Fearmongering

Bradly Schiller on President Obama’s fearmongering regarding the economy,

Mr. Obama’s analogies to the Great Depression are not only historically inaccurate, they’re also dangerous. Repeated warnings from the White House about a coming economic apocalypse aren’t likely to raise consumer and investor expectations for the future. In fact, they have contributed to the continuing decline in consumer confidence that is restraining a spending pickup. Beyond that, fearmongering can trigger a political stampede to embrace a “recovery” package that delivers a lot less than it promises. A more cool-headed assessment of the economy’s woes might produce better policies.

As consumer confidence erodes it wouldn’t be surprising to see spending decline and savings increase. So, if the President’s rhetoric does have an impact on consumer confidence then President Obama’s scare rhetoric could be making the economy worse to the extent that it reduces consumer confidence. The question though is how much impact does the President of the United States’ statements have on consumer confidence?

Still, that aside one of the things that many complained about regarding President Bush and his administration was their almost hostile attitude towards being intellectual and reality based. President Obama was supposed to change that. Yet what we get are statements that are not based on facts. We are treated to rhetoric based on fear in an effort to get legislation passed. Oh well I guess being reality based and intellectually honest is a bit much to ask of any politician.

Via Greg Mankiw.

FILED UNDER: Economics and Business, Government, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:

    Man, you TOD guys seem to be looking in every direction in an effort not to deal. For extra credit explain Japan, and how Obama’s fresh Presidency crashed their economy.

  2. Steve:

    Have you ever considered that maybe, ya know, you’re the one who is wrong about the state of the economy? This is a conclusion that might arise from the fact that, as I’ve said several times before, you’ve been behind the curve on your assessment about how bad things were going to get several times.

    Just consider the possibility that your ideological bias against government intervention in the economy is driving your assessment that things are not bad enough to justify such an intervention.

    My assessment is that things continue to worse based on the evidence I see in a half-dozen news stories from just the past 48 hours:

    + State budgets in a complete disaster and without very strong counter-cyclical measures from the federal government the pro-cyclical pressures from the states and localities will drag the economy completely down;
    + I would also point to the economic data out of Japan;
    + the increasing evidence that several of our largest banks will ultimately need to be nationalized or liquidated;
    + the still increasing unemployment,
    + the high inventories,
    + the collapsing capital investment by business…

    I mean, seriously, can you really claim that fears about the economy are purely in Obama’s imagination and not supported by facts?

    –BF

  3. spencer says:

    When I read what the President says I keep seeing that he says this is the worse “CRISES SINCE” the depression.

    I challenge you to find one quote where he said what you claim he said, that things are as bad as during the depression.

    It is fine to criticize someone for saying something you disagree with.

    But it is not OK to put words in someones mouth and then criticize those word you put in their mouth.

  4. Drew says:

    “I mean, seriously, can you really claim that fears about the economy are purely in Obama’s imagination and not supported by facts?”

    Well, first, that’s not what he said, but you want some relevant facts that suggest that this recession, although a good solid one, is simply on par with several past ones?

    Unemployment rate:

    Current: 7.6% That level of unemployment has been the existing condition for 15% of the time post WWII. In 1975 the full year annual rate was 8.5%. 1982 recession: 9.7% 1992: 7.5% I don’t know where it will peak (and the numbers I cite are full year) But even Dr Doom Roubini has it peaking at 9%.

    Duration of declining employment: Current 13 months. A bad recession? 17 months. By both measures, this is within tolerance compared to the past.

    GDP:

    The quarterly decline in the US GDP Q4 was reported to be (1.0%.) Some say it will be revised upward to (1.25%) after trade and inventory data are in.

    For comparison, here are some historical declines:

    1953 Q4 (1.6%) preceded and followed by (.5%) in Q3 and 1954 Q1.

    1957 Q4 – (1.1%)
    1958 Q1 – (2.7%)

    1960 Q4 – (1.1%)

    1970 Q2 – (1.1%)

    1974 Q3 – (1.0%)
    1974 Q4 – (0.4%)
    1975 Q1 – (1.2%)

    1980 Q2 – (2.0%)

    1981 Q2 – (2.0%)
    1982 Q1 – (1.6%)

    Current data, even if followed in 2009 Q1 by more of the same, seems pretty typical of previous severe recessions.

    How about correction in bloated asset values?
    Are we nearing full correction?

    Housing values is said to be a key issue in creating this problem. Well, US Median Housing Price: Current: $183K. Peak: $280K Long Term Trend: $180K Doom Roubini: $150K
    Closing in.

    How about equity values, another wealth effect? As a percent of GDP: 75% today. Long term post WWII: 70% Peak: 190% As Minkew points out, Buffet is buying.

    And your inventory to sales ratio? Its 1.45 today, the same level as the 2001 recession.

    This is not to downplay the current situation. But by a number of relevant measures, this recession is on par with other severe recessions: 1958, 1975, 1981. But it does not appear to be some wildly extraordinary event commensurate with current rhetoric, like Obama’s “catastrophe” talk.

