Take charge Mr President.

At times like this, the public craves bold leadership, even if corners need to be cut.   FDR understood that.  President Obama is very lucky that he could stop this madness without cutting any legal corners.  Here’s what he should say Sunday night:

My fellow Americans.  The endless squabbling in Washington over the debt ceiling is injecting uncertainty into the markets and threatening the recovery.  Therefore, after consultation with my legal advisers, I have decided to not enforce the debt limit, until Congress resolves the budget mess.  This non compliance will consist of two steps.  First, we will show that compliance with the debt limit would force either default on our debt obligations, which is illegal and unthinkable, or deep cuts in programs like Social Security.  Because funding for these programs was passed after the debt limit law, they take precedence whenever there is a conflict between two laws.

I anticipate this stance will be contested in the courts, and there may be a long drawn out case that ends up in the Supreme Court.  If we lose, I’m told there are accounting gimmicks that will allow us to avoid the constraints of the debt limit, in a fashion that is perfectly legal, but undignified for a great power.  Unfortunately, I may have no other choice, as default is far more undignified, and would be disgraceful for a nation like ours.

At the same time, the problems in Europe have given me a greater awareness of the threat posed by runaway spending.  Hence I’ve accepted the fact that some cuts need to be made in programs that I strongly support.  I look forward to working with Congress on the budget process, to sharply reduce the deficit in the out years.  I call on the Federal Reserve to assure the markets that these debt reductions do not reduce economic activity, and lead to higher unemployment.  Thank you.

I know I’m hopelessly naive, and this will never happen.  I have no idea what Obama really thinks.  Maybe this is all a Machiavellian plan to entrap the GOP, as Clinton did in 1995.  But if Obama is serious, I think the public (and stock market) would welcome this speech.  As Obama Osama once said, people gravitate toward the strong horse.  People detest chaos in government and look for bold leadership, especially when the economy is a mess. I probably won’t even vote for Obama, but I think this is what he should do.

Then we should abolish the debt ceiling, and while we’re at it abolish the Social Security trust fund.  Burn all the securities in the trust fund.  Have a marshmallow roast.  Then adopt a parliamentary form of government. 

That’s all for today.


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71 Responses to “Take charge Mr President.”

  1. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 14:42

    I didn’t vote for Obama. He never promised much change. I never understood what the excitement was about, except that he was a gifted speaker. I haven’t even seen much of him as a gifted speaker, since elected.

  2. Gravatar of Nick Rowe Nick Rowe
    29. July 2011 at 14:50

    “Then adopt a parliamentary form of government.”

    Finally!

    Let’s face it. That rebellion in 1776 was, with hindsight, perhaps not the best move. And you would still need a Head of State, with purely symbolic power. Perhaps you would be in favour of QE2?

  3. Gravatar of StatsGuy StatsGuy
    29. July 2011 at 14:57

    Or, gosh, the president could declare a special session of congress and propose actual legislation. I know, this would be uncharacteristic (look at the health care debacle, the stimulus debacle, etc.).

    So we spend 27% of GDP and tax 15%. We don’t want to actually print money, so we float debt. We don’t want to raise taxes. And when push comes to shove, the republicans can’t actually come up with a trillion in savings a year, and know their most loyal constituency (older white folks) would kick them out on their butts if they cut medicare and social security (unless they grandfather all the older white folks).

    The only positive note is that Boehner has redefined raising taxes (but closing “loopholes”) as cutting spending. That’s a good thing. A little more creativity like that, and we might have a compromise.

  4. Gravatar of JimP JimP
    29. July 2011 at 15:01

    If only Obama would do that. I really do not understand why he doesn’t.

    I have been calling for him to be more decisive even since this blog got started. It makes me spin with dismay that he does not act.

  5. Gravatar of Bill Bill
    29. July 2011 at 15:21

    So Scott will probably vote for the party that almost unanimously rejects the monetary theory he’s spent the past couple years promoting? Or maybe he’ll abstain? Or will he vote for Ron Paul?

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. July 2011 at 15:32

    Let’s see now, Obama is declaring he’s going to borrow more money and issue bonds that have NOT been authorized, as required in the Constitution, by congress? Wouldn’t that give pause to prospective lenders? Wouldn’t institutional investors be asking to be sued if they touched Obama’s new bond issue?

    This sounds a lot like the Gregory Peck speech in ‘Other People’s Money’. But, I don’t know who we get to be Larry the Liquidator.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. July 2011 at 15:37

    ‘So we spend 27% of GDP and tax 15%.’

    For a half century we spent 20% and taxed 18%. Maybe Obama should make a speech declaring he intends to ask congress to return us to those halcyon days.

  8. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 15:42

    Mike, I hear you.

    Nick, With all due respect we already have royalty, chosen according to merit. They’re called Hollywood actors. But I agree about the parliamentary system.

    Statsguy, Yup, it’s that insane, with or without the debt limit. So let’s get rid of the limit.

    JimP, Yes, you’ve been ahead of the curve.

    Bill, I have always voted libertarian, but am growing increasingly disenchanted. So my vote is up in the air. I don’t like any of the parties. But remember, it makes no difference who I vote for, what matters is what I do here. And I’m giving Obama good advice, just as when I told him to fill the Fed vacancies in 2009, and he ignored me.

    Patrick, You said;

    “This sounds a lot like the Gregory Peck speech in ‘Other People’s Money’. But, I don’t know who we get to be Larry the Liquidator.”

    That’s hitting below the belt–why can’t I be the DeVito character?

    Seriously, Obama wouldn’t be violating any law, as he can go the platinum coin route legally as a backup, if all else fails. That’s what makes this so ABSURD.

  9. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 15:43

    Patrick, Those percentages sound good to me. Set both at 19%, even better.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. July 2011 at 16:06

    Scott, you seem to have ducked my point about the potential investors being leery of buying bonds that haven’t been authorized in accordance with the constitution’s article I, section 8.

