Does Krugman Know How to Balance a Checkbook?
For a while now, it has been clear that Krugman becomes the anti-economist during a liquidity trap. In this strange alternative universe, government projects coming in under budget are bad, protectionism can be good, imposing costly new mandates on business can jumpstart the economy, and a sudden decision by China to invest in euros instead of Treasury debt can make Americans richer at the expense of Europe.
Yet Krugman has outdone even himself in this latest gem:
Of all the things to worry about in today’s world, the prospect of Social Security shortfalls several decades from now doesn’t rank high on the list. But there’s a whole generation of Very Serious People who think that worrying about entitlements is how they demonstrate their seriousness — while, say, worrying about climate change is hippy-dippy. Indeed, we find the same people who declare that to show how responsible we are we must do something about Social Security RIGHT NOW declaring that saving the planet is, you know, expensive, so let’s not.
If you’re like me, you have to calm down after the completely unnecessary “you know,” intended to convey just how incredibly stupid and shallow Krugman’s opponents are.
Stripped to its essence, I believe the following is what Krugman is saying:
(A) Some people are worried that we’re going to go broke trying to pay for Social Security, so we’d better scale back our spending or increase its funding.
(B) These same people are saying we don’t have the money to spare right now to throw trillions over the next few decades into a completely new program that won’t start paying for itself until after 2075 or so.
(C) What a bunch of morons! How could anybody simultaneously believe (A) and (B)?
Pushing the Analysis Deeper on Social Security
I have been feeling quite smug the last few years, since I knew that the projections of the date at which Social Security “runs out of money” were wildly optimistic. The latest projection is 2036, but that relies on the mythical “trust fund.” The true crisis point occurs much earlier, when payroll taxes put in less money in a given year than Social Security recipients are due in payouts. At that point, the Social Security Administrator has to start drawing down the “trust fund,” which of course is nothing but a pile of IOUs from the Treasury. Thus, taken as a whole, the federal government will have a higher deficit (because of Social Security) starting at that much earlier date, which the latest forecast puts at 2016–a mere seven years away!
But Robert Wenzel does me one better. The actual crunch is already underway, because the annual surpluses from Social Security are shrinking. (We know that they are projected to fully shrink to zero by 2016.) In a sense, it’s as if the Social Security program were a separate country that ran enormous trade surpluses with the US every year since the 1930s, and used the proceeds to invest in US Treasurys. But now–just like China–that country is backing away from purchasing ever more federal debt. Other things equal, as the net additions to the trust fund continue to shrink over the next seven years, the pressure will increase on US interest rates.
If you keep going cross-eyed with he Social Security / Treasury distinction, just drop all of that and realize that the government has a certain flow of revenue coming in, due to both income taxation as well as Social Security taxes, er, contributions. On top of that, the government has a certain flow of spending that it has already committed itself to, in the form of Social Security (and Medicare etc.) payments. As the years pass, the promised flow of payments is rising more quickly than the automatic flow of revenues. Hence, other things equal, the federal budget deficit will rise because of these demographic shifts.
I’ll conclude by quoting Wenzel:
Currently, Social Security buys approximately 25% all Treasury securities issued. Who is going to make up for that shortfall, especially since Social Security will not only stop buying, but will be a net liquidator? It’s not going to be the other major Treasury security player, the Chinese. They are trying to slow their purchases now. So in addition to the Social Security and Medicare crisis for the elderly, this funding crisis will have a major impact on Treasury funding above the 81% increase in Social Security and Medicare that Bartlett has identified.
That light you see at the end of the tunnel is a train heading toward us, soon you will hear it roar.
Awkward Thoughts on Memorial Day
Yesterday in church I was very uncomfortable. Because it was Memorial Day weekend, and because I am in a pretty conservative area (replete with McCain-Palin and “Nobama” bumper stickers), it was not surprising when the pastor took several minutes to talk about military veterans. I am truly not trying to rile up those who think it entirely appropriate to shower praise on people who fought in various wars, but even so I think it is a very dangerous custom we have in this country.
The first thing that struck me as very odd was the video they showed after the “praise and worship” (i.e. the music in the opening) was over. It had a picture of a fluttering American flag and the words scrolled on the screen to tell us that since 1775, some 1.3 million American soldiers had made the ultimate sacrifice for…(pause)…freedom.
But hang on a second. That number includes the military deaths from both sides of the Civil War (or the War Between the States as many prefer to call it). If you want to say 1.3 million Americans made the ultimate sacrifice because they all thought they were fighting for freedom, OK that’s more sensible. But it really doesn’t make sense to me, to say that both sides of the Civil War were in fact fighting for freedom. When I was in college and had a bunch of free time, I think I dreamed up some scenarios in which you could have two sides of a huge war both be objectively “in the right.” But that clearly wasn’t what happened in the United States from 1861-1865. You can argue easily enough that both sides were wrong in a given war (or the Civil War in particular), but it’s very hard to say both sides were right.
