Tuesday, June 14, 2011

Here's another great encounter in the Fox green room.



I went over to Fox yesterday to do “Cavuto” and while waiting in the green room I saw my friend Bob Beckel and another guy who I thought at first was former White House Budget Director, Robert Orszag. Believing it was Orszag I thought to myself, “Here goes, I’m gonna be doing battle with this guy.” That’s because Orszag is a noted deficit hawk.

Just as I started gathering my thoughts for a debate with a Orszag I heard Beckel say, “Hey Mike, I’d like to introduce you to Senator John Barroso.” I was relieved to find out that the guy was not Orszag, but then I realized that Barroso was a conservative Republican Senator from Wyoming so if we ended up having a conversation it would go pretty much the same way.

Beckel said that although Barroso was a Conservative, “he was one of us,” meaning that he was open minded and willing to listen to both sides of the argument.

“That’s good,” I thought. Actually, Borrosso is a very educated guy. He’s a physician and a surgeon and as such probably believes in the scientific method; had a good understanding of math and was capable of rational thought and judicious reasoning.

I decided to get the ball rolling and strike up a discussion with the guy. I figured, what could I lose? I’ve had many of these “convos” with loads of others who had far less brains than Barroso and besides, it was a good way to sharpen my MMT debating skills.

I opened with a simple question. I asked him if he could explain the GOP’s position on the economy.

“Correct me if I’m wrong,” I said, “but the Republican plan is to cut spending significantly, right?”

“Yes,” he answered, “anywhere from $2 trillion to $4 trillion.”

Actually, Paul Ryan’s plan calls for spending cuts of $6 trillion, but I thought I could present my case well enough with the numbers he threw out. Moreover, Obama himself said he’d do $4 trillion so, presumably, a deal could get done at that number. I’d go with that.

So I said, “Okay, Senator, let’s say you agree to cut $4 trillion over the next 10 years. That equates to $400 billion taken out of the economy every year for the next 10 years, correct?”

He nodded his head.

I continued.

“Using current GDP of $14.5 trillion, that means shrinking the economy by 3% each year for the next 10 years,” I explained.

Actually it’s more because each year as the economy shrinks, that fixed, $400 billion reduction in spending equates to a larger and larger slice of GDP.

“So, Senator,” I went on, “the GOP plan would shrink the economy by 30% or more, roughly equivalent to what we saw during the Great Depression. Can you explain to me, sir, how that results in greater job creation and more prosperity for all?”

He looked at me completely dumbfounded. Seriously.

I saw that he seemed to grasp my example and my numbers and his face almost looked a bit worried as if to suggest that maybe it wasn’t such a good plan after all. You could see his mind going over the math.

At that point I asked him, “Do you know what makes up our economy? I mean, what is our Gross Domestic Product comprised of?”

I just figured a guy who’s making economic policy should know what the economy is, right?

He gestured to me as if to say, go ahead and please explain it.

“Well, there’s personal consumption,” I said. “That’s everything households spend money on . That’s the biggest part. Then there’s government spending and investment, which is everything the government spends money on. By the way, that also happens to be the second biggest component, nearly two times as big as business investment. Then there’s business investment and finally, there’s net exports, which is almost always negative because we run trade deficits.”

Once again I posed the question, “Senator, how can you shrink the second biggest component in the economy by such a huge amount and expect to create jobs and grow the economy?”

At that point I could see he lost all his logical arguments, so he fell back on the tried and true response of all Deficit Terrorists and hit me with, “So you’re one of those Keynesians who thinks it’s okay to just borrow and spend forever?”

That’s what they do. When all else fails, throw the labels: Keynesian, Socialist, Communist. I knew at that point there was no sense in proceeding any further. Cognitive dissonance had set in and his otherwise rational, scientific mind was stymied. There was no way he was having any of this. He shook his head and looked at me with incredulity. I was the crazy Keynesian.

