A warning about what is about to happen

Summary:  There is a desire in the hearts of many Americans for a crisis, a catharsis.  A big bang or fire that would purify America, razing the corrupt structures, allowing construction of a new America on the ruins.  This could have potentially serious effects.

I see a strong if hidden current of nihilism flowing in American society today.  I see it in some of the writings of the Tea Party, and in fringe financial websites like Zero Hedge.

While not textbook nihilism, it is a belief that the current structures of society are corrupt and deserve to be swept away.  Belief that a crisis, even a collapse, would provide a catharsis, purging society back to health.  The roots of this in Christian eschatology (see Wikipedia) are obvious, although a distortion (perhaps even antithetical) of traditional Christian theology.

It is a commonplace attitude arising before wars, especially wars following long periods of peace.  People raised in stable times sometimes yearn for excitement, ignorant of the consequences of crisis.  These people can become a hazard to society when they regard as despicable the normal mechanisms maintaining social stability:  expert opinion (they know!), recognition of complexity and uncertainty (they know!), negotiation, compromise, slow reform — even thought and reflection.

The price to society of their education can be high.  As I suspect we will soon learn, unless America has more luck than we deserve.

Two examples

Here are two examples of responsible people inciting panic.  Are these people lunatics?  Machiavellian planners?  Christians with a sublimated yearning for a secular apoclaypse?  Secure suburbanites unaware of the fragile walls separating civilization from barbarism?  Perhaps they want Republican power, and consider damage to the US economy as a trivial side-effect.  We can only guess, but the answer does not matter.  Only their actions matter.

(1)  A commonplace opinion on the right-wing fringes of the financial industry:

“the national debt should be defaulted on for several reasons.”
— Investment guru Doug Casey (source here)

(2)  A more serious example

Default Now, or Suffer a More Expensive Crisis Later“, Representative Ron Paul (R-TX), op-ed at Bloomberg News, 22 July 2011 — Excerpt:

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

… Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.

If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

… We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.

A few interesting points about this extraordinary statement.

(a) He’s inciting panic by exaggeration, for political purposes.   It’s an effective technique to lead sheep.

Most of that $200 trillion total liabilities represents future expenditures for health care, which results mostly from our dysfunctional health care system.  The primary obstacle to reform is the Republican Party.  Adoption of the mixed public-private systems used in Europe would eliminate most of that — with NO effect on health care outcomes.  Modest tax increases would close the remaining gap.  US taxes/GDP are far below the post-WWII average (when we had faster growth), and below that of most of our peers.

(b)  Representative Paul of the Tea Party appears to have forgotten section four of the 14th amendment to the US Constitution:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

As has been evident for many years, the Constitution no longer lives in the hearts of our leaders.  It functions as a loosely followed procedural guide, coordinating the power struggles of our elites.  Nothing more.  Beyond that it retains a ceremonial role for the public, and a fetish object object for some like the Tea Party (words which they repeat but no longer hear or feel).

For more information about the American spirit, the American mind

For a full listing see the FM Reference Page American – how can we reform it (section 2)

  1. America’s Most Dangerous Enemy, 1 March 2006
  2. Diagnosing the eagle, chapter IV – Alienation, 13 January 2008
  3. A great artist died today. We can gain inspiration from his words., 26 June 2009 — Michael Jackson
  4. Know thyself, America, 2 March 2010
  5. It’s a national emergency, so an opportunity to watch much of America get hysterical, 27 May 2010
  6. Matt Taibbi helps us see ourselves, and the leaders we elect to run America, 29 May 2010
  7. Pain and misery builds discipline!, 12 October 2010

20 thoughts on “A warning about what is about to happen

  1. If you mention the tax rates of Post WWII again with no mention of the massive US demographic shifts and worldwide economic competition (which did NOT exist after WWII) we currently face then you are a poorly informed. Fully 1/3 of our populace is now hispanic and black (with lower health, wealth and school performance). Life was easy with no competition and the social cohesion and high performance of a nearly all white country.

    Also, NOBODY paid those 90% upper ranges — there were massive amounts of deductions. Finally, you are VERY selective with your outrage (picking on one marginal politician and one website – whoa! it’s a phenomenon!). Give me 10 minutes and I’ll give you 10 examples of outrageousness on the left. Did some right-winger beat you up as a kid?
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    FM reply: You must be very young. At least I hope so, in which case there might be hope for you.

    “massive US demographic shifts ”
    There is no obvious or simple relationship. For example, Germany and the Scandinavians have worse demographics than the US, in many ways further along the age wave, but is by most measures doing better than the US — and with higher tax/gdp levels.

    “worldwide economic competition (which did NOT exist after WWII)”
    If you mean “in the post-WWII era”, you are mistaken. Look at Japan’s penetration of US markets in the 1970s and 1980s, one of many such examples.

    “Fully 1/3 of our populace is now hispanic and black (with lower health, wealth and school performance).”
    Why does that affect the level of taxes/gdp? Esp as our levels are below those of many poorer OECD nations.

