Dude, Where’s my New Deal?

Ever since the economic meltdown began last year we have heard lots of voices on the left gleefully predicting the end of “laissez-faire capitalism” (when did we ever have it?) and the dawning of a new New Deal.  I’ll get to the US eventually, but first let’s take a quick look around the world:

1.  In the most important election since the crisis hit, Indian voters decisively ousted the communist party from the coalition government, opening the door to further economic reforms by the Singh government.

2.  In EU elections voters swung to the right in all 5 of the biggest countries.

3.  And now for the election in Argentina.  To set the scene, recall that Argentina since 1998 is the closet parallel to the US of the 1930s to be found anywhere in the world.  Just to review:

Argentina started the decade with a right wing government foolishly pegging its currency to an asset whose real value was appreciating in world markets.  (Remember Hoover?)  It was memories of 1980s hyperinflation that made the government reluctant to devalue.  (In the US memories of the 1920s German hyperinflation made everyone fear fiat money.)  Eventually the pain got so bad (in the form of high unemployment) that voters threw out the right wing government and replaced it with a left wing government.  The left wing government blamed the crisis not on a deflationary monetary policy, but rather on laissez-faire capitalism (now termed “neoliberalism.”)  The left wing government sharply devalued its currency, leading to an immediate surge in economic growth.  The left wing government renounced contracts that promised to pay debts in the reserve asset (gold in the US, dollars in Argentina.)  In both cases the decision was contested all the way to the Supreme Court, and in both cases the government eventually got their way.  Over time, their statist policies gradually took a toll on the economy.

Here is a short description of the Argentine Election results, which repudiated the governing Peronist party:

Although supporters once praised Fernandez and her husband for slashing unemployment with public works programs that jump-started Argentina’s battered economy, opponents and analysts now cast the couple as authoritarian and unwilling to compromise.

“Their overall nature is too much intervention,” said Alberto Ramos, senior Latin America economist for the Goldman Sachs investment firm. “It’s not going to put Argentina on a crash course, but it is a story about growing inefficiencies and increasingly autocratic management.”

The Kirchners’ problems have also “gone beyond substance to style,” Ramos said. “They’re very confrontational and stubborn: It’s all or nothing, and they’d prefer to break rather than bend. People have gotten disenchanted with that.”

Fernandez’s approval rating tumbled to 29 percent this year after a four-month standoff over export taxes with Argentina’s powerful farm sector. She has extended price caps, nationalized $23 billion in pensions and taken over the country’s biggest airline in a bid to boost the state’s role in the economy.

“I’d like the government to be somewhat weakened by this election,” said Alejandro Siniscalco, 41, after casting his ballot in the middle-class Buenos Aires neighborhood of Caballito. “Many things aren’t being done well, and we need to put a brake on the government in congress.”

Before anyone jumps in with the “all incumbents are unpopular during a crisis” argument, consider the following Reuters story written before the election:

Argentina’s powerful agricultural sector rebelled last year against Fernandez’s plans for higher taxes on soy, the nation’s top crop. If she is weakened, farmers will push for less government intervention in farm exports and grain markets.

The presidents of neighboring Brazil and Chile have seen their popularity soar even as their economies go into recession because people in those countries approve of how they are handling the crisis.

So the unpopular incumbents story, which didn’t work in Europe, also doesn’t work in South America.  So far voters seem to be treating this more like the economic crisis of the 1970s, when voters decided we need more market-friendly policies, not more statism.  One final prediction; Alex will find at least one error in my Argentine history.  Now on to the USA.

The poster child for the failures of capitalism was the financial crisis of 2008.  So much so that even a right-winger like Richard Posner entitled his new book “A Failure of Capitalism.”  Just to be clear, the financial crisis of 2007 and early 2008 (which was comparatively mild) was in part a failure of capitalism.  A lot of bankers made really bad decisions, and it can’t all be explained away with bad government policies like Fannie Mae and the regulations encouraging lending to low income groups.  But the much bigger financial crisis of late 2008 was of course caused by rapidly falling NGDP, just as in the 1930s.  It was a failure of monetary policy.

But suppose the left is correct.  If this crisis shows the failure of capitalism, then isn’t regulatory reform the sine non qua of any “New Deal.”

After wrestling with the issue for months the Obama administration has basically decided to punt.  It may not seem that way if you rely on the newspapers, but let’s go behind the scenes to some private White House conversations that I overheard (or perhaps just fantasized):

Obama:  Rahm, I’ve heard a lot of good things about the Canadian system, why don’t we go that route?

Emanuel:  Which parts of the Canadian system?

Obama:  Well don’t they make it much harder for borrowers to get subprime loans?

Emanuel:  I just checked, their system is a nightmare for our party.  The mortgages are fully recourse.  Borrowers must usually make much larger down-payments, interest is not tax deductible.  Remember Mr. President, we are the party that encourages banks to lend more to the poor and minorities.  The Canadian system would make it tougher on those groups.

