Jeff Madrick from the Economic Policy Institute has written a book called The Case for Big Government which is dedicated to explaining how an active and capable state sector is a necessary precondition for economic growth. David Kusnets gave it a positive review in The New York Times Book Review. Donna Wiesner Keese, from the Independent Women’s Forum, a conservative anti-feminist group, objected:

Madrick’s statement, quoted by the reviewer, that “there really is no example of small government among rich nations,” is unsupported nonsense. Think Dubai, free and rich.

As Rick Hertzberg says this is a bit of a bizarre counterexample:

I mean no disrespect to the 240,000 citizens of Dubai (its other 1.2 million residents are imported workers, hundreds of thousands of whom live in “collective labor accommodations”), but is this the best Mrs. Keene can do? Not even a “nation” but a province of the United Arab Emirates, specializing in real-estate and financial-services bubbledom?

Again, no disrespect, but the UAE’s role vis-à-vis the non-oil-extracting rich nations falls somewhere between that of a welfare recipient and that of an extortionist. Or—speaking of “independent women”—a bit like the role of Alaska within the United States.

There’s also the question of why you would describe Dubai as “free.” Or, rather, I understand perfectly well why she describes it as “free” — it’s a straightforward consequence of the right-wing’s sick obsession with reducing the level of taxes rich people need to pay as the prime virtue of politics. For from being free, Dubai is ruled by a dictator, Mohammed bin Rashid Al Maktoum, dignified with royal title in virtue of the fact that he inherited his political power from relatives rather than seizing it of his own accord. The State Department certainly doesn’t seem to think that his subjects, or those of the other UAE component emirates, are all that free:

The government’s respect for human rights remained problematic, and significant human rights problems reported included: no citizens’ right to change the government and no popularly elected representatives of any kind; flogging as judicially sanctioned punishment; arbitrary detention and incommunicado detention, both permitted by law; questionable independence of the judiciary; restrictions on civil liberties- freedom of speech and of the press (including the Internet), and assembly; restrictions on right of association; restrictions on religious freedom; domestic abuse of women, sometimes enabled by police; trafficking in women and children; legal and societal discrimination against women and noncitizens; corruption and lack of government transparency; common abuse of foreign domestic servants; and severe restrictions on and abuses of workers’ rights. [...]

The constitution prohibits arbitrary arrest and detention; however, there were reports that the government held persons in official custody without charge; and that the government charged individuals but denied them a preliminary judicial hearing within a reasonable period. The law permits indefinite routine prolonged incommunicado detention without appeal, and the detainee only has the explicit right to contact with an attorney. [...]

The constitution provides for freedom of speech and of the press; however, the government restricted these rights in practice. The government drafts all Friday sermons in mosques and censors private association publications (see section 2.c.). The law prohibits criticism of the rulers, and from acts to create or encourage social unrest.

Freedom House sticks the UAE with its coveted “not free” tag, owing to its total lack of political freedom and scant respect for human rights. But, hey, the Independent Women’s Forum says we should look to it as a shining example of how small government will bring us prosperity and liberty.

The AP reports:

Kansas Gov. Kathleen Sebelius was near the top of President Barack Obama’s list of candidates to head the Health and Human Services Department, a senior administration official said Saturday.

The source, speaking on the condition of anonymity to discuss private administration deliberations, said no decision was imminent and that other candidates remain in the mix. But the official added the former Kansas insurance commissioner was rising as Obama considers prospective candidates, in no small part on the strength of her close relationship with the president.

Sebelius would be an excellent Secretary. But as with Secretary of Homeland Security Janet Napolitano, I also think she could be an excellent United States Senator. And in Kansas, even more so than in Arizona, the second-best potential candidate is probably a good deal weaker. Of course cabinet positions aren’t inconsistent with Senate runs, but the timing doesn’t look great to me in either of these situations. And one thing we’re learning is that President Obama’s ability to deliver on a progressive agenda depends at least as much on the outlook in the Senate as it does on the quality of his team.

Taking a suggestion from DTM, it’s probably worth attempting a layman’s explanation of “the paradox of thrift” in the current situation. So here goes:

I get a paycheck direct deposited into my bank account every two weeks, which is my salary less deductions for taxes and less money diverted into retirement savings. And every month, about as much money comes out of that account—to pay the mortgage, to pay utility bills, to pay credit card bills, and as ATM withdrawals for cash that I spend. I also have coming in a less-regular flow of checks for various freelance assignments I pick up here and there. Those freelance assignments don’t come with taxes deducted, so I always winding up owing money when I do my taxes so I try to make sure I have money saved to pay that off when April comes around. Beyond that, I’m usually saving up some money to take a trip (to Spain, for example) or to buy something somewhat expensive (a new Macbook, for example). But those kind of savings are a pretty small portion of the overall pie. The money I’m not saving for taxes or MacBooks gets spent on goods and services. That spending provides jobs for other people around the world. And those people, in turn, probably spend most of the money they make on other goods and services thus providing more jobs.

