Monday, July 18, 2011

Fear No Default: Dr. Drew Comments on John Lott, Jr.'s Seven Myths About the Debt Ceiling

I used to teach political economy at Williams College and it sort of annoys me when we allow Democrats to say silly, obviously false things about the workings of the U.S. economy and the state of knowledge we have about politics and economics.  Nevertheless, I ran across a great article by John Lott, Jr. who is an economist and author of the revised edition of "More Guns, Less Crime" (University of Chicago Press, 2010).

I thought it might be fun to repeat his take on these seven myths that he asserts the Obama administration is pushing on the American people and add my own comments:

1) Not increasing the debt ceiling means the U.S. government will default on its debt. This is probably the biggest lie that almost all other claims arise from. Default occurs if the government stops paying interest on the money that it owes. Not increasing the debt ceiling only means that the government can't borrow more money and that spending is limited to the revenue the government brings in. And, with interest payments on the debt making up less than a ninth of revenue, there is no reason for any risk of insolvency. Time after time, congress and the president have failed to agree on a debt ceiling increase and still there has been no default. Examples include: December 1973, March 1979, November 1983, December 1985, August 1987, November 1995, December 1995 to January 1996, and September 2007. Indeed, this really shouldn't even be a point of debate. The 14th Amendment to the Constitution requires that the debt payments come first before any other spending.

Dr. Drew adds: Obama is trained as a Constitutional scholar.  We can be sure that he is aware of this portion of the 14th Amendment and that he can rightfully be expected to abide by it.

2) Until the debt ceiling is raised, uncertainty over the payment of U.S. debts will create chaos in financial markets. Given that the Constitution mandates U.S. debts be paid before any other spending and that sufficient money will be available to cover our interest payments, the only uncertainty arises from Obama's actions. Will he try not to pay the interest? Even a delay of a day in paying this interest will create a default. Court action could eventually force Obama to follow the Constitution but a default would have already occurred. But there is a simple way to end this uncertainty: have the president declare now that he will indeed follow the Constitution and make those payments. Failure to increase the debt ceiling clearly doesn't mean default. During one three week period at the end of 1996 and the beginning of 1996, some of the government shutdown when a similar battle over the debt ceiling occurred, but there was no default. President Clinton used the revenues that were coming in to pay the interest on the debt.

Dr. Drew adds: Even if Obama chooses to default, it will be easy for Republicans to blame his excessive spending and poor priorities as the cause of the default.  I knew the young Obama and I've studied the contemporary Obama.  I suggest he holds tightly to John Rawl's A Theory of Justice and that the reason we are in this crisis is that Obama does not want to give up his long-standing hatred of the rich or his desire to redistribute income.  He has never explained how, if at all, he dropped the commitment to Marxist thought I observed in him when he was a sophomore at Occidental College.  See, my article, Meeting Young Obama in American Thinker, February 24, 2011. 


3) Obama doesn't know if there is money to send off Social Security checks on August 3. The president knows very well how much revenue will be available to send out checks on August 3. Indeed, enough money will be available to not only pay the interest, but to also cover all Social Security, Medicare, Medicaid and children's health insurance, defense, federal law enforcement and immigration, all veterans benefits, Response to natural disasters. Terrifying elderly people who are dependent on their Social Security checks may make good politics, but it is unconscionable. Yet, these scare tactics aren't really very surprising. The Democrats behaved no differently when they ran television ads bizarrely depicting Rep. Paul Ryan (R-Wis.) as pushing an old lady in a wheel chair off a cliff.

Dr. Drew adds: If my take on Obama is correct, then he will - reflexively - seek to defend those aspects of redistribution which he thinks are most widely supported by the American people, whether or not these aspects of redistribution are really in play for not.

4) Mortgage interest rates will rise dramatically if the debt ceiling isn't increased. Not true. Indeed, the opposite is more likely, for not raising the debt ceiling stops the government borrowing more money. Less borrowing by the government could lower mortgage rates as there would be more lending available for potential homeowners. The interest rate paid by the government might go down for a second reason. Just as banks charge individuals a lower interest rate for those who have less debt compared to their incomes, the same is true for governments.

Dr. Drew adds: One of the main reasons the stimulus package failed us is that it sucked up resources that would be better spent and more efficiently spent by by private sector.  Freeing up that capital and keeping it in the private sector would help turn around the economy. 

5) Time is Running Out on Debt Deal, and it must be done immediately. Despite Obama’s insistence that a deal be completed by July 15 and Geithner’s claim that a deal had to be reached by July 22, as already noted, there have been many times over the last few decades where negotiations have extended past when the debt limit has been reached. The longest delay lasted three weeks. Besides claiming that there will be a default, no explanation has been offered for why the debate is any different this time.

Possibly all these claims of urgency are part of some grand strategy to scare people, but that strategy depends on voters not knowing what is necessary for a default to occur.

