For reasons I cannot imagine, Niall Ferguson has achieved some standing as an intellectual with interesting things to say about the economy. Whenever I have read one of his pieces I almost always find it so confused that it would take a blog post at least as long as the original to set it straight. This is why I generally ignore Ferguson, except when prodded by friends and readers.

For this reason I was struck to see that my occasional Niall Ferguson corrections got me on the list of Paul Krugman’s

“like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O'Brien, Noah Smith, Matthew Yglesias and Justin Wolfers.”

This was in the concluding segment of a three part tirade from Ferguson directed at Krugman. Krugman is of course highly visible, and has been especially effective in calling attention to some of Ferguson’s more absurd claims.

I have great respect for Paul Krugman and consider him a friend, but Ferguson’s list of “like-minded” bloggers seems more than a bit bizarre. There is certainly overlap in the views of this group of bloggers, but not all that much. For example, I believe that Josh Barro considers himself a libertarian. The only attribute that we really have in common is that we took offense at some of the ridiculous pronouncements from Ferguson and used our blogs to correct them.

But it is hardly worth wasting time and killing electrons in a tit for tat with Ferguson. What matters is the underlying issues of economic policy. These affect the lives of billions of people. The absurdities pushed by Ferguson and like-minded people in positions of power, in direct defiance of massive evidence to the contrary, have ruined millions of lives and cost the world more than $10 trillion in lost output since the crisis began.

First, contrary to what Ferguson claims, the downturn is not primarily a “financial crisis.” The story of the downturn is a simple story of a collapsed housing bubble. The $8 trillion housing bubble was driving demand in the U.S. economy in the last decade until it collapsed in 2007. When the bubble burst we lost more than 4 percentage points of GDP worth of demand due to a plunge in residential construction. We lost roughly the same amount of demand due to a falloff in consumption associated with the disappearance of $8 trillion in housing wealth. (FWIW, none of this was a surprise to folks who follow the economy with their eyes open. I warned of this disaster beginning in 2002, see also here and here.)

The collapse of the bubble created a hole in annual demand equal to 8 percent of GDP, which would be $1.3 trillion in today’s economy. The central problem facing the U.S., the euro zone, and the U.K. was finding ways to fill this hole. Government stimulus is the most obvious answer. This is where the Ferguson types first began to obstruct efforts to boost the economy. They warned that stimulus would not be an effective way to boost growth and create jobs. We also heard dire tale of exploding interest rates and runaway inflation.

In fact, the stimulus in the United States went pretty much according to the textbook. It was far too small and too short to get the economy back to full employment (again, this was predictable at the time, see here and here), but it did create around 2-3 million jobs. The problem was that that the economy needed 10-12 million jobs.

The Washington Post ran an editorial endorsing Republican House Budget Committee Chairman Paul Ryan's proposal for ending the shutdown/debt ceiling standoff. It is apparently anxious to seize on yet another route to try to cut Social Security and Medicare benefits for seniors.

While the obvious crisis facing the country is a government that is not doing its job and an economy that is suffering enormously from a shortage of demand (i.e. too little government spending), the Post sees this as an opportunity to fix its invented crisis about the long-term budget deficit. This is in keeping with the Post's basic philosophical principle that a dollar in the pockets of ordinary workers is a dollar that could be in the pocket of a rich person. The editorial therefore insisted once again that we have to cut Social Security and Medicare.

The story on Social Security is of course bizarre. Few people think that seniors have too much money. Most must face sharp reductions in living standards when they reach retirement. The median income for a person over age 65 is less than $20,000 a year, that's a day or two's pay for your typical Wall Street high flyer. Furthermore, Social Security is entirely funded from its dedicated tax for the next two decades. Even after the trust fund faces depletion in 2033 the overwhelming majority of benefits would still be payable from the tax. Eliminating the cap on income subject to the tax would fill most of the remaining gap.

