What if they had a fiscal crisis, and nobody came? What if the chump generation figures out the Ponzi scheme? Bob Samuelson thinks the fallout will be political:

... As baby boomers retire, higher federal spending on Social Security, Medicare and Medicaid may boost Millennials' taxes and squeeze other government programs. It will be harder to start and raise families.

Millennials [ages 30 and younger] could become the chump generation. They could suffer for their elders' economic sins, particularly the failure to confront the predictable costs of baby boomers' retirement.

Samuelson asks the question in a political context, and that's how most analysts interpret the looming fiscal crisis, as if young voters will punish fiscally irresponsible representatives in Washington. My alternative theory focuses on the context of immigration. Already you may have heard about the millions of illegals who departed the U.S. when the Great Recession dried up job opportunities. A lot of crass nativists might think "Good Riddance!" but I wonder what they'll say when their own children seek greener pastures abroad in 10 or 20 years?

Consider: almost everyone younger than the Baby Boomers expects to get the short end of the fiscal stick. We were laughing about the unlikeliehood of getting Social Securiyt Checks when I was in high school in the 80s. So now that the reckoning is all but unkickable, do the Boomers think their kids and grandkids will just become fiscal serfs?  Think again.

The consequences of U.S. fiscal calamity will go hand-in-hand with globalization. The world is in the early stages of globalization, but already member states in the EU are feeling the effects of combining tax competition with the right of movement. A 2006 BBC report noted that nearly 10 percent of Britons lived aborad, a million in Spain.  Two emigrant types dominate: retirees and workers!  Here's a more recent report from the OECD

... the share of immigrants in the OECD population almost doubled from just over 4.5% in 1975 to 8.3% in 2005. It is also noteworthy that 45% of immigrants living in OECD countries in 2008 came from other OECD countries.

The threat America faces is a world that competes for our greatest natural resource: it's young. If we make the tax climate hellish, the U.S. is going to suffer outmigration as places like Canada, Australia, Brazil, Mexico, Chile realize what an opportunity they have to cream our entrepreneurial talent. If we don't, and let the deficit spiral out of control, the dollar will fall and workers will go elsewhere for value reasons. There's already a migratory tension in Europe, waged primarily with favorable tax treatment for high net worth immigrants.

Go ahead and worry about the fiscal crisis of 2020, and worry about its implications across the generations. Just make sure you worry on a big enough scale. We all know that globalization will deepen, and the national borders that seem so tall and vital today will look more and more like borders among the 50 states of yesterday. Remind me again, how difficult does Texas make it on fleeing Californians to move in to their state?

For thousands of entrepreneurs, Bob Cringely is more than a guide to the inside world of technology and innovation, he is a co-conspirator. I bet that half of the tech entrepreneurs of the 1990s were inspired by his documentary "Triumph of the Nerds." I can attest that at Neocor, in the summer of 1996 especially, we had that video on as background noise almost daily. We got so used to Bob's voice that we thought of him as a co-founder (he'll probably ask for some loot soon...).

So I'm very, very pleased to announce that Bob has invited the Kauffman Foundation to literally conspire with him on his next project. It's going to be huge. Here's the announcment posted on his I,Cringely blog:

Today is a great day for I, Cringely and for me. It is the day we launch the special web site for Cringely’s (NOT in Silicon Valley) Startup Tour. I wrote a column last month announcing the Tour ... but today marks the actual start of this summer’s adventure, because it opens nominations.

Visit the new web site here

... Just to recap what I announced last month, my family and I will this summer saddle-up our 1996 Winnebago motor home to visit all 24 finalists, taking with us a TV camera crew. We’ll spend two days at every company, camped in the parking lot or in the CEO’s driveway. Two days is how long it usually takes for my kids to use up all the water and demand a trip to Redbox for new videos.

In addition to two months of ongoing text, audio, and video coverage right here, the 24 finalists will appear in my 12-hour reality TV series which will be on a BIG cable channel, one you have actually heard of that does not include the word “shopping” in its name.

