Sunday, July 29, 2012

More on "You didn't build that"

There’s a bit more to say on “You didn’t build that”, because even though we all, both liberal and conservative, appreciate the infrastructure we have all around us, and with few exceptions we recognize that government is central to providing it, and even though we all appreciate the work and grit that it takes to run a small business, and the intelligence it takes to make one successful, even though that specific controversy is a complete fabrication, there is an ideological distinction that evoked it.  There's a reason it seemed to resonate with some people, on both sides of the political divide.  And a financial blogger named Rortybomb (aka Mike Konczal) has nailed it here.  He relays this quote from a Romney fundraiser named Michael Zambrelli as reported in the LA times:

It's not helping the economy to pit the people who are the engine of the economy against the people who rely on that engine.”

Frankly, this is another statement that people at all points on the political landscape would agree is true---but in this case we would mean completely different things when we said it.  What I would mean by those words is that those who have done well should be humble and very grateful to the efforts of those around them that provided that wealth to them; to the government who provided infrastructure that made communication and transportation possible, and who provided security and a justice system to enforce contracts, and that created large-scale technological advances on which their wealth was built, and that they should also be profoundly grateful to the people they have employed along the way, the engineers and clerks, accountants and electricians, project managers and office managers,  plumbers and assembly line workers, sales staff and programmers and all the others I’ve left off this list, who worked and built the foundations of the economy on which the wealth of the well-off was built, and on which it rests.  Those people are the engine of the economy, and it is on those people that the wealthy rely not only to create their wealth but also to create all the things their wealth can buy.

What Zambrelli meant, apparently, was that we, all of us,  all the people on the list in the last paragraph, rely on the rich to provide us with our survival; they, the rich, are the creative engine, the job-creators, the goods-creators, and the rest of us would be lost without them.   Here’s another quote that Rortybomb cited, this one from Ayn Rand:

The man at the bottom who, left to himself, would starve in his hopeless ineptitude, contributes nothing to those above him, but receives the bonus of all their brains.”

This, seemingly, is the attitude that underlies the policy prescriptions of people like Paul Ryan (who gives all of his staff copies of Atlas Shrugged, from which this quote was drawn).  Their entire philosophy of government is that we will all be better off if we just get our government out of the way of “those above us”, to whom we contribute nothing and without which we, in our hopeless ineptitude, would starve.   To get out of the way of these creators we need only to stop taxing them, stop regulating them, stop repressing them, and if (and only if) we do that, the economy will bloom.

Since Rortybomb made this clear for me, I’ll leave this topic with his conclusion.  I can’t say it any better than this.  From Mike Konczal at Rortybomb:

“These policies include no hint that the economy is stuck due to inadequate demand or the weak purchasing power of the middle and working classes and the delinking of wages and productivity. There's no mention of the need to expand education and infrastructure to create the economy of the 21st century. There's absolutely no sense that the economy encourages the most innovative or entrepreneurial when there is full employment and a portable social safety net that provides economic security. And it is light-years away from the observation that society is a system of cooperation in which the value in the economy is created together.”
Yeah.  Exactly. 

Saturday, July 28, 2012

On “You Didn’t Build That”

I have to comment, at least briefly, on Obama’s "you didn't build that" remark, and on the Romney campaign’s use of it, and on the economics contained in it, and on the nature of politics.   Given the huge blogospheric response to this insignificant blip of a side comment, peer pressure alone would probably drive me to comment, and to come down in favor of one side or the other.   But instead, what I want to say is that the whole mess had been nothing more than mess, with no content whatever.

This is a perfect example of an entirely manufactured political controversy, because there is no real disagreement on the basics of this.  Period.  Not between Romney and Obama, and not between liberals and conservatives.

Paul Krugman, in his blog on this, pointed out that the small businessman in Romney’s first campaign spot on this pseudo-issue, the man who indignantly demanded recognition that he built his business without any help from government or anyone else, had in fact received direct help from the government in tax exempt revenue bonds, government contracts, and so on.  His response to that fact was that he was just taking advantage of what was available,   which is true, and there’s absolutely nothing wrong with building your business using every reasonable avenue to success: that’s what those loans were there for, after all, to help small businesses.  Any small businessman, liberal or conservative, would do that.  There is something wrong with taking that direct help from government and failing to recognize that it is, in fact, help.  

But really that’s all just a distraction, because Obama was not talking about loan guarantees, or any of the myriad of other things the government does to help small businesses.  Obama was talking about the long creation of infrastructure that makes all of our lives better, the infrastructure that we all use to communicate, to transport ourselves or our products, to meet, to conduct every part of our lives.  Obama, in the speech that quote comes from, specifically mentioned roads, bridges and the internet.    Here’s the quote from his speech:

“If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business -- you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.

