"The folly of deficit fearmongers"

Dean Baker @ The Guardian:

The news that the UK, with negative growth in the fourth quarter of 2012, faces the prospect of a triple-dip recession, should be the final blow to the intellectual credibility of deficit hawks. You just can't get more wrong than this flat-earth bunch of economic policy-makers.

They're pretty much batting zero. They failed to foresee the collapse of housing bubbles in the US and Europe and its consequent downturn. They grossly underestimated its severity after it hit. And their policy prescription of austerity has been shown to be wrong everywhere that applied it: in the US, the eurozone and, especially, the UK.

By all rights, these folks should be laughed out of town. They should be retrained for a job more suited to their skill set – preferably, something that doesn't involve numbers, or people.

But that's not what is happening. The people who got it all wrong are still calling the shots in the UK, the IMF, the European Central Bank, and Washington. The idea that job security would have any relationship to performance is completely alien in the world of economic policy. With few exceptions, these people enjoy a level of job security that would make even the most powerful unions green with envy.

Of course, the cynical among us might note that the highest earners have done just fine. High unemployment rates undermine workers' bargaining power, which ensures that almost all gains from economic growth go to those at the top. In the US, the profit share of national income is near its post-second world war high.

Even if this upward redistribution was not a deliberate goal, it certainly affects the urgency with which policy-makers attend to depressed economies and high unemployment. If the stock markets were tumbling, as they were in 2008-09, there would likely be a lot more attention devoted to fixing the economy. (And if you think a plunging stock market has to mean that the economy is going down, you need to study more economics.)

Instead of focusing on glaring issues, like how the economy is down 9m jobs from its trend growth path, or how the typical worker's real wage has risen by just 2% over the last decade, the policy people in Washington are debating how to reduce the deficit. This makes about as much sense as debating the right color to paint the White House kitchen.

Joe Sarborough out of his "stunningly superficial" depth

Joe Scarborough, once again, proves that sidekick Mika's dad, Zbigniew Brzezinski, was spot on with his observation that the Morning Joe host was "stunningly superficial."

 Greg Sargent @ Plumline:

Joe Scarborough and Paul Krugman are having a very interesting argument that offers a useful peek into Beltway deficit mania. It’s a reminder that even as the deficit as a share of GDP has begun to come down, and even as President Obama is trying to refocus the conversation (to some degree) on a more progressive second term agenda, the Beltway Deficit Feedback Loop is alive and well.

To summarize, Krugman went on Morning Joe the other day and reiterated his view that the deficit is mostly a function of the bad economy, and that it isn’t the long term menace to American civilization that the deficit hysterics — who are really motivated by a desire to shrink government — would have you believe. Scarborough responded with this:

Paul Krugman vs. the world

Of course, Krugman isn’t really isolated in this view. Joe Weisenthal responded this morning to Scarborough with a list of 10 prominent economists and public officials who largely agree with Krugman that deficit hysteria is misguided and overblown. As Weisenthal puts it: “there are plenty of economists and economically-literate minds who think that, to varying degrees, the deficit is not what we should be worrying about.”

"America's fiscal policy is not in crisis"

Martin Wolfe @ Financial Times:

The US confronts huge challenges, at home and abroad. Its fiscal position is not one of them. This is a highly controversial statement. If one judged by the debate in Washington, one would conclude that the federal government is close to bankruptcy. This view is false.

Yes, the US does confront fiscal challenges in the long term. But these are largely caused by the soaring costs of its inefficient healthcare. Yes, the US is engaged in a fierce debate on fiscal policy. But this is due to philosophical disputes over the role of the state. Yes, the US has been running large fiscal deficits in the short run. But these are a result of the financial crisis.

Start, then, with the medium-term prospects. In a widely cited piece, published this month by the Center on Budget and Policy Priorities, Richard Kogan argues that “policymakers can stabilize the public debt over the coming decade ... with $1.4tn in additional deficit savings”. The explanation for this improved medium-term outlook is a combination of economic recovery and policy measures, particularly the Budget Control Act of August 2011 and the American Taxpayer Relief Act enacted this month. Moreover, because of savings on interest payments, policy makers could achieve this amount of deficit reduction with just $1.2tn in further savings. That would be just 0.6 per cent of prospective gross domestic product, even on the pessimistic assumption that nominal GDP grows at an annual rate of just 4 per cent.

