Tuesday, February 26, 2013

Woodward Blowback

There’s been quite a bit of blog chatter about the Woodward article I cited in my last post.  And the chatter has a point.  Ezra Klein was very polite---Woodward is one of Klein’s colleagues at the Post, after all, and a senior colleague with a historic resume.  Yes, it’s the same Woodward who, with his partner Bernstein, broke the Nixon Watergate story four decades ago.   But Klein respectfully disputed Woodward’s last paragraph, in which he claimed that Obama was “moving the goalposts” by requesting revenue increases in any new budget deal to replace sequester.  Since I cited the Woodward article, I think I should also cite Klein’s response, and support its premise: Obama is not moving any goal posts or changing any part of the dialogue when he asks for new revenue.  It’s what he asked for in 2011 when the sequester was passed, what he asked for before the 2011 debt ceiling debate ever arose, what he asked for during negotiations, and what he has asked for ever since.  A combinations---a “balance”, in his words---of new revenue and expenditure cuts has been his constant theme, and the Republicans’ constant theme has been resistance to any new revenue at all, and those two goal posts have bounded the playing field from the start.  So far no one has moved them.

Klein was far too nice.  Klein’s words:

I don’t agree with my colleague Bob Woodward, who says the Obama administration is ‘moving the goalposts’ when they insist on a sequester replacement that includes revenues. I remember talking to both members of the Obama administration and the Republican leadership in 2011, and everyone was perfectly clear that Democrats were going to pursue tax increases in any sequester replacement, and Republicans were going to oppose tax increases in any sequester replacement…

Think back to July 2011. The problem was simple. Republicans wouldn’t agree to raise the debt ceiling without trillions of dollars in deficit reduction. Democrats wouldn’t agree to trillions of dollars in deficit reduction if it didn’t include significant tax increases. Republicans wouldn’t agree to significant tax increases. The political system was at an impasse, and in a few short days, that impasse would create a global financial crisis.
The sequester was a punt. The point was to give both sides a face-saving way to raise the debt ceiling even though the tax issue was stopping them from agreeing to a deficit deal.”

Klein “doesn’t agree”, emphasis is mine.  

No.  It’s not possible for anyone with a working memory to agree with that paragraph.  It’s completely, absurdly, insanely wrong.  And other writers have not been nearly so restrained.  This is from Timothy Noah in The New Republic, on whether this bad idea was Obama’s:

“That’s true in roughly the same sense that it was Charles Lindbergh’s bad idea eight decades ago to fork over the equivalent in today’s dollars of $840,000 to a German-born carpenter named Bruno Hauptmann. Faulting Obama for inventing the sequester is like faulting Lindbergh for inflating the local price paid for carpentry work in Hopewell, N.J….

Lindbergh drove a harder bargain than Obama did. Hauptmann demanded a current-dollar equivalent of $1.2 million, but he got only $840,000. The House Republicans got $2 trillion in spending cuts, which is what House majority leader Eric Cantor had repeatedly said he wanted, and they avoided the tax increase they didn’t want... Except for having to accept defense cuts in lieu of entitlement cuts, the Republicans got all the ransom they demanded.

On the other hand, Lindbergh’s partial payment to Hauptmann failed, tragically, to save his young son’s life. Obama’s full payment to the Republicans did avert a default on U.S. Treasuries and the onset of a global depression.”

But the real problem is not just that the claim is cross-eyed, through-the-looking-glass wrong, it’s that Woodward has to know that.  No one could have lived through the debt ceiling stress in this town without understanding that the whole sequester concept was a way to avert the immediate crisis created by the Republican House majority without waiting for a final agreement on terms: that was explicit, in fact.  The same deal created a Congressional Supercommittee (remember that?) whose whole job was to find a bargain between the President’s stand that revenues had to be raised and the Republicans insistence that tax rates should decline.  The Supercommittee, of course, failed.   But there was never anything secret about the intent.  Obama made it clear at the time, and Congressional Republicans made it clear that they understood.  Not only that, Obama ran on raising taxes for people with incomes over $250,000 in 2008, and ran on it again in 2012, and both times he won the election.   

