Tuesday, July 31, 2012

Clintpublicans Did It. The CLIBUSHTA Urban Legend

Assigning blame is something we all do. It was the other guy who broke the expensive vase. There is nothing new in political candidates claiming success for everything good and shouldering blame for nothing. But the world is not that simple. National political and economic outcomes are surely the composite of many factors manifesting over many time periods.

One specific instance of credit/blame that I hear with regular frequency is the two-part conclusion that (1) President Clinton raised taxes, created a budget surplus, and that was good for the US economy while (2) President Bush lowered taxes, created a budget deficit, and that was bad for the economy. The truth of these statements have current application because some folks would like to make the point that raising taxes on the rich today will reduce the government deficit and would be a good thing for the US economy.

This blog post looks a little deeper at this urban legend about Clinton/Bush/Taxes or what I will refer to below as the CLIBUSHTA. In economics you get rich and famous by writing things on napkins or making up names like stagflation and disintermediation. So let’s see if CLIBUSHTA sticks.

The first thing I would like to note is that Clinton had a majority in both houses of Congress from 1993 to 1995. He was President for eight years from 1993 to 2000.  (see this source for congressional numbers from 1867 to 2009  http://arts.bev.net/roperldavid/politics/congress.htm ). During the remaining six years of his term the Republicans had majorities in both parties. We can label the 1993 legislation that raised top income tax rates to 36% and 39.6% as belonging to Clinton. But upon losing his majority the policy in the remaining years required bipartisan support.

My second point has to do with the behavior of the government budget balance during the Clinton years. The bipartisan Congressional Budget Office did a study (http://www.cbo.gov/publication/41238 ) which examined government budget positions between 1959 and 2008. There you find quarterly figures that show the US budget turning to surplus in the first quarter of 1998 and staying in surplus until the third quarter of 2001. Thus, Clinton-era budgets were in deficit during all the quarters of his first term and the first year of his second term. The budget turns surplus in his 6th year in office and remains in surplus until the end of Bush’s first year in office.

So it is true that we enjoyed government budget surpluses for three of the last four years of Clinton’s second term in office. The CBO has another set of interesting data that decomposes the actual recorded surplus (or deficit) into two parts:
(1)   the part that is caused by deliberate policy action (called the cyclically adjusted  budget position)
(2)   the part that is caused by the changes in the growth of the economy (called the cyclical budget position)

During the 12 quarters of the Clinton/Bush budget surpluses, the effect of deliberate policy action was shown to be a negligible contributor to the measured surplus. That is, in none of these quarters were Clinton’s tax changes or CLIBUSHTA tax or spending policies a major factor in the surpluses. But the story is even stronger than that. In eight of the quarters, the policy part was contributing to a government deficit. If it had not been for exceptionally strong economic growth in those eight quarters, the budget surpluses would have been deficits. Interpretation – intended policy was to have government deficits but strong economic activity swamped the intentions and created surpluses.

What was going on in those eight quarters? First, the economy was in a long and strong growth cycle that started in March of 1991 and did not end until March of 2001. This 10 year economic expansion started well before Clinton came into office in 2003. It had the unemployment rate falling throughout but it is notable that it went from 4.7% in early 1998 to 3.9% in the final quarter of 2000. During this time period incomes grew rapidly and tax revenues increased despite a host of tax reduction measures taken in Clinton’s second term.

Clinton fans could try to take credit for these eight quarters of government surpluses but it would be a real stretch. Taxing rich people more had very little to do with this tsunami of tax revenue. What about the third year of surpluses? During Clinton’s last year of office (2000) it made sense that policymakers would be less interested in employment and much more worried about inflation. It would make sense as well to move toward surplus-generating policies. And that they did. But even in that year the effects of the economy swamped the policy impact on the surplus. During those four quarters the policy component had less than half the impact of the economy on the surplus.

