Wednesday, November 7, 2012


I did a short spot on NPR's Marketplace this morning (also here). The announced topic was what I thought would happen to economic policy after the election. Jeff Horwich, the interviewer wanted to stitch together a story about everyone is going to get together and play nice now, which seemed like a fairly pointless line to pursue. What "I would do" is now off the table, and I didn't think it worth arguing with Jared Bernstein's repetition of Obama campaign nostrums.

But it gave me a chance to put some thoughts together. I usually don't predict anything, because I (like everyone else) am usually wrong. But I'll make an exception today

Forecast in three parts: The sound and fury will be over big fights on taxes and spending. They will look like replays of the last four years and not end up accomplishing much. The big changes to our economy will be the metastatic expansion of regulation, let by ACA, Dodd-Frank, and EPA.  There will be no change on our long run problems: entitlements, deficits or fundamental reform of our chaotic tax system.  4 more years, $4 trillion more debt.

Why? I think this follows inevitably from the situation: normal (AFU). Nothing has changed. The President is a Democrat, now lame duck. The congress is Republican. The Senate is asleep. Congressional Republicans think the President is a socialist. The President thinks Congressional Republicans are neanderthals. The President cannot compromise on the centerpieces of his campaign.

Result: we certainly are not going to see big legislation. Anything new will happen by executive order or by regulation.

1. Taxes and spending

The tax negotiations fell apart last summer. Why should exactly the same deal revive now? The President will not give in on raising taxes on  "the rich," and go for a revenue-neutral reform, especially after campaigning on it. The house will not give in: They will note that even the President's rosy revenue forecast of $1 trillion in 10 years is $100 billion a year, 1/10 of our deficit. They will look across the ocean and see that every European country that has tried to balance its books by raising (marginal) taxes, especially on investment, is raising pathetic amounts of revenue and creating a double dip recession.

If you have the same situation, you have the same outcome: every January a free-for-all chaos to plug the holes for one more year. Every lobbyist comes to Washington to get his piece renewed. Occasional debt ceiling fights. No budget for 4 more years.

2. Regulation:

With no big legislation coming, the unfolding of regulation will be the big story. It is news to most Americans, but the ACA and Dodd-Frank are not regulations written in law. They are mostly authorization to write regulations. They are full of "the secretary shall write rules governing xyz" with a timetable. Most of that timetable starts today, November 7 2012. You don't have to think the administration is a bunch of willy nilly regulators to foresee a metastatic expansion of regulation. You just have to look at the time-table of regulations already legally mandated and pending.

I fished around a little on the net. The EPA has regulations under development that by its own estimates will cost hundreds of billions of dollars a year.  I'm all for clean air, but there is a question of just how clean and at how much cost. A few small examples, picked for their obviously intrusive nature, questionable cost/benefit or humorous values

  • Greenhouse gases. Detailed industry controls focusing on greenhouse gas emissions.  They're even going to regulate cow farts. Sorry, Farm Methane Emissions. It's funny unless you're a dairy farmer.  Hundreds of billions
  • Between greenouse gases, much tighter mercury limits, and  designating coal ash a "hazardous substance" like nuclear waste (I'm exaggerating, but that's the idea), the end of coal.
  • Tight fracking regulations.
  • Much tigher ozone standards. Many cities are now way over the limit.
  • Cut sulfur in gas from 30 ppm to 10 ppm. EPA: $90 billion a year
  • Temperature standards to protect fish in powerplant cooling ponds
  • Tighter standards for farm dust. Farms have to submit mediation plans.
  • Water quality control for every body of water in the country.  
  • Strict regulation of industrial boilers ($10-20 billion)
  • Formaldehyde emissions from plywood. I didn't know Home Depot was a dangerous place to hang out. 

ACA/Obamacare. The big parts are all coming in the next four years.  Medicaid expansion, Exchanges, the mandate to buy insurance, the ban on charging people different amounts based on preexisting conditions, “accountable care organizations,”  and most of the regulatory bodies are all coming.

Dodd Frank. For number of rules that a law commands be written this takes the cake. If you want to scare your libertarian kids on Halloween, just read from the Fed's admirably transparent regulatory reform website. Just for fun here is a sampling of Final Rules Due in one three day period,  Dec 31 – Jan 2

  • Expiration date for CEA exemption for swaps 
  • Broadened leverage and risk based capital requirements 
  • FDIC Investment grade definition 
  • Final rule OCC credit rating alterinatives 
  • Joint final rule Market risk capital 
  • OCC lending limit rule compliance 
  • Supervision of consumer debt collectors 
  • Incorporating swaps 
  • Clearing agency standards

I have no idea what any of this means either. I do know that hundreds of billions of dollars are at stake, and the involved industries, their lawyers and lobbyists, are furiously "helping" to write all these rules.

