Interest rates. Sometime ago, 20-30 years ago, some pinhead economists proposed what became Modern (Moron) Monetary Theory. Deficits don’t matter. Really? This appeals to almost all politicians. Cut taxes , spend. Doesn’t matter. Keep interest rates low and no cost to anyone.
Where it gets crazier is that the theory states that if inflation increases, then the government needs to cut deficits. Politically untenable.
So this is the political headwind that the deficit is confronting
I accept Keyne's reasoning; if stimulus and deficits are the right things during a recession, then austerity is the right thing during a hot economy. But how do we maintain state capacity when government employees, already making less than the private sector, can't even keep up with inflation? You note that spending cuts may trim some waste, but reading the details of the president's budget request, the cuts seem to have no correlation at all with waste. It's inevitable that when funding gets tight, it goes to those with influence, not those who can best use it.
You say: "But the crucial Keynesian point is that in a downturn, inefficient spending is better than no spending at all." That is indeed what Keynesians say ... but it's an example of the mistakes of Keynesian theory (and your post). Because you completely leave out monetary policy.
In true, you shouldn't use fiscal policy AT ALL, for purposes of management of aggregate demand. That is the domain of monetary policy, which does the job much, much better in every way. The requirement for Keynesian "inefficient spending" is just one example from among many, of the failures of the Keynesian framework.
Please, please, please: stop making the mistake of writing posts about fiscal demand management, without even mentioning or acknowledging the primary role of monetary policy for that function. Keynes suggested deficit spending during slumps, and austerity during booms. Politicians only do the deficit spending, but can't be relied on to do the austerity. That part of your post is correct. But Keynes was wrong. The entire project is mistaken: monetary policy should be used for demand management, not variations in fiscal policy.
I've anecdotally tested messaging with folks I know, and I've found that giving an example reaches the average voter more easily than outlying the macros. Long time Trump supporters were pretty stunned when I explained the Dodd-Frank rollbacks that Trump signed & endorsed were the direct cause of a bank crash, making inflation worse.
I realize that this incident contributed at most a quarter of a percent of GDP to interest & inflation, possibly less, but that's fine. "I personally have to pay ten cents more for bread" seems to sink in more than "a bunch of people hundreds of miles have lost an abstract amount of billions of dollars." It's a solid example that manages to directly connect Trump's efforts to allow business owners to cut more corners/get away with more to our day-to-day life, and once that sinks in, every new example of criminality or a regulation cut starts to sting.
"and they rightly point out that high interest rates are a drag on housing construction"
Oh so NOW they care, huh? I live in a state that just removed the requirement for lawyers to take the bar exam because it had "disproportionate impacts on examinees of color and first generation examinees". Clearly, this is a pretty progressive state. But put all kinds of housing types and locations on each square of a dart board, and Ted Lasso couldn't possibly hit one that is legal to build. I find it pretty disingenuous to argue that you care about interest rates because you want more housing construction, when you have already basically outlawed housing construction.
“Housing construction” encompasses both multi family infill near you and SFH sprawl far away. Almost everyone is in favor of SFH sprawl far away, as long as it’s other people who have to live there. Especially if it prevents them from living near you!
I’ve been through a few economic cycles in a few countries, and I definitely feel the best way to extend an economic recovery into a boom is strong deficit reduction and even going into a surplus. At the margin people are drifting from low productivity public jobs to higher productivity private jobs.
With regard to regulatory forbearance, the soon-to-be-final PFAS in drinking water rule is a good opportunity. The key elements of the proposed rule are 4ppt limits for PFOA and PFOS. AWWA, the drinking water utilities trade organization has suggested that a 10ppt would be protective of health and would cost much less, perhaps $30bn less over time. If the rule comes out at 4ppt, the utilities will complain until the $30bn is provided from the proceeds of PFAS producer litigation and federal funding. If the limit is set at 10, the litigation settlements will go further and likely no new fed funding would be needed. So there’s ~1% of your $3 trillion for absolutely no measurable downside beyond the whining of the groups.
