December 3, 2010
Fixing the Deficit

As the Deficit Commission concludes—or doesn’t—its work, a little perspective. According to a recent analysis by the Center for Budget and Policy Priorities (CPBB), the bulk of today’s budget deficit comes from four sources: the Bush era tax cuts, the recession, the wars in Afghanistan and Iraq, and the stimulus package. (You can find a graphical depiction of the center’s analysis at: Indeed, something like 40% of our current deficit derives from the Bush tax cuts and the two wars in Afghanistan and Iraq, a decreasing percentage derives from the stimulus, and the rest is largely accounted for by the reduced tax revenues that government has collected since the recession began.

The graph makes it clear that at least two of the four major sources of the increasing US deficit are entirely within our ability to control right now. It is fully within the United States’ power to let the Bush tax cuts expire. (Indeed, keeping them will lead to a massive explosion in the deficit, as the graph demonstrates.) It is likewise entirely in the United States’ control to radically reduce our presence in both Afghanistan and Iraq. (The stimulus money has by now mostly been spent, and so no huge savings will be found cutting the rest of it, as the graph also makes clear.) 

Note that if we do these two things, and at the same time do not increase government spending beyond inflation, the budget will be essentially balanced once the economy recovers—without a single cut in government programs. You can still have roads, and schools, and social security, and Medicare, and food and drug testing programs—all of it. Significant entitlements reforms will surely be needed as time passes, but the notion that it is spending on the arts or welfare that is driving the deficit is utter twaddle. 

We’ve made this mess, and we can fix it. But we need to start from the facts: our poor choices in sending Americans into two wars and cutting taxes while expanding military spending and creating a prescription drug benefit for elderly Americans have been the biggest government-made sources of the deficit. Almost all the rest of it derives from the recession. If you want to make progress in stopping the bleeding, you need to stop it where it’s bleeding the worst. Until we do this, we’re throwing bandaids at a jugular vein and kidding ourselves that we’re making the patient better.

December 2, 2010
When Spin Wins

One the memes of 2010 has been conservatives’ claims of government overreach. Government “takeovers” of health care, the auto industry, and even financial firms are asserted to have promoted incipient socialism in the United States, all while destroying private industry’s ability to create jobs and economic growth for the country and its citizens. Ronald Reagan’s long-ago formulation that “government is not the solution to our problem, government is the problem” has been reified into religious dogma. If government does it, if government touches it, it’s bad. The free market is the source of truth and good and progress. Amen.

Except it turns out that corporations don’t really believe this. At least, they don’t really believe it when they need help. The New York Times reports today that in the depths of the economic crisis of 2008, many more companies than is generally recognized begged the federal government for loans and loan guarantees. (You can find the story here: Unsurprisingly, Citigroup asked for help 174 times in 13 months. Barclays, a British bank, owed the Federal Reserve Bank almost $48 billion at one point. Many other financial firms went calling for loans and loan guarantees.

But the guarantees and loans went much further than just the financial sector. General Electric took money, as did Harley Davidson. So did Dell computers, the Teamsters pension fund, and the Omaha teachers’ system. Caterpillar, McDonald’s and Verizon all came calling as well. The central banking systems of Australia, Denmark, England, Japan, Mexico, Norway, South Korea, Sweden and Switzerland all got U.S. assistance. When all was said and done, the Fed had $1.5 trillion in loans out, with $9 trillion in additional loan guarantees added on, all with the intent of propping up the global economy.

As it happens, this makes sense to me. I accept the premise that in times of great crisis governments step in to prop things up—that is the purpose of contemporary global economic policy. And, as the richest country with the most extensive global ties and the most stable currency, it makes sense that the United States is on the hook for a lot of this support. We would, no doubt, have been in a lot of trouble if everything had fallen apart, but then again we would also have been in a lot of trouble if the global economy had collapsed. In 50 years, this intervention will likely be recognized as having staved off another Great Depression, and the people who did it will be seen as having made mistakes, but as worthy of praise.

The thing is, the very same corporations that came begging for loans two years ago, and indeed that STILL take 0% interest loans from the Fed and use these to invest and give themselves record bonuses for their genius in turning 0% loans into profits, are now insisting that regulation is bad, and that the government shouldn’t have any say in what they do or how they invest their money. In effect, the corporations that took loans and begged for help are now insisting that they should be allowed to continue doing the very things that blew up the global economy in the first place, and that the government that saved them when their practices led to their collapse has no right—no business—telling the corporations what they can do with the public’s money. It’s a remarkable case of socializing risk—we pay if they screw up—while privatizing benefits—they get all the money when things go well.