27 comments:

Mario said...

wow. there must be some type of a response we can conjure up for that default attack position surely...

you could always explain that we actually don't "borrow" money or that "spending" is actually what the economy needs to see these days...

but then again, like you say, once cognitive dissonance sets in...the likelihood of pulling them out of that is next to nil. The gut usually knows how far to take such discussions. Nice job though man. Looks like honed debate tactics to me.

Clonal said...

A very good post from Jim O'Reilly, which can be used to convince people on the Govt deficit/Net Saving issue.

How can corporate profits be so high?

The money quote:
Workers are paid less than the price of the products they produce and therefore cannot be the source of system wide profit. This being the case, how can profits arise? Where does the extra purchasing power come from?

Also another good article from him - The radical nature of austerity

Quote:
We live in an era of unrivaled technological capacity. We’ve mastered the art of satisfying material human wants..... When we begin with this basic premise, the unbelievably radical nature of what’s being asked of us becomes more clear.

Tom Hickey said...

He had the typical brain infarction that generally happens when the numbers collide with the ideology. :)

TomatoBasil said...

Keynesian has become an epithet for anyone that disagrees with austerity. The psychology behind this American notion that the politicians are playing has almost a religious tone and sermon like fervor to it. We must cut, suffer and pay for our excesses. Its become an issue of morality and has nothing to do with the fact that 387 mortgage banks vaporized in the last few years and in the process eliminated a couple trillion of real estate lending per year.

googleheim said...

So the Republicans have indeed finally booted the Greenspan era 100% since Obama is prez.

No more exuberance and greenspanian ways about it ?

They are spenders without taxes

googleheim said...

or at least they were ...

now we see they have recanted

flip flops

John Harvey said...

Just don't let them change the subject. You'd be happy to answer their question once they answer yours. And stick to it, drives 'em crazy.

Ralph Musgrave said...

Mario says “there must be some type of a response we can conjure up for that default attack position surely...” I suggest there is no need to “conjure up” anything: just tell the truth.

This is, (as Keynes, Milton Freidman, and other economists have pointed out) that a deficit can be funded EITHER by borrowed OR by “new” or “printed” money. I.e. it is child’s play to get the advantages of a deficit (stimulus) without the disadvantage (debt).

The knee jerk reaction by economic illiterates to that is Weimar, Mugabwe, bla, bla, bla. And the answer to that is, first, that the monetary base has TREBBLED over the last two years with no inflationary effect.

Second, money supply increases do not cause inflation UNTIL they’ve caused a rise in demand, and raising demand IS THE SOLUTION to the whole problem.

Chewitup said...

I heard Cullen Roche on the radio the other day. The host asked him is we were monetizing the debt. Cullen was trying his alchemist metaphor and the guy screamed WEIMAR, ZIMBABWE. Needless to say, he was not able to finish. Tough crowd I tell ya.

Karl Petrick said...

Awesome piece in yesterday's NY Times: 'Reason Seen More as Weapon Than Path to Truth'

http://www.nytimes.com/2011/06/15/arts/people-argue-just-to-win-scholars-assert.html?bl

A good insight into why facts don't often beat out ideology

Crake said...

Mike, when I first started listening to your radio show, all your talk was so alien to me. I am a CPA and went to business school, and almost everything you said was counter to the “assumptions” in which my teachings were presented. But I kept listening, and started thinking and in short time, it started making sense. But what concerns me is that most people, including elected leaders as you illustrated in your tale, are not open to new ideas and do not listen. And not only do most not listen, but many people tend to seek out confirmation to things they already believe and avoid other views, a situation building even larger moats between them and learning.

Look at the debate now; statistically, there is no one arguing against budget cuts – no one.

Mike Norman said...

Chewitup:

Cullen emailed me about that interview. He was on a show hosted by Dan Coffall, who is a total idiot. One of these clueless, hard money, Austrian types. I've been on his show several times. Won't go anymore.

Mike Norman said...

