War Is Not the Answer

I must add my voice to Brad Delong’s, Dean Baker’s, and Mark Thoma’s.  War is NOT the answer to our economic problems.  The only way war can help economically is by increasing government spending dramatically.  If we could do it for a war, then we can get the same benefits without the dead bodies, the broken families, and the destruction just by focusing our spending here on constructive stuff.  David Broder should be fired. I will let Mark Thoma explain:

I don’t know if I can muster the shrillness this deserves, so let me turn it over to Dean Baker and Brad DeLong. Brad DeLong first:

There Should Be Resignations in Protest and on Principle from the Washington Post Today…, by Brad DeLong: …but there should be such resignations every day. …

David Broder… call[s] for Barack Obama to bomb Iran to get the economy moving? It would be good for the country if this monstrosity shut itself down today. … Broder is … monstrous:

[I]f Obama cannot spur that [economic] growth by 2012, he is unlikely to be reelected…. Can Obama harness the forces that might spur new growth?…. What are those forces?… One is the power of the business cycle…. What else might affect the economy? The answer is obvious, but its implications are frightening. War and peace influence the economy.

Look back at FDR and the Great Depression. What finally resolved that economic crisis? World War II.

Here is where Obama is likely to prevail…. [H]e can spend much of 2011 and 2012 orchestrating a showdown with the mullahs. This will help him politically because the opposition party will be urging him on. And as tensions rise and we accelerate preparations for war, the economy will improve.

I am not suggesting, of course, that the president incite a war to get reelected. But the nation will rally around Obama because Iran is the greatest threat to the world in the young century. If he can confront this threat and contain Iran’s nuclear ambitions, he will have made the world safer and may be regarded as one of the most successful presidents in history.

Dean Baker:

David Broder Calls for War With Iran to Boost the Economy, by Dean Baker: This is not a joke (at least not on my part). David Broder, the longtime columnist and reporter at a formerly respectable newspaper,quite explicitly suggested that fighting a war with Iran could be an effective way to boost the economy. Ignoring the idea that anyone should undertake war as an economic policy, Broder’s economics is also a visit to loon tune land. …

Sorry Mr. Broder, outside of Fox on 15th the world does not work this way. War affects the economy the same way that other government spending affects the economy. …

If spending on war can provide jobs and lift the economy then so can spending on roads, weatherizing homes, or educating our kids. Yes, that’s right, all the forms of stimulus spending that Broder derided so much because they add to the deficit will increase GDP and generate jobs just like the war that Broder is advocating (which will also add to the deficit).

So, we have two routes to prosperity. We can either build up our physical infrastructure and improve the skills and education of our workers or we can go kill Iranians. Broder has made it clear where he stands.

Even they aren’t shrill enough for my taste. Trying to sell a war by pointing to positive economic and political externalities is pretty disgusting, especially when the same economic benefits and then some can be realized by spending the money on infrastructure instead. Killing Iranians and Americans is not required. (And even if there was some way to justify going to war to spur the economy, the spike in oil prices that would surely occur would likely make things worse, not better.)

How about a war on joblessness? Had that war been conducted with the support of people like Broder, or without for that matter, the economy would be doing better, and Democrats would be doing better in the polls. I’m convinced of that. But the Broders of the world, the “serious people,” aren’t so serious when it comes to ordinary households struggling to make ends meet. Where’s the support for their struggles? Why aren’t they worth spending money on? Grrr.



Real GDP 3rd Qtr 2010: What’s that smell?

The initial estimate on 3rd quarter 2010 U.S. GDP came out this morning.  Real GDP growth was very weak.  From Calculated Risk:

From the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2010, (that is, from the second quarter to the third quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.

GDP Growth RateClick on graph for larger image in new window.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the median growth rate of 3.05%. The current recovery is very weak – the 2nd half slowdown continues.

Although this is technically a tick higher than real GDP growth in the 2nd qtr, let’s also remember that this is only the advance or “flash” estimate.  There’s an excellent chance it will be revised downward next month.

More important though is the composition of the growth.  Increases in inventories accounted for 1.44 of the 2.0 points of real growth.  That can’t continue.  There is  a very good chance 4th qtr will be even slower and still a very good chance of a negative  growth number in 1st quarter.  Even if we stay in what is mathematically positive growth, it’s far too slow.  We need real growth of over 3.0 % in order to reduce unemployment.

