John Taylor takes aim at Goldman-Sachs report

Last week, when Goldman-Sachs’ Alec Phillips released his inflated-multiplier report on the House Republicans’ budget, I noted the problems with his Old Keynesian assumptions.

I was gratified to see that today, Professor John Taylor – the man on whom I’ve relied most extensively in re the new findings on the multiplier – came to the same conclusion (and added some other ones that I confess I missed in my focus on the multiplier problem):

As I have written before, the old-style Keynesian approach used by Zandi has many of the same flaws that are found in the Goldman Sachs approach: excessively large multipliers, inaccurate predictions of the effect of the 2009 stimulus, failure to recognize that reducing uncertainty about the debt can have positive effects, especially if it is done in a credible way by reducing spending growth now, not postponing it to a date uncertain in the future.

Cross-posted to BD

Knicks 91, Heat 86

What was it Jack Buck said back in Game 1 of the ’88 World Series?

I don’t believe what I just saw.

Miami scored 34 points in the first quarter – and 52 for the next three. New York was down 15 with 4 minutes left in the second quarter.

Oh, and the Knicks last field goal? Chauncey Billups, with a three that I swear he shot from Tampa with 1:01 left.

That gave the Knicks a one-point lead; they never trailed again.

Wow.

Cross-posted to VV

Governor McDonnell, please veto SB771

Every now and then, a blogger decideds to charge a windmill. I tend to do it more than most. I’m doing it again today.

I am asking Governor McDonnell to veto SB771 – a bill that won aye votes from 40 Senators and 92 Delegates. I ask him because those 132 legislators are wrong. We have yet another class Paul Wells Second Rule moment (adapted from Canada to Virginia): If everyone in Richmond knows something, it’s not true.

SB771 is a recently passed bill that would raise the “malpractice cap,” i.e., the maximum amount plaintiffs can win in malpractice suits, from $2 million to just under $3 million. According to the Washington Post, two lawyers (!) in the General Assembly basically presented the bill to the medical community as an offer they couldn’t refuse.

That is passed so easily is troubling; if Governor McDonnell were to sign it, it would send a terrible signal to doctors and health professionals across the country.

One of the least discussed aspects of the health care debate is our chronic and increasing doctor shortage (Jim Bacon provides the gory details in Boomergeddon, pages 114-119). While there has been frighteningly little discussion about how to address the shortage, it is without doubt that upping the malpractice cap will discourage the practice of medicine, and make the shortage worse. Our elected officials should not be exacerbating this problem.

I know I’m coming very late to the game on this.

I know I’m asking the Governor (on whom I’ve been hard on various occasions) to stick his neck way out and hope his veto will convince enough Republicans in at least one house to come to their senses (14 in the Senate, 28 in the House to add to the 6 current opponents).

However, I am also asking the Governor to keep the legislature from making the doctor shortage worse.

Please, Governor, veto SB771.

Cross-posted to BD

Goldman-Sachs’ Old Keynesian report on budget: garbage in, garbage out

Washington is starting to absorb Goldman-Sachs latest missive on the projected economic effects of the budget cuts proposed by House Republicans.

At first glance, it’s not good (ABC News):

A confidential new report prepared by Goldman Sachs for its clients says spending cuts passed by the House of Representatives last week would be a drag on the economy, cutting economic growth by about two percent of GDP.

“Under the House passed spending bill [which cut spending by $61 billion],” says the report, which was obtained by ABC News, “the drag on GDP growth from federal fiscal policy would increase by 1.5pp to 2pp in Q2 and Q3 compared with current law.”

Naturally, the Democrats are all touting it, while Republican Speaker John Boehner’s office is dismissing it (same link).

I decided to do a little digging into the report first. Mainly, I was looking for G-S’s multiplier.

For those who are not aware: the multiplier is what economist use to measure the effect of government spending on the economy.  As I described here, a multiplier of 3, for example, would turn $1 of government spending into $3 of economic growth (or, as more appropriate here, a cut of $1 in government spending cuts growth by $3).

For “Old Keynesians,” the multiplier is a straightforward and simple way of measuring how government spending improves the economy. For the rest of us in the field, it’s not so simple. Old Keynesians tend to ignore the effect of government spending on available funds for the private sector entreprenuers and business. Financial investors can choose between private companies and U.S. Treasury notes; the more the government borrows, the less these folks will invest in the private sector. This “crowding out effect” (i.e., private business are crowded out of the funds available from investors) can reduce the impact of government spending (as shown in the multiplier).