To summarize, there is very little evidence from either of Clinton’s terms that his policies or those of the CLINTBUSHTA during his terms had much if anything to do with the resulting government budget position. Or to say it another way—there is no evidence here to suggest that taxing the rich creates surpluses and strong economic growth. The truth is just the opposite and more simple – something before Clinton’s Presidency and before Clinton’s tax increase caused economic growth to accelerate and that lead to automatic increases in tax revenue and automatic decreases in government spending. Budget surpluses were caused by growth not by tax policy during the Clinton years.

Without going into a lot of detail one can extrapolate this same point to the dismal economic growth and large deficits of the early Bush years. After the Dot Com bubble burst, we had a recession that began in April of 2001. Bush did not cause that recession in April 2001 any more than Obama caused the recession in 2008. Bush’s budgets quickly went into deficit and it was mostly because of stimulus policy. The recession pushed the unemployment rate from a low of 3.9% to a high of 6.3% by the middle of 2003. Government deficits were automatically increased by the slowing economy but very large tax cuts and spending increases combined to increase measured deficits to the neighborhood of 4% of GDP.

Again the story is the opposite of the urban legend. The latter says that Bush tax cuts caused government deficits and were bad for the economy. But the truth is that during a recession few governments are able to withstand the demands for stimulus policies. Bush was no different. But it is not the tax cuts and the budget deficits that hurt the economy. It was a weak economy that led to tax cuts and higher deficits.
Whether we look at Clinton’s or Bush’s terms – the lesson is the same. The economy caused changes in the taxes and government budget positions. Higher tax rates did not cause surpluses and strong economic growth – lower tax rates did not cause budget deficits and weakened economic growth. To think that higher tax rates on the rich or poor today is a solution to our budget deficits and economic woes is to misunderstand CLIBUSHTA!

Tuesday, July 24, 2012

Mutual Interdependence Admits Relative Contribution

 The latest useless debate between Obama and Romney has to do with whether or not business owners or other successful business people did it on their own. Obama says that we all benefit from some help from somewhere. Romney interviewed business execs who pointed out how much they sacrificed to get where they are. This is like them debating whether my mother or my father was responsible for my birth. Geez guys, this is a no-brainer – this is another red herring (no offense to smoked kipper) to keep our eye off the ball.

No business executive could honesty say that he/she never got any help from anyone. We can be bright and driven but surely somewhere along the way a lion pulled a thorn from our paw. At the same time, in addition to friends and luck, success usually requires long and hard hours and family sacrifice. People who put in the time often get rewarded. People who don’t work so hard or who choose less risky occupations get less rewarded. Mentors often tell you that you have to be in the right line if you are going to receive the benefits of luck. You have to buy that lottery ticket if you are ever going to win the lottery. Young people find it hard to see why learning math is worth all that effort. Parents tell them to keep working because someday that effort will pay dividends. Those who do not follow that advice take themselves out of the math benefits line. 

While it is true that both sides are correct, the question is which one is “more-correct” when it comes to influencing the economy. That is, if you want to improve employment and output, where do you aim most of your policy? Here I am going to say a few things that seem very practical and normal to me – but I may stir the beast in some of my friends and family. But what’s a blog for if not to lose friends and gain enemies? J

An accounting or a snapshot of a mature business firm finds it with owners, managers, machines, real estate, and labor and 6,000 lawyers. There are a lot of components to make a business tick. Each is critical to the outcome. If one part fails to do its job then the business suffers. The human body has a lot of parts. If one loses a hand or foot then the whole body performs less well. This snapshot suggests that we all rise and fall together.

But depending on the specific company, there are parts that are more or less important when it comes to the overall functioning of the business. Some small firms in some lines of business may not need a lawyer. Those firms can get by with someone who wears a coat and tie, bathes daily, and looks and smells like a lawyer.
Other firms need an inventor or entrepreneur to get started and to continue being competitive. Let’s face it there are many lines of business today whose continued existence is based on staying ahead of the competition. In that kind of firm, a particular plant site or machine might not be so important. To stay alive that firm needs a particular kind of scientist or engineer or manager. Lose that professional and the firm and all its parts go under. Losing a machine or administrative assistant means a challenge. Losing a key professional means losing the firm.  