Obama:  OK, but how about regulations to restrict Fannie Mae from supporting risky mortgages?

Emanuel;  But sir, that could limit their support of property developments in high risk areas.  We already have Barney Frank calling on Fannie Mae to loosen its condo restrictions, to start lending on riskier condo projects.  That would never fly with the House caucus.

Obama:  OK, then what about all the derivatives and other fancy innovations on Wall Street?  What about the excessive leverage, the risk taking with deposits backed by the government? Surely we can do something about that?  Put sand in the gears of finance.  Krugman says we should make banking boring again, like in the 1950s.

Emanuel:  With all due respect Mr. President, that would make Chuck and Hillary go ballistic.  If we tried to crack down on Wall Street they’d just take their business to the City of London.  Those high-paying finance jobs are the bedrock for the New York City and State economies.  They support lots of jobs in fancy restaurants, and their huge income tax payments allow New York to have its extensive government services.

Obama (increasingly exasperated):  So you are saying there is nothing effective we can do?  Well if that’s so, you’ll still have to come up with something, otherwise all the Netroots will be furious.  I don’t care if it’s just rearranging deck chairs on the Titanic, make it looks real impressive, we need a 5 part plan that at least gives the appearance of doing something:

(2 days later)

Emanuel:  Mr. President, the new plan is ready.  Here is how the NYT describes it:

Although it would strikingly reorganize the regulatory architecture, the president’s plan results from many compromises with industry executives and lawmakers, and is not as bold as some had hoped.

Mr. Obama seemed to acknowledge as much when he posed the question: “Did, you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills.”

Obama:  Well done.  I like that.  “Strikingly reorganize the regulatory architecture” sounds much better than “rearranging deck chairs on the Titanic.”  Do you think Krugman will be fooled?

Emanuel:  Not entirely, but at least he didn’t notice the irony of putting non-banks under a commercial bank regulatory system that was a complete failure.

Yes, I have left out all the other impressive Obama initiatives, such as his health plan.  It would boost federal spending on health care by more than a trillion dollars over 10 years, while leaving millions uninsured.  Surely that’s a big improvement over Bush’s health plan, which raised spending by over a trillion dollars over 10 years, and left . . . oh nevermind.

One area where I wish Obama was a New Dealer is of course the stimulus package.  As Christy Romer correctly pointed out the recovery from the Depression was almost entirely due to monetary stimulus, with fiscal stimulus playing a minor role.  A smaller fiscal stimulus and a more powerful monetary stimulus—now that would be change I could believe in.

PS:  Earlier I quoted Nick Rowe’s description of the Canadian banking regulation, which left me envious.  Now Stephen Gordon says they’ve also avoided our wasteful fiscal stimulus.  Nick is so lucky to live in a country with small government.

Update:  I blanked out on the fact that Mrs. Clinton is no longer New York’s senator.  On a slightly more serious note, this piece from The Economist is about right.  Some more regulation would be good, but the type that would be good would have a hard time getting through Congress.  The Obama administration decided not to even try:

“Mr Obama’s aides have concluded that a more ambitious overhaul of America’s sprawling regulatory system would expend too much political capital with too little benefit.  That bodes poorly for their willingness to face down special interests over details of even this limited proposal.”

Where I slightly disagree with The Economist is that they overlook the fact that there are worse things that “letting a crisis go to waste.”  Remember Sarbanes-Oxley?



31 Responses to “Dude, Where’s my New Deal?”

  1. Gravatar of Thorfinn Thorfinn
    1. July 2009 at 11:09

    Actually, Indian voters rejected the Communists in West Bengal because they were industrializing using stolen land. That is, they went back on their ideology, and Mamata Banerjee–their principal opponent–went further left than them.

    Congress itself is the left-centre party. The party of liberalization and reform–the BJP–was absolutely hammered. The success of Congress itself was due less to reforms (of which there were none) or even the promise of reforms (which may or may not happen), but were due to massive populist sops that wrecked the budget, such as the loan-waiver program and a rural make-work scheme.

    A few reforms are now pending, but it’s increasingly looking like Congress is doubling-down on the populist strategy that brought them success. Even without the Communists, there are substantial elements within Congress that stand against reform.

  2. Gravatar of James James
    1. July 2009 at 11:24

    If you want examples of good balance between laissez-faire capitalism and regulation, look to Canada or France’s health care, and Sweden’s income tax structure: two brackets, the bottom bracket is 0%, the cusp between the brackets is 10% above the median wage, and the top bracket rate is set to whatever happens to balance the budget, e.g., 57%. You don’t see Ikea, Ericsson, Volvo, etc. complaining, do you?

  3. Gravatar of ssumner ssumner
    1. July 2009 at 11:32

    Thorfinn, Great comment. Yes, I knew about the land dispute. But remember that this is a national election, and the communists were a veto on everything Singh tried to do.