The real story of budget deficits is in health care. And here the problem is that people in the United States pay way too much for the care we get. Although the quality of health care is no better in the United States than in other wealthy countries we pay more than twice as much per person as the average in other countries. If this gap persists, in the long-term it will create serious budget problems, since more than half of our health care is paid by the government.

There are two ways to reduce costs. One is to get our costs in line with what people pay in every other country. This would mean taking on the health care industry. Our doctors (who comprise close to 20 percent of the country's richest 1 percent) would see their pay cut by roughly 50 percent, on average. We would cut what we pay for drugs and medical equipment by roughly the same amount. This could be done if we were prepared to eliminate the government protections that keep these prices so out of line with prices in the rest of the world.

This would mean opening our borders to more qualified foreign doctors and also educating more at home. (The reason free trade in physicians' services is not being discussed in current trade agreements is that the doctors' lobbies are too powerful and folks like the Post's editors are happy with protectionism that redistributes money to the rich.) It would mean paying less to drug companies and medical equipment companies. It would also mean ending the massive waste of our private health insurance system.

On August 15, Horacio Cartes, a millionaire, businessman, and alleged drug-trafficker assumed the presidency in Paraguay, leading the Colorado Party back into power after a four-year interruption from its 61-year rule by Fernando Lugo, who was deposed last year in a “parliamentary coup.” Cartes has been investigated by the U.S. government for money laundering and drug trafficking, according to this 2010 U.S. diplomatic cable released by Wikileaks.

Since Cartes started his term eight weeks ago, several announcements have been made regarding Paraguay’s social and economic policy that are worth noting.

Militarization

Only a week after having taken office, Paraguay’s Congress –in which the Colorado Party has a majority in both houses– granted the president the power to deploy the military within the country to carry out policing activities. Despite opposition from human rights organizations who fear a return to dictatorship-era military operations, three days later Cartes ordered 400 military personnel to areas in which disputes over land tenure are ongoing. On August 28^th the military entered an elementary school with demands to interview children on the whereabouts of suspected rebels and arrested several land rights activists and peasant leaders in the area.

The military powers granted to Cartes are especially alarming in a country that spent most of the 20^th century either in political turmoil or under brutal dictatorship. The increased militarization of the Cartes regime is occurring in a context of growing discontent over public sector layoffs and privatization plans.

In September, the Center for American Progress released a report on The State of Women in America, which ranks the 50 states by 36 indicators of the economic, health, and leadership circumstances of women.  Authors Anna Chu and Charles Posner find that despite recent movements toward equality, women still trail behind men in the United States.

Poverty rates, wage gaps, and paid sick leave policies are among the many economic factors examined in the report.  Based on these measures, women across the nation experience economic inequality.  On average, women earn only 77 cents for every dollar a man is paid.  African-American women earn an average of only 64 cents for every dollar that white men make; Hispanic women, only 53 cents for every dollar white men earn. Not surprisingly given these statistics, women also make up a majority of minimum-wage workers.

October 9, 2013, Testimony by Dean Baker before the U.S. Committee on Small Business Subcommittee on Health and Technology.

That's what the NYT told us this morning in a piece on what the Fed does and can do. The piece turns to a discussion of bubbles. It notes regulatory efforts to limit bubbles, then comments:

"The outstanding question is whether the Fed should try to pop bubbles if those first lines of defense don’t work. The problem with popping bubbles is that the Fed really only has one way to do it: by raising interest rates for the entire economy, which is something like dropping bombs on cockroaches."

Hmm, the only way for the Fed to pop bubbles is by raising interest rates? Let's think this one through.

Suppose we go back to the early days of the housing bubble in 2002, before the subprime nonsense had fully taken off. Let's imagine that then Federal Reserve Board Chairman Alan Greenspan had read a great little paper warning that house prices had grown out of line with trend values and that this increase had no plausible explanation in the fundamentals of the housing market. After having the Fed staff review the evidence, he concludes that there is in fact a dangerous bubble in the housing market.