Calculated Risk shows what effects different real GDP growth rates would have on unemployment:

Real GDP is still 0.8% below the peak at the beginning of the recession.  Industrial production is still 7.5% below the pre-recession peak and employment is 5.6% below peak.  It will be a long time before we get back to full employment.  The  Federal Reserve Bank of San Francisco is forecasting full employment no sooner than 2014.

The economy continues to effectively stagnate.  Maybe that’s the smell. Stagnation.

Poorer Boomer Retirees: Macro Implications of Proposed Pension and SS Benefit Cuts

In many political circles this year, a mantra has emerged:  we cannot afford the public sector pension plans and we cannot afford Social Security – we must cut the future benefits. For example, George Biggs of the conservative, right-wing think tank American Enterprise Institute argues that even though public sector workers receive lower pay than comparable private sector jobs, it’s “just not fair” for public sector workers to have secure, attractive pensions:

There is no reason public-sector employees should receive retirement benefits that are either larger or more secure than those received by private-sector workers.

But like most one-liner economics arguments, when we consider the macroeconomic effects, we have to conclude it’s not that simple! In fact, we (as a macro economy and society – all generations) might not be able to afford to cut future benefits, despite the growing portion of society that will be over age 65 and not working when baby boomers retire.

Here’s why.  Consumer spending is 70% of GDP.  Reductions in consumer spending rapidly translate into stagnant growth and/or recession resulting in lower employment and fewer jobs.  Even slowdowns in the growth of consumer spending have negative job consequences.  Consumer spending benefits us two ways:  the spending supports a higher lifestyle (both quantitatively and qualitatively) by the people doing the spending, but it also provides the income for the workers who produce the goods.  This is what in economics is called the circular flow.  Spending by seniors is today a significant part of the circular flow.  Now picture the future. We know that seniors and retirees will be a larger portion of the population for at least the next 30-some years as the baby boom generation moves from working age to retirement and eventually dying.  Retirees are a critical part of the consumer spending.  As boomers retire, they become an even larger portion of consumer spending, both because there’s more retirees and because typically it’s the middle-aged and seniors that have the money to spend.  McKinsey estimates how much of that consumer spending will be accounted for by the boomer retirees:  40%!  As reported by Diane Jean Schemo:

At every stage of their lives, Boomers, the generation born between 1946 and 1964, have exerted a singular force on the economy. Cradled in the relative prosperity of the post-war years, they graduated from college in higher numbers and earned higher incomes than both their parents and their children. Boomers saved less and spent much, much more. By their sheer numbers and appetites, what Boomers do — how much cash they have in their pockets, and whether they save it or spend it — matters. Consumer spending accounts for 70 percent of economic activity, according to government figures. By 2015, Boomers will account for 40 percent of that consumer spending, according to a 2007 report by McKinsey Associates.

At present, lawmakers, politicians, and fiscal worriers are claiming that the future (typically distant future) pension and social security liabilities (promised benefits) are too much.  Governments cannot afford them today with today’s assets, incomes, an deficits they claim.  Now there’s a serious flaw in logic there: cutting future benefits/liabilities will do nothing to cut a present-day budget deficit, but let’s ignore that for a moment.  So, they argue for cutting promised benefits (often argued for SS) and/or shifting all of the risk to the future retirees themselves instead of the employers or government.  Typically this is done by proposing to end defined-benefit pension plans for public employees (much like the private sector did 20 years ago) or by calling for privatization of Social Security.  But like most arguments from one-liner economists, the world doesn’t work that way.  The macroeconomy is more complex.  These people assume that there’s no connection between today’s economy and the future promised benefits other than the government having to record a liability on it’s books.  Wrong.

You see, people make plans and those plans are based on expectations of the future.  What people spend now is based on how confident they are of their future income. So let’s go back to our future scenario.  Let’s now assume these one-liner economists have been successful.  Defined-benefit pension plans for public sector employees are either eliminated or cut back.  Maybe even Social Security has been partially privatized or future benefits cut.  Our aging boomer cohort sees it’s future retirement income as lower and as more risky and uncertain.  That means they cut back today’s spending now to rationally protect themselves against this increased risk. As they cut back today’s spending, that reduces overall consumption spending now. That lowers employment and GDP now.  Lower GDP and lower employment now means even bigger government budget deficits now (this effect would swamp any projected future savings – see the 2009 Federal deficit that resulted from lower employment).