     The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.  There are some things, just like fighting fires, we don’t do on our own.  I mean, imagine if everybody had their own fire service.  That would be a hard way to organize fighting fires. 

So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together.  That’s how we funded the GI Bill.  That’s how we created the middle class.  That’s how we built the Golden Gate Bridge or the Hoover Dam.  That’s how we invented the Internet.  That’s how we sent a man to the moon.  We rise or fall together as one nation and as one people”

  It would have been better if Obama had used the phrase “you didn’t build that alone”, but that, in context, is clearly what he meant.  If you have created a successful small business, you had the vision, you took the risks, you worked your butt off, but you also used public roads that all of us together built through our government, used the internet that we all helped to invent by funding government labs, and by funding, through government programs, research in universities public and private.  Together, through our government, we have invented satellites, GPS, jet engines, nuclear power, microchips, synthetic fuels and alternative energy; through land grants and other assistance we helped create railroads.  We created the interstate highway system, we provide the justice system that enforces private contracts, the police that protect property, the teachers that educate workers that small businesses hire.  And it’s not just small businesses that benefit from all of that: we all do.  I make a fair income, enough to own a house out in the Washington DC exurbs, and own two (aging) cars.  I make that income because I worked hard, because I spent many long, late hours getting a lot of education, because I’m at least moderately intelligent and not completely devoid of ambition.  But there are thousands, probably millions, of people in this world who are just as smart as I am, who have worked just as hard and long as I have, but who make a tenth of my income or less, because I was smart and hard working here in this country, surrounded by massive infrastructure and other smart, hard-working, well educated people, and born and raised in a middle class American family with all the advantages that implies, while they were smart and hard working but poor in Burundi or Burkina Faso or Mali or Haiti.  The GDP per capita in Somalia in 2010 was about 200 U.S. dollars, according to the CIA World Factbook, as reported in Wikipedia.

And no one, really, disputes any of that.  Conservatives these days try to ignore it for political reasons, but I think that under all of that they still agree with the older conservative stand, which was always that infrastructure does matter, and does help all of us, and that either through directly building it or hiring private companies to build it, government effort is the primary means of creating it.

So there really is no dispute.  Obama clearly, not only from this speech but from speeches and actions thoughout the last few years, has great respect for people who build small businesses.  And even in this speech he recognizes that they do build those businesses “because of…individual intiative”.  Both sides of the political divide recognize that small businesses are built by people who work, risk, invent, organize and lead, and also that they are built using the opportunities that those business people see around them, including all the infrastructure, and the justice system, and the educated population, and the protection provided by police and firefighters and our national defense, that we as a nation have built over the last two centuries.  

This is a dispute that we are having in our political discourse simply for the sake of fighting with each other, a vehemently and bitterly embellished distinction without a hair’s worth of real difference.

Sunday, July 22, 2012

A Response to Kathleen Parker

And now it’s time for a note to Kathleen Parker regarding her column today.  Go read it.  Go ahead, I’ll wait.  When you get back we can ask, in unison: Kathleen, have you completely lost your mind?  You’re usually a fairly reasonable person.  I know you’re a big Romney fan, but let’s get real here.

Start with her first line:

“When it comes to over-the-top politics, the Obama campaign has set a new standard with recent attempts to paint Mitt Romney as a felon.”

What’s wrong with calling this a new standard in over-the-top politics?   I mean calling him a felon is pretty bad, isn’t it?

First, the Obama campaign did not try to “paint Romney as a felon”, they just pointed out a logical problem in Mr. Romney’s rhetoric.  As Parker quoted them later in her piece, what they said was that if Romney misrepresented himself in filings with the SEC then he would be a felon.  But that’s clearly true: it is a felony to file a false statement with the SEC.  So either the report that was filed was true, or Mitt Romney committed a felony.  Note that this doesn’t mean that Mr. Romney was guilty of outsourcing or layoffs that occurred in 2000, for example. It does not mean that Romney fired anyone in those later years.  But it does mean that he either was or was not CEO.  Is Ms. Parker claiming that filing false reports with the SEC is all ok?

Now having said all of that, I should hasten to add that I do NOT think that Romney is a felon.  I think that the statements he files with the SEC are all true.   And why not?  Why on earth should he have quit as CEO?  There is nothing wrong with being CEO of a significant company; it’s a great accomplishment.  Bain had no complaint about keeping him, even if he was doing little work for them between 1999 and 2002.  He had, from all reports, done great work for them before that, and they were willing to keep him on as CEO in the hope that he would return.