    “Life was easy with no competition”
    It’s is difficult to determine if that statement is ignorant or callow. Or both.

    “the social cohesion and high performance of a nearly all white country.”
    Or racist. We’re discussing tax/gdp levels, not some imaginary past racist paradise.

    “NOBODY paid those 90% upper ranges — there were massive amounts of deductions.”
    This post discussed taxes/gdp, which are at the low end of thos post-WWII range. Not marginal income tax rates, which is a different subject.

    “you are VERY selective with your outrage”
    This is not a academic study. Writing for a general audience is a process of abstraction with selective evidence given as illustations, within a tight length constraint (Most internet posts are a few hundred words; this was 800 words. Readership drops off after a thousand words).

    “Give me 10 minutes and I’ll give you 10 examples of outrageousness on the left”
    I’ve cited dozens from the left, dealing with AGW. Nothing here said that there were substantial differences in such things between the Left and Right.

    “Did some right-winger beat you up as a kid?”
    Yes, probably very young. I was an active Republican for a quarter-century, probably when you were in diapers.

  2. Andrew,

    Nevertheless, the deficit facing the U.S. during WWII was larger then now, and there was no Tea Party then to complain about the ‘debt crisis.’ Ronald Reagan also catapulted U.S. debt to extraordinary levels for a peacetime President with virtually no repercussions.

    So what’s different now? Why is this particular debt (not the largest) so important to tackle? The answer has nothing to do with economics and everything to do with this article.

    There is a take-over occurring. A soft coup. The astro-turfed (not grass-roots) Tea Party movement are now calling the shots. They don’t need a mandate. They don’t need a majority. They just need to be willing to do what no party has dared to do in over 240 years of our republic: they need to be fearless about the complete collapse of America.
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    FM reply: I have a article in draft with much the same message. Patient investment by wealthy backers since the 1960s has paid off, organized as an “open source insurgency” — to use John Robb’s brilliant formulation. It’s a soft insurgency, ripping the Constitution (not that it has many defenders these days) in order to gain power and rollback much of the New Deal. Success is in sight for them.

  3. While I think your point has merit, aren’t you here guilty of the same scare mongering?
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    FM reply: Perhaps so. But a wide range of economic and financial experts share my fears. The experts I’ve cited during the past three years (e.g., Richard Koo of Nomura, Brad DeLong of Berkely, and Paul Krugman) have proven right throughout this rolling crisis (since 2007). As have my more modest forecasts. Let’s hope we’re all wrong now. Starting a recession with 9%+ unemployment and weak household balance sheets could be ugle.

    While markets are not reliable indicators of the future, they provide clues. US interest rates are in free fall, showing that bond investors expect (at best) severe slowing in the US economy. Asian markets are burning as I write this. I have no idea what this means (nor do the experts I’ve asked). It is, however, not a good sign.

    Also of concern are the riots Greece and now in London. While not serious yet, this is a bad time for social instability.

  4. J Hill offered: “There is a take-over occurring. A soft coup. The astro-turfed (not grass-roots) Tea Party movement are now calling the shots. They don’t need a mandate. They don’t need a majority. They just need to be willing to do what no party has dared to do in over 240 years of our republic: they need to be fearless about the complete collapse of America.”
    ………………………………

    It becomes more obvious as time compresses. The exaggerated Debt Level Crisis with the strong hyperbole revealed the desires of these people. No responsible person can sanction brinkmanship like we have seen. The self-destructive nature and the almost nihlistic fervor for a New Beginning are the ideas of an inexperienced, angry and almost unbalanced sort of character.
    One hopes some may pull back before….
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    FM reply: We can hope, which costs nothing — and accomplishes nothing. Their techniques work, and therefore will be used again. Also, success breeds success.

    For example, many naive people believed the news media had an inherent liberal bias (e.g, me). In fact, this was rather courtiers bowing before the ruling power. Now the center of political power shifts to the right, and the news media slowly shifts allegance to follow. They have already adopted much the Right’s terminology and worldview. Expect stronger support in the future.

  5. You are Fabius Maximus. What this country needs is its Scipio Africanus. Fabius was all about politics and conservation of the old – old way of doing things. It was not working to stop Hannibal and it is not working to solve the economic mess we are at now.

    Scipio was thinking outside the box and although was severely handicapped by Fabius (out of pure envy), won the war and saved Rome, setting it on a course to become an empire. This country and in fact the whole world needs its Economic-political Scipio Africanus and these people rise only in times of acute crisis. We are not there, we are at the point of impeding crisis. We will get there. Recommended reading ” Scipio Africanus – Greater than Napoleon” by B.H. Hart.
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    FM reply: That’s a provocative thought! From the About page:

    Fabius Maximus (280 – 203 BC) saved Rome from Hannibal by recognizing Rome’s weakness and therefore the need to conserve its strength. He turned from the easy path of macho “boldness” to the long, difficult task of rebuilding Rome’s power and greatness. His life holds profound lessons for 21st Century Americans.

