Saturday, December 10, 2011

No shock treatment, please

Is it already too late to save the US from becoming Greece? I think there's hope. We have some time left, but we don't know how much time it is.

If this was an action movie, and the US was under a known threat of attack, there would be multiple military missions, conventional and unconventional, trying to prevent a terrible outcome. You can probably picture it--the stalwart hero who does everything he can think of to stop the devastation.

Well, we are under that kind of threat. We don't know how long we have to defuse the bomb, this bomb being our high and growing level of debt. And unlike in an suspense movie, I don't want to take any high stakes gambles. I don't want to try to shock our economy into a burst of activity that saves us, because what if it doesn't work? Shock treatment always costs a lot, whether direct government stimulus spending or tax cuts. The costs and risks are too high, and there is a good alternative.

We can take a conservative course. We can match our spending to our income. We haven't done that on a federal level in 11 years, and it'll be hard to do in just one year without causing painful shocks to our economy. However, we can put ourselves on a multi-year reducing diet plan. We can plan that in year 1 we will do this, in year 2 even more, etc.

Sticking to a budget can be hard for a family unless the family has 1) discipline and 2) some emergency money. The US is a wealthy country, so having some emergency money isn't really the problem. Discipline definitely is.

Right now, most of the country agrees that we have economic problems and rapidly increasing debt. In fact, that was the consensus at the beginning of 2010 when Obama created the deficit commission.

Unfortunately, there wasn't a consensus on the treatment. Was it more important to stimulate the economy to grow, and if so, using what method? This lack of consensus didn't hamper the deficit commission. As they studied the problem, most of the members came to a consensus, which became the Simpson-Bowles plan. Ultimately, the Republican and Democratic chairs (Simpson and Bowles) and 9 other committee members representing both parties approved the plan. However, there were dissents on both the right and the left. Obama damned the plan with faint praise, and Congress didn't act on it. This was an incredible waste, because a plan that can get bipartisan agreement is a rare achievement. This plan, supported by moderates, was scuttled by the extremes and the cowardly.

Once the plan was rejected, then we saw the plans from the extremes. Obama's initial budget proposal for 2012 had a deficit of $1.1 trillion. The Ryan plan cut only $90 billion, had a deficit of $1 trillion, and had future cuts that overwhelmingly affected domestic spending. Ron Paul's plan called for cutting $1 trillion in his first year. He's clearly unafraid of the economic shock. Consequently, no budget was ever passed for 2012. Instead, the government has operated under continuing resolutions for the entire year. Budgets cuts were agreed during a crisis over the debt ceiling, but there is no plan in place for 2012.

If Simpson-Bowles had been accepted, voted on, and passed, we would be nearly to our second year of the plan. Instead, we have a deeply polarized Congress, a current confrontation over payroll tax cuts, and no deal in sight for the Bush tax cuts due to expire at the end of 2012. We will stumble to a more balanced budget, even without a deal, thanks only to sunset provisions. I guess we should count our blessings. The extremes are canceling each other out (at least until the next election). A lucky default outcome is better than an expensive, ill-conceived policy, but a reasonable, conservative approach like Simpson-Bowles would be far better. In the meantime, the bomb is still live, and time is getting shorter.

 Blue - new taxes, Red - spending cuts. Simpson-Bowles: Most balanced

Update 2/10/12. Greece today:  "Papademos said failure to secure the $171 billion rescue package that’s under negotiation threatened 11 million Greeks with a default that would halt the payment of wages and pensions and shut down schools, hospitals and businesses." -- Bloomberg.  Is that what we want in our future?


Couves said...

MP -- After reading this, I think we’re much closer than our interaction on Plain Blog would suggest. [And please excuse me, because I'm about to be long winded here!] I do like the Simpson-Bowles plan quite a bit. But as we're learning, making any kind of cuts is extremely difficult. Electing Ron Paul, with his mandate for “shock treatment,” would do far more to get us there than electing someone from the “sensible center.”

Paul would also be a far more effective budget cutter because he’ll look everywhere, sparing no sacred cows. Do the Republicans refuse military cuts? Dems refuse entitlement cuts? Fine, Ron Paul will then make them justify every corporate giveaway, failed government program and foreign aid swindle.

I also think we actually need the shock treatment that Paul is alone in fighting for. Just avoiding the fate of Greece -- total economic collapse -- isn’t enough. I also want to avoid the years of depressed growth that await us if we don’t dramatically cut spending. If Greece is the worst case scenario right now, Japan is looking like the best case scenario… that’s not a future I want for our country.

Finally, Paul is the only candidate who seems to really understand the role monetary excess played in our recent housing bubble. Economists now generally agree that the bubble was caused by Greenspan keeping interest rates too low for too long. Ron Paul predicted this outcome in the early 2000’s, as did Paul Krugman (Makes it hard to understand why Krugman continues to support the same policies…

The Fed continues policies that guarantee future bubbles, general inflation and depressed growth. The idea is to encourage US consumers to spend us out of our slump, but it's now clear that unsustainable consumer spending is like a cancer on our economy. Even without a disastrous new bubble or punishing inflation, monetary stimulus creates malinvestments that suck capital out of the more productive investments, which we depend upon for future growth.

And those are just the economic reasons I support Paul… ;)

ModeratePoli said...

My post was titled "No Shock Treatment, please" and that includes Ron Paul. I also think Ron Paul would be more effective in cutting the budget, but he aims too high too soon. A trillion dollar reduction in the first year is too big an economic shock. In my budget plan, I'd aim for substantial in the first year and 1 trillion over 4-6 years.