    Btw, Obama has other options to pay bills other than borrowing more money to repay past borrowings. He could start selling gold and oil. Then all that pasture land out west.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. July 2011 at 16:22

    Well, don’t hold your breath, Scott. Obama’s no FDR.

    Here’s an excerpt from FDR’s Fourth Fireside Chat (October 22nd 1933). I think you’ll recognize some themes.

    “Finally, I repeat what I have said on many occasions, that ever since last March the definite policy of the Government has been to restore commodity price levels. The object has been the attainment of such a level as will enable agriculture and industry once more to give work to the unemployed. It has been to make possible the payment of public and private debts more nearly at the price level at which they were incurred. It has been gradually to restore a balance in the price structure so that farmers may exchange their products for the products of industry on a fairer exchange basis. It has been and is also the purpose to prevent prices from rising beyond the point necessary to attain these ends. The permanent welfare and security of every class of our people ultimately depends on our attainment of these purposes…

    Some people are putting the cart before the horse. They want a permanent revaluation of the dollar first. It is the Government’s policy to restore the price level first. I would not know, and no one else could tell, just what the permanent valuation of the dollar will be. To guess at a permanent gold valuation now would certainly require later changes caused by later facts.

    When we have restored the price level, we shall seek to establish and maintain a dollar which will not change its purchasing and debt paying power during the succeeding generation. I said that in my message to the American delegation in London last July. And I say it now once more.”

    http://www.mhric.org/fdr/chat4.html

  12. Gravatar of cassander cassander
    29. July 2011 at 16:49

    Scott, I agree it’s absurd, but spending needs to go down, and it isn’t going to go down without a crisis. And the longer we go until that crisis, the worse the crisis will end up being. Playing chicken with the debt ceiling is bad policy, full stop. But I think it (and shenanigans like it) are the only way of preventing a worse policy, i.e. the status quo.

  13. Gravatar of Benjamin Cole Benjamin Cole
    29. July 2011 at 17:06

    Well, Scott Sumner is hopelessly naive, and so am I.

    One thing really bothers me: When I see a guy up against a wall, no money, facing prison etc., and he does something wrong–well, I don’t condone it, but I understand it.

    What I don’t understand is a lot of Congresspeople, mostly millionaires, all of whom will become well-to-do as lobbyists, lawyers etc., cannot do the right thing.

    Just as I wonder sometimes about Bernanke. He knows what he needs to do, but he is worried about what–losing his job? Getting ridiculed? Yet, there will always be a cushy job on Wall Street or academia for Bernanke.

    JFK’s “Profiles in Courage” was always a bit of a sop–real courage is when you see ordinary people without resources risk livelihoods and property etc.

    Today we have “Profiles in Cravenness” as the definition of public leaders.

  14. Gravatar of Full Employment Hawk Full Employment Hawk
    29. July 2011 at 17:22

    The best Plan Z appears to be the Platinum coin gambit. An obscure but perfectly valid law gives the Secretary of the Treasury the authority to issue an unlimited number of Platinum coins of whatever denomination he chooses. This permits him to coin say $100 Billion dollar coins and put them on deposit at its account at the New York Fed. The Treasury can then pay its bills out of this deposit until the debt limit is raised. Besides preventing default, this would have the following advantages.

    1. If the failure to raise the debt ceiling is expected to not go on for very long and that the Fed will not offset the effects of this policy, this would give the economy the needed stimulus to increase NGDP growth. If it were expected to go on for an extended period of time and that the Fed would not offset it, that would cause a serious inflation. But that will not happen because the Fed will be expected to offset it.

    2. The threat that the Obama administration would finance the deficit by coining money would frighten the right-wing extremists in the Republican party into agreeing to raise the debt ceiling even if they do not get what they want.

  15. Gravatar of Full Employment Hawk Full Employment Hawk
    29. July 2011 at 17:25

    “I call on the Federal Reserve to assure the markets that these debt reductions do not reduce economic activity,”

    Nothing the Fed has done so far can lead one to expect the Fed to do this. There is every reason to believe that the Fed would either not offset the spending cuts with expansionary monetary policy, or the offset would be too small. Therefore the spending cuts would do exactly what Keynesian economics predicts, that they would make our current Little Depression worse, and very likely bring on a double dip recession.

  16. Gravatar of Full Employment Hawk Full Employment Hawk
    29. July 2011 at 17:30

    One of the things that is being overlooked is that the best way to reduce the deficit in the short run is for the Fed to give the economy a strong monetary stimulus. The growth in income would sharply increase the tax revenues of the government and sharply reduce the deficit with no changes in spending or tax rates taking place.

  17. Gravatar of Full Employment Hawk Full Employment Hawk
    29. July 2011 at 17:38

    We now see the effects of austerity in Great Britain. The deficit reduction policies of the Cameron administration have had a strongly contractionary fiscal policy effect on the British economy, and any offsetting monetary policy by the Bank of England has been too incomplete to offset this, so that the British economy has virtually stalled during the last 3 quarters, just as I had predicted months ago. Once again the result has been just as Keynesian theory predicts. Spending cuts in the United States at this time will have similar effects on the U.S. economy.

    To be fair to the Bank of England, at least they have not made things worse by giving in to pressure to raise interest rates. In that respect their record is far better than that of the European Central Bank, and probably better than the record of the Fed.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. July 2011 at 18:02

    The speech Obama should give:

    My fellow Americans, Amen. Amen. And, Amen. I say that because I’ve been taught by my spiritual adviser, Dr. Jeremiah Wright, to say Amen whenever I hear a prayer. And all I’ve been hearing out of congress is prayers, as we move toward the day, coming next week, when we no longer have the ability to pay for all the spending we’ve been promising.