Under these assumptions, the ratio of debt to GDP would stabilise at about 73 per cent (see chart). Would this be unbearable? No. At current real interest rates, the cost would be zero. Even if real rates of interest were to rise to, say, 3 per cent, the fiscal cost, in real terms, would be a mere 2 per cent of GDP. That is perfectly manageable.

"Widening inequality"

Robert Reich:

As President Obama said in his inaugural address last week, America “cannot succeed when a shrinking few do very well and a growing many barely make it.”

Yet that continues to be the direction we’re heading in. 

 A newly-released analysis by the Economic Policy Institute shows that the super-rich have done well in the economic recovery while almost everyone else has done badly. The top 1 percent of earners’ real wages grew 8.2 percent from 2009 to 2011, yet the real annual wages of Americans in the bottom 90 percent have continued to decline in the recovery, eroding by 1.2 percent between 2009 and 2011. 

In other words, we’re back to the widening inequality we had before the debt bubble burst in 2008 and the economy crashed...

An insightful interview with Larry Summers

Not my favorite, but he's making good points.

"Fakers..."

Paul Krugman @ NYTs:

(P)rominent Republicans have begun acknowledging that their party needs to improve its image. But here’s the thing: Their proposals for a makeover all involve changing the sales pitch rather than the product. When it comes to substance, the G.O.P. is more committed than ever to policies that take from most Americans and give to a wealthy handful.

Consider, as a case in point, how a widely reported recent speech by Bobby Jindal the governor of Louisiana, compares with his actual policies.

Read the rest HERE.

"The March of the Oligarchs"

Nick Cohen @ The Guardian:

In March last year, Emmanuel Saez, a sober economist at the University of California, published a sensational analysis that ought to change the way you see the world.

Saez had set himself the apparently mundane task of collecting data on how the super-rich had fared after the crash of 2007/8. If you had asked commentators around at the time, we would have said that the great recession would hammer the plutocracy hardest. After the crash of 1929, former titans of finance died in poverty. The Dow did not reach its 1929 levels again until 1954. Dealing in funny money became disreputable and Wall Street became a backwater until the Reagan/Thatcher revolution revived casino capitalism.

For a while, it seemed as if history had repeated itself. Average real income for America's top 1% fell by almost a third. The incomes of the remaining 99% fell sharply too – by 11.6%. But, as was traditional, those with the most to lose took the biggest hit.

Then came the American recovery of 2010. It showed that the past was no longer a reliable guide to the future. The incomes of the top 1% grew by 11.6% while the incomes of the bottom 99% rose by a pathetic 0.2%. The rich captured nearly all the income growth going in America and this when the country was led by Barack Obama...whom idiot conservatives denounce as some kind of socialist.

To put it another way, far from being an end of an era, the Great Recession was a temporary blip in the global march of the oligarchs...

"Deficit Hawks Down"

Professor Krugman: 

(Deficit Hawks) have cried wolf too many times. They’ve spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.

But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit. 

 ...(B)oth deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which, therefore, led both to low tax receipts and to a rise in unemployment benefits and other government expenses. It should have been obvious that the deficit would come down as the economy recovered. But this point was hard to get across until deficit reduction started appearing in the data. 

Now it has — and reasonable forecasts, like those of Jan Hatzius of Goldman Sachs, suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015. 

And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression...

Read Krugman's entire piece HERE @NYTs.

"Why Government Spending Is Not Out of Control"

Authentically conservative and intellectually honest policy analyst Bruce Bartlett @ The Fiscal Times:

It is a standard talking point of Republicans and deficit hawks of all political stripes that federal spending is out of control; that major surgery is needed, especially on entitlement programs such as Social Security and Medicare, to get the budget on a sustainable course.