Recent analyses, in fact, have shown a dramatic crowding out effect: the International Monetary Fund determined the multiplier to be 0.7 (John Taylor); the European Central Bank had an even lower figure: 0.5. Both of these mean that the “multiplier” is in fact a divider (i.e., $1 of government spending leads to only 50 or 70 cents in growth). Harvard economist Robert Barro actually find a multiplier of zero (Taylor).

So, what does Alec Phillips (the G-S economist) use as his multiplier? He doesn’t come out and say it, but this paragraph lets us pull it out (ABC again):

(Shutting the government down for the whole month of March) would equate to $32bn in annualized terms, or around 0.2% of GDP for each week of shutdown. Pulling this spending out of Q2 would reduce the contribution to quarterly GDP growth from federal activity by a little over 0.8pp (RWL note: short for percentage points) at an annualized rate for each week the shutdown lasted . . .

So a 0.2% of GDP cut in government spending would lead to of reduction in growth by 0.8 percentage points – that’s a massive multiplier of 4. Even some Old Keynesians don’t use multipliers that high; New Keynesians and non-Keynesians would consider it laughable.

More to the point, it is completely outside the trend of recent analysis.

It reminds me of something I had drilled into my head in my undergraduate and graduate students days from economics professors: “garbage in, garbage out;” i.e., bad data, bad variables, or a bad model lead to bad analysis no matter how much you dress it up.

In the end, that’s what Goldman-Sachs did here. They plugged numbers into a terrible model and came up with an “analysis” that isn’t worth the bandwith on which it was carried.

Or, as my old professors would say: garbage in, garbage out.

Cross-posted to VV

The Politics of Illegal Aliens, Part III: The Unexpected Future

This is the conclusion to the my series of posts on the politics of illegal aliens. To recap: Part I dealt with how this became a political issue; Part II deals with how the issue turned in the last decade. This post will deal with what I expect to be the future of this issue – and it’s not what you think.

At present, the “debate” on illegal aliens is polarized by the open-borders and deportationist camps. How polarized? Let me put it this way: I support “attrition” (cracking down on those who hire illegals and letting them self-deport as the job opportunities dry up). So does this guy. Moreover, we both agree that states and localities should be able to sue the federal government for compensation of cost illegal aliens force upon them via various social service mandates.

Yet because we happen to disagree on Prince William County’s reaction to all of this (I’m sympathetic; he’s not), perception holds that there is a massive gulf between us.

Meanwhile, it goes without saying that the elected officials who examine this are in no small part driven by the effect this will have on voters, present and future – and this is where one missing factor could reshuffle the deck.

Let’s face it: Democrats (by and large) are supportive of amnesty and paths to citizenship because they consider today’s illegal aliens to be tomorrow’s registered Democrats. Republicans fear this to be true, but are generally divided between opposing amnesty (to keep the aliens out of any future body politic) and following the Democrats in the hope that “Hispanic voters” will be grateful to them.

Readers of this blog will know that I hate the term “Hispanic voters.” It assumes a racial conformity and ignores ethnic and ancestral diversity. Americans of Cuban descent look at issues very differently than Americans of Mexican descent, for example. Americans of Central American descent (Honduran, Salvadoran, and Nicaraguan) will react differently than either of the above. The idea that any discussion of illegal aliens will affect Puerto Ricans (who are Americans by birth, and tend to vote for the Democrats because they reside mostly in large urban centers) is laughable.

In fact, just about all ”Hispanic” ethnicities are politically competitive, save two: Puerto Ricans (see above) and Mexican-Americans (due to long-time-PRI-domination, which shifted the population heavily left-ward on economic and cultural issues). According to the Pew Hispanic Center, 58% of all illegal aliens are Mexicans. This is the origin of the expectation of illegals voting for the Democrats, if they get the chance.

I’m betting that they won’t though, and here’s why: only one political party can be reasonably certain to clean up with this group of Mexican nationals at the polls: the PRI.

Who’s the overwhelming favorite to win the Mexican Presidential election next year? You guessed it: the PRI.