    Don’t blame me for the situation. It existed before I got here. I’m just the messenger who’s bringing the bad news. Since I know what happens to that guy, I’m announcing tonight that I intend to be a one term president (like I have a choice!)

    C’est la vie. As the poet put it, sweet are the uses of adversity. During the remainder of my presidency I intend to alleviate the suffering, in the short run, by taking a number of actions that will protect the most vulnerable amongst us. For instance, if you are currently collecting Social Security benefits; relax. The SS Trust Fund receives enough revenue from businesses every day to cover 95% of promised benefits. The small shortfall will be covered by the Treasury honoring its obligation to redeem SS trust fund bonds presented to it.

    All military pay, pensions and veteran benefits will be met. All essential civilian government employees will be paid 75% of their salaries (and their benefits will be reevaluated to bring them into line with comparable private sector practices). Non-essential employees should update their resumes.

    If you’re expecting a government check, you’d better be an ammunition or jet fuel supplier. Others should expect delays as we proceed to liquidate our gold holdings and other assets in an orderly fashion.

    I’ll personally write to Scotty Pippen and Sam Donaldson to inform that their mohair subsidies are a thing of the past; adios, sayonara (if Keith Olberman still has work, Sam, there’s hope for you too. Scotty, I’ve got the coin to send Sasha and Malia to basketball camp).

    There are no longer any essential personnel at the Dept of Education, Bureau of Indian Affairs, FDA, EEOC, Commerce, HUD, NASA, and probably several other agencies (as soon as I’m informed what all we’re currently funding). I’ll be firing 1/3 of the White House staff including all the press spokesmen. I’ll suggest that congress do likewise.

    Longer term; if you’re younger than 55, eventually you’ll get a bond representing the present value of your SS taxes (when we can get congress to raise the debt ceiling, heh, heh). But, SS as we know it will be replaced with a negative income tax. Same thing with Medicare (as soon as we figure out what, but it won’t be traditional fee for service; more like an HSA).

    The corporate income tax will be abolished and replaced with a small percentage, gross revenue tax on all businesses. No more worrying about depreciation schedules for corporate jets!

    I want to especially thank all you high income Americans who’ve been shouldering almost all the income tax burden lo these many years. We’ll be adding some lower income Americans to the tax rolls in our quest to attain 10% of GDP in income tax collections. If I get my way.

    I’ve ordered Ben Bernanke to schedule a seminar on NGDP targeting with the distinguished Bentley University macro economist Scott Sumner, ASAP.

    Those are the highlights folks. Don’t call me, I’ll call you. If you’re thinking of suing, remember sovereign immunity.

  19. Gravatar of Tom Dougherty Tom Dougherty
    29. July 2011 at 18:05

    While we are burning things, we might as well throw the Constitution on the fire too. Only Congress has the authority to borrow money on the credit of the United States (Article 1, Section 8). The 14th Amendment does not give the President this power. Perhaps if the President doesn’t like what people are saying about him he can throw the 1st Amendment on the fire and if he wants to start a war with a small North African country without Congressional authority he can ignore the power of the Congress to declare war. (Oh, he already did that). But I guess Obama can’t make an Omelet without breaking a few eggs.

    But just think if the Congress had to operate with a balanced budget. Then Congress couldn’t use counter-cyclical fiscal policy to smooth out the business cycle. And we all know how effective fiscal policy is in stabilizing output.

  20. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 18:16

    And Patrick, whether Obama like it or not, thats what is coming.

    As basic long term chess, the next couple moves are 20/20:

    1. The Public Employees will be gutted. Gutted = no longer can donate large quantities of coin to Dems to get bigger paychecks.

    2. The means teachers are going to got the way of Khan Academy. Less of them, paid more, not teaching directly, just filling the gaps from from self-paced computer learning.

    3. THEN we will finally get out the long knives and figure out how to force old people to do odd tasks around our homes into their 70′s. I think my Guaranteed Income plan makes the most sense.

    3. Finally we will admit that health care is a technology good, and as such, who gets what will be based on how old the technology is, how cheap that tech has become.

    NOW, to make all of this easier, we should let worker in the top 5-10% globally come live here and hire our lower classes to cut hair, teach Matty’s yoga class etc.

    And while we’re at it, we should encourage economic distributism, my whole Tea Party / A power thing.

    Generally, I think Obama is an abject less to future Dem Presidents if you don’t make like Clinton and start cutting spending.

  21. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 18:28

    Cassander,

    Why does spending have to go down? There’s no reason I can think of, a priori or evidence-wise. We surely shouldn’t be worried about the deficit or the debt.

    If many millions of American families can finance houses at whole multiples of income, along with cars, furniture, college educations, credit cards, etc., why can’t the US government? The gross debt to GDP ratio is only at around 100%. How many times annual income is the average mortgage? The vast majority of homeowners are solvent, even in times like these, and the government can raise taxes and print money.

    If the economy were healthy, I’d say we should start closing the deficit, but right now spending should explode, if anything. We should really try fiscal stimulus before anything else, if the Fed won’t offset it, and unless we can get more monetary stimulus.

    We really need a lot of tax reform and fiscal reform anyway, and there are many people who need more help, whatever the economic conditions.

  22. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 18:39

    Patrick, You said;

    “Scott, you seem to have ducked my point about the potential investors being leery of buying bonds that haven’t been authorized in accordance with the constitution’s article I, section 8.”

    My understanding is that the platinum coin gimmick essentially ends the debate. If they go that route, it’s 100% legal.

    Mark, Yes, I’ve read that many times–one of my favorite FDR statements. I quoted it in an article I published.

    cassander, A debt crisis won’t force spending down, in my view. Congress needs to address this issue in their budget. As far as I can see, neither party really wants to cut spending very much. I don’t see the debt crisis changing that dynamic. In any case, there’s no real threat here, as no one seriously believes the US will default. So it’s an empty threat. Hence the GOP has no leverage over Obama. It’s all kabuki.