Paul Krugman just can't stand the praise being given to Chile's liberal economic reforms of the last 30-40 years, so he is denigrating them. Why would he do that?  He claims the economic liberalization in Chile is nearly mythical, and uses the following chart as his key piece of evidence.  It's scandalously misleading.

 
That chart does not jibe with my own experience following Chile's development, especially in contrast to other Latin American economies. And note the source: Total Economy Database. Why not use the Penn World Tables, or World Bank data? Paul's data says Chileans are just 15 percent wealthier than they were in 1970. The PWT Mark 6.3 indicates they are 161 percent wealthier. So who do you trust: the global standard for cross-country economic comparisons or the Nobel prize-winning NYTimes blogger?

Even my kids know the answer. Just look at the wikipedia entry on Chile's economy, and you'll find this chart:

 
For the record, anyone who travels in Latin America can attest that little Chile's role as a model is not what you might expect. Neighboring nations still like to think of Chile as their poor sibling, and pretend that its economic success does not exist. It's time to take off the rose-colored glasses.

UPDATE: The chart Krugman uses cuts off in 1991, so it's not the data source that's misleading. It's chart trickery with the X axis, a Tufte favorite.

Growth economics is filled with errors. The Solow residual has become ingrained in conventional wisdom as "technology" when it is really a measure of intangibles. Technology, sure, but also culture, institutions, creativity. Not to mention, conventional wisdom assumes a linear link between more R&D spending and more innovation. What about entrepreneurs?  Most startups I know don't have an R&D budget -- the whole company is a tech gamble!  How can government officials measure that?  They can't.

But the biggest myth of practical growth economics is getting punctured, thanks to India. The CW still hasn't digested the truth yet, because it is still beholden to the idea that manufacturing is the alpha and omega of prosperity.  Well, India has been showing that a country need not "industrialize" to grow. Rather, India is leap-frogging (for the most part) the trail of sweatshop tears by embracing services-led development.  You might call it a Globalization strategy instead of Industrialization strategy. And lest we forget, embracing Industrialization was no guarantee of success. Remember Africa circa 1960?

Here's Ejaz Ghani in a VOX essay:

... India’s growth pattern in the 21st century is remarkable because it contradicts a seemingly iron law of development that has held true for almost two hundred years since the start of the Industrial Revolution (Chenery 1960, Kaldor 1966). This law – which is now conventional wisdom – says that industrialisation is the only route to rapid economic development for developing countries. It goes further to say that as a result of globalisation the pace of development can be explosive. But the potential for explosive growth is distinctive to manufacturing only (UNIDO 2009). This is no longer the case.

... Service-led growth is sustainable because the globalisation of services is just the tip of the iceberg (Blinder 2006). Services are the largest sector in the world, accounting for more than 70% of global output. The service revolution has altered the characteristics of services. Services can now be produced and exported at low cost (Bhagwati 1984). The old idea of services being non-transportable, non-tradable, and non-scalable no longer holds for a range of modern impersonal services. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.

Maintream economics taught students that services dominate the non-tradeable sector (think haircuts) across distance.  I always wondered what Elvis or Lassie would say to that.  But now I just wonder what the accountants in India would say.  Probably the same.  Woof. 

This is worth keeping in mind the next time someone tells you that "America used to be a place where people made things."  It still is, but that's not the future. In the future, manufacturing will be automated. American factories will quietly produced more stuff with less, or no, workers on the line. Indeed, that trend may make China's industrialization strategy a bad bet over the long-term.

Read David Stockman's tirade about the 30-year fiscal war. Stockman says the U.S. is "hurtling irreversibly toward a budgetary crack-up...." Published in Politico, it nails everyone. This would be great fodder for any classes that covers public finance.

My only quibble is that Stockman doesn't offer solutions. By that I mean he's like a doctor who diagnoses obseity and declares with an ominous scowl, "Be less obese."

Of course! Our government spends more than it taxes, and the gap has been accelerating. But the policy solutions (spend less, tax more) are NOT THE POINT. The point is that the rules that govern fiscal policy-making are broken. If you did not get that message from Evan Bayh's retirement, then you are missing the forest for the trees.

