Monthly Archives: November 2012

The manuscript is complete

I thought I might take a moment to describe the writing process. If this is interesting, please let us know in the comments and I will write more like this in the future.

Glenn and I wrapped up the first draft of the manuscript and turned it into our editor at Simon and Schuster a few weeks ago. We had already gotten some feedback on the first three chapters from him, and our first order of business was to redraft the introduction.  The original had been more of a pitch summary than an intro, so this was useful. After completing the 12 chapters, the redrafted intro was much more informed. Feels great. We compiled a single WORD document, cleaned up some charts, and sent it in.

This isn’t exactly a new process for me or Glenn, though he has many more books under his belt. Nonetheless, BALANCE is in many ways the most ambitious book we’ve ever attempted. It’s a 2000+ year economic history, after all, so hard to top that ambition-wise. Each chapter tries to say something really original, from measuring power in a new way to recommending political reforms in the U.S. to gentle advice for Japan and others following its development model. Also, working with a big league publisher like Simon and Schuster is a huge honor, so we are hopeful that the text measures up to their faith in us.

There’s a strange lull after finishing a manuscript. For the moment, the work is done, though the second draft might be even more challenging. If we’re asked to expand or cut, that’s tough. Cutting a manuscript, when done well, means leaving whole limbs of the body on the operating room floor, which is hard to do after taking such care in crafting those limbs in the first place.

The whole writing process itself seems like a blur. We were falling behind our self-imposed schedule in July, and hit a bit of panic in August. But all of the springtime investment in research paid off as we assembled the case study chapters (imperial Span, Ming China, etc.). It seems hard to believe that when we penned the agreement in early 2012. That, for me at least, was a heady experience. The only thing I can compare getting a major book deal inked is raising a venture capital round for a startup company. On the day of the deal, it feels like you just scored one of life’s touchdowns, but a week later you realize that you were merely issued a professional uniform and fresh cleats. Even after the project is complete (software master disk or book manuscript), it’s not a touchdown yet. Not. Yet.

Hopefully the reception of the book will be positive (in the right places). We’re both frustrated with the way policy gets made in Washington and the messy 2-party duopoly that has a choke hold on American politics. Maybe the economists in China or Italy are frustrated with their politics as well. But if the book does its job, it will offend those who need offended and encourage those who need encouraged. For now, I’m going to enjoy sleeping in for one more weekend, maybe two, until we see the 300+ pages of red-penned editorial guidance ….

UPDATE (5:59 pm):  No, we actually did not turn the manuscript “into” our editor. He might say vice versa.  If I had a blog editor, s/he would have revised that sentence to “turned it in [SPACE] to our editor.”

What Exactly is a ‘BALANCED” Approach?

The ‘fiscal cliff’ that lies before us has brought forth many calls for ‘balance’ in approaches to reducing America’s yawning budget deficits.

But what exactly is a ‘balanced’ approach?  Is there a meaningful economic description or just a Solomonic split that, in fact, leaves the truly concerned worse off?

Economic analysis offers two thoughts.

First, with growth in mind, increases in revenue should be only a modest component of deficit reduction.  The fiscal challenge is in part a recent acceleration in federal spending relative to GDP, coupled with a more worrisome acceleration in future Social Security and Medicare spending.  These spending increases can be attenuated progressively and gradually by slowing the rate of growth of benefits to upper-income Americans.  And recent research by Alberto Alesina and Silvia Ardagna of Harvard University shows that fiscal consolidations are less detrimental to growth when they are overwhelmingly about tax reform and spending reductions, particularly cuts in transfer payments.

What if the public wants the larger government implied by the fiscal projections?  Here lies the second economic lesson.  In this case, revenues will, of course, have to rise substantially.  But the present tax system cannot raise this much revenue at levels of economic growth to which Americans are accustomed.  A tax reform toward consumption taxation would be required.  In addition to being a less costly way to raise revenue, such a tax makes clear that all Americans must pay for large government benefits for all Americans.

What then of the fiscal cliff?  Note the importance of tax reform and of highlighting choices about spending in both scenarios.  As a consequence, the 2012 discussion is more likely a ‘fiscal bluff’ (pun intended) to the fiscal cliff once more in 2013.

How much debt are we buying from ourselves?

Krugman says not to worry:

People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.

That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood.

Kling says to worry:

In 2011, the Federal Reserve bought 77 percent of new debt issued by our government. We are already resorting to inflationary finance.

