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Home Publications Blogs Beat the Press Ross Douthat Is at Least Half Right

Ross Douthat Is at Least Half Right

Sunday, 23 September 2012 07:16

Douthat's column today lashes out at the economy of the Washington metropolitan area. Douthat describes it as an economy of exploitation as highly paid lobbyists thrive on efforts to manipulate government policy to advance their interests. Douthat is 100 percent on the mark here. This is a town chock full of 6 and 7-figure buffoons. People who draw paychecks in the hundreds of thousands or even millions but who have no discernible skills other than an impressive contact list.

What he gets wrong is tying this to government spending or the deficit. Many of the most important issues that lobbyists devote themselves to, such as patent and copyright rules, trade agreements (e.g. the Trans-Pacific Partnership), and rules on bank regulation, involve little or no government spending. However the sums of money are often far larger. For example, patent protection on prescription drugs will be worth more than $3.5 trillion to the pharmaceutical industry over the next decade.

Douthat is also wrong as to the reason we have a budget deficit. We have a budget deficit because the collapse of the housing bubble sank the economy. Most people in Washington didn't see the bubble when it was expanding and apparently still haven't noticed it even after it burst and wrecked the economy. The collapse of the bubble cost the economy $1.2-$1.5 trillion in annual demand. The deficit is helping to fill the gap created by the loss of private sector demand. This is primarily due to the fall in tax collections and the increase in payments like unemployment benefits and food stamps that automatically take place in a downturn.

Comments (11)Add Comment
Patents and government spending
written by David, September 23, 2012 9:49
The IP lobby corps indirectly raises costs for , and therefore expenditures by, Medicare, one could argue.
Douthat May Be More than Half Right About Rent Seekers
written by Last Mover, September 23, 2012 10:36
Douthat does says this which is commendable:

But this story is one that Romney and his party seem incapable of telling. Instead, many conservatives prefer to refight the welfare battles of the 1990s, and insist that our spending problem is all about an excess of “dependency” among the non-income-tax-paying 47 percent.

In reality, our government isn’t running trillion-dollar deficits because we’re letting the working class get away with not paying its fair share. We’re running those deficits because too many powerful interest groups have a stake in making sure the party doesn’t stop.

When you look around the richest precincts of today’s Washington, you don’t see a city running on paternalism or dependency. You see a city running on exploitation.

The question is whether Douthat would have written the same thing before the bubble burst absent a reference to trillion dollar deficits on which to lay the blame, since there's plenty of corruption beyond patent, copyright and trade protections that he would ignore anyway.
Supply, demand, and prices.
written by Gerry Flaychy, September 23, 2012 11:45
"The collapse of the bubble cost the economy $1.2-$1.5 trillion in annual demand. " Dean Baker
When demand, the offer of money, decrease, and the supply, offer of goods and services, stay the same, or even increase, are the prices not supposed to adjust to the situation by decreasing ?
written by Aaron, September 23, 2012 12:55
This is a town chock full of 6 and 7-figure buffoons. People who draw paychecks in the hundreds of thousands or even millions but who have no discernible skills other than an impressive contact list.

Are you still talking about lobbyists, or are we now talking about Beltway pundits?

The comment on Medicare is interesting - it's less a matter of patents, though, that keep U.S. drug costs so high and more a matter of the government tying its own hands behind its back - the Bush Administration's insistence that Medicare not negotiate for discounts with the pharmaceutical industry for Medicaid Part D (the prescription drug benefit). Patent laws apply in Canada, but their provincial Medicare programs buy drugs at a discount and thereby achieve substantial savings. Note, Congress did not place a similar impediment in front of private insurance companies - there is some merit to the argument that Medicare, by virtue of its size, might be able to negotiate deeper discounts than private insurers, but I suspect that this was really about making sure that private insurers could profitably participate in the system by artificially inflating the cost of any prescription benefit Medicare might offer directly. That, of course, made lobbyists for both pharmaceutical companies and prescription insurance companies very happy.

