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.

Cowards, Liars

 Ezra Klein:

This is pretty much the Republican Party in one tweet:

Today’s Republican Party thinks the key problem America faces is out-of-control entitlement spending. But cutting entitlement spending is unpopular and the GOP’s coalition relies heavily on seniors. And so they don’t want to propose entitlement cuts. If possible, they’d even like to attack President Obama for proposing entitlement cuts. But they also want to see entitlements cut and will refuse to solve the fiscal cliff or raise the debt ceiling unless there are entitlement cuts.

You can see why these negotiations aren’t going well.

"The Grand Scam"

Paul Krugman @ NYT:

... (T)he current budget deficit is overwhelmingly the result of the depressed economy, and it’s not clear that we have a structural budget problem at all, let alone the fundamental mismatch between what we want and what we’re willing to pay for that people like to claim exists. Here’s another chart, showing the primary federal balance — that is, not counting interest payments — since 1972 (data from CBO):

It’s hard to look at that chart and not conclude that the slump is the principal cause of the deficit. (Evan) Soltas suggests, based on a more careful statistical analysis, that the structural budget deficit, including interest, is 2 percent of GDP or less. He also makes an interesting observation: the deficit has become more cyclically sensitive over time thanks to rising inequality. How so? More revenue comes from the wealthy — even though their tax rates have fallen — and their income is more volatile than that of ordinary workers.

So, the whole deficit panic is fundamentally misplaced. And it’s especially galling if you look at what many of the same people now opining about the evils of deficits said back when we had a surplus. Remember, George W. Bush campaigned on the basis that the surplus of the late Clinton years meant that we needed to cut taxes — and Alan Greenspan provided crucial support, telling Congress that the biggest danger we faced was that we might pay off our debt too fast. Now Greenspan is helping groups like Fix the Debt.

And as Duncan Black points out, the Bush experience tells us something important about fiscal policy: namely, that when Democrats get obsessed with deficit reduction, all they do is provide a pot of money that Republicans will squander on more tax breaks for the wealthy as soon as they get a chance. Suppose Romney had won; do you have even a bit of doubt that all the supposed deficit hawks of the GOP would suddenly have discovered that unfunded tax cuts and military spending are perfectly fine?

The point is that the whole focus of budget discussion is based on a combination of bad economics and bad (and fundamentally dishonest) politics. We’re looking not so much at a Grand Bargain as at a Great Scam.

More HERE from Joe Weisenthal @ Business Insider on the fact that the path to deficit reduction isn't imposing austerity "pain" but addressing unemployment. Excellent article with lots of data, worth reading in full.

Both Democrats and Republicans want to raise taxes...

Kevin Drum @ Mother Jones (w/ link to Ezra Klein):

Both Democrats and Republicans want to raise taxes on certain people. The main difference is which people they want to raise taxes on:

Democrats do want to raise taxes on families making more than $250,000. You sometimes hear Democrats say they just want to "restore the Clinton-era rates" for these folks, but that's misleading. In addition to letting the Bush tax cuts expire, the White House wants to add about $700 billion in further tax increases on these taxpayers. And that's in addition to the high-income taxes passed in the health-care law. Under Obama's plan, taxes on the richest Americans would be much higher than under the Clinton tax code.

So yes, Democrats want to raise some taxes. But so do Republicans. They want to let the payroll tax cut and the various stimulus tax credits (notably the expansion of the Earned Income Tax Credit and the Child Tax Credit) expire. Those are the tax cuts that primarily help poor and middle-class Americans. In fact, 87.8 percent of the payroll tax cut's benefits go to taxpayers making less than $200,000 and 99.9 percent of the stimulus tax credits' benefits go to taxpayers making less than $200,000.

But you want numbers, don't you? How much do Democrats want to raise taxes on the rich? How much do Republicans want to raise taxes on the poor? This is a little tricky... I don't have numbers for the entirety of Obama's most recent proposal. However, the Tax Policy Center gives us a good rundown of the major points of contention in the chart below, which I've compressed and annotated. Bottom line: allowing the payroll tax cuts and the stimulus tax cuts to expire will raise taxes on the poorest Americans by nearly 3 points. Allowing the high-end Bush tax cuts to expire will raise taxes on the richest Americans by nearly 4 points. Take your pick.

Exception to the rule - "A Conservative Case for the Welfare State"

Authentically conservative and eminently sensible policy wonk Bruce Bartlett - a former advisor to Reagan, GHW Bush,  Jack Kemp and Ron Paul - combats The GOP Crazy:

At the root of much of the dispute between Democrats and Republicans over the so-called fiscal cliff is a deep disagreement over the welfare state. Republicans continue to fight a long-running war against Social Security, Medicare, Medicaid and many other social-welfare programs that most Americans support overwhelmingly and oppose cutting.