Ms. Parker asserted that

“Nine days is hardly enough time to pack a toothbrush, much less push the paperwork necessary to hand over a multibillion-dollar business.” 

What??  Romney could not write a letter of resignation as CEO in nine days??  I could write one in 15 minutes, and so could Kathleen Parker.  But maybe Mr. Romney is functionally challenged in this; maybe he’s slower than Ms. Parker and I are.  I still doubt that it would take more than an hour.  He does speak English; it’s his mother tongue.  He did not resign as CEO, and that was not because he was just too rushed to get that done.  I'm not sure why it was; maybe it was to keep his options open for a return to Bain when his work with the Olympics was over, and maybe he would have done that if he had not been overtaken by political ambition .  But claiming that he just didn't have time is stretching so hard that I'm surprised Ms. Parker didn't snap.

I have no doubt that Mr. Romney left day-to-day control to others after 1999.  He was busy.  But the idea that he left on a moment’s notice, and simply ceded to others all control in the company on which his entire fortune rests without even watching what they were up to is beyond all credibility.  No.  All indications are that he left a bit of a vacuum when he disappeared from Bain in 1999, and there’s not much doubt that he observed Bain from a far greater distance than he had while he was in charge, but if he truly just left without following what Bain was doing with his personal fortune he’s a much frostier human being than most of us are.  Cyborg frosty.

The Obama campaign would like Romney to admit that, and frankly I think he should.  What on earth is he afraid of?  But I’ll get to that later.  There’s another issue to deal with first.

When it comes to over-the-top politics it’s hard to compete with the loonies who have gone after Barack Obama over the last few years.  And two pages before Ms. Parker’s column was another column by Dana Milbank displaying the latest eye-popping gibberish from these people.    Mr. Milbank discussed a recent event organized at the National Press Club (!), a venue that lends a veneer of near-sanity to these people.  The organizer of this event was a man named Cliff Kincaid.  You can look him up.  But here’s a quote from the Milbank column:

“On the program, Obama’s photo was alongside Vladimir Lenin’s and those of radical Muslim clerics. Kincaid got right to the point: Obama was actually sired by the late author Frank Marshall Davis, identified by Kincaid as a communist pornographer.
There is, Kincaid said, a ‘distinct possibility that Davis was Obama’s real father.’ The host further informed the assembly that Davis was ‘Obama’s sex teacher’ and that ‘Obama was under the tutelage of a pedophile.’ Kincaid asked ‘what Frank Marshall Davis may have done to a young Barack Obama’”

Wow.  Compared to that exudation the Obama campaign’s request that Romney admit that he maintained an interest in Bain, a perfectly respectable American company, during the years between 1999 and 2002, seems pretty tame and wholesome, doesn’t it?

Now let’s get back to the economics of this.  Because what Obama and his campaign really want is a real discussion of the issue of outsourcing to other countries.  So let’s look at that for a minute.
I’ve said before in this blog that the government is not a business, and not a household.  This is one example of an area where a business has a different view because it has a completely different purpose than the government: there is nothing wrong with a business hiring people wherever it is best for their bottom line to hire them.  If that is India or China, then it is.  And it is not the purpose of any business to maximize employment: on the contrary, as Nick Hanaour has been saying all over the country, hiring new people is a last resort for any real profit maximizing company.  If Mr. Romney did not behave like that when he did have day-to-day operational control of Bain then he was failing in his duty to his shareholders.  But the government of the United States has an interest in, and must promote, full employment for its population.  

These are different goals.  But the important thing to recognize is that they are not competing goals.   There’s no real conflict between individual private companies acting in their own best interest, reducing their own payroll if that is what they think is best, even outsourcing to China, on the one hand, and the achievement of full employment in the country as a whole on the other.   That is not because the rich, or private companies, are grand humanitarian “job creators” and will gladly hire locally even if it loses money for them.  It’s because with sufficient demand for the products the companies create they will have no choice but to hire people in this country to design and build those products.  They will do that, as a last resort, because they must do that to achieve their maximum level of profits.

It is the job of governments at all levels to help that happen, and they have multiple tools at their disposal to do that. The government can and does control the money supply and the interest rates to provide an appropriate level of incentive for borrowing to invest. The government can hire people directly, and that will have a multiplier effect as those direct hires spend their incomes.  The government also impact exchange rates with other currencies, and this is the real issue when we are talking about outsourcing outside the country.  If the workers in China appear cheaper than the workers here, one reason might be that the Chinese government has been holding its currency at an artificially low exchange rate for a very long time.   There’s no reason that reliable, high quality, local American manufacturers could not compete with distant, lower quality, less reliable Chinese manufacturers if the dollar/yuan exchage rate were at a level that would allow that.