    Benjamin, I agree.

    FEH, Yes, I did a post on the platinum coin, that was the undignified accounting gimmick I referred to.

    The Fed has behaved like someone targeting inflation in the 1% to 2% range, and I’d expect them to continue that policy. It’s not good enough, but they might well offset the effects of fiscal tightening. It’s clearly their job to do that, after all.

    You said;

    “One of the things that is being overlooked is that the best way to reduce the deficit in the short run is for the Fed to give the economy a strong monetary stimulus.”

    Exactly, I’ve made the point here dozens of times, since early 2009.

    You said;

    “We now see the effects of austerity in Great Britain. The deficit reduction policies of the Cameron administration have had a strongly contractionary fiscal policy effect on the British economy, and any offsetting monetary policy by the Bank of England has been too incomplete to offset this,”

    Maybe, but that’s not clear. NGDP grew at a 9% annual rate in the first quarter, we don’t have second quarter NGDP figures yet. RGDP is a different story, but that’s not the concern of monetary policy.

    Patrick, That sounds like a beautiful dream.

    Tom, What I propose is 100% legal, due to the platinum coin loophole.

  23. Gravatar of cassander cassander
    29. July 2011 at 18:51

    Mike> The evidence from the lat 50 or so years is that regardless of tax rates, the federal government can only raise about 18% of GDP as tax revenue, which means it can sustainably spend ~20%. We’re already past 20, and with the boomers retiring we’re scheduled to go much much higher. But not only do the democrats not seem to realize this, they want to pile on even more spending, mostly universal healthcare, but also high speed trains, green jobs, a larger federal role in education, and a million other things. All of these promises cannot be kept, but breaking any of them will be politically unpopular, so it will be put off as long as possible, but that will just make the ultimate crash worse.

  24. Gravatar of cassander cassander
    29. July 2011 at 18:59

    Scott Sumner> It’s true that the current debate is over peanuts, cutting from the baseline budget just means slightly reducing the rate of increase. But as unenthusiastic as the the Republicans are, it’s at least something, while the Democrats are frothing at the bit to increase spending on almost everything.

    Put it this way, imagine Boehner goes down to a humiliating defeat, do you think that makes real medicare cuts more or less likely? I think a lot less. Your advice is great for Obama personally and politically, but I don’t see how him following it makes the country better off.

  25. Gravatar of Bonnie Bonnie
    29. July 2011 at 19:09

    What *should* happen is the states need to call a convention and straigten this mess out. They need to overrule slaughterhouse and other gross distortions of the commerce clause with this convention and neuter the Feds. The problem isn’t that Washington spends too much, it is that it has assumed the power to do so with the help of the oligarchs in robes. It just cannot seem to manage this power approriately without taking us all down with it, and so it shouldn’t have it any longer. In that state, the debt ceiling and limits will simply no longer matter.

    Of course that isn’t going to fix it tomorrow or next month, but it is more of an enduring fix that becomes more and more likely the longer this problem persists and the goverment keeps annoying us with economic issues that just won’t go away.

  26. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 19:34

    Cassander,

    Your unsubstantiated statement about the tax revenue limit aside for a moment, what tells us we need to address the deficit right now? The market isn’t.

    And you mention healthcare reform, high speed trains, green jobs, etc., but those are miniscule expenditures. If Obamacare really costs only $1 trillion over the next ten years, that’s only roughly 7 tenths of 1 percent of GDP/year, for example, and the rest you mention cost far, far less. Oh, and Obamacare could even cost less than that, depending on how the measures to cut cost work.

    If anything, military spending should be cut first, as almost spending as much on “defense” as the rest of the world combined might be excessive.

  27. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 19:39

    Bonnie, you mean states like Texas with Rick Perry, Florida with the possible criminal Rick Scott, and New Jersey with Christie, and all the red states with their wingnuts?

    I think I prefer the particular form and rate of decay we have now.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. July 2011 at 20:14

    Cassander wrote:
    “The evidence from the lat 50 or so years is that regardless of tax rates, the federal government can only raise about 18% of GDP as tax revenue, which means it can sustainably spend ~20%.”

    Heh, heh, he incited Hauser’s Law.

    http://www.rollingstone.com/videos/new-and-hot/beavis-and-butthead-mock-jersey-shore-in-sneak-preview-20110722

    Yes, and the tea-party Hobbits could return to Middle Earth having defeated Mordor.

  29. Gravatar of cassander cassander
    29. July 2011 at 20:24

    Mike>

    First, taxes as a % of GDP: http://imgur.com/cBgmk&zTgEI

    Second, yes, any one of those expenses is small, but committing to more spending when we can’t pay what we’ve already committed to is madness. It would be like a family deeply in debt buying paying for 6 cars and a boat they can afford to eat at 5 star restaurants because 100 dollars a meal is only a tiny fraction of what they owe.

    And far as Obamacare goes, even if they hadn’t played games with the CBO window to keep the sticker price down, I’m certain it it will end up costing vastly more than has been projected, just like every other healthcare program ever passed has.

    As for defense spending, I have no problem with cutting it, but it’s really not the problem. Defense spending has gone from 10% of GDP in the 50s to ~9% at the height of Vietnam, to ~6% at the height of the Reagan buildup, to ~4% today. We can afford that level of defense spending, just like we can afford what we currently spend on Medicare and SS. Personally I think we should spend less on all of them, but the present levels are supportable. Unfortunately, they won’t stay at present levels. But both Medicare and SS costs are going up, and fast. Medicare, in particular, is projected to almost double from 5% to 9% of GDP over the next 15 years, and 11% in 25. Those levels are not supportable. Cuts will need to be made, and the sooner they are made, the less painful they will be.

