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Wonkbook: Robert Byrd dies; G-20: Prelude to Depression or wise turn from spending?


In Toronto, members of the G-20 have cut a deal on deficit reduction, ignoring the White House's push to focus on growth. Paul Krugman thinks this could mean a "Long Depression." Greg Mankiw think it's only prudent. There was also a deal on capital requirements for banks, though as is normal for these multilateral agreements, it was more of an agreement to make a deal at some future date.

Meanwhile, the finalization of the FinReg bill is causing lobbyists to focus on regulators instead of legislators. That's what happens when you give regulators most of the power. And across the country, politicians who were traditionally union allies are tussling with labor as they find themselves needing to cut public employee salaries. In sadder news, Sen. Robert C. Byrd, one of the institution's few remaining masters, died last night. He was 92.

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Sen. Robert Byrd, 92, died last night. WaPo's obit: "Starting in 1958, Mr. Byrd was elected to the Senate an unprecedented nine times. He wrote a four-volume history of the body, was majority leader twice and chaired the powerful Appropriations Committee, controlling the nation's purse strings, and yet the positions of influence he held did not convey the astonishing arc of his life."

Watch this photo gallery of his life:

G-20 member countries agreed to halve their deficits within three years. Read their declaration:

Obama responded by calling for more stimulus spending, report Howard Schneider and Scott Wilson: "'A number of our European partners are making difficult decisions,' Obama said. 'But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today.'…The declaration, in the works for weeks, gave each side what it wanted, although the specific deadlines went further than the Obama administration had preferred before the meeting."

The G-20 also agreed to tougher bank capital requirements:

Paul Krugman warns that this kind of austerity will lead to a Third Depression: "It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."

Greg Mankiw wishes Keynesians would take the risks of stimulus spending more seriously: "The negative effects are even more challenging to trace. For example, if people observe the government issuing substantial debt (required to finance a stimulus), they may anticipate higher future taxes and therefore cut back on their current consumption. Increased government borrowing may also drive up long-term interest rates, which could make it difficult for people to borrow money and could therefore reduce spending today."

Some tips for balancing the federal budget, and a game that lets you do it yourself:

Politicians who are traditionally union allies are at war with labor over budget cuts, reports Steven Greenhouse: "In Oregon, Gov. Theodore R. Kulongoski, a former lawyer representing the state employees’ union, is insisting upon wage concessions from those very workers. In Los Angeles, Mayor Antonio Villaraigosa, a former teachers’ union organizer, is battling once-friendly unions, demanding $100 million in concessions. In New York, Gov. David A. Paterson, a longtime union ally whose father is a top adviser to several unions, is threatening large-scale layoffs unless public sector unions agree to a pay freeze and re-open contracts."

British dance interlude: Hot Chip play "One Life Stand".

Still to come: How the health-care system can make death worse; BP lacks a successor should Tony Hayward go; a new study shows that women and minorities who're nominated for the Supreme Court have tougher confirmation hearings; can you have a functioning financial sector without financial literacy?; and Ozzy Osbourne pretends to be made of wax.


Banks are already gearing up to lobby regulators once FinReg passes, reports Binyamin Appelbaum: "The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition. Regulators are charged with deciding how much money banks have to set aside against unexpected losses, so the Financial Services Roundtable, which represents large financial companies, and other banking groups have been making a case to the regulators that squeezing too hard would hurt the economy."

The Frank-Dodd still may not be strong enough, writes Gretchen Morgensen: "For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed."

James Surowiecki says we need financial literacy if the Ownership Society is to work: "A study by economists at the Atlanta Fed found that thirty per cent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one. A study of subprime borrowers in the Northeast found that, of the people who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile."

Homebuyers are scrambling to close sales in time to collect the just-extended tax credit:

Tyler Cowen argues that austerity is winning due to political realities, not the triumph of fiscal conservatives: In the United States, we face rising health care costs and pension problems in state governments, with no clear long-run solution for bringing the books into balance. That makes responsible politicians reluctant to undertake major new commitments.…In short, it’s not that ideas of government interventionism and free markets are fighting a titanic intellectual struggle. The reality is more mundane. The ascendancy of one view often creates the conditions for an economic counterreaction."

Vancouver rock interlude: Japandroids play "Wet Hair" on Jimmy Fallon.


