Over 140 years there has been no systematic correlation of financial crises with either prior current account deficits or prior growth in public debt levels. Private credit has always been the only useful and reliable predictive factor.

Doomed to repeat it, etc.

Comments

[polifrog]

Public debt is not a problem ... until it is.

Or said another way: Public debt is not a problem until the faith in the currency holding that debt is lost.

[polifrog]

Or said another way:

While private debt faces the pain of correction, public debt faces no pain until collapse.

Pointing to the discomfort of correction as though it is the problem when it is actually the unpleasant remedy and pointing to kicking the can as though it is the cure when it is the path to collapse is a rather Keynesian like rationalization, no?

[Andrew Brod]

"Public debt is not a problem ... until it is."

True enough, but note the paper's emphasis on "prior current account deficits [and] prior growth in public debt levels." When public debt becomes a problem it's the result of the financial crisis, rather than a cause of it.

Most of the current level of U.S. federal debt results from either the 2008-09 recession and its aftermath or from factors that did little or nothing to cause the recession, such as the Bush tax cuts. Spain and Italy were running government surpluses before the recession and the euro crisis.

[bubba]

"Public debt is not a problem ... until it is."

But those who need to ignore the problem politically and socially will always find all sorts of ways to deflect attention away from the problem, don't they?

Notice how Arnold frames the debt issue by saying 'Most of the current level of U.S. federal debt results from either the 2008-09 recession and its aftermath or from factors that did little or nothing to cause the recession, such as the Bush tax cuts' without saying that over 50% of the current debt level was accumulated under Dem/Obama control.

That's simply a good way to avoid the reality.

Meanwhile, Cone chose the wrong Taylor to use regarding insight about the national debt. Here's just one example from the right Taylor.

[polifrog]

Brod:

Most of the current level of U.S. federal debt results from either the 2008-09 recession and its aftermath or from factors that did little or nothing to cause the recession, such as the Bush tax cuts.

The federal government is not at the mercy of the private sector.

As Bubba notes, it is convenient to start measuring the question at the time of the recession the federal government created.

Any government that claims credit for economic success as a result of it stewardship must also accept responsibility for mismanagement of the economy. Except in Brod world.

[Andrew Brod]

I very much agree that government should accept responsibility for mismanagement. Most of my criticisms have been to make that very point. For example, slashing government revenues without reducing government spending sounds a lot like mismanagement to me. Will anyone take responsibility for that?

[justcorbly]

Or, increasing government spending without increasing government revenues.

That would be Bush II, in case I'm bring subtle.

Either way, the existence of folly in government does not mean folly is nonexistent elsewhere.

[Hartzman]

"When public debt becomes a problem
it's the result of the financial crisis,
rather than a cause of it."

The assumption of always and never
are two ideas that most should always never to imply.

How about our elected government of both sides
spending the SS trust fund?

Asked former Senator Bill Bradley that last week
after he brought it up.

If the benefits I started paying twice as much for
after 1983 get curtailed,
how is it not a default of commitment by the Federal Government?
.
.
.
Also, see Ottoman Empire.

And the Roman Empire.

[bubba]

Note that Arnold equates tax cuts with "slashing government revenues". It's always the same approach: Ignore the fact that economic GROWTH provides more government revenues that raising taxes.

Only in statist central planner La La Land are tax cuts equated to "slashing government revenues". THAT'S what sounds "a lot like mismanagement to me", and likely qualifies as outright malfeasance if done by someone who has an actual fiduciary responsibility.

[Hartzman]

"Most of the current level of U.S. federal debt
results from either the 2008-09 recession and its aftermath
or from factors that did little or nothing to cause the recession,
such as the Bush tax cuts."

The Bush tax cuts and wars
caused the largest increase in Federal borrowing in history.

When has an empire borrowed the entirety of the cost of a war?

I believe that was the Spanish empire.

Does anyone even remember them being an empire?

Are you OK Andrew?

[Hartzman]

"slashing government revenues without reducing government spending
sounds a lot like mismanagement to me."

"When public debt becomes a problem
it's the result of the financial crisis,
rather than a cause of it."

"Most of the current level of U.S. federal debt
results from either the 2008-09 recession and its aftermath
or from factors that did little or nothing to cause the recession,
such as the Bush tax cuts."

?

[Account Deleted]

What's with Romney claiming that he will not cut taxes for the wealthy and will leave parts of Romne .. I mean Obamacare in place?