    When communists fail, the left always try to say that they weren’t communist enough. That’s what Orwell’s Animal Farm is all about, and it’s the emerging view of North Korea (where the elite live like royalty). But I don’t buy it. West Bengal was falling behind the more progressive parts of India, despite its wealth of human capital. The government got desperate to catch up, and turned to foreign investors. What does that tell you? In the modern world when economic troubles strike people instinctively reject left wing solutions.

    I’m sure that the Congress party will disappoint us, it is India we are talking about. But your left/right distinction is debatable. The reforms started under the Congress party, and the BJP were hardly free-market ideologues. And stocks soared on the election news. Markets aren’t perfect, but I think their view is better than any single individual (including you and I.)

    I still view the election as good news in relative terms, but you make some very good arguments which are all true to some extent. India is a mixed bag, but how could it be otherwise? If reform was easy, India wouldn’t be in its current predicament in the first place.

  4. Gravatar of Dilip Dilip
    1. July 2009 at 12:23

    “If reform was easy, India wouldn’t be in its current predicament in the first place.”

    That problem isn’t specific to India. Reform isn’t easy anywhere. Unless pushed to the brink no country ever takes up much needed and ground breaking reforms. Take the US for example — if not for the mess it finds itself in, do you think there will even be any talk of financial regulatory overhaul? If the Great Depression hadn’t happened, would we have had the New Deal? If not for the balance of payment crisis that India found itself in 1991, the economic reforms Singh initiated (back when he was the Finance Minister) wouldn’t have happened otherwise. Reforms are always incremental — more so, in a diverse country like India where different sections/castes of people have different needs and not all of them are always compatible with each other. Besides politicians simply reflect the mindset of the people (at least most of the time). The previous commenter talked about the rural work programme (called NREGA) being populist. Whatever you want to call it, that brought the Congress party back to power and one has to remember when that scheme was implemented the finance minister was P Chidambaram, a Harvard Educated guy who is about as good as they come. So if people seem to want it, what do you think political parties can do? Sure it wrecks the budget but if the people bring them back to power at least they will have some political capital to do something about it.

    Currently the Chief Minister of Uttar Pradesh (the largest state in India) is busy immortalizing herself by building monuments for herself and her mentor by using public money. If the voters bring her back to power, she will just continue to do whatever she thinks works. The problem is the people — if they don’t demand change, nothing will ever happen. Indians are always accused of what we call the “Chalta Hai” attitude (roughly means “take it easy” approach). As long as we keep doing that the pace of India’s reforms will always be a little slow.

    I am reminded of an article I read long time ago about India’s economic reforms being “irreversible” (as if that was some kind of achievement). One commenter wrote — a bullock cart stuck in a huge sloshy mud is also irreversible in that it doesn’t move backward but neither does it move forward!

  5. Gravatar of Alex Alex
    1. July 2009 at 12:56


    It is always easy to blame monetary policy. The convertibility in Argentina caused a deflation but to blame everything on monetary policy is unreal. Sure we had high unemployment and close to falling prices. But the economy was growing at 5-8% at the same time as unemployment was reaching 20%. Comparing our situation to the 30’s is absurd. You cannot compare our structural unemployment issues with anything you see in the US (maybe with Europe). You like market forecasts, how do you explain that the country risk was still low when Menem left his second term and the country was already well into deflation? Argentinas problems, had to do with low productivity caused by rigid labor markets. Ofcourse the appreciation of the peso didn’t help. But hidding the problems under the rug of a devaluation is not a long term solution. Is like, in Krugman’s words, creating a housing bubble to save the economy from the dot com bubble. The structural changes that needed to happen didn’t and when market realized that they were not going to happen that is when the whole thing when down the drain. You like market indicators no? How do you explain then that the country risk was still low when Menem ended his second term and the economy had been with a fix exchange rate for 10 years and with prices already falling? Now we devalued our currency and had a great run for 6 years at the expense of 15-20% inflation (which actually nobody knows since the statistics are bugged). Sure that inflation lowered real wages (and helped by record commodity prices) boosted exports and generated a Current Account surpluss (of course when you have no access to international credit markets you cannot have a Current Account Deficit anyway). But real wages could have fallen if labor reforms had been carried out or if the president signed a law lowering wages (which was actually tried De la Rua’s minister Lopez Murphy) just like they increased them before. In any case prices have catched up with the exchange rate, commodity prices are still high but not as much as we would like and our fictitious competivness is vanishing. You think monetary policy can save us again? Sure, devalue the currency, destroy the economy again then it will be easy to have record high growth like in the last years.

    With regards to the politics in Argentina, it was not the left that defaulted. The Left came after the default with the Kirchner’s and now the Kirchner’s are loosing ground but I wouldn’t say that it is to the Right. True the Right (Macri the leader of the PRO is the son of a millionaire) won the elections in Buenos Aires (city and province) but only got 17% of the total votes at the national level. In the city of Buenos Aires the second place went to a Pino Solanas who is a really left guy (he is Argentina’s Michael Moore) who’s complain about the government was that they didn’t go deep enough with the socialist reforms. And the Radicales with their alliance (which represent the center left) got most of the votes at the national level with over 30%. The peronists that are alligned with the government got another 30% and the peronists that would be alligned with the center right got very few votes nationally. I whish you were right and Argentina was moving to more market friendly policies but I still don’t see it.


