Andrew Ross Sorkin shows his range of thought goes from one 40 yard line to the other when he contemplates a world where the government decided to rescue Lehman rather than allow it to fail. He considers various bailout scenarios, all of which leave the welfare dependents on Wall Street intact.
There was an alternative. It was possible to allow the market to work its magic, which would have certainly destroyed the other three remaining independent investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch). Two of the megabanks, Citigroup and Bank of America, which were on life support at the time, surely would have failed as well. It is possible that the other two megabanks, J.P. Morgan and Wells Fargo, also would have been dragged down as well.
In this world, we would have quickly eliminated much of the waste that has developed over the decades in a coddled financial sector that uses its political power to get hundreds of billions of dollars of implicit and explicit subsidies from the government. The economy would have taken a big hit, but those of us old enough to remember 2008 recall that the economy did take a big hit even with the bailouts.
It would have been necessary to have major stimulus to reboot the economy, but spending money is a political problem, not an economic one. (Most of us know how to spend money.) It is certainly plausible that serious stimulus would have been easier with the Wall Street gang put out on the street, dodging law suits and indictments, rather than advising President Obama.
Unfortunately, Andrew Ross Sorkin can’t even think of such possibilities.
Andrew Ross Sorkin shows his range of thought goes from one 40 yard line to the other when he contemplates a world where the government decided to rescue Lehman rather than allow it to fail. He considers various bailout scenarios, all of which leave the welfare dependents on Wall Street intact.
There was an alternative. It was possible to allow the market to work its magic, which would have certainly destroyed the other three remaining independent investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch). Two of the megabanks, Citigroup and Bank of America, which were on life support at the time, surely would have failed as well. It is possible that the other two megabanks, J.P. Morgan and Wells Fargo, also would have been dragged down as well.
In this world, we would have quickly eliminated much of the waste that has developed over the decades in a coddled financial sector that uses its political power to get hundreds of billions of dollars of implicit and explicit subsidies from the government. The economy would have taken a big hit, but those of us old enough to remember 2008 recall that the economy did take a big hit even with the bailouts.
It would have been necessary to have major stimulus to reboot the economy, but spending money is a political problem, not an economic one. (Most of us know how to spend money.) It is certainly plausible that serious stimulus would have been easier with the Wall Street gang put out on the street, dodging law suits and indictments, rather than advising President Obama.
Unfortunately, Andrew Ross Sorkin can’t even think of such possibilities.
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Remember President Obama’s 2008 campaign where he promised to cut Social Security, Medicare, and Medicaid? Yeah, that was where he said, “yes we can.”
Okay you probably don’t remember it because if he ever said he wanted to cut Social Security, Medicare, and Medicaid, the media strangely did not bother to report it. But that does not stop Fred Hiatt from claiming in his Washington Post column:
“President Obama came into office five years ago promising to make hard decisions, not to kick the can down the road, not to let entitlement programs — primarily Medicare, Medicaid and Social Security — swallow the rest of the budget.”
This is the Washington Post so perhaps we should not expect much in the way of accuracy, but even for the Post this is pretty far out. After all, in the real world Obama never said anything remotely like this in the 2008 campaign. Hiatt is just putting his senior-bashing agenda in the mouth of President Obama, hoping he can fool some readers. That is really pathetic.
Addendum:
Those interested in what President Obama did actually say about Social Security during the 2008 campaign can get a sample here.
Remember President Obama’s 2008 campaign where he promised to cut Social Security, Medicare, and Medicaid? Yeah, that was where he said, “yes we can.”
Okay you probably don’t remember it because if he ever said he wanted to cut Social Security, Medicare, and Medicaid, the media strangely did not bother to report it. But that does not stop Fred Hiatt from claiming in his Washington Post column:
“President Obama came into office five years ago promising to make hard decisions, not to kick the can down the road, not to let entitlement programs — primarily Medicare, Medicaid and Social Security — swallow the rest of the budget.”
This is the Washington Post so perhaps we should not expect much in the way of accuracy, but even for the Post this is pretty far out. After all, in the real world Obama never said anything remotely like this in the 2008 campaign. Hiatt is just putting his senior-bashing agenda in the mouth of President Obama, hoping he can fool some readers. That is really pathetic.
