Needless to say, the US has a long-term debt problem.  The problem is long-term both in the sense that it pertains to the next several decades rather than to this year.  (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.)   The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001.
     It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs:  the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich.  
     The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up.  The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents.  This familiar frame does not seem right to me.  There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.

          What are the demands of the hostage-takers?   Even if there existed an explicit ransom letter detailing specific severe spending cuts, in exchange for which it credibly offered to raise the debt ceiling, President Obama’s refusal to negotiate under such conditions would be fully justified.  But the situation is worse than that.  There is no specific set of demands, and never has been.  I truly believe there does not exist any set of spending cuts that the blackmailers would accept if they came from Obama. 
     Remember the occasions in the past when he has announced that he will accept the Republican position on some issue, only to have his opponents switch places, saying “if you are in favor of it, we are against it”?    One example was the idea of Obamacare itself, which originally came from conservative think tanks and Mitt Romney.   Another example was the proposal for an automatic version of what in February 2010 became the Simpson-Bowles Commission.
     There are only so many dollars that can be cut out of PBS and foreign aid.   If, hypothetically, Obama were to come out in support of severe cuts in agricultural supports, oil and gas subsidies, Medicare benefits and other programs, Republicans would attack him for proposing hurtful cuts. (Remember attacks on Obama’s health plan for non-existent “death panels” and fictional cuts to Medicare benefits?)  Simultaneously, Republicans would say that the cuts were not big enough. 
     What would be enough?   Some debt crazies have said they think it would be fine if we failed to raise the debt ceiling.  Some are crazy enough to think it is not a problem if the US government were to default on its legal obligations.  (They may not realize that defaulting on the bill for office supplies that you ordered from Staples is as bad as  missing interest payments on your debt.)  But some want to enforce a balanced budget immediately:  the refusal to allow the government to borrow any more is not just a negotiating tactic, but is the outcome they want.  This is crazy in light of the adverse economic and financial impact (which would be much worse than that of the fiscal cliff that we just dodged two weeks ago).    
     But the prize for ultimate insanity must go to those who want to eliminate the budget deficit rapidly and insist on doing it without raising taxes, cutting defense, or cutting programs for seniors.  These people deserve the label “deranged” because what they are demanding is for a literally false proposition to be true.  It is arithmetically impossible to eliminate the budget deficit if the cuts are to come primarily in non-defense discretionary spending.  
     To be very clear, I don’t think most Republicans believe all of this.  Certainly my many economist friends who are Republicans do not.  The truly “deranged” people are just a subset of the “crazy” people, who are in turn a subset of those who are unwise enough to favor the debt ceiling threat as a tactic, who are in turn a subset of the Republican Party.   The problem is that it is this minority of a minority that is holding the whole country hostage.  The size of the minority evidently shrunk after the August 2011 debt ceiling debacle, after the November 2012 election, and after the January 1 cliff.   But it still has its finger on the grenade pin.

          So that leads us to the question of tactics.  A variety of stratagems have been proposed for the White House to use to defuse the bomb, if it comes to that.  These are all designed as ways that the federal government can continue to meet its legal obligations beyond March, even if the Congress doesn’t raise the debt ceiling.   While these unconventional proposals are beyond anything that would have been contemplated under normal conditions, they must be considered, in light of the correspondingly absurd situation in which the country would find itself.  If the Congress refuses to act, the White House would have to choose between two contradictory laws: the one that Congress passed to authorize spending and taxes versus the debt ceiling law that apparently prohibits the government from borrowing to make up the difference between spending and taxes.  Following the implication of the latter law would have disastrous impacts on the country and the world if obeyed.

• Given the contradiction between the two laws, President Obama could just ignore the debt ceiling and follow the direct implications of the spending and taxation laws. I am not qualified to judge the legality of this course of action. The courts would eventually have to sort it out. The hope is that by then the Congress would have come to its senses and raised the debt limit.
• In the meantime, the White House might try invoking the 14^th Amendment, as Bill Clinton suggested at the time of the last debt ceiling standoff, in 2011.  The Amendment includes the passage “The validity of the public debt of the United States…shall not be questioned.” Again the Supreme Court would eventually have to decide the issue.
• The Treasury could issue “IOUs” to the office supply stores, soldiers, Social Security recipients, etc. The IOUs would just be written acknowledgements of a legal fact: that the government owes these people money. Maybe the Federal Reserve could let it be known that it will honor these IOUs. (There must be something wrong with this, or somebody besides me would have proposed it already.)
• The government writes an option to buy all its property and buildings for $1, and then sells that very valuable option to the Federal Reserve for something like its true value. This proposal has been made by the Yale constitutional expert Jack Balkin last time around, from which I infer that it is not obviously contrary to the law.
• And finally, the most colorful of the proposals: the trillion dollar coin. The Treasury would exercise its legal authority to mint a commemorative coin made out of platinum, with a face value of $1 trillion. The Federal Reserve would then buy the coin for $ 1 trillion, allowing the Treasury to pay its obligations by drawing down its checking account at the Fed up to that amount. This proposal originated in the blogosphere and was one of those anointed by Balkin in July 2011. Paul Krugman greatly elevated its prominence by declaring his support earlier this month.