  6. Gravatar of O que a crise mundial não é « De Gustibus Non Est Disputandum O que a crise mundial não é « De Gustibus Non Est Disputandum
    1. July 2009 at 13:35

    […] O que a crise mundial não Ã© Julho 1, 2009 Posted by claudio in Uncategorized. Tags: crise mundial trackback Não é o fim do capitalismo. Por que? Bem, se você acompanha o debate, não terá dificuldades em entender o que Sumners diz. […]

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. July 2009 at 14:02

    The Honduran legislature just showed the door to Hugo Chavez’s soul mate in other blows to socialism.

    But, in the USA, not so much; the Cap and Trade legislation will set up New Deal-like agencies that will outlive us all. Jim Glass recently explained it to Andrew Samwick:


    Just look at what just happend with Obama’s cap and trade: All the tax revenue from it (the equivalent from a potential carbon tax) has aleady been blown on one of the greatest pork distributions ever, Orszag’s “greatest act of corporate welfare in history”.

    Once all those industries are on that dole and all those new government agencies are running it for them, the government and Treasury have about as much chance of “clawing back” that revenue as NYC landlords have of escaping the “emergency” rent controls put into effect in the 1940s … as NYC residents like me have of escaping the taxi fares needed to cover the cost of $200,000 taxi medallions — an innovation of the Depression intended to boost fares for drivers … as the federal govt has of escaping the cost of agricultural subsidies created during the Depression, etc.

    And, Keith Hennessey proclaims the coming of Smoot-Krugman:


    Sorry, Dude.

  8. Gravatar of ssumner ssumner
    1. July 2009 at 14:59

    James, I have heard good things about the two health care programs you mention, although I don’t know enough to have an intelligent opinion. There is also the issue of whether specific policies can easily be adopted in different countries. Could we adopt the French system? Maybe, but when we tried to emulate the French fast trains we failed. If we are looking for models why not pick the best? And so far no one has told my why I shouldn’t regard the Singapore health care system as best–and it’s much more free market than the US system.

    I have heard good things about the Scandinavian tax systems. They tax consumption heavily and savings and investment very lightly. If true that is a good thing. To raise that much revenue you need a pretty efficient tax system. Our system is a complete mess and could never raise that kind of revenue, even if the tax rates were raised sharply. On the other hand countries like Sweden have too much tax revenue, they should let individuals take care of more of their own needs through forced savings plans, as does, you guessed it, Singapore.

    Dilip, Those are good points. You obviously know much more about India than I do, and your opinions sound reasonable to me. I like seeing countries move in what I consider a progressive direction, but I also understand that it’s their culture and their decision, not mine. As I said in my reply to Thorfinn, I wouldn’t expect a country as large and complex as India to reform at a rapid rate.

    Alex, Your GDP data isn’t even close to being correct. During the deflation of the late 1990s and early 2000s Argentina’s real GDP fell year after year, sometimes as much as negative 10% a year. If you don’t get the facts right, how are you going to figure out what caused the problem? It was very much like the Great Depression in the US. We didn’t have flexible labor markets in the 1930s either. We also had over 20% unemployment. We had real GDP fall year after year. You can say it was different all you want. But unless you give me a reason to think the deflation wasn’t the problem, than I will continue to believe it was the problem in Argentina, just as in the US. I’m sure those on the right thought it wasn’t the problem, just as those on the right in the US thought deflation wasn’t the problem. But is was. And that’s why the right lost power in both countries.

  9. Gravatar of ssumner ssumner
    1. July 2009 at 15:11

    Patrick, I am an eternal optimist. In 1975 when I was studying economics I never would have guessed that we were on the verge of a massive wave of privatization sweeping the world. Or that we were about to abolish all sorts of regulations from the Great Depression. Not the taxi cartel as you point out, but cartels in airlines, trucking, communications, and lots of other industries. Obama plans to raise the top capital gains rate to 20%, which is bad. But that would have seemed like a dream come true in 1975.

    And if America gets too socialist I can always move to China–which is going the other direction.

    Keep hope alive!

  10. Gravatar of James James
    1. July 2009 at 15:50

    I’m not sure changing train systems, which requires huge capital outlays, can be compared to changing healthcare systems, for which we mainly need to cut out the middlemen if we ever hope to overcome the deductibles, partial coverage, and lack of coverage which keeps us from reaping the 1.40 bang-per-buck ratio of preventative care. And as for Singapore, can a country without any rural regions be a better model for us than Canada with its vast tundra with sparse population?

  11. Gravatar of ssumner ssumner
    1. July 2009 at 16:16

    James, Why would health savings accounts be less effective in a country with a rural population?

    You are probably right that trains and health care are not comparable, but not for the reasons you indicated:

    The reason fast trains didn’t work in the US is that we are more litigious than the French. We could afford to build the track, but there’d be no way to ram the necessary straight track right through the wealthy suburbs of Connecticut and other northeastern states.