Thus, while the mantra may be, “government is bad, corporations are good,” it turns out that corporations don’t believe it. They love to use the government when it helps them. It’s just the actually paying for it that pisses them off. They want welfare for them. The rest of us should be thankful they’re around to employ us.

The corporations are of course aided and abetted in this effort by their shills—like the Republican Party, or blowhard entertainers who claim to “get it” like Glenn Beck and Rush Limbaugh. Such shilling is evident in many places. Senate Republicans just yesterday signed a letter to Senate leader Harry Reid (D-NV) in which they insisted that nothing can be done in Congress until taxes are permanently cut for the rich, and social services are cut for the poor. Oklahoma Republican Senator Tom Coburn opposed new food safety regulations on the grounds that the market could handle protecting the food supply—despite the spinach, tomato, egg and beef supply problems of recent years that caused many deaths and untold illnesses. Glenn Beck sneered about how “progressive” Teddy Roosevelt (a Republican!) helped create the Food and Drug Administration—to, you know, try to guarantee that the food we eat is safe. But it’s a “government program,” so it’s bad. The mantra is repetitive: government bad. Business good.

Notably, this “black is white” and “two plus two equals whatever I want it to mean” kind of thinking is popular among a large segment of the American population. Repeated reassertions of Reagan’s claim appears to have convinced them that whatever actually happens, government is always bad and private industry is always good.

This mantra has had lots of effects in American society. Some important ones include the fact that there have been no substantial reforms to banking and investment practices since the economy melted down in 2008. No new rules about what companies must do if they seek government loans and loan guarantees have been implemented. And of course there is no expectation that if you take public money it must be used to support the public interest. The spin has won. Government is bad. Corporations are good. Amen.

November 29, 2010
A Christmas Miracle?

Everyone is looking for a Christmas miracle.

Of course, the miracle in question is not religious in nature—or, at least not explicitly religious in nature. Rather, what people around the world are hoping for massive is sales of goods and services this Christmas sufficient to restart the global economy.

The reasons for this hope are completely understandable. If sales are sufficiently high, increased demand will require new hirings to make the goods and services that are in demand. This hiring will tend to stimulate more demand, since people with jobs consume more readily than do the unemployed. As a consequence, more and more people must be hired to meet this increased demand. Hiring begets hiring; jobs beget jobs; and the global economy can get a jumpstart towards alleviating the suffering of millions of un- and under-employed people. Job growth offers a hope that things will get better.

Growth in jobs also offers two positive effects for governments, at least those with social safety nets. First, it removes lots of unemployed people from the rolls of welfare, unemployment insurance recipients, and health programs for the poor. Indeed, one of the major reasons global government budgets are so far out of whack right now is that lots of people demand government services in tough times. When things get better, demands for services goes down. This helps reduce a government’s budget deficit.

Second, employed people pay taxes. More employed people pay more taxes. Accordingly, governments collect more taxes, potentially closing the gap in the government’s budget.

Growth thus seems a magic bullet solution to what ails us. It both reduces demands for government services and increases government capacity to pay for the services it provides. It’s a seeming win-win.

However, what is usually missed in this conversation is the question of how growth is paid for.

The ideal type of growth happens when wages to increase relative to inflation. Such real income growth means that people can buy increasing amounts of goods and services, at least in combination with new consumers—children coming of age, immigrants (illegal and legal both). In such circumstances the economy grows AND people get richer.

In the American case, however, from the middle class down real wages have stagnated or have declined  for most of the last 30 years. Growth has been entirely concentrated in the top strata of the income spectrum. It has been extraordinary at the very top.

Supply side economists insist that this inequitable growth is fine since the wealthy are expected to spend and invest and thus stimulate growth. The empirical record has shown this is not true, however—or at least it has shown that such spending is not adequate to promote real wage growth. The rich control vastly more US wealth than they did 30 years ago (the top 10% control something like 90% of wealth in the US, while the top 1% control something like 50% of US wealth), but their spending and investments have not promoted growth in jobs and real incomes in the US.

A second way to grow is massive borrowing.
This is the way growth was concocted in the last 30 years. Both citizens and governments consumed more than they could afford, and borrowed on credit cards and even home equities in an endless effort to consume more than incomes allowed. Sometimes, as in thoughtful home loans or, in the case of governments, selling bonds to build roads and schools and electric grids, some debt is productive: it returns vastly more value than the financed costs. But in the last 30 years we financed electronic consumer goods, pizzas, everything, to a staggering degree. And no pizza has much of a multiplier effect. Moreover, the electronic goods were produced internationally, creating sales and tech jobs in the US, and making the products cheaper here, but also financing the (mostly) Asian/Chinese boom.