This is the real news. It's baked in. Any new regulatory agendas come on top of this. And it will remake the American economy in the next four years.

The point here is not good or bad. I'm just forecasting what is going to happen -- and it seems clear to me that writing, haggling over, implementing, challenging, and repairing all this regulation is going to be the main story about actual economic policy for the next four years.

With no legislation forthcoming, any new initiatives will be by new regulations, or by executive orders.

3. Deficits, entitlements, reform

I see no chance that the new government, a repeat of the old government, will make any substantial progress. I wish they would, but hope is not a forecast.  Deficits will be $1 trillion per year, plus or minus due to the usual effects of any economic growth or lack of it on taxes and spending, so long as some chumbolones somewhere are willing to lend our government the money at negative real interest rates.  4 more years, $4 trillion more debt.  Entitlement bomb 4 years closer.

4. Economic forecast

Slow growth. Recovery is a bit natural, no matter how much sand the government puts in the gears. So, sclerotic but positive growth is the baseline. That's all conditional on my forecast that not much new comes out of Washington. With big tax hikes, slower growth or a double dip recession. With (in my dreams) a revenue-neutral, marginal-rate cutting dramatic simplification, or a miracle of sanity hitting our regulators, we get much more growth.

We're still sitting on a debt bomb. Remember 2004, when a few chicken-littles were saying "there is trouble brewing, there is a huge amount of debt (mortgages) that is in danger of defaulting, and the banks are stuffed with it?" And how everyone made fun of them? That is our situation now, but it's sovereign debt. (There's an interesting tidbit in today's news that Exxon and Johnson and Johnson bonds are trading with prices above / yields below US Treasuries)

Advice? If you run a business, get a lot of lawyers and lobbysists. He who writes the regulations will make a lot of money. He who does not will lose.  Make sure you make the right political contributions and don't say anything critical of those in power. You will need a discretionary waiver of something, and these rules are so huge and so vague, the regulators can do what they want with you. Don't be the one to get "crucified" (EPA). We live in the crony-capitalist system that Luigi Zingales describes so well. Live with it. Political freedom requires economic freedom, taught us Milton Friedman. You don't have the latter, don't expect the former.

If you're an investor, get out of long term nominal government debt. I have no idea who is holding 10 or 30 year treasuries at slightly negative real rates of interest, and bearing the risk of inflation and interest rate rises. Not me.

I hope I'm wrong. I really, really hope I'm wrong.

OK, no more grumpy, and no more forecasting.


  1. Do you offer any predictions on unemployment? Do you think structural unemployment will be resolved? Do you think the President's stimulus for the economy will make a difference.

    1. Unemployment should fall very slowly, especially among young, minorities, and older people who have been out of work a long time.

      Why would structural employment be resolved with no change to the structure?

      The bigger question is not unemployment -- people out of work, looking for work. It's non-employment, people not even looking, on disability, etc. The employment/population ratio is the key, sad, number.

      What "stimulus" are you talking about? I don't see how next year's $1 trillion deficit will make much difference relative to this year's $1 trillion deficit.

    2. Doesn't it matter which unemployment numbers you talk about? The U-3 (what, 7.8% now?)probably won't change much in the near-term, barring a major drop in the economy. If no jobs are created, no change. If jobs are created, then people who have stopped looking (counted in the U-6 number but not U-3) will start looking again, leading to no change in the percentage. Course, overall numbers in that case will improve, but to sell a recovery, people will start having to explain the numbers. Which might lead to uncomfortable questions about the last 3 years of our "recovery".

  2. Just a note that the entitlement bomb hits hard. In a little country near the North Sea we have pension coffins filled up to 120% of GDP. And still we need to balance our pension books for longevity. That costs pensioners up to 20% of their monthly salary. Guess what would happen if you are in a country where pensions and entitlements are unfunded. No pensions.

  3. I think this is all very correct. The sad part was the inability or unwillingness to persuasively offer the alternative of "equality of opportunity" to the current focus on "equality of results". It appears to me the reason for that inability is that the Rs are as bought by their special interests as are the Ds.