Many start-ups would have never gotten started without a capitalist. A capitalist is a saver who decides to take an equity or ownership position in a new company. This capitalist believes there is a chance that the new company will succeed but understands that it might not. Most new companies fail. Capitalists also provide money for existing companies and the equation is the same. They give their money for a return not knowing in advance how big that return might be. Capitalists are indispensable. Talented professionals and high tech machines matter little if the firm cannot adequately buy or finance them.

Am I putting you to sleep? Good. I am told that a lot of my friends don’t get enough sleep. I am happy to help. Now where was I?

You hopefully are getting my drift that depending on the company some components are more critical or important than others. Most basketball teams need five players but let’s face it – Lebron and Wade get paid more and are more important than the others.  Somehow the other members of the team get this fact and are not insulted by this reality.

Now we get back to Obama and Romney. Obama is right that it takes a village to help a company succeed. So we should pay attention to all the parts. But let’s not mistake the fact that many companies exist and survive because someone took the financial and personal and family risk. A worker or manager in that company is important but it is usually much easier to find another assembler or industrial engineer than it would be to replace the guy or gal who spent endless hours and gallons of perspiration getting the company started to begin with. To ignore this basic intuition is to put logic on its ear. It not only puts the cart before the horse but it puts the horse in the cart! And that makes the horse very uncomfortable.

This point applies to many companies—large or small, new or old. Betty asks me what I do all day now that I am retired. Much of what I do is read the FT and the WSJ as I sip a nice JD – and learn about companies. Okay I also fume about Paul Krugman’s latest brain-fart but I spend a lot of time reading about companies. Every time I do that I thank my lucky stars that at age 21 I decided to never work in a business. I don’t have the nerve or the stomach to run a business. It is a dogfight out there folks. Ask the owners at Nokia or Research in Motion how they are doing financially. Ask the guy who just started a new restaurant in your town how much he is raking in.
Some workers are lucky. All they have to do is come to work and follow the company manual and not smoke funny cigarettes in the parking lots at lunch time. They have an "investment" in their company and they depend very much on that employment but in no way does that compare to what others put in. Some distant and rich investor might have a billion dollars tied up. The entrepreneur may have planned, dreamed, and put his/her life on hold for years to get the company up and running.

Note: I recognize that some firms are run by incompetents. Some of you read the last paragraph and fumed about the fact that you are a key employee and if given the chance you would run the company better after you fired the existing management. You might be right. My point in no way supports the existing management.  My point underscores that some productive inputs are more effective and important than others. When firms get this backwards then they do not succeed. You are proving that point. It must be very frustrating to work in a company like that. Luckily you have the freedom to argue your point or to move on to another company to show that you are right.

While this might seem normal and practical to me some of you are already saying that I have given the working class or the middle class short-shrift. I don’t mean any insult and have tried to say above that all parts are important and valuable to a company. I also fully understand how the income distribution has changed and I know that many middle income Americans have lost ground.  My concern, as is yours, is the best bath to help these Americans improve their lives. It seems backward to help them at the expense of investors, entrepreneurs, and innovators. It seems more sensible to focus on the mutual dependency among the parts. Let’s make sure rewards for entrepreneurial activity are commensurate with the risks. Let’s make sure that our companies can compete as effectively as possible. Let’s improve our education and training. Let’s remove impediments to hiring and firing workers. Let’s take away all those loopholes and stupid illegal and immoral relationships between business and government.

There is a way to move this country out of recession. We do it by valuing mutual dependence with a mature understanding about what it takes to both create and sustain competitive labor and product markets. We all work hard but that does not mean that some are not more vital than others. Our policies should celebrate this fact and not pit one side against the other with inane arguments about whether someone got help or not. 

Tuesday, July 17, 2012

LIBOR: The Biggest Financial Scandal Ever?