    I fear that you are correct, and we will get an ambitious, aggressive general. The Gallup polls show that the military and police are the only institutions in which Americans have confidence. With Americans no longer willing to operate our current political machinery (the second Republic, based on the Constitution), the Third Republic might be some form of military-led plutocracy. Perhaps somewhat like that which followed the fall of the Roman Republic.

  6. Wow. Your reading of economic history is inept. The comparison of debt-to-GDP post WWII and present is meaningless. Society has more obligations today, public and private, fedral, state, and municipal, than post WWII. Nor did the Nation bear the annual cost of a military hegmony. Further,the US was the dominant industrial economy left standing, post WWII. We made things that people wanted. The nation produce far more than it consumed. It was this condition that led to the USD becoming the worlds reserve currency. Quite a different tale today.

    Today, US corporations profit largely overseas, and in fact, the ongoing decline in the value of the dollar is profittable to the bottom line. Back home, a majority of people are getting squeezed by the declining purchasing power, lower earning power, and the constant pressure for increased productivity. These people are losing their homes, while the banks losses are backed, and bonuses go out. These are the people that build, maintain, and service society. They are being squeezed, and the cost are not being born equally.

    So lets just say the majority are growing restless, and resistant to more government solutions, pitched by their experts, beneath a thinly veiled religious bigotry–the millenialist view point came by way of the Hebrews, and was birthed at the desert fringe of civilization; it is an attribute of civilization. And, please save that nonsense about a majority. The left does not have a majority. Nor does the right. The left and right have been swapping welfare programs between the social and security states.

    The Great Society went hand in hand with the escalation in Vietnam and the cozy arrangement remains in place today.Now someones come along to say no, and you try to paint them as religious extremes responsible for the political, social, and economic upheaveal we have been careening towards for a generation? Meanwhile, a committee of established players will determine matters of debt and reform outside democratic debate? Oh, you can vote…but we will determine what you vote on? what majority are you talking about?

    It is true that the religious are a threat to the Statist. For to submit to a power in the spiritual dimension undermines the States authority. It also transcends the social and political classifications upon which the State relies upon. And finally, submission to a spiritual power is an acceptance of ones condition. In fact, it is ones condition that enables salvation. The States claims to be bettering conditions are thus proven false.

    In the end, your assessment of nihilism strikes me as a blind groping for explaination with the pretense of intellectualism. The current social upheaval could be interpeted as cyclical. A winter like death gives way to a spring like rebirth and growth, leading to a summer like climax, giving way to a fall like disorganization, back to a winter like death. It is you who strikes me as the scare monger.
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    FM reply: Most of this is a fact-free rant, largely unrelated to the specific points made in this post (and others on the same point on the FM website). Let’s examine just the first paragraph.

    “The comparison of debt-to-GDP post WWII and present is meaningless.”

    First, this article DOES NOT even mention debt-gdp ratios. It discusses tax-gdp ratios, a very different thing. Please read more carefully before ranting.

    Second, statements like this are typical of psseudoscience (in this case, faux economics). While historical comparisons must be used with care, as circumstances vary, they are the building blocks to understand how basic economic factors work. In this case of tax/gdp levels (now 16%), both historical (ranging 17%-20% before the ruinous Bush tax cuts) and comparative (current US vs peers) shows that higher tax rates will not harm the economy — and might not even slow growth.

    “Society has more obligations today, public and private, fedral, state, and municipal, than post WWII.”
    Yes. What is your point?

    “Nor did the Nation bear the annual cost of a military hegmony.”
    Please open history book and read about the “Cold War”. Military spending/GDP was aprox 7% before the Vietnam buildup, peaked in the high 9%s, and (even with our global wars) is only 5% now.

    “Further,the US was the dominant industrial economy left standing, post WWII”
    Yes. How does this relate to anything in this post?

    “We made things that people wanted.”
    Your implication that we do not do so today is false. Exprts have grown faster than GDP since (at least) 1960. From memory, aprox 8-10%/year average — growing at 10-20%/year (its a volatile number. Exports are up 44% in the last five years.

    “It was this condition that led to the USD becoming the worlds reserve currency.”
    Yes, but so what. Reserve currency status is often called a “poisoned chalice”, tempting but destructive. You can look up the reason, and would learn much from doing so.

    So many errors in just the first paragraph! I could continue, but I doubt you will learning anything from the exercise. Only a radical change of reading sources (turn off the TV!) can save you.

  7. As others have noted, the vast bulk of America’s putative future fiscal obligations trace back to our 2.2 trillion dollars per year of medical-industrial spending + our roughly 1.2 trillion dollars per year of military-industrial spending (broadly defined to include the CIA, NSA, NRO, military retirements, the VA, DHS, and so forth).

    Both these rates of expenditure are easy to reduce.