    Reforming health care would be much more difficult than fast trains. The extra 5% of GDP lines the pockets of many people, including the doctors in the US who make twice as much as in Europe. Do you really think these and other powerful special interest groups would be easy to deprive of $700 billion dollars a year in income? We can’t even reform agriculture, where the amounts are much smaller because the farm lobby is too strong. I hope I am wrong, but I see little chance of shrinking the health care sector in the US to European levels, much less the even smaller levels of Singapore. (Now I am sounding like Patrick.)

  12. Gravatar of TGGP TGGP
    1. July 2009 at 16:34

    Sure the BJP are hardly free-market ideologues. But neither are the parties whose success you were trumpeting in the European elections, OR the left-populist president of Brazil & center-left (Socialist) president of Chile. I snickered when people at places like the Guardian and Crooked Timber said for that reason it didn’t indicate a rejection of social democracy, because that wasn’t really on the table. However, you can’t then use the same logic against the BJP. From what I understand they are considered to be to the economic right of Congress. Congress dumped the communists because they had a large enough coalition against their main rivals (the BJP) that they didn’t need them.

    The folks at Economic Perspectives from Kansas City have almost made much note of how little Obama’s reforms do. Of course, they want an actual repeat of the New Deal. Meanwhile, Joe Stiglitz(!) is worried about the tarnished image of capitalism around the world and a surge in third-world socialism.

    Canada has vast areas of tundra, but I believe the population is largely urban and huddled near the U.S border.

  13. Gravatar of Alex Alex
    1. July 2009 at 16:51


    This is the data for GDP growth

    1994 5,84%
    1995 -2,85%
    1996 5,53%
    1997 8,11%
    1998 3,85%
    1999 -3,39%
    2000 -0,79%
    2001 -4,41%
    2002 -10,89%
    2003 8,84%
    2004 9,03%
    2005 9,18%
    2006 8,47%
    2007 8,65%
    2008 6,97%

    (Not PPP adjusted)

    The -10% is after when the government defaulted and the convertivility abandoned. Unemployment in October 1996 was over 17% + a 13% subemployment rate. That same year the economy grew over 5%. The following years the economy kept growing and unemployment decreased slightly until 1998. Inflation between January 1996 and December 1997 was virtualy zero, yet the economy grew. Prices started falling at a faster pace in 1998 yet the EMBI+ index that measure the country risk premium for Argentina was stable until (between 440 and 550 pts) until 2000, so markets were not anticipating a the crisis. It was then that markets saw that the new government was not going to carry out the necesary reforms to fix the structural problems in the economy: rigid labor markets and soaring government debt that all hell broke loose. In May 2000 the country risk broke the 600 points and doubled during the following year. In 2002 the inflation rate was 30% and you can see what happened to GDP.

    Yes, maybe the currency exchange should have been abandoned sooner, or pegging to the euro or a basket of currency would have helped our Current Account balance, but that is only treating the feaver when you have the flu. Taking Tylenol will help you feel better but it will not cure the infection.

    I understand your view of the economy, but taking the money view to the extreme is not always helpful. Think of the US 40 years from now if health care costs are not controlled. What do you think will happen? Well that was Argentina in the early 2000. We had the fiscal problem then, it was not comming some time in the distant future, it was right around the corner. Yet our problem could have been solved, but there was uncertainty about whether the government would to do it. It it would make the reforms or take the easy way out by devalueing the currency, as time passed it was clear that the new government was not going to do the reforms. In March 2001 Lopez Murphy tried to cut public sector wages by 10% to control government spending, I don’t think he lasted more than a week as minister of finance.

    You have to stop thinking that everything is like in the US (I wish we could be like the US in the 30’s, at least we would have a bright future to look forward to). Monetary policy was abused for decades in Argentina. It was a slave to fiscal policy. The convertibility was an attempt to correct that. To have an independent central bank, so independent that it could not control the money supply even if it wanted. The idea being that that would force the fiscal side to correct itself. Clearly it didn’t work, but the problem is not the monetary policy and if you actually think about it as long as people keep thinking about it in terms of monetary policy the necesary changes on the fiscal side and the market structure will never happen.


  14. Gravatar of Alex Alex
    1. July 2009 at 16:51

    I forgot to mention that the data is from the INDEC.

  15. Gravatar of ssumner ssumner
    1. July 2009 at 17:34

    TGGP, I may be inconsistent, but I am not that inconsistent. The point about Chile and Brazil was made by Reuters, not by me. But I think it is a reasonable distinction. The Chilean and Brazilian “left wing” governments are much more market friendly than in Argentina. Having said that, I wouldn’t be surprised if the voters in Chile turned even further to the right next year. But again, that was Reuter’s observation.