     Contrary to some fears, none of these proposals need result in the money supply being any larger than it would otherwise be.  The Federal Reserve determines the money supply.  If it creates a new component of money by buying a platinum coin, a property option or IOUs, it can offset it by shrinking other components of the money supply by the same amount, leaving the total unchanged.
     The Obama Administration so far is eschewing gimmicks, and is calling on the Congress to do its job in a responsible manner.  This is the right approach.  
     But in the event that the minority does succeed in blocking a debt increase, it may be worth turning to some legal gimmick to avert the financial and economic catastrophe.   Of the five proposals bulleted above, the platinum coin is the one that seems to have the most experts currently expressing belief in its legality.  It is certainly clever.  Unfortunately, it would probably be the worst from a political standpoint.  The reason is - I am guessing here - there is a fairly high overlap between the debt crazies (defined above) and people who have paranoid conspiracy theories that relate to the Fed, money and precious metals (especially gold, but platinum is too close for comfort). For all I know, some of these people are the same who believe that Obama was born outside the U.S.  (That would fall into the category of deranged propositions, also defined above; but there is no need for us to go there.)  When you are dealing with a crazy person, it is best to avoid anything that would pour gasoline on the flames of his paranoia.  We actually want to win back some of those people who are merely misguided but not really insane.  After all, just getting past the current debt cliff wouldn’t solve the problem, with sequester and shutdown deadlines also looming.   So I’d go for some other legal gimmick, one that would be less likely to feed the paranoia and more likely to continuing chipping away at popular support for the extremists.

[I was interviewed this week on the trillion dollar coin by Boston magazine and radio station WGBH.] 

This blogpost also appeared on Econbrowser, Jan. 17, courtesy of Menzie Chinn.  Comments may be posted there.

Every pundit agrees that President Obama did badly in the first debate.  But I can’t help wondering whether he (and VP Joe Biden) would have been able to come out swinging as freely as they have in the subsequent debates, if it were not for what happened in Denver.  Obama must have been afraid of sounding unpresidential.   But because his initial performance was so roundly criticized for passivity, he was licensed after that to argue aggressively:  “What you are saying is not true, Governor Romney.”  And it helps that he was right, each time.   (My morning-after talking-head comments can be viewed: “Re-cap of 1st Presidential Debate,” Oct.4; and “Re-cap” of 2nd Presidential Debate, Oct.17.)

Of all the areas where Romney’s assertions in the first debate were rebutted successfully in each of the subsequent debates, his tax “plan” is one of the most important.  The credibility of independent analysts and fact-checkers has helped here.   The main problem is not that Romney hasn’t announced a plan detailed enough to be worthy of the name.   The main problem is, rather, that no plan can achieve three simultaneous goals, each of which the Republican candidate has repeatedly promised:   (1) cutting tax rates 20%,  (2) avoiding loss of tax revenue by elimination of deductions, and yet  (3) preventing overall taxes from going up on those earning less than $200,000 a year.    Romney and Ryan have been conducting a shell game:  they show the public what is under two of the three shells, but not all three at any one time.  For example, Republicans will argue that the tax cut won’t raise the budget deficit by citing a study that cuts middle class benefits like the tax-deductibility of mortgage interest.  Then when reminded that they promised not to do that, they will cite a study that lets taxes go up on those earning $100,000-$200,000.

The 20% cut in tax rates would in itself cost $480 billion on revenue in 2015 or about $5 trillion over the next 10 years.  I don’t think there is disagreement about that.  (But Bruce Bartlett estimates $6 trillion:Tax Notes, 10/29/12, p.2.)   All the disagreement is whether Romney can make up the revenue by eliminating deductions as he claims.  Yet in the first debate, when Obama started to address this question, Romney tried to shut him down by saying that a $5 trillion tax cut wasn’t his complete plan, as if anyone had ever said it was.  Worse, in the Vice Presidential debate, Congressman Ryan claimed that the Obama deputy campaign manager had “stipulated” that they had been wrong, that the tax cut wasn’t really $5 trillion.  The media was fooled by this one, failing to note that she had only made the (accurate) statement that the question of controversy was not whether the overall loss of revenue would be the full $5 trillion, but whether Romney could make all of that up by eliminating deductions.  This is an elementary point and Obama was able to get it across effectively in the second and third debates, even to number-weary viewers.