This means the Mexican politics of the border suddenly becomes very, very different. For now, the center-right PAN would love to see Mexicans currently in America turned into American voters. By contrast, the PRI will want to keep them as Mexican voters. The massive amounts of remittances from illegal aliens into Mexico has become a lifeline for the Mexican economy outside of the government, which makes the free-market PAN very happy. The PRI will see it instead as a part of the economy presently outside of their control, something they’ll want to fix, pronto.

Assuming things go as expected, the PRI’s Enrique Pena Nieto (currently Governor of Mexico state, effectively the subrubs around Mexico City) will be elected President next summer and take office in December 2012. Because of the lopsided nature of the Senate Elections (the Democrats have to defend 2/3 of the seats up for election), even if Obama is re-elected, he will either be stuck with a fully Republican Congress or generate such a wave that he will lead the Democrats to win control of the House. In other words, there is almost certain to be some change in Washington, which is usually enough to reset the examination of all issues, including this one.

Into this uncertainty will step a Mexican regime looking to keep their fellow Mexicans away from American citizenship, while looking for some way to reduce the influence of remittances outside its control.

My guess? Very soon after his inauguration, Pena Nieto will try to bring back the bracero program of old. Among other things it would ensure that Mexican nationals in America remain just that, gives the Mexican government more control over remittances, and creates a system by which these Mexicans can be where the PRI wants them on future elections days – voting in Mexico.

Of course, it will also turn the politics of illegals in this country on its head. The pressure for citizenship disappears, and the security concerns so many Americans have become largely assuaged. The matter of “jobs Americans won’t do” will still be contentious, but that has always been a rumbling issue on this subject – and until 1994, it wasn’t enough to get the issue on the national scene.

The other domestic political effect will be on the attrition option, which may finally get some oxygen – especially with Mexico more than willing to help make sure illegal aliens from other countries don’t get in the way of bracero Mexicans working, sending money home through the program, and expressing gratitude by voting PRI. Given that attrition is the preferred option from Kenney to McGuire to Krikorian, it is well-primed to be the emerging consensus position. Add to it a self-interested Los Pinos, and it’s practically a lock.

This may sound a little Pollyannaish; it’s not. The Mexican economy would be waylayed by a return to center-left government. Moreover, the PRI is still the PRI, with all its historical problems. That said, it would have a strong interest in getting the illegal alien issue resolved – their way, and for most Americans, I suspect that way will be good enough.

Cross-posted to BD

Knicks get Carmelo . . . and Chauncey Billups

They didn’t kill the plastic plant after all.

The Knicks got Carmelo. That shouldn’t be a surprise, but this is the Knicks (see aforementioned plastic plant).

The real surprises were: (a) the team kept Landry Fields, and (b) they got Chauncey Billups in the deal.

The laugher: Denver was holding out for Tim Mosgov – Mosgov?!?!

Anyhow, Carmelo’s a Knick. Whew!

Cross-posted to VV

From the It’s-A-Pity-They-Can’t-Both-Lose-Department

Egypt’s leading spiritual Wahhabist – Yusuf al-Qaradawi – has issued a fatwa calling for the assassination of Libyan tyrant/buthcer Mummuar Gaddafi.

Cross-posted to BD

On Wisconsin!

When most Americans think about hotbeds of political drama, Wisconsin normally doesn’t register. History says something different: Wisconsin was the birthplace of the modern Republican Party, the Progressive movement (arguably), and Joe McCarthy’s career (inarguably).

Today, to hear it as the left calls it, Wisconsin is supposedly the front line in a battle to kill unions. I’m sure it will be a shock to learn it isn’t quite so.

Wisconsin Governor Robert Walker – in an attempt to keep his state out of the red – is proposing legislation that would make public employees contribute some to their retirement (they contribute nothing now) and more to their health insurance premium costs. He also wants to tweak the public-employee labor laws – and this is what led the mob to descend upon the state capital and, in some cases, threaten Republican lawmakers.

Again, to hear the left say it, Walker wants to destroy collective bargaining and unions – never mind that not even FDR supported the public-sector unions he and the GOP is “targeting.”

In fact, of course, there’s a lot less than meets the eye (WTMJ – Milwaukee):

Unions still could represent workers, but could not seek pay increases above those pegged to the Consumer Price Index unless approved by a public referendum. Unions also could not force employees to pay dues and would have to hold annual votes to stay organized.