The point is that Romney’s response is to avoid this discussion.  He shouldn’t.  The truth is that he would outsource, and he would fire people, in pursuit of profit in business, and the further truth is that he believes in his inner heart that doing those things is the proper and correct behavior for business management.  He should say so, and provide an honest argument based on his true beliefs.  Why doesn’t he?

A Touch of Wonkery.

I want to take some of the edge off one comment from last week.  In my diatribe against Samuelson’s imbecilic effort to blame all the sins of the known galaxy on John Kennedy, I leaned a little too hard in another direction.  I said this:

“…deficits as a fraction of GDP began to rise not in the sixties, or even in the seventies, but in the eighties after the Reagan tax cuts, and averaged 4% of GDP during that decade.  They fell again over the nineties, largely under Bill Clinton, and the nineties ended with budget surpluses, and then deficits rose again to 4% to 5% of GDP under Bush after the Bush tax cuts.”

That sounds as though I’m blaming parties, rather than policies, and I don’t really mean to do that.  It sounds like I am blindly trying to blame Republicans for a situation over which they did not exercise complete control.  Here’s a graph from this web site that shows the basic story of deficits by president:

The reply from those who blindly want to blame Democrats instead would be something like: during the eighties the Democrats controlled the House of Representatives through the whole decade, and controlled the Senate too from 1987 to 1994, and it was their excessive spending that caused all of those deficits under Reagan; and in the nineties the Republicans controlled both houses of Congress from 1995 through 2000, and they were the cause of the surpluses at the end of the nineties.  They would point out that under the Constitution it is Congress who holds the purse strings.  Congress passes the budgets.  Of course those same people want to blame Obama for the deficits that have happened under his Presidency, even though the Republicans have completely dominated the House for the last two years, and have done their best to control the Senate as well using filibuster rules.  To further muddy the issue, here’s a graph from the Wikipedia Public-Debt-By-President entry

Here’s a link to an interesting compilation that allocates Federal deficits and debts by party control of Congress or the Presidency.   It shows some unexpected results in some ways; for example, the author of that page notes that the first year of any President’s administration is conducted under the budget passed in the previous year, that is, it is the last budget of the prior administration.  Using this, he shows that the first actual Obama budget, meaning the year starting in October of 2009, significantly reduced the deficit compared with the budget that was in place when he took office.

But the point of this whole blog entry, is that this graph is a little misleading because it seems to imply that the whole reason that the debt grows or shrinks is because of who is in office, rather than what they do there.  A much, much better approach would show how the trajectory of public debt changes after identifiable policy changes, rather than who happened to be in office when those changes took place.  As a start to that, I’ll state as an observation of rough data going back to the beginning of the United States as a country that the biggest factor in increases in the national debt, as a general rule, is war.  Wars are expensive.  But the second biggest factor is recession.  Here’s a graph from the Federal Reserve Economic Data site (FRED) showing gross national debt as a percent of GDP from 1947 to now:

In this graph the gray bars are “official” recessions, but the actual recession issues generally begin before the gray bars and continue for a time after.  The ticks up in the forties and fifties are clearly associated with recessions, and the radical upward kink in about 2007 was---and is---associated with our current massive recession.  Similarly the start of the rise in 1980 is associated with the large (and intentional) recession then.  But revenue collapses or increased social spending from recessions can’t explain the continuation of the rise in debt through that decade and into the next.  And it can’t explain the rising debt as a share of GDP in the first decade of this century.  Those were both pure policy change, not war or recession.

I’ll add a final graph that may help to see this.  It’s the same data as the graph above, only in this one I’m showing the change in debt as a share of GDP, the change from one data point to the next in the graph above:

See all the high points in the middle of the gray bars?  Recessions are big factors in the creation of Federal debt.  During recessions revenues fall and costs rise.  

After the recessions this line falls again, and even in this recession, at the very end of the chart, we are already on a declining path.  But I’ve also added a heavy bar across the graph at zero on the vertical axis.  The thing to notice is that most of the line before 1980 is below zero, meaning that we were reducing the debt as a share of GDP.  Most of the line after 1980 is above zero, except for a few years at the end of the nineties. 

That’s what has to be explained, based on a policy change, not on which party happens to hold office at any time.   There are a number of significant policy changes that began around 1980, some before 1980.  But the big one as far as the deficit is concerned, I think, is tax policy.   Kennedy and Reagan both proposed tax reductions, but Kennedy’s was constrained enough that the debt as a share of GDP continued to decline, particularly during times when the economy is proceeding at a healthy pace.  To Kennedy that mattered.  Contrary to the popular image, that is the policy embedded in the basic Keynesian view, and the one Keynes himself prescribed: deficits during recessions to restore sufficient demand to create full employment, but reduced deficits or surpluses in ordinary times. 