Some pundits say that, if Romney’s weakness is that his budget numbers don’t add up, Obama’s weakness is that he hasn’t laid out a specific agenda for his second term.  (Either that, or that he didn’t get us out of the recession fast enough.)

What will happen after the election?   It is typical that fervently debated plans of the candidates become mostly irrelevant soon after the winner’s presidential term begins.  (My Oct.22 talking head comments on this are viewable, at the 26-min. mark.) They are overtaken by unexpected events, such as a market crash at home or an armed attack somewhere in the world.  In the present case, we have a good idea of the events that, soon after the election, will quickly replace the sound-bites of the campaign.   In economic policy, a renewed euro crisis within the next year is likely to have serious spillover effects.   But more urgent for the American president will be the Fiscal Cliff, which arrives January 2013.   Immediately after the election it will become the dominant question.  Yet neither candidate is talking about it.  The explanation for this silence is in part that no politician wants to talk about the specifics of budget-cutting pain; but it is also in part that the two candidates genuinely can’t know what they will do before they know how many supporters they would have in Congress to do it. By the way, I have a prediction regarding monetary policy.   If Romney were to be elected president, his position that monetary policy has been much too easy would turn around on a dime.   Like Nixon, Reagan and Bush before him, he would seek to push the Fed toward easing, not tightening.

Foreign policy was the focus of the third debate.  (Incidentally, why does Romney believe that Syria “is Iran’s path to the sea?”  That is a strange rendering of geography.  Four years ago, McCain thought that Afghanistan bordered Iraq.  GWB said that Africa was one nation.  Reagan mixed up Brazil and Bolivia. Anyone see a pattern? )

The pressing foreign policy issues for the next president will likely be the withdrawal from Afghanistan, the nuclear standoff with Iran, and territorial disputes over islands off the coast of Asia.  Instead of discussing realistically the sort of policy decisions that will need to be made, the candidates have been debating “who said what, when” after the killing of four American diplomats in Benghazi last month.   Despite that tragedy, Obama’s overall policy in Libya remains a success on net.  His actions helped remove Qaddafi, which is reminiscent to me of Bill Clinton’s interventions in Kosovo (helping remove Milosevic) and Haiti (Cédras).   Removing bad guys without US combat deaths.   Libya ranks behind two other major Obama foreign policy successes: withdrawal from Iraq and removal of bin Laden.   Contrast that to the 4,000 Americans who died in the Iraq war; the 3,000 in the World Trade Center; and the global damage done to American foreign policy more generally during those years.

         A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FP conducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)   

My fellow economists choose defense spending and agricultural subsidies as the two categories of US federal budget that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.   

For a slideshow presentation of the results, see “The FP Survey: The Economy.”   Or in a magazine format:  “If we’re ever going to get out of this slump, what will it take?  We asked more than 60 leading economists to tell us.”   

        Also, here is a recent poll from The Economist, asking similar questions of NBER and NABE economists:   “Asking the Experts,” Oct. 6.

Once again this morning, the BLS employment release tells conflicting stories depending on whether one looks at the unemployment rate or job growth.   The U.S. unemployment rate fell from 8.3% in July to 8.1% in August, continuing the gradual three-year downward trend (from its 2009 peak at 10 %).     Political economy equations often say that the direction of movement of the unemployment rate in the period preceding a presidential election is the main economic determinant of whether the incumbent is re-elected.  

“Are we better off than we were four years ago?”   Yes.   If the criterion is to be a narrow unemployment comparison, and one counts from the month following the day Obama took the oath of office, then we are now at a lower unemployment rate.   But that is very simple-minded as a criterion.   (Look at GDP.  Better yet look at how the free-fall turned around  and the recession ended within his first 5 months.)

Employment growth is the more important statistic, to evaluate the progress of the economic recovery.  Here today’s BLS report was disappointing: only 96,000 jobs created.    The jobs number climbs into six digits if one looks at private sector employment growth.  

By the way, am I the only one who sees a general bias toward negativity in the media?   When the unemployment number looks bad and job creation looks good, like a month ago, the newspapers seem to headline the former.   When the unemployment rate looks good and employment disappoints, as this time around, they tend to focus on the latter.  The TV shows do the same (including those on which I appear).

