Archives: 06/2012

Estonia and Austerity: Another Exploding Cigar for Paul Krugman

I have great fondness for Estonia, in part because it was the first post-communist nation to adopt the flat tax, but also because of the country’s remarkable scenery.

Most recently, though, I’ve been bragging about Estonia (along with Latvia and Lithuania, the other two Baltic nations) for implementing genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth by reducing the burden of government.

Not surprisingly, some people disagree with my analysis. Paul Krugman of the New York Times criticized Estonia yesterday, writing that the Baltic nation suffered a “Depression-level slump” in 2008 and has only managed an “incomplete recovery” over the past few years.

He blames this supposedly weak performance on “austerity.”

I have a positive and negative reaction to Krugman’s post. My positive reaction is that he’s talking about a nation that actually has cut spending, so there’s real public-sector austerity (see Veronique de Rugy’s L.A. Times column to understand the critical difference between public-sector and private-sector austerity).

This is a sign of progress. In the past, he launched a silly attack on the U.K. for a “government pullback” that never happened, so what he wrote about Estonia at least is based on real events.

My negative reaction is that Krugman is very guilty of cherry-picking data. If you look at the chart that accompanies his post, Estonia’s economic performance isn’t very impressive, but that’s because he’s only showing us the data from 2007-present.

The numbers are accurate, but they’re designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).

But before exposing that bit of trickery, there’s another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 - a year in which  government spending in Estonia soared by nearly 18 percent according to EU fiscal data!

It wasn’t until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.

Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period - including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.

This doesn’t mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.

But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.

And now that spending has been curtailed, it’s worth noting that growth has resumed.

What makes Krugman’s rant especially amusing is that he wrote it just as the rest of the world is beginning to notice that Estonia is a role model. Here’s some of what CNBC just posted.

Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average. Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece. Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies. It all seems a long way from the gloom elsewhere in Europe. Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. …How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank. …that’s not exactly the message that Europeans further south want to hear. …Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.

Good policy makes a difference. But it also helps to have rational citizens (unlike France, where people vote for economic illiterates and protest against reality).

While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them. “It was very difficult, but we managed it,” explains Economy Minister Juhan Parts. “Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost. …As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

It’s worth noting, by the way, that government is still far too big in Estonia. The public sector consumes about 39 percent of economic output, almost double the burden of government spending in Hong Kong and Singapore.

But, unlike certain American politicians, at least the Estonians understand the problem and are taking steps to move in the right direction. I hope they continue.

P.S. The President of Estonia, a Social Democrat named Toomas Hendrik Ilves, used his twitter account to kick the you-know-what out of Krugman yesterday. For amusement value, check out this HuffingtonPost article.

P.P.S. A few other nations, such as Canada and New Zealand, also imposed genuine spending restraint in recent decades and they also got good results.

Public Housing Director Paid $644,241

When you work at a non-profit, like Cato, you accept part of the deal is being paid below-market wages.  Not that I’d reject a raise, but I actually think it improves the organization.  No one is here for the money.  You’re here for the mission.  When one hears, however, of public employees, especially those in “mission-driven” organizations, being paid out-sized compensation, you can’t help but wonder what happened to the devotion to the mission.

In response to public complaints, HUD conducted a survey of public housing authority director compensation.  The average salary, not including benefits for a housing authority director, who manages over 1,250 units, was $115,615 (2010).  Certainly in excess of the median household income, but not extreme for senior public employees (who in general are over-paid).

A few “outliers” did stand out.  The Atlanta public housing director apparently received, in 2010, $644,241 in total compensation.  Now of course, that director is claiming that such a number is “misleading” as it includes bonuses and pay-outs for unused vacation.  You can find her defense here and judge for yourself.  I would certainly say from having met her on a few occasions, she is one of the more competent and hard-working housing authority directors.  But worth $644,241?

HUD’s reaction to all this?  To cap the federal contribution to $155,500.  Given that housing authorities are themselves creatures of state law and their directors usually appointed by mayors or governors, it is not clear to me why there should be any federal contribution to their compensation.  Let’s cap the federal part at zero.  If a city, county or state wants to continue to receive federal housing money, the least it can do is manage to pay the salary of its director.  While I’m no fan of federal housing programs, I’d at least like to see said funding actually go to those in need.