Gerry, supply has gone down - we have a lot of people who are unemployed right now because of reduced demand for the goods and services they used to provide. A couple of large, obvious examples: The housing market only now appears to be getting back on solid ground, and even that could be affected if "ghost inventory" (REO homes that banks are withholding from the market) were put up for sale. Demand for new vehicles is still far from peak and, if you recall, crashed so badly that two out of three U.S. car manufacturers went through structured bankruptcy. Were auto makers maintaining supply at pre-crash levels, they would be bank in bankruptcy.
Demand, supply, and prices.
written by Gerry Flaychy, September 23, 2012 1:47
Aaron, it is the demand that has gone down first. The supply already there did not gone down. On the contrary, because the demand was not there to buy all of it, we have to conclude that this supply was still there after.

In the case of houses, their prices have effectively gone down, so there is no need of more spending by the government to compensate the lack of demand, this lack of demand being compensated by the 'lack of prices'. No need to increase the government deficit for that: just let the prices continue to adjust to demand.
written by liberal, September 23, 2012 2:34
Gerry Flaychy wrote,
When demand, the offer of money, decrease, and the supply, offer of goods and services, stay the same, or even increase, are the prices not supposed to adjust to the situation by decreasing ?

Google "deflationary spiral".
written by David, September 23, 2012 2:51
Demand for money dropped, supply of money (savings) went up. Thus price for money (interest rates) dropped. Demand for food has not dropped (gotta eat) and supply has not dropped so food prices did not change much. S House prices dropped, but the outstanding debt on their mortgages did not. 15 million plus jobs were lost, and, so, millions of mortgages lost, not to mention a heck of a lot of demand. Thus life savings lost, thus future demand. ...
a bit more ...
written by David, September 23, 2012 3:33
The slope of the the aggregate supply is a function of employment. At full employment, the slope is high, at high unemployment the slope is nearly horizontal. We are in the latter case, so as demand drops the supply remains constant at that price level. Thus in the face of a drop in overall demand, prices for goods remain rather stable, and the past 4 years gave strong evidence that Keynes' point of view is correct. The reasoning behind this is given briefly here: http://en.wikipedia.org/wiki/AD-AS_model

Don't forget that we're in a liquidity trap too, which provides a constraining "boundary condition" for the system and thus fiscal policy provides a way out. I agree the housing market doesn't need government help (but the people in underwater mortgages do, as do the many jobless and underemployed; helping them helps the rest of us too (a rising tide raises all ships)). There hasn't been much support for the homeowners whose mortgages are underwater.
written by Michael Chase, September 24, 2012 9:43
Dean, I am confused by your $1.2-$1.5 trillion range for a loss of demand due to the deflation of the housing bubble. If I remember correctly, you have often stated the wealth effect due to housing to be $0.05-$0.07 on the dollar, and the bubble size to have peaked at $8 trillion. Does that not imply a demand effect of $400-$560 billion annually?
Effect of housing D on aggregate demand
written by Steve Hamlin, September 24, 2012 11:02
@Michael Chase: there are (at least) two components to Dean's $1.2-1.5 trillion range of lost aggregate demand due to end of the housing bubble: (1) direct demand lost: not as many houses being built, not as many builders, not as much lumber, not as many appliances being bought, not as many lawns being landscaped; and (2) indirect demand lost: spending not undertaken because of (zero or even inverse) wealth effect from changing house prices.

So, per your numbers, maybe $1 trillion in lost direct demand (fewer houses being built as we work through over-supply), and $0.5 trillion in lost indirect, wealth-effect-driven demand.
written by saurabh, September 24, 2012 6:54
Michael Chase, see this post: http://www.cepr.net/index.php/...-stimulus, where Dean lays out the math. Basically, $500 billion for bubble-driven consumption, $600 billion for loss in real estate construction demand, $100-200 billion for loss in spending from state and local governments due to decreased tax revenue.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.