbridled support of trade treaties lately. In this blog post, he says “I think I’ve never assumed away the income distribution effects.” Those distributional effects are, he says, predicted by the standard models. In the Foreign Affairs article I’ve discussed in the last two posts in this series, he must be referring to his statement that NAFTA will “…probably lead to a slight fall in the real wages of unskilled U.S. workers”. Here’s part of of his explanation:

When a country with a highly skilled labor force increases its trade with a country in which skill is at a greater premium, it can expect a decline in the real wages of its own unskilled workers. As a matter of economic principles, we should expect to see at least some adverse impact of NAFTA on the wages of American manual workers.

All the evidence suggests, however, that this effect will be extremely small. For one thing, since the existing barriers to trade between the United States and Mexico are already quite low, it is hard to see how removing them could have any dramatic effect on wage rates.

At first, the evidence did better, but then the trade explosion with China began. That resulted in enormous job losses directly and indirectly in the US, The rest of what happened is that real wages of both the working class and the middle class stagnated, and substantially all the gains went to a tiny minority of rich people. I don’t see that prediction in this or any of Krugman’s other writings. In fact, inequality plays no role in any of these early works of Krugman or, for that matter, any other liberal or conservative economists.

As part of his walk-back on free trade, Krugman says this:

Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins — but we now have an ideology utterly opposed to such redistribution in full control of one party, and with blocking power against anything but a minor move in that direction by the other.

Here’s what Kleiman said:

The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the gains to the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.

[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]

So, the key point in this analysis is the Pareto test. This is the idea that any change in any change in economic allocation that makes one person or group better off without hurting anyone else is good. Suppose the 1% has 90% of the wealth of a society, and the 99% has the rest. If you try to take some of the wealth from the 1% to balance things out a bit, you violate the Pareto test, because the 1% is made worse off by loss of a bit of wealth, even though the bulk of society is better off. That principle sounds like a justification for the way the rich whine about taxation. It also sounds like a lousy way to run a society.

The Pareto test also implies that if a change benefits one group and another group loses, then if the winners pay enough to make the losers whole financially, then it should be just fine. That’s what Kleiman means when he talks about the government redistributing the benefits of trade. So, suppose the allocation of the social goods in a society gives the 1% all the gains but the 99% all lose. Then we redistribute money from the 1% to the 99%. Krugman and the rest of the liberal elites accepted this as a justification for the damage which their models predicted free trade would inflict on the working class. This astonishing idea is common in the economist tribe, even among more conservative economists.

I hardly need point out that neither political party ever contemplated any reallocation of gains either on the expected losses from NAFTA (small decrease in real wages of low-skilled workers), or on the massive losses that arose from trade with China. Krugman didn’t mention this argument in his 1993 Foreign Affairs article. Congress did set up a small program to support the hundreds of thousands who lost jobs because of NAFTA, but those funds were quickly exhausted, did little to ameliorate the problem and never reached anyone who didn’t get a job because US corporate executives built new advanced manufacturing facilities in China and Taiwan. And there was no compensation for anyone whose job was an indirect casualty of the closing of US factories, and no compensation to communities wrecked by plant closures, or forced to bid tax concessions and more to keep jobs.

So, how did things turn out so badly when the great brains all told us it would all work out on average?

The Problem of Liberal Elites Part 2 On Trade

Paul Krugman begins his 1993 defense of NAFTA by insulting its opponents gratuitously and wrongly. Then he offers the readers of Foreign Policy the defense of trade treaties they love.

The truth about NAFTA may be summarized in five propositions:

• NAFTA will have no effect on the number of jobs in the United States;
• NAFTA will not hurt and may help the environment;
• NAFTA will, however, produce only a small gain in overall U.S. real income;
• NAFTA will also probably lead to a slight fall in the real wages of unskilled U.S. workers;
• For the United States, NAFTA is essentially a foreign-policy rather than an economic issue.

NAFTA won’t affect the number of jobs, says Krugman, because the only important factor driving number of jobs is interest rates set by the Fed.