    OK, the BJP is somewhat to the right of Congress. That’s a fair criticism. But I don’t agree that Congress threw the communists out of their coalition, I think the voters did. Correct me if I am wrong, but until this election didn’t the Congress party pretty much have to include the communists? Didn’t they depend on their votes to form a government, even though the communists were a pain in the neck? So well I agree that is was hardly a ringing endorsement of laissez-faire, it was a turn to the right compared to the previous election. Again, I don’t know enough about India to have an intelligent opinion. But when a stock market rises 17% the day of the election, and the explanation is that traders now expect more economic reforms, then we are talking about something beyond the opinion of one minor professor. I consider that as as strong a piece of evidence as you could find that the election did move India in the right direction. (In both senses of the term “right.”)

    Thanks, I’ll check out the KC Fed article. Regarding Stiglitz being worried about the image of capitalism going down, I’m tempted to make a joke. Something like, “Maybe that’s happening because people are reading Stiglitz’s book.” Others can probably think of a better joke.

    Alex, I understand perfectly well that Argentina has all sorts of problems beyond monetary policy. But the specific problem of 1998-2002 was basically monetary. Four straight years of negative growth is horrible. We didn’t even have that in the Great Depression. And it just happened to occur during a period of deflation? I stand my my argument that it was a huge mistake. Was it understandable? Sure, as I pointed out in my post both the US and Argentine mistakes were understandable give the distrust of fiat money and the history of hyperinflation when you had no monetary anchor. But it was still a mistake. It’s not a moral judgment I am making, I might have supported the policy had I lived in Argentina at the time. But in retrospect it caused the severe recession, and made the budget crisis much worse.

  16. Gravatar of d kite d kite
    1. July 2009 at 18:48

    If the US has implements a system comparable to the Canadian system, for one thing the Canadian system would collapse. We enjoy the benefits of free riding. Drug R&D is paid by the US consumers, we benefit. Advances in surgery, diagnostics, almost everything comes from the US system.

    And secondly, I doubt that US consumers would put up with the wait lists.

    Just an anecdote. My GP is retiring. He has a practice with around 2500 patients, and is looking for someone to take it over. No one out of school will take it on, there is not enough money in it to make it worth taking on such a workload. He is shedding, or attempting to shed around 1000 of his patients so that someone will look at it. GP’s are doing procedures outside of the medical system to make enough money.

    As for the rural/urban services, rural in Canada ranges to terrible to non existent. Interestingly a politician who wrote a report (largely ignored) on how to save a failing medical system closed rural hospitals during his time as a provincial premier. There isn’t enough doctors, enough money, enough nurses.

    If the US implemented such a system, I would expect the majority of US doctors would just quit.


  17. Gravatar of Robin Robin
    1. July 2009 at 19:11


    You reference the Scandinavian top income tax rate of 57% as if it were higher than the top US marginal income tax rate.

    But it’s not really much higher.

    In high population and high tax states, such as California, NY, and Mass, top marginal tax rates – including payroll – reach above 50% after deductions. If you don’t include payroll, you’re at ~40% after deductions.

    Add in the fact that US corporate tax rates are far higher than those in Scandinavia, and it should be obvious why Nokia isn’t complaining.

  18. Gravatar of Robin Robin
    1. July 2009 at 19:28

    Just as a quick follow up, and please forgive me for sidetracking the conversation, but Wikipedia has a rudimentary and incomplete chart of income, payroll, and corporate taxes across many nations. Despite the weaknesses of the chart, for example it doesn’t include deductions or loopholes, I think you’ll find that for folks located in high tax parts of the US, their taxes are in the same neighborhood if not outright higher than those of Sweden, Finland, Norway, and Denmark.

    There is another chart on that Wiki page which excludes state taxes. Even with the state taxes excluded, the US corporate + personal income tax rates are in the same neighborhood as Scandinavian nations.


    Sorry again for sidetracking the conversation, Scott. I’ll leave this well enough alone now.

  19. Gravatar of StatsGuy StatsGuy
    1. July 2009 at 19:43

    Argentina in 1996 was like the US in 1982…

    That is to say, Argentina (under a rightist govt.) financed growth with a strong currency by issuing massive amounts of debt, such that the debt to GDP ratio jumped from 29% to 38% in one year. Meanwhile, the debt was paying 12% more than US treasuries IN SPITE of deflation, which can only be explained by default risk since no one thought they could repay it fully.

    That is to say, it was just another instance of a “conservative” government financing temporary growth by indebting future generations.

    Here is an excellent timeline:


    Frankly, my great concern is that the US is doing something similar to what Argentina did (that is, financing anemic short term growth through obscene fiscal stimulus with inadequate monetary stimulus, largely due to the political power of certain financial players and terror of higher interest on existing debt).

    In this regards, I fall into line with ssummer. (On other issues, not so much.)