A successor to Tony Hayward, especially one untainted by the oil spill, is hard to find, reports Steven Mufson: "Three leading candidates -- head of exploration and production Andy Inglis, BP America president Lamar McKay and Chief Operating Officer Doug Suttles -- are all closely associated with the oil spill. Inglis, the most senior, has kept out of the public eye, while McKay has taken his lumps before Congress and Suttles has been the voice of the Gulf operations. But any one of them could -- and perhaps should -- have been aware of the costly and dangerous problems the Macondo well was having before the blowout."

Navy Secretary Ray Mabus has to spell out details of the administration's environmrntal recovery plan, reports Catherine Cheney: "Mabus still has to address the big, multi-billion-dollar question: who will pay?…Another complication Mabus will face is where to draw the line: Who wins, and who loses? What portion of the 1,680 miles of American coastline in the Gulf of Mexico will the government define as eligible for restoration?"

The EPA is lagging on implementing air standards, reports Yeganeh June Torbati: "Some experts said the failures were persisting largely because the E.P.A.’s Office of Air and Radiation, which is responsible for regulating air pollutants, lacked the money needed to meet its deadlines. In a written response to the report, E.P.A. officials also said budget cuts had made it difficult to meet their deadlines, noting that 'air toxics support has been cut over 70 percent' since 2001."

The BP oil spill made landfall in Florida:

Scientists need to listen to the public to educate it on climate change, writes Chris Mooney: "Politics comes first on such a contested subject, and better information is no cure-all -- people are likely to simply strain it through an ideological sieve...Resistance to climate science in the United States seems to be linked to a libertarian economic outlook: People who resist what experts tell them about global warming often appear, at heart, to be most worried about the consequences of increased government regulation of carbon emissions."

Madame Tussauds interlude: Ozzy Osbourne pretends to be made of wax, scares children.

Domestic Policy

Civil rights activists are questioning Elena Kagan's record on race, reports Amy Goldstein: "The National Bar Association, the main organization of black lawyers, has refrained from endorsing Kagan, giving her a lukewarm rating. The group's president, Mavis T. Thompson, said it 'had some qualms' about Kagan's statements on crack-cocaine sentencing and what it regards as her inadequate emphasis while dean at Harvard Law School on diversifying the school along racial and ethnic lines. Others have expressed reservations about Kagan's views on affirmative action, racial profiling and immigration."

EJ Dionne thinks the Kagan hearings will show a new liberal populism on economics:

A new study suggests Supreme Court confirmation hearings are quite candid, and tougher on women and minorities, reports Adam Liptak: "A new study, based on an analysis of every question asked and every answer given at Supreme Court confirmation hearings in the last 70 years, shows that the hearings often address real substance, illuminate the spirit of their times and change with shifts in partisan alignments and the demographic characteristics of nominees.…And it finds that female and minority nominees are questioned more closely than white male ones."

The DISCLOSE Act needs to pass by July 4 to affect this year's elections, reports Russell Berman:

The health-care system made my parents' death worse, writes Katy Butler: They were seemingly among the lucky ones for whom the American medical system, despite its fragmentation, inequity and waste, works quite well. Medicare and supplemental insurance paid for their specialists and their trusted Middletown internist...They signed living wills and durable power-of-attorney documents for health care...Even so, I watched them lose control of their lives to a set of perverse financial incentives — for cardiologists, hospitals and especially the manufacturers of advanced medical devices — skewed to promote maximum treatment. At a point hard to precisely define, they stopped being beneficiaries of the war on sudden death and became its victims.

States are finalizing their high risk pool proposals, but more federal funds may be needed, reports Robert Pear: "A new study by the Congressional Budget Office says the money will 'not be sufficient to cover the costs of all applicants.' If more than 200,000 people participate, the budget office said, 'the available funds will probably be exhausted prior to 2013.'…Richard S. Foster, the chief actuary at the Department of Health and Human Services, said 375,000 people could gain coverage in high-risk pools this year. But he predicted, 'By 2011 and 2012, the initial $5 billion in federal funding would be exhausted.'"

Think you're a "supertaster"? Find out:

Closing credits: Wonkbook compiled with the help of Dylan Matthews. Photo credit: Ray Lustig-The Washington Post.

By Ezra Klein  |  June 28, 2010; 6:51 AM ET
Categories:  Wonkbook  
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Next: Want low deficits? Grow.


May the country fiddle music light up the heavens as Robert Byrd goes home.