  30. Gravatar of cassander cassander
    29. July 2011 at 20:26

    Woops, this:

    It would be like a family deeply in debt buying paying for 6 cars and a boat they can afford to eat at 5 star restaurants because 100 dollars a meal is only a tiny fraction of what they owe.

    should say:

    It would be like a family deeply in debt paying for 6 cars and a boat saying they can afford to eat at 5 star restaurants because 100 dollars a meal is only a tiny fraction of what they owe.

  31. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 20:35

    Well cassander, hasn’t Medicare D cost about 40% less than projected?

    And why would you ever cut Social Security? Do you think that the $800-$1100 that many recipients get is lavish? Most people retire mostly broke. Means testing wouldn’t save tremendously.

    Everything I read indicates that making Medicare more efficient is the best thing we can do to cut spending, in addition to cutting military spending. More fundamentally though, we can raise revenues by actually stimulating our way out of this economic slump.

  32. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 20:37

    Oh, and federal tax revenues are currently well-below the percentage of GDP you cite.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. July 2011 at 20:39

    Cassandra,
    You wrote:
    “First, taxes as a % of GDP: http://imgur.com/cBgmk&zTgEI

    Well, that just proves it doesn’t it? No need to consult international evidence or refer to longer time periods at all.

    Yes, Omphaloskepsis is the way for sure.

  34. Gravatar of Mike Sandifer Mike Sandifer
    29. July 2011 at 20:51

    Mark,

    I’ve long thought the greatest shortcoming of our public education system is in failing to teach kids how to think. No one should graduate from high school without demonstrating an understanding of the scientific method.

    I think it’d also be nice if graduation required at least one world and US history course each, national government, state and local government, comparative politics, intro to macro and micro econ, psychology, personal finance, and a course on biology that covers the theory of evolution. Maybe evolutionary anthropology would be nice too.

  35. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 20:53

    Sadkowski, THAT IS EXACTLY WHY I say the entire budget problem is just the pay increases we have given state and local employees.

    We’re going to go back to treating them like shit, and everything will be fine.

    See Wisconsin.

  36. Gravatar of Rien Huizer Rien Huizer
    29. July 2011 at 20:56

    Scott,

    How much will you charge the President for using your your IP here? For good ideas, silence is golden.

  37. Gravatar of Rien Huizer Rien Huizer
    29. July 2011 at 21:02

    Mike Sandifer,

    “If anything, military spending should be cut first, as almost spending as much on “defense” as the rest of the world combined might be excessive.”

    That may be true, but the US spends that year in year out in order to be a able to defeat the rest of the world. Only it does collect not the rents that could accrue to that position..Instead its institutional belief is that this makes the world safer for all.

  38. Gravatar of CA CA
    29. July 2011 at 23:19

    Good point Rien. Isn’t it also fair to state that our generous defense spending allows Europe, and others, to freely benefit from our security blanket, while spending generously on their own domestic social programs?

    I’ve recently read some unflattering articles about NATO’s capabilities in Libya.

  39. Gravatar of CA CA
    29. July 2011 at 23:29

    “our generous defense spending allows Europe, and others, to freely benefit from our security blanket”

    Don’t you econ guys call that an externality? :)

  40. Gravatar of Mattias Mattias
    30. July 2011 at 00:44

    I think Obama realizes that if he declared the debt ceiling unconstitutional the pressure on Congress to make a deal on the deficit would more or less disappear. So he waits till the last minute. It’s also quite possible that a deficit reduction deal would make it easier for Bernanke to do more. I choose to be optimistic :)

  41. Gravatar of W. Peden W. Peden
    30. July 2011 at 01:38

    CA,

    Yeah, but it’s a positive externality, so we Europeans don’t have to pay for it. ;)

  42. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 01:55

    I say this as very much a small-govt guy who’d very much like to see all kinds of spending slashed:

    Obama should, IMHO:

    1) Assure the national debt is serviced. There is plenty of revenue for that, and I don’t see any practical problem with letting the computers that send out checks continue to do so as before. So that ought to be easily done. Then…

    2) Let the Republicans choose between…

    a) Passing a clean debt ceiling increase, like the last 104 of ‘em.

    b) Passing a budget reform law that is sufficiently bipartisan to be endorsed by moderate Democrats and passed by hte the Senate — though it may be too late in the game to do that now. But that is how our Republican form of govt is supposed to function.

    c) If that is too humiliating for them, don’t pass anything, let the money be *cut off* for the military, Medicare, maybe Social Security, and everything else.

    And let them be incinerated as a result. That is how our form of Republican government is supposed to work too.
    Elected representatives being answerable for their actions.

    I see no reason whatsoever for Obama to break the law or do anything unconstitutional like taking it on himself to issue more debt — if he can do that, why can’t he take it upon himself to create new taxes or impose new spending cuts to solve this problem.

    None of that! Do this the honest way and the legal way. Let the Republicans use their power to defund the military during wartime and grandma’s medical care and pension, if that is what they want to do — and let them answer to the voters for it.

    I have no fear at all the delaying such federal spending for a few days will do any serious permanent damage to the govt — when the Repubs see what is about to happen to them, they will start retreating fast, like Napoleon from Russia, realizing as bad as the retreat is the alternative will be worse. So this won’t last long.

    There are lunatic extremists in every political coalition who will resort to blackmail of the majority to get their way — they must never be indulged out of fear of “what could happen”, or they win and will have countless imitators, making things much worse. This is not a left-right thing, this is principle. Let them play by the rules straight-up and be crushed by everyone they defund. The some sense of responsibility and perspective may be return to the political players.

    Do not compromise and give the blackmailers more hands to play, or panic and take the heat off them by doing something illegal yourself. There’s no responsibility in that.
    Follow the law, come what may.