By the way, typing comments on Substack sucks. I've taken to writing in Word and cutting and pasting. The previous user interface I experienced that reached this nadir of utility was owned by the federal government. Improving the Substack interface to be 10% better than a federal government backwater would also be a boost to our nation's productive capacity.
For your consideration, I have a theory that aggressive deficit reduction could have greater political viability than more modest efforts.
Every spending program and tax loophole has its entrenched supporters who will scream bloody murder if you try to cut a single penny. I believe (hope, pray) that there is a deficit-hawk constituency out there, but they won’t get energized over budget proposals that merely seek to “bend the curve”, slowing the rate at which we increase the bleeding.
However, I think that a budget that imposed all the “unacceptable” changes, that actually balanced and got us to the promised land, could inspire a lot of voters to appreciate the bigger picture.
Very good piece Matt. I think however that the Covid recession does not have the same dynamics of traditional recessions to be equivalent. Most recessions are about over supply of goods, even deflation in many cases, and low job availability.
Covid was unique in that it was less that items were going unbought on store shelves but they weren't being made because of the supply chains disruption by Covid. And although many jobs disappeared, there were also reasons that people did not want to work b/c they had to care for kids or were risk averse.
Therefore, stimulus ran the risk of causing inflation by putting money into a system of short supply and allowing people not to seek work when very quickly the economy morphed into a labor shortage.
As a modern liberal I am fine with some amount of spending to protect vulnerable people, but eg paying people 150% of wages instead of the usual 80% seemed excessive. And funding huge infrastructure at a time when there wasnt enough cement only added to inflation. Even liberal economists admit that stimulus added 1-2% to inflation, but if the 1.9 T Build Back Better had passes, but for Manchin, or Biden had succeeded in his 400B loan forgiveness that would have added more.
What’s interesting is how the shift in the Democrat voter base to higher incomes makes it very unlikely that there is appetite to let the Trump tax cuts expire.
College-educated Democrats (which doesn’t correlate perfectly with higher-income but still correlates pretty well) are to the left of non college-educated Democrats on basically all issues including economics. https://www.slowboring.com/p/democrats-college-degree-divide
This is one of those Slow Boring posts where I read the headline and nodded my head, "Yeah sounds about right" and then I don't have a lot of commentary on all the supporting evidence... so let me shift to a dumb language suggestion.
We need to find a better phrase than "tighten your/our belts". You know why you tighten a belt? Because you've lost weight. Because you can't buy enough food. Because you're starving. Let's not do the type of austerity where people tighten their belts. Suggested replacements:
1. Time for the country to economize.
2. Time to be the ant, not the grasshopper. (Too obscure?)
3. Families are clipping coupons and hunting bargains, and it's time for the government to do the same.
But let's retire a phrase that suggests people literally can't get enough food, because that's the type of austerity we don't want. (I told you it was a dumb language suggestion.)
The Bolhuis et al paper is absurd. They do a bunch of statistical gymnastics to prove why consumer sentiment currently is as bad as it was not only during the Great Recession but also during the worst of the late Carter/early Reagan years by using new measures incorporating interest rates. Yet certainly in the latter, not only was the misery index (inflation and unemployment rate) much worse than recently, but so were interest rates, which were close to three times higher than now. Even by their own logic, consumer sentiment should be far, far better now than in, say, 1980, rather than basically the same. And having lived then and been on the job market, I can confirm that 1979-1982 was a far worse time than 2021-2023.
Plus, there is a huge divergence between people currently saying their own situation is good but that of the nation's economy is bad. I imagine that wasn't the case in 1979-1982.
Call it a vibecession, media bias toward negativity, the Republican partisan effect or whatever, but people are not responding to these surveys rationally.
Interesting! And a great addition to the question. (I know you meant "lower" and not actually "higher.")
The other problem with their focus on interest rates is that they only affect a relatively small and rolling part of the population. Most people aren't buying a car or buying a house. Most people with mortgages have them at pretty low rates. And even if you buy a house with a high mortgage rate, refinancing is so easy that when rates fall (and that's what the Fed is saying it's highly likely to do), you can just grab the lower rate.