    And honestly, since debt load (both private and public) is a good chunk of the problem, a less costly long term solution would be a massive one-time monetary shock (the govt. prints a one-time shot of 14 billion dollars and pays off its debt) which would avoid the current trap in which fear of _future_ inflation is counter-acting the monetary stimulus through higher interest rates. This would create a massive reduction in living standard, but would not eject people from their houses. Except, of course, no one believes it would be a one-time thing, because we still haven’t fixed the deep structural problems (health care, financial regulation, energy, trade imbalances), so we’d just run that tab back up. Unless we were FORCED to live within our means (like a bankrupt homeowner whose credit is ruined, and now has to live on cash).

    So instead, we’ll pile up debt, and then suffer higher interest which will strangle the economy, until it becomes unsustainable and we are _forced_ to inflate to buy our own t-bills (instead of doing it now in a controlled manner). Meanwhile, instead of the govt. paying off its debt, private actors will use publicly-subsidized interest rates to hedge themselves by gaining exposure to hard and/or non-dollar denominated assets.

  20. Gravatar of tom s. tom s.
    1. July 2009 at 22:07


    You linked to a startling graph showing Canadian and U.S. spending over the last sixty years. What was going on politically in Canada from 1993-2000? This is when the steep decline in government expenditure as a percentage of GDP seems to have occurred? I asked this same question two months ago when Alex Tabarrok posted the graph at MR. I got no response over there.

  21. Gravatar of Current Current
    2. July 2009 at 01:50

    I think Scott is broadly right that the left are suffering. Looking at the local situation in the UK and Ireland the big reason seems to be profligacy. They have run up large debts.

    The Conservatives have been very successful in the UK recently. Because of Labour corruption and incompetence, and because of the debt issue. However, the Conservatives are no longer really a right wing party, they are soft-left.

    The UK is taking the same course as the US, running up large budget deficits. It is hiding them too. I think a crisis will be needed to precipitate change, just as it was in the 1970s. I’m not particularly optimistic about the future. I think things will be worse though in the more rigid european countries such as France and Spain.

  22. Gravatar of Current Current
    2. July 2009 at 01:50

    Topical comedy…


  23. Gravatar of Current Current
    2. July 2009 at 03:16

    It’s worth mentioning that folks don’t quite appreciate how bad a kicking the left are getting in Europe.

    Here is the map of English council seats from the local elections a months ago. The Labour party won no councils and the Liberal democrats won only one.

    In the European elections Labour came third behind the Conservatives and UKIP – the conservative anti-EU party. The Conservatives got 25 seats, UKIP 13 and Labour 13. Labour got only 16% of the vote.

    France is quite similar, although the right are currently in government. Sarkozy’s UMP got 29 seats, the Socialists got 14 seats as did the Greens.

    Normally elections in this part of the world are decided by small changes of floating voters. Not this time though it seems. That may be an artifact of the low turnout though.

  24. Gravatar of cannuck cannuck
    2. July 2009 at 04:50

    tom s.,

    That period was when the Liberal Party was in power. The Conservatives under Mulroney had run up such a huge debt through tax cuts and wild spending that Canada was under threat of having to deal with the IMF. The Liberals under Finance Minister (and for a short time Prime Minister) Paul Martin had to make a LOT of painful cuts in spending, and eventually got the situation under control. The only problem is that the Conservatives are back in power now (but probably not for long), have been blowing money like crazy ever since they got in, and are now running a deficit.

  25. Gravatar of ssumner ssumner
    2. July 2009 at 06:37

    d kite, You make some good points. I think the statement that the Canadian system would collapse is too strong, but many of your specifics are right on the mark, such as the way Canada, and indeed much of the world, free rides on American R&D into new drugs.

    Robin, You make a good point. I think you and James are both right in different ways. The US rates are higher then they look, and that is part of what I mean by the inefficiency of the US system. We have almost as much disincentives in our tax system but collect much less revenue. We should either have much lower rates, or we should collect more revenue with these rates. Capital income is the big problem here.

    I’d also be curious if foreign tax codes are as complex as ours. I find the stupidity of things like the AMT and schedules to phase out deductions almost mindboggling. They serve no role, equity or efficiency. The only people who gain are accountants, unless I am missing something. You could get rid of all that paperwork and just add one or two points to the tax rate. You’d get just as much revenue and have just as much progressivity, for far less paperwork

  26. Gravatar of Current Current
    2. July 2009 at 07:18

    In Britain and Ireland the tax code is quite simple.

    A normal worker, such as myself, pays two taxes – income tax and national insurance. National insurance is called PRSI in Ireland, it’s notionally a nationalized insurance scheme, but in reality it’s another tax.

    There are exemptions for marriage, children, pensions, renting and being in the pay-as-you-earn scheme. A few other rare things get some tax relief.

    Most workers who are paid salaries or wages never have to fill out a tax return.

    In Britain you have to pay a property tax in relation to the value of your house.

  27. Gravatar of ssumner ssumner
    2. July 2009 at 07:46

    statsguy, We agree on the madness of fiscal stimulation, but monetizing the debt would be crazy. A cup of coffee would cost more than $50, perhaps $100.

    Tom, Check out cannuck below.

    Current, I plan a new post on the UK. And I had a post after the EU elections that made a similar point

    Thanks Cannuck.