The only discussion worth having now is: What new rules will restore sound policymaking?  There are two tests for rules. One, will the rule work and work robustly over time? Two, can the U.S. enact the rule?  The dilemma is that potential rules may never be able to pass both tests.  As an example, President Obama's "bipartisan fiscal commission" has already passed the first test, but there is a great deal of skepticism if it can pass the second test. Pay-go is another example.  Works for a while, but it has always proved non-robust. Alternatively, rule that would completely satisfy the first test are budgetary Amendments to the Constitution, but again political reality seems to make enactment of these near impossible.  What rules would you like to see?

Let's hope (and suggest) that the President's new commission includes a careful set of recommendations on rules, in addition to the policy options. We've been talking policy options for 30 years, with lone economists like Stockman screaming into the wind, and I don't think that conversation is working.

UPDATE:  Thanks to Asa Hopkins for noting the broken link (now fixed) which should be going to this URL:

http://www.politico.com/news/stories/0210/33412.html

Ken Rogoff, a Harvard professor, and one of the few economists who can claim to be prescient (this January 2008 NBER paper with Carmen Reinhart anticipated the economic fallout from the financial crisis in the U.S.), now warns that fiscal policy is out of control ... here, there, and everywhere.

Speaking in Tokyo, he actually used the phrase "out of control" to describe Japanese fiscal policy (debt to GDP is over 200% there), but also focused on Greece, the EU, and the U.S.  The difficulty to curb fiscal stimulus during a recession means that monetary policy is likely to tighten first, and last week's Fed announcement pretty much fits in exactly with the Rogoff prediction.  Actually, the political economy of fiscal versus monetary policy is something taught in economics classrooms for decades. Rogoff now predicts:

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said....

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

It's interesting to note the 2008 NBER paper said:

A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response. (emphasis added)

What are the consequences? 

The first consequence is that the U.S. recovery will be more difficult than it needs to be, followed by a systemic shock. It is impossible to anticipate what the U.S. economy will look or feel like in 2020 after that shock occurs.

The second consequence is global. For growth optimists like Dane, Bob, and me (and our readers, right?), it is very difficult to reconcile the gloomy short-term outlook with all of the historical evidence showing long-term acceleration in economic growth. (I'm reminded of the TED talk Alex Tabarrok gave a year ago). The reconciliation is, of course, growth is heterogenous among countries, states, and cities (people, too, for that matter). Japan and Greece seem determined if not destined to be fiscal train wrecks. America seems to be falling into the same trap, and not just because of next year's projected deficit, but because of the inability to institutionally even think about entitlement realities. So, yes, growth will happen, but it won't surge in nations with fiscal hangovers. Growth leadership starts with fiscal restraint, so we can look at this list of public debt by country to see who has the advantage. Names that stick out: China, Russia, Estonia, Chile, Australia, among others. 

Does America eally want to pass the baton of global leadership? Of course not. Such batons are never passed. They're dropped.

UPDATE: Jim Hamilton makes the case that the Fed discount rate increase is not a signal of tighter monetary policy.  I don't disagree, per above, but I doubt Jim would disagree with the claim that monetary policy is much more likely to tighten before fiscal policy (I give 50-1 odds). And I can guarantee that Jim would prefer to see real fiscal discipline, because he's been writing about that for years.

It's unbelievable, but higher taxes on work are coming to most states in the Union.

The median increase will be 27.5%. And employers in places such as Hawaii and Florida could see levies skyrocket more than ten-fold.

If anyone wants an easy bipartisan job-creating legislative idea, top of the list is to give states the flexibility to modify the Unemployment Insurance (UI)I system. A smart policy would let states opt out entirely, given that UI is proven to prolong joblessness. There are alternative approaches, but they will be left untested so long as one-size-fits central planning from Washington continues (as it has for decades). Or did I hear that everything is on the table?