In any case, as always, one should look at a longer run trend.   The fact is that private sector job growth has been running at an annual rate of 162,000 per month over the last two years.    This is far greater than the rate during the Bush Administration even if one looks only at the years in between the Bush recessions of 2001 and 2008  (83,000 per month, on average, from November 2001 to December 2007.)   It is not enough.  For example it is much less than the rate during the Clinton Administration, month in, month out (218,000 private sector jobs created per month, on average).  But it is a big improvement over where we were.

On the subject of Bill Clinton.  His speech to the Democratic Convention  Wednesday night again demonstrated his unique ability to explain wonkish policy details in a folksy way.    This included pointing out the statistics on private sector job creation under Democratic presidents since 1961 compared to Republican Presidents.   The rate has been just over twice as great.   Thus the current Obama-Bush comparison continues a half-century tradition.

The point about private sector job expansion looking better than overall employment growth is of course what Obama was trying to say in June when he made his unfortunately worded statement that “the private sector is doing fine.”   He quickly retracted that language, which was the right thing to do.  But the point still needs to be made.

Why look at private sector jobs, instead of total jobs?    I have a feeling that this is a Republican way of looking at things.  The Republicans don’t seem to believe there is anything amiss if a million public sector workers lose their jobs.  (Which is what has happened over the last year:  934,000.)    Teachers, firefighters, construction workers…   Apparently those don’t  count as real jobs because they are in the public sector.    That would explain the Republican congressional opposition to Obama’s initial fiscal stimulus in 2009 (the one that ended the recession) and their more successful subsequent attempts to block Obama’s job proposals.  

So maybe we should be looking at total employment after all, rather than private employment.  Or even focusing on the underemployed and discouraged workers.  But these are all reasons why we need to resume enacting the policies that Obama has been trying to enact.

The BLS this morning reported U.S. job gains of 163,000 in July, which is good news in the eyes of the financial markets.  The jobs data had been disappointing over the preceding three spring months.  Before that, during the winter months, employment growth was strong.

In terms of perceptions and politics, pundits will say that today’s report is good news for Obama’s re-election prospects, just as they said the spring jobs numbers were bad news for the President.  But my interest is in economics and reality, rather than perceptions and politics.   From a longer-term perspective, a few important facts have not been adequately discussed.

• 1. The rate of job growth over the last two years, 137,000 jobs per month, inadequate as it is, has actually been greater than the rate of job growth during the George W. Bush Administration (101,000 per month) even if one excludes the two Bush recessions that occurred in the first and last years of his administration, respectively.   The Obama Administration looks even better if one confines the numbers to private sector employment, since the government has been shedding jobs under Obama and was growing rapidly under Bush. Of course this is still nothing like the sort of progress we would ideally want to see - say, the 237,000 jobs that were created month in and month out on average during the 8 years of the Clinton Administration. And the number of long-term unemployed remains worryingly high. But the situation is a big improvement over the economy that Obama inherited three years ago.  

• 2. An unemployment rate of 8.3% shows that the economy is still in unsatisfactory shape.   (The July numbers show a rise from 8.21 to 8.25, which the BLS labelled “essentially unchanged” in the first sentence of its release.)   Unemployment remains higher than what the Obama Administration hoped we would have by now at the time it took office in January 2009.  Most of the difference can be explained by the fact that the level of economic activity in January 2009 - as a result of the free-fall in the last part of 2008 - was much worse than was realized at the time. The subsequent downward revision by the Commerce Department in the official statistic for the level of GDP at the start of 2009 can explain why the level of the economy is disappointing 3 ½ years later, more than the rate of growth over the intervening period. After all, those horrendous 2008 rates of decline in GDP and employment turned around during the six months immediately following the day Obama took office.  

• 3. Most private-sector and independent economists agree that the Obama fiscal stimulus made a positive difference; that - together with TARP and monetary easing by the Fed, unpopular as they are in some circles — it helps explain the mid-2009 economic turnaround; and that it helps explain the moderate growth that followed (2 ½ % growth p.a. in the 2nd half of 2009 plus 2010).   A good explanation for the disappointingly slow rate of growth in output and employment since the end of 2010 is that the fiscal stimulus has been withdrawn and the government sector has been contracting. (Since the November 2010 election, there have been enough Republicans in Congress to block the American Jobs Act and every other action that Obama proposes.)  One can see this in the composition of both GDP and employment. Today’s jobs report features another 9,000 jobs cut in state, local, and federal governments, continuing the pattern that has held throughout the recovery: jobs and output in manufacturing and the rest of the private sector have been expanding, partially offset by contraction in the public sector.