Moreover, it is a choice that responds to economic conditions; the decision to raise or lower interest rates represents a trade-off between the Fed’s desire to raise employment (drive somewhere) and its fear of inflation (a speeding ticket). …

Suppose that NAFTA really does lead to a rise in U.S. imports from Mexico, one that would, other things being the same, reduce U.S. employment by 500,000 over the next ten years. Will other things actually be the same? Of course not. The Fed, faced with the prospect of a weaker economy, will set interest rates lower than it otherwise would have. Conversely, other things being equal, if NAFTA would add half a million jobs, interest rates would be higher. The Fed will, without doubt, miss the target-but it is as likely to overshoot as to undershoot, and over the course of a decade there is no reason to suppose that the average level of employment will be any different with NAFTA than without.

How did that work out? It seems to be true that the overall impact of NAFTA on employment was neutral, though not necessarily for the reason Krugman gave. See, for example this chart showing all manufacturing (definition) jobs for the period 1987 to the present, from the Bureau of Labor Statistics:
Manufacturing jobs 1987 - present

Formulating the issue in terms of total employment, by sector or otherwise, fails to answer any of the crucial questions. What was the effect of NAFTA on communities where the factories were closed? What kinds of jobs are the new ones? How do those jobs meet the needs of workers for income, financial security and job satisfaction? What happened in specific areas? Were the results the same for Los Angeles and for Celina, Tennessee? What happened to the losers? Who profited? Aggregate studies hide the real impact of trade treaties in exactly the way that they miss the point of the farmers’ anger as I discussed in this post.

So, here’s a a story. My law partner was a Bankruptcy Trustee in Tennessee; he was assigned to handle all the cases from the area around Cookeville, TN. In the mid to late 1990s, he was called to deal with an emergency bankruptcy of a cut and sew plant in his area. This is a company that has machines to cut fabric to a pattern and sewing machines; the workers cut the cloth and sew it into clothes. In this case, it was blue jeans. One Friday after work, trucks pulled up to the factory, loaded all the machines and office equipment and moved them to Mexico. They left behind several pallets of completed jeans, which needed to be secured and sold. The workers were not paid. The jeans were “hot goods”, and became property of the US Department of Labor, which hired the Trustee to sell them and distribute the funds to the workers so they got partial payment. The secured creditors and general creditors got nothing. It was about that time my partner reported that one of his cases was a 35 year old guy with few teeth, which, his lawyer said privately, was the result of heavy meth use. That was only the first such case.

Perhaps Krugman would be surprised to learn that the Fed did not intervene to create new jobs in the Cookeville area. How exactly would that happen? Workers who lose their jobs burn up their savings or live off their friends and relations and churches, or on credit cards or the safety net until they get back on their feet. Many don’t. Trade economists like Krugman don’t count these and related losses when they run their computerized models. Most people don’t care because they get cheaper jeans. All the discussion, all the studies of NAFTA, ignore these and many more localized effects.

Krugman admits that if the job losses were very large, his model might not work. Even if the impact of NAFTA on manufacturing jobs was small, that isn’t so with China. Recent studies say that imports from China might have resulted in 2.4 million jobs lost between 1999 and 2011. Is that enough to upset Krugman’s certainty? How many millions of jobs never happened here because US corporate executives exported US-made knowledge, US-generated capital, and frequently entire US factories to other nations. Computer chips and other high-tech equipment weren’t invented in Taiwan or China or Japan, but they got the advanced manufacturing jobs, not the citizens of the US whose hard work laid the groundwork for creating those valuable assets. Worse, the corporate executives arranged to duck US taxes on their profits. Their refusal to pay taxes leads to the further deterioration of conditions in the US.

Krugman knows this. His Nobel Prize was for his demonstration that “national location of specialized production is indeterminate; there will be specialization, but how it is distributed across countries cannot be determined ex ante”, as a correspondent explained it to me in a private email. The policy of Asian nations is to grab those manufacturing operations by nay means necessary. The US, dominated by single-minded free marketeers, doesn’t have an industrial policy, or a safety net, for that matter. It relies on some magic and undefined “market” to fix everything.

Congress won’t lift a finger to help the people of Cookeville. Liberal elites, like Krugman, tell us everything will work out fine. On average.

Index to prior posts in this series.

Yesterday’s Some-Sayers Have Become Today’s Fact-Checkers

Paul Krugman makes a very good argument why the Bain attacks on Mitt Romney are necessary.