In fact, our long-term deficit situation is not nearly as severe as even many budget experts believe. The problem is that they are looking at recent history and near-term projections that are overly impacted by one-time factors related to the economic crisis and massive Republican tax cuts that lowered revenues far below normal.
Taking a longer-term view, such as that in a recent Treasury Department report, shows that our longer-term fiscal problem is in fact quite manageable.

As the chart below illustrates, federal spending ballooned in fiscal year 2009 mainly because of what economists call “automatic stabilizers” – programs already in law such as unemployment compensation that rises whenever a recession occurs. Spending rose from 20.7 percent of the gross domestic product in fiscal year 2008 to 25 percent in 2009.



 
Republicans would have us believe that all of this resulted from Barack Obama’s policies, but this is simply a partisan lie. Fiscal year 2009 actually began on September 1, 2008, and was based on the budget that George W. Bush submitted in January 2008.

The 2nd Inaugural Address

President Obama, today:


Vice President Biden, Mr. Chief Justice, Members of the United States Congress, distinguished guests, and fellow citizens:

Each time we gather to inaugurate a president, we bear witness to the enduring strength of our Constitution. We affirm the promise of our democracy. We recall that what binds this nation together is not the colors of our skin or the tenets of our faith or the origins of our names. What makes us exceptional — what makes us American — is our allegiance to an idea, articulated in a declaration made more than two centuries ago:

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the pursuit of Happiness."

Today we continue a never-ending journey, to bridge the meaning of those words with the realities of our time. For history tells us that while these truths may be self-evident, they have never been self-executing; that while freedom is a gift from God, it must be secured by His people here on Earth. The patriots of 1776 did not fight to replace the tyranny of a king with the privileges of a few or the rule of a mob. They gave to us a Republic, a government of, and by, and for the people, entrusting each generation to keep safe our founding creed.

For more than two hundred years, we have.

Through blood drawn by lash and blood drawn by sword, we learned that no union founded on the principles of liberty and equality could survive half-slave and half-free. We made ourselves anew, and vowed to move forward together.

Together, we determined that a modern economy requires railroads and highways to speed travel and commerce; schools and colleges to train our workers.

Together, we discovered that a free market only thrives when there are rules to ensure competition and fair play.

Together, we resolved that a great nation must care for the vulnerable, and protect its people from life's worst hazards and misfortune.

Through it all, we have never relinquished our skepticism of central authority, nor have we succumbed to the fiction that all society's ills can be cured through government alone. Our celebration of initiative and enterprise; our insistence on hard work and personal responsibility, are constants in our character.

But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today's world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we'll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together, as one nation, and one people.

"Inequality is squelching our recovery"

Joseph E. Stiglitz, former Chair of the Council of Economic Advisors and chief economist for the World Bank, @ NYT:

The re-election of President Obama was like a Rorschach test, subject to many interpretations. In this election, each side debated issues that deeply worry me: the long malaise into which the economy seems to be settling, and the growing divide between the 1 percent and the rest - an inequality not only of outcomes but also of opportunity. To me, these problems are two sides of the same coin: with inequality at its highest level since before the Depression, a robust recovery will be difficult in the short term, and the American dream - a good life in exchange for hard work - is slowly dying.

Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues - as it did in a special feature in October - that the magnitude and nature of the country's inequality represent a serious threat to America, we should know that something has gone horribly wrong. And yet, after four decades of widening inequality and the greatest economic downturn since the Depression, we haven't done anything about it.

There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle - who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators - have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable - it was reliant on the bottom 80 percent consuming about 110 percent of their income.

Our Mr. Brooks descends into pathology

 Jon Chait @ NYMag:

Moderate Republicanism is a tendency that increasingly defies ideological analysis and instead requires psychological analysis. The psychological mechanism is fairly obvious. The radicalization of the GOP has placed unbearable strain on those few moderates torn between their positions and their attachment to party. Many moderate conservatives have simply broken off from the party, at least in its current incarnation, and are hoping or working to build a sane alternative. Those who remain must escape into progressively more baroque fantasies.