Thanks to Buck Klemkosky for being our guest blogger this week. Buck has been the dean of the SKK Graduate School of Business at Sungkyunkwan University, Seoul, since 2004. SKK GSB is the top MBA program in Korea and one of the top programs in Asia. Previously he was a finance professor and served as associate dean and chair of the finance department at the Indiana University Kelley School of Business. He follows the markets closely as a money manager as well. A version of this article recently appeared in the Korea Times.

Barclays, a 300-year-old British Bank, just paid a $453 million fine for manipulating LIBOR. Why the big fine? LIBOR (the London Interbank Offered Rate) is the most important short-term interest rate benchmark in the world. More than $10 trillion of securities and $350 trillion of derivative contracts are tied to LIBOR. Do the math and it is easy to see what impact a 1-basis-point change (one hundredth of one percent) could have with trillions of dollars involved.

The problem is that LIBOR is not a market-based rate but one set daily by survey. Each morning at 11:00 a.m. London time, 18 banks are asked the rate at which they could borrow from other banks in 15 maturities, from one day to one year, and in 10 currencies. Thomson Reuters aggregates the rates by rejecting the four highest and lowest and calculates the average LIBOR from the remaining 10 rates. This process is repeated 150 times for the 15 maturities and 10 currencies. Once calculated, the LIBOR figures are published and disseminated throughout the world. The most important of the 150 rates is the three-month dollar LIBOR.

LIBOR acts as a benchmark or reference rate for trillions of dollars of financial securities such as credit cards, corporate loans, home mortgages and just about any security that has a floating interest rate, as well as derivative contracts such as interest rate and currency swaps are tied to LIBOR. The impact of changes in LIBOR to borrowers and lenders is significant. For comparison, a one basis point (.0001) change on one $1 trillion of securities is $100,000,000. Given the $300 trillion to $400 trillion conservative estimate of securities and derivative contracts that are tied to LIBOR (some estimates are as high as $600 trillion), the amounts involved are huge.

Barclays had manipulated its LIBOR figure hundreds of times from 2005 to early 2009. Some were at the urging of its traders to help positions they had in derivative contracts and other securities. Also, during the financial crisis of 2008-2009, the bank purposely lowered its LIBOR bid because a higher rate at which banks could borrow would signal higher default risk. The banks that were too big to fail were under severe pressure at the time and any sign of weakness would have prompted massive withdrawals and/or a call for more collateral as counterparty risk was perceived to have increased. An interesting question is how involved or complicit were regulators during this time? They also were under tremendous pressure at the time to stabilize the whole financial system.

One thing you can count on in finance is contagion. The scandal has already spread from Barclays to other large banks that are under investigation or face lawsuits alleging LIBOR was manipulated. In Britain, the Financial Services Authority is involved, in the U.S. the Department of Justice and Commodities Futures Trading Commission, and Brussels in the E.U.

The LIBOR mess will be in the news for years to come. But it is not the only financial instrument to set rates by survey. There is TIBOR (Tokyo Interbank Offered Rate) and EURIBOR (Euro Interbank Offered Rate) that are similar to LIBOR. Many swap prices are also set by survey as well as other financial instruments.

LIBOR is the most important short-term interest rate in the global financial markets as the 10-year Treasury bond yield is for longer-term interest rates. The problem is that LIBOR does not reflect market prices or transactions as does the 10-year U.S. Treasury bond yield. Going forward, LIBOR and its equivalents should be based upon actual rates and prices at which banks have lent to or borrowed from one another, not estimates. At this time, LIBOR transactions are not publicly reported so there is a lack of transparency. There may not be current prices each day for all 150 LIBOR quotes but reported transactions should be the starting point, and that data used to fill in the blanks for those quotes not having transactions.

LIBOR has been around since the 1980s and has become one of the most important rates in the financial markets with huge financial implications for consumers, corporations and governments. And the market has been under suspicion of being manipulated for several years, but regulators never seriously investigated until recently. It is obvious that the present process of computing LIBOR is deficient. Given the amounts involved, the incentives to manipulate it are too large. Banks should not be able to profit from the level of LIBOR set by the banks themselves.