    As FM pointed out, the rest of the developed world spends at a per capita rate of roughly 50% what America spends for medical care — and the rest of the world gets better results for it. Putting America’s medical-industrial complex on a financial diet isn’t a big mystery. We know how to do it. Pay American doctors what doctors in France or Germany or the Netherlands make relative to their GDP (which respresents a pay cut of roughly 50%), shut down the current system of fee-for-service system run exclusively by privatized for-profit businesses and substitute nationalized non-profit medical care, and so on. An MRI in France using the exact same machine costs $150: an MRI in America costs between $1800 and $3500, depending where and how you get it. It’s simple to reduce the cost of U.S. medical care. We have a model used successfully by the rest of the developed world. it’s simply a case of too many parasites making too much money off a grossly wasteful and corrupt system to wean ourselves off it.

    Corruption and collusion play a crucial part in inflating American medical costs. Medical devicemakers bribe hospitals to use their wildly overpriced equipment: google “bribery scandal medical devicemakers” for a peek at the rotting underbelly of the medical-industrial complex. Doctors take kickbacks from big pharma to prescribe wildly overpriced patented drugs instead of far cheaper generics. Hospitals sign sweetheart non-disclosure contracts with devicemakers and big pharma and insurance companies to make sure no one can find out hospitals’ actual costs, so that other players can’t determine the pricing to compete. Doctors set up private imaging clinics and blood test labs which wildly overcharge hospitals for simple scans and tests. Health insurance companies divvy up geographic territories to enforce anti-competitive cartels, so that it’s literally impossible to find more than one health insurer in many parts of the country. This isn’t just waste. It’s corruption, collusion, bribery, restraint of trade, and rent-seeking by cartels operating monopolies in violation of various anti-trust laws. The reason the DOJ doesn’t unleash its antitrust division against American medical-industrial corruption is that there’s too much corruption and collusion — the entire system depends on collusive non-disclosure agreements and kickbacks and restraint of trade to function. if the DOJ were to shut down the parts of the U.S. medical-industrial complex which depend on bribery or collusion or corrupt conflict of interest to function, it would have to shut down the entire U.S. medical industry.

    As for the U.S. military, stories like “Pentagon’s lightning gun sold for scraps on eBay” represent the rule rather than the exception. If America reduced its military spending to merely half what the rest of the world put together spends, we could cut our annual deficit to nearly zero tomorrow. (I.e., reduce American military spending by 1 trillion of the 1.2 trillion dollars per annum. Putting 1 trillion dollars per year into servicing our debt would soon reduce our debt service costs to zero from the current half a trillion dollars per year. It is no exaggeration to say that America’s entire annual deficit is accounted for by two line items: pointless counterproductive U.S. military spending + debt service.)

    The real key to drastically reducing American military spending involves the simplest “fix” of all. Simply change the American lust for death and destruction. All we have to do is stop getting involved in endless unwinnable wars that accomplish nothing.

    There are currently less than 100 Al Qaeda fighters in Afghanistan. Al Qaeda was never present in any significant numbers in Iraq: as far as anyone could tell, there was never any sensible reason to invade Iraq in 2003 at all. America has no real enemies in today’s world. (North Korea is an impoverished sinkhole full of starving people and presents no realistic threat to anyone.) China depends on America for so much of its economy that it would be absurd for China to attack us. (And vice versa, of course.)

    America simply doesn’t need to run around the world blowing up brown people. There’s no reason for it. We can stop it tomorrow simply by refusing to burn brown babies — a win-win scenario, because by doing so we will stop creating more terrorists, as Andrew J. Bacevich and William S. Lind and Martin van Creveld have pointed out.

    As Stephen Pinker has remarked, global violence has dropped exponentially over the last few centuries and continues to plummet. Ramping up America’s already bizarre level of military spending in a world which is growing exponentially more peaceful is behavior which verges on the hallucinatory.

    Unlike previous eras where America faced the Nazis or the Soviet Union, our problems today are largely of our own making. (We didn’t create the Nazi Party or the Bolsheviks, but today we are creating our unsustainable deficit and creating virulent hatred for America worldwide wholly because of bad decisions we ourselves have made. From America’s crumbling infrastructure to our degenerating K-12 education system to the 45,000 people who die every year from lack of access to adequate medical care to the terrorists who strap on suicide bombs because some CIA drone pilot accidentally killed their family’s wedding party by mistake in Pakistan, these are all the results of decisions America has made.) The good news? We can as a result fix America’s problems today quickly and easily — by stopping the unwise behavior and bad decisions that are creating our problems. It’s not even difficult. France and Germany and Japan show that we can drastically cut U.S. medical costs while improving health outcomes. We can do the same for American military spending.

    Contrary to previous historical periods in which America faced intractable foes, today we face only our own unwillingness to change. That’s a solvable problem. The only mystery today is why we haven’t yet decided to solve it.

  8. Hi Fabius. One comment I would like to make, is that I have seen you mention Paul Krugman in several posts as an economic expert, but personally I’m not really sure what you see in him. In every general audience piece I’ve read of his, from his Times column to books, he has the same demagogic bent, exagerrating his pet assertions with no evidence, and ignoring all nuance– a fitting tone for a mere hack columnist, not an economist.