Greenspan then prepares the following statement as his opening comment for the next time he gives congressional testimony:

"We are increasingly concerned about the bubble that has developed in the housing market. Prices are 20-30 percent above their trend levels, with no change in the fundamentals that can possibly explain this rise. At some point prices will inevitably fall back to their trend level.

"The Fed is prepared to take whatever steps are necessary to prevent any further growth in this bubble. This means that we will redouble our regulatory efforts to ensure that proper procedures are being followed in the issuance and securitization of mortgages in the institutions under our control. I will also urge the other federal and state regulators to take similar steps to ensure the integrity of new mortgages in the institutions under their control. I will follow this up by scheduling regular meetings with these regulators to discuss the steps they have taken to advance this goal.

On September 19, in an event attended by U.S. Ambassador to Haiti Pamela White, USAID and Haitian government officials, the U.S.’ largest post-earthquake program came to its official close. According to Ambassador White, the $155 million Haiti Recovery Initiative (HRI) “is among the U.S. Government’s biggest earthquake response programs, and throughout its entire lifetime, the program has remained committed to helping Haitians rebuild their communities and work with national and local leadership to prioritize and respond to community needs.” But, as the program comes to a close, there remain more questions than answers as to what was accomplished.

In the first days after the earthquake in Haiti, USAID awarded contracts to Chemonics International and Development Alternatives Inc. (DAI), each with a value of up to $50 million dollars. The contracts were awarded through USAID’s Office of Transition Initiatives, which aims to support "U.S. foreign policy objectives…in priority countries in crisis,” according to their website. Chemonics’ contract with USAID, obtained through Freedom of Information Act requests, explains that “OTI seeks to focus its resources where they will have the greatest impact on U.S. diplomatic and security interests.” Further, while noting that “OTI cannot create a transition or impose democracy,” they can “identify and support key individuals and groups…In short, OTI acts as a catalyst for change where there is sufficient indigenous political will.”

A press release from USAID announcing the end of the program lists a number of interventions taken by OTI: provision of emergency materials to those displaced, removal of rubble, cash-for-work programs and rehabilitation of government infrastructure, among others. While the press release contains few details, quarterly and annual reports on the OTI website are supposed to provide greater detail -- yet there hasn’t been an update posted in over a year-and-a-half. When asked about the lack of disclosure in December 2012, a USAID official responded that “Due to USAID's website overhaul, more information will be available in the New Year.” No such information has been posted.

USAID Refuses to Release Info to Prevent “Demonstrations”

What information has been made public about OTI’s operations in Haiti has called into question the efficiency and performance of OTI’s contractors. In October 2012, the USAID Office of the Inspector General (OIG) released an audit on the HRI program, finding that the program was “not on track” to complete its projects on schedule. The audit also found that Chemonics was operating with little to no oversight on the part of USAID. Performance indicators were “not well-defined” and only one performance evaluation was completed despite the contract stating that “they should be conducted between two and four times a year.” A previous USAID OIG audit found that OTI was not performing internal financial reviews, despite the contractors “expending millions of dollars rapidly…in a high-risk environment.”

Documents obtained from Freedom of Information Act requests submitted by HRRW have redacted cost information, and the contractually mandated report on to whom Chemonics distributed funds has not been released either. After HRRW appealed the redactions, USAID responded in July, upholding their decision and in fact going even further, reissuing the document that had previously been released, with the entire Statement of Work redacted (the previous version had redacted just part of it). As can be seen in the highlighted section of the image, below, USAID justifies the lack of transparency by stating that “if the information is released, we believe that the information will be used selectively and out of context,” and that “to release the information in such a way could willfully stir up false allegations about the HRI and cause strife within target communities.” Finally, USAID notes that the “release of the information in the Statement of Work would likely instigate demonstrations and create an unsafe environment in which to implement and/or develop programs.” It is unclear how or why the projects listed in their press release would lead to such a violent reaction.

Dean Baker
Al Jazeera English, October 8, 2013