LIBOR may end up being the largest financial scandal of all times, given the trillions of dollars impacted by the rate. As mentioned previously, LIBOR will be in the  news for years to come. But what a global financial calamity it would be if LIBOR were to collapse. Hopefully in the future a better process can be devised to set a benchmark short-term interest rate that all lenders and borrowers can have confidence in as a real rate and not an artificial rate.

There may be alternatives to LIBOR. Some would suggest U.S. Treasury bills which are owned globally and traded in a liquid and efficient market. But they are subject to the creditworthiness of one country as opposed to 18 global banks. Another possibility would be to use the repo rate, which is the rate for financing securities. The borrower puts up securities for collateral for a loan and agrees to repurchase them at a later date at a specified price. So don’t be surprised if something replaces LIBOR.

Tuesday, July 10, 2012

Outsourcing Common Sense and US Jobs

President Obama quoted others in calling Romney and his past colleagues at Bain Capital “Pioneers at Outsourcing.” The President smiled and puffed out his chest as he proclaimed that in contrast he was the one who saved the auto industry.  Romney denied that either he or Bain Capital were responsible for outsourcing. But given the chance he did not take the opportunity to stand up for free trade. Thus they both want us to think that outsourcing is something evil that hurts US employment. As an aside, I think they used the wrong word – outsourcing instead offshoring. Their rhetoric works better for locating businesses abroad. But I suspect they like neither offshoring nor outsourcing.Both appear to hurt US employment. But keep reading please...

One quick thing to ask the President… he proudly bailed out the auto industry.  Is there any other industry that has done more offshoring of jobs? Does GM not have a plant in virtually every country of the world? Why is he so proud of saving the auto industry when he is so against offshoring? Has he vilified GM for all those jobs created abroad rather than at home? Why is it okay for GM to offshore but not okay for Bain to help other companies who want to offshore?

Those of you who are very worried about employment in the USA want your politicians to stand up for jobs in America. The disappointing labor department report last Friday underscored our concern for jobs.  But please, both these guys are agreeing on the wrong thing. Yammering against globalization is just wrong. It is very wrong.  Obama continues to take his eye off the ball. Employment suffers in the US because we have no fix for finance, housing, and a fiscal cliff. Yet he finds something new to talk about each week – he will talk about anything that diverts our national attention from what matters.  Romney does not do much better. I don’t care if he worked for Bain Capital or Micky D’s – I want a clear exposition of what he is going to do as President. Neither of these guys lived normal lives with paper routes and lemon-aid stands. I doubt either one would know the right end of a lawn mower.  Get over it. Both are running. What are they going to do once they get into office? This offshoring thing is a red herring.

Both these guys think they can score points with workers by pointing out that outsourcing/offshoring (o/o) hurts national employment. But stopping o/o is not going to save US jobs. It is important to see that o/o is not much different than importing goods and services from abroad. If we o/o or if we import we are buying things that are produced abroad rather than at home. On the surface it sounds pretty bad to import or to outsource. But luckily that is not the whole story.

We cheer for our good guys when export sales increase. When a firm on US soil sells more peanut butter to China, we acknowledge the extra jobs that are created in the US. Imports do just the opposite. Imports are goods that we buy and consume here that are produced abroad by workers in Brazil or Spain or Botswana. Clearly if those goods were produced at home this would create more job opportunities for Americans. But what has the president done about imports? During his watch US imports from the world increased from $2.54 trillion in 2008 to $2.66 trillion in 2011.  In 2011 US exports to the world were $2.1 trillion so we had a net deficit in goods and services of more than half a trillion dollars. That half a trillion dollars represents the difference between jobs gained through exports and jobs lost through imports. That’s a lot of jobs.  Why isn’t Mr. Obama traveling around in his fine bus ranting about all those imports? Clearly neither he nor previous presidents wanted to stop this trade deficit. It has gone on for decades. A Buy America program has done almost nothing to reverse all this.