Why would Woodward have offered this strange, false history?  Klein, diplomatically, just says he disagrees.  The rest of the blogosphere, those who bothered to write about it, took a sterner stance, and one that I think is closer to the truth: either Woodward has contracted some kind of early dementia, or he is flat out fabricating this idea, knowing it is not true but saying it anyway.  I don’t believe that he has lost his mind.  So I have to go with the alternative view: he has, apparently, joined forces with the Fox News alternative-reality construction team.  

Could anything be sadder than this? 

Sunday, February 24, 2013


Sequester kicks in on Friday, and like everyone else in the Washington DC area I will feel the impact.  It probably won’t hit home immediately even in this town, since government furloughs probably won’t start the instant the sequester is official.   But if sequester remains for a few weeks they will happen.  And all the other short term impacts will happen, too, over the ensuing several months, if nothing is done to reverse the event.  Given the political incentives on each side that seems possible now, even though it seemed unthinkable even a month or two ago. 

The blame for this is tangled.  The original suggestion for a set of automatic budget cuts so unpalatable that it would force the two sides of the great budget debate back to the table, to force the Republicans to accept some revenue increases and the Democrats to accept some entitlement changes, seems to have originated in the White House.  In the Washington Post this morning Bob Woodward informs us that Jack Lew and Rob Nabors, for the White House, first proposed the sequester to Harry Reid on July 27th, 2011.  But they did that because they had no other viable options left.  The debt ceiling “crisis” of 2011 was an immediate threat.  The United States government would have been forced into default within a very short time if no resolution was found that would induce the House Republicans to vote for a debt ceiling increase.  All other proposals had been rejected by one side or the other.   And once this sequester was suggested the Republicans leaped on it with an eager glee, since it is all cuts and no revenue increases.  But Congressional Republicans are also to blame, because they manufactured the debt-ceiling crisis that this sequester diverted; they created it out of thin air, and have created one unnecessary crisis after another since the 2010 election swept the tea party into de facto power in Congress.  (Yes, de facto power: they hold enough power in the House to defeat even proposals from their own Republican leadership, and enough power in the Senate to derail any proposal that has less than 60 solid votes.)  Week after week, month after month, the Republicans in Congress bring this country to the brink of brutal self-mutilation in an effort to gain through threats what they can't achieve through votes.

So the idea came from the White House to divert a budgetary and economic threat that the Congressional Republicans created, and have created again in the months since then, and threaten to create again at the end of the current Continuing Resolution when the authority the Congress has granted to the government to spend money expires, and again shortly after that when a new debt ceiling is reached, meaning that the authority that Congress has granted to the Treasury to borrow money has expired.  Again, and again, and again, in an endless series.  Note that in each case the Congress can, on its own and without any negotiation with the White House, simply extend new authority for each of these fundamental functions of government.  They create crises by refusing to do so, and by creating crises they threaten us all.

But the issue now is not how we got here.  We are here.  So what will the consequences be?  And the answer to that is far more complicated and more interesting than deciding who to blame.  Because I suspect that the immediate impact on average lives will be less than the chatter has implied, at least the chatter in this town (I don’t know whether this is actually a topic of everyday conversation in the rest of the country.)   

Because much of what the government does takes time to show any result.  Much of what the government does is insurance or defense: no one’s life is immediately improved when the government invests in a fire truck, and until a fire breaks out that expense may seem like a waste of money.  Similarly, building a new ship for the Navy may seem like a waste of money until it’s needed to combat pirates off Somalia, or to provide what is called, in defense-speak, HADR (humanitarian assistance and disaster relief) after a Tsunami somewhere along the Pacific rim.  And some of what the government does is investment in progress.  It’s hard to pinpoint the exact time when a reduction in cancer research will be felt, or what event would could be blamed on it.  That kind of long-term investment in R&D is a slow process, producing results a decade or two away.  And a reduction in support for education won’t be felt for a decade either, except by those whose education is immediately disrupted.  That’s one of the reasons that government is called on to make investments like that: there is no immediate profit in them, so private markets, private investors with finite lives and time horizons measured in years, will systematically under-invest in them from the view of a nation, whose goals span many generations, and whose time horizons may be measured in decades or centuries.

