Brooks and Krugman

Bobo’s at it again.  In “Livin’ Bernie Sanders’s Danish Dream” he babbles that his policies would give several of our systems northern European characteristics, including some that could surprise some of his supporters.  Izzat so, Bobo?  Let’s see what “Lise Mielsen” who actually lives in Copenhagen has to say in the comments:  “I live in Denmark and belong to the lower middle-class. We pay high taxes but we never have to worry about healthcare cost. My son has a PHD in chemistry – with no expense for me. My daughter-in- law had 52 weeks paid maternity leave after she gave birth to my grandchildren. We all have 6 weeks paid vacation each year. The minimum wage is 20$ per hour. We work 37 hour a week. When I grow old – there will be a nursing home for me.  If I loose my job I will get poor according to Danish standards – but I will never have to live on the street or worry about getting food.  We still have rich in Denmark, and Forbes finds Denmark to be among the best places to do business.  I bet the middle class has more freedom and Liberty in Denmark than in the US.”  Damn, doesn’t actually sound like a dystopia to me…  In “On Economic Stupidity” Prof. Krugman says many of the presidential wannabes haven’t learned much about economic risks in the past eight years.  Color me amazed…  Here’s Bobo:

American capitalism has always been distinct from continental European capitalism. We’ve had more entrepreneurial creativity but less security. Our system has favored higher living standards for consumers while theirs has favored stability for employees and producers.

For the past several decades, the United States has had a bipartisan consensus that we should stick to our style of capitalism and our style of welfare state. There has always been a broad consensus that a continent-size nation like ours had to be diverse and decentralized, with a vibrant charitable sector and a great variety of spending patterns and lifestyles.

American values have always been biased toward individualism, achievement and flexibility — nurturing disruptive dynamos like Bell Labs, Walmart, Whole Foods, Google and Apple — and less toward dirigisme, order and economic equality.

It’s amazing that a large part of the millennial generation has rejected this consensus. In supporting Bernie Sanders they are not just supporting a guy who is mad at Wall Street. They are supporting a guy who fundamentally wants to reshape the American economic system, and thus reshape American culture and values. As he told ABC’s George Stephanopoulos, he wants to make us more like northern Europe.

According to The Wall Street Journal, Sanders would add $18 trillion to the federal budget over the next 10 years. Currently, total government spending is about 36 percent of G.D.P. Under Sanders it would rise to about 47.5 percent of G.D.P., putting us comfortably in the European range.

First, Sanders would centralize power in Washington. If you radically increase the amount of money going to the Washington establishment, as Sanders would, you’re giving that establishment greater resources to control American life.

Second, Sanders would weaken the ability of members of the middle class to make choices about their own lives. He would raise taxes on the rich, but there is only so much money you can squeeze out of such a small group of people. European welfare states generally rely on a highly regressive value-added/sales tax — usually around 20 to 25 percent.

Middle classes across Europe bear a much higher tax load than the American middle class. As Austan Goolsbee, a former economic adviser to President Obama, has noted, you really can’t have a Swedish-style welfare state without a broad high tax burden. That means less spending power for most Americans, and fewer resources to choose one’s own lifestyle.

Third, Sanders would change the incentive structure for the country’s most successful people. He proposes raising the top tax rate to 52 percent. As Josh Barro noted in The Times, when you add in state, local and other taxes, top earners would be paying a combined tax rate over 73 percent. In high-tax locales like New York City and California, it would be even more.

It’s possible that entrepreneurs, company founders and others would pay these rates without changing their behavior, but I wouldn’t count on it. When you make risk-taking less rewarding, you get fewer risk-takers, which is exactly what you see across the Atlantic. When you raise taxes that high, the Elon Musks of the world find other places to build their companies.

Fourth, Sanders would Europeanize American public universities. It sounds great to make college free. In fact, it’s a hugely expensive program that would mostly benefit the already affluent.

It would create, as in Germany, a legion of eternal students who have little incentive to leave school because the costs are so low. It would give Washington officials greater control over state universities, determining what sort of faculty they could hire and what sort of programs they could run. It would threaten hundreds of private colleges, which could no longer compete against the completely subsidized state system. It would reduce the pressures universities now feel to reform themselves because it would cushion them with federal largess. Slowly, American universities would look more like their European counterparts. They’d be less good.