    And you know what? If the military and grandma et al get mad and instead blame Obama and the Democrats for being defunded, that’s OK, the political playes will learn something from that. That’s how our Republican form of govt is supposed to work too. (But I doubt we’ll see that.)

  43. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 04:04

    “NGDP grew at a 9% annual rate in the first quarter,”

    With inflation at about 4.5%, that implies that RGDG should have grown at 4.5%. So what happened. If this had been caused by an adverse supply shock, inflation should have significantly increased.

  44. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 04:08

    “It’s clearly their job to do that, after all.”

    The reality is that the Fed is refusing to do its job. It has a congressional mandate to achieve maximum employment that it is blatently ignoring. The FOMC is a group of scofflaws.

  45. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 04:14

    “The Fed has behaved like someone targeting inflation in the 1% to 2% range, and I’d expect them to continue that policy. It’s not good enough, but they might well offset the effects of fiscal tightening.”

    With nominal wages very sticky downward once inflation drops to this low range, the effects of the spending cuts will largely reduce output and have only a small effect on inflation, so it will bring little expansionary response from the Fed. We are now in a Little Depression, and the spending cuts will make it worse.

  46. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 04:23

    “I have no fear at all the delaying such federal spending for a few days will do any serious permanent damage to the govt”

    But it will make the current Little Depression even worse. It will almost certainly create a double dip recession.

  47. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 04:39

    “The Public Employees will be gutted. Gutted = no longer can donate large quantities of coin to Dems to get bigger paychecks.”

    “THEN we will finally get out the long knives and figure out how to force old people to do odd tasks around our homes into their 70’s.”

    “Finally we will admit that health care is a technology good, and as such, who gets what will be based on how old the technology is, how cheap that tech has become.”

    “state and local employees. We’re going to go back to treating them like shit”

    Morgan is doing an excellent job explaining what the class war between the corporate plutocrats and working people is all about. This is why the recall elections in Wisconsin are a major battle in this class war.

  48. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 05:19

    Inflation Hawk

    you have two choices:

    1. lots and lots of public employees paid less than the private sector makes per man on average (not some comparable thing)

    2. very few public employees paid very very well.

    choose.

  49. Gravatar of PrometheeFeu PrometheeFeu
    30. July 2011 at 05:48

    I really don’t understand this whole debt-limit thing. Well, that’s not true. It’s a great game-theoretic idea, establishing a commitment and signaling that you will not keep running a huge deficit, which failed miserably. But more importantly, it is pretty clear that Congress has authorized that spending. So unless the argument is that Congress thought that resources would magically fall from the sky, they knew when they authorized spending that they would have to borrow or raise taxes. At this point I think it’s very much within the President’s role to say: “OK, we have three options which are constitutionally acceptable: raise taxes, lower spending or borrow more. Congress is supposed to choose which one we go for, but if they can’t, I’m not going to default which would be unconstitutional. I’m going to pick something and make sure we can keep going.”

  50. Gravatar of Full Employment Hawk Full Employment Hawk
    30. July 2011 at 06:03

    “you have two choices:”

    Morgan:

    There is a tertium quid here and you state it in the parentheses: (not some comparable thing)

    The best option is to pay public employees wages comparable to what the private sector will pay people with the same levels of skill and experience (also allowing for the degree of pleasantles and unpleasantless of the work) in a highly competitive labor market. The pay includes the entire package including both salaries and benefits, including retirement benefits. This will provide for an optimal amount of public employment if the economy is at potential output. Not lots and lots and not very few.

    I benefit from debating with you because, unlike Scott, you have a full understanding of what the class war is all about. The only difference between us is that we are on opposite sides.

  51. Gravatar of Rien Huizer Rien Huizer
    30. July 2011 at 07:02

    CA,

    I was just pointing at the attractive opportunities (forget seignorage, this is real money) facing the US given its large investment in coercive international power. What would less benevolent rulers (say, XXX) do with them? Nothing? No question that the Europeans are free riders, but they are not going to pay either, right?

  52. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 07:07

    Inflation hawk,

    FAIL.

    When the public sector delivers productivity gains comparable to the private sector, they will deserve to earn comparable wages.

    Until then it is a jobs program.

    Comparable private sectors routinely pull 2-5% annually and have done so each year since 1996, WHEN Clinton stopped measuring productivity to “save money.” (this is the kind of idiots you are).

    So to be charitable, I’m willing to carve just 25% out of Public Employee Compensation, now you can choose:

    1. Do you want to pay everyone 25% less?
    2. Or would you like to fire the many incompetents, automate everything and let my crowd (the Internet guys) come in make government a simple online service?

    Good government is frugal government. When something costs less, people want more.

    Your problem is that government as delivered is judged correctly as a bad deal. People look at the product, they look at the price, and they blanch.

    Don’t you feel like a shit heel? If your damn troops just could keep up, if they weren’t such no-goods, everyone wouldn’t hate you, this crisis wouldn’t be upon us, and you could win this argument!

  53. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 07:12

    The debt limit is just fine, once we get near 100% of GDP, every time we hit the ceiling, we get to force some cuts.

    After it happens maybe one more time, all but the most liberal will be ready to restructure government.

  54. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 07:43

    Cassander, You said;

    “It’s true that the current debate is over peanuts, cutting from the baseline budget just means slightly reducing the rate of increase. But as unenthusiastic as the the Republicans are, it’s at least something, while the Democrats are frothing at the bit to increase spending on almost everything.”

    I see that as empty rhetoric, posturing. The GOP had their chance in 2001, with both the presidency and Congress, and right out of the box spending exploded on both domestic and military. They support more spending in many areas the Dems would be willing to cut, such as the military and space program. I doubt the GOP would significantly cut Social Security or Medicare. I agree they’ll cut spending on the poor, but that’s about it.