 To Reagan and those around him, the tax reduction mattered far more than any other economic result; tax reduction was not a tool of policy, it was policy’s most compelling goal.  And that attitude has solidified to concrete since then, so much so that no deficit reduction package that includes any tax increase at all, even back to the historically low taxes of the 1990s, has any chance of passing.   This mistake has infected both parties, in truth.  Even the Democratic proposals for reducing the deficit are mostly spending cuts these days, and very few revenue increases.  And that, I believe, is a large part of what has gone wrong in the last thirty years: not the party of the person who happens to sit in the Presidency, but the wrong ideas that dominate the political world.  

As Keynes once said---I forget where---"It is ideas, not vested interests, which are dangerous for good or evil."

Sunday, July 15, 2012

Deficits and Samuelson's Moral Confusion

This blog seems to have settled into a once-a-week schedule; maybe it should be renamed the “weekend economist”.  But I hope this is a temporary circumstance.  There is plenty to blog about, but it’s been hard in the last few weeks to do it in the evenings. 

Today I have a particular disincentive: I am having some damned assertive lower back issues, and it hurts to sit here and type.  But no matter.  It’s Sunday, so I feel a responsibility to comment.

And what I want to talk about today is nearly a week old: it is a column by Robert Samuelson from last Monday.  It was abysmal.  It was much worse than abysmal, in fact.  It was so intellectually lazy that it was insulting to the world for the Washington Post to publish it.  I used to have some respect for Samuelson; I thought he was at least trying.  But he made it clear in Monday’s column that he has given up trying for any kind of honesty or clarity; he is relying entirely on wishes and unthinking moral indignation to produce his economic views.

I’m sure you think I’m kidding.  But I’m not.  He tries to blame our current recession, and all of our recent deficits, on John Kennedy’s decision half a century ago, in the beginning days of the 1960’s, to intentionally run a deficit to stimulate the economy.  He presents no facts to back this up, other than a long recital of economic problems that have bugged him over the intervening years, and that, for no clear reason, he wants to blame on Kennedy.  Fortunately, a Washington Post reader named Chris Siple wrote a few days later to point out that deficits throughout the sixties were low, averaging roughly 1% of GDP even after Kennedy’s tax cuts.  He  also pointed out that deficits as a fraction of GDP began to rise not in the sixties, or even in the seventies, but in the eighties after the Reagan tax cuts, and averaged 4% of GDP during that decade.  They fell again over the nineties, largely under Bill Clinton, and the nineties ended with budget surpluses, and then deficits rose again to 4% to 5% of GDP under Bush after the Bush tax cuts.  And these were deficits during the economic good years!

Samuelson blames the inflation of the seventies on Kennedy’s early sixties tax cut, ignoring much more proximate possible causes, such as a major war in Vietnam that we failed to fully finance, and a 10-fold growth in the cost of a barrel of oil over the course of the seventies (from $3.60 per barrel in 1970 to $36 per barrel in 1980)---a modern equivalent would be an increase from the current price of about $85 per barrel to a cost in 2022 of $850 per barrel.  Frankly, I doubt if the current economy, with current economic policies, would fare nearly as well as we did through the 1970s if oil prices were to rise at anything like that rate. Think about it.  We completely panic when oil prices break $100 a barrel.

Samuelson blames the recession of the early 1980’s on the Kennedy tax cuts twenty years earlier, ignoring the role played by Paul Volcker as Chairman of the Federal Reserve in intentionally creating that recession by very tight money policies in order to cut short an emerging culture of inflationary expectations; and he ignores the role that Volcker and the Fed played in releasing the money supply a few years later, creating the “morning again in America” recovery, which, in contrast to our current recession, was nearly instant when the Fed released the brakes. 

Samuelson blames the current policy paralysis on Kennedy’s tax cuts 50 years ago, claiming that  “The careless resort to deficits in the past has made them harder to use in the present, when the justification is stronger”.  It's an easy, tempting assertion.  But even if that were true, the deficits that produced our current large debt were created by tax cuts under Ronald Reagan and continued under the first Bush presidency, were resolved in the 1990s, and then were created again in the first decade of this century by renewed tax cuts under a new President Bush.  In all cases, the deficits were the result of deliberate policy decisions in the decade they happened, not some long delayed impact of a distant historic event.