Censoring Ray Bradbury

Ray Bradbury has died at 91. Far be it from me to try to assess the work of the great author of Fahrenheit 451 and The Martian Chronicles. I’ll just quote Gerald Jonas in the New York Times:

By many estimations Mr. Bradbury was the writer most responsible for bringing modern science fiction into the literary mainstream. His name would appear near the top of any list of major science-fiction writers of the 20th century, beside those of Isaac Asimov, Arthur C. Clarke, Robert A. Heinlein and the Polish author Stanislaw Lem.

Like most libertarians – which in this case probably includes a lot of liberals and conservatives – I’m a great fan of the anti-censorship novel Fahrenheit 451. But a story that doesn’t get much attention – it’s not in the Times obituary – is how Fahrenheit 451 itself was censored by people who no doubt thought they had the best of intentions.

When Bradbury discovered what had been done, he wrote this Coda to the 1979 Del Rey edition. It’s worth reading today. What he said then is still true: “There is more than one way to burn a book. And the world is full of people run­ning about with lit matches.”

In memoriam, Ray Bradbury’s Coda:

About two years ago, a letter arrived from a solemn young Vassar lady telling me how much she enjoyed reading my experiment in space mythology, The Martian Chronicles.

But, she added, wouldn’t it be a good idea, this late in time, to rewrite the book inserting more women’s characters and roles?

A few years before that I got a certain amount of mail concerning the same Martian book complaining that the blacks in the book were Uncle Toms and why didn’t I “do them over”?

Along about then came a note from a Southern white suggesting that I was prejudiced in favor of the blacks and the entire story should be dropped.

Two weeks ago my mountain of mail delivered forth a pipsqueak mouse of a letter from a well-known publishing house that wanted to reprint my story “The Fog Horn” in a high school reader.

In my story, I had described a lighthouse as hav­ing, late at night, an illumination coming from it that was a “God-Light.” Looking up at it from the view-point of any sea-creature one would have felt that one was in “the Presence.”

The editors had deleted “God-Light” and “in the Presence.”

Some five years back, the editors of yet another anthology for school readers put together a volume with some 400 (count ‘em) short stories in it. How do you cram 400 short stories by Twain, Irving, Poe, Maupassant and Bierce into one book?

Simplicity itself. Skin, debone, demarrow, scarify, melt, render down and destroy. Every adjective that counted, every verb that moved, every metaphor that weighed more than a mosquito—out! Every simile that would have made a sub-moron’s mouth twitch—gone! Any aside that explained the two-bit philosophy of a first-rate writer—lost!

Every story, slenderized, starved, bluepenciled, leeched and bled white, resembled every other story. Twain read like Poe read like Shakespeare read like Dostoevsky read like—in the finale—Edgar Guest. Every word of more than three syllables had been ra­zored. Every image that demanded so much as one instant’s attention—shot dead.

Do you begin to get the damned and incredible picture?

How did I react to all of the above?

By “firing” the whole lot.

By sending rejection slips to each and every one. By ticketing the assembly of idiots to the far reaches of hell.

The point is obvious. There is more than one way to burn a book. And the world is full of people run­ning about with lit matches. Every minority, be it Baptist / Unitarian, Irish / Italian / Octogenarian / Zen Buddhist, Zionist/Seventh-day Adventist, Women’s Lib/ Republican, Mattachine/ Four Square Gospel feels it has the will, the right, the duty to douse the kerosene, light the fuse. Every dimwit editor who sees himself as the source of all dreary blanc-mange plain porridge unleavened literature, licks his guillotine and eyes the neck of any author who dares to speak above a whisper or write above a nursery rhyme.

Fire-Captain Beatty, in my novel Fahrenheit 451, described how the books were burned first by minori­ties, each ripping a page or a paragraph from this book, then that, until the day came when the books were empty and the minds shut and the libraries closed forever.

“Shut the door, they’re coming through the win­dow, shut the window, they’re coming through the door,” are the words to an old song. They fit my life-style with newly arriving butcher/censors every month. Only six weeks ago, I discovered that, over the years, some cubby-hole editors at Ballantine Books, fearful of contaminating the young, had, bit by bit, censored some 75 separate sections from the novel. Students, reading the novel which, after all, deals with censorship and book-burning in the fu­ture, wrote to tell me of this exquisite irony. Judy-Lynn Del Rey, one of the new Ballantine editors, is having the entire book reset and republished this summer with all the damns and hells back in place.