Posted by: Patrick_M | June 28, 2010 7:02 AM | Report abuse

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Posted by: fostercool | June 28, 2010 7:18 AM | Report abuse

Krugman is quite courageous to declare we are now firmly headed for a "Long Depression". He has now put his reputation on the line, front and center.

If the economy instead rebounds, who will listen to him any more? And if he is proved correct, well, no one will care about "I told you so's."

Even though Krugman is now on trial, I don't think keynesian economics is. As witnessed by the deficit, we are still spending huge sums on wars and corporate welfare in the form of medical costs and other programs. So in effect we are indeed in a way engaging in keynesian efforts as we speak. On the other hand, our spending isn't tied to improving unemployment; rather, it just ends up in the bank accounts of corporate execs, health care providers, et al.

Things are broke. I don't see anything changing either. America's slide to a long depression I think is assured as Krugman claims. Where I differ from him is that he seems to think it is preventable. I don't. The system is the system and no one can change it until every single penny or anything of value has been sucked dry from all hard working people. A hard reset is upon us. Plan accordingly.

Posted by: Lomillialor | June 28, 2010 7:22 AM | Report abuse

Uh oh. Somebody better proofread this, stat. The "Still to come" paragraph has a huge typo. Hope this has nothing to do with the fact that the last two SCOTUS nominees were female.

Posted by: KathyF | June 28, 2010 7:42 AM | Report abuse

Rip Sen Byrd

Krugman had better be careful with his terminology. He, of all people should know better.

Also a very legitimate case can be made that anti business policies rather than lack of stimulus can be fostering the continued RECESSION.

Posted by: visionbrkr | June 28, 2010 7:59 AM | Report abuse

And what a SHOCK that original estimates of Healthcare were far off in terms of high risk pools. We've said that all along. Not to mention the fact that not many at all will start on time and many will be months or quarters late. Not a good sign at all

Posted by: visionbrkr | June 28, 2010 8:08 AM | Report abuse


"if people observe the government issuing substantial debt (required to finance a stimulus), they may anticipate higher future taxes and therefore cut back on their current consumption."

Not that I think that actually applies to 99% of "people", but regardless, what am I missing? If you truly did believe this, wouldn't you spend more money now before you get taxed more later? Or is this an economic concept that's hard (for me, anyway) to understand?

Posted by: JERiv | June 28, 2010 8:41 AM | Report abuse

"Tyler Cowen argues that austerity is winning due to political realities, not the triumph of fiscal conservatives"

Which fiscal conservatives would argue is a belated recognition that fiscal conservatives are, in fact, correct. It's not their rhetoric that gave fiscal conservatism its victory, but reality, which is what fiscal conservatives would, for the most part, say was going to happen.

Posted by: Kevin_Willis | June 28, 2010 8:50 AM | Report abuse

@JERiv: "If you truly did believe this, wouldn't you spend more money now before you get taxed more later?"

Only if you were anticipating an increase in sales taxes. Or, if your were anticipating increased in capital gains taxes, you might sell assets ahead of anticipated taxes. However, unless you can decide to increase your income, financial gifts, or immediate inheritance, saving money would give you something to help compensate for increased income or property taxes in the future.

Although I don't think people, generally, think that far in advance. Tax policy mostly has an impact in what it takes out of your pocket, right now.

Posted by: Kevin_Willis | June 28, 2010 8:54 AM | Report abuse

"Even so, I watched them lose control of their lives to a set of perverse financial incentives — for cardiologists, hospitals and especially the manufacturers of advanced medical devices"

While that is, without a doubt, a bad thing and a tragedy to watch, those same "perverse financial incentives" sometimes lead to long extensions of productive (if elderly) lives, advances in technology that end up extending the productive lives of thousands and hundreds-of-thousands of people.

Also, one of the perverse financial incentives in that scenario is the threat of the lawsuit. Folks may dismiss tort reform as irrelevant to health care costs, and it may be, but it certainly isn't irrelevant to treatment decisions, as any healthcare professional not engaged in the maximum of testing and treatments (especially on older or sicker patients who are more likely to die) is just leaving themselves open to a lawsuit.

Posted by: Kevin_Willis | June 28, 2010 9:14 AM | Report abuse

Long Depression. Interesting name Krugman has for it.

The historical long depression lasted from 1873-1879.