In any case, given Americans’ contemporary over-indebtedness, as well as the collapse of the housing market, there is little capacity for a debt-driven recovery. At least not a consumer-driven one.

The plain fact is that there is no miracle cure for what ails us. There is no magic, painless bullet that will resolve the equation in a way that means we can continue to consume at the same—or increasing—rates that we once consumed, all while governments provide goods and services at a high level. It’s going to take spending cuts and tax increases and service reductions—in short, changes to our expectations of life and the standard of living.

As Wesley puts it in The Princess Bride: “Life IS pain…. Anyone who says differently is selling something.”

November 23, 2010
Economic Culture War

Perhaps the most distinctive aspect of recent American politics has been the rise of the so-called culture war. Starting about the time of the civil rights movement and the counter-culture, American politics became increasingly polarized around issues of prayer in school, abortion rights, sex education, teaching evolution (or intelligent design) and other issues deeply grounded in moral choices and moral systems. Notably, these issues are hard to reach compromise on: moral and social issues tends to promote either/or thinking in which one way is right and true and proper, while the other is immoral, wrong and dangerous. American politics fractured.

While there have always been social and moral issues in politics, the culture war politics of the 1960s, 70s, 80s and 90s were a break from previous American practices—at least practices since the turn of the 20th century. From about the 1880s through the 1950s, US politics focused on the reining in of corporate power and the redistribution of wealth throughout US society. The era of the Robber Barons and monopolistic trusts gave way to trust-busting regulations and government standards for health and safety of food, medicine, and labor. The era of unmanaged economic Panics gave way to state intervention in the economy and the attempt to limit the ups and downs of the business cycle to reduce human suffering. And, in the greatest feat of social engineering in US history, millions upon millions of Americans went to college, leading to the massive expansion of the middle class.

The thing is, policies like trust busting, and safety and health regulations, and educational opportunity are not generally imbued with moral fervor. We don’t usually think a sub-category regulation about how slaughter houses should operate is a flashpoint of moral identity. Accordingly, such issues are inherently compromisable. In such cases, leaders can cut deals about how much to spend, or where the appropriate line between state intervention and individual or corporate rights lies, fairly easily. These are “ordinary” political issues.

It seems to me that one of the remarkable features of our current political order, the tea party moment, has been the infusion of culture war attitudes into what have traditionally been seen as ordinary political and economic issues. Ever since Rick Santelli’s February 19, 2009 rant on CNBC, asking whether you and I should be forced to pay to bail out people who had made irresponsible decisions and bought more house than they can afford, the question dominating American politics has not been, “how do we save the American (and world) economy?,” it’s been “why should we have to pay for “their” mistakes?” More, the dominant ethos has been one of moral character: “they” screwed up; “they” used credit like heroin; “they” want to avoid their moral responsibility for their choices and use “our” tax dollars to do it. It’s economic policy-making by culture war.

As it happens, I am sympathetic to the “they screwed up, why do I have to pay?” sentiment. I pay off my credit card every month. I carry no debt other than my car payment and my mortgage—and I could pay off my car if I wanted to. I have lived responsibly much of my life, some of the time because I had no money (grad school!), and some because that’s just how I am. It gripes me no end that, in effect, I am being punished because I did the right thing. It’s intensely annoying.

When it comes to economic issues, however, there is a second side to the story that is often missed: what else is there to do? We might let the economy collapse as a matter of moral absolutism … but then the economy will have collapsed for the responsible, too. We might gut social services, education, prisons and infrastructure in order to enforce an austerity scheme that is as much about punishing people for their economic profligacy as it is about squaring the nation’s balance sheets … but then we will have broken infrastructure, ever-worsening schools, untold millions of homeless, starving or otherwise suffering people, a further collapsed housing market, and millions of prisoners walking the streets with no jobs, no opportunities, and no skills. It all adds up to what my mother would call “cutting off your nose to spite your face.”

Turning economic policies into matters of moral rectitude and pitting a culture of the responsible—us—against the party of the irresponsible—them—has made great short term politics. It has also absolved “us” from admitting our role in creating the fiscal irresponsibilities of the last 30 years, just as it has let “us” off the hook of paying higher taxes or enduring cuts in services we think are essential in order to get past the current troubles. But it’s crippled the United States’ ability to respond to both the immediate economic crisis and the looming one in the future (when 30 years of deficits come due). Which, again, returns me to the theme of irony that has suffused many of my posts: we have the right to do stupid things. The test is whether we can see through the murk and do better.