Addendum:
Those interested in what President Obama did actually say about Social Security during the 2008 campaign can get a sample here.
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A NYT article discussing the possibility that Silvio Berlusconi may have his seat in the Italian Senate taken away following a criminal conviction for tax fraud, noted that this could lead to a collapse of the coalition government ruling Italy, which it tells readers could pose risks:
“to the tentative economic recovery under way in Europe.”
It is worth noting that Italy has not shared in this recovery having seen its economy contract for 8 consecutive quarters. In the most recent quarter it contracted at a 0.8 percent annual rate. This may make Italians less concerned about jeopardizing the recovery.
A NYT article discussing the possibility that Silvio Berlusconi may have his seat in the Italian Senate taken away following a criminal conviction for tax fraud, noted that this could lead to a collapse of the coalition government ruling Italy, which it tells readers could pose risks:
“to the tentative economic recovery under way in Europe.”
It is worth noting that Italy has not shared in this recovery having seen its economy contract for 8 consecutive quarters. In the most recent quarter it contracted at a 0.8 percent annual rate. This may make Italians less concerned about jeopardizing the recovery.
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Paul Krugman corrected my earlier comment to note that he in fact did say that the 1990-91 and 2001 recessions were qualitatively different than prior ones in that the recoveries did not have the same sort of strong bounce back that followed prior recessions. These recessions were also attributable at least in part to the collapse of asset bubbles. In this sense, the 2007-2009 downturn is not unique.
This is certainly fair, but at the risk of picking nits, there is another important point. Given the weakness of the current recovery, we all agree (I’m implicating Mike Konczal here as well) that stimulatory fiscal policy was and is appropriate to boost the economy out of the current downturn. However, are we in agreement that fiscal stimulus would have been useful following the 2001 downturn and perhaps the 1990-1991 recession also?
That seems to me the bigger issue. Maybe we are all in agreement and think that a fiscal response would have been appropriate for these prior two recessions as well, but I am not sure on this point.
(“Knit” corrected, thanks folks.)
Paul Krugman corrected my earlier comment to note that he in fact did say that the 1990-91 and 2001 recessions were qualitatively different than prior ones in that the recoveries did not have the same sort of strong bounce back that followed prior recessions. These recessions were also attributable at least in part to the collapse of asset bubbles. In this sense, the 2007-2009 downturn is not unique.
This is certainly fair, but at the risk of picking nits, there is another important point. Given the weakness of the current recovery, we all agree (I’m implicating Mike Konczal here as well) that stimulatory fiscal policy was and is appropriate to boost the economy out of the current downturn. However, are we in agreement that fiscal stimulus would have been useful following the 2001 downturn and perhaps the 1990-1991 recession also?
That seems to me the bigger issue. Maybe we are all in agreement and think that a fiscal response would have been appropriate for these prior two recessions as well, but I am not sure on this point.
(“Knit” corrected, thanks folks.)
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If the new Fed chair was being selected by people without names, Larry Summers would win hands down. The Post gives us yet another article assuring us that Larry Summers is a good guy that depends almost entirely on unnamed sources.
The article gives us supportive comments from “many of his colleagues,” “people close to Summers,” and “one person who knows Summers.” There is one named source in the piece. That would be Chrtistine Romer, the former head of the Council of Economic Advisers, who opposes appointing Summers as Fed chair.
Most serious newspapers try to restrict the use of unnamed sources to exceptional situations. The reason is that it allows them to use the paper to advance their agenda. Apparently the Post has little interest in such journalistic standards.
If the new Fed chair was being selected by people without names, Larry Summers would win hands down. The Post gives us yet another article assuring us that Larry Summers is a good guy that depends almost entirely on unnamed sources.
The article gives us supportive comments from “many of his colleagues,” “people close to Summers,” and “one person who knows Summers.” There is one named source in the piece. That would be Chrtistine Romer, the former head of the Council of Economic Advisers, who opposes appointing Summers as Fed chair.
Most serious newspapers try to restrict the use of unnamed sources to exceptional situations. The reason is that it allows them to use the paper to advance their agenda. Apparently the Post has little interest in such journalistic standards.