There is, predictably, a mini-backlash against the Obama campaign’s focus on Bain. Some of it is coming from the Very Serious People, who think that we should be discussing their usual preoccupations. But some of it is coming from progressives, some of whom are apparently uncomfortable with the notion of going after Romney the man and wish that the White House would focus solely on Romney’s policy proposals.

This is remarkably naive. I agree that the awfulness of Romney’s policy proposals is the main argument against his candidacy. But the Bain focus isn’t a diversion from that issue, it’s complementary. Given the realities of politics — and of the news media, as I’ll explain in a minute — any critique of Romney’s policies has to make use of his biography.

The first point is that voters are not policy wonks. They do not go to the Tax Policy Center website to check out distribution tables. And if a politician cites those distribution tables in his speeches, well, politicians say all kinds of things.

Nor, alas, can we rely on the news media to get the essentials of the policy debate across to the public — and not just because so many people get their news in quick snatches via TV. The sad truth is that the cult of balance still rules. If a Republican candidate announced a plan that in effect sells children into indentured servitude, the news reports would be that “Democrats say” that the plan sells children into indentured servitude, with each quote to that effect matched by a quote from a Republican saying the opposite.

He’s right. While I alluded to this in my post on Glenn Kessler’s changing belief in the seriousness of SEC filings, it deserves exposition directly. Glenn Kessler, back in the days when it was time to distinguish Gore’s economic plans from Bush’s, back in the days when it was time to consider whether Bush’s huge tax cuts would serve the interest of the country, committed just that kind of journalistic sin.

I pointed to this May 3, 2001 story, titled, “Some See Deficiencies in Bush’s Budget Math,” as just one example. It cited Rudolph Penner as the only expert speaking in any way supportively of Bush’s tax cut.

This fiscal situation, despite the uncertainties, is extraordinarily good.

But of course, Penner doesn’t actually say the tax cut is a good idea, just that Bush effectively inherited a good fiscal situation from Clinton.

Kessler then goes on to provide a bunch of anonymous quotes from Bush officials about the tax cuts–many admitting they’re not providing a full picture of the cuts and budget increases–as well as Ari Fleischer providing an excuse for why Bush didn’t include the cost to privatize social security in his estimates.

Which leaves this as the only non-Administration quote in support of the tax cuts.

“Look, [the spending ceiling is] going to hold because you have a different team,” said Sen. Pete V. Domenici (R-N.M.). “We’ve got the president in town.”

Compare that to evidence like this:

“The president is proving his critics right,” said William G. Gale, a budget expert at the Brookings Institution. “The ink isn’t even dry on the tax cut, and he’s already moving ahead on Social Security and defense. The president’s budget adds up only if you think the government will not do anything other than it has been doing.”


One budget expert calculated that just the $100 billion in tax refunds will result in $73 billion in additional interest payments over the next 11 years. The entire tax cut would increase interest costs by about $400 billion, thus reducing the surplus by $1.75 trillion.

The budget agreement would increase spending on annually funded federal programs in fiscal 2002 by 4.9 percent, or about $667 billion, slightly higher than the 4 percent sought by the president. The rest of the nearly $2 trillion federal budget goes to pay for programs whose costs can’t be easily reduced — Social Security and Medicare, and interest payments on the national debt.

And while Kessler likely didn’t stamp that case with the “Some Say” headline, he failed to do what a journalist presenting such evidence should have: said clearly that Bush’s budget numbers didn’t add up, even before you accounted for the increases in defense and social security spending Bush planned (to say nothing of unexpected expenses like post-9/11 Homeland Security and two wars).

Mind you, that wasn’t the only version of such a story Kessler wrote. He also wrote the following “Some Say” stories:

May 3, 2000: Candidates Duel Over Tax Cuts; Gore and Bush Trade Analytical Shots, Seeking an Imprimatur of Fiscal Responsibility

Read more

David Plouffe, Still Believe People Are Feeling Better about Economy?

David Plouffe was at yesterday’s disappointing “Freedom Rally” at Johnson Controls. Aside from being amazed (as I often am when I see politicos in person) at how short he is, seeing him also made me newly cranky about Plouffe’s comments last month about people feeling better about their own economic situations.

The average American does not view the economy through the prism of GDP or unemployment rates or even monthly jobs numbers.