[Andrew Brod]

I equated the Bush tax cuts with "slashing government revenues" because the latter was the result of the former. Anyone who dislikes my choice of words can replace the verb to come up with a more Republicanly correct phrase such as "reducing government revenues" or "gently nestling government revenues onto a cloud of fairy dust."

[hartzman]

i believe we r entering a period of great consequence.

things r getting downright ugly, except for capital mkts, which seem pretty obviously currently rigged.

scary numbers coming across the wires.

it's all held up by ben's and mario's promises.

if they qe, oil and food spike.

zugzwang.

[Andrew Brod]

Oil and food and other commodities are not driven primarily by monetary policy. For them it's mostly supply and demand, hence they're unlikely to shoot up due a mild intervention like QE3. Certainly, the first two QEs did little to commodity prices. So far in the Second Depression, each commodity-price spike has been just that, a spike that soon reversed itself.

[polifrog]

Brod:

For example, slashing government revenues without reducing government spending sounds a lot like mismanagement to me.

I was not aware you favored a combination of tax cuts and smaller government.

[Andrew Brod]

I don't favor smaller government, but neither do I favor bigger government. Fiscal responsibility doesn't require one or the other, but it does require long-run (though not necessarily short-run) budget balance.

[polifrog]

Brod:

Oil and food and other commodities are not driven primarily by monetary policy.

Actually, monetary policy is the "dark energy" that drives all prices eventually upward.

It may not be obvious when short term "gravitational" forces like our current Keynesian Depression are the dominant pricing force second to supply and demand, but eventually every depression gives way to expansion (Keynesian Depressions may take decades) and when that happens the "dark energy" of monetary policy will become the dominate pricing force second only to, once again, supply and demand.

The QE's and stimulus have only served at great expense in delayed growth to slow a necessary deflationary period by lengthening a recession into a depression. The expense of stimulus/QEs and the expense of lost opportunity inherent in depression is not the end of the cost to our nation, though. There will be greater costs when the QE's and stimulus return as inflation again costing us growth even as we attempt to pay off debt generated by stimulus at higher interest rates.

That is mismanagement.

It is not mismanagement to allow people to manage their own affairs. It is, however, mismanagement to poorly manage the affairs of an entire nation then blame that nation when management screws up.

[polifrog]

Brod:

I don't favor smaller government, but neither do I favor bigger government.

Sigh...

I was not aware you favored a combination of tax cuts and smaller government.

[Andrew Brod]

I don't.

Do try to keep up.

[prell]

"What's with Romney claiming that he will not cut taxes for the wealthy and will leave parts of Romne .. I mean Obamacare in place?"

Shhhhh... Don't spoil the party.

[polifrog]

Brod:

For example, slashing government revenues without reducing government spending sounds a lot like mismanagement to me.

poli:

I was not aware you favored a combination of tax cuts and smaller government.

Brod:

I don't.

Then your goal is not proper management but higher taxes as that gives the whiff of a balanced budget. Carter/Dem Control, and Obama/Pelosi/Reid proved it to only be a whiff.

The 94 congress proved that lower taxes and smaller government yield a balanced budget.

[Hartzman]

"By a continuing process of inflation,
governments can confiscate secretly and unobserved…
the wealth of their citizens."

- John Maynard Keynes
Advocate of fiscal and monetary measures
to manage economic highs and lows
with money saved during expansions,
which the world did not do.
.
.
.
"For imposing Taxes on us without our Consent"

The unanimous Declaration of the thirteen united States of America
.
.
.
If the Fed prints
and consumer prices rise as a result,
how is it not taxation without representation
if the revenue to fill government budget deficits
comes from an unelected privately owned entity
that is the Federal Reserve Board of Govenors?

[Hartzman]

"Oil and food and other commodities
are not driven primarily by monetary policy."

Primarily...

How about them low interest rates?

How did the real estate bubble happen?
.
.
.
"For them it's mostly supply and demand,
hence they're unlikely to shoot up
due a mild intervention like QE3."

mild?

If it's mild, the markets may...

Then we'll get some actual deflation.

And many a economic theory may be buried
under a heap of incorrect, faith based,
central plan centered, quasi-socialistic/fascist textbooks.

[Hartzman]

"The 94 congress proved that lower taxes and smaller government
yield a balanced budget."

Big stretch.

Please don't say lower taxes = higher revenues.

Has been debunked too many times.

