(And by the way, before I set you straight ;-> You are one of the few here who do not engage in sophistry or simple sling slam. I appreciate the honest interchange. I'm sure these various themes will come up again and again in future posts. I look forward to jousting.)

Now, here's why you are flat damned wrong...or, uh, misguided...

1. "No, Clinton's surpluses were a combination of defense being flat lined for the most part AND much much importantly a tax increase that ultimately raised the overall federal tax burden to roughly 20% of GDP -- it peaked at 20.9% in 2000 though a lot of that was revenue on people making money on the tech bubble, otherwise it was in the 18.5-20 range."

I agree on defense; he let scaling occur. I don't think you (or anyone) can prove the effect of the income tax. However, you correctly point out the tech bubble (an unsustainable revenue source, by the way) But little known, or conveniently forgotten, by Clinton detractors and fans alike - he lowered the capital gains tax rate. And that's how you got to 20.9% Funny how marginal rate reductions work.

2. "At roughly 20% of GDP in federal revenue, you can run a balanced budget in normal times. Bush's tax cuts dropped that number to 15.9 in 2002, and it remains, last I checked, under 17.5%.

C'mon, Bernard. 2002?? Can you say recession numbers? But to a larger point, you have just changed the paradigm. The post war average Fed revenue is 17.9%. Clinton's peak is an aberration. (You must be looking at the same data series I am: Table 1.3 in the Budget) I could recast your statement by saying that "in normal times" we could spend 23% of GDP and be balanced by just taxing 23%. Yeah. True. Its just an expansion of government. Go talk to Obama, he'd see my 23%, and raise me to 27%.

3. "Now, we can debate what the overall level of federal spending ought to be. But my view is that taxes in non-recessions ought to be set at what the spending is, not what we wish it were."

I understand the thrust of your point, but you do understand that the history of the last 45 years is that we live in a country that has steadily reallocated govt taxing and spending from military to social spending, and that game has an endpoint. If social spending is unchecked, your predicate is for unlimited taxation, since we apparently have no will for social spending control, and no defense reductions to tap into....and it will soon lead us to unprecedented levels of taxation..........but for your next point:

4. If it were up to me, I would cut Social Security by means testing it.

I'd love to see that. For it would expose the system for the fraud it has always been. It has always been sold politically as a defined contribution pension plan. You pay in x, you get back y. I get a statement every year. To recast it as a bait and switch welfare program ("Sorry! Thanks for 35 years of contributions, but we've decided you don't need it mf.") is the only thing I can imagine will put a sword in it. Good riddance.

5. "I would do all sorts of thing to cut spending. But if that is not possible, you have pay your bills."

Sigh. No offense. But I am an owner and manager of industrial companies. We have budgets. We have problems. We have recessions. I tell my managers: "figure out a way to deal with the realities of your environment, or else." They complain. They tell me "you have to pay your bills." I say: "you are paid to be managers; figure it out, or I will find a competent manager." Somehow they do. Its called innovation; its called ingenuity. Its capitalism. But government is different. Ma and Pa Kettle have to deal with budgets. Private companies have to deal with budgets. But government? Budgets? Budgets? We don't need no stinking budgets. We just tax.......

6. "Now, there are two separate issue with deficits -- one is the overall debt burden. The other is the velocity of increases or decreases. Here is the problem we face now -- we risk falling into a vicious cycle with deficits and debt. There is a tipping point, whether the combination of deficits increasing interest rates, interest payments eating up tax revenues, and the political consequences of debt financing become unmanageable. We are not immune to these dynamics."

I couldn't agree with you more. But something tells me your solution is taxes. Am I correct? There is a tipping point there, too. We have three strategies for getting ourselves out of a mess 45 years in the making and fundamentally driven by the Great Society mentality: 1) reduce the rate of spending increase such that overall GDP growth plus the byproduct tax revenues will grow into the need over time, 2) increase taxes to meet the need, 3) cut spending.

3 is a political pipe dream. 2 will lead to a reduction in output and Europeanization of the economy. Despite its apologists, that's a disaster. Further, let's be honest. The pols will spend all the new money anyway.

That leaves us with 1. Let's hope that Team Obama will not throttle growth too much. I'm not optimistic.

7. "Finally about models... no... comparing economic models to physics models is wrong, wrong, wrong. I doubt this is the time and place for it, but in economics there are two sets of "models" -- theoretical ones whose utility is bound by the power of the underlying assumptions and empirical ones which are essentially sophisticated regressions models which are bound by decisions over data -- what do you include? Over what period of time? etc etc. Neither set of models has the kind of experimental validation associated with the physical sciences. And indeed, the economists models are, on the whole, worse that those of other social sciences because of various disciplinary pathologies involving a bizarre fixation on incorporating high-level mathematics."