It gets worse.

Many of the securities that the Fed has acquired are long-term bonds and mortgages. As inflation and interest rates increase, the value of these securities plummets. (A bond that pays 2.5 percent interest loses roughly half its value when market rates rise to 5 percent.) In this scenario, the Fed will be incurring losses, which will require a subsidy from the government budget.

Who is right? We’ll find out soon enough.

T-Hawks versus S-Hawks

Deficit hawks are not all the same. While doves believe that deficits are necessary during recessions, and have tried to appropriate the word “growth” as their own, hawks come in two distinct types. T-hawks aim to cut fiscal deficits by raising taxes, in contrast to spending-cutters which I call S-hawks.  Alberto Alesina has a good essay making this point more elegantly in CITY Journal:

In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes. When Carlo Favero, Francesco Giavazzi, and I studied the results, it turned out that the two kinds of deficit reduction had starkly different effects: cutting spending resulted in very small, short-lived—if any—recessions, and raising taxes resulted in prolonged recessions.

We weren’t the first people to distinguish between the two kinds of deficit-cutting, of course. In the past, such critics as Paul Krugman, Christina Romer, and some economists at the IMF have responded that the two approaches don’t have different results. When an economy performs well after government spending cuts, they say, it’s actually because the business cycle has picked up, or else because the government’s monetary policy happened to be more expansionary at the time. But my colleagues and I took both factors into account in our research, carefully analyzing the business cycle and monetary policy in relation to each fiscal episode, and concluded that the difference between expenditure-based and tax-based actions remained.

… But the deficit doves are right to be wary of tax-hiking deficit reductions, as Italy, which has struggled with a high debt-to-GDP ratio for the last 20 years, demonstrates. Various Italian governments have repeatedly tried to reduce that ratio by raising more revenue, a course that has crippled the Italian economy and left the ratio firmly in place, just as the deficit doves would predict. Last November, Italy’s current government passed a very large tax hike; the country’s economy promptly nose-dived and is expected to show negative 2.6 percent growth for 2012. (Italy is finally starting to realize its errors: it has initiated a “spending review,” which should lead to spending cuts in the near future, and passed labor-market reforms.)

… My own view is that reducing the size of government is more important than protecting every dollar in the pockets of the wealthiest 1 percent. But however the resulting tax burden is distributed, the important thing is that we cut spending. Whoever wins the next presidential election in the United States will need to present a plan that changes the trajectory of the country’s debt-to-GDP ratio. It’s exceedingly important that he do it the right way.

Quick analysis: It seems the academic disagreement shows the way to political compromise.  Left academics say there is no economic difference between T and S deficit reductions. Right academics say S is better than T.  Clearly, there is room for agreement on S, so a compromise solution will be a good faith proposal by the White House to reduce spending. Will that happen?  Well, it’s the smart thing to do, but won’t happen if there are political factions that matter more than good economics.

The most important election result?

Disappointed about the November 6, 2012 election outcome?  You are not alone, because everyone won something and lost something last night. President Obama won a second term, securing 50.3% of the national vote and 332 electoral college votes (projected if Florida holds). This is a sharp drop from his 52.9% / 365EV triumph four years ago.  And Republicans won a solid majority in the House of Representatives which is projected to be a 235-200 seat majority, so Democrats will not control the legislature like they did when Nancy Pelosi was in charge back in 2008. This is divided government, and one can hope it will no longer be the divisive government of the last four years.

The biggest surprise of last night’s voting is, I suspect, an outcome you have not heard about yet and might not even believe is true. This is no spoof, and I suspect it may be the most historic shift that history will record about the election of 2012.  I pray it will be embraced by all parties.  Are you ready for Puerto Rico as the 51st state?

A slim majority of Puerto Ricans sought to change their ties with the United States and become the 51st U.S. state in a non-binding referendum that would require final approval from Congress.

The two-part referendum asked whether the island wanted to change its 114-year relationship with the United States. Nearly 54 percent, or 922,374 people, sought to change it, while 46 percent, or 786,749 people, favored the status quo. Ninety-six percent of 1,643 precincts were reporting as of early Wednesday.

I have been dreaming of this day for a long time, and it is the first time our fellow citizens in Puerto Rico voted in the majority to join as a state. The change will remind all Americans about what our union really is, and who we as a people truly are. Time to celebrate!

(Here is the link to the AP story at Yahoo!)