Samuelson blames a hypothetical change in American sentiment toward deficits on the Kennedy tax cuts, saying that   “Until the 1960s, Americans generally believed in low inflation and balanced budgets.”  But the truth is that Americans have often run deficits to fund major efforts---usually wars.  After the Revolutionary War the federal debt ended up as about 35% of GDP.  After the Civil War, the U.S. debt was again at 33% of GDP.  We ran substantial deficits to finance our participation in World War I, and again throughout the nineteen-thirties while trying to recover from the great depression, and we ran enormous deficits in the nineteen-forties to finance our participation in the Second World War.  At the end of that war the U.S. public debt was over 120% of GDP, far higher than it is now.  Over the next thirty five years or so the debt as a fraction of GDP slowly shrank, not because the U.S. stopped running deficits---we ran deficits throughout that period, with only rare exceptions---but because the GDP grew enough to swamp any additions to debt our continuing deficits created.  The debt shrank as a share of GDP before the Kennedy tax cuts from the end of the war, and after the Kennedy tax cuts throughout the sixties, and throughout the seventies; enacting Kennedy’s tax cuts did not alter that trajectory by more than a hair.  By the end of the seventies federal debt was down to about 30% of GDP.  The truth is that sentiment about deficits didn’t change much from the fifties to the sixties; indeed, it did not seriously change until the trauma of the oil embargo and the stagflation of the seventies, and did not publicly change until Reagan declared that “the Government is the problem”, David Stockman declared that the Reagan administration’s goal was to “starve the beast” (meaning the federal government), and Grover Norquist declared that he wanted to shrink his country’s government enough so that he could “drown it in a bathtub”, all by reducing revenues, and intentionally creating large deficits.  These people did not create deficits from some Keynesian urge to help the economy through stimulus, but in a carefully considered affort to cripple their own government by limiting its capacity for action.  If the exploding deficits of the eighties and of the oughts have created limitations, they have done so because that was their deliberate and publicly stated purpose.  And that, support for the use of deficits to intentionally restrict government action, is the true change in the American attitude toward deficits.

But in spite of the long Stockton/Norquist assault, it is not even true that deficits are economically impossible now.  We don’t want a deficit in excess of GDP growth forever, but there is no good economic reason that we can’t run very substantial deficits in the short run.   We can, and we can do so in the current economic circumstances without risking any great economic calamity in the future, as long as we reduce the deficits when recovery is well established.  At that point, we can reduce the debt-to-GDP ratio the old fashioned way: by allowing nominal GDP growth (real growth plus inflation) to shrink the debt burden over time, as it did from the forties until the eighties.

Samuelson claims that Kennedy’s advisors “contended that deficits weren’t immoral and could be manipulated to boost economic performance”, and that “This destroyed the intellectual and moral props for balanced budgets.”    Wow.  Immoral?  They are a sequence of numbers in the National Income and Product Accounts, not a sin, and for economists they are, or should be, a tool, not a cause.   If they help, then use them.  If they don’t, then don’t use them.  But don’t bias your economic judgments, which should be intellectual and based on data, by turning what should be a study into a moral cause. 

And it is by no means true that we can do nothing to improve the deficit picture: we can raise taxes on the wealthy, not only by raising their tax rates but by eliminating the kinds of tax loopholes like “earned interest”, by treating capital gains and dividends as ordinary income, by extending FICA taxes to 90% of wage earners.  To quell the screams of the outraged at this list, I should point out that every single one of these suggestions except raising the tax rates was proposed in the Simpson-Bowles plan.  But in the short run, we should use the revenues we gain from those tax changes to increase block grants to the states to re-hire the teachers, police, firefighters and others that they have fired over the last few years, to directly fund contracted work on infrastructure in the hardest-hit states, to provide assistance and incentives for banks to lend at low rates to households that are currently underwater or nearly so. 

The abstract numbers in the National Income and Product Accounts can’t be moral or immoral, they are just accounts.  But the impacts of economic policy, and of policy failures, can.   Right now millions of lives are being crippled by lack of opportunity, millions of households are suffering, millions of young people are putting off or abandoning too-expensive college because they have no jobs to pay for it, infrastructure is crumbling, state governments continue to lay of the people we depend on to help, to protect, to teach.  We can end that, all of it.  We should. 

Monday, July 9, 2012

Elegy On An Immoral Employment Report

Let’s look at Friday’s dismal employment report.  It’s the third dismal report in a row.  Unemployment is now stuck above 8%, and it’s been stuck there and higher for so long that even getting down to 8% flat would be a relief; getting under 8% would seem like a great victory.  It’s hard to remember long ago in the olden days, in the 1990s, when 5% to 6% was commonplace, and even 7% would have been seen as crisis.  We’ve been down so long it looks like up to us now.