       The world is in the grip of a debate between fiscal austerity and fiscal stimulus.  Opponents of austerity worry about contractionary effects on the economy.  Opponents of stimulus worry about indebtedness and moral hazard.

Is austerity good or bad?   It is as foolish to debate this proposition as it would be to debate whether it is better for a driver to turn left or right.   It depends where the car is on the road. Sometimes left is appropriate, sometimes right.  When an economy is in a boom, the government should run a surplus; other times, when in recession, it should run a deficit.    

True, it is hard for politicians to get the timing of countercyclical fiscal policy exactly right.  This is the reason, more than any other, why Keynesian policy lost its luster.  “Fine-tuning” it was called.  Sometimes the fiscal stimulus would kick in after the recession was already over.   

But this is no reason to follow a pro-cyclical fiscal policy.  A procyclical fiscal policy piles on the spending and tax cuts on top of booms, but reduces spending and raises taxes in response to downturns.  Budgetary profligacy during expansion; austerity in recessions.  Procyclical fiscal policy is destabilizing, because it worsens the dangers of overheating, inflation, and asset bubbles during the booms and exacerbates the losses in output and employment during the recessions.  In other words, a procyclical fiscal policy magnifies the severity of the business cycle.

Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by procyclicality. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.  Exactly backwards.

            Consider the positions taken over the last three decades by some American politicians. 

First cycle:    During a recessionary period, President Ronald Reagan in his 1980 campaign and in his 1981 Inaugural Address urged immediate action to reduce the national debt “beginning today.”  (Recession: austerity.)    But in 1988, as the economy approached the peak of the business cycle, candidate George H.W. Bush was unconcerned about budget deficits, even though the national debt was rapidly approaching three times the level it had been when Reagan had given his speeches.   “Read my lips, no new taxes,” Bush famously said.  (Boom: profligacy.)

Second cycle:  Predictably, the first President Bush and the Congress finally summoned the political will to raise taxes and rein in spending growth at precisely the wrong moment, that is, just as the US was entering another recession in 1990.   (Recession: austerity.)  Although the timing of the legislation was poor, the action was courageous.    The Pay as You Go Rule and other reforms switched government finances back onto a path that eventually was to eliminate the deficits by the end of the decade.   

But three years later — and even though the most robust recovery in American history had begun — every Republican congressman voted against Clinton’s 1993 legislation to continue Bush’s spending caps, PAYGO, and tax increases.  Nor did they change their minds in response to the subsequent success of the policy.   Even after seven years of strong growth, with unemployment at the peak of the business cycle dipping below 4% for the first time since the 1960s, George W. Bush based his 2000 campaign on a platform of large long-term tax cuts. (Boom: profligacy.)

Third cycle:  Even after the Bush fiscal expansion had turned the inherited record budget surpluses into record deficits, the Administration went for a 2^nd round of tax cuts in 2003, and continued a rate of growth of spending that was triple the rate under Clinton (both national security and domestic spending).  Vice President Richard Cheney said “Reagan proved that deficits don’t matter.”   These policies were maintained for five more years, as another $ four trillion was added to the national debt.  (Boom: profligacy.)  

Predictably, when the worst recession since the Great Depression hit in 2007-09, politicians felt constrained from an adequate fiscal response due to the big deficits and debts the government had already been running. Republicans suddenly re-discovered the evil of budget deficits and decided that retrenchment was urgent.  They opposed Obama’s initial fiscal stimulus in February 2009, even though GDP growth and employment were much worse than they had been when Reagan and Bush had launched their tax cuts and spending increases.  (Recession: austerity.)   Subsequently, with a new majority in the House, they succeeded in blocking further efforts by Obama when the stimulus ran out in 2011.  The government spending cutbacks of the last two years are the most important reason, in my view, why the economic recovery which began in June 2009 subsequently stalled in 2011.

Three cycles.   Three generations of politicians who favored expansionary fiscal policies during a boom and then decided after a recession had hit that budget deficits were bad after all.  (See the graph below.)

This is not to say that the procyclicalist politicians have always succeeded in getting their policies adopted.   Clinton had a strong enough congressional majority in August 1993 that he was able to pass his budget balancing legislation (Omnibus Budget Reconciliation Act) — even though every Republican in Congress voted “no” at a time when the economy was expanding.  Similarly, Obama had a strong enough majority in January 2009 that he was able to pass some initial fiscal stimulus (the American Recovery and Reinvestment Act), without a single Republican vote, at a time when the economy was in freefall.  But too often the countercyclicalists are overpowered by the procyclicalists.