  4. Why is this narrative of regulation so different from the well-meaning Chicago scholar's who headed OIRA?

    1. Because the Bloomberg article is pre-election propaganda.

    2. David, excellent refutation of factual claims, spot on!

      But you illuminated the mechanism, thanks, I would never have thought of that. I wonder what it would help if somebody labeled John's post here post-election propaganda. Very useful. We learnt a lot.

    3. Easy because when the Ds held the presidency, house and senate we got DF and ACA. You expect Ds to cut back on regulatory power concerning those pieces of legislation and then have to face opposition from the house? Sure there may be some cut backs in areas that are not of political concern, which is an improvement, but not on politically devise topics where you can do an end around of the house.

    4. Laszlo, there really is a difference between pre- and post-election propaganda. Post is much more interesting because the incentives for truth vs. spin are different. Sunstein was trying to fix the impression people have of Obama as a regulator in time for the election. See for Sunstein's view of the role of propaganda.

      Focusing on the number of regulations obscures the impact of powerful vs. trivial rules, and "international regulatory harmonization" is often a smokescreen for imposing stricter rules on the U.S.

  5. In terms of the global economy the Titanic has already hit the iceberg. What we did yesterday was elect which captain will preside over the aftermath and whose cronies will get the prime lifeboat allocations.

    Not that I'm cynical or anything.

  6. Thank you John,

    Always a joy to read "grumpieces" no matter how sad they are. Here is a reminder from "just" 48 years ago:!

    This should add emphasis to your expectations.

    The real question is Who Is John Galt? Republicans keep doing same things time and time again and expect different results. They only win when they face more incompetent Leftists (current generation of Democrats).

    And so the cycle repeats ...

  7. If Republicans in the house do not budge, then we have the fiscal cliff, which automatically solves our fiscal problem. Tax rates will go back to Clinton levels, we reduce the deficit and the money that currently keeps flowing into treasuries will actually go into productive investments ( since treasury yields will fall further ) and we will have a real investment driven recovery. There is legitimate concern over marginal rates reducing incentives, but it is not born out by the data both time series wise and cross sectional in terms of looking at countries such as Sweden.

    1. the money that currently keeps flowing into treasuries will actually go into productive investments

      since, as Professor Cochrane mentions at least twice, treasury rates are negative, any productive investment would have to offer a better return.

      You seem to think that such exist but that investors are too stupid to see the opportunity.

      Please take a moment and list (say the top ten) productive investments that investors should be making now?

    2. Investors are not stupid but extremely risk averse. But they have to weight that risk aversion against the prices they pay for treasuries. At some point the price paid for treasuries becomes not worth the risk protection they get. If we dramatically reduce the supply of new treasuries by fixing the deficit, their prices will go up because there will be fewer of them issued and as a consequence, some of the money that is flowing into them now will flow into other things, such as new and existing businesses, land, real estate, etc.

    3. It seems to me that you are just making it up as you go along. First you say there are productive investments. When asked what they are you cannot identify even one and you change your tune and say now that investors are extremely risk averse.

      Did you just become a Keynesian in mid air, as you did a Romney flip?

      If investors see extreme risk, that has to mean they see what I see (and what concerned Keynes): No demand.

      The only way to reduce the supply of federal debt is to cut spending and further weaken demand, making investment even more risky

      Seems you and John don't agree after all.

  8. I think Yglesias has it right that the economy is on track to improve, presumably the increased debt will be considerably less than the last four years. I find it hard to understand why people are accepting such returns on government debt but I have a heuristic: "If you disagree with the market, stop right there because you are probably wrong". Are you placing bets on inflation?

    1. I think markets still think that this is a serious country, which will do the right thing sooner or later, after we've tried everything else. Inflation is a risk, not a forecast. Pointing out that we're sitting on an earthquake fault is not "forecasting an earthquake," but it does suggest a few preventive measures.

    2. That sounded like a forecast to me. We all know about the San Adreas fault, but that doesn't mean telling Californians "Get out while you can".

    3. Look up the difference between "conditional mean" and "size of left tail."

  9. I'm new to your blog; heard you on NPR this morning. During this election I was rooting for Gary Johnson. After many years living outside the US I find our political process unpalatable--I haven't had a horse in the race in a long time. But the Libertarian call for for a truly free market along with across-the-board social liberties stirred my interest. (Sadly, Johnson didn't get the 5% needed to guarantee ballot access and federal funds for 2016, but hope springs eternal.)

