Time to Stop Digging
Robert Skidelsky notes that the first thing to do to climb out of a hole is to stop digging.
The trouble is that the current crisis finds governments intellectually disabled, because their theory of the economy is a mess. Events and common sense drove them to deficit finance in 2009-2010, but they have not abandoned the theory that depressions cannot happen, and that deficits are therefore always harmful (except in war!). So now they vie with each other in their haste to cut off the lifeline that they themselves extended.
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Policymakers need to re-learn their Keynes, explain him clearly, and apply his lessons, not invent pseudo-rational arguments for prolonging the recession.
Around The Dial – August 18
Economic policy reports, blog postings, and media stories of interest:
- Ezra Klein talks housing policy with Dean Baker.
- Fed Watch is feeling gloomy.
- Calculated Risk looks at the July housing start data.
- Jamie Surowiecki advises “soak the very, very rich.”
Four Steps to Fiscal Health
Simon Johnson and James Kwak offer four steps for improving the nation’s fiscal health. The most important step: controlling the cost of health care.
There are two ways to reduce the government’s health-care outlays: reduce the amount of health care the government buys, or reduce the cost of health care. The simplest solution is to mandate that the government buy less health care – by raising the eligibility age for Medicare, capping benefits for high-income beneficiaries, and so on.
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The problem with this approach is that Medicare is not particularly generous to begin with. If the eligibility age were to increase, responsibility for health care for many people would simply be dumped back onto their employers, resulting in higher health-care costs for all working people. A better solution is to figure out how to reduce health-care costs.
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This year’s health-care reform legislation, the Affordable Care Act (ACA), is a starting point. According to CBO data, the ACA will reduce the long-term fiscal deficit by two percentage points of GDP per year. A top priority should be to preserve and expand its cost-cutting provisions. Another obvious step to consider is to phase out the tax exclusion for employer-sponsored health plans, which would not only increase revenue, but also end the distorting effects of employer subsidization of health care.
Who Knew?
Felix Salmon doesn’t buy the argument that it was impossible for economists to identify the housing bubble. Writes Salmon:
So my conclusion, after reading the arguments of the housing bulls, is that they were mostly bunk. And there’s even a hint of that in one of the footnotes to the paper, which says that “economists at policy institutions may have shied away from making pessimistic predictions for fear of spooking the markets”. It seems to me that if there wasn’t a bubble, no one was likely to be worried about spooking healthy rising markets.
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The bigger conclusion, of course, is that it’s silly to look to economists to forecast anything at all. Not because they don’t have the tools, but just because it’s always possible to find an economist who’ll believe just about anything. Housing bubbles are normally pretty obvious at the time: there’s one right now in Vancouver, for instance. You can see them in the rise of dozens of huge new glass-clad condo buildings; you can see them in massive price increases; you can see them when mortgage payments are significantly larger than the amount of money you could get renting out the place; and you can see them whenever people start making more money from selling their homes than they do from actually working. The only people who can’t see them, it seems, are economists, realtors, and bankers on Wall Street.
Around The Dial – August 17
Economic policy reports, blog postings, and media stories of interest:
- Paul Krugman debunks some myths about Social Security.
- The Wall Street Journal discusses the upcoming report on tax reform.
- The Washington Post reports on problems with spending parts of ARRA.
- The New York Times notes that the economy has led to cuts in health care use.
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