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A NYT article applauded reports that the birth rate stabilized in 2012 after declining sharply in the years from 2007 to 2011. While it is clearly good news insofar as birth rates are a measure of the economic security of young families, there is no reason that the rest of us should want to see more children.
The piece tells readers that higher birth rates are associated with higher economic growth. This is true, but they are not necessarily associated with higher per capita growth. Bangladesh has a higher GDP (on a PPP basis) than Denmark, but no one would say that Bangladesh is richer than Denmark. This is because Denmark has a far higher per capita GDP.
There are also many items related to population density that are not captured by GDP. For example, if people spend more time commuting because roads and infrastructure are more crowded this will not be picked by in GDP. The same is true for recreational sites like parks and beaches. Also, a larger population will make it more difficult to attain targets for reducing greenhouse gas emissions for folks who care about things like global warming.
One final point that is worth noting, the piece effectively confuses levels and changes. The fact that the decline has stopped at its 2011 level implies that families in 2012 were as pessimistic as at any point in the downturn. Insofar as we can see the birthrate as a measure of economic security, that is not a good story.
A NYT article applauded reports that the birth rate stabilized in 2012 after declining sharply in the years from 2007 to 2011. While it is clearly good news insofar as birth rates are a measure of the economic security of young families, there is no reason that the rest of us should want to see more children.
The piece tells readers that higher birth rates are associated with higher economic growth. This is true, but they are not necessarily associated with higher per capita growth. Bangladesh has a higher GDP (on a PPP basis) than Denmark, but no one would say that Bangladesh is richer than Denmark. This is because Denmark has a far higher per capita GDP.
There are also many items related to population density that are not captured by GDP. For example, if people spend more time commuting because roads and infrastructure are more crowded this will not be picked by in GDP. The same is true for recreational sites like parks and beaches. Also, a larger population will make it more difficult to attain targets for reducing greenhouse gas emissions for folks who care about things like global warming.
One final point that is worth noting, the piece effectively confuses levels and changes. The fact that the decline has stopped at its 2011 level implies that families in 2012 were as pessimistic as at any point in the downturn. Insofar as we can see the birthrate as a measure of economic security, that is not a good story.
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A NYT article on Raghuram Rajan, the new head of India’s central bank, told readers:
“Some of the biggest problems bedeviling the Indian economy are beyond his control, like the trade and government budget deficits and the crippling shortage of roads and other infrastructure.”
Actually the trade deficit is fairly directly under the central bank’s control. It can raise or lower the value of the rupee, India’s currency. By allowing the rupee’s value to fall, Rajan can make India’s goods more competitive in the world economy, thereby reducing its trade deficit.
It is worth noting that India’s current account deficit (the broadest measure of the trade deficit) is around 5 percent of GDP. This is not obviously too large for a rapidly growing developing country. In fact, it is exactly what textbook economics would predict since capital is supposed to flow from slow growing rich countries to developing countries where it can be put to better use.
A NYT article on Raghuram Rajan, the new head of India’s central bank, told readers:
“Some of the biggest problems bedeviling the Indian economy are beyond his control, like the trade and government budget deficits and the crippling shortage of roads and other infrastructure.”
Actually the trade deficit is fairly directly under the central bank’s control. It can raise or lower the value of the rupee, India’s currency. By allowing the rupee’s value to fall, Rajan can make India’s goods more competitive in the world economy, thereby reducing its trade deficit.
It is worth noting that India’s current account deficit (the broadest measure of the trade deficit) is around 5 percent of GDP. This is not obviously too large for a rapidly growing developing country. In fact, it is exactly what textbook economics would predict since capital is supposed to flow from slow growing rich countries to developing countries where it can be put to better use.