    So, all that said, what are your thoughts on the Fair Tax (which Johnson adopted into his platform) and the purported positive impact that would have on spurring growth? It seems likely that a 0% corporate tax environment would do more good than simply shifting tax burdens like a shell game, but I didn't see any corporations lining up to further the Libertarian efforts. You say we need reform. Would you take it that far?

  10. John,

    Thanks. What about energy costs - prediction over the next 4 years? I think this could be a ticking time bomb to the economy.

    1. Very dangerous to try to forecast energy prices or asset prices. Actually it's dangerous to try to forecast anything!

    2. By saying that reducing marginal income taxes and reducing regulation will help growth, aren't you making a time series forecast that if we reduce drag at time T, growth (t to t+1 ) will be higher? you seem to do this all the time

    3. Anonymous, I think you are mistaking unconditional forecasts (i.e. the SP500 tomorrow will be 1500) vs. conditional forecasts (i.e. reducing marginal rate will give you a higher rate of growth, anything else being the same). Forecasts of the first kind are made by fortune tellers of different kinds, forecasts of the second kind are the only sensible forecast an economist may be able to make

    4. Gio, I agree we should make conditional forecasts. The problem is, what to condition the forecast on. "All things being equal" is not good enough, since out of sample all things are never equal, you will not be able to ever empirically evaluate the result of any policy that way because you can always fall back on "well, lots of other factors were different" defence

  11. Why are you complaining about EPA's regulation of carbon emissions? Surely you don't believe that global warming is some kind of conspiracy?

    As for taxes, here is what the CBO has said.

    In essence, the report, written by the economist Thomas L. Hungerford, who has a Ph.D. in economics from the University of Michigan, concluded that changes in the top statutory tax rate and the rate on capital gains had no discernible effect on economic growth in the period since 1945. It noted that the top rate was over 90 percent in the 1940s and 1950s, 70 percent in the 1960s and 1970s, 50 percent during most of the 1980s and has been below 40 percent ever since.

    1. I support a uniform, evenly applied carbon (greenhouse) tax. The EPA is planning a industry by industry, source by source, command and control (and hence highly political) regulation of carbon.

      Europe just kindly ran pretty much a controlled experiment for us of what happens when you raise marginal tax rates. Even the IMF has seen the light.

      We can raise revenue with out raising marginal rates. We should score the income effects (and all distribution and margins) including benefits. When we stop subsidizing green energy boondoggles owned by rich people, that counts.

    2. Europe has also been running a controlled experiment on what happens when you cut gov't spending as well.

      BTW, the paper has nothing to say about raising rates in a deflationary period.

      The paper is about whether cutting marginal rates ever promotes growth. There is no evidence that it does. It seems pretty clear the best path is tax and spend (Clinton).

    3. Sir,
      The President also supports a uniform system like cap and trade or carbon tax. It was in his 2008 campaign. However, the Congress, mostly Republicans, but a few coal-state Dems, also blocked it.

      However, in 2006, the Supreme Court gave the EPA the right to regulate greenhouse gases.

      The EPA does not have the power to tax, only the power to regulate.
      So your choice as President is either to do nothing about greenhouse gases since you can't get a cap and trade/carbon tax system
      OR have the EPA do things on an ad-hoc basis along with renewable tax credits and hope the opposition will change their mind.

      If you care about climate change, you are going to take the latter option, since the polluters would love the status quo. Sometimes the optimal solution is not available and you have to choose from what is available.

      Hence, why I think your original post was unfair, because it lacks the political context. Granted , you are an economist and not a political scientist, but when you wade in the cage, you have to play by the rules.

    4. In theory, we should raise revenue without raising marginal income tax rates. The best way to do this is a consumption tax. But the problem is, it amounts to a wealth tax. And the wealthy people who are currently financing elections are unlikely on both sides of the political spectrum to go along with a wealth tax, perhaps not surprisingly. So where does that leave us in practice ?

    5. I don't see how a consumption tax amounts to a wealth tax. A true wealth tax is a tax on your net worth. A consumption tax is basically a national sales tax (unless you mean something else by that, in which case please explain). My understanding is that a wealth tax in the U.S. would have constitutional problems. That's the only reason I can think of why one hasn't already been passed. That and I think our lawmakers are generally aware of how destructive such a tax would be. WP article on effects of the French wealth tax:

      I'm wealthy, one of the hated 1% who supposedly controls both parties (I did give $100 to Romney). If a wealth tax did somehow pass, I would definitely pay the exit tax and leave the country. A consumption tax would not drive me away, unless it were absurdly burdensome.