Dr. Drew adds: I don't feel any sense of urgency about this myself.  My sense of urgency is based on the idea that big government is dangerous and that Obama is using his executive power to grow it.  If Obama were more honest about his past and more honest about his future intentions for us, then I'd feel safer with him as president.  For now, however, I'm deeply afraid he is taking us in the wrong direction.  Now is the time to use all the tools in our power to fight big government.  The last time the government got shut down, we enjoyed substantial economic prosperity later on.

6) If government spending is cut, there will be a depression. Obama promised that a "temporary" increase in government spending would "stimulate" the economy, but he is now telling us that we can't cut that "temporary" increase -- that we are stuck with it.

If Obama's program -- including a 28 percent spending hike since 2008 and more than $4 trillion in deficits -- worked so well, why has our unemployment rate risen more than elsewhere? The European Union, Canada, South America, Japan, and Australia have all had smaller increases in unemployment compared to the U.S. after Obama's "stimulus." We have also had these shutdowns before and the numbers don’t show any negative impact on unemployment or GDP. Figures for the longest shutdowns during the fourth quarter of 1995 and the first quarter of 1996 are available here.

Dr. Drew adds: This one is just plain silly. Based on what we know about monetary policy it is physically impossible to ever have another Great Depression. Moreover, Burton Folsom's book, Raw Deal, teaches us how FDR made the Great Depression worse through frightening off business owners and investors.

7) The value of the dollar will plummet. Again, the supposed collapse occurs when we default. But there won't be any default. In addition, less government borrowing means lower future taxes, thus making the U.S. a more attractive place to invest. More foreign investment will actually cause the dollar to rise.

Dr. Drew adds: The value of the dollar is based on our political culture, economic power and military strength.  Clipping Obama's spending wings will provide great benefits to us and to all the people that want to invest in the safety and security we provide to them and ourselves.

John C. Drew, Ph.D. is an award-winning political scientist.

Monday, July 4, 2011

Dr. Drew Debates MSNBC's Ezra Klein on the Obama Stimulus Package

I started with Quora about seven days ago.  I already have 150 followers, so I guess I'm doing something right.  I was a little startled to bump into Ezra Klein, 27, from MSNBC.  Ezra only has a BA degree in Political Science from UCLA and I've been teasing him about his lack of expertise relative to a person like me. Here's a bit of the debate that I cleaned up.  I have also included a link to Klein's sheepish follow-up article in the Washington Post.  It is amazing to me that this inexperienced guy is featured so prominently on MSNBC - he really does not have the sort of credentials or practical experience needed to make sense of the data he is looking at.  It is sort of a textbook case of dangerous, misguided liberalism in action. 

Ezra Klein's Initial Post Attracts Quora Attention

Klein: I've come to think "what size should it have been" is, to some degree, the wrong question. At the time, Christina Romer and Larry Summers believed it should be $1.2 trillion, but the consensus was nothing that could be called "a trillion-dollar spending bill" would pass Congress. But even that $1.2 trillion was too small. We simply didn't have the economic data we needed to make a good judgment. That's the period when the administration disastrously predicted that, with the stimulus, unemployment would never pass 8 percent. If they'd known what was actually happening in the economy, they'd have known it would be above 8 percent before the stimulus even began. But the data has a lag. They did their best.

But there's something to be said for not getting in front of the data, and perhaps even for erring on the side of caution with these policies (I'm more of a shock and awe guy when it comes to combatting financial crises of unknown, but clearly large, magnitudes, but I see how reasonable people can disagree). The real problem wasn't that it wasn't big enough to start, when we didn't know the size of the recession, but that it wasn't made bigger when we did know the size of the recession. Indeed, the underpowered stimulus ended up discrediting itself, and instead of realizing we needed more, the fact that we were still seeing tremendous joblessness gave the opposition party an opportunity to argue that we needed less. It's as if we took too few antibiotics, and finding the disease still present, decided to give up on antibiotics altogether.

Dr. Drew to Another Quora User Regarding Klein's Unusual Post

Drew: Your liberal arrogance is showing. :-) I have Ph.D. in political science. I'm a published author in the field. I've taught at one of the best schools in the nation. There is no way you could have the same expertise as me with "a lot of work." Your comment is almost endearing if it wasn't sadly representative of the flawed thinking of many liberals.

If you look closely, you'll see that all Ezra is doing is citing other people.

He isn't even aware of the Japanese example and hasn't read a book like Burton Fulsom's Raw Deal. This sort of knowledge takes time...and it isn't taught to undergraduates at UCLA.

Political science, unlike physics, is one of those topics that you get better on with age and maturity. To be sure, I did my most creative and influential work while I was in my mid-20s...no one else had figured out the connection between child labor law enforcement and early U.S. welfare programs prior to me in political science. Nevertheless, I'm light-years ahead of where I was as a young man when it comes to predicting political events.

The bottom line is that I predicted the failure of the stimulus package thanks to my expertise. I don't think Ezra can make the same claim to having any predictive power in his political science observations.