    One economic fact which may interest you: empirically, no government-spending GDP multiplier effect has ever been detected. The highest empirically-detected multiplier effects have been in the low decimals barely over 1. Even Obama’s economic advisors predicted no higher than a 1.5x multiplier for the 2009 stimulus, and it is difficult to tell for sure if even that panned out. If you think I’m being fanciful and fact-free on this point, please point me to empirical economic research that would prove me wrong.

    Also, while it is all well and good to be against banking and medical industry corruption, there are a number of different ways to look at the phenomenon. I think it is a solidly defensible point empirically that a critical enabler of the kind of centralized corruption and abuses we see currently is the existence of centralized political power with un-checked regulatory scope. Size alone would not make any of these cartels unassailable if they didn’t have the power to change the rules in their favor. The solution that you and other posters advocate is a sensible one– take ownership of the regulation and make it work. This is a solution that has had some success in European countries.

    But there are a number of ways that the United States is different from successfully-regulated European countries. One is size, both in population and geography. Another is diversity– ethnic, political, and geographical/economic. One state which has pulled off successful centrally-driven regulation in spite of similar or greater scale and diversity is China– but few in America are attracted to China’s high levels of repression and (tightly policed) social/political instability.

    While it is certainly not possible to turn back the clock to a simpler time, there are many who advocate some degree of federalism and principled regulatory restraint as a solution that may work better for America, as she is. This, I think, is the viewpoint that you are denigrating.

    Some might say, for instance, that the hope that America’s medical problems could be fixed by a European-style national healthcare system are utopian and foolish.

    FM reply: You raise several important points beyond the scope of good reply in comments. So, in brief…

    I know many economists, some quite famous. They all rate Krugman quite highly, even when they disagree with him (there is wide agreement on the basic economics he discusses in his NYT blog; there is wide disagreement among economists on more advanced topics). The people who mock him tend to know little about economics, tend to consider it somewhat like a cross between the Bible and arithmetic, and would find incomprehensible any professional discussion of economics. Like many top experts, he may have more than his share of personal flaws.

    “empirically, no government-spending GDP multiplier effect has ever been detected”

    That’s a gross overstatement.
    * It is misleading. There is no one multiplier for “government spending”. Different spending has different multipliers. Social net spending by most accounts has a high multiplier; the multiplier of tax cuts is on the other end of the range.
    * It is false. There are many papers showing high multipiers; there are many showing low multipiers (but few showing below one for circumstances like ours). This kind of attribution analysis is complex and difficult — hence the widely varying estimates of multipliers (I have cited several papers on this subject). Also, multipliers vary according to the economic situation (e.g., the depth and nature of the recession, the financial and social structure of that economy).
    * It misses the point. The primary reason for multipliers, IMO, is to stablize the ecoomy. To use a metaphor, it’s first aid: plasma, morphine, and bandages. Saying first aid should not applied because it cures nothing is insane. It stabilizes the economy, allowing further treatment and natural healing. Overselling the effect of contra-cycle action (misleadingly called “stimulus”) was IMO a major mistake. It was well-meant, intended to increase confidence – like doctors reassure children that the magic pill will cure them.
    * An equally strong reason for increased spending is that a recession allows the government to do valuable infrastructure projects (new and upkeep) cheaply (e.g., with unemployed construction workers), funded with debt borrowed at near-zero real rates. That’s important, since the US infrastructure is rapidly decaying (esp after local spending cuts during the past 4 years). Otherwise we’ll do this during a boom, at higher costs, borrowing at far higher rates.

    For more about this see Economists discuss the impact of the stimulus on our recession, with quotes from leading economists (including Republican advisors) who disagree with you. Esp note the links to papers given in Section 2.

    A few papers from the large literature on the subject:
    * The basis for the 2nd round stimulus programs (after Bush Jr’s in 2008): “THE MACROECONOMIC EFFECTS OF TAX CHANGES: ESTIMATES BASED ON A NEW MEASURE OF FISCAL SHOCKS“, Christina D. Romer and David H. Romer (Profs Economics at Berkeley), March 2007
    * More recently: “How Big (Small?) are Fiscal Mutlipliers?”, , National Bureau of Economic Research, 17 June 2011

    “the hope that America’s medical problems could be fixed by a European-style national healthcare system are utopian and foolish.”

    This is too silly an exaggeration to deserve reply. Those nations are structurally similar to us, and I have seen no expert work explaining why (for example) the mixed public-private systems of France and Germany would not work here — and much better than our mixed public-private system (in which the government funds almost half of health care spending). To describe such a thing as “utopian and foolish” is taking American exceptualism to a crazy extent. Saying such things works as propaganda, however, to people who know nothing but the lies they’re told about Euro health care.

    “The Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.”
    — attributed to Winston Churchill

  9. Hi Fabius,

    Sorry if I was out of scope with my previous reply. As long as we’re on the topic, I would like to make another brief comment on multipliers. Some facts about the US economy:

    – The US dollar has a flexible exchange rate.
    – The US is open to trade.
    – The US debt-to-GDP ratio is currently somewhere around 100% (according to here and here)

    From the NBER paper you provided (this one):

    Economies operating under predetermined exchange rate regimes have long-run multipliers that are larger than one in some speci…cations, but economies with flexible exchange rate regimes have essentially zero multipliers.