As a general point, I'm sympathetic, but as a former process engineer in a chemical refining environment I will tell you truly brutalized theoretical physical models have a place in the real world. I think the same is true in economics. I have always thought the problem with economic models is too many moving pieces.

For another time. My fingers are tired.

Regards,

It seems to me that Obama knows what the facts are. After all, one has to know where the mud puddle is, to be so neat about dancing around it. I suspect the Emmanuel rule about never wasting a crisis is the ruling part of this deal.

To what end?

Well, think;

I submit that a new, and massivly higher baseline in spending has now been set. Any attempt over the next several years to roll back these massive spending increases, will be decried as a ‘cut in spending’ and the Democrats will fight it tooth and nail. Forget that the increase cannot be sustained… That’s why they’ve not been particular concerned over what this spending bill… (They call it stimulus) … actually spends money on. All they’re concerned about is that it it is spent on something.

(And again, the argument of sustainability goes out the liberal window when economics are concerned.)

No, Clinton's surpluses were a combination of defense being flatlined for the most part AND much much importantly a tax increase that ultimately raised the overall federal tax burden to roughly 20% of GDP -- it peaked at 20.9% in 2000 though a lot of that was revenue on people making money on the tech bubble, otherwise it was in the 18.5-20 range.

At roughly 20% of GDP in federal revenue, you can run a balanced budget in normal times. Bush's tax cuts dropped that number to 15.9 in 2002, and it remains, last I checked, under 17.5%.

Now, we can debate what the overall level of federal spending ought to be. But my view is that taxes in non-recessions ought to be set at what the spending is, not what we wish it were. If it were up to me, I would cut Social Security by means testing it. I would do all sorts of thing to cut spending. But if that is not possible, you have pay your bills.

Now, there are two separate issue with deficits -- one is the overall debt burden. The other is the velocity of increases or decreases. Here is the problem we face now -- we risk falling into a vicious cycle with deficits and debt. There is a tipping point, whether the combination of deficits increasing interest rates, interest payments eating up tax revenues, and the political consequences of debt financing become unmanageable. We are not immune to these dynamics.

Finally about models... no... comparing economic models to physics models is wrong, wrong, wrong. I doubt this is the time and place for it, but in economics there are two sets of "models" -- theoretical ones whose utility is bound by the power of the underlying assumptions and empirical ones which are essentially sophisticated regressions models which are bound by decisions over data -- what do you include? Over what period of time? etc etc. Neither set of models has the kind of experimental validation associated with the physical sciences. And indeed, the economists models are, on the whole, worse that those of other social sciences because of various disciplinary pathologies involving a bizarre fixation on incorporating high-level mathematics.

I want to be clear on something. I hold no brief for Bush or the Republican controlled Congress that went on a spending spree. I have said here and elsewhere many times that it was irresponsible and destroyed the fiscal conservative brand. However, the steely eyed analyst in me looks at the country's leverage ratio and the amount of fiscal stimulus that might actually do some good and rejects the notion that the country has in the last decade been rendered unable to "counter-cyclically" spend if it so chooses.

In your argument you assume we must run huge fiscal stimulus counter cyclical measures. There has just been a huge debate as to whether those are effective in any large measure, and needed. So your argument is self fulfilling: we have to spend, therefore we bust the budget.

On Clinton's surpluses, I really think people need to understand what actually occurred during those years. The story of smaller deficits is incomplete, and implies a degree of fiscal discipline that was simply not true. Split spending into defense and non-defense. During the Clinton years non-defense spending went right on its merry way. (Take a worthwhile 10 minutes on Historical Table 8.1, 2008 Budget of the United States) And of course that is the portion that has been, and is going to, strangle us, especially when the full Medicare liability hits. Clinton did nothing to stop that freight train. Instead he reduced the deficit on the back of the defense budget. Part of that was the so-called peace dividend. Part of it was because he didn't have wartime fiscal issues to deal with. In any event, if you look at the reduction in the deficit as a pct of GDP, and look at the reduction in defense as a pct of GDP, it explains the total improvement. Carter pulled the same stunt in the 70's.

I'm confused, if you basically find yourself in agreement with Roubini, which would be on the pessimistic end of the scale, why did you defend Obama's hyperbole? 10% unemployment, a recovery beginning in 2010 etc would put this recession on par with 1982. I know that's what I have been saying; and I believe it to be the point Steve Verdon has been making. We have lost perspective in this country. The 1991 and 2001 recessions were short and mild. But 1981, 1958 and 1975 type recessions happen as well. I can see no justification for Obama's "potential catastrophe" language if not to - as Verdon said - fearmonger a spending bill into place. (And by the way, its not as if Rahm Emanuel's "don't waste a crisis" comments are not in the public domain.)