September 1, 2010
Good tax cuts versus bad tax cuts

The following is excerpted from David Leonhardt’s New York Times article this morning. He makes some impressive points.


"Republicans argue that a permanent cut in tax rates is the best form of stimulus. Allowing any of the Bush cuts to expire, John Boehner, the top House Republican, said in a speech last week laying out the party’s economic agenda, is “a recipe for disaster.”

As theories go, this isn’t a bad one. You can certainly imagine how a tax increase on the affluent could hurt the economy or how a tax cut for them would lift growth. Theories aside, though, consider what has actually happened in the last three decades.

Mr. Bush signed his original tax cut in June 2001, when the economy had been losing jobs for four months. It then shed jobs for two more years. In the decade that followed the tax cut, economic growth was slower than in any decade since World War II.

If the goal is short-term stimulus, even Ronald Reagan’s much-lauded 1981 tax cut doesn’t appear to have worked. After he signed it, the economy lost jobs for 16 straight months. It didn’t start gaining jobs until after he had raised taxes, to reduce the deficit, in late 1982.

What explains this pattern? Tax rates matter, but people don’t make most decisions based primarily on their marginal tax rates. Mr. Bush’s and Mr. Reagan’s tax cuts were just not powerful enough to overcome the economic headwinds at the time.

Consumers and executives didn’t rush out to spend more money in part because they understood their tax rate would still be lower months or years later. That the Reagan and Bush tax cuts went disproportionately to high-income households, which save more of their income, did not help, either.

In fact, simply sending rebate checks to most households seems to have more punch. If you look at this chart, you can see that consumer spending bounced back in both the second quarter of 2008 (temporarily) and the third quarter of 2009. Those happen to be the quarters when the Treasury Department finished sending the one-time cuts from Bush and Obama.

Based partly on this history, Moody’s Analytics estimates that a new rebate would have about three times as large an effect on growth next year as would making all the 2001 tax cuts permanent.

Yet a rebate still isn’t the best solution, according to the Moody’s analysis or, for that matter, common sense. Some households will surely put their rebate into a savings account or use it to pay down debt.

That is why the ideal solution tries to leverage government dollars with private dollars. The cash-for-clunkers program did precisely this last year, causing a jump in vehicle sales. So did a 2009 tax break for corporate investment, leading to an end-of-year spike in spending.

The tension with such tax cuts is between targeting and simplicity. Targeted ones can avoid showering too much money on households and businesses that were going to spend anyway.

One possibility is an expanded tax credit for new clean energy projects, which is favored by the White House and by at least two Republican senators, Orrin Hatch and Richard Lugar. Another is an expansion of the tax credit for businesses that increase their work force, like the one sponsored by Mr. Hatch and Charles Schumer, the New York Democrat. This time, though, it would not have to be restricted to companies hiring the long-term unemployed.

The disadvantage of these programs is that people have to figure out if they’re eligible and then fill out forms. A simpler approach — but a less targeted one — would temporarily cut the payroll tax, which finances Social Security and Medicare and is paid by both businesses and workers. By suspending the part that applies to businesses for a few months, Washington could lower the cost of keeping or hiring workers.

Either way, a couple of tax cuts along these lines could make good additions to a bill extending the Bush tax cuts for households making less than $250,000 a year. Economically, the extra cuts would have a bigger impact than an extension of all the Bush cuts. Politically, this kind of bill would force opponents to explain why they instead wanted smaller tax cuts for middle-class families and businesses and a bigger one for the affluent.

Of course, no temporary tax cut will solve the economy’s long-run problems. That’s a harder project, one that involves upgrading the skills of the work force, slowing the growth of health costs, reducing the deficit, lifting exports, restarting healthy wage growth and, yes, simplifying the tax code.

But we won’t make any of those tasks easier by falling into a double-dip recession or enduring months more of halting growth. The aftermath of a financial crisis is usually difficult. It’s not yet time to declare victory.”

June 21, 2010
How Chicago Ruined the Gulf. And the Economy. And a Whole Lot Else.

First, let me say I am an unabashed fan of Chicago.  I have loved the city from the first time I visited it and am a regular visitor now. I just spent two days there as a tourist for the first time in years and had a blast—great architecture, good food, and it’s easy to get around in (once you beat your way through the commuter traffic). Chicago rocks.

