What is Ray Lopez Missing?

the economist link is not working

@Cyril Morong,
Thanks. It’s fixed.

From the letter:

At the end of the year, we face a congressionally-created “fiscal cliff,” with automatic “sequestration” spending cuts everyone agrees should be stopped to prevent a double-dip recession. That threat has led to backroom negotiations, backed by a multimillion dollar public relations campaign, toward a “grand bargain” that would maintain tax give-aways for the rich; cut Social Security, Medicare, and Medicaid; and impose new, job-killing spending cuts.

So much recent discourse reminds me of the apparitions of the residents of Salem. I just can’t fathom how people who call themselves economists could sign on to the idea that the rich are a powerful cabal, planning in secrecy, whose main source of income is tax cuts funded by benefit cuts and public policy designed to reduce employment.

Hey my 15 seconds of fame on the internet!

Of the five economists listed by Henderson, I’ve heard of Temin (read his book on AT&T and I see from his other works he’s mainly a historian of economics, like Peter Bernstein was, and that’s great but he’s not a theorist). The others I’ve heard mentioned but can’t say who they are, but I see Wells is Krugman’s Other (guilt by association?) and Justin Wolfers is an up-and-coming whippersnapper.

But in my defense (from the comments section of Sumner’s post), I have (if you assume the internet name matches the real world name): Daniel P. Kuehn – https://danielpkuehn.wordpress.com/about/ – Daniel Kuehn is a doctoral candidate in American University’s Department of Economics

Like Walter White: I WIN.

I did not find a prediction of recession in response to the sequester in the letter. I did find an argument that the deficits that result from recession are not a good reason to decrease Federal (and neither ought decrease state and local) expenditures. Does Henderson disagree with that argument?

There are lots of good reasons to oppose many specific kinds of government expenditures (including tax expenditures) — military spending, farm subsidies, special treatment of certain kinds of business income — and many good reason to favor others — research, EITC. Different people will have different views of what falls in each category (Medicaid? food stamps? education?) and whether on balance taxes and expenditures ought to be higher or lower.

What a recession does (because the Fed will have lowered real interest rates on government borrowing) is, given one’s analysis of costs and benefits, increase expenditures on things with present costs and future benefits, which will increase deficits as defined to include investment spending.

As a second order effect, if the Fed is politically constrained in how much monetary stimulus it can engage in — not a bad assumption, in my view, about the Fed in 208-2014 — there might be an argument for “fiscal” policy that goes a bit beyond the deficit spending that would result from straight discounting of costs and benefits.

But in no case are deficits during a recession a good reason to reduce expenditures per se and that was the correct central point of the letter.

It is a shame that there was not a second letter arguing for looser constraints on the Fed or even better a firm commitment to NGDPL targeting, but that does not invalidate the point of the first letter.

@ThomasH-

I did find an argument that the deficits that result from recession are not a good reason to decrease Federal (and neither ought decrease state and local) expenditures.

You found an argument that addressed something that had nothing to do with the reality of the fiscal situation in the US?

Deficits did not result from the recession: we were running deficits before the recession. The recession did not cause expenditures to spike: the amount of spending is always something Congress can change. Yes including so-called mandatory spending. To the extent that spending “automatically” increases in recession, the cause is Congress leaving spending on auto pilot. But there were plenty of discretionary spending increases of choice. The most that can really be said is that the recession made the deficits that already existed, and would have existed with the same spending level, worse than they would have been as a result of reduced revenue. Actually, one could say, deficits were worsened by proportional/super-proportional taxation. Because Congress also has the power to change the tax code at any time.

Deficits are a choice. Often a passive choice, but always a choice none the less. They aren’t just endogenously “caused” by factors outside of Congress’s control.