Karl:

I read that article. Very interesting indeed.

Mike Norman said...

Crake,

I know. It's all very disappointing. You have very smart, educated people who refuse to even consider these FACTS! Instead, the cling to myth and dogma.

Crake said...

It seems almost inevitable that it will take a crisis to combat the combination of group think and individual reinforcement of widely held assumptions. People are only truly free when they have no choice any more and must take a new road. And while many might see that as the normal ying and yang cycle with a soon to rise phoenix from its ashes, as someone wrote on here, you could just as easily get a Hitler or Mussolini than a Roosevelt or Churchill. Extreme risk is ahead of us.

Tom Hickey said...

Crake: "It seems almost inevitable that it will take a crisis to combat the combination of group think and individual reinforcement of widely held assumptions."

What we are witnessing is the culmination of Reagan-Thatcherism in a giant implosion due to accumulation of private debt that cannot be paid. It isn't going to be pretty. Maybe that's what it will take to change the economic and political universe of discourse.

Tom Hickey said...

"Awesome piece in yesterday's NY Times: 'Reason Seen More as Weapon Than Path to Truth'

As a professional philosopher, I can attest that this is what philosophers do. It's pretty well recognized now that reason is used for ex post justification and all justification has to come to a rest in ultimate criteria. Since there are no absolute criteria upon which everyone agrees, justification is always relative, resting on arbitrary criteria.

The scientific method uses empirical criteria to test hypotheses that can be used to generate predications expressed as descriptive proposition that assert the existence or non-existence of states of affairs in the observable world. Hypotheses or claims that are not testable empirically are not subject to the scientific method and are "philosophical."

Most controversial arguments are over claims that are not testable, either in principle, since they are non-empirical, or in practice, e.g., due to complexity. Thus, most argumentation comes down to the rationalization of an ideology based on arbitrary norms that function as ultimate criteria.

This is not a worthless endeavor, since it clarifies thinking and reveals that many arguments are based on extremely shaky foundations, or are even nonsensical owing to poor formulation, whereas others are more plausible even though not certain, e.g., resting on self-evidence.

beowulf said...

OK, there are two ways of looking at it, the audience determines your angle of attack: The govt is spending too little OR the govt is taxing too much. Cutting the deficit is impossible until spending is increased (OR taxes are cut) enough to get people back to work.

In medical terms (for any doctor-senator you run into) :o)
The economy is like a patient who comes into the ER with an open wound. Injecting govt spending into the private sector is like a doctor transfusing blood into the patient. Reducing what the govt taxes out of the private sector is like closing the wound so the patient can keep his own blood.

Obama did stimulus backwards, he should have stopped the bleeding with tax cuts first before ordering spending transfusions. Instead he ordered new spending, forgot about stopping the bleeding and now can't figure out why the patient's blood pressure keeps dropping.

Hank said...

Keep spending all you want(or keep printing what ever you want to call it) but taxes need to be cut. This will provide imediate stimulus where it's needed, the consumer.

beowulf said...

Point in fact, Lord Keynes was a free market conservative who despised socialism and labor unions. As Peter Drucker put it, "His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market.
http://www.forbes.com/2009/08/13/john-maynard-keynes-conservative-opinions-columnists-bruce-bartlett.html

Conservative economists (most notably Greg Mankiw) have pointed out that the actual "Keynesian" stimulus plan was James Meade's idea of counter-cyclical payroll tax holiday that Keynes quickly endorsed ("I am converted to your proposal…for varying rates of contributions in good and bad times").
http://gregmankiw.blogspot.com/2009/02/mature-keynesian-perspective-ii.html

Mike Norman said...

I'm all for tax cuts, however, a fair amount of that consumption is lost due to "leakage" via the trade deficit. We need investment in infrastructure, education, transportation, alternative energy, health care, basic R&D. That's what I would do.

Anonymous said...