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That’s what readers of the NYT’s Economix blog must be asking. Swagel used his column today to complain:
“The improvement in the budget outlook for this year and the next several has empowered the fiscal ‘ostrich caucus,’ but does not change the reality of a ‘severe long-run fiscal imbalance.’ President Obama has spoken about the need to take on the long-term fiscal challenge. But this requires making difficult choices to address the funding gaps in Social Security and Medicare, and on this Mr. Obama has flinched, setting aside the recommendations of his own Bowles-Simpson fiscal commission and instead putting forward only modest entitlement reform proposals — enough for a talking point but by far not addressing the imbalances. Indeed, in his 2013 State of the Union address, Mr. Obama spoke merely of ‘the need for modest reforms’ in Medicare, when the decisions will be wrenching, not modest, since ultimately they will involve how to allocate health care resources for people in the final year of life when costs, ethics and human dignity crowd around the beeping hospital equipment.”
The most recent projections from the Congressional Budget Office show that the debt to GDP ratio will actually be lower in 2023 than it is at present. The deficit projected for 2023 is just 3.5 percent of GDP, a deficit that implies only a modest increase in the debt to GDP ratio in that year. The need for “wrenching” decisions is not apparent in these projections.
It is worth noting that projections for future deficits have fallen sharply in the last few years, partly due to the budget cuts and tax increases that have been put in place, and partly due to a slower rate of projected health care cost growth, which is the main driver of long-term deficits. In fact, the projected debt for 2023 is now lower than the target set by Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s deficit commission. (Swagel mistakenly refers to recommendations from the Bowles-Simpson commission. The commission did not get the necessary majority to make recommendations. The recommendations were those of the co-chairs, not the commission.)
The other point that should be mentioned in any discussion of the deficit is that the cause of large deficits is the economic downturn that followed the collapse of the housing bubble. Prior to the bubble’s collapse the deficits were modest and the debt to GDP ratio was falling. Deficits were projected to remain small well into the current decade.
The larger deficits of the last five years have supported the economy, boosting growth and creating jobs. Since the private sector is not creating demand, there is no alternative to demand generated by the public sector. Smaller deficits mean less growth and fewer jobs.
Unless the dollar falls in value against other currencies, thereby reducing the trade deficit, it will be necessary to run large budget deficits to sustain demand. That story is pretty much dictated by accounting identities, unless the goal is to spur a wave of demand driven by another bubble.
That’s what readers of the NYT’s Economix blog must be asking. Swagel used his column today to complain:
“The improvement in the budget outlook for this year and the next several has empowered the fiscal ‘ostrich caucus,’ but does not change the reality of a ‘severe long-run fiscal imbalance.’ President Obama has spoken about the need to take on the long-term fiscal challenge. But this requires making difficult choices to address the funding gaps in Social Security and Medicare, and on this Mr. Obama has flinched, setting aside the recommendations of his own Bowles-Simpson fiscal commission and instead putting forward only modest entitlement reform proposals — enough for a talking point but by far not addressing the imbalances. Indeed, in his 2013 State of the Union address, Mr. Obama spoke merely of ‘the need for modest reforms’ in Medicare, when the decisions will be wrenching, not modest, since ultimately they will involve how to allocate health care resources for people in the final year of life when costs, ethics and human dignity crowd around the beeping hospital equipment.”
The most recent projections from the Congressional Budget Office show that the debt to GDP ratio will actually be lower in 2023 than it is at present. The deficit projected for 2023 is just 3.5 percent of GDP, a deficit that implies only a modest increase in the debt to GDP ratio in that year. The need for “wrenching” decisions is not apparent in these projections.
It is worth noting that projections for future deficits have fallen sharply in the last few years, partly due to the budget cuts and tax increases that have been put in place, and partly due to a slower rate of projected health care cost growth, which is the main driver of long-term deficits. In fact, the projected debt for 2023 is now lower than the target set by Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s deficit commission. (Swagel mistakenly refers to recommendations from the Bowles-Simpson commission. The commission did not get the necessary majority to make recommendations. The recommendations were those of the co-chairs, not the commission.)
The other point that should be mentioned in any discussion of the deficit is that the cause of large deficits is the economic downturn that followed the collapse of the housing bubble. Prior to the bubble’s collapse the deficits were modest and the debt to GDP ratio was falling. Deficits were projected to remain small well into the current decade.
The larger deficits of the last five years have supported the economy, boosting growth and creating jobs. Since the private sector is not creating demand, there is no alternative to demand generated by the public sector. Smaller deficits mean less growth and fewer jobs.