A final test for old Job II here: I sent a play, Leviathan 99, off to a university theater a month ago. My play is based on the “Moby Dick” mythology, dedi­cated to Melville, and concerns a rocket crew and a blind space captain who venture forth to encounter a Great White Comet and destroy the destroyer. My drama premieres as an opera in Paris this autumn.

But, for now, the university wrote back that they hardly dared do my play—it had no women in it! And the ERA ladies on campus would descend with ball-bats if the drama department even tried!

Grinding my bicuspids into powder, I suggested that would mean, from now on, no more productions of Boys in the Band (no women), or The Women (no men). Or, counting heads, male and female, a good lot of Shakespeare that would never be seen again, especially if you count lines and find that all the good stuff went to the males!

I wrote back maybe they should do my play one week, and The Women the next. They probably thought I was joking, and I’m not sure that I wasn’t.

For it is a mad world and it will get madder if we allow the minorities, be they dwarf or giant, orangu­tan or dolphin, nuclear-head or water-conversation­ist, pro-computerologist or Neo-Luddite, simpleton or sage, to interfere with aesthetics. The real world is the playing ground for each and every group, to make or unmake laws. But the tip of the nose of my book or stories or poems is where their rights end and my territorial imperatives begin, run and rule. If Mor­mons do not like my plays, let them write their own. If the Irish hate my Dublin stories, let them rent type-writers. If teachers and grammar school editors find my jawbreaker sentences shatter their mushmilk teeth, let them eat stale cake dunked in weak tea of their own ungodly manufacture. If the Chicano intel­lectuals wish to re-cut my “Wonderful Ice Cream Suit” so it shapes “Zoot,” may the belt unravel and the pants fall.

For, let’s face it, digression is the soul of wit. Take philosophic asides away from Dante, Milton or Hamlet’s father’s ghost and what stays is dry bones. Laur­ence Sterne said it once: Digressions, incontestably, are the sunshine, the life, the soul of reading! Take them out and one cold eternal winter would reign in every page. Restore them to the writer—he steps forth like a bridegroom, bids them all-hail, brings in variety and forbids the appetite to fail.

In sum, do not insult me with the beheadings, finger-choppings or the lung-defiations you plan for my works. I need my head to shake or nod, my hand to wave or make into a fist, my lungs to shout or whis­per with. I will not go gently onto a shelf, degutted, to become a non-book.

All you umpires, back to the bleachers. Referees, hit the showers. It’s my game. I pitch, I hit, I catch. I run the bases. At sunset I’ve won or lost. At sunrise, I’m out again, giving it the old try.

And no one can help me. Not even you.

The Fed’s Dilemma

Chairman Bernanke will be testifying on Thursday, June 7th before the Joint Economic Committee of Congress. His testimony comes against a background of gloomy economic data. The U.S. economy grew at just a 1.9-percent annual rate in the first quarter of 2012. At that anemic growth rate, the economy cannot produce enough jobs to accommodate an expanding labor force. That fact was evidenced in the rise in the unemployment rate to 8.2 percent. The jobless rate for recent graduates is much higher. And this is occurring in the third year of economy recovery. Harvard economist Robert Barro has analyzed this pattern as unprecedented in economic recoveries.

Clearly something is very wrong with the policy mix.

The Fed has run out of viable policy options. Three years into a range of policies intended to keep interest rates very low, near zero for short term interest rates, it is time for the Fed Chairman to recognize that more of the same policy will produce more of the same results: weak growth and high unemployment. Commercial banks are not lending all the reserves the Fed is creating. Failure to fix the financial system in the wake of the financial crisis has left us with a hobbled banking sector. The ill-advised Dodd-Frank Act worsened rather improved matters. The Fed Chairman is not responsible for Dodd-Frank. But the unprecedented low interest rates have not produced credit for manufacturers, farmers and other productive sectors. Instead they are fueling bubbles in the bond markets and financial-market speculation. The fiasco with JP Morgan’s losses in London is symptomatic of how easy money fuels speculation rather than investment.

On the fiscal side, policy is equally wrong. The mindset of the Obama administration is that spending lots of money today, and taxing its citizens tomorrow to pay for todays’ spending, will make them feel wealthy and stimulate spending. That view is at odds with the lessons of Economics 101 and commonsense. Tuesday’s election in Wisconsin was less about an endorsement of Scott Walker the man, as an endorsement of his commonsense Midwestern antipathy to debt and large government as a solution to the economic woes that have befallen us. It is in that sense that Wisconsin is a bellwether for the nation.