Economists models work about as well as physicist's models work on the plant floor. But as any process engineer knows, lard them up with co-efficient fudge factors and they are very useful for making practical judgements on the shop floor.

Lastly, I'll have to review estimates of what is considered "pork" in the bill (which of course will be judgement, depending on who's pig is getting gored) but $3B? That doesn't even pass the snicker test.

Regards,

It is not our overall debt burden, is it our structural deficit position that is the problem. When run deficits in good times, if means they will explode in bad, so that we were looking at somewhere in the neighborhood of $800 billion deficits even absent any stimulus spending. So if you try to apply counter cyclical measures, you can easily start running deficits of $1.5 trillion -- as we are likely to do. That is an annual increase in debt burden equivalent to something like 10% of GDP per year, and at those levels, I think there is good reason to ask whether the "cure" is worse that the "disease" -- which is why I am less than gung-ho over the stimulus package. If we had continued to pay down debt in the Bush years -- as we were in the Clinton years -- we would not be faced with the choice to sitting on our hands now versus placing our long-term fiscal health in jeopardy.

Even the guy who seems to have had the best model the last couple years, gloom and doomer Nouriel Roubini, has unemployment topping at 9%, a 20% further decline in housing prices, and GDP returning to growth later this year.......barring a banking meltdown, that is.

I think that is probably in the right ballpark, though I think a banking meltdown is much better than a 50-50 chance, especially since a further decline in housing prices will add to the insolvency problem. So... my prediction is closer to 10% unemployment before all is said and done, and growth starting again spring of 2010.

About models -- I'd be delighted to debate with you, in depth, the utility of economists models, if you'd like. My short version -- they don't work.

About pork -- look, even the GOP talking points only identified about $3 billion in pork. What they ended up cutting out of the bill was a big chunk of aid to education to keep from having to fire teachers and such. This wasn't about pork or not pork, it was that the GOP virtually wanted all of it to be tax cuts with a small amount of support for shovel-ready infrastructure, while the Dems wanted more direct government spending and less tax cuts. Pork was just a smoke screen -- like McCain's idiotic focus on "earmarks" during the campaign.

For example, you tell us that the massive Bush deficits leave us unable to apply a fiscal response in a recession. Yet our national leverage ratio, debt to GDP was approximately 50% in the mid nineties. Was that disastrous? In 2000, when Bush took office and the nation was sliding into recession, not to mention the subsequent 9/11 shock, it was approximately 35% In 2007 it was 37%, and obviously has been pretty steady for years now. So how do you support your assertion?

You also scold Steve for his "unsupported" assertion that this is a recession similar in scope to past recessions. That works both ways. No one can predict the future. But you have no support for your assertion that this is some other worldly event, other than popular press articles. So far, the hard data support the typical recession view. And further, two huge asset bubbles - equities and housing prices -are now nearly deflated and far closer to their long term norms than their bubble tops. This would suggest that stabilization is on the horizon.

Even the guy who seems to have had the best model the last couple years, gloom and doomer Nouriel Roubini, has unemployment topping at 9%, a 20% further decline in housing prices, and GDP returning to growth later this year.......barring a banking meltdown, that is.

How is a sober view of this recession as a serious but manageable event some sort of denial; and how is criticism of bizarre claims of imminent catastrophe unless we implement a classic pork bill unwarranted?

And why aren't we focusing on the banks if this is such a dire situation?

You have done a good job look at what has happened so far... and so far have done a very poor job predicting what will happen next. Seriously, let's pull our predictions about the economy from the past six months and see who has been closer to getting it right. You're problem is that you are so busy debunking what you consider to be overstatements that you are not doing any forward looking analysis.

My starting point was, and remains, that the confluence of negative trends would be reinforcing and make things worse. I was biased in that direction, I admit. I have been predicting for years that the Bush/GOP massive deficits of the past half-decade would be ruinous if we ever had a real recession and needed an effective fiscal response. So I was primed to see the dangers. But regardless, the fact is that neither massive deficits nor extreme monetary policy have even slowed the downturn, and that scares me. And it scares me in conjunction with that fact that none of the underlying issues is close to being resolved. Housing prices continue to fall. Many of the large banks are insolvent. The capital markets are a complete disaster. Internationally, the situation is as bad, so we can't count on some other engine pulling us out.

I am analyzing trends, not just trying to typologize what has already occurred. Fact is, this is a very small-n. You're big mistake is your assumption -- wholly unsupported btw -- that this is a recession like any other and hence that looking at the average of past recessions we can gauge its course. This isn't a normal recession. It a normal recession combined with an asset-meltdown in multiple key sectors combined with a financial crisis combined with a situation of ineffective government policy tools due to policy mistakes of the past decade.