Then the true awkwardness began. The pastor started by asking if anyone in the congregation had served in the war in Afghanistan or Iraq, and a few guys stood up and everyone of course started clapping. But I couldn’t do it, because (a) I was reminded that contrary to the pastor’s usage and plain common sense, we technically are not “at war” with anybody right now, nor have we been since 1945, and (b) the official reason given for the invasion of Iraq turned out to be, at best, a gigantic string of mistakes, and at worst, outright lies by our political leaders.
I am not going to hold it against an 18-year-old who signed up for the Army and then doesn’t desert his buddies even when (in my opinion) it becomes clear that the institution he is serving is being led either by fools or liars. In fact, alongside with Iraqi civilians who have been killed, I think young American soldiers are among the biggest victims of the deception by our political elite regarding Iraq. Yet even so, I’m not going to clap for the people who participated in a struggle of which Pat Tillman commented, “This war is so f—ing illegal.” (I am not here getting into the distinction between Afghanistan and Iraq.)
Those who know me personally, know that I am the furthest thing from confrontational. I was not trying to “make a statement” by refraining from applauding, and in fact I did my best to be “looking around” at all the people standing up so that at worst it would simply look as if I were lazy or spacey. And I must admit that I finally did break down and start clapping when the pastor got to World War II, and one or two real old timers slowly stood up. But for those guys, most of us were clapping just because hey, good job for making it out to church and standing up on your own power! (Also, at least a United States base–not part of the actual country, mind you–was attacked before millions of Americans started killing and dying in World War II.)
It is no coincidence that we have all been trained since birth to pay the utmost homage to people who died while carrying out the government’s orders to kill other human beings. Yes, ultimately it is the politicians who decide whether to deploy US forces in a truly defensive way, or whether to instead implement what is, for all intents and purposes, a global American empire. The politicians will never relinquish that tool on their own, unless the American public stops blessing it with cheers and tears, and unless millions of young American men (and now women) stop volunteering to kill for the government.
One last point in this Memorial Day essay: Look at the relative amounts of military expenditures by various world powers. Isn’t it just possible that, in addition to the thousand-and-one other things about which you know perfectly well that the politicians have lied to you, that they are lying too about the purpose of the American war machine? You know full well that the government squanders hundreds of billions annually on education and social programs, and it doesn’t even achieve its ostensible goals with such profligacy. When 19 guys with box cutters can take down the Twin Towers and hit the Pentagon, at what point do Americans stop reflexively “supporting the troops”?
Correcting Quiggan on Austrian Business Cycle Theory
In today’s Mises Daily I defend Austria from the Australian. An excerpt:
I am not here to tell you the Mises-Hayek theory of the business cycle is a work of art that has no flaws. If I said that, then I would be living up to Quiggin’s caricature. What I will say is that the Austrian explanation of the boom-bust cycle makes more sense than any other explanation I’ve seen. In particular, most rival schools of thought say that the way to fix an economy plagued by overconsumption and reckless lending is to have the government borrow obscene amounts of money and to have politicians take over financial accounting. And it’s the Austrians who allegedly cling to dogma in the face of overwhelming counterevidence?
UPDATE: Quiggan responds on the Mises blog; I give a half-serious answer.
The Smugness of a Liberal
Sometimes I really am just taken aback by Paul Krugman’s condescension. Look at this, from a post called “Gratuitous Ignorance”:
The PEN/New York Review panel discussion on the economy is online. I’ll outsource the discussion of what went down to Brad DeLong. Just this to add: it’s bad enough to have people resurrecting 75-year old fallacies about macroeconomics right in the middle of a crisis in which knowledge is our only defense against catastrophe. What’s really bad, however, is when they do so believing that these fallacies are deep insights that have somehow eluded those of us who have, you know, been studying these issues for a while, and saw some (not all) of this crisis in advance.
If you follow the link, you see that Krugman is referring to a panel discussion in which he was a participant. So he’s not talking about random people here, he’s talking about people he just had a discussion with! (Someone correct me if I’m misunderstanding what happened.)
I think I need to stop this post now, lest I venture into hypocrisy.
An Amazing Chapter from Deuteronomy
In my (intended) nightly reading of a Bible chapter, I was paying extra special attention to the book Deuteronomy. When Jesus was tempted by Satan, His defense consisted of quoting scripture. And every single quotation came from Deuteronomy! (What’s really interesting is that the Devil uses scripture too, by quoting from Psalms.) So if (the person I believe was) the Lord incarnate faces off against the Devil himself, and goes into battle armed with just His knowledge of one book…it seems like a good idea to familiarize myself with that book!
Anyway, there certainly were some very powerful passages in Deuteronomy. However, Chapter 30 really jumped out at me. But in particular check it out starting at verse 11:
11 “For this commandment which I command you today is not too mysterious for you, nor is it far off. 12 It is not in heaven, that you should say, ‘Who will ascend into heaven for us and bring it to us, that we may hear it and do it?’ 13 Nor is it beyond the sea, that you should say, ‘Who will go over the sea for us and bring it to us, that we may hear it and do it?’ 14 But the word is very near you, in your mouth and in your heart, that you may do it.