    The multiplier in open economies is negative and significantly lower than zero both on impact and in the long run. During episodes where the outstanding debt of the central government was high (ex-ceeding 60 percent of GDP) the fiscal multiplier was not statistically different from zero on impact and was negative (and statistically di¤erent from zero) in the long run.

    (I’m pretty sure “fiscal multiplier” in this case means government expenditure in general, without differentiating between government consumption and government investment.)
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    FM reply: You did nothing needing an apology. It’s nothing personal; this is how the FM website works. Let’s take this in two parts. Before that, I recommend reading to get a basic understanding of the topic. This short article by The Economist is a good start.

    Your facts are accurate, but you are probably drawing the wrong conclusions from them:.
    * That the “US has a flexible exhcange rate” is only more or less true. As the reserve currency many nations (esp emerging nations, like China) peg to it. Which is why the USD has responded so slowly to its obvious overvaluation (btw, despite conservative doctrine, overvaluation is a bad thing — one factor wrecking the British Empire after WWI).
    * The US is formally open to trade but, due to structural factors, the cost of imports is only 7.3% of consumer spending (source: Fed article), tiny compared to (for example) Germany or Greece.
    * The relevant national debt is not gross debt but net debt (excluding intragovernmental loans). Write yourself a billion dollar check — you are bankrupt! Net debt as of today is almost $10 trillion, aprox 2/3 of GDP.
    * The ability of the US to borrow is, for various reasons, far greater than that of most nations (e.g., Greece, Turkey).

    Similarly, you may be drawing the wrong conclusions from the NBER paper (it’s easy to get wrong since these things are complex). The authors show a wide range of multipliers depending on the local situation. Under situations similar to those of the US today they show multipliers of aprox 1.5, which is the number used by the Council of Economic Advisors under Obama (perhaps under Bush Jr as well; I have not checked).

    See this explanation by Menzie Chinn (Prof Economics, U WI Madison); his summary:

    Is the US a small country with monetary authorities actively moving interest rates in order to respond to fiscal impulse; or is it better characterized as a large, relatively closed, economy with short interest rates at near zero. Then consider which {of the paper’s} results apply.

    … What I take from these papers’ empirical results is that the proposition that multipliers are positive and (for government consumption and/or investment) in excess of unity, for conditions most applicable to the US. This characterization is in line with my many earlier posts on teh subject of multipliers, are are collected here.

    For more about this subject
    (1) “Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy“, posted at the IMF website, 20 May 2011
    (2) Assessing the Stimulus and Its Aftermath, Menzie Chinn (Prof Economics, U WI – Madison, 20 July 2011

  10. Thanks for the additional reading material. I also found this study, evidently released about the same time as Ilzetski et al, to be quite interesting. A quote:

    If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940. Interest rates were near the zero bound, and unemployment rates never fell below 10% and there was ample idle capacity. We develop an annual panel data set for the 48 states from 1930 through 1940 with evidence on federal government grants, loans, and tax collections and a variety of measures of economic activity. Using panel data methods we estimate a multiplier, defined as the change in per capita economic activity in response to an additional dollar per capita of federal funds. The state per capita personal income multiplier with respect to per capita federal grants was around 1.1. Some point estimates for multipliers for nontransfer grants and nonfarm grants were higher but not statistically significantly different from one. There is some evidence that AAA farm grants had negative or no effect on personal income. Federal grants had stronger effects on consumption than on personal income, but they had no positive effect on various measures of private employment.

    See table 3.

    So is the existence/size of fiscal multipliers really a settled issue, or is it an area where there are still serious limitations to our level of knowledge? If I understand correctly, Chinn is using the results of the Ilzetski et al paper to extrapolate that the US would have a multiplier of about 1.5 based on its categorical memberships; and Fishback and Kachanovskaya go looking for it in a specific period in US history where it should be large according to most interpretations of the Keynesian model, and empirically demonstrate a figure on the small side. Chinn rightly points out that the second study uses per capita income (the only one for which data was available) as a dependent variable, and suggests that the coefficients on the growth rate may actually point in the direction of a higher multiplier– which is all good and well for educated speculation, but where’s the beef? Not to say that there isn’t any beef to be found… but if we haven’t quite found it yet, shouldn’t we acknowledge the uncertainty?

    One point of agreement in the two papers’ implications is that multipliers in the US are positive, and can be be greater than 1.

    Fishback and Kachanovskaya
    Chinn’s review
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    FM Reply: I think we can end this now.

    (1) Most of your questions are answered in a post I cited earlier: Economists discuss the impact of the stimulus on our recession, with quotes from leading economists (including Republican advisors). Esp note the links to papers given in Section 2.

    (2) Let’s return to your original statement: “If you think I’m being fanciful and fact-free on this point, please point me to empirical economic research that would prove me wrong.” I have done so, citing several papers from a variety of sources (with links to articles citing still more research).