And about the link... look... this may shock you... but I think the PATRIOT ACT does not go far enough in many ways. My beef with the Bush Administration on domestic counter-terrorism has not been in terms of specific programs, but with illegality. If Bush had been less concerned about defending the powers of the Presidency and more concerned about building a durable domestic counter-terrorism system, we might have had a very good PATRIOT-style law passed quite quickly.

Odograph, the stimulus bill is divorced from bank discussion as you put it. Perhaps you should be e-mail Barack Obama and Lawrence Summers.

Get real. They publicize them on different days but they are part and parcel of the credit crisis and resulting contraction (a credit-driven contraction).

In terms of sheer size ... from The Big Picture: Through Feb. 10, the government has made commitments of nearly $8.8 trillion and spent $2 trillion. Here is an overview, organized by the role the government has assumed in each case.

There is the net investment versus net costs thing to confound comparison ... but still, in terms of being in deep something ...

That looks to me like a sliding defense, and one that is trailing the facts. I mean, the very fact that stimulus discussion here is so divorced from bank discussion is part of that.

Odograph, the stimulus bill is divorced from bank discussion as you put it. Perhaps you should be e-mail Barack Obama and Lawrence Summers.

Bernard,

See... Steve... that is the problem. I don't have a bias in favor of government intervention. I'm a small-government libertarian generally. But I look at the data and I am pessimistic.

Yes Bernard I got that last part. You see this as a potential catastrophe. I don't share that outlook yet. It is bad, I don't think it is Great Depression style bad.

There is tons of scary data. You can choose to dismiss it, and there are good reasons to do so perhaps, but simply claiming that Obama is wholly ignoring facts to make his argument is lunacy.

Oh for God's sake, I'm not dismissing it. I'm trying to put it in historical context, similar to what Drew has done. I have seen little evidence that you are trying to do the same. I read news articles see screaming headlines then go get the data. I look at, say, unemployment claims as a percentage of the labor force and go, "Oh, well that isn't as bad as the article makes it out to be. Its bad, but not that bad." Now that could all change. In three month we could be looking at 15% unemployment and 8% reduction in GDP in which case things are very, very, very bad. But just because the current trend is bad doesn't mean it will continue forever or even get worse. It could, but I'm doubtful.

In any event, the haste surrounding this stimulus bill is shameful. The waste present in the stimulus bill even moreso.

I don't doubt that Obama is aware of the facts. I think he is exaggerating to get what he wants. That is how government works. Take a crisis real or fabricated...and it doesn't hurt to exaggerate a real crisis, then propose an expansion of government power. FDR did it, Bush did it, even Johnson did it. And then when the economy recovers, as it likely will, he can take the credit and hopefully it will happen so he can get re-elected then after his second term then rake it in with speaking engagements after that term is over.

By the way you did follow the link in the OP for the word legislation...or at least mouse over it? If not do so.

Then I come to OTB to see:

Pass It Now Or We All Die!!!!
Fearmongering
Amar Bhide on Fearmongering and the Economy

That looks to me like a sliding defense, and one that is trailing the facts. I mean, the very fact that stimulus discussion here is so divorced from bank discussion is part of that.

It's part of reducing the problem to ... fearmongering.

(Meanwhile the libertarians are accepting nationalization!)

Steve, you can't do two or three headlines on "there is no problem" and then claim to be engaged with the problem.

Really, exactly which headline would that be? I see no such headline that says, "There is not problem".

By the way, that I happen to think that there is an exaggeration of the current economic condition does not mean that I think the current economic condition is not a problem.

Sounds a little like the GW irrationality.

You do realize that most Japanese economists see their stimulus spending as wasted right?

After that, sure, engage with best solutions ... but man, you seem so political making in turns the argument that there is no problem, but if there is the best response is to do nothing.

And are you drunk? Where did I say there was no problem? If we end up like Japan there is a huge problem. Still, one reason why Japan maybe suffering such slow economic growth could be the huge debt they have.

Funny, a few years ago, everyone pointed to the reduction in the deficit and slower accumulation of national debt as part of the Clinton economic growth. Now...pffft debt doesn't matter.

I mean, if you can accept the problem, then take me through the Republican logic that tax cuts, now are the appropriate fix.

Why must I, if I don't subscribe to the Obama view, subscribe to the Republican view?

By the way, AFAIK, the payroll tax cut is not a Republican idea, but an idea put forward by Greg Mankiw. Yes he worked for George Bush, but that doesn't mean his ideas are "The Republican Idea".

As for the logic, go to the post (not this one) and read items 1 - 4.

Opponents pull out the canard that people will just save the money. Well, first, that's not demonstrable.

If it is a permanent decrease this is unlikely.