Did government get smaller from 94-2000,
during the biggest semi-actual bull market in US history?

How about those stolen SS trust funds back then?

Big money stolen and spent then.

[Andrew Brod]

"Then your goal is not proper management but higher taxes."

Still wrong.

[polifrog]

You meant correct.

[Andrew Brod]

Just as I suspected. I looked at Bubba's link, a blog post by John Taylor, an excellent and highly regarded economist who, when it comes to public policy, always puts on his uniform and (in the words of Brad DeLong) plays for Team Republican. He's very reliable.

Anyway, "the right Taylor," as Bubba punnily refers to him, posts a scary graph of federal debt, attributed to the Congressional Budget Office. And it's definitely scary. However, following Taylor's links reveals that he's hiding something, namely that his scary graph isn't what CBO calls its "extended baseline projection." The baseline projection doesn't look so scary, as it involves, among other things, the repeal of most of the Bush tax cuts. It's impressive what a difference a little fiscal sanity can make.

So what's the scary graph that Taylor posts? It's CBO's "alternative fiscal scenario," in which the Bush tax cuts are retained.

So thanks, Bubs, for making my point. If we keep the Bush tax cuts in place, it'll be much harder for us to achieve long-run budget balance.

[David Hoggard]

Thanks, Andrew... I read the CBO source document that Taylor used for his scary graph that bubba offered - and it does, indeed, assume that the Bush tax cuts remain, and concludes that...

"Under that combination of policy assumptions, federal debt would grow much more rapidly than under the extended-baseline scenario. With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels..."

So bubba is now promoting the reversal of the Bush tax cuts, aka "gently nestling government revenues onto a cloud of fairy dust"?!? Will wonders ever cease?

[MojoNixon]

That Bubba-Gum. Always good for a distortion or two. Or a laugh.

[Thomas]

Ever get the feeling you're reading the same thread over and over?

[polifrog]

Brod:

"Then your goal is not proper management but higher taxes."

Still wrong.

Brod:

If we keep the Bush tax cuts in place, it'll be much harder for us to achieve long-run budget balance.

Tax increases.
Pelosi/Reid-like increases in spending.
Hopes for Bush-like compliance.
Carter-like Mismanagement.
Malaise.
More of the same.

Brodian economics.

[Spag]

I guess all of the concern over the war on terror that was expressed so frequently around here and in such morally superior tones has disappeared.

Maybe those who accused liberals of being less than patriotic by exploiting the war to attack Bush for political gain were right. It's hard to otherwise reconcile the past with the present.

There are no problems these days, not debt, not anti-terror techniques. The only problem is that the "rich" pay 4.9% less than they should.

[polifrog]

What happens when Brodian economics is avoided?

We are forced backward in time past our current depression, Japan's current depression, past depression rife Europe and past the Great Depression - to a time before Keynes:

One of the last of the "do nothing" presidents was Warren G. Harding. In 1921, under President Harding, unemployment hit 11.7 percent -- higher than it has been under President Obama. Harding did nothing to get the economy stimulated.

Far from spending more money to try to "jump start" the economy, President Harding actually reduced government spending, as the tax revenues declined during the economic downturn.

This was not a matter of absent-mindedly neglecting the economy. President Harding deliberately rejected the urging of his own Secretary of Commerce, Herbert Hoover, to intervene.

The 11.7 percent unemployment rate in 1921 fell to 6.7 percent in 1922, and then to 2.4 percent in 1923. It is hard to think of any government intervention in the economy that produced such a sharp and swift reduction in unemployment as was produced by just staying out of the way and letting the economy rebound on its own.

[Hartzman]

"If we keep the Bush tax cuts in place,
it'll be much harder for us to achieve long-run budget balance."

True.

Moody's warned today of another US sovereign downgrade
if the fiscal house doesn't get into better shape.

Problem is, if we remove the money through higher taxation
and less gov spending,
we may also lose about 4% of GDP.

[Roch]

Sam, I'm wondering where do YOU stand? Were you silent in your disapproval of the tactics under Bush or are you silent now in your approval of the tactics under Obama?

[polifrog]

Hartzman:

True.

When has it ever been true?

[Account Deleted]

It's hard to take Sam's arguments seriously anymore when he attempts to state that no one is concerned about the debt. Most of these long threads end up about the debt and the variety of choices we have for reducing it.