    (3) I think we can draw some conclusions (tentative) and end this thread.
    * Economics is a field of limited utility, and knowledge of it not a requirement to be a good citizen. If you are interested in it, I suspect you would be better off looking at introductory economics texts before reading technical articles. You do not appear to have grasped the points I’ve made in the previous comments (i.e., you’ve ignored them entirely) or the content of the articles.
    * You might reflect on the sources of information you rely upon for information in these matters. Guessing from this brief discussion, they appear to have substantially misled you.
    * An apology to Krugman seems in order. IMO you do not have sufficient understanding of this field to have leveled such criticisms of him.

  11. I actually think I’ll stick by my original statements, thank you. From the articles you have provided, we have shown:

    (1) The 1.5X multiplier is extrapolated, not empirically demonstrated.
    (2) The most recent attempts to empirically verify the size of fiscal multipliers have been mixed, leaving the question wide open for differing opinions and debate.

    Which, of course, is all I said originally. I happen to have an undergraduate degree in economics which included a number of intermediate theoretical courses and some econometrics, and none of my professors ever expressed such certainty about the true nature of fiscal multipliers as you have.

    My misgivings about Paul Krugman were expressed in very moderate terms, and are direct paraphrases from my professors, including one who assigned us readings from both Krugman’s general audience and technical work.

    But this shouldn’t be about me. This should be about the state of the evidence on the question at hand. We have looked at the sources you provided and seen that though there is one camp of academics who interpret the evidence in one direction (which could quite possibly be correct), the evidence itself is not complete, and dissenting academic interpretations abound.
    .
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    FM reply: My conclusions were empirical, based on your frequent incorrect factual statement and repeated misrepresentation of the articles in question. For example …

    “The 1.5X multiplier is extrapolated, not empirically demonstrated. … but if we haven’t quite found it yet, shouldn’t we acknowledge the uncertainty?”
    Wrong in several ways. Briefly:
    * Several of the articles estimated multipliers based on historical evidence, hence were empirical (as in “by observation or experience rather than theory or pure logic”). To call them extrapolations misrepresents them.
    * Most of the articles discussed the uncertainty and variablility of multipliers, having text like “Nevertheless, the uncertainty regarding those estimates remains high. Several economists remain skeptical that fiscal multipliers–whether from spending or taxes–are very large (see, for instance, Barro 2009). Moreover historical relationships may prove much less reliable during this downturn.” (source: Fed letter I mentioned below).

    “and none of my professors ever expressed such certainty about the true nature of fiscal multipliers as you have.”
    Grosssly false (try using quotes as a basis for such things, as I do). First, I’ve quoted economists on both sides of the debate. My few direct statements expressed that, such as “There are many papers showing high multipiers; there are many showing low multipiers.” Third, although Second, my reason for supporting fiscal stimulus applies for multipliers of one or even less.

    “are direct paraphrases from my professors”
    First, you gave this as your own analysis — hence my statement that “you do not have sufficient understanding of this field to have leveled such criticisms of him.” Second, I doubt many economics professors would make such a sweeping statement as “In every general audience piece I’ve read of his … exagerrating his pet assertions with no evidence, and ignoring all nuance– a fitting tone for a mere hack columnist, not an economist.” Most (not all) of his NYT articles in the past few years have been basic economics.

    “I actually think I’ll stick by my original statements”

    Of course you will; most of us knew that from the start.

    Your broad and confident original statement was: “empirically, no government-spending GDP multiplier effect has ever been detected. … to empirical economic research that would prove me wrong.” I have done so, pointing to many articles examinging the historical data to determine the size of the multipliers and the circumstances underwhich they vary. Those articles, plus other statements I quote by both liberal and conservative economists, show a clear consensus that under circumstances like our well-designed measures have multipliers above one.

    In response you have misrepresented what these articles say, given incorrect facts as support, ignored what I’ve written in response, and attributed to me stuff you’ve made up. This is a common MO of conservatives discussing economics on this website; it’s faith-based faux economics. And of liberals discussing global warming (aka CD, AGW or CGW), faith-based science. My guess is that this dogmatism reflects something at work in modern American society, and may play a significant role in our broken OODA loop (observation-orientation-decision-action loop).

  12. First time reading ur blog. You come across as a condescending and arrogant jerk. Won’t be back
    .
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    FM reply: I thank Stan for sharing. First, Stan is late to the party. Most of the 16 thousand comments on this website are critical (despite their rather high accuracy, looking back). Everything he says has been said before (probably all correctly), and in more entertaining fashion. See here for samples.

    Second why does Stan believe that anyone cares? He offers no explanation or analysis. This is not grade school, where teachers love to read how he feels about dogs and his summer vacation. That’s another of the cruel truths that are the special providence of the FM website.

  13. I’m an American and I spent years in global finance. I find you assessment that Zero Hedge is some kind of fringe outfit looking for a puritan release, naive.

    There are very few willing to see the serious flaws of the American, and by extension global financial system, let alone recognize them for the ponzi that they are.