Which is not only a problem, it’s a travesty, because this wearying economic languor is not that hard to fix, if we only had the wit and determination---and political capacity---to do it.  And since it is a great harm to the world, and since we could fix it if we chose, it is flatly immoral, shameless, base, for us to simply shrug our shoulders and walk away.

This recession is not about an absence of anything real or basic about the economy.  Our working age population didn’t shrink between 2007 and 2008; it grew, and has grown since then too.  Our innate capability has not changed; we still have the training, the education, the skills that we had before the recession started.  Our technology is no worse now than it was in 2000, or 2007.  There are plenty of new products available, and plenty more that are possible, which is evident from the fact that over the years since 2007 the U.S. Patent and Trademark Office has issued many millions of new patents. Our natural resources are still there.  Our energy, our intelligence, are still good; our productive capacity should even be higher now than it was then since new, energetic, well trained young people have joined the labor force.  Even the general level of our infrastructure is not significantly worse now than it was then---it was badly deteriorated then, but that was not the cause of the economic collapse in 2007.  There is no physical or intellectual reason for us to suffer from unemployment this high for this long.  But we are suffering from it, and will continue to suffer from it for a long time, unless we choose to do something about it.  

We are seeing the clash of two great ideological armies in this area, and the pro-austerity side has won outright in Europe, and has done considerable damage in the United States.   If we are going to combat this simmering depression we have to first admit what is wrong.  I say ‘admit’ because in reality everyone knows what is wrong.  It’s not a secret.  It’s not hidden.  And it’s not a matter of Federal overreach, or overspending, or over-regulation, or anything like that: those things may be bad or good for the economy, and it’s legitimate to argue about them, but they also did not significantly change in 2007, and did not cause this recession.   

No.  What caused this recession was a collapse of highly leveraged assets, primarily a collapse of frothy housing prices, and of the value of mortgages and all the toxic assets derived from them, and derived from the derivatives based on them.  The bubble of housing prices burst, and in the wake of that mass cataclysm every part of the economy was wounded.  Every part.  Banks and Wall Street and the financial sector in general, businesses, and also, importantly, households, were wounded, because much of the value of the assets they owned vanished almost overnight.  Something like $50 trillion of wealth was lost worldwide in the first 18 months of this recession.  Levels of debt that households thought were stretched but tolerable in 2007, when the median U.S. household net worth was $126,400 (much of it in retirement accounts and the value of the houses they owned), seemed much less tolerable in 2010 when the median household net worth had dropped to $77,300, and suddenly retirement seemed much more distant and much more meager.  Businesses suffered not only because their assets lost value, but also because households and other businesses reduced spending to restore their balance sheets, to restore the wealth and sense of security they had lost, and so businesses were not sure they could sell what they produced.  

And so we entered a strongly negative cycle: households reduced purchases to regain some sense of financial wellness, and businesses reduced their investment, first to rebuild their damaged balance sheets, but also because confidence in their ability to sell their products in the future was shaken by falling demand.   Households then saw not only a decline in wealth, but also a decline in job security, a decline in wage prospects, and they pulled in their purchases even further.   The only leg left of this three-legged stool was government.  Households and businesses were stuck in a paradox of thrift, so government had to act to break out of it.

And in fact governments everywhere ground into action to save the parts of the economy they really cared about and knew how to save: they saved the banks, and they saved businesses.  I approve of that, of TARP and QE1 and QE2 and all the rest.  The financial sector does provide the funding that makes the rest of the economy work, and if it suddenly disappears much of the business of the economy disappears with it until a new financial system builds itself to fill that need.  And at least some governments went into action to support businesses more directly.  And as a result, both the banks and large businesses have recovered.   Both are once again experiencing robust profits.

But no one has helped to restore the balance sheets of the third leg, of households and very small businesses.  And no one is going to, if the headlines are any indication.  Both here and in Europe, all the proposed solutions involve cranking up the respective central banks---the Fed or the ECB---to further bolster banks, or to drive down interest rates even further.  My response to all of these finance-mesmerized policizers is this: get a freaking clue!  Interest rates are near zero here, we can’t push them any lower than that.  For those who don’t believe in liquidity traps or zero lower bounds, here’s a graph of the federal funds rate since 1990:

See that bit at the end laying there like a dead snake on a lonely desert road?  That’s us flat against the zero lower bound.  We can’t push interest rates any lower than that.  There are a few things the central banks can still do, pushing longer term rates down another small bit, but really, it’s not that clear that an even lower interest rate will push new investments. The Fed has already fired all the ammunitions for its biggest guns; they’re empty.