Union-busting? Hardly. It does lessen the power union bosses would have over their own members (by making dues voluntary and forcing the union to be re-elected, as it were, every year), and that, I suspect, is why union leaders are acting like their thuggish predecessors and elected Democrats are on the lam.

Falling for the union bosses’ rhetoric is foolish. Amplifying it (as in current DNC Chair and would be Senate candidate Tim Kaine is doing) is flatly reprehensible.

Cross-posted to VV

Entitlements and the children

Governor Christie dramatically added his voice to those calling for entitlement reform yesterday; his comments brought me back to some earlier thinking I had on this.

The entitlement debate (to the extent there is one) is subtely changing with the demographics. As more Americans or my age or younger (who are skeptical about Social Security’s survival) entering the voting populus, entitlements’ sacrosanct status disappears.

That said, I think there’s more to it than mere skepticism. Most of us are aware that Social Security and Medicare is not sustainably funded, i.e., we are not getting out what we pay in. Funding decisions have repeatedly been made independent of the incoming revenue, even after the 1983 rework.

Fact is, our parents are taking out what we put it, and we’re reliant upon what our children will contribute. That’s actually been the case since the beginning, when FDR first proposed Social Security to help impoverished seniors immediately. While the idea may have been to put it on a generationally sustainable footing, politics has repeatedly intervened to prevent that. Today, Social Security and Medicare remain what they always were: a government-run generational transfer.

Truth be told, I don’t mind helping my dad retire (Mom passed away four and a half years ago); I’m somewhat upset about the four or five bureaucrats that get hired along the way, but that’s a different discussion.

What I am not willing to do is force my kids to get whacked with massive tax increases to pay for my retirement. The idea that my children should have to postpone their dreams or families of their own just so I can afford to come by often enough to remind them how much better I had it at their age simply doesn’t work for me.

I expect that many more American parents my age have or will come to the same conclusion.

We hear a lot of politicians who hide behind “the children” to justify this or that vote, but in this case, entitlement reform really is about the children: it’s about making sure their American Dream isn’t crushed by taxes used to augment our retirement.

Cross-posted to BD

Christie throws down the gauntlet to House Republicans

So House Republicans trying to work their way through entitlement reform are hearing from Teabrewers, party activists . . . and the Governor of New Jersey (Weekly Standard):

This afternoon at the American Enterprise Institute, New Jersey governor Chris Christie said he wants House Republicans to “put up or shut up” on entitlement reform and had a message for those candidates he campaigned for in 2010: “If the people who I campaigned for don’t stand up and do the right thing, the next time they’ll see me in their district [it will be] with my arm around their primary opponent,” Christie said. “Because you asked me to put my reputation on the line for you based on a promise that you were going to deal with these hard issues.”

I know several Teabrewers who themselves wouldn’t go that far – at least not yet, anyway.

Christie then approached the “third rail” of American politics . . . and french-kissed it (WS again):

“What’s the truth? The truth that no one’s talking about?” he said. “Here’s the truth that nobody’s talking about: You’re gonna have to raise the retirement age for Social Security.”

“Whoa ho! I just said it, and I’m still standing here,” Christie exclaimed, as the audience laughed. “I did not vaporize.”

“We have to reform Medicare because it costs too much and it is gonna to bankrupt us,” Christie continued. “Once again, lightning did not come through the window and strike me dead.

“And we have to fix Medicaid because it’s not only bankrupting the federal government, it’s bankrupting every state government.

“There you go. If we’re not honest about these things–on the state level about pension benefits and on the federal level about Social Security, Medicare, and Mediciad–we are on the path to ruin.”

“I did not vaporize!”  Good one, Guv.

I would add this: if the Republicans win control of the NJ legislature in November, it’s much more likely Christie runs for President. He’s smart enough to know any hint of doing so now will embolden the Democrats who control the legislature (and who are currently cowed into submission by him). They can them claim his crisis talk was all a ruse to win primary votes, and reclaim some of the political capital Christie took from them. With a GOP-controlled legislature, that goes away – and unless Trump or Giuliani manages to catch fire (the former is possible; the latter, inconceivable, IMHO), the field will be wide open for a budget-cutter from the Northeast.

You heard it here first; unless I’m wrong, in which case, you didn’t hear anything.

Cross-posted to VV