There will be short term inconveniences if the sequester lasts more than a few weeks: FAA furloughs and reductions will make air travel a bit more of a hassle, government offices (ie, for unemployment applications, Social Security issues, and so on) will have longer lines, and so on.  There will be fairly quick reductions of support for education and public safety.  The Center for American Progress has released a report showing the immediate funding losses to the states, and it’s worth a read (download the full PDF, and look through it---it's only 16 pages including all the tables.)  And if the sequester lasts more than a few months the economic cost will be substantial: a renewed recession is a real possibility, and we have not yet come close to recovering from the last one.

But for the average person in an average day, going to the job he or she still has and going home, cooking dinner and watching TV, caring for children, there will be no immediate cataclysm they can point to and blame on sequester.  So I expect the usual jokes about how the government shut down and no one noticed.  But those jokes are ignorant, and dangerous.  The loss is real, and some of it can’t be quickly recovered.   Some can’t be recovered at all.    

Thursday, February 14, 2013

Watch this. Really.

My brother in law sent me this link.  When it comes to the study of history I take a back seat to my wife, and to my sister, and to a lot of people...but this is history I understand.  I almost...almost...remember it.  I've heard the stories first hand.

Oh, right, economics...um...well, look at the prices and incomes.  And fashions.  Whatever.  But watch this.  Compare it to now.  Compare the transition from hopelessness to optimism, from stagnation to growth.  

Plus, the music is awesome.

Friday, February 8, 2013

A comment on the CBO Budget and Economic Outlook paper

It’s taken me a few days to graze through the new CBO Budget and Economic Outlook that came out last Tuesday.  I was a bit disappointed, because the budget impact of extending the Bush tax cuts was big, and I had discounted that a bit in my last post.   So the budget forecast was worse than I had hoped---but still, no great cataclysms were forecast for the next decade.  On the contrary, the forecast is that the Treasury debt held by the public will decline a bit as a share of GDP after 2015 (and grow again after 2018, but forecasts that far out are, shall we say, subject to revision as the date approaches.)   The forecast for the deficit this year is $845 billion, the first deficit under a trillion dollars since the plunge into recession---the first since the final Bush budget---and for declining budget deficits for the next few years as the economy slowly, painfully recovers.  The deficit will be 2.4% of GDP in 2015, according to their figures and will remain under 3% until 2019.  So nothing in the report requires an immediate panic, and nothing requires that we decimate our economy in a frantic effort to balance the budget right now.  If anything, in my opinion and the opinion of many others, good investments (ie, in new infrastructure and repair of existing infrastructure) could increase growth toward the end of the decade and for decades after that, and could therefore reduce the debt as a share of GDP.

Here are links to comments on the new Outlook document by Paul Krugman and Jared Bernstein.  Krugman presents a pretty lucid graph from the report showing that the big factor in rising deficits at the end of the decade is not anything we are likely to be able to fix between now and then no matter how much we cut budgets or increase taxes: it is increasing interest rates on the government debt we already have.  Health care programs are part of it too, but Social Security is just not a factor, and other programs are assumed (under current law) to decline. 

But Bernstein noticed the thing that bothered me the most in the report.  I left a comment on his blog citing these two quotes from the report.  From the first chapter, on page 7:

“Because federal borrowing generally reduces national saving, the stock of assets, such as equipment and structures, will be smaller and aggregate wages will be less than if the debt were lower…Moreover, such a large debt poses an increased risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.”

And from the second chapter, on page 47:

“CBO estimates that greater federal borrowing under current law…would reduce the size of the capital stock. That reduction would occur because, by CBO estimates, federal borrowing would take up a larger share of the saving potentially available for private investment.”