Also, I don't think people care *that* much about prices actually falling (see: Reagan reelection; prices didn't fall, but people were just happy they weren't zooming up so fast). I think they care about things being under control. They'll get used to the higher prices (especially if their wages/salaries are increasing) as long as they're not going up by more than 2 or 3 percent. Admittedly, it takes a while for them to get used to the higher prices, and it's an open question if they'll feel more accepting of them by this November.
In general, agree with the thrust of this post. We can debate the details for sure as to what should be cut or what taxes should be made, but it really does seem like this is the actual right time for deficit reduction.
However, I need to address something you wrote "If you look at contemporary polling, it’s still the case that voters want reassurance that Democrats care about the national debt...". Yeah going to stop you right there. Unless your "voters" are policy wonks at AEI or Brookings or economists at banks or colleges, there is no way this is actually a true statement. Vast majority of voters do not actually care about the national debt. In fact, vast majority of voters I doubt could tell you the mechanics of why bad debt is a problem in the public policy realm beyond associating with their own personal finances; which as you know is actually a terrible way of assessing national debt.
It's weird that this lesson was apparently only heeded by Bill Clinton who famously got a question at a debate in 1992 about the deficit and then pivoted because he (or someone on his team) understood that when voters worry about the deficit or debt, it's really general (to use the famous phrase from November, 2016) "economic anxiety".
Looking at pure politics, the reason to decrease deficits is that it should put downward pressure on interest rates which voters should notice in lower borrowing costs which should lead to less worries about the economy generally. But worry about the deficit and debt is just pure "serious people" stuff and saying the public wants debt reduction is just categorically incorrect.
What's weird is I'm pretty sure Matt is one of the people who taught me to not look at issue polling at face value but ask yourself what is the real thing public is worried about so odd to me he would sort of throw that line in.
I saw that poll. And I'll reiterate on the merits, I think Matt has a good argument for reasons Keynes originally laid out.
I think what I'll say is that issue polling in general should be taken with a grain of salt; especially on policy issues that are more esoteric to the general public. But even on issues that are simpler and/or voters have strong feelings about. This actually one of the reasons that Kevin Drum (somewhat) correctly notes to liberals that a lot of their favorite policies are not as popular as polls indicate. https://jabberwocking.com/surprise-surveys-are-unreliable-guides-to-actual-voting-patterns/
In fact we're seeing a real world example of an issue that people have extremely passionate feelings regarding; abortion. One reason GOP felt confident that overturning Roe vs Wade would be popular was due to polls conducted on the issue pre 2022. They took these polls too much at face value when a closer reading of the issue would suggest a lot of voters a) never really thought through the implications of overturning Roe and therefore didn't consider real world impacts b) never seriously thought Roe would be overturned given Democrats have been warning about this possibility for over 30 years which gave it a "boy who cried wolf" aspect c) mostly didn't like thinking about the issue more than having passionate feelings one way or the other.
The point isn't that issue polling is useless. The point is the top line survey results need to be interpreted correctly or less you will be left with wildly overestimating or underestimating actual public support for a particular policy.
Interest rates. Sometime ago, 20-30 years ago, some pinhead economists proposed what became Modern (Moron) Monetary Theory. Deficits don’t matter. Really? This appeals to almost all politicians. Cut taxes , spend. Doesn’t matter. Keep interest rates low and no cost to anyone.
Where it gets crazier is that the theory states that if inflation increases, then the government needs to cut deficits. Politically untenable.
So this is the political headwind that the deficit is confronting
I accept Keyne's reasoning; if stimulus and deficits are the right things during a recession, then austerity is the right thing during a hot economy. But how do we maintain state capacity when government employees, already making less than the private sector, can't even keep up with inflation? You note that spending cuts may trim some waste, but reading the details of the president's budget request, the cuts seem to have no correlation at all with waste. It's inevitable that when funding gets tight, it goes to those with influence, not those who can best use it.