  28. Gravatar of ssumner ssumner
    2. July 2009 at 08:04

    Thanks Current, The US system is really a disgrace. People like to make fun of Steve Forbes, but what other politician even had the guts to point out that the US tax system was a abomination. Didn’t Bush make it even more complicated? And isn’t Obama promising to make it even more complicated than Bush did?

  29. Gravatar of Thorfinn Thorfinn
    2. July 2009 at 13:46


    Yes, this was a national election, but as they say all politics is local. Many of the dynamics in this election–including the Communist votes–can be explained through local factors. Certainly few voters know/care about the Nuclear Deal and other national issues.

    The fact that the Communists have chosen to move to industrialize like their Chinese friends certainly indicates a level of pragmatism that comes with governance. The problem is, their ham-fisted way of doing so (involved taking land away from people they had given land to decades ago) left the populist part of the spectrum open. In this case, they really were ‘insufficiently leftist.’

    Looking at stock movements and traders perceptions as a guide to reforms is a little much. The market was afraid of total government gridlock, so any stable government is an improvement. Look at the President’s speech–few economic reforms are forthcoming, though governance may improve in some areas.

    As for the Congress/BJP record; Congress was free-market once, in 1991, after a record BoP crisis and World Bank intervention. They have never before, nor ever since, been in favor of reform. The BJP, though hardly market fundamentalists, at least moved the liberalization movement throughout their time in office. They currently offer marginally better governance at the state level.

    In any case, I think that South Asia should make us think a little harder about what causes growth. Take all of Collier’s traps: corruption, check. Landlocked–some of India’s most prosperous areas are far inland. Most countries in the region have dealt with civil conflict, internal divisions, and ethno-linguistic divisions (among others). The business climate is horrible, while most institutions have actually gone downhill over the past. And yet growth in the region has been impressive. What does that mean for Africa?

  30. Gravatar of StatsGuy StatsGuy
    2. July 2009 at 16:34

    The reason fully monetizing the debt would be crazy is because it would engender expectations that future debt would be monetized. And so I agree with you on this too, as noted above. BUT, if there were some way of credibly committing to not monetizing debt in the future (after monetizing a large chunk of it now), it would work since it would decrease the likelihood of default down the road (thus actually lowering interest rate spreads). But I can’t envision anything that would work in the current political environment. The closest thing would be passing needed laws to restructure elements of the economy, and solidifying the federal tax base. Doing so, however, could trigger capital flight, but we remain loathe to pass legislation to equalize the regulatory costs of imports vs. domestic consumption (e.g. charge a carbon/pollution/labor abuse tax on imports equivalent to the costs of complying domestically). We might as well put a gun to our head.

    What we have now is ugly – a growing spread between interest rates and inflation rate, which is driven by perceived risk of US default (aka _future_ inflation). The only ones benefiting from this are banks, for whom the spread is a massive hidden subsidy. And, every day it continues, the risk of (effective) default grows as the debt mounts and jobs fail to recover. But the typical “business cycle” models keep telling us that recovery is just 6 months down the road… And, thinking this, we continually delay action since our policymakers keep thinking it will get better by itself in just a little bit. (Either that, or they are – perhaps justifiably – afraid of a flight from the dollar.)

    Hence, we should be monetizing somewhat more of the debt now (when we have disinflation) so that we don’t build up a mass of expected future monetization. Consider this: the difference between what the Fed is buying (300 billion) and what we’re spending in deficits this year (some estimates of 1.8 trillion)… this difference (which is being made up by selling IOUs) is larger than last year’s record deficit under Dubya Bush.

    Thus, we are in fact approaching Argentina – disinflation, increasingly high interest rate spreads, and a govt.-debt funded economy.

    Aside from drastic action, I think we may have hit the event horizon. It’ll just take time to play out. In previous eras when we’ve recovered from such high debt, we’ve had a relatively closed economy that accounted for a larger portion of the total world economy. Capital flight was not as great a threat.

  31. Gravatar of ssumner ssumner
    3. July 2009 at 11:51

    Thorfinn, Just to be clear, the Indian communists are nothing like the Chinese communists. The Chinese communists support pragmatic market oriented economic reforms at the national level. The Indian communists block every such attempt. Having said that, your point has some validity, but I certainly don’t think the Bengal voters want to go further to the left. Even the Nepalese Maoists became much more market friendly as they got closer to power. Voters aren’t suicidal, they are pragmatists. And taking land from poor farmers without adequate compensation is not a market friendly policy. It may be business friendly, but it’s not market friendly.

    Again, I think much of what you say is true, I just put a slightly different spin on it. Here’s an analogy. What would you make of Eastern European voters voting overwhelming to join the EU because they see on their TVs that market economies produce higher living standards than communist countries, but then tell pollsters that they oppose every single economic reform that the EU forces their government to adopt? Are they pro-market, or not? I don’t think it is an easy question to answer.

    Despite my reservations, I appreciate you pointing out that I oversimplified things. That’s why I love the comment section.

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