In fact, those terms very rarely pass their lips. So it’s a very one-dimensional view. They view the economy through their own personal prism. You see, people’s — people’s attitude towards their own personal financial situation has actually improved over time. You know, they’re still concerned about the long-term economic future of the country, but it’s things like “My sister was unemployed for six months and was living in my basement and now she has a job.”

There’s a — a “help wanted” sign. You know, the local diner was a little busier this week. Home Depot was a little busier. These are the ways people talk about the economy. [my emphasis]

As I pointed out then, people actually weren’t feeling better about the economy, which seemed like a point you ought to be cognizant of if you’re trying to get a President re-elected based on improving consumer confidence.

Particularly when consumer confidence is at Jimmy Carter levels of malaise.

Confidence among U.S. consumers plunged in August to the lowest level since May 1980, adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment slumped to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.

The biggest one-week slump in stocks since 2008 and the threat of default on the nation’s debt may have exacerbated consumers’ concerns as unemployment hovers above 9 percent and companies are hesitant to hire. Rising pessimism poses a risk household spending will cool further, hindering a recovery that Federal Reserve policy makers said this week was already advancing “considerably slower” than projected.

“The mood is very depressed,” said Chris Christopher, an economist at IHS Global Insight Inc. in Lexington, Massachusetts. “Consumers are very fatigued and very uncertain. In the short term, people are going to pull back on spending.”

Of course, when the President’s team decides that, rather than go and point out that the government can and has done something about jobs (and proposes to do more), it should blame Congress and pretend that freedom creates jobs all by itself, it doesn’t really inspire confidence.

As Paul Krugman says, what we need is someone to go out and staunch the bleeding, not someone to lecture more about getting the deficit in order (as Obama also did yesterday).

For the fact is that right now the economy desperately needs a short-run fix. When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.


What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.

Mind you, just from watching last night’s debate via Twitter, I recognize that most of the alternatives would be far, far worse. But to prevent one of those yahoos from having a change, the Obama Administration really ought to be looking at what works–investing in factories like JCI–rather than lecturing more about deficits and freedom.

Jared Bernstein’s Glorious Diarrhea of Quashed Ideas

I rarely post solely to recommend you follow a blog or twitter feed. But I am here.

You see, Joe Biden’s economic advisor, Jared Bernstein, was recently liberated from the White House.

And, as part of that liberation process, it seems, he got himself a blog and twitter feed. His inaugural post explained he could do more and better on the outside, speaking truth.

Democrats lately seemed to be trapped in a position that amounts to: “sure, we have to cut and shrink—just not as much as the other guys want.”

There’s got to be a better way—a way to widen this terribly narrow debate.

Why couldn’t I do more to help from the inside?  One reason is that in order to move the ball forward, you need consensus, and in today’s politics, that is particularly elusive.  And that makes it especially hard to call out people and their arguments.  There’s a reason why Jon Stewart can speak truths that highly-placed elected officials cannot.  When you’re on the inside at a time like this, you’re constantly balancing the risk of losing the support of people you need to lead.

So, not meaning to be at all grandiose, I’m going to try to do my part to improve the debate from the outside, to make sense out of the arguments, to go for truth over truthiness, to elevate the facts of the case in a way that’s respectful to all sides of the case.  It’s also my hope that by dint of my recent experience at the White House, I can imbue this blog with a sense of political realism that’s sometimes missing in critical commentary.

And he’s got all the smarts of Paul Krugman with–excuse me, the Shrill One–better voice.

But what’s more fascinating to me is the way his blog reads like the exploding diarrhea of common sense ideas that were quashed within the Obama White House:

Social Security Benefits: They’re Important!

The Correct Diagnosis

Family Budget Not Equal to Government Budget

This Just In: Wars Are Expensive

What’s Going Down with Real Wages?

Along with this line from a post on the auto bailout I heartily endorse:

You’d be hard-pressed to find a policy intervention that did as much good yet engendered so much disdain.

Partly I want to say “duh!”

Partly I want to cheer that someone with an economist badge is finally putting these ideas into circulation.

And partly I’m fascinated by the seeming free association going on at the moment, with every reaction a seeming opportunity to expound on something–it seems–that has been gnawing on Bernstein for the last two years.

Finally, there’s the recognition that the entire time the White House was shunning truth-tellers like Krugman and Joe Stiglitz, there was apparently someone on the inside speaking many of the same obvious truths.