            Trying to turn left or right at precisely the wrong points in the road is a worse record than one would get by switching policies randomly.  To explain this perverse pattern, let us switch metaphors in mid-stream.   It is the old problem of needing to fix the hole in the roof when the sun is shining, rather than waiting for a storm to realize that it is necessary.  When the economy is booming, there is no political support for painful spending cuts or tax increases.  After all, everything seems fine; why make a change?   Then when the deluge comes, sinners suddenly see the evils of their ways and proclaim the necessity of reforming.  Of course it is very difficult to fix the roof in the middle of a thunderstorm.

Procyclical Politicians:  Support for fiscal contraction (down-arrows) and fiscal expansion (up-arrows) 

 (Click here for larger version) (more…)

     The Supreme Court today upheld the Affordable Care Act of 2010, otherwise known as Obamacare.  Judging from the polls, American public opinion appears to be very sharply divided over the legislation.  Some view it as socialism, others as the first success in a half-century of efforts to achieve a sensible national policy on health care.

       What explains the wide divergence of views?   An economists’ approach - cynical or naïve depending on how you look at it - would be to assume that citizens vote according to their own personal interests.   Getting the uninsured onto paid insurance through the individual mandate is very much in some people’s interest, but not necessarily as strongly in others’ interests.  Let’s take a look.

       Those who have the most to gain from President Obama’s health care legislation are those who have a pre-existing condition or are pre-disposed to illness, for example because they are overweight.  They are more likely to need medical care in the future, but can be charged higher rates if they try to buy private insurance, by virtue of their condition.  Or they can be excluded completely.   (Each obese American incurs medical costs 42% higher than those of normal weight.)     

         Figure 1:  States with higher obesity rates tend to oppose the Affordable Care Act     

     I show how Congressmen from each state voted on the Affordable Care Act on the vertical axis of Figure 1, with the state rates of obesity on the horizontal axis.   There is a statistically significant relationship.  But the relationship goes the other way:    states where more people are overweight, such as Mississippi, Alabama, South Carolina and Texas, are more likely to oppose Obamacare.   In those parts of the country where people are slimmer, such as New England, New York and Colorado, there is strong support for health care reform.  For every one percentage point increase in obesity, support for Obamacare declines by an estimated four percentage points on average.

     Obesity is partly genetic, of course, but also is determined by habits of exercise and eating.  The states where residents get the most physical exercise are Minnesota, Utah, Oregon, Washington and Vermont; the states that get the least are Mississippi,  Tennessee,  Kentucky,  Lousiana and Alabama.   Another data source tells us the states with bad eating habits:  the five worst-ranking are Mississippi, Alabama, Missouri, Kansas and Oklahoma.

      There are some outliers, of course.   Utah’s population appears to be physically fit (and to do well by other measures that we will be looking at later), while opposing the Affordable Care Act and voting Republican.   Mormons look exceptional in the extent to which they abide in their personal lives by the strictures of their religion.   Could this be why evangelicals tend to resent Mormons so much according to opinion polls?  

       It’s not just obesity and exercise.  The states that rank the best on an overall health index are Vermont, New Hampshire, Massachusetts, Minnesota, and Maine and Iowa.  The states where people are the least healthy overall are Louisiana, Mississippi, New Mexico, Nevada, Oklahoma and Texas.  The weight of the evidence is fairly clear: the states where people are most in need of help getting private insurance are the states opposing the legislation that helps them do that.    (I hope in future blogs to look at such other specific risk factors as unprotected sex, drunk driving, and smoking habits.)

      It seems that the economists’ view of the world is wrong.  People are not voting in their self interest.  What is going on here?

       I can think of two plausible explanations as to why those who stand to benefit from Obamacare should oppose it politically:   (1) lack of knowledge regarding the bill, and (2) partisanship.  

       Most people don’t know what Obama’s bill does.  Many think that it reduces personal responsibility for health care.  But the truth is the opposite.  Under the current system, hospitals are required to treat patients who show up at the emergency entrance with a heart attack - even if their condition is partly their fault, due to habits of overeating and under-exercising.  The hospitals have to pass the costs on, and the rest of us end up footing the bill.   The individual mandate is designed to fix that, by making everyone pay for the health care they get (and perhaps even encouraging them to see a doctor who will advise them to adopt a healthy life style).  Establishing personal responsibility, not socialized medicine, is the reason why conservative think tanks such as the Heritage Foundation proposed the idea of the ndividual mandate in the first place, and why Mitt Romney enacted it in Massachusettts.   But most people still seem unaware of this.  If people do not understand their economic interests, that may explain why the voting patterns do not line up correspondingly. 