A lot of people favor letting the Bush tax cuts expire. I think that is a sound idea. Others want to keep them in place for the poor and middle class while letting them expire for the wealthiest among us. I can see the logic in that given the wage stagnation of the last 30 years among the lower working class.

Others thinks we should cut taxes for the rich even more, increase the pentagon budget and turn some of the most efficient aspects of our social safety net over to private companies.

I used to think privatizing social security was a great idea until I watched people near retirement age have their 401k's wiped out in the last market crash ...

[Spag]

Jeff, you forgot the option where we leave things the way they are and cut spending instead.

RE: Terror. I just want one person to come forward and admit "we were full of shit".

[Thomas]

Frog - Please provide a link or citation for what appears to be a quote in your 1:12 comment. Thanks.

[Roch]

" I just want one person to come forward and admit "we were full of shit"." -- Sam

And I just want you to acknowledge that implicit in the circumstances you find so troubling is your approval of Obama's handling of the war on terror.

[Andrew Brod]

Thomas, here's why we don't really need a link or citation: Can anyone think what was happening in the early 1920s? Anyone? Bueller? The answer was the bumpy transition from a wartime to a peacetime economy. With all the soldiers coming home and restarting their lives, the peacetime economy of the 1920s was a very strong one. We had high unemployment in 1921 for very different reasons than we did in 2009, and as such, what Harding did or didn't do tells us nothing about Obama should or should not have done.

Recessions instigated by financial crises are different from all others.

But Frog loves mixing the apples with the oranges.

[polifrog]

Sorry for the oversight, Thomas:

Citation.

[polifrog]

More from the same:

History tells a different story. For the first 150 years of this country's existence, the federal government felt no great need to "do something" when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to "do something" in the wake of the stock market crash of 1929, which set a new precedent.

Yeah, something is different all right.

[Andrew Brod]

Also, for what it's worth, a 1986 paper by Christina Romer (here's the working paper that preceded it) argues that methodological and data limitations in the prewar era led published unemployment rates to overstate the actual rate during recessions and understate it during expansions. Her estimate of the unemployment rate in 1921 is a still-high-but-not-crazy-high 8.7%.

[Andrew Brod]

"For the first 150 years of this country's existence, the federal government felt no great need to 'do something' when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to "do something" in the wake of the stock market crash of 1929, which set a new precedent."

That statement is so wrong that it can only have been said by someone who knew it was wrong. Let's just take duration. By my calculations, in 1854-1933, recessions lasted an average of 22 months while expansions lasted 25 months on average. We were in recession nearly as often as in expansion.

In contrast, in 1933-2009, recessions lasted 11 months while expansions lasted 59 months. The claim to which Frog links isn't even close to being accurate.

[CP ( worst person on the internet)]

I'll say this much, he must be one convincing liar.
I thought it was all about credentials and publications with you economists, anyway.

Awards
In 1990, he won the Francis Boyer Award, presented by the American Enterprise Institute. In 1998 he received the Sydney Hook Award from the National Association of Scholars.[29] In 2002, Sowell was awarded the National Humanities Medal for prolific scholarship melding history, economics, and political science. In 2003, he was awarded the Bradley Prize for intellectual achievement.[30] In 2004 he was given a Lysander Spooner Award for his book Applied Economics: Thinking Beyond Stage One.[31] In 2008, getAbstract awarded his book Economic Facts and Fallacies with its International Book Award.
Career highlights

Senior Fellow, Hoover Institution, September 1980–present
Professor of Economics, UCLA, July 1974–June 1980
Visiting Professor of Economics, Amherst College, September–December 1977
Fellow, Hoover Institution, Stanford University, April–August 1977
Fellow, Center for Advanced Study in the Behavioral Sciences, July 1976–March 1977
Project Director, The Urban Institute, August 1972–July 1974
Associate Professor of Economics, UCLA, September 1970–June 1972
Associate Professor of Economics, Brandeis University, September 1969–June 1970
Assistant Professor of Economics, Cornell University, September 1965–June 1969
Economic Analyst, American Telephone & Telegraph Co., June 1964–August 1965
Lecturer in Economics, Howard University, September 1963–June 1964
Instructor in Economics, Douglass College, Rutgers University, September 1962–June 1963
Labor Economist, U.S. Department of Labor, June 1961–August 1962
[edit]Books by Sowell