The bottom line on the central spending issue facing the US

Republicans in Congress opposed the New Deal and the Great Society, but Republican presidents from Dwight D. Eisenhower through George H.W. Bush accepted the legitimacy of the welfare state and sought to manage it properly and fund it adequately. When Republicans regained control of Congress in 1994 they nevertheless sought to repeal the New Deal and Great Society programs they had always opposed.

Energized by their success in abolishing the principal federal welfare program, Aid to Families With Dependent Children, in 1996, Republicans tried to abolish Social Security as well, through partial privatization during the George W. Bush administration, and they more recently have attempted to change Medicaid into a block grant program with funds going to the states and to turn Medicare into a voucher program.

In the 40th anniversary edition of his book, “Capitalism and Freedom,” Milton Friedman advised conservatives to use crises as opportunities to advance their agenda. “Only a crisis – actual or perceived – produces real change,” he contended.

Thus Republicans are now using the fiscal impasse to try to raise the age for Medicare and reduce Social Security benefits by changing the index used to adjust them for inflation. They know that such programs will be easier to abolish in the future if the number of people who qualify can be reduced and benefits are cut so that privatization becomes more attractive.

This is foolish and reactionary. Moreover, there are sound reasons why a conservative would support a welfare state. Historically, it has been conservatives like the 19th century chancellor of Germany, Otto von Bismarck, who established the welfare state in Europe. They did so because masses of poor people create social instability and become breeding grounds for radical movements.

How Crazy Are They?

Just how intellectually, emotionally and morally dysfunctional is contemporary "conservatism"?  Some clues in this incredible New York magazine feature story on National Review's "Ship of Fools" Cruise - a boatload of their most elite supporters and subscribers at sea in the Caribbean just weeks after the November elections.  Read the whole thing - even for someone who is extremely cynical about the GOP,  it's both jaw-dropping and eye-opening that The Crazy runs this wide and this deep.

"Medicare spending isn't out of control"

While there is agreement among economists and health care experts that overall the US has highly inflationary health care expenses over the long term - certainly compared to other relatively wealthy countries with high-quality medical care and much better health outcomes - Uwe E. Reinhardt @ New York Times Economix shows, once again, that the locus of this "out of control" spending isn't Medicare:

It’s the season of holiday cocktail parties, demanding intelligent chit-chat over Chardonnay. In such data-free environments it is always safe to say, “Medicare spending is out of control!” Wise heads will nod, because it is a credo with wide currency.

After all, as I explained in my previous post, traditional Medicare, which still attracts about 75 percent of all Medicare beneficiaries, affords its enrollees free choice of providers and therapy. In the jargon of health-policy wonks, it is “unmanaged.” Thus, it would not be surprising if unmanaged Medicare spending were, indeed, out of control.

But some caution is in order. A really wise guy in the crowd, one familiar with relevant data, might challenge you with: “Oh, really? In what sense is Medicare spending out of control?”

That query might have been prompted by the following data.

 

Kaiser Family Foundation

These data, most of which have been published by the Office of the Actuary, Centers of Medicare and Medicaid Services, of the Department of Health and Human Services (see Table 16), show that in most periods Medicare spending per Medicare beneficiary has risen more slowly than per-capita spending under private health insurance.

The exceptions are the period 1993-97, when private managed-care plans appeared to be able to hold down their outlays on health care better than did Medicare, and 2002-7, because there was a jump in spending as Medicare began, in 2006, to cover prescription drugs under the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

So anyone claiming that “Medicare spending is out of control” can fairly be asked to explain on what data that assertion is based. The responses might be interesting.

Two objections might be raised to my interpretation of the data.

"There is no fiscal crisis..."

Neil Irwin @ WaPo Wonkblog:

Two separate events from the last few days, on two different continents: In the United States, a messy series of negotiations over how to avert the fiscal cliff and bring down the nation’s large budget deficits seemed to be heading nowhere. In Japan, a land of the largest public debt in the world relative to the size of its economy, a new government was elected pledging to pressure the nation’s central bank to inflate the money supply much more.

Here are two numbers to know about  the United States and Japan: 1.79 percent and 0.77 percent. Those are the yields on 10-year bonds in those two nations as of Thursday morning, the price their governments must pay to borrow money for a decade. In other words, investors are willing to fling their savings at those two seemingly dysfunctional governments for next to nothing.