You say: "But the crucial Keynesian point is that in a downturn, inefficient spending is better than no spending at all." That is indeed what Keynesians say ... but it's an example of the mistakes of Keynesian theory (and your post). Because you completely leave out monetary policy.
In true, you shouldn't use fiscal policy AT ALL, for purposes of management of aggregate demand. That is the domain of monetary policy, which does the job much, much better in every way. The requirement for Keynesian "inefficient spending" is just one example from among many, of the failures of the Keynesian framework.
Please, please, please: stop making the mistake of writing posts about fiscal demand management, without even mentioning or acknowledging the primary role of monetary policy for that function. Keynes suggested deficit spending during slumps, and austerity during booms. Politicians only do the deficit spending, but can't be relied on to do the austerity. That part of your post is correct. But Keynes was wrong. The entire project is mistaken: monetary policy should be used for demand management, not variations in fiscal policy.
I've anecdotally tested messaging with folks I know, and I've found that giving an example reaches the average voter more easily than outlying the macros. Long time Trump supporters were pretty stunned when I explained the Dodd-Frank rollbacks that Trump signed & endorsed were the direct cause of a bank crash, making inflation worse.
I realize that this incident contributed at most a quarter of a percent of GDP to interest & inflation, possibly less, but that's fine. "I personally have to pay ten cents more for bread" seems to sink in more than "a bunch of people hundreds of miles have lost an abstract amount of billions of dollars." It's a solid example that manages to directly connect Trump's efforts to allow business owners to cut more corners/get away with more to our day-to-day life, and once that sinks in, every new example of criminality or a regulation cut starts to sting.
"and they rightly point out that high interest rates are a drag on housing construction"
Oh so NOW they care, huh? I live in a state that just removed the requirement for lawyers to take the bar exam because it had "disproportionate impacts on examinees of color and first generation examinees". Clearly, this is a pretty progressive state. But put all kinds of housing types and locations on each square of a dart board, and Ted Lasso couldn't possibly hit one that is legal to build. I find it pretty disingenuous to argue that you care about interest rates because you want more housing construction, when you have already basically outlawed housing construction.
“Housing construction” encompasses both multi family infill near you and SFH sprawl far away. Almost everyone is in favor of SFH sprawl far away, as long as it’s other people who have to live there. Especially if it prevents them from living near you!
I’ve been through a few economic cycles in a few countries, and I definitely feel the best way to extend an economic recovery into a boom is strong deficit reduction and even going into a surplus. At the margin people are drifting from low productivity public jobs to higher productivity private jobs.
#Tradle #744 4/6
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https://games.oec.world/en/tradle
I do this without a map or any references.
The $57.5K in "Carbon Paper" exports is blowing my mind.
#Tradle #744 4/6
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https://games.oec.world/en/tradle
With regard to regulatory forbearance, the soon-to-be-final PFAS in drinking water rule is a good opportunity. The key elements of the proposed rule are 4ppt limits for PFOA and PFOS. AWWA, the drinking water utilities trade organization has suggested that a 10ppt would be protective of health and would cost much less, perhaps $30bn less over time. If the rule comes out at 4ppt, the utilities will complain until the $30bn is provided from the proceeds of PFAS producer litigation and federal funding. If the limit is set at 10, the litigation settlements will go further and likely no new fed funding would be needed. So there’s ~1% of your $3 trillion for absolutely no measurable downside beyond the whining of the groups.
By the way, typing comments on Substack sucks. I've taken to writing in Word and cutting and pasting. The previous user interface I experienced that reached this nadir of utility was owned by the federal government. Improving the Substack interface to be 10% better than a federal government backwater would also be a boost to our nation's productive capacity.
For your consideration, I have a theory that aggressive deficit reduction could have greater political viability than more modest efforts.
Every spending program and tax loophole has its entrenched supporters who will scream bloody murder if you try to cut a single penny. I believe (hope, pray) that there is a deficit-hawk constituency out there, but they won’t get energized over budget proposals that merely seek to “bend the curve”, slowing the rate at which we increase the bleeding.