2011. The Thomas Sowell Reader. Basic Books. pp. 464. ISBN 978-0-465-02250-2.
2010. Basic Economics: A Common Sense Guide to the Economy (4th edition ed.). Cambridge, Mass: Perseus Books Group. ISBN 978-0-465-02252-6.
2010. Dismantling America. Basic Books. pp. 352. ISBN 978-0-465-02251-9.
2010. Intellectuals and Society. Basic Books. pp. 416. ISBN 978-0-465-01948-9.
2009. The Housing Boom and Bust. Basic Books. pp. 184. ISBN 978-0-465-01880-2.
2008. Applied Economics: Thinking Beyond Stage One (2nd ed.). Basic Books. pp. 400. ISBN 978-0-465-00345-7. OCLC 260206351.
2007. Economic Facts and Fallacies. Basic Books. pp. 262. ISBN 978-0-465-00349-5.
2007. Basic Economics: A Common Sense Guide to the Economy (3rd edition ed.). Cambridge, Mass: Perseus Books Group. ISBN 978-0-465-00260-3. OCLC 76897806.
2007. A Man of Letters. San Francisco: Encounter Books. pp. 320. ISBN 978-1-59403-196-0.
2006. Ever Wonder Why? And Other Controversial Essays. Stanford, CA: Hoover Institution Press. pp. 460. ISBN 978-0-8179-4752-1.
2006. On Classical Economics. New Haven, Conn: Yale University Press. 2006. pp. 320. ISBN 978-0-300-12606-8.
2005. Black Rednecks and White Liberals: And Other Cultural And Ethnic Issues. San Francisco: Encounter Books. pp. 360. ISBN 978-1-59403-086-4.
2004. Affirmative Action Around the World: An Empirical Study. New Haven, Conn: Yale University Press. pp. 256. ISBN 978-0-300-10775-3.
2004. Basic Economics: A Citizen’s Guide to the Economy, revised and expanded ed. Basic Books, ISBN 0-465-08145-2 (1st ed. 2000)
2003. Applied Economics: Thinking Beyond Stage One, ISBN 0-465-08143-6
2002. The Einstein Syndrome: Bright Children Who Talk Late, ISBN 0-465-08141-X
2002. Controversial Essays, ISBN 0-8179-2992-4
2002. A Personal Odyssey, ISBN 0-684-86465-7
2002. The Quest For Cosmic Justice, ISBN 0-684-86463-0
1998. Conquests and Cultures: An International History, ISBN 0-465-01400-3
1996. Migrations and Cultures: A World View, ISBN 0-465-04589-8 OCLC 41748039
1996. The Vision of the Anointed: Self-Congratulation As a Basis for Social Policy. Basic Books, ISBN 0-465-08995-X
1995. Race and Culture: A World View. Description & chapter previews. ISBN 0-465-06796-4
1993. Inside American Education, ISBN 0-7432-5408-2
1990. Preferential Policies: An International Perspective, ISBN 0-688-08599-7
1987. A Conflict of Visions: Ideological Origins of Political Struggles. William Morrow, ISBN 0-688-06912-6
1987. Compassion Versus Guilt and Other Essays. William Morrow, ISBN 0-688-07114-7
1986. Education: Assumptions Versus History. Hoover Press, ISBN 0-8179-8112-8
1985. Marxism: Philosophy and Economics. Quill, ISBN 0-688-06426-4
1984. Civil Rights: Rhetoric or Reality? William Morrow, ISBN 0-688-03113-7
1983. The Economics and Politics of Race. William Morrow, ISBN 0-688-01891-2
1981. Ethnic America: A History. Basic Books, ISBN 0-465-02074-7
1981. Markets and Minorities. Basic Books, ISBN 0-465-04399-2
1980. Knowledge and Decisions. Basic Books.
1975. Race and Economics. David McKay Company Inc, ISBN 0-679-30262-X
1972. Say's Law, An Historical Analysis. Princeton University Press. ISBN 0-691-04166-0

[Andrew Brod]

I have a couple of Sowell's books. He's written some great stuff. But his resume notwithstanding, he just said something that was demonstrably wrong.

[CP ( worst person on the internet)]

....and of course, knows it. Isn't that kind of unethical?

[Hartzman]

http://research.stlouisfed.org/fred2/graph/?id=PPIACO

"So far in the Second Depression,
each commodity-price spike has been just that,
a spike that soon reversed itself."

Andrew Brod
.
.
.
This is correct.

Printing money drives up commodity prices
until demand falls,
which motivates the Fed to print even more
so prices rise until demand falls again
and wiemer germany.