So what happens if I decide to cut back and save more, maybe because I want to buy a car or just because I feel a bit nervous and want to build up a cushion? Well, if there’s some particular business that depends crucially on my patronage, that might be bad news for them. But even though the economy as a whole depends on consumers like me spending me, my personal decision to cut back shouldn’t particularly have any macroeconomic impact. And not just because the amount of money is small. It won’t have much impact because if I increase the amount of money I have in my savings account, the bank can increase the amount of money it lends out. And just as my spending led to economic activity and jobs, whatever it is other people borrow money from the bank to do will also generate economic activity.

But now suppose a bunch of people lose their jobs in the construction business and start spending less money. And also a bunch of people in finance lose their jobs and start spending less money. And some restaurants and bars that catered to the finance crowd start having less business so they employ staff for fewer hours and those guys all start spending less money.

Now it’s not just me looking to build a bigger cushion by cutting back on spending, it’s a whole bunch of people looking around and feeling nervous and deciding to cut back. Well, with all that cutting back there’s a lot less stuff flying off the shelves. So retailers start laying off workers (who need to reduce spending and whose friends start feeling nervous and reducing their own spending) and discounting the merchandise. Maybe the sales are so impressive that everyone changes their mind, decides that the bargains are too good to pass up, and goes and buys a bunch of stuff rather than increasing savings. If so, the economy just had a minor hiccup and life goes on. But maybe the accelerating wave of discounts just makes people feel more nervous. And maybe I see all this discounting and decide not to buy that new MacBook after all, because it’s not on sale yet and I’m betting it will be soon.

Now we’ve entered “paradox of thrift” territory. People are saving more. And the increased saving isn’t being cycled back into the economy as new investment. In part, that’s because of problems in the financial system. But in part, it’s because with short-term demand slumping so much, there’s not a lot of worthwhile investing to be doing. The economy needs someone to decide to borrow some money and start a new firm that employs these newly unemployed people. But with the volume of consumption going down so rapidly, nobody’s really in the mood to start a new business. And existing businesses are busy scaling back production, not interested in borrowing money to ramp it up. The result of this is an overall fall in the average level of income. And that means that even with the share of income being saved going up, the actual level of savings can be going down and we can truly end up in the toilet.

The ultimate point of a fiscal stimulus policy is to avoid that toilet scenario. To get money flowing in the economy again, so that savings gets translated into investment which gets translated into jobs which pay salaries which, in turn, are spent and saved in ways that create jobs.

One unfortunate aspect of human psychology is that people aren’t good at understanding magnitudes that are far outside the range of ordinary experience. Everyone’s very clear on the fact that 50 eggs is a lot more eggs than seven eggs. But the difference between a $50,000,000 budget item and a $7,000,000 budget item tends to get fuzzy. And it gets worse when you start using words in place of numerals. $5 billion is a lot more than $5 million—$4,995,000,000 more to be exact—but the two words sound similar and look similar on the page. Which brings us to things like this bit of rounding by Michael Steele:

When families keep the money, they spend it, save it, or invest it. And the private sector economy benefits when families and businesses buy consumer goods or invest it for the future. But when Washington spends the money, some of it may flow into the economy, but all too often, much gets wasted.

Democrats in Congress want a one-trillion dollar spending bill. You’ve heard about the pork-barrel programs they want to fund… 45 million dollars for ATV trails and removal of fish passage barriers is one that caught my eye. Exactly what is a fish passage barrier and why does it cost 45 million dollars to stimulate the economy with it?

There are about a million things wrong with this argument (to be saved for future posts) but just note that there’s a big difference between rounding 85 cents up to one dollar and rounding $850 billion up to $1 trillion. Nobody would call a candy bar that costs $1 a “$150 billion candy bar.” And yet $1 is, in absolute terms, closer to $150 billion than $850 billion is to $1 trillion. Of course that comparison isn’t entirely fair, the percentage difference matters as well. But the fact remains that when you’re dealing with very large magnitudes, these kind of decisions to round up or down—especially when the decision is made to add rhetorical force to the point—can wind up obscuring huge actual quantities. It’s true that if you round the recovery package’s cost to the nearest number you can express with one numeral followed by a word that it’s a “$1 trillion” plan. But it actually costs much less than $1 trillion.

Meanwhile, it’s worth saying that to call it a “one-trillion dollar spending bill” is just a flat-out lie. There are hundreds of billions of dollars worth of tax cuts in the package. Some of them are there for good reason, others we’d do better to do away with. But either way, they’re there. Anyone who’s calling the bill a pure spending package is lying.