    I’d also argue that we’ll never be able to fix Medicare with cuts. You’d need a sea change in opinion toward some other system. Even if you’re right, it would take a Republican taking the presidency in 2012 to get major change. Right now my focus is recovery, I don’t see this dysfunctional government doing anything productive.

    Bonnie. I think as the superiority of the Singapore/Australia approach becomes clearer, we may be able to do some productive reforms. But right now Washington lacks ideas. I’d love to see less federal power too, but I don’t think a constitutional convention will make it happen. I hope I’m wrong.

    Cassander, I’ve made a slightly more nuanced argument about taxes. I don’t doubt that we could get above 18% with a VAT, for instance. But I see us as being near the top of the Laffer curve. As the % of GDP goes up, GDP falls. It’s very revealing that before the recession the US and Germany had almost identical tax takes per capita. Yet their total taxes were 40% of GDP and ours were 30%. Their per capita GDP was 25% lower. That’s the problem. I think your 18% applies best if we don’t do the VAT, and try to raise more federal revenue with just higher income taxes.

    Rien, If he uses my speech word for word, believe me, I’ll find a way to cash in from that fact.

    Mattias, I try to be optimistic too.

    Jim Glass, I’m not talking about Obama “breaking the law.” Everyone knows the debt limit is just as questionable as the War Powers act. Every single president ignores the war powers act, and gets away with it. That’s how things work. Again, if the courts rule against him, pull out the platinum coins.

    FEH, The 9% figure reflects nearly 8% inflation, and very little real growth. The VAT increase was a factor. Annual figures are different. I think closer to 5% NGDP growth over 4 quarters. The jobs numbers show a similar pattern to what occurred under Labour.

    You may be right about the Fed, but the fact that they pulled out QE2 at 0.6% core inflation (and which modestly raised inflation) suggests you also may be wrong.

    Prometheefeu, I agree.

  55. Gravatar of JTapp JTapp
    30. July 2011 at 07:43

    Do you think if he’d appointed Larry Summers instead of Bernanke to Chair we’d be in a different world? I doubt Larry would get bullied by Fisher and others and probably would have bluntly stated a higher inflation target. We might not be any closer to an NGDP target, but I bet we’d be a lot more optimistic about things.

  56. Gravatar of Chris Chris
    30. July 2011 at 08:58

    I agree with that hypothetical speech. But I think when Obama announces he is not going to enforce the debt ceiling, he should announce he is implementing the Bowles-Simpson deficit reduction plan. I’d like to see the Republicans try to complain about implementing a plan that eliminates the deficit while basically giving the Republicans almost everything they want. It would be entertaining, at least. I never understood why the Republicans didn’t push Bowles-Simpson as a compromise to the debt ceiling and deficit reduction. Getting a Democratic Senate and a liberal president to implement it would be a huge Republican victory. Instead, the Republicans complain that Bowles-Simpson calls for a level of taxation that is slightly higher than the historical average (21% vs 19%, I believe), even though the simplifications to the tax code would be hugely beneficial. This is why I think the Boehner plan of having a commission figure out $1.8 trillion in cuts is ridiculous. We already had a commission and absolutely nothing was done with its findings. You can always count on the Republicans snatching defeat from the jaws of victory, I guess.

  57. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 09:13

    Jim Glass, I’m not talking about Obama “breaking the law.” Everyone knows the debt limit is just as questionable as the War Powers act.

    After the Supreme Court rules that, everyone will know.

    Next week, if Obama defies the debt ceiling he’ll just take upon himself a good part — if not most — of the outrage that should land on the people who are causing all this mess. What more could they want? Politically, it is practically the best outcome possible for them.

    Is the roof really going to fall in on the USA if the national debt *is* financed but Social Security checks are delayed three days or a week? I very much doubt it.

    We are not talking about FDR doing some things of dubious legality to position the USA to stop the Nazis from taking over Europe. We’re talking about delaying domestic program bill payments a few days.

    Play by the plain vanilla rules, let the right wing delay the bill payments if it wants, then have them pay the price for it.

    It’ll keep the same thing from happening at a later date when the US situation could be much more serious and such blackmail could really be truly damaging.

    Or, alternatively, if blackmail gets results, it will encourage such replays, by all the players in the game.

  58. Gravatar of Liberal Roman Liberal Roman
    30. July 2011 at 09:44

    Obama is too much of a pansy to even consider what you just suggested Scott.

    His press secretary came out a couple days in no ambiguous terms said there is no other 14th amendment option. So unless he blatantly lied, it is unfortunately not an option.

    One thing I want people to take away from this is the stance of Ron Paul. From what I’ve read, Ron Paul is against raising the debt ceiling, fully understands that failing to raise the debt ceiling will lead to default and fully understands that default would be devastating for this country. This tells me that Ron Paul is worse than an idealogue. He is a cult leader. He is no better than a Jim Jones or a Marshall Applewhite. He puts adhering to his beliefs above everything else.

  59. Gravatar of W. Peden W. Peden
    30. July 2011 at 11:10

    JTapp,

    Doesn’t Larry Summers believe that monetary policy is impotent under current circumstances? That suggests that the Fed would have been inactive in early 2009 and the US would have headed into a Great Depression scenario until someone replaced him or the federal government passed a huge stimulus that wasn’t offset.

  60. Gravatar of JTapp JTapp
    30. July 2011 at 11:24

    Peden, his views are equivalent to Krugman’s. Krugman has said that while he believes monetary policy is probably ineffective, the Fed should at least TRY. He would have done something to increase inflation expectations. There’s no way he would have let inflation expectations fall through 2010.