    6. Yeah, anonymous #1 -- a wealth tax is completely different from a consumption tax. As long as you leave it invested, you pay nothing. You pay only when and if you remove it from investment and go on a round the world tour. That's what makes the estate tax particularly destructive.

    7. a consumption tax of 8% would reduce the purchasing power of your wealth, i.e the amount of consumption you can achieve today by 8%, would it not, all other things being equal ?

    8. 1st off, it's a false premise that economic problems in Europe are only due to cuts in government spending. The problems are equally caused by favored interest groups and union thuggery.

      2nd, please show me the oppressive government cuts you speak of.

  12. Predictions:

    1) Obama offers the Republicans a worse deal (say one dollar of spending cuts for every dollar of additional taxes) than he offered in the debt ceiling negotiations in 2011. The Republicans initially refuse any revenue increases and demand cuts to medicare, medicaid and social security. The matter is not resolved until after January 1 and the Republicans ultimately accept something like two dollars of spending cuts for every dollar of increased revenue. The Republican Party fights in public over accepting the deal.

    2) Obama approves the new international bridge at Detroit immediately and the Keystone Pipeline by April.

    3) The Fed announces it will buy State and Local bonds issued to pay for infrastructure repairs.

    4) Obama puts forward comprehensive immigration reform. The Republican Party is torn apart by competing responses to the proposal. Some Tea Party Republicans say things in front of cameras about immigrants that cannot be taken back.

    5) Florida is shamed (or ordered) into getting it electoral processes in order.

    6) The Democrats win the House in 2014 as a result of the positions taken by the Republicans on the "grand bargain" and immigration reform.

    1. Um, #6 probably not. The House Republicans certainly didn't ride to victory on the coattails of President Obama. Weaker House Democrats who did will lose in 2014 when they must stand on their own. The Republicans didn't do badly at the state level. The Paul Krugmans of the world prevaricate with their blustery assertions of mandate (they know but won't admit how close it was). Romney's team shot him in the foot repeatedly, and they were too stupid to see it simply by looking at Nate Silver's blog. Frankly, had Romney selected Robert Portman from Ohio, I believe we'd be waiting for Florida to tally the vote....still not in. Lol. God Bless America!

    2. Anonymous - Obama and Romney both agreed during the debates that the country was making a fundamental choice. Obama won the Electoral College and the popular vote. Obama has a mandate to increase taxes on the wealthy.

      I agree that the Republicans could have run a better campaign but the problems with the Republican campaign were both deep and wide and not just limited to the choice of vice president or the incompetence of their pollsters. There should be no finger pointing in the Republican Party because they all, by acts of commission and omission, contributed to losing an election that was winnable (but probably not winnable on the platform they ran on).

    3. "Obama has a mandate to increase taxes on the wealthy."

      Huh? Obama won with fewer electoral votes and 10 million fewer popular votes than in 2008. He also ran a very deliberately polarizing campaign, which has left half the country intractably opposed to him (including "yours truly").

      That's a pretty pi**-poor "mandate," Bub.

      As for taxes on the wealth, I'll be more impressed with Obama's puffery when he imposes hefty wealth taxes on Bruce Springsteen, Jay-Z, Katy Perry, Beyonce, and Steven Spielberg.

      Fat chance of that happening, huh?

    4. "Obama has a mandate to increase taxes on the wealthy"

      To quote James Carville, the only guy with a man-date here is Barry Frank.

      The power to tax resides in the House, and the American public gave the republicans control of that body. If there was a tax raising mandate, clearly the Democrats would have been given control of the body that is responsible for the task.

    5. "2) Obama approves the new international bridge at Detroit immediately and the Keystone Pipeline by April."

      Wow, you are some kind of an optimist. I'm reading this from Canada and I'd be thrilled if those predictions came true -- but I'd also be amazed. Why would he approve the bridge? For him, Canada is a pasty-white country run by conservative troglodytes, and their trucks emit greenhouse gases. Why would he approve the pipeline? That would only mean a steady supply of more petroleum from a secure source, helping to drive down prices and make the USA immune to Middle Eastern oil problems. Exactly what the Democrats oppose, no?