And with that recognition, the evidence that Bernstein’s truth-telling didn’t do anymore good from the inside than Krugman and Stiglitz did on the outside.

“Competitiveness” Is Peace

I spent much of the day yesterday pointing out how stupid it was for Obama to put outsourcer, China nut, and TBTF bankster Jeff Immelt in charge of his Council on Jobs and Competitiveness. Meanwhile, Paul Krugman and Robert Reich have been focusing on Obama’s frame for the problem as “competitiveness.”

In his piece, Krugman calls the frame “hackneyed” (and Jeff Immelt’s op-ed on it “vacuous”). He then links to an older discussion on competitiveness of his, in which he explains,

The rhetoric of competitiveness turns out to provide a good way either to justify hard choices or to avoid them.

Reich makes largely the same point about how meaningless the term “competitiveness” has become.

Whenever you hear a business executive or politician use the term “American competitiveness,” watch your wallet. Few terms in public discourse have gone so directly from obscurity to meaninglessness without any intervening period of coherence.

Reich goes on to show how competitiveness might mean:

  • American exports (which, if that was your definition, would require lower American wages)
  • Balance of trade (which, if that was your definition, would lead to dollar devaluation and currency wars)
  • Profits of American-based companies, which, if that were your definition, Reich notes, we’d be doing great:

In case you haven’t noticed, the profits of American corporations are soaring. That’s largely because sales from their foreign-based operations are booming (especially in China, Brazil, and India). It’s also because they’ve cut their costs of production in the US (see the first item above). American-based companies have become global — making and selling all over the world — so their profitability has little or nothing to do with the number and quality of jobs here in the US. In fact, it may be inversely related.

  • The number and quality of American jobs

Reich argues that the only way to improve our “competitiveness” by that last measure–the number and quality of American jobs–is to make investments America is probably not willing to make.

The only sure way to improve the quality of jobs over the long term is to build the productivity of American workers and the US overall, which means major investments in education, infrastructure, and basic R&D. But it’s far from clear American corporations and their executives will pay the taxes needed to make these investments. Read more

Nothing To Be Done But Blame Republicans

Jake Tapper hammered Robert “a recovery that got our economy moving again” Gibbs yesterday on whether the Administration is not doing more for the economy because of political paralysis. After four attempts to avoid answering the question or focus exclusively on blaming Republicans, Gibbs finally suggested there wasn’t all that much the Administration can do to stimulate the economy.

Q Is the reason the President is not pushing for a bolder move on the economy because he doesn’t believe there is one, or because he doesn’t think he could get it through Congress?

MR. GIBBS: Well, Jake, I think you will hear the President — you heard him today after meeting with his economic team, and you will hear him over the course of the next several weeks outlining a series of ideas, some of which are stuck in Congress and some of which we continue to work through the economic team, that will be targeted measures to continue to spur our recovery and to create an environment in which the private sector is hiring.

Q But these are smaller-bore type proposals. These aren’t $787 billion stimulus packages.

MR. GIBBS: No, they’re not. But let’s understand — when you mention small bore — some of you probably saw this article today — “Small businesses sit in holding pattern.” “Small businesses have put hiring, supply buying, and real estate expansion on hold as they wait out the vote on a small business aid bill that is stalled in the Senate earlier this summer.” Right?

As the President said in the Rose Garden, 60 percent of our job losses have come from small business. Small businesses are waiting for the Senate to act on a bill that would cut their taxes and provide them greater loans and investment opportunities with which to expand.

The Republican Party talks a lot about their support for and their helping of small business, and I think the question that the President put toward them today is, if that’s what you support, why are you standing in the way of something that small businesses acknowledge would help with their hiring, with their purchasing, and with their expansion?

Q Okay, but the question I asked was, do you think — does the President think that there should be a bolder move taken beyond a $30 billion small business lending initiative —

MR. GIBBS: Well, again, I think —

Q — and there aren’t the votes for it, or he just didn’t think there is such a thing?

MR. GIBBS: I think, Jake, I think the President mentioned several ideas today that he believes are important to continue that recovery that we will pursue. I think these will be areas and initiatives that are targeted towards spurring recovery and creating an environment for hiring, not some —

Q But does that mean he believes that that is the right approach, or he believes that it’s the only politically possible approach?