    The term rip-off banking is a polite term that is appropriate by any measure of objective assessment of the TBTF. The only people who seem not to realize this are either totally oblivious of the issue or entrenched in the system. The problem is that no amount of polite speeches hoping for change will be enough to get the job done. This has already been demonstrated by the toothless legislation passed last year, which is now in the process of being lobbied to death.

    Sorry, don’t look for some kind of spiritual profundity when taxpayers and voters get very angry. The religious quacks and tea party nut cases you read about are a small but well financed.
    .
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    FM reply: I don’t know what “naive” or “spiritual profundity” mean in this context. Reading the original content of Zero Hedge (and some of the material they repost) provides ample evidence supporting my statement that they see “the current structures of society are corrupt and deserve to be swept away. Belief that a crisis, even a collapse, would provide a catharsis, purging society back to health.” Cheerleaders of the apocalypse. Plus, as I have shown elsewhere, they frequently hype baseless rumors (every carrier reflief becomes an imminent attack on Iran, plus every puff from volcanos warns of erruptions) and misrepresent data (e.g., confuse seasonally adjusted and non-SA data).

    We need not rely on fringe analysis, as there is so much excellent analysis easily available about our system’s problems. To name a few, read Paul Krugman on the pages of the New York Times (and in his books), Michael Lewis on the screens of Bloomberg (and in his books), and Matt Taibbi at Rolling Stone. Other voices can be found at Roubini Global Economics, FireDogLake, and Naked Capitalism. We need sound insight, not cheap rabble rousing.

    “spiritual profundity when taxpayers and voters get very angry”

    Anger is a bad master. I suggest you read some of the posts about anger on this website before joining in a movement that could easily wreck American in righteous anger.
    * Now is the time for America to get angry, 24 March 2009
    * An important article which every American should read, 1 January 2009
    * Re-envisioning the FM website, becoming soldiers in the war for American’s future

  14. S ..p…q….R…. gibbon? Roma declinded due to hi taxes, debased coinage, laws trying to limit interest rates (Casesar 8% max), requiring ppl to follow occupation of father, etc.

    1. We lack the social science tools to say why Rome declined, other than make lists of possible factors. There are many causes beyond the bad public policies you mention. Such as lead poisoning and low fertility. The relative importance of each is as yet impossible to determine. Note that the real qustion is not why it died, but why the Empire lasted so long: from 44 bc to 476 ad (to use the standard it somewhat arbitrary dates). As Queen Gertrude says to Hamlet (Act I, scene 2):

      Good Hamlet, cast thy nighted colour off,
      And let thine eye look like a friend on Denmark.
      Do not for ever with thy vailed lids
      Seek for thy noble father in the dust:
      Thou know’st ’tis common;
      all that lives must die,
      Passing through nature to eternity.

  15. Fabuloso Maxim,
    First time here – fabulously interesting blog. Is your decimation of the GOP support for the Democrat’s platform?
    TIA

  16. I can understand what you are saying Fabius. Of course I have no idea what you do for a living or how much you make, but assuming you make a pretty stable – if that’s the right word – amount, most would expect you to despise this thought of collapse followed by rejuvenation. Don’t get me wrong, it is a horrible thought and a horrible way for things to end, even for those who look forward to it. But then when you see what poverty does all around you – the opportunities it crushes, and the perpetuation of it through our current policies – you begin to understand that things are only going to get worse for these people unless a miraculously rapid systemic change occurs that helps the impoverished. Can you honestly see this happening without a collapse of some sort by now?

    I am not advocating that collapse is a good thing. It would bring tremendous suffering and, I can only assume, death. I personally would like to see the American people as a whole become better educated and better informed in order to make the right decisions that will incite positive change.

    So I guess my argument is that people are not actually hoping for a crisis, but instead, are hoping for equality and fairness. And since everytime they look they see massive inequality and injustice they begin to care less about where America ends up; not that they want a crisis. I believe most people know what a crisis would entail and nobody wants that, but for this ponzi scheme to keep running like it is there’s no incentive (or for many, even opportunity) to contribute when it all goes to the elites anyway.

    One question I ask myself almost everyday is: What the hell is going on!?………help me out.

    1. All great points. Thanks for posting! Here are some thoughts in reply.

      (1) “Can you honestly see this happening without a collapse of some sort by now?”
      Good question. I have no idea what comes next, or after that. Too many scenarios.

      (2) “I personally would like to see the American people as a whole become better educated and better informed in order to make the right decisions that will incite positive change.”

      Agreed. But the US evolving into a stable plutocracy seems more likely, and far more likely than collapse.

      (3) “So I guess my argument is that people are not actually hoping for a crisis, but instead, are hoping for equality and fairness.”

      Why is the most difficult of questions, about which we can only guess. My guess is that the doomsterism is an emotional reaction, unconnected to any vision or goal for the future. Much like the lust for war in the American south in 1860, and 1914 Europe.

      (4) “And since everytime they look they see massive inequality and injustice they”

      Perhaps so, but I wonder if instead most American prefer NOT to see what’s happening.

      (5) “What the hell is going on!?”

      I wish I knew. Many of the articles on the FM website seek answers to that question. Suggestions welcomed!

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