    6. Exurban - My reasoning goes like this: Obama wants the economy to be stronger by fall 2014, both these projects involve Canadians spending money on infrastructure in the US; the American auto industry really wants the bridge; the Canadian government really wants both projects; there is very little left to do to get the bridge going; if there is going to be environmental pushback on the pipeline, the sooner Obama gets that out of the way the better, the Republicans cannot oppose the pipeline since they just ran a campaign saying it should go ahead.

    7. "The power to tax resides in the House, and the American public gave the republicans control of that body"

      Obama doesn't need to pass legislation to raise taxes ... he just has to do nothing for 6 weeks or so. At that point he can push for broad-based taxed cuts (excepting the wealthy), and if House Republicans oppose it, they will wind up in a political mess.

    8. "For him, Canada is a pasty-white country run by conservative troglodytes"

      Forgive me Professor Cochrane, I can't resist and there is an important point here.

      Exurban - here is my short take on Canada vs. US:
      1) Twenty years ago the Canadian conservatives went through what the Republicans are currently going through (substitute Reform Party for Tea Party)
      2) The Canadian Conservatives have worked hard (and successfully) at bringing ethnic groups into the party. Along the way they have brought the hard right under relative control.
      3) The current Conservative government of Canada is probably to the left of Obama. In the Canadian context, Obama would be center-right.

      To be explicit about a point that is implicit in my earlier post: approving the bridge and the pipeline is a small but useful way for Obama to stimulate the American economy without needing Congressional approval and without borrowing.

      I could of course be completely wrong about all of this.

  13. Interesting. It could happen. Serious immigration reform would be great.

    1. Seriously, that has been tried before; Think of something else.

  14. "Deficits will be $1 trillion per year, plus or minus due to the usual effects of any economic growth or lack of it on taxes and spending, so long as some chumbolones somewhere are willing to lend our government the money at negative real interest rates. 4 more years, $4 trillion more debt."

    And why exactly do you believe the federal government must sell debt to fund deficits - because a central banker told you so?

  15. John, the 'metastatic expansion of regulation' might play out as a government make-work strategy rather than true regulation.

    Having gone to a USDA meeting in which we faculty involved in IACUC (institutional animal care and use committees) were told not to send them written questions or emails but rather deal with problems only by phone, I was reminded of regulatory capture, the stated reason for such policy being to avoid PETA et al. FOI requests.

    So it seemed that the purpose of these inspectors and their departmental logistical tails was to appear to do a lot by helping justify individual actions to the public.

    A bunch of Captain Renaults on the gov't dime?
    Rick had a way of dealing with that...

    Bill K.

  16. Another great post! Hope you don't mind me linking to your blog at

  17. One thing Politicians can be counted on to do is to act in their own self-interest to be re-elected. I think some things have changed. The Republicans thought the Senate was in the bag due to the fact that only 10 Republican Seats were up compared to 23 Democrats. Further they thought the Presidency was ripe for recovery with a weak president in a weak economy. They threw everything they could at him along with unprecedented spending and for everything that they expected would happen, they failed and are now aware of their falling behind the 8 ball of emerging demographics that will eschew many of their traditional positions.

    I think the Republicans have to very serious consider that it's possible they'll lose the House if they don't work with this President and Senate to get the minimal work of this nation done.

    That doesn't negate all of your very well presented thoughts, but some things have changed and business as usual is no longer as much of an option as the gamble they took failed.

  18. A little monday morning quarterbacking here, but with the market down over a hundred points again today and the bad news coming out of Europe--especially that Germany seems certain to be slipping into recession--the article's projection that we should see continued marginal recovery with matching employment gains seems way optimistic. Apple's twenty percent fall plus the unpredictability of a spectrum of worsening international conditions along with QE3 already having spent its force in record time back-lights a US economy that is frighteningly vulnerable to whichever black swan event or events that my be lurking--unless Bernake's earlier claim to be 100% in control is absolute, or just intended to reassure. We also have to witness a further upward ceiling legislation passage on the national debt by Congress before the end of the year. I'd buckle up.

    1. I should never forecast...! Seriously, that's my conditional mean given that nothing changes. If they raise taxes, especially on investment, and we get a recession exactly like all the European countries that tried it, I get to say I told you so. If Europe goes down the tubes and drags us along I get to say I told you so on that one too. If they raise taxes, add regulations, and we get a Reagan style recovery, then I eat crow. Anyway, "forecast" is the conditional mean, lots of shocks can push it either way.