Now none of this analysis should be new or surprising.  It’s basic stuff macroeconomists learned 80 years ago in the Great Depression.  But unfortunately, good macroeconomic analysis doesn’t lend itself to one-line political slogans.

The bottom-line:  If public sector defined benefit pension plans and/or Social Security future benefits are cut or privatized, it will have a negative effect today on government budgets – deficits get worse.  It will also mean a much leaner lifestyle for baby boom retirees.  How much?  The model developed by/for Social Security and Urban Institute projects that simply converting existing public sector defined benefit plans to quasi-private defined contribution plans could easily reduce the average boomer’s retirement spending by as much as $4,000 per year.

In the state of Utah, they have already debated and decided to end public sector defined benefit pension plans.  Yet amazingly, they never considered the huge impact this would have on  the Utah economy now and in the near future (from Schemo article in Remapping Debate – emphasis is mine):

Cutting pensions in Utah

Utah, one of 18 states to revamp its pension system since 2005, held a lively, often contentious, debate before moving to end its current defined benefit system for new workers earlier this year. It replaced it with a two-tiered system allowing new hires to choose either a defined contribution or a defined benefit plan. For the latter, the new rules limit the state’s contribution to 10 percent of an employee’s salary, allow retirement after 35 years’ service instead of 30, and lower the maximum benefit to 52 percent of an employee’s salary.

And yet, John Nixon, the state budget director, said he does not recall the impact of the changes on consumer spending coming up much in the debates over pension remedies. Nixon had neither heard of or nor seen a February 2009 report by the National Institute on Retirement Security, which uses Census and other government data in 2006 to assess the impact of state and local pension plans on the larger economy.

The study, entitled “Pensionomics,” found that every $1 Utah taxpayers spent in public pension benefits spurred $6.36 in economic activity in the state. State and local governments in Utah provided 37,186 retired workers benefits averaging $1,471 a month. These payments, the report found, triggered $1 billion in economic output, concentrated most heavily in retail sales and health care.

Nixon said that lawmakers in Utah, alarmed by a $6.5 billion fall in the pension fund’s assets in 2008, focused on the long-term liability to the state of its obligations to retirees, not on the repercussions of possible benefit cuts to the state or local economies — a discussion that usually focuses on a shorter time frame of 12 to 24 months.

“As far as the impact on consumer spending, that’s a whole different dialogue,” Nixon said.

One-liner Economics

One-liner economics:

Noun.  Def: the practice of making economic arguments and describing economic effects in one or two sentences.  For the statements to be true or even highly probable, there are usually numerous, gross, and often un-realistic assumptions necessary. Such assumptions are always unstated since they are so unrealistic.  When dealing with macroeconomics, one-liner economics is very often likely to be wrong because it commits the fallacy of composition.  The practice of one-liner economics is widespread among politicians, radio and TV talk show hosts, Cable TV talking head programs, and anywhere else that special interests want to push a particular policy that often is not in people’s real interests.

Links for More Info on Social Security

The Angry Bear Blog series on Social Security, courtesy of Bruce Webb: http://bruceweb.blogspot.com/2008/08/angry-bear-social-security-series.html

Andrew Biggs’ Blog called Notes on Social Security: http://andrewgbiggs.blogspot.com/

The myth of the Social Security system’s financial shortfall an article in the LA Times.

The Washington Post:  Making Social Security less generous isn’t the answer

From American Prospect:  Social Security and the Deficit-Social Security is not part of the federal deficit: Even with no policy changes, it will be in balance for the next 26 years.


Links to all the actual Social Security Trustee’s annual reports, 1941-2010: http://bruceweb.blogspot.com/2008/08/social-security-reports-1942-2008.html

Social Security:  The Phony Crisis by Dean Baker and Mark Weisbrot

Myths about Keynesian Policy

From Economicshelp.org:

There are quite a few misunderstandings about Keynesian fiscal policy, two of them include:

  1. Successful fiscal expansion relies on having a war and large military spending. No, fiscal expansion would work much better if it is targeted on public services under provided in a free market, such as: transport, health and education. These maintain AD and improve (rather than destroy) infrastructure.
  2. Fiscal Policy means bigger government. In a boom, governments should be aiming to run budget surplus (or at least very low borrowing). For example, restraining public spending, and not slashing taxes. From a fiscal point of view, in the boom years, it was a mistake to allow UK government spending to grow faster than GDP; in the US it was a mistake to cut income taxes in the boom. The government should have had better finances at the start of 2007, but, we didn’t and you have to deal with what you have.