Ezra Klein's Response to Dr. Drew's Comments

Klein: Without getting too deep into this, I think this conversation substantially mistakes the role of both expertise and journalists. For one thing, a degree in political science -- whether PhD or BA -- is not relevant to analyzing the macroeconomic effects of the stimulus. You'd want to ask a PhD economist for that.

Which is what I spend my time doing. I don't have, myself, a particular take on whether stimulus works or doesn't work. But I have the accumulated weight of many, many conversations with many, many topnotch economics from both sides of the aisle -- not to mention a lot of time spent reading the research and commentary on these subjects -- and what I present here, and in my other work, is my best read of the evidence. I might be wrong, or they might be wrong, but that's what journalists bring to these conversations: not our own expertise, per se, but the aggregate wisdom of the experts who give us their time and provide us with information. I wouldn't answer a question on physics because I don't talk to many physicists and have no way of accurately assessing the empirical work on various studies.

(And more specifically, the case of Japan is a complicated one, but those who've studied it, like Ben Bernanke and Adam Pozen and, for that matter, Paul Krugman, tend to think that the problem was inconsistent and underpowered policy responses, which is why they tend to advocate for more stimulus rather than less. Indeed, it's the people most familiar with Japan who've been most frustrated at the policymakers who are repeating their mistakes of doing too little, for too short a period of time.)

(And to your point, Craig, I think the evidence is that the stimulus has worked quite well, though not as well as its supporters hoped, but that it was also too small. If someone is very hungry and they have a hamburger, they might not be full, but that doesn't mean the hamburger did a bad job.)

Dr. Drew's Response to Ezra Klein

Drew: As an ex-Democrat, ex-Marxist, ex-friend of Barack Obama, I've been slowly won over to the conservative side that I once ridiculed at Occidental College and at Cornell University. Trust me. I'm not unsympathetic to your point of view.

Nevertheless, I don't buy your bizarre suggestion that you don't have a "take" on whether the stimulus package was too big or too small. Like Rep. Weiner, you seem to believe that you can tell an outright lie and get away with it. :-)  He could not, neither can you.

Nevertheless, I can say with much greater authority than you that your belief in the success of the Obama stimulus package is misplaced and completely wrong. The fact that I and a lot of other political economists predicted its failure - and explained why such policies have always failed (even during the New Deal) - gives conservative thought much greater credibility than your ability to pretend objectivity, call people on the phone and ask them questions.

As you mature and grow intellectually, I think you'll find that the truth has a funny way of winning in the end. I expect that swing voters have now had a harsh lesson in the simple truth that government stimulus programs always fail.

Ezra Klein Does More Interviewing

Klein: Update: Answering this question got me interested in looking into this more deeply, so I asked Christina Romer and Jared Bernstein, two of the architects of the stimulus, for their answer:

Could we have had a bigger stimulus?

“A rough, back-of-the-envelope calculation is that $100 billion of stimulus creates 1 million jobs for 1 year (or reduces the unemployment rate by about 1/2 percentage point for a year),” Romer told me over e-mail. “So, if we needed to reduce the unemployment rate another 2 percentage points for two years, we needed about another $800 billion. So, we probably needed about $2 trillion given what we were actually up against.”

The problem, she says, is that more stimulus also means more problems designing the stimulus. “We had a hard time spending $800 billion quickly,” she says, and “with that much stimulus, the issue of diminishing returns could be important. We don’t have much experience with something that large, so I am less confident that the same multipliers would hold.” Perhaps making things even harder, “that much stimulus would have been irresponsible just on its own with no plan for paying for it. It could well have spooked financial markets. If we were going to go that large, it would have had to be with an explicit agreement on what taxes would be raised or spending cut in the future to pay for it.” Passing such a deal would’ve been almost impossible amid the crisis environment of 2009.

Bernstein’s calculation proved very similar. “The simple Keynesian answer is you take the GDP gap— actual GDP minus potential— sum it up over the downturn, and divide by the multiplier,” he wrote to me. “Using annual CBO potential GDP and the real GDP on the books for 08-2010, you come up with a GDP gap of around $3 trillion. Divide that by 1.4, and you’d need around $2 trillion, more than twice the ARRA.”

But, like Romer, he thought the abstract calculation a lot easier than the practical problems associated with shoving $2 trillion into the economy in a fast, effective fashion. “That $2 trillion ignores implementation constraints,” he continued, “which are also binding. I don’t believe we could have efficiently and effectively put that large a stimulus to good use with requisite accountability.”

Dr. Drew's Conclusion

As you can see, Klein did an article in the Washington Post that came out on July 5, 2011 called "Could we have had a bigger stimulus?"  What can I say?   I'm picking away at the defenses of the arrogant liberals who have done so much damage to our country, damage caused by their lack of experience, and painful lack of knowledge regarding economics, politics, and political economy.  As he writes this last piece, it looks to me like he is figuring out that high levels of government spending are inefficient and - in fact - dangerous to our economy.  What a tough lesson.  To me, it is eerie to see Ezra Klein's painful, irresponsible learning take place right before our eyes.

John C. Drew, Ph.D. is an award-winning political scientist.