  19. Frankly I think the smartest thing the Republicans can do is support whatever the Democrats introduce and supercharge the fiscal bus that Obama will drive off the cliff. Of course they should first make it clear that they think it's a terrible idea but that the people have spoken and as Mencken said they should get what they want, good and hard. Make sure that the Democrats own the ruin that will surely come. Fighting them, obstructing them in Congress, only forestalls the inevitable crash. Let the day of fiscal reckoning come sooner, rather than later.

    1. Exactly my thought. Should the Repubs hold them off they will be vilified in the press as obstructionist. Even a win for the Repubs will a loss for them. If they, and I, are wrong, then the economy will be in full bloom and I will be the happiest man on the planet, and will be the first to say I was wrong. If the "supercharged the fiscal bus" runs its course as I see it, then the Dems better have a good compass because they will find thems in a vast wilderness.


    2. Couldn't agree more.

      Unfortunately, most of the public believes that the Democrats, the media and the academy are right: top-down planning works best, and the economy is a zero-sum game.

      This leads them to punish Republicans for helping them.

      So let the public have it good and hard. Either we'll sail into the nirvana of social democratic utopia, or crash on the rocks of recession, inflation and bankruptcy. At least this time the public shouldn't have any trouble identifying which party's policies were in effect (and responsible).

  20. Good insights, John. But let's give APM its due. Marketplace is produced and distributed by American Public Media, a competitor of NPR.

    1. From my son at dinner: If the government is subsidizing NPR, why doesn't the taxpayer get all the merchandising revenue from big bird?

    2. Don't you mean PBS - television instead of NPR - radio?

      Also, Big Bird's merchandising revenue is used for stock buybacks timed to coincide with the expiration of stock options held by Oscar, Bert, Ernie, and the rest of the gang.

  21. Personally, I think the regulation explosion we are looking at is going to hobble the economy to such an extent that any other negative shock will sent us back into recession. What is coming out of Washington is the equivalent of a trillion dollar tax hike - not the $x trillion over 10 years kind, but $1 T per year. In this context, the Republicans should grudgingly give Obama what he wants and let him hang himself.

    I've always felt that the long-term decline in GDP growth rates since the 50s is best explained as the gradual choking of the economy by the steadily expanding regulatory state and its various appendages (lobbying, torts, extortion of campaign contributions). What growth we've seen has largely been from various new technologies that flew under the radar long enough to get traction before gradually being dragged down into the mire. Eventually the drag becomes too much (see Detroit for a micro version) and everything stagnates.

  22. The Democrats have won:

    "There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever."

  23. How about this scary prediction:
    Three of the nine Supreme Court judges are over 80 years old, and probably won't last past this benighted administration.
    Imagine America's future with three hard-left socialists added to the Supreme Court.
    Who needs a Constitution.
    We have become a people of the Government, by the Government, and for the Government.

  24. John, you should know better than to go on Marxistplace....

  25. Can Obama appoint regulators without Congress?

  26. “Recovery is a bit natural, no matter how much sand the government puts in the gears. So, sclerotic but positive growth is the baseline.”

    This seems very optimistic, particularly considering the negative regulatory, tax and spending developments that are scheduled to occur over the next few years. For example, as part of Obamacare, a new 3.9% surtax on all investment income in excess of $250K (or all investment income if AGI is greater than $250K) will go into effect on January 1, 2013. This will be accompanied by a companion surtax of 0.9% on earned income over $250K. Neither of these surtaxes have anything to do with the so-called Bush tax cuts and will not be rescinded as part of negotiations to avoid the fiscal cliff.

    Indeed, it is very possible that the only reason that we have experienced any growth over the past two years has been due to the efforts of the Republican House to delay or stall potentially anti-growth measures — efforts for which the Republicans were punished at the ballot box.

    Instead of playing for an economic tie and a political loss, the Republican should instead find a way to “capitulate” on the Democrats' most egregious (yet popular) anti-growth measures. Or, in the words of H. L. Mencken, they should give the public the democracy it wants “good and hard.”

    The muddled outcome on November 6th reflects muddled responsibility for the economy. By finding a politically savvy way to give the Democrats what they want, responsibility should become crystal clear — and, in 2014, the public can make an informed choice about which path they prefer.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.