The scientific method uses empirical criteria to test hypotheses that can be used to generate predications expressed as descriptive proposition that assert the existence or non-existence of states of affairs in the observable world. Hypotheses or claims that are not testable empirically are not subject to the scientific method and are "philosophical."

Most controversial arguments are over claims that are not testable, either in principle, since they are non-empirical, or in practice, e.g., due to complexity. Thus, most argumentation comes down to the rationalization of an ideology based on arbitrary norms that function as ultimate criteria.


There should be no argument or controversy. Lack of predictive power or empirical evidence means we are dealing with conjecture/opinion/just so stories. I would never entertain these types of claims as being valid.

schwapj said...
This comment has been removed by the author.
schwapj said...

Clearly I'm missing something in the nature of sarcasm or a higher level of wit than I possess. Merely not being able to obtain a coherent response on money policy from a clueless senator does not mean that a guy that talks like a crazy Keyensian isn't one. I mean, you have to know that reducing government spending is nothing at all like taking money out of the economy. Right?

Tom Hickey said...

"you have to know that reducing government spending is nothing at all like taking money out of the economy. Right?"

Reducing spending does not withdraw nongovernment net financial assets. Only taxation does that. But reducing the amount of government expenditure, that is, G in Y = C + I + G + (X-M), reduces the injection of nongovernment NFA and that definitely affects sectoral balances unless taxes are cut in the amount of the cut in expenditure so that the government fiscal balance stays the same.

Money is created in only two ways, 1) by the government's deficit expenditure, and bank lending. Bank lending nets to zero, so there is no change in net financial assets. Only government expenditure and taxation affect nongovernment NFA.

psyquark said...

It wasn't that he was dismissing you but rather that your position was not fully conceptualized or presented properly for your audience. When dealing with individuals who are capable or willing to reason (especially if you have a captive audience) the best rhetorical style is the "socratic method." You lead them through the logic with questions. You were doing well with "what would happen if we actually went through with reducing government spending" but you did not follow through.

The proper response to his dismissal would be something along this line:

"Ok, let us say the government does reduce it's fiscal position. Who will make up the difference (+ a bunch since we have mass unemployment)?"

"Foreign holders of USD and T-bills etc? They have to send us real goods (cheap Chinese crap, cool Japanese electronics and fancy German cars) and we "send" them bits. We could try for capital controls or tariffs and such but why would we want to give up such a sweet deal?"

"A competent business won't since they operate based on projected activity and decreasing GDP means decreasing sales. Heck constant GDP and sales does not give much opportunity for return on investment."
"An incompetent business might but that is done to get kickbacks for the CEO or some other form of control fraud. Or just incompetence. Those companies don't last long anyways."

"Households then? The bottom X% have an average net position of -Y$ (someone has to have the numbers). They are currently trying to de-leverage. There is no blood in that stone to squeeze."
"the other (100-X)%? Sure, they can. They have the financial position to do so, but what would they purchase/consume? They already have everything they could want and are saving because they can't do anything else."

"Now if the bottom X% had more effective pay either through higher wage share or from total tax burden being shifted upwards..."

The key is that he did not have cognitive dissonance or at least not for very long. Cognitive dissonance is holding two contradictory positions to be true and being aware of it. In this case you presented your answer that contradicted his previously held assumptions and he solved the dissonance by simply rejecting you. What you needed to do was follow through with his ex ante budget constraint and show where it leads. If he is shown that he has to raise wage share and shift tax burden off the lower 90% to keep his balanced budget obsession then the cognitive dissonance might be strong enough to change his mind.

Anonymous said...

That assumes that the economy has a finite size, correct? And that anything that the government doesn't spend will never be generated by the private sector?

Would you also suggest that the $4 Trillion that has been raped from Social Security and other Federal retirement programs through intragovernment debt can be harmlessly replaced by printing it?

And if you introduce the necessary taxes just to cover the spiraling service on the debt the capital removed from the private sector is less harmful than removing public spending?