Friday, February 25, 2011

Contraction In Action

Reports out of the UK last week indicating that the GDP had contracted in the 4th quarter surprised just about no one who understands economics.  As promised during the campaign by the Conservatives (I'm not sure about the Liberal Democrats), the coalition's budget made significant cuts in government spending.  And as predicted, cutting government spending (demand) when there is insufficient private spending (demand) to make up for it led to a significant slowdown.  The Tories and their apologists in the UK financial press tried to blame it on the weather, but the only month affected by the unusual snows was December.  Either the snows were so bad that the economy contracted by a drastic 3-4% (they weren't) or the economy was very, very weak before the weather hit.  The latter seems much more likely, as the snows didn't result in widespread property damage or loss of life.

While it hasn't run its course, the spending cuts in the UK have created what is about as close to a single variable experiment as can be had in the field of macroeconomics.  The country is not much of an oil importer and so it was relatively unaffected by the recent prices increases.  The economies of the rest of Europe (overall, though not in some countries) and the US are growing, so export demand hasn't changed.   And there were no internal shocks such as a bank run or stock market crash.  The only major change was spending cuts.  Not all of them have hit, and there may be some scrambling to lessen the amounts of the upcoming cuts.  Still, the reduction in government spending will end up being significant.  We will be able to be certain about the result of the experiment after the first quarter of 2011.

Update 2011/2/26 (originally posted 1/30): It turns out that the numbers were even worse than initially reported - the UK economy shrunk by 0.6% in the fourth quarter.  That translates to an annualized rate of ~2.4%, which is how the numbers are reported in the US.

Saturday, February 19, 2011

Isn't It Grand?

The Villager rumor mill churned out a real humdinger last week, which was that a "grand bargain" is in the offing.  Recovering economist Duncan Black provides the appropriate reaction in his usual pithy manner.  A number of other people weighed in, including Black two more times, Digby, Drum, Klein, Benen, and Day again.  I agree with the two basic reactions: it's unlikely to happen, and it would suck if it did happen.

The fact is, any such bargain would bad for the country and its citizens.  At this point no amount of cutting alone can close the budget gap without basically eliminating a large number of government functions.  A lot of conservatives argue that government shouldn't be doing much of what it currently does, but they are as wrong about that as they were about weapons of mass destruction in Iraq.  On the other hand, the budget can definitely be balanced in the short term without too much difficulty by cutting one area - defense - and raising revenue.  And that revenue can be raised with minimal harm to the lower and middle classes.

Here's the current situation.  As recently as 2008, the Federal Government collected 18.8% of GDP in taxes.  Receipts have fallen to a projected 14.8% for the current budget year.
And here we are with a budget that leads to a constant debt ratio.  How did we get here all of the sudden?  Security spending (Department of Defense, Department of State, Department of Homeland Security, and about 2/3 of the Department of Energy) was cut by 1.4% of GDP.  Revenue was increased via two new taxes (carbon and transaction), reforming of the corporate income tax, and hiking personal income taxes on the wealthy.  The SS portion of F.I.C.A. also goes up once (if) the idiotic payroll tax holiday ends.  The carbon tax is regressive, but in the long run the poor and middle classes would be better off paying it, and not having other programs cut or eliminated.  And even after the tax increases, the total federal, state, and local tax burden in the US would be lower than just about every other industrialized country in the world.

Some things to note:  I'm not saying that this would be popular. Nor am I saying it has any chance of passing Congress.  Nor, finally, am I saying that the long-term budget problem - which is almost entirely due to out of control health care costs - would be solved.  The point of these two graphics is simply to point out that the current budget discussion as it is presented in most of the media is entirely fraudulent.

Thursday, February 17, 2011

A Hanging Curve

Back during the run up to the 2003 invasion of Iraq, most of the arguments presented in favor of the war weren't very persuasive to me.  The evidence seemed flimsy, and the logic of Saddam Hussein giving Osama bin Laden weapons of mass terror or mass destruction was flawed.  A flurry of articles in the Guardian this week sheds further light on how the country was deceived into supporting the war.  Rafid Ahmed Alwan al-Janabi, who was dubbed "Curveball" by his handlers in the German and then US intelligence agencies, has admitted to a Guardian reporter that he lied about his knowledge of Iraqi chemical and biological weapons programs.  As it turned out, they didn't exist at all, except in the mind of Hussein.  But the Bush Administration, despite knowing that there were very good reasons to doubt him, constructed a case for war based on al-Janabi's dubious story.  Everything flowed from the assumption that his story was accurate, including the evidence shown during Colin Powell's "dramatic" presentation to the UN.  (Powell has been engaged in an active campaign to rehabilitate his reputation ever since.)

None of al-Janabi's revelations are really new, though.  Apart from the lack of hard evidence on the ground in Iraq for a weapons program, the internal doubts in the Bush Administration and Blair's Government have been reported before.   And that leads to an unpleasant truth: the new report just does not matter.  If the people who actively supported the Iraq War were willing to accept that the war was wrong and unnecessary, they would have done so by now.  They haven't, and won't, because the implications are too hard to face.  Their willful disregard for facts puts a burden of doing something on the people in the middle, who were passive supporters for one reason or another.  But they declared their apathy on the matter in 2004, when Bush was re-elected.  There are plenty on the left side of the political spectrum who would like to do something, such as prosecuting or at least exposing people who knew about al-Janabi's lies.  But they are busy trying to prevent the dismantling of America's already very weak safety net.  So the issue will be left to fester.

What is the fate of democracies that can't respond to internal, self-made crises?  The few prior examples are not encouraging.

ETA: Powell's good reputation was always undeserved.

Friday, February 11, 2011

There's No Map to Human Behaviour

I've been working on several maps lately, but I don't really feel like making a full post about each.

Wednesday, February 2, 2011

Let's Hope This One Doesn't Come True

As all good liberals know, The Onion has a proven record of being the best source of future news on the planet.  So we should all hope this little article doesn't come true.