    Aside from the previously cited statistics, here are some observations I think Obama/stimulus defenders need to deal with:

    Should a leader calmly but firmly present their case, attempting to instill confidence – a key determinant of consumer behavior – or do their best Henny Penny routine? This has been pitiful.

    Why was the stimulus package such a political spectacle, and clearly loaded up with pork, if things are so dire? If “catastrophe” looms, should not every dollar be wisely spent? But there were significant amounts of the same old pork favors. Not the actions of a scared Congress.

    If a “catastrophe” is to occur, it will be because of a meltdown in the banking system. Roubini has the insolvency number at about $1.5T. This “stimulus” package could have gotten us about half way there. If “catastrophe” looms, explain why the focus has not been on the banking system, but Lev trains? Especially in light of legitimate concerns over any multiplier?

  5. Drew says:

    spencer –

    He owns the invocation of “catastrophe.”

    See the above post.

  6. Steve Verdon says:

    Bernard,

    Just consider the possibility that your ideological bias in favor of government intervention in the economy is driving your assessment that things are bad enough to justify such an intervention.

    All snark aside, do you look at the data? I mean really look at it, not just read a news story? Do you go to DoL down load their unemployment claims data, data on labor force and look at percentages (something you rarely find in news stories by the way)? Do you look at unemployment from the past recessions since WWII? Have you graphed them all out? Are you aware that people tend to take the most recent data and give it too much weight? I pointed you to this quote a few weeks back,

    …why are Americans so gloomy, fearful and even panicked about the current economic slump?

    ..The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. “Never in my adult life have I heard more deep- seated feelings of concern,” says Howard Allen, retired chairman of Southern California Edison. “Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble.” Says University of Michigan economist Paul McCracken: “This is more than just a recession in the conventional sense. What has happened has put the fear of God into people.”

    That was written about the 1990/1991 recession. A recession that was shorter and less severe than almost all post WWII recessions. Fear of God? People tend to over-emphasize the recent and forget about the past. I think you are doing that.

    Oh and for state budgets, California’s budget has been a mess for years. Don’t know about the other state’s budgets. I wouldn’t be surprised if it was in part fiscal mismanagement. I’d be curiuos to know the state of these various State budgets prior to the recession starting. Were they struggling like California due to the ineptitude of their elected state politicians or is it the economy?

    Regarding unemployment, it will likely increase even after the recession is over. Try not to use a lagging indicator. Similarly the ratio of manufacturing and trade inventories to sales is also a lagging indicator. Talk about being behind the curve.

    As for Japan I look at that and see little support for fiscal spending stimulus given that Japan has done lots of public works and still has a slow economy.

    Spencer,

    Cute, yes that is what he says, as the article notes. You did click through right? However, Obama then follows up with a comment that things could get so much worse if the stimulus bill is not passed. Hence pointing out that the economy, while bad, isn’t that bad seem reasonable.

  7. odograph says:

    As for Japan I look at that and see little support for fiscal spending stimulus given that Japan has done lots of public works and still has a slow economy.

    That was a little of a dodge and weave.

    If we face something like Japan (multiple lost decades?) then I would think Americans would agree that we have a very real problem. It is not “fearmongering” to talk about the problem.

    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.

    Sounds a little like the GW irrationality.

  8. odograph says:

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

  9. Drew says:

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

    Can you think of anything more direct, and faster, than a guy getting a reduction in payroll taxes beginning next week?

    Opponents pull out the canard that people will just save the money. Well, first, that’s not demonstrable. They will spend some, and save some. But to the extent they save, they are deleveraging their personal balance sheets, a necessary long term correction that needs to be made. And what will that spending do? Retain or create jobs.

    Second, am I to believe that 12 months from now when some stimulus project finally employs someone that they of course will be spenders, and not savers, like the guy who got a tax cut?

    That stretches credulity.

  10. Steve Verdon says:

    Odograph,

    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.

  11. odograph says:

    I actually do like Mankiw’s “slash payroll now, start a carbon tax next year.”

  12. odograph says:

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

  13. Steve Verdon says:

    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.

  14. odograph says:

    You’ve got to understand that first I read MR this morning, and was shocked to see Alex make an acceptance/call for bank nationalization, in the United States of America.

    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!)

  15. 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. But either way, my point is that claiming that it is impossible to make an empirical argument about the challenges facing the economy is absurd. 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.

  16. Steve Verdon says:

    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.

  17. odograph says:

    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 …

  18. Steve:

    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.

  19. Drew says:

    Bernard, you tell us you are doing analysis, but then offer arguments that are apparently oblivious to data.

    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?

  20. Drew:

    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.

  21. Drew says:

    Bernard –

    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,

  22. Drew:

    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.

  23. Bithead says:

    Arguments about the data aside for just the breif comment. My interest is the reaction to those facts.

    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.)

  24. Drew says:

    Bernard –

    (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,