The second set of questions from the Kauffman Economic Outlook Q1 2010 focus on policy options for the U.S. economy.  The summary text from the report itself is copied here:

Despite being a balanced panel in terms of political alignment (16 percent Republican, 19 percent Democratic, 47 percent independent, and roughly 18 percent libertarian/other), there is a strong consensus around many policy recommendations. Seventy-one percent of economics bloggers think the U.S. government is “too involved in the economy,” with only 17 percent calling for greater involvement. When asked what the government should be doing, the only policies with more than 50 percent support are: 1) to increase high-skill immigration (63 percent), and 2) to increase legal immigration at all skill levels (57 percent). Two policies stood out sharply with nearunanimous opposition: increasing business regulation (9 percent) and increasing tariffs (4 percent).

On taxation, the panel was widely in favor of lowering taxes on payrolls (74 percent) and income, both corporate (64 percent) and individual (62 percent). Likewise, there was strong support for higher taxes on gasoline/carbon (68 percent and 57 percent, respectively), and consumption (54 percent). A common battleground for tax policy is progressivity, but 47 percent of bloggers are calling for flatter taxes compared to 26 percent in favor of increased progressivity (i.e., even higher tax rates on higher incomes relative to lower incomes).

According to economics bloggers, the top three variables that policymakers should emphasize in a model of economic growth are human capital, innovation, and economic freedom. In a related question, bloggers were asked to rate the beneficial importance of numerous key players in the U.S. economy. One hundred percent of the panel rate entrepreneurs as “important” or “very important,” and innovation also had unanimous support. Only slightly less important are free trade and education, with nearly all respondents rating them as “important” or “very important.” In contrast, only 30 percent of economics bloggers think labor unions are important, and nearly 70 percent rate them as “unimportant” (numbers may not add to 100 due to non-responses and rounding). Opinion is decidedly mixed on manufacturing, while there is mild support for the importance of big business.

And here are the individual charts (in .gif format) from this section:

As a few observors have pointed out, not all of these policy recommendations might be as popular with a random sample survey of the American public. For example, increasing immigration is arguably a political non-starter. But that has been a top priority here at Kauffman as a boost to economic growth. I was pleased to see this had broad support from the econ bloggers panel, which again I would emphasize is politically balanced. 

Is it biased?  Naturally, a reader of the survey should wonder if this survey is biased. There is a big difference between an ideological bias versus an experiential bias. Indeed, the question of bias goes to heart of survey research. There are random sample surveys (like Gallup) that try to capture public opinion, and most econometric research aspires to the standard of an unbiased sample of observations. The KEO is not of the variety. The Kauffman Economic Outlook is a lot more like a co-authored research paper, with scores of co-authors.  Although some might characterize it as "expert" opinion, that seems to me like a diversionary label and conversation. 

It is trendy these days to hint that economists as a class of thinkers have been discredited for not forecasting the recession. That was the topic of a few panels at the recent American Economic Association conference in Atlanta, where a handful of economists were on hand who expressly had warned of the stock market bubble, the housing bubble, the financial dangers of leverage, various deficits, etc. Indeed, the much-maligned Alan Greenspan mentioned the dangers of Fannie and Freddie more times in Congressional testimony than most Congressman can count. Even if the vast majority of economists and economic commentators warn of the dangers of unsustainable budget deficits, we can never know the exact month when the U.S. will lose credibility and the dollar will fall, but that surely isn't proof of ignorance or failure of the discipline.

The point is that the KEO economics bloggers survey includes numerous voices who warned either of the coming recession or of pitfalls, or both. Even now, the sample includes a balance of opinions that differ on a range of issues.  Thus, finding areas of consensus, especially strong consensus, is a very interesting result.

Specifically, on the issue of taxes, this survey found a consensus for taxing consumption more. That would be unpopular, true. But the finding is not in isolation. Bloggers also overwhelmingly support lower taxes on work (payrolls) and income. The consensus to shift the tax burden should not be couched as a public-versus-expert paradox at all (as the public would probably favor such a change as well). Rather, the finding offers some common ground for policymakers in the years ahead.