  61. Gravatar of W. Peden W. Peden
    30. July 2011 at 11:28

    JTapp,

    If so and he could successfully lead the Fed, then I suspect we’d be debating who was going to be the sap to lose against Obama in 2012.

  62. Gravatar of dwb dwb
    30. July 2011 at 11:40

    really, you are hoping for a 14th amendment option? Why not the coin seniorage option – the Tsy prints a handful (4-5 100 Bn platinum coins) per month until the crisis is resolved? Seems to me it kills 2 birds with one stone- improves NGDP and gets us out of the debt crisis as well.

  63. Gravatar of JimP JimP
    30. July 2011 at 12:37

    Obama initially lead us to believe that he thought he was like Lincoln. Fine. Then ACT like Lincoln.

    http://www.tnr.com/article/john-judis/92958/obama-lincoln-debt-ceiling

  64. Gravatar of OneEyedMan OneEyedMan
    30. July 2011 at 16:29

    @ Scott
    My impression of the legal discussion is that the debt limit is that it is on much firmer ground than the war powers act. Even Obama’s lawyers seem to think that the Debt Ceiling is constitutional. Perhaps they are pretending for political reasons (like the lip service they give the war powers act). Nevertheless, huge legal scholars like Larry Tribe said that the limit is constitutional (http://www.nytimes.com/2011/07/08/opinion/08tribe.html?_r=1). The legal scholarship is at best divided and judging by the discussion I’ve followed online it is more likely in support of the legality of the limit. The war powers act seems to also be divided but with more of a consensus towards unconstitutionality. Who knows if anyone could stop Obama if he decided to violate the ceiling, but that’s a separate matter.

    I’m interested in the monetary consequences of the coin idea. That’s the same as the government printing money. Either way it seems the Fed looses. If they don’t neutralize then they loose control of the monetary environment. If they do, they help the government monetize the debt. Neither seems an especially good outcome. I know there is always a fiscal-monetary entanglement, but this seems like exactly the sort of policy you’d want to do to end the power of the fed over the monetary environment.

  65. Gravatar of cassander cassander
    30. July 2011 at 21:23

    Mike>

    >And why would you ever cut Social Security? Do you think that the $800-$1100 that many recipients get is lavish? Most people retire mostly broke.

    I wouldn’t cut SS payments, but I would raise the retirement age to keep the system solvent, maybe tweak the COLA a little.

    >Everything I read indicates that making Medicare more efficient is the best thing we can do to cut spending

    The problem with medicare isn’t that it’s innefficient. It is actually quite efficient at doing what it is supposed to do, the problem is that what it is supposed to do (pay almost the full cost of almost any medical procedure of everyone over the age of 65) is a vastly expensive undertaking, so expensive that it cannot be afforded. At some point, medicare will have to be cut, which will mean either covering fewer people, fewer treatments, or capping the amount it will pay per person.

    >More fundamentally though, we can raise revenues by actually stimulating our way out of this economic slump.

    Not as a percentage of GDP, which is what matters in the long run. Taxes are down as a % of GDP right now because income tax revenues always decline faster than the overall economy does, Taxes in 2007, with the bush tax cuts in full effect, were almost exactly 18% of GDP, precisely the historical average.

  66. Gravatar of Mike Sandifer Mike Sandifer
    31. July 2011 at 05:31

    Cassander,

    There’s absolutely no reason to raise the retirement age for Social Security. That’s ludicrous.

    The economy’s grown/capita over the last 30+ years, right? That means it’s more efficient, meaning output for less input. So, why should people be retiring later? Yes, there’s the baby boom crunch and the budget’s out of whack, but still… If anything, benefits should be going up across the board.

  67. Gravatar of Scott Sumner Scott Sumner
    31. July 2011 at 06:15

    JTapp, Summers might be even worse–he thinks the Fed is out of ammo.

    Chris, I agree.

    Jim Glass. That’s a good argument. My point is that he should have ignored this issue from the beginning. It’s a phony issue and there is nothing to “negotiate.”

    Liberal Roman, Yes, he’s very cautious.

    dwb, I did mention the coin option, that’s the accounting gimmick I referred to.

    JimP, That’s a good article.

    OneEyedMan, I’m not saying the law is illegal, I’m saying that if it conflicts with another law, the more recent law (spending authorization) takes precedence.

  68. Gravatar of OneEyedMan OneEyedMan
    31. July 2011 at 06:56

    @Mike Sandifer
    Because Social Security is a straight wealth transfer system, it has nice efficiency features in comparison with practically every other government program. So if we are cutting government programs, I’d rather see the in-kind transfers cut first when we cut the welfare state. That said, there are a number of justifications you might have for raising the retirement age even under rising wages. 1) The economy as a whole is more efficient, but that doesn’t meant that all workers are more efficient. High school dropouts have seen their real wages decline. 2) Jobs have become less physically demanding, lowering the costs of longer employment
    3) Disability payments have become more common, so acts as a better (though flawed) separator than straight age as who can and cannot work.

    @Scott. I’m still hoping for you to comment on the economics of the government to do as you suggest and use the printing presses (well minting machines) to pay her bills.

  69. Gravatar of cassander cassander
    31. July 2011 at 18:06

    Mike> I agree with What OneEye said, but would like to add that when SS and Medicare were passed, the elderly were poor. Today, the elderly are the wealthiest demographic group in America. The 65+ crowd is given 10% of GDP in free money any year. It is true that these programs are a big part of why the elderly are no longer poor, but I see no reason to further enrich the old at the expense of the young. As you might guess, I’m young.

  70. Gravatar of Scott Sumner Scott Sumner
    1. August 2011 at 08:48

    OneEyedMan, I did a post on the coins a few days ago.

  71. Gravatar of OneEyedMan OneEyedMan
    1. August 2011 at 20:00

    How did I miss that? Sorry.

    I wonder if the debt deal closed the platinum coin loophole.

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