As for depressed growth, I think that awaits us anyway, but I like to think of it as "steady-state."

I disagree that Paul is the only candidate who understands that the monetary policy caused the housing bubble. Even my dog knows that. My thoughts on the current strategy for the Fed are too long for a comment. Maybe a speculative post sometime.

To sum up, I think the Dr. Paul medicine is too much, Simpson-Bowles is my preference. Best of all would be a time machine back to Florida in 2000 to stop the election of Bush. Then all our problems would be solved. ;)

PS. I'm a big fan of Westport.

Couves said...

Thanks for the response!

There’s no way he’d get 1 trillion in the first year, but he’d have a mandate from the voters to make significant cuts and that’s what matters. If the new President is only asking for modest cuts, he’ll be lucky to escape Congress with his shirt. Additionally, there’s no way we can get the budget under control without making significant cuts to military spending and Ron Paul is alone in pushing for this.

On growth-- we’re already experiencing depressed growth, and there’s plenty of it baked in the cake, but things will be much worse if we do too little to change current policies.

Perry, Bachman and Gingrich have been parroting Paul on monetary policy. Frankly, I think they’re just pandering to Paul’s supporters... Perry has also promised to bring home the troops from Afghanistan. I don’t believe it. Bachman called herself the champion of libertarians (!). Gingrich seems to actually understand Paul’s critique of the Fed, but after what he’s said about Fanny and Freddie, I highly doubt he’s the hard money guy that virtually every Republican *claims* to be (remember, Greenspan himself was once a Randian capitalist superman).

Ironically, the progressive-left generally scoffs at the hard money advocates on the right, but they actually seem to recognize the harm done by Fed policy. I wish I could share your optimism that this perspective is so prevalent!

Ron Paul is a very flawed candidate, but he’s right on the issues and absolutely trustworthy. Trust is what earns him such devotion -- and while I wouldn’t call myself a Paul fanatic, let’s just say I’m still smarting from the “humble” foreign policy of our last Republican in office.

PS: If you haven’t visited the winery, it’s worth a visit! (they make beer too)

ModeratePoli said...

@Couves, When I said all the candidates and even my dog know the Fed's role in the bubbles, I forgot about Perry, Bachmann, and Santorum. I think Perry's dumber than dirt, so it would be surprising if he understood. Bachmann seems to have a skewed sense of reality in which truth is tangential, so ditto with her, and ditto with Santorum.

That leaves Romney, Gingrich, Paul and Huntsman, and Obama of course, and I believe all of them understand the role of the Fed in bubbles.

I don't agree that Paul is right on all the issues. I'd like to right-size regulatory agencies, and definitely keep the EPA, SEC, bureau of mines, etc. Environmental issues are very important to me, but for safety and conservation, not to bash business. My sense of Paul is that he doesn't care about environmental issues, and a lot of greedy, short-sighted people would take advantage of laxity in enforcement.

As for the trillion dollar of cuts in the first year, I can't ignore it. If he really means $250 billion, that's what he should say. If we elect him and he does the trillion, or shuts down the government for that level of cuts, we can't say we weren't warned. I think he's honestly aiming for a trillion, and that's too much.

PS. Love the winery, very nice champagne. Not into beer.

PPS. Nothing is keeping Paul from exposing "every corporate giveaway, failed government program and foreign aid swindle." That can be his next career, and I'd wish him much success.

Couves said...

He's not at all anti-environment, but I'd agree that his ideal environmental policy is completely unworkable (he talked about it on Leno tonight).

I guess we'll just have to disagree on the budget cuts -- I think it's impossible that he'd get the 1 trillion he's asking for, but it's definitely preferable to zero, which is what I'd expect from the other candidates.

If you've seen any indication that Obama has acknowledged the role low interest rates played in the housing bubble, I'd love to see it. All I can say is that Bernanke has initiated an unprecedented monetary expansion and Obama is apparently ok with this.

Romney and Huntsman repeat the usual conservative bromides about hard money but I haven't seen them address the issue in the context of our recent economic collapse. Gingrich says the right thing, I just don't trust him to do the right thing.

Yes, the Westport Rivers champagne is quite good.

ModeratePoli said...

As for your request that I find some indication that Obama knows the Fed was partially responsible for the housing bubble, I couldn't find any in a 10-minute online search. However, Greenspan has openly admitted that he was mistaken, and I don't think Obama is going to disagree about that.

When you talk about "hard money" you mean the gold standard, right? I'm against the gold standard as unworkable in modern economies with many different forms of wealth (my post on the topic).

If you're inclined, please read and comment there. In the meantime, I'll be reading your comments on Plain Blog with a more background knowledge and enjoyment now.

Couves said...

If Greenspan wants to take the blame for the bubble, Obama is obviously not going to stand in his way. But since Obama has been President for three years now, the important point is that he hasn’t ended Greenspan’s policies – rather, he’s doubled down on them in a dramatic way.

By “hard money” I was referring to the anti-inflationary policies supported by all Republicans in theory. I don’t think Paul’s ideal monetary policy is politically realistic, but he would have the power to replace Bernanke with a Fed chief who will stop and ultimately roll-back the massive monetary expansion we’ve experienced under current leadership.

Ron Paul is far from perfect, but he's popular for good reasons, particularly his determination to end American empire, follow sound economic policies and protect our liberties.

ModeratePoli said...

@Couves, Can you briefly describe what policies you refer to, and maybe provide some links? I don't want to assume I know exactly which policies you're talking about.

Couves said...

If you're asking about Fed Policies... Low interest rates, debt swaps with europe, the purchase of mortgage-baked securities and government debt.

Couves said..., that is.