Why is it okay to let imports replace US jobs but not to let o/o do the same? The answer is that it isn’t okay. Globalization is a two-way street. We all realize that you can’t have exports without imports. You can’t have in-sourcing without out-sourcing. A policy to reduce imports or o/o would surely hurt our exports and the desire of foreigners to invest here. Worse yet, it would be very inefficient and costly. Many imports reveal our own decisions to specialize. Importing things where we have no real business edge makes no sense. It would simply mean less choice and higher prices.  That is not what we are after.

Along similar lines, it makes sense to produce abroad rather than at home.  China and other parts of Asia are growing rapidly. They need a lot of goods to support the growth. Given the distance and cost of traversing it – it often makes sense to produce for those markets in Asia. Producing in the US would be more costly and we might lose in the competition with Asian, German, and other firms who also want to serve those markets. The reason the President doesn’t rail again GM plants abroad is that he knows that a global foot print makes GM a stronger company and more able to sustain its jobs at home as it spreads employment and production around the globe.

Why has Obama been so silent about the recent decision of Airbus to locate a production facility in Alabama? Obama does know that Alabama is one of the 57 US states, doesn’t he? I realize Alabama is a right-to-work state but even non-union workers count in the national employment statistics, don’t they?  Why did Airbus decide to locate in the US? Did they do it to irritate French workers? The Wall Street Journal says the location decision was made because Airbus wants to be able to produce for the US government. To be competitive in government procurement a company must have factories in the US. Is it not possible that many US companies locate abroad for similar reasons – whether they serve government or private purchasers? Isn’t Airbus made stronger by locating a plant for US buyers in the US? Are not jobs in France and other places in Europe made that much more secure because Airbus is stronger? So it makes sense for France and other countries to o/o.

Let’s take a look at offshoring in a comparative sense. You will see below that the US is just doing what everyone else is doing. We are clearly not alone.   In 1990, the US owned $732 billion in foreign capital (Foreign Direct Investment, FDI*. A more complete definition of FDI is given below.) That is, US cumulative purchases over many decades of foreign productive capital across the globe amounted to $732 billion. That amounted to 13% of our GDP in 1990. We have since experienced more than 20 years of rapid globalization and now own $4.8 trillion capital abroad. That amounts to an almost 7-fold increase. FDI was 32% of GDP in 2010. Offshoring is very evident for the US.

The below table compares the US to 10 other countries and the EU: (this data comes from the United Nations Web Table 8. FDI outward stock as a percentage of GDP, 1990 to 2011. Stock values are in trillions of dollars). http://archive.unctad.org/Templates/WebFlyer.asp?intItemID=6018&lang=1

The stock of FDI owned by the EU was almost twice as large as that for the US in 2010.  The listed countries own from $340 billion (Switzerland) to $1.7 trillion (UK) of FDI in other countries. What matters more, however, is how large the ownership compares to the size of the country.

For the Netherlands, FDI was 123% of the economy in 2010.  The US position was 32% which ranks it about 9th in this list – at par with Australia. Only Japan and Italy have FDI lower as a percent of the economy than the US.

Consider the increases in dollar value since 1990. The US FDI increased 7 times. That sounds like a lot but over these 20 years only Japan had slower growth in FDI at 4 times. Spain’s FDI increased 41 times! The median country’s FDI increased 8 times. Spain, France, Switzerland and the EU all found FDI increasing in double digits.

Globalization means investing at home and abroad. Countries that don’t do it will lose out on opportunities and will not compete well. Between 1990 and 2011 US non-farm employment increased by 23 million jobs. Private sector jobs increased by 19 million. The New Age of Globalization saw American jobs at home increase by more than 20%.