15 “See, I have set before you today life and good, death and evil, 16 in that I command you today to love the LORD your God, to walk in His ways, and to keep His commandments, His statutes, and His judgments, that you may live and multiply; and the LORD your God will bless you in the land which you go to possess. 17 But if your heart turns away so that you do not hear, and are drawn away, and worship other gods and serve them, 18 I announce to you today that you shall surely perish; you shall not prolong your days in the land which you cross over the Jordan to go in and possess. 19 I call heaven and earth as witnesses today against you, that I have set before you life and death, blessing and cursing; therefore choose life, that both you and your descendants may live; 20 that you may love the LORD your God, that you may obey His voice, and that you may cling to Him, for He is your life and the length of your days; and that you may dwell in the land which the LORD swore to your fathers, to Abraham, Isaac, and Jacob, to give them.”
I don’t have too much to say, except a Chris Farleyesque “Wow that was awesome.”
Rachel Maddow Actually Gets It Right On Obama’s Newly Claimed Powers
This is indeed spooky, and Maddow nails it. (HT2 Chris Brunner.) President Obama wants to lock people up indefinitely against whom we do not have enough evidence to prosecute, but whom we believe pose a threat to society. He doesn’t give too many details, but it sounds like he’s saying such people could be held for ten years. Spooooo-ky.
Winners and Losers in the Waxman-Markey Stealth Tax
I was the lead author in this IER blog post. The main thing in this one was to explain (to a first approximation) why handing free allowances to emitters will not lower energy prices, but instead represents a simple transfer of wealth from the general public to the emitters. Here’s the meat of it:
It’s difficult for some non-economists to understand why handing back allowances to producers wouldn’t significantly alter energy price increases, but the point is crucial so we’ll walk through it: Suppose the government auctioned off 100 percent of the carbon allowances, and the resulting market price for a ton of emissions was (say) $25. If the government spent all of the auction receipts to pay for universal health care, leaving the burden of the cap and trade system to fall entirely on the energy sector, it is clear that prices for consumers would rise. Ultimately, it wouldn’t be the utilities, but rather their customers, who would foot the bill. Because of the cap on emissions, the costs of producing energy rise, and so the price of electricity for consumers rises as well.
Now suppose instead of spending all of the auction revenues on health care, the government chose to give, say, $10 million to every major electricity producer. Would that push down electricity prices? In general the answer is probably “no.” In order to push down prices, more electricity would need to be produced (because consumers would try to buy more after the price cut). But that means firms would have to use some of their $10 million handout to enter the carbon allowance market and buy the rights to emit more CO2, or to invest in a larger capacity for carbon-free generation, in order to ramp up their operations and sell more electricity (at a lower unit price).
But why would firms use their $10 million handouts in this way? If it made sense to buy more carbon permits (at the going price of $25 each), or to invest in a larger carbon-free capacity, the producers could have relied on private sources of capital to make these changes. But the firms chose not to, because on the margin the $25 price for each ton of carbon emissions made it sensible to scale back their operations. This logic doesn’t change just because the government writes them a check for $10 million (unless the subsidy is somehow tied to market share).
Even though it is counterintuitive, the important point is that even if the allowances are handed out for free to utilities, they still see their costs of production go up because of cap and trade. A coal-fired power plant still “loses” $25 per ton of emissions, because it could choose to scale back operations and sell its allowances into the market at $25 each. The logic is inescapable: the consumers will ultimately pay for cap and trade through higher energy (and other) prices. By giving some of the potential auction revenues to individual firms in the form of free allowances, the government doesn’t thereby prevent price hikes, all it does is lay subsidies to these beneficiaries on top of the other effects of Waxman-Markey.
If you want to divorce yourself from the carbon context, just imagine that you run a grocery store that’s been losing money for years. No matter how you advertise or try to cut costs, you check the books and realize that you lose money with every item you sell. So you decide to go out of business and stop the bleeding.
Ah, but that very same day you get notified that your rich uncle died, and left you $100,000. Does that mean you now decide to keep the store open?
Of course not, the logic of your decision is still the same. On the margin, you are poorer by staying in business. Obviously the new information makes you richer–$100,000 richer to be precise–but becoming richer doesn’t make you more willing to sell grocery items at a loss.
So it’s similar with handing out free allowances to emitters. Unless there are strings attached–e.g. if the number of allowances is based on last year’s market share of the electricity market or something like that–then generally speaking handing the allowances to producers will just mean a transfer of wealth to them.
Some producers, such as owners of coal-fired power plants, might still be worse off than under the status quo, but the point is that very few of these free allowances are devoted to protecting the general public. This just shows how naive those people were–and I truly am not implicating any of the readers of the this blog–who agitated for either a cap and trade or a carbon tax with dollar-for-dollar cuts in other taxes.
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