But it’s not just the United States and Japan. Name a country with three elements—a stable political system, a credible central bank to call its own, and a free flow of capital across its borders—and it has, right now, extraordinarily low interest rates. That’s true for Canada and Australia (10 year yields of 1.85 percent and 3.36 percent), of Switzerland and Sweden (0.55 percent and 1.6 percent). Britain, certainly (1.94 percent), but even some countries that don’t technically fit our classification because they lack their own central bank (Germany at 1.42 percent and France at 1.99 percent. That would be the same France that The Economist, in a cover story last month, called “the ticking time bomb at the heart of Europe.”).

So what is going on? Interest rates  are, essentially, the relative price of money today versus its value in the future. And investors are saying that they don’t need very much compensation to delay their spending for the future, as long as they can feel secure that they will get their money back and that the money they get back will be worth roughly what they put in.

To put it a different way, around the world there are all sorts of savers—pension funds, wealthy individuals in emerging nations, governments that want to ensure they have reserves put aside in case there were to be a run on their currency—for whom the goal is not so much to get a big yield on their savings, but rather to ensure that they will get their money back when they need it.

One of America’s greatest exports, then, is not any physical good, but offering the world a deep, liquid, secure bond market. We may have dysfunction in Congress and large deficits as far as the eye can see, but as long as investors are confident that the Treasury will honor its debt obligations and the Federal Reserve won’t allow out-of-control inflation, the United States looks like a terrific place to park money.

There are three points to draw from that.

One is that as the United States looks to reduce budget deficits, it should do so on its own terms. We should figure out what path of deficit reduction would be best for our economy, leaving us with more sustainable finances in the longer run without sucking the wind out of growth. We are not Greece, a nation that found itself unable to pay its debts and had austerity forced upon it by the outsiders offering bailout cash. We have time, and we should use it wisely.

Second, if there are things we can do with the cheap money the world is flinging at us that would make the U.S. economy more competitive in the longer run, we should take advantage. There are reasonable arguments to have on what that might be—infrastructure versus education spending, for example. But if there is spending we could do that would increase our economic potential over the generation ahead, we are fools not to do it.
The third point to draw from the low global interest rates is this: There is an unfortunate tendency to treat the size of budget deficits and the level of inflation or unemployment in moral terms. Surely when a nation sins through fiscal irresponsibility and tempts the devil inflation, it ought to receive the wrath of a vengeful god. But that’s not how it is.

Macroeconomics is not a morality play. Macroeconomics is like the weather. Sometimes the weather is nice and sometimes there is a mighty hurricane. It just is. What we all need to do is adjust to the reality as it is, not pretend the weather is as we think it ought to be.

The growth of income inequality

The Atlantic:

Jordan Weissmann, The Atlantic: This graph, from the Pew Research Center, tracks the annual rate of income growth for Americans across the economic spectrum for each of the past six decades. I have yet to find a more evocative illustration of how profoundly the rewards of our economy have tilted away from the middle class and towards the wealthy. Here, we don't just see who's claiming the biggest slice of the pie, but rather whose standard of living is actually improving (or deteriorating). You can argue about why we've arrived at this point, but that doesn't change the starkness of this picture.

Reject "chained CPI" Social Security cuts as part of any budget deal

 Richard Eskow at Campaign for America's Future:

News reports say the President’s proposed deal includes the “chained CPI,” which would impose drastic Social Security cuts and tax hikes for everybody but the wealthy.  And House Minority Leader Nancy Pelosi says that “Democrats will stick with the President.”

They should both think again.

The “chained CPI” is being offered as part of a “deficit reduction” deal, even though Social Security is forbidden from contributing to the deficit.  Even if you accepted this unreasoned act, it remains morally unacceptable to reduce spending on the backs of the elderly, women, the poor, veterans, disabled Americans, and the poor.

It’s even more unethical to do it when other options available could save much more money, And it’s even worse when we see who isn’t “sharing in the sacrifice” – a list that includes hedge fund managers, Wall Street gamblers, billionaires, drug companies, defense contractors, and tax-dodging corporations.

Independent estimates say that the “chained CPI” will slash Social Security benefits by $122 billion over the next ten years. Here are eight solutions that will save more money  - and really will reduce the deficit – without compromising either our ethics or our sense of fairness:

1. Close multiple loopholes in the capital gains law: $174.2 billion. (1.42x)
Lawmakers could save nearly one and a half times as much money as they’ll get from stripping seniors, the disabled, veterans, and children of their benefits - 1.42 times as much, to be precise – by closing capital