The Wrongologist

What’s
Wrong Today:

The deficit
hawks have taken flight once again.

We see
that the serious newspapers can’t stop giving space to the deficit hawks. Two
very serious examples are from two very serious people, Tom Friedman in the NYT
and the editorial board of the Washington
Post.

First,
Mr. Friedman:

The siren song of the uncertainty meme
was just too strong for Tom Friedman on Sunday, as he ruminated
on Mr. Obama’s SOTU speech. Last Sunday, in another Fried-tastic column, he said: (emphasis by the Wrongologist)

Have a claim you’re too
lazy to substantiate? Just preface it with “I’ll bet anything that
…” and presto, you too can be Tom Friedman!

Data
might help Mr. Friedman see that current investment in equipment and software
is actually reasonably healthy. Measured as a share of GDP it is almost back to
its pre-recession level. Furthermore, apart from the tech bubble days of the
late 90s, it has never been much higher than it is today. Here’s the picture
from the BEA:

In short,
there is no reason to expect investment to be much higher than it is. The peak in the graph was during Y2K. It
doesn’t appear that uncertainty is very important to investment.

What
about corporate investing?

Let’s
consider Apple Inc. (NASDAQ: AAPL): Like other big companies, Apple leaves a
lot of its cash overseas. If it brought it home to the US, it would have to pay
US corporate taxes on the money.

The cash that Apple
has overseas is a stunning $82.6 billion.


Apple paid an income tax rate of only 1.9% on its earnings outside the US in
its latest fiscal year, according to a regulatory filing by the company. They had
$713 million in tax on foreign earnings of $36.8 billion in the fiscal year ended
Sept. 29.

Rather
than repatriating more of its foreign earnings, Apple is lobbying to change US
law so that it can erase its liabilities through a tax holiday that will allow
it to bring home cash at a lower tax burden than it would currently pay.


Get this: Where does AAPL invest all of this foreign cash? The vast majority is
invested in US government securities, and
the earnings on those investments are tax-free in the US.

It
is clear that uncertainty hasn’t stopped Apple from purchasing US government securities.

Next,
WaPo:

The WaPo
had another in its series of editorials warning against
any complacency in our efforts to stabilize the debt:

We need to
differentiate between “stabilizing” our deficit and “eliminating” our deficit. This
is the crux of the difference between the parties on the Sequester and the
deficit.

• Democrats
  want to stabilize the deficit and let a slowly growing economy gradually unwind
  our debt position over a couple of decades

• Republicans
  want to eliminate the deficit within a decade and unwind our debt position more
  rapidly

WaPo’s
view that deficit reduction is more urgent than Mr. Obama thinks is both dangerous and naive: Today’s
Congress simply can’t be trusted to achieve deficit savings in a way that’s
compatible with either growth or smart governance.

Many in
Congress are driven by deep ideological opposition to government. They remain in
deficit-freak-out mode in order to slash and burn the social safety net. They
are pushing balanced budget amendments that could rob the federal government of
counter-cyclical policy tools or force massive sequesters.

They argue
for spending caps that have no reference to the nation’s needs going forward.
 

Arguments
like WaPo’s simply throw fuel on the  Hawk’s fire.

Consider
an analogy:
There is a dam outside your city that is owned and operated by the city. The
dam is essential for flood prevention, electricity generation and providing the
city with its water supply. But it is in bad repair and crumbling, and every
year the city’s dam maintenance expenditures have been going up.

Ultimately,
the city will either have to spend a lot of money in a short period of time to
repair the dam for good, or else accept mounting annual maintenance costs that
over the long run will cost much more than the one-time repair.

A city
councilman says, “We have to do something about this dam problem! We must
reduce our dam maintenance budget!” It would be obvious to everyone that
simply reducing the maintenance budget will not solve the
problem.

Deciding not to spend money to address a
growing problem is not the same thing as fixing that problem.

Citizens know
that the dam problem isn’t fixed simply by selling the dam to a private utility
company. The utility will charge the people of the city higher water and
electric rates, so the citizens pay either way. Shifting the cost from the
public’s tax bills, payable to the city, to the citizens’ water bills payable
to a private company does nothing for the taxpayer.

It’s dishonest
to say about any problem, “We have to
reduce the public commitment, because the government will never be able to
afford this”, while saying with the same breath that the whole society can
afford it.

The debate
about public provision vs. private provision, regardless of whether we are
talking about the Postal Service or a local dam, is a debate about delivery mechanisms,
not about affordability.

A little
strategic thinking could go a long way right now. Some advice to the WaPo and
the NYT: Consider our economy today–

• Is
  there a lack of demand? Yes

• Are
  people saving? No

• Is
  private investment high? Reasonably so

Isn’t it also
true that only an ideologue would
say you can make progress on the deficit without a strong economy?

Note to
Mr. Friedman:

• If
  we aren’t saving but we are investing, then weak demand must be a function of weak personal
  income

• Why
  is personal income weak? Not enough people are working, so our entire focus
  should be on getting people back to work

Message
to WaPo and the New York Times: Write a column listing ten ways to eliminate
unemployment.