The last line in the first quote seems to be a straightforward statement of belief in the Confidence Fairy , that magical creature that has done such a great job of restoring prosperity in Europe in the last few years.  And federal borrowing reduces national saving?  It certainly does not reduce private savings.  Here’s a chart of net private and government savings as recorded in the National Income and Product Accounts from the Bureau of Economic Analysis database:

Notice how the two lines seem to almost mirror each other?  Increases in government deficits (or, to say the same thing, decreases in government surpluses) seem to be associated in time, at least, with increases, not decreases, in private savings.  Which, as I’ve pointed out before, is what you would expect from the accounting equations.  

On the issue raised in the second quote, Bernstein said this:

The usual argument here—the thinking embedded in the CBO quote above—has to do with public borrowing crowding out private borrowing and thus leading to higher interest rates for scarce investment capital.  It’s actually hard to find convincing evidence for that relationship even in good times, but it’s impossible to find it right now, for obvious reasons.  In recessions, deficit spending goes up while weak demand and Fed Reserve actions push interest rates down.”

Now, these quotes that seem to endorse crowding-out and the Confidence Fairy are only a couple of lines in a long report, and the report as a whole is---well, it’s the Congressional Budget Office report on the Budget and Economic Outlook.  It’s the standard against which other forecasts will be judged, and which every other forecast will cite, at least until their next revision comes out in August.  It’s the CBO’s job to be non-ideological, non-partisan, plain economists doing their best to provide fair analysis, and they do it very very well, which is why both Republicans and Democrats cite them endlessly in political argument.     Still, these side comments in the report mean something.  Maybe they mean that even economists at the CBO aren’t immune to influence from all the Washington insiders they know, from the important people who say these groundless things about Confidence Fairies and crowding out as though they were certainties, and who never question them.  

Sunday, February 3, 2013

Forecast: continued occasional showers of other shoes.

For some reason it’s been hard to raise enough energy to blog for a while.  I think it’s just waiting for the next shoe to drop, the next toxic budget confrontation to play its course.  We have sequester and another debt ceiling debate to go through in the next couple of months, even though sequester, according to pretty much every economic analyst on earth, would create a renewed recession in the United Sates, and failing to raise the debt limit to pay the bills Congress has already created would amount to default, and it would create both national and international financial chaos. Either one would risk catastrophic economic retractions all over the world, and a deep, intractable recession here. Whether we like it or not, the United States Treasury notes and bonds are woven into the deepest fabric of international finance; they are sought out because they are (so far) regarded as the single safest investment available in the world. If the United States chose to default on those bonds it would be an astonishing, and crippling, act of national self-mutilation. And yet there seem to be people in Congress with the power to perform that mutilation who seem blithely unconcerned about the potential results.  But even though this is the thing that most needs saying I’ve already said it many times, and so have many economists with much bigger voices than mine. 

But there are other shoes that will drop soon: at one o’clock Eastern time next Tuesday, for example, the CBO is supposed to publish its January 2013 edition of its Budget and Economic Outlook, which is produced in January and August of each year.  I have no inside information about what’s in it, not even rumors, not even internet rumors.  But if I had to guess (and what else is there to do until it gets here?) I would guess that it will show a much better expected budget outlook than it has for the last few years, both short term and long term.  Short term will improve because the economy is still improving, in spite of last quarter’s small contraction, and because of all the budget cuts and revenue increases that have already been enacted.  And long term, at least as a potential vision of the future, because health care costs have been rising at a much slower pace over the last couple of years.  We can’t know yet whether this is an anomaly or a trend, but the budget outlook should at least mention it, and forecast what would happen if it continued…and what would happen would be a much, much better forecast for Medicare and Medicaid.

So last quarter’s contraction, which was largely due to cuts in the military budget (really!  Look it up!), should have some instructive impact on Capitol Hill, and the CBO report might give the Tea Party caucuses in the House and the Senate some moments of self-reflection.  Maybe it will help them to back away from the sequestrations, the fiscal cliffs, the debt ceiling confrontations and all the other ways these ignorant ideological armies clash in the night at such great cost to their country.

I wish I could say I was hopeful.