The changes in the health care system would be along the same lines. Sanders would create a centralized and streamlined system. His approach would also, as in Europe, reduce the rate of medical progress, increase the rationing of care, increase the wait times for patients, induce many doctors to retire and centralize decision-making. He might reduce health care costs by $6 trillion over the next decade, but his proposal to do this gives new meaning to the word vagueness.

There’s nothing wrong with living in northern Europe. I’ve lived there myself. It’s just not the homeland we’ve always known. Bernie Sanders’s America is starkly different from Alexander Hamilton’s or Alexis de Tocqueville’s America or even Bill Clinton’s and Barack Obama’s America.

It’s amazing that so many young people want to mimic a continent that has been sluggish for decades. It’s amazing that so many look to the future and want a country that would be a lot less vibrant.

Bobo should be forced to live as one of the hoi polloi for a year or three and then see what he has to say.  Here’s Prof. Krugman:

Bill Clinton’s 1992 campaign famously focused on “the economy, stupid.” But macroeconomic policy — what to do about recessions — has been largely absent from this year’s election discussion.

Yet economic risks have by no means been banished from the world. And you should be frightened by how little many of the people who would be president have learned from the past eight years.

If you’ve been following the financial news, you know that there’s a lot of market turmoil out there. It’s nothing like 2008, at least so far, but it’s worrisome.

Once again we have a substantial amount of troubled debt, this time not home mortgages but loans to energy companies, hit hard by plunging oil prices. Meanwhile, formerly trendy emerging economies like Brazil are suddenly doing very badly, and China is stumbling. And while the U.S. economy is doing better than almost anyone else’s, we’re definitely not immune to contagion.

Nobody really knows how bad it will be, but financial markets are flashing warnings. Bond markets, in particular, are behaving as if investors expect many years of extreme economic weakness. Long-term U.S. rates are near record lows, but that’s nothing compared with what’s happening overseas, where many interest rates have gone negative.

And super-low interest rates, which mainly reflect market forces, not policy, are creating problems for banks, whose profits depend on being able to lend money for substantially more than they pay on deposits. European banks are in the biggest trouble, but U.S. bank stocks have fallen a lot, too.

It looks, in other words, as if we’re still living in the economic era we entered in 2008 — an era of persistent weakness, in which deflation and depression, not inflation and deficits, are the key challenges. So how well do we think the various presidential wannabes would deal with those challenges?

Well, on the Republican side, the answer is basically, God help us. Economic views on that side of the aisle range from fairly crazy to utterly crazy.

Leading the charge of the utterly crazy is, you won’t be surprised to hear, Donald Trump, who has accused the Fed of being in the tank for Democrats. A few months ago he asserted that Janet Yellen, chairwoman of the Fed, hadn’t raised rates “because Obama told her not to.” Never mind the fact that inflation remains below the Fed’s target and that in the light of current events even the Fed’s small December rate hike now looks like a mistake, as a number of us warned it was.

Yet the truth is that Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan, the speaker of the House, not only berated Ben Bernanke, Ms. Yellen’s predecessor, for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”

And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.

On the Democratic side, both contenders talk sensibly about macroeconomic policy, with Mr. Sanders rightly declaring that the recent rate hike was a bad move. But Mr. Sanders has also attacked the Federal Reserve in a way Mrs. Clinton has not — and that difference illustrates in miniature both the reasons for his appeal and the reasons to be very worried about his approach.

You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. (In case you’re wondering, the Fed is already audited regularly in the normal sense of the word.)

Now, the idea of making the Fed accountable sounds good. But Wall Street isn’t the only source of malign pressure on the Fed, and in the actually existing U.S. political situation, such a bill would essentially empower the cranks — the gold-standard-loving, hyperinflation-is-coming types who dominate the modern G.O.P., and have spent the past five or six years trying to bully monetary policy makers into ceasing and desisting from their efforts to prevent economic disaster. Given the economic risks we face, it’s a very good thing that Mr. Sanders’s support wasn’t enough to push the bill over the top.

But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.

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One Response to “Brooks and Krugman”

  1. Battle Stations Says:

    Congresswoman Waters asked why the Fed pays banks interest (IOER and IORR) . Waters serves as the Democratic ranking member on the House Committee for Financial Services. http://www.bloomberg.com/news/articles/2016-02-10/this-is-why-the-fed-is-paying-interest-to-big-banks

    After Yellen said the Fed would consider negative rates as a tool to ameliorate the market’s squalls it miraculously found its footing the next day.

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