The prevalent expression of this psychological pain is the belief that President Obama is largely or entirely responsible for Republican extremism. It’s a bizarre but understandable way to reconcile conflicting emotions — somewhat akin to blaming your husband’s infidelity entirely on his mistress. In this case, moderate Republicans believe that Obama’s tactic of taking sensible positions that moderate Republicans agree with is cruel and unfair, because it exposes the extremism that dominates the party, not to mention the powerlessness of the moderates within it. Michael Gerson recently expressed this bizarre view, and the pathology is also on vivid display in David Brooks’s column today.

"The dwindling deficit"

Professor Krugman:

It’s hard to turn on your TV or read an editorial page these days without encountering someone declaring, with an air of great seriousness, that excessive spending and the resulting budget deficit is our biggest problem. Such declarations are rarely accompanied by any argument about why we should believe this; it’s supposed to be part of what everyone knows. 

This is, however, a case in which what everyone knows just ain’t so. The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should. 

It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers: Revenue will rise while some categories of spending, such as unemployment benefits, will fall. Indeed, that’s already happening. (And similar things are happening at the state and local levels — for example, California appears to be back in budget surplus.) 

Still, will economic recovery be enough to stabilize the fiscal outlook? The answer is, pretty much. 

"A Modest Proposal for (Treasury Secretary nominee) Jacob Lew: Acknowledge Three Simple Facts about U.S. Fiscal Reality"

Robert Pollin @ "Back to Full Employment":

It is clear that debate over the fiscal deficit and austerity will dominate Lew’s confirmation hearings and at least his initial period in office, if he ends up getting confirmed. But without pursuing any deep explorations about who should be taxed more or less, or whether 47 percent of U.S. citizens are indeed freeloaders, I would just propose that Lew be willing to recognize three sets of very simple, irrefutable facts about the current U.S. fiscal condition. Here they are:

Fact #1: The U.S. government is not facing a fiscal crisis.

In any common sense meaning of the term “fiscal crisis,” we would be referring to the government’s inability to make its forthcoming payments to its creditors. By that common sense definition, the U.S. federal government is in just about the best shape it has ever been. Figure 1 below tells the story.


According to the most recent data from the third quarter of 2012 (which we term “2012.3”), the federal government spent 7.7 percent of its total expenditures on interest to its creditors. As the figure shows, that figure is less than half of the average figure under the full 12 years of Republican Presidents Reagan and Bush, when the government paid, on average, 16.8 percent of the total budget to cover interest payments. Right now, as we see, government interest payments are at near historic lows, not highs. As Treasury Secretary-designate, Lew needs to just state this obvious, and highly relevant point. To my knowledge, it has been heretofore completely left out of the insider-D.C. fiscal cliff debates, by Lew, Obama, and Geithner, to say nothing of the Republicans.

Fact #2: Interest rates on government bonds are at historic lows.

"No!" to Chained CPI cut to Social Security benefits

New York Times editorial:

At the end of last year, just shy of the 11th hour in the fiscal cliff negotiations, President Obama made an offer that included a Republican-backed idea to cut spending by lowering the cost-of-living adjustment for Social Security benefits. The move shocked Congressional Democrats and dismayed Mr. Obama’s liberal base.

The offer, however, was rejected by House Republicans who could not stomach the tax increases and other concessions that Mr. Obama demanded as part of the deal. The talks moved on, and when all was said and done, Republicans did not get the lower cost-of-living adjustments (known as COLAs) and Mr. Obama did not get the concessions he had sought. 

But that is not the end of the story. As the next round of deficit reduction talks gets under way, the administration seems determined to include the COLA cut in any new package of spending reductions. Rather than using the issue as a bargaining ploy, the administration appears to have embraced it as a worthy end in itself. 

Is it? In a word, no. 

That is not to say that Social Security should be off the table. There are reforms that are eminently sensible, if only the political will could be found to enact them. But reducing the COLA is not a sound idea now and may never be. 