X-Tax Book by Viard and Carroll

Two of Washington’s top tax scholars have authored an excellent new book on overhauling the federal tax code. Alan Viard and Robert Carroll’s new book, Progressive Consumption Taxation, is a great introduction to tax reform for young policy wonks who want to understand the economics of savings, investment, tax base neutrality, efficiency, and other factors that are important in tax design.

I discussed the book at an AEI forum on Capitol Hill on Monday. The video is available here.

The X-Tax is a compromise version of the Hall-Rabushka Flat Tax created by the brilliant former tax economist David Bradford. The Flat Tax itself is a ”progressive” or graduated tax system because it has a large basic exemption, but the X-Tax would be even more graduated. I’m a fan of more proportional tax systems, so I like the Flat Tax. But the X-Tax would represent a huge simplification of the tax code and remove the income tax bias against savings and investment, which harms economic growth.

The X-Tax and Flat Tax are consumption-based tax systems, which Viard and Carroll favor. In their book, they wisely reject a VAT, which is an often-discussed consumption-tax option. In my view, a VAT would be a money machine for the federal government, simply throwing fuel on the fire of overspending in Washington.

Viard and Carroll seem particularly interested in the Flat Tax/X-Tax idea of cash-flow business taxation. If we are going to impose a tax on business entities at all, cash-flow taxation seems to be the way to go, as I explored in this Cato paper.

Anyway, great book. My tip for readers, however, would be to substitute the word “proportional” whenever the authors talk about “progressive” consumption taxation.

Krugman’s Complaint

Today POLITICO Arena asks:

Does Walker’s victory pave the way for the GOP in 2012?

I know it’s bad form to kick a man when he’s down, but if Paul Krugman’s initial response this morning to the Wisconsin returns is any indication, he and his side should be bracing for another boot come November, perhaps even in Wisconsin. He writes:

Obviously I’m not happy with the result; not just out of political sympathies, but because all the recent political trends have been rewarding the side that caused the very crisis from which it is now benefiting, not to mention politicians who have been wrong about everything since the crisis hit.

Taking the Wisconsin crisis first, what on earth could Krugman be talking about? Governor Walker inherited a budget that was spinning out of control, which in only two years he not simply balanced but brought into surplus – all by taking on the public-sector unions and the entrenched politicians who were themselves the cause of that mess. Thus, ”recent political trends” – yesterday’s Wisconsin voters – rewarded those who cleaned up the mess, not those who caused it.

As for the broader national economic crisis, yes, the Bush administration was hardly blameless in bringing that about – and Republicans paid the price in November 2008. But when Obama and the newly elected Democratic Congress only deepened the crisis with out-of-control deficits and debt, the voters hardly rewarded them. They gave them a “shellacking,” in Obama’s memorable words. And the “establishment” politicians who’ve supported the Fed, Fanny and Freddie, the Community Reinvestment Act, and other such causes of our crisis are being weeded out by the voters as well, as recent primaries have shown.

Krugman’s basic complaint, of course, is that the politicians haven’t gone even further in the more-government direction that the repudiated 111th Congress took. If yesterday’s results are a portent of the future, voters increasingly understand that our having gone in that direction is what gave us the crisis in the first place. That’s the good sense that Krugman and his side continue to resist on this morning after.

Why Obama Strikes Out In Court: Outlandish Claims of Federal Power

It’s because the Justice Department has been making ridiculous arguments about extra-constitutional federal powers that don’t even get one vote at the Supreme Court.  As I explain in the Wall Street Journal today:

The government’s arguments across a wide variety of cases would essentially allow Congress and the executive branch to do whatever they wanted without meaningful constitutional restraint. This view is at odds with another unanimous Supreme Court decision, Bond v. United States (2011). Bond vindicated a criminal defendant’s right to challenge the use of federal power to prosecute her. As Justice Kennedy wrote, “[F]ederalism protects the liberty of the individual from arbitrary power. When government acts in excess of its lawful powers, that liberty is at stake.”

If the government loses in the health-care or immigration cases, it won’t be because its lawyers had a bad day in court or because the justices ruled based on their political preferences. It will be because the Obama administration continues to make legal arguments that don’t pass the smell test.

Read the whole thing.