                   Stock      FDI        Fold increase
                    FDI         %GDP       Since 1990
                    2010      2010

EU            $8.93tr      57%               11times
US              4.84        32                    7
UK             1.69        72                    7
France        1.52         62                  14
Germany     1.42         44                    9
Netherl         .89        123                   8
Japan           .82         15                    4
Spain            .66        46                  41
Canada        .62         41                    7
Italy              .48        24                    8
Austral         .40         32                  11
Switzerl        .34         80                   8
*FDI is meant to capture the value of purchases of companies abroad for the intent of management control. It does not include purchases of foreign stock that are made for the purposes of only financial investment. That is, most international bodies distinguish between FDI and portfolio investment. FDI involves the purchase of companies through merger, acquisition, or simply enough shares to lead to some managerial control. It also includes greenfield sites which would include building a new plant or business firm in a foreign country.

Tuesday, July 3, 2012

Manifesto to Macroeconomic Nonsense

Alan Blinder and then Paul Krugman (with Richard Layard) wrote articles that showed up in the last week of June – one in the WSJ (The Long and short of Fiscal Policy) and one in the FT (Time to Speak Up: Manifesto for Economic Sense). They basically say the same thing. Krugman and Layard go a little farther since they are recruiting like-minded economists to show support for their manifesto. Please do not humor these guys.

Since both articles amount to the same thing let me try to summarize their arguments. Policymakers who disagree with Krugman and Blinder are “inflicting massive suffering.” This suffering comes from too much austerity. National demand needs to be stimulated, preferably by hiring more police, firemen, and teachers supplemented by more spending on national infrastructure. The government needs to make up for the lack of spending on the private side. Larger government deficits can be sustained by most countries but would damage long-term economic growth if not reversed at the right time sometime in the future. There are no supply constraints – the problem today is simply not enough spending.

I think this is a bunch of hooey (silly or worthless talk) and hardly deserves a response but it is either this or working in the yard in 105 degrees.

First question I ask is: What austerity?  I wrote a post on that a few weeks back (May 22 Austerity is hot) and showed there is not really much austerity going on except in Greece. Mostly we have seen historically strong government stimulus.

Second, they lament austerity in the US. But the numbers show nothing but government deficits and rising debt as far as the eye can see. Surely these two economists know the difference between stocks and flows. EVERY year a government has a deficit means an economic stimulus. While it is true that a smaller deficit yields a smaller stimulus, it remains that $1 trillion or so of deficits is having a walloping impact on aggregate demand. Saying there is austerity in the US now is like telling someone to eat a quart of ice cream to lose weight.

Third, in virtually no US budget that I have seen is there anything amounting to spending cuts. We all know that spending was increased dramatically at the onset of the recession.  Taking spending back to normal levels would not be a cut in my book. But even that is not happening. Spending continues to grow from these bloated levels.

Fourth – so while I agree that private spending is holding back, I seriously doubt that more government spending is the answer to our problems. We have plenty of government spending thank-you.

Fifth – these guys say that people who disagree with them are old fogies who fail to embrace the new and relevant economics. But what are they embracing? Keynesian economics is not exactly the Justin Bieber of economics.

Sixth, what they are embracing is a remedy that simply does not fit the patient. “Nurse, give the patient more heart medicine. But Doctor, the patient hurt his big toe. I don’t care, give him heart medicine.”

These mouth-breathers say that governments did not cause the recession. They are correct though decades of growing national debt definitely didn’t help us prepare or deal with a financial crisis. What caused the recession some 5+ years ago was housing and finance. Do these guys not see that lacking remedies for these problems, the economy is NOT going to improve?  Do they not see how much trouble Europe is having because of sovereign debt increases? Do they not see that promising a return to fiscal balance at some unspecified time in the future is like your daughter’s 16 year old boyfriend telling her that he will disengage just before the big moment arrives?

Seventh, these guys dismiss supply constraints as they obsess about demand. Yes demand is weak. But demand is weak because banks won’t lend and because firms won’t borrow or hire. Banks won’t lend and firms won’t hire because they don’t see government solving the housing and financial problems. In fact, many think them think the government is making the financial problems worse as they throw a Spiderman net of regulation over business activity from healthcare to investment.

Krugman and Layard (and Blinder) want you to sign a manifesto (a ticket on the Titanic). I suggest you send them free passes to the Betty Ford Clinic. They need a time-out to get off this Keynesian high.