At issue is the way inflation is calculated. The administration’s offer in the fiscal cliff talks — and the approach long advocated by Republicans — calls for using a new measure of inflation, called the “chained” Consumer Price Index, to calculate the COLA.

Two Sentences That Should Be Part of All Discussion of the Debt Ceiling

James Fallows @The Atlantic:

Here they are:

1) Raising the debt ceiling does not authorize one single penny in additional public spending.

2) For Congress to "decide whether" to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to "decide whether" to pay a credit-card bill for goods it has already bought.

That is all.

Defense spending

Brad Plumer @ Wonkblog:

1) The United States spent 20 percent of the federal budget on defense in 2011. 



All told, the U.S. government spent about $718 billion on defense and international security assistance in 2011 — more than it spent on Medicare. That includes all of the Pentagon’s underlying costs as well as the price tag for the wars in Iraq and Afghanistan, which came to $159 billion in 2011. It also includes arms transfers to foreign governments.

Krugman talks to Moyers

Austerity Bomb?

Brad Plumer @ WaPo Wonkblog:

For years now, economists like Paul Krugman have been criticizing countries in Europe for engaging in too much austerity during the downturn — that is, enacting tax increases and spending cuts while their economies were still weak.

But after this week’s fiscal cliff deal, the United States is now on pace to engage in about as much fiscal consolidation in 2013 as many European nations have been doing in recent years — and more than countries like Britain and Spain.

A back-of-the-envelope calculation suggests Congress has enacted around $336 billion in tax hikes and spending cuts for the coming year, an austerity package whose total size comes to about 2.1 percent of GDP. (That’s merely the size of the cuts and taxes; it’s not necessarily the effect on growth.)

This includes the expiration of the payroll tax cut, which will raise about $125 billion this year. It includes $68 billion in scheduled cuts to discretionary spending from the 2011 Budget Control Act. It includes $24 billion in new Obamacare taxes and $27 billion in new high-income taxes. And it includes about $92 billion from the now-delayed sequester cuts — assuming that these either take effect or are swapped with other cuts.

Of course, the United States would be facing much, much more austerity if Congress had done nothing about the fiscal cliff this week and all the Bush tax cuts had expired. But even after the deal, we’ve still got the payroll tax increase and an array of spending cuts coming down the pike. Those aren’t minor. And economists expect them to exert some drag on the economy, even if it’s unclear exactly how much.

So how does the sheer scale of the U.S. austerity program for 2013 compare to what European countries have been doing over the past few years? We can get an approximate sense by looking at this paper from the European Trade Union Institute on the size of Europe’s various fiscal consolidation programs. A few comparisons:

Data: European Trade Union Institute, Chart: Brad Plumer

Fair warning: These comparisons are far from perfect—finding a common baseline is tricky, and not all austerity measures have an equivalent effect on growth. But a few broad points stick out.

"The Endless Cliff"

Robert Kuttner @ American Prospect:

Beyond yesterday’s narrow escape from the dreaded fiscal cliff are … more cliffs. President Obama and Congress averted one fiscal calamity of tax-hikes-for-all only to face even steeper cliffs—the sequester, the debt ceiling, the Social Security shortfall, ad infinitum. It is a fiscal Wizard of Oz, an extended odyssey with perils on every side.

The question progressives are asking themselves this morning is whether President Obama settled for too little in the fiscal mini-deal, having traded away his best single piece of leverage—the automatic tax increase on all Americans scheduled to hit today unless Congress acted.

Some, like our colleague Robert Reich, have argued that it would have been better to “go over the cliff”—let tax hikes briefly take effect on everyone, thus increasing pressure on Republicans—rather than to make this agreement.

Mercifully, Obama backed off any “grand bargain.” The deal was a defeat not only for the Republicans but for the Fix the Debt corporate gang. It spared the economy cuts in Social Security or Medicare (for now).

But on the other side of the ledger, it included no agreement to raise the debt ceiling. The impact of the automatic “sequester” of $120 billion in other spending cuts was postponed only 60 days. These issues will now have to be negotiated separately.