Real GDP grew from an estimated $138.3 billion to $177.1 billion, or just over 4%/yr (2% per capita).

That wouldn't be such a bad outcome.

Anyways, the question I have for the Keynesians is when will enough be enough? Won't cutting the deficit always put us at risk of re-entering a slump, as resources dependent on government largesse need time to be redeployed for other uses?

Posted by: justin84 | June 28, 2010 9:56 AM | Report abuse

And what of the little known fact that you must be UNINSURED not UNDERINSURED for 6 months to qualify for the high risk pools. Again just like the dependent to age 26 rule change misunderstanding will cause bad feelings towards the dems

Posted by: visionbrkr | June 28, 2010 10:07 AM | Report abuse

And what of the little known fact that you must be UNINSURED not UNDERINSURED for 6 months to qualify for the high risk pools. Again just like the dependent to age 26 rule change misunderstanding will cause bad feelings towards the dems

Posted by: visionbrkr | June 28, 2010 10:07 AM | Report abuse

After 10 years of shameful behavior, why is anyone still listening to Mankiw? (Then again, some people are still listening to Newt Gingrich.)

Posted by: paul314 | June 28, 2010 10:08 AM | Report abuse

"If people observe the government issuing substantial debt (required to finance a stimulus), they may anticipate higher future taxes and therefore cut back on their current consumption. - Greg Mankiw

Not that I think that actually applies to 99% of "people", but regardless, what am I missing? If you truly did believe this, wouldn't you spend more money now before you get taxed more later? Or is this an economic concept that's hard (for me, anyway) to understand?"


This is the basic concept. Suppose the government wishes to increase spending by $1. It can either do this by raising taxes $1, or borrowing $1. If it is done via taxes, private spending falls by about $1 and government spending rises by $1.

If it is done via borrowing (say from a foreigner), there are two possibilities. If private actors continue to spend as they were otherwise planning to, the extra dollar increases demand and raises prices and output in some combination. However, the next period the government will need to tax $1+r (r being the interest rate) in order to repay the debt. In this example government spending falls by $1 and then private spending falls by about $1+r.

The private sector might anticipate this occurring. If the private sector wishes to smooth its spending as much as possible, it will decide to save $1 when the government spends $1 via borrowing, and next period when taxes of $1+r come due it will have $1+r in order to pay them.

As you have suggested, it doesn't work quite this way in the real world for many reasons, such as:

- Taxes are very complicated, future income is uncertain and the structure of the future tax code becomes increasingly less predictable over the longer time horizons. It is hard to save for future taxes if you aren't sure what they will be.
- The government is likely to rollover the debt rather than pay it back soon.
- If you don't expect to have to pay back the full amount in your lifetime - and you don't care about your heirs - you will keep spending.
- The structure of taxation could tax consumption (e.g. via a VAT), and so you might purchasing big ticket items now to avoid the VAT down the line. I'll point out that purchasing durable goods can be considered investment. Buying a car today provides future driving consumption for many years.

In any case, if people don't save in anticipation in future taxes, instead of consumption falling by $1 today due to government spending, it falls by $1+r in the future. If you think government spending causes economic growth or some other measurable benefit (say, national security which itself is an important determinant of economic growth) that exceeds the cost of the borrowing, then borrowing to spend might make a lot of sense. If you think the long-term output of the economy is largely unaffected by this borrowing and spending, you are just consuming future income in the present.

Posted by: justin84 | June 28, 2010 10:25 AM | Report abuse

Go Roberts and get together with your old compadres... Regarding the G-8 Summitt.. when is Barry of O'telly start to understand that having one ARSE handed to him so many times when he travels abroad is not giving a right Image?? Olympics... Climate Change.. The audacity to accept a NO bel prize.. the many tours of Blaming America while Bowing to Muslims ... No wonder Jammah Cawtah is smiling again.. He no longer is the worst Predident....

Posted by: redhawk2 | June 28, 2010 12:05 PM | Report abuse

In his "Crisis Economics" article, Mankiw argues for (or attempts to restore the legitimacy of) deficit-financed tax cuts. But unless I missed it, he didn't even mention that the Bush administration undertook exactly this sort of stimulus. Why would this type of stimulus work now-- afaict it didn't work during relatively stable economic times. In fact, it was one of the main factors in creating the current deficit tsunami.

Posted by: Edoc | June 28, 2010 1:36 PM | Report abuse

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