However, I think that a budget that imposed all the “unacceptable” changes, that actually balanced and got us to the promised land, could inspire a lot of voters to appreciate the bigger picture.
Very good piece Matt. I think however that the Covid recession does not have the same dynamics of traditional recessions to be equivalent. Most recessions are about over supply of goods, even deflation in many cases, and low job availability.
Covid was unique in that it was less that items were going unbought on store shelves but they weren't being made because of the supply chains disruption by Covid. And although many jobs disappeared, there were also reasons that people did not want to work b/c they had to care for kids or were risk averse.
Therefore, stimulus ran the risk of causing inflation by putting money into a system of short supply and allowing people not to seek work when very quickly the economy morphed into a labor shortage.
As a modern liberal I am fine with some amount of spending to protect vulnerable people, but eg paying people 150% of wages instead of the usual 80% seemed excessive. And funding huge infrastructure at a time when there wasnt enough cement only added to inflation. Even liberal economists admit that stimulus added 1-2% to inflation, but if the 1.9 T Build Back Better had passes, but for Manchin, or Biden had succeeded in his 400B loan forgiveness that would have added more.
What’s interesting is how the shift in the Democrat voter base to higher incomes makes it very unlikely that there is appetite to let the Trump tax cuts expire.
College-educated Democrats (which doesn’t correlate perfectly with higher-income but still correlates pretty well) are to the left of non college-educated Democrats on basically all issues including economics. https://www.slowboring.com/p/democrats-college-degree-divide
I agree with the Keynesian theory. But in practice only the spending part is ever done.
We need big cuts to long term spending, in particular entitlements. We are now spending more on interest than the military. That's crazy stupid.
But this is decades of bipartisan mismanagement except with Gingrich/Clinton
I agree with the Keynesian theory. But in practice only the spending part is ever done.
We need big cuts to long term spending, in particular entitlements. We are now spending more on interest than the military. That's crazy stupid.
But this is decades of bipartisan mismanagement except with Gingrich/Clinton
This is one of those Slow Boring posts where I read the headline and nodded my head, "Yeah sounds about right" and then I don't have a lot of commentary on all the supporting evidence... so let me shift to a dumb language suggestion.
We need to find a better phrase than "tighten your/our belts". You know why you tighten a belt? Because you've lost weight. Because you can't buy enough food. Because you're starving. Let's not do the type of austerity where people tighten their belts. Suggested replacements:
1. Time for the country to economize.
2. Time to be the ant, not the grasshopper. (Too obscure?)
3. Families are clipping coupons and hunting bargains, and it's time for the government to do the same.
But let's retire a phrase that suggests people literally can't get enough food, because that's the type of austerity we don't want. (I told you it was a dumb language suggestion.)
The Bolhuis et al paper is absurd. They do a bunch of statistical gymnastics to prove why consumer sentiment currently is as bad as it was not only during the Great Recession but also during the worst of the late Carter/early Reagan years by using new measures incorporating interest rates. Yet certainly in the latter, not only was the misery index (inflation and unemployment rate) much worse than recently, but so were interest rates, which were close to three times higher than now. Even by their own logic, consumer sentiment should be far, far better now than in, say, 1980, rather than basically the same. And having lived then and been on the job market, I can confirm that 1979-1982 was a far worse time than 2021-2023.
Plus, there is a huge divergence between people currently saying their own situation is good but that of the nation's economy is bad. I imagine that wasn't the case in 1979-1982.
Call it a vibecession, media bias toward negativity, the Republican partisan effect or whatever, but people are not responding to these surveys rationally.
I got an option on “higher rates on mortgages and credit cards” put into the “what would you most like to see improved in the economy” question on this survey because of that paper and overwhelmingly voters’ top issue remains the price level. https://acrobat.adobe.com/id/urn:aaid:sc:va6c2:ee2fd7af-680a-4a4d-996c-e171816c6f25
Interesting! And a great addition to the question. (I know you meant "lower" and not actually "higher.")