       The other, not inconsistent, explanation, is that people are voting along simple party lines.   Figure 2 shows the popular vote in the 2008 presidential election on the vertical axis, state by state.   The states where people are most likely to be overweight or obese tend to vote Republican.  Evidently the people in New England, New York, Hawaii and DC, who tend to vote Democratic, are slimmer.   A one percentage point increase in the obesity rate is estimated to raise the ratio of Republican to Democratic voters from 1.00 to 1.06 (easily enough to swing an election). The statistical confidence interval — “margin of error” – is thin enough to exclude the possibility of a zero effect.      

                 Figure 2:   States with higher obesity rates tend to vote Republican                                 

        Ideology is much less important than party affiliation.  This is the same result when one looks at which states receive more federal subsidies: despite all the rhetoric about “getting the government off our backs,” it is the red states, i.e., those where people vote Republican, that receive the most transfers from Washington.  Alaska, Mississippi, Louisiana, West Virginia, and the Dakotas top the list.   The Democratic-leaning states are the ones paying into the federal government and subsidizing everyone else:  New England, New York, New Jersey, California.   Those who claim to be fiscally conservative are the ones who in fact tend to feed voraciously at the public trough.

[Econometric results are available in an appendix.]

With November’s election fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus made matters worse.  And, despite recent improvement, the level of unemployment indeed remains far too high.not blame George W. Bush for the recession that began two months after he took office in 2001. There hadn’t yet been time for bad policies to damage the economy.)

Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since.  Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.

There is a good case to be made that government policies - while not strong enough to return the economy rapidly to health — did indeed halt an accelerating economic decline.    By “government policies,” I mean not just the fiscal stimulus the new president steered through Congress when he took office, but also the Obama version of TARP, and Fed Chairman Ben Bernanke’s aggressive monetary stimulus.   All three policy initiatives remain extremely unpopular with Republicans, and ambiguous among swing voters.

But the middle-ground observers are of course right that one cannot prove what would have happened otherwise.   It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.  These things usually take time.  One cannot infer the merit of a new president’s policies from the path of the economy during his first few months in office.  (For example, I did

But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that the economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.

This is especially true if one looks at revised economic statistics, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been negative 2.2%; but current figures reveal it to have been a horrendous negative 6.3%. This is the main reason why the level of economic activity in 2009 and 2010 was so much lower than had been forecast, which in turn explains why unemployment was so much higher.

Figure 1 shows the quarterly economic growth rate. The maximum rate of contraction — a veritable freefall in the economy — came in the last quarter of 2008 (the quarterly GDP data come from the Bureau of Economic Analysis of the U.S. Commerce Department).   More specifically, it came in December, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (See monthly income figures in the form of growth rates in Figure 2 or levels of GDP in Figure 3.)  This was the month before Obama was inaugurated.  The situation miraculously began to improve as soon as Obama’s term began! 

(click here for larger graphs)

The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009.    The NBER officially designates the end of the recession as having come in June of that year.  GDP growth turned positive in the third quarter.

US economic growth slowed down again in late 2010 and early 2011, as one can see in Figure 1.  The timing coincides with the beginning of withdrawal of the Obama fiscal stimulus. Indeed, the government has been the one sector to experience contraction in income and employment over the most recent five quarters.  The private economy has been expanding.

Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. Labor-market recovery normally lags behind that of GDP - hence the “jobless recoveries” of recent decades. But the graph of monthly job losses and gains reveals that here, too, the end of the freefall came precisely when Obama was inaugurated.  The last two charts show the same “V” shaped pattern in the monthly job change figures that are released by the Bureau of Labor Statistics, as the GDP growth figures that are released by the BEA.  The rate of job growth over the last two years, inadequate as it is, actually exceeds the rate of job growth during the Bush Administration, even if one counts only the period before the big recession hit in December 2007.

Again, these graphs do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.

What is the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact?   Start with common sense. When the government spends $800 billion on such things as highway construction, teachers and policemen who were about to be laid off, and so on, it has an effect. Workers who would otherwise not have a job now have one. Furthermore, they may spend some of their income on goods and services produced by other people, creating a multiplier effect.

Those who claim that this spending does not boost income and employment (or that it even hurts), apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.

They also think that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms. But interest rates are rock bottom, even lower than they were in January 2009, while core inflation is running at its lowest levels since the early 1960’s. The conditions of the last four years - high unemployment, depressed output, low inflation, and low interest rates - are precisely those for which traditional “Keynesian” remedies were designed.

Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach.   The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects of the traditional Keynesian models. Allowing for a wide range of uncertainty [to allow for different economists' views], the CBO estimates that the stimulus added 1.5 percent to 3.5 percent to the level of GDP by the fourth quarter, relative to where it otherwise would have been.  The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.

To be sure, of the many theoretical models produced by eminent macroeconomists at prestigious universities, some say that fiscal stimulus has no positive effect on the economy, even under recent economic conditions.  (The theoretical innovations underlyng the models have even won Nobel Prizes for the innovators, and not without justice.)  But these models are not sufficiently realistic to meet the market test:  they are not used by private businessmen for whom getting good forecasts matters to their planning and in turn to the success of their businesses.

Of course, econometric models do not much interest the public at large. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth, have not been used - and reused - to make the case.

(Click here for larger versions of all 5 graphs.)

[Appears also at Fair Observer,with a nice presentation of the charts.

A shorter version appeared as an op-ed at Project Syndicate, which has the copyright.]

A recent video interview from Project Syndicate recaps some of my recent op-eds.  It covers the following territory:

•           The Obama Recovery.    The U.S. economy was in free fall in late 2008, whether measured by GDP statistics, the monthly jobs numbers, or inter-bank spreads.     Was the end of the recession in mid-2009 attributable to policies adopted by President Obama?   A full evaluation of that question to economists’ standards would require delving into the complexity of mathematical models.  The public generally has a simpler standard:   was the impact big enough to be visible to the naked eye?   Amazingly, the answer is “yes.”   Whichever of those statistics one looks at, and whether it is coincidence or not:  the economic free-fall ended almost precisely the month that Obama took office, January 2009.
•           Emerging markets have generally had much better economic fundamentals over the last decade than advanced economies.    For example, one third of developing countries have succeeded in breaking the historical syndrome of procyclical (destabilizing) fiscal policy.   For the first time, they took advantage of the boom of 2003-08 to strengthen their budget balances, which allowed a fiscal easing when the global recession hit in 2008-09.
•           The 15-year cycle in EMs.  Market swings that start out based firmly on fundamentals can eventually go too far.   Some emerging markets like Turkey look vulnerable this year.  A crash would fit the biblical pattern: seven fat years, followed by seven lean years.  Here are the last three cycles of capital flows to developing countries:
  • 1975-81: 7 fat years (”recycling petrodollars”)
  • 1982: crash (the international debt crisis)
  • 1983-1989: 7 lean years (the “Lost Decade” in Latin America)
  • 1990-1996: 7 fat years (Emerging Market boom)
  • 1997: crash (the East Asia crisis)
  • 1997-2003: 7 lean years (currency crises spread globally)
  • 2003-2011: 7 fat years (the triumph of the BRICs)
  • 2012: ?

This morning the Bureau of Economic Analysis released its first estimate for 2011 GDP.   It showed national output for the first time surpassing the pre-recession peak, which occurred in the last quarter of 2007.    (See chart below)    The expansion in 2011 was led by autos, computers, and other manufactured goods.

Given that the economy hit its trough in mid-2009, the long slow climb since then has been disappointing.   The outcome turns out to have been worse than the conventional wisdom that sharp declines tend to be followed by sharp recoveries.   On the other hand, the outcome turns out to have been somewhat better than the Reinhart-Rogoff thesis that when the cause of a recession is a financial crisis, the recovery tends to take many years.  

To be sure, the housing market has yet to recover and households are still painstakingly rebuilding their battered balance sheets.   But is this the complete explanation for the disappointing state of the economy — the origins of the crisis in a housing bubble and financial collapse?   

The first point to note is that the biggest single reason why the level of GDP over the last three years has been lower than most people forecast in January 2009 has nothing to do with overly optimistic forecasts in January 2009 of the rate of growth looking forward, nor with how good or bad Obama’s policy proposals were, nor with how effective the Republicans turned out to be at blocking them.  The BEA subsequently revised the GDP statistics substantially downward, and now reports that the real growth rate of the economy in the last quarter of the Bush Administration, instead of negative 3.8% per annum as reported that January, was in fact negative 8.9% per annum! The trough of the V was far deeper than was realized at the time.

The second point to note is that construction, which usually helps lead the economy out of a recession, remained, indeed had a strong negative influence on GDP throughour 2006-2010.   Fortunately, in the latest figures, residential construction finally returned to a (small) positive source of growth in the economy over the last three quarters.

The third point to note is that the government sector has been the one component of demand to exert a substantial negative effect througout the last five quarters.   The reason is the withdrawal of fiscal stimulus at the federal level, at a time when state and local governments are also cutting back sharply on spending and employment.