MR. GIBBS: Well, look, I don’t think there’s any — I think there’s no doubt that there are — there’s only so much that can be done.

Q Not having to do with politics?

MR. GIBBS: Not having to do with politics. [my emphasis]

At which point Gibbs promptly pivoted and adopted the most thread-bare of DC excuses: whocouldanode.

Q In retrospect, was the stimulus too small?

MR. GIBBS: Look, we always — I think it makes sense to step back just for a second. If you look at — and I don’t think anybody had — and I think we’d be the first to admit that nobody had, in January of 2009, a sufficient grasp at the sheer depth of what we were facing. I think that’s, quite frankly, true for virtually every economist that made predictions. You had — the chart that I generally show, adding the job losses for the last three recessions up doesn’t get you to the job loss that we’ve seen in this recession alone.

It took us a long time to get to this point. We got here not simply because of one thing but because of many things. We’ve seen the housing market collapse. We saw what happened to credit markets. We saw what happened to the stability of our financial system. All of that accumulated after many years into one big pothole that — the size of which any stimulus was unlikely to fill.

I think that for all of the political back-and-forth on the Recovery Act, there should no longer be any doubt — despite some Capitol Hill nonbelievers — that what the Recovery Act did was prevent us from sliding even into a deeper recession, with greater economic contraction, with greater job loss, than we have experienced because of it. [my emphasis]

Calculated Risk didn’t even have to look outside of the Administration–at least as it existed when people were making predictions about the recovery act–to find an economist who had enough of a grasp on what was happening.

How about Christina Romer (the chair of the Council of Economic Advisers)? From Ryan Lizza at the New Yorker:

At the December [2008] meeting, it was Romer’s job to explain just how bad the economy was likely to get. “David Axelrod said we have to have a ‘holy-shit moment,’ ” she began. “Well, Mr. President, this is your ‘holy-shit moment.’ It’s worse than we thought.” She gave a short tutorial about what happens to an economy during a depression, what happened during previous severe recessions, and what could happen if the Administration didn’t act. She showed PowerPoint slides emphasizing that the situation would require a bold government response.

The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. … Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion.

So Romer thought the right size was probably about double what was actually enacted (excluding the Alternative Minimum Tax relief).

And then there are the prominent Nobel prize winning economists in the Democratic party who predicted the stimulus was too small.

So basically, the Administration’s strategy for limiting the political damage of the dismal economy (to say nothing of doing something to fix it) is simply to blame Republicans, because actually admitting that the Administration fucked up–much less doing something like firing Tim Geithner and starting fresh–is just not palatable.

A pity for all those struggling Americans who have to pay for the Administration’s arrogance, huh?

NY Times Admits Gruber Problem, Fails To Mention Krugman Problem

imagesIn a full throated mea culpa by the New York Times Public Editor, Clark Hoyt, appearing in the Sunday edition, the Times officially describes the critical and material implications that arise when readers are misled by undisclosed interests of sources and authors in their paper of record.

These examples have resulted in five embarrassing editors’ notes in the last two months — two of them last week — each of them saying readers should have been informed of the undisclosed interest. And on Thursday, the standards editor sent Times journalists a memo urging them to be “constantly alert” to the outside interests of expert sources. The cases raised timeless issues for journalists and sources about what readers have a right to know and whose responsibility it is to find it out or disclose it.

That is exactly right. One of the prime examples the Times’ Public Editor bases his proper conclusion on is that of Jonathan Gruber:

Jonathan Gruber, a prominent M.I.T. health economist, wrote an Op-Ed column and was quoted frequently in other Times columns, news articles and blogs on health care reform before it came to light that he had a contract worth nearly $400,000 to analyze health proposals for the Obama administration.


Gruber, the health care economist, wrote an Op-Ed column in July supporting an excise tax on so-called Cadillac health plans. Not long before, he had signed a contract with the Department of Health and Human Services to analyze the economic impact of various health care proposals in Congress. He did not tell Op-Ed editors, nor was the contract mentioned on at least 12 other occasions when he was quoted in The Times after he was consulting for the administration. After a blogger reported on Gruber’s government contract on the Daily Kos Web site, Gruber did volunteer it to Steven Greenhouse, a Times reporter interviewing him for an article on the excise tax. Greenhouse said he included the fact in a draft but struck it because the article was too long. Greenhouse said that Gruber’s views on the tax were so well-known that he did not think they would be influenced by a consulting contract. But had he realized how large the contract was, Greenhouse said, “I would have stood up and paid lots more attention.”

While it is nice the Times has admitted its problem with Gruber, and his wantonly serial failure to disclose material facts and appearances of conflict, it is extremely curious and convenient they dodge the most recent, and in many regards most glaring, example of their damage from Gruber’s Read more

Marcy Wheeler TeeVee – Jonathan Gruber and the Cadillac Plan

There has been a fair amount of misinformation and disinformation about what has been said by Marcy Wheeler on this blog about Jonathan Gruber, his modeling work on healthcare and relationship with the Obama Administration. One instance in this regard, quite unfortunately, was notably made by Paul Krugman. Mr. Krugman, who is a solid liberal voice and worthy of respect, nevertheless very unfairly tarred Marcy with complaints he had, or perceived, with others and he owes better.

First off, I would like to point out the matter of Gruber started primarily about the duty and obligation of disclosure, and there was, unequivocally, a failure in full disclosure by both Mr. Gruber and the White House, both relying on his work (inferring that it was independent), and simultaneously funding it, whether directly or indirectly. For Mr. Krugman to extrapolate that out to being “just like the right-wingers with their endless supply of fake scandals” was startling and beyond the pale. There was also no foundation for it from Marcy’s words and statements on this blog.

The foregoing is something that I, bmaz, felt compelled to say; if you disagree, then your beef is with me, not Marcy, not Firedoglake, nor anybody else. Now, with that said, I wish to present Marcy Wheeler and let her speak for herself about exactly what the Gruber matter is about, and what it means. The attached video clip is from a MSNBC interview of Marcy conducted by David Shuster Tuesday morning.

It should be noted that Marcy was covering the North American International Auto show in Detroit when MSNBC interviewed her, as David Shuster notes. What David didn’t catch was that, the whole time he was discussing the infamous “Cadillac tax” Mr. Gruber’s work is central to, Marcy was standing in front of the Cadillac display. Now that is product placement!

Interestingly enough, in discussing the Cadillac tax, Paul Krugman has flat out admitted the claims of insurance premium reductions leading to wage increases are “exaggerated” and that “Cadillac plans aren’t really luxurious — they reflect genuinely high costs.” Mr. Krugman might want to take a look at the most recent work by Larry Mishel, an economist Mr. Krugman has cited before; in fact the exact economist Paul cited as support for the fact that the wage growth claims were “exaggerated”. Mr. Mishel’s new article seems to undercut the entire Cadillac tax thesis as to wage movement.

UPDATE: Economist Larry Mishel, who was linked to in the main post and referred to with seeming approval by Paul Krugman as well (link to that also in main post) put the following in a comment to his FDL Seminal Post yesterday:

I do think Gruber’s claim about the wage impact of lower health care inflation in the 1990s (and the reverse trends in the 200s) was wrong: The simple tale seemed to support his policy desire to curtail health care costs via the excise tax but digging into the details shows that health care costs have not driven wage trends. This does not mean that lower health care costs might not lead to better wages, just that the scale of the impact won’t move wages appreciably.

I may differ with many of you on the site though in that I don’t impugn Gruber’s motives. I don’t think there’s much of a scandal regarding his contract with HHS. I think his error in the case I’m criticizing is that he’s a health care economist and doesn’t know the details about wage trends. I, on the other hand, have been studying wages for thirty years or more. Gruber clearly over-reached with the argument about health care driving wage trends and has acknowledged that to me privately (yesterday).

So, I think he’s wrong on this issue and I also disagree with him on the overall merits of the health excise tax. But I think he’s a pretty smart, reasonable and straightforward economist. I’ve had to debate some pretty scummy economists and he’s not one of them. (emphasis added)

I agree with Mr. Mishel about the absence of malice by Mr. Gruber. But malice was never ascribed by Marcy Wheeler, she merely pointed out that there was a simple failure to fully disclose potential conflict information, that others had an interest in knowing, and that the assumptions Mr. Gruber’s model was based on may not be correct. These points have been borne out by others, indeed effectively by Paul Krugman himself and other experts he relies on. The tarring that occurred from Paul should be retracted.