The other problem with their focus on interest rates is that they only affect a relatively small and rolling part of the population. Most people aren't buying a car or buying a house. Most people with mortgages have them at pretty low rates. And even if you buy a house with a high mortgage rate, refinancing is so easy that when rates fall (and that's what the Fed is saying it's highly likely to do), you can just grab the lower rate.
Also, I don't think people care *that* much about prices actually falling (see: Reagan reelection; prices didn't fall, but people were just happy they weren't zooming up so fast). I think they care about things being under control. They'll get used to the higher prices (especially if their wages/salaries are increasing) as long as they're not going up by more than 2 or 3 percent. Admittedly, it takes a while for them to get used to the higher prices, and it's an open question if they'll feel more accepting of them by this November.
In general, agree with the thrust of this post. We can debate the details for sure as to what should be cut or what taxes should be made, but it really does seem like this is the actual right time for deficit reduction.
However, I need to address something you wrote "If you look at contemporary polling, it’s still the case that voters want reassurance that Democrats care about the national debt...". Yeah going to stop you right there. Unless your "voters" are policy wonks at AEI or Brookings or economists at banks or colleges, there is no way this is actually a true statement. Vast majority of voters do not actually care about the national debt. In fact, vast majority of voters I doubt could tell you the mechanics of why bad debt is a problem in the public policy realm beyond associating with their own personal finances; which as you know is actually a terrible way of assessing national debt.
It's weird that this lesson was apparently only heeded by Bill Clinton who famously got a question at a debate in 1992 about the deficit and then pivoted because he (or someone on his team) understood that when voters worry about the deficit or debt, it's really general (to use the famous phrase from November, 2016) "economic anxiety".
Looking at pure politics, the reason to decrease deficits is that it should put downward pressure on interest rates which voters should notice in lower borrowing costs which should lead to less worries about the economy generally. But worry about the deficit and debt is just pure "serious people" stuff and saying the public wants debt reduction is just categorically incorrect.
What's weird is I'm pretty sure Matt is one of the people who taught me to not look at issue polling at face value but ask yourself what is the real thing public is worried about so odd to me he would sort of throw that line in.
You can find the full results here but the poll Matt is referencing shows that voters' top concern (63%) about Biden after his age is that he would increase the debt. One of the most persuasive Biden messages mentions cutting the deficit by $1.8 trillion. https://blueprint2024.com/polling/key-voter-analysis-bidens-most-effective-attacks-against-trump/
I saw that poll. And I'll reiterate on the merits, I think Matt has a good argument for reasons Keynes originally laid out.
I think what I'll say is that issue polling in general should be taken with a grain of salt; especially on policy issues that are more esoteric to the general public. But even on issues that are simpler and/or voters have strong feelings about. This actually one of the reasons that Kevin Drum (somewhat) correctly notes to liberals that a lot of their favorite policies are not as popular as polls indicate. https://jabberwocking.com/surprise-surveys-are-unreliable-guides-to-actual-voting-patterns/
In fact we're seeing a real world example of an issue that people have extremely passionate feelings regarding; abortion. One reason GOP felt confident that overturning Roe vs Wade would be popular was due to polls conducted on the issue pre 2022. They took these polls too much at face value when a closer reading of the issue would suggest a lot of voters a) never really thought through the implications of overturning Roe and therefore didn't consider real world impacts b) never seriously thought Roe would be overturned given Democrats have been warning about this possibility for over 30 years which gave it a "boy who cried wolf" aspect c) mostly didn't like thinking about the issue more than having passionate feelings one way or the other.
The point isn't that issue polling is useless. The point is the top line survey results need to be interpreted correctly or less you will be left with wildly overestimating or underestimating actual public support for a particular policy.
I'm talking more about messaging than policy
Well said, Colin. Voters care about their deficit only until their taxes go up or their favored programs get cut.
There are good reasons for politicians to push deficit-reducing policies, but winning the affection of voters is not among them.