The Chicago in question is not the city, but rather the Chicago School of economic theory. Centered at the University of Chicago, the Chicago School’s guru was Milton Friedman, a Nobel Prize winning economist. Among other ideas, Friedman and his many students—disciples?—advocated free market solutions to most social and economic issues. He argued that government regulation inevitably led to outcomes that were not as good as those that the free market could achieve—or, even worse, that were guaranteed to fail.

Friedman’s arguments were of course more complex than the summary I can offer here, but a discussion of two core concepts will suggest the dimensions of his approach. The first derives from what Austrian economist Friedrich Hayek called “creative destruction.”  The relentless search for profits and markets makes capitalists endlessly creative, Hayek argued. (At least in theory.) New products are constantly developed, usually making existing goods cheaper and better.  Sometimes the process leads to innovative new goods and services no one knew they needed but that nonetheless change the way society works—think iPhone.  Old companies (and ways of life) fail and new social institutions rise in their place, simply because capitalist competition makes it happen.

Friedman noted that government lacked this kind of flexibility. Governments build bureaucracies that freeze existing social relationships into regular, regulated orders. Innovation is at best resisted; at worst crushed. Government didn’t invent the iPhone, after all. Indeed, when government aggressively regulated the telecom industry, phones were hardwired into walls, and the only way you could carry one around your house was to have a really, really long cord. (On the other hand, no one ever lost their phone.) It took the free market to achieve the iPhone.

The conclusion to this tale is seemingly obvious: cut regulations. Get government out of the business of choosing winners and losers and let the market sort things out for itself. There will pain and disruption and life transformation, but the net effect will be better for everyone than it would be if government took steps to freeze the way things are into the future. Less regulation would equal a better future for all—or pretty much all.

The second of Friedman’s core ideas answered the fairly obvious criticism of his laissez faire philosophy: what if businesses cut costs by cutting safety, abusing workers, etc.? For Friedman and his followers, the answer to this question lay in the same place as the answer to social and economic problems lay: the market. Safety, the good treatment of workers, and similar social goods are simply in the interest of corporations themselves. After all, if a company has a bad safety record, this will hurt it in the market: consumers can choose to not buy their products, costing them market share and profits. Likewise, if the company is abusive of its workers, news of its practices can be expected to harm its reputation and profits. Companies also have an interest in not making silly investments or otherwise behaving irrationally: the competitiveness of the market guarantees that reckless, irrational acts can lead to the company’s destruction. Thus, the goals of survival and profits would compel companies to behave well all on their own. Indeed, given that government bureaucracies distort superior, market-based outcomes, market-led solutions would work better than government-led ones.

That all of this sounds like fairly conventional Republican talking points today speaks to how completely Friedman’s ideas (and those of his students) have come to dominate conservative thinking in American political life. As Republicans became conservative (something that was not always true before Reagan), Friedman’s ideas became the centerpiece of Republican economic ideology. Government regulations were slashed and market-based solutions were offered to everything from welfare (workfare) to education (vouchers and charter schools). Cuts in oversight were particularly extensive in the financial system and in enforcing safety standards. The market, as Harvey Cox noted, became God.

Except, of course, that Dr. Friedman was wrong. Corporations are not rational—they are legal concepts staffed by human beings. People can make mistakes—or be corrupt. It also turns out that in the real world human beings can quite often get away with being incompetent (or corrupt). They can leave the companies that employ them and cash giant bonuses earned while they set in motion the events that led to their company’s destruction. The company loses, but they win—an incentive about which the Chicagoans seemed surprisingly ignorant.

Moreover, consumers often don’t know—or don’t care—about corporate practices. Most every piece of clothing you own was made in a sweatshop; your cell phone was made in a factory, probably in China, that treats its workers abysmally. The BP case shows that our desire for cheap gas trumps our alleged desire for environmental safety. As former Chair of the Federal Reserve, Allan Greenspan, said as the economy collapsed, he had thought that the markets were rational, and that non-regulation was the way to go, but he was “wrong.” Ah.

It is, of course, entirely possible that government regulators can make mistakes, be corrupt, or otherwise screw up the economy. Too much regulation can surely stifle creativity—look at any communist country at the height of the Cold War. But the United States isn’t the Soviet Union.  More, and this is crucial, WE CAN HOLD GOVERNMENT ACCOUNTABLE. We can vote and protest and lobby and otherwise take steps to try to make government behave the way we want it to. Government is open to democratic pressures in ways that corporations are not.

Government works for us—or does if we make it. Corporations work for their investors—or at least they’re supposed to. The Chicago School and their conservative disciples decided it was better to have corporations run social life rather than democratic government. Americans agreed for most of the last 30 years. Welcome to the gulf oil spill. And the financial meltdown. And …