At the beginning of this long post I said that the problem is not that hard to fix.  What did I have in mind?  Unfortunately, I meant nothing radical, and nothing novel.  To get out of this recession, we have to help all the legs of the stool; two legs are not enough.  And since we have already helped banks and businesses, we have to help---well---people.  Households.  And governments who hire people and serve households.  We have to reduce the burden of household debt, and we have to create jobs, and if there is no easy indirect way to do that we need to do it directly through the government.   Yes, we need to spend federal government money to do this.  Yes, that might mean increased deficits in the next year or two.  We need to suck it up for a little while, and just get it done.

But if we are going to have deficits, at least we can insist on smart deficits.  Deficits that result from tax cuts would be limp, at best.  Deficits that resulted from tax cuts for the wealthy would be next to useless.  We need deficits that make investments in the future, to both repair and improve infrastructure, to add new infrastructure, or to support pragmatic research.   And since a complete view of infrastructure includes education and a vibrant, well organized web of first responders, we need to provide grants to the states so that they can re-hire the teachers, firefighter, and police that they have had to fire over the last few years to balance their budgets, as many of them are bound by law to do.  And we need to provide effective incentives for banks to allow existing homeowners, even if they are currently underwater or nearly so, to refinance at the current very low interest rates.  With new jobs and new lower cost mortgages will come both new income and, gradually, improved household finances.  And with new jobs, new income, better financial balance, the third leg of this stool will finally do it’s share to help to support it.   

And if we could do these things the depression would end.  Nothing stops us from doing them except the ornery disconnect of our political parties.  The things I suggested above---and that many, many others have suggested also, including a long list of top economists---are fundamental, supported by both theory and empirical research.   And they are also, for some reason, politically impossible.  The disconnect continues, and the long dismal depression, to our great and historic shame, continues with it.

Sunday, July 1, 2012

Medicaid Expansion and Other Things

First, I’m grateful to be online again after Friday’s storm knocked out our power.  There are many people in my area, near Washington DC, who will not get power back for days.  So I’ll take this opportunity to thank the people out there cutting up trees that have fallen, repairing lines, and helping in general to recover and restore things, all out in record heat…and when I say record, I mean record.  Friday was the hottest June day in the DC area in 142 years of record keeping, breaking last year’s record by 2 degrees.  It was 109 degrees F in Nashville; the heat definitely contributed to the severity of the storm, which was also one of the worst non-hurricane wind events on record in this area, and all along its path.  Winds gusted to 79 MPH in Reston Virginia, 77 in Swan Point MD, 71 at Dulles airport.  I’d make some snarky comment about the global warming deniers, but what’s the point?  This won’t convince them either.

There are several things to comment about, but let’s look at one part of Sarah Kliff’s Wonkblog story in the Washington Post about the Supreme Court’s decision about the Medicaid expansion section of the PPACA (“Obamacare”, or sometimes “ObamaRomneyCare”).  The Court said that the Federal Government can’t penalize states for not participating in the extension of Medicaid in the new law by reducing funds they would get under ordinary Medicare provisions; they, the states, won’t get the additional funding for the new provisions if they don’t participate, but the Feds can’t penalize them any further than that. 

And actually, I don’t want to comment on that decision, or intervene in any individual state’s decision about whether to participate in the new Medicaid extension or not. That’s up to them.  But I do want to comment on one line, because it relates to something that I’ve said here before.  Here’s the main quote:

“There’s one really big incentive to expand Medicaid: a huge sum of federal money.”

Unfortunately this may be the incentive that many state governments recognize.  I say unfortunately because money should not be a prime motivator for government.  For a government money is a tool, not a goal. Governments, again, are not households, and they are not businesses.  Their motivation is not household vacations or transportation to work or saving for retirement, or finding love or shelter for themselves.  Their motivation is not making a profit, creating new products or trimming the workforce.  They are there not to compete with private business or to displace the responsibilities of families, but to provide an environment in which businesses and families can thrive, in which there is fair opportunity for everyone.   Governments do that by providing defense, justice, infrastructure, education, and yes, the wide availability of clean air and water, food, shelter, health care and other basic needs.   Governments use money to do these things, but money is not the purpose of government’s existence or the measure of its success, and it should not be a major motivator for its decisions.

A bit later in the story she comes closer:

“…the Medicaid expansion sounds like a real win: … It would be a big help to local hospitals and doctors, who often get stuck with uninsured patients’ bills. And it is likely to drive down the cost of health care for everyone; studies have found higher rates of uninsurance to be associated with higher costs for everyone else.”

THAT describes something that should motivate government: the general welfare of the citizens it represents.