Unless the dollar falls in value against other currencies, thereby reducing the trade deficit, it will be necessary to run large budget deficits to sustain demand. That story is pretty much dictated by accounting identities, unless the goal is to spur a wave of demand driven by another bubble.
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Robert Samuelson used his column today to dismiss the idea that the nation could be “war weary.” He correctly notes that a relatively small segment of the population has either served in recent wars or has close relatives who served. However his discussion of the costs is misleading.
He tells readers:
“From 2001 to 2012, federal spending totaled $33.3 trillion; the wars were 4 percent of that. Over the same period, the American economy produced $163 trillion of goods and services. War spending equaled nine-tenths of 1 percent of that.
“As important, no special tax was ever imposed to pay war costs. They were simply added to budget deficits, so that few, if any, Americans suffered a loss of income. It’s doubtful that much other government spending was crowded out by the wars.”
It is difficult to get a precise estimate of the cost of the wars over this period, but one simple approach would be to look at the path of defense spending. This had been 3.0 percent of GDP in 2000 and was trending downward. After 2001 it averaged more than 4.5 percent of GDP. This difference over 12 years comes to 18 percentage points of GDP or roughly $2.9 trillion in today’s economy. This calculation ignores the timing of the expenditures, but it should be sufficient for a ballpark number. It also excludes increased spending on veterans benefits that resulted from the wars.
As a practical matter, since the economy was well below full employment for most of this period, the wars would not have imposed much of an economic burden. They would have had roughly the same economic effect as paying people to dig holes and fill them up again.
However, we live in a country with deficit and debt fixations that are pushed by people like Robert Samuelson and his newspaper. These people have been yelling frantically about the need to contain spending and get deficits down. For a long time they warned about a boogeyman who would destroy the economy if the debt to GDP ratio exceeded 90 percent.
In this context the debt that we ran up as a result of the wars has been a very large burden. This debt has been a big weapon used by those who don’t want the government to take steps to stimulate the economy and put people back to work.
In short, if we were having a serious discussion about economic potentials, then Samuelson would be right that the wars have not posed much of a burden. However in the political world where we actually live, the wars have been a big factor impeding our ability to boost the economy and create jobs.
Robert Samuelson used his column today to dismiss the idea that the nation could be “war weary.” He correctly notes that a relatively small segment of the population has either served in recent wars or has close relatives who served. However his discussion of the costs is misleading.
He tells readers:
“From 2001 to 2012, federal spending totaled $33.3 trillion; the wars were 4 percent of that. Over the same period, the American economy produced $163 trillion of goods and services. War spending equaled nine-tenths of 1 percent of that.
“As important, no special tax was ever imposed to pay war costs. They were simply added to budget deficits, so that few, if any, Americans suffered a loss of income. It’s doubtful that much other government spending was crowded out by the wars.”
It is difficult to get a precise estimate of the cost of the wars over this period, but one simple approach would be to look at the path of defense spending. This had been 3.0 percent of GDP in 2000 and was trending downward. After 2001 it averaged more than 4.5 percent of GDP. This difference over 12 years comes to 18 percentage points of GDP or roughly $2.9 trillion in today’s economy. This calculation ignores the timing of the expenditures, but it should be sufficient for a ballpark number. It also excludes increased spending on veterans benefits that resulted from the wars.
As a practical matter, since the economy was well below full employment for most of this period, the wars would not have imposed much of an economic burden. They would have had roughly the same economic effect as paying people to dig holes and fill them up again.
However, we live in a country with deficit and debt fixations that are pushed by people like Robert Samuelson and his newspaper. These people have been yelling frantically about the need to contain spending and get deficits down. For a long time they warned about a boogeyman who would destroy the economy if the debt to GDP ratio exceeded 90 percent.
In this context the debt that we ran up as a result of the wars has been a very large burden. This debt has been a big weapon used by those who don’t want the government to take steps to stimulate the economy and put people back to work.
In short, if we were having a serious discussion about economic potentials, then Samuelson would be right that the wars have not posed much of a burden. However in the political world where we actually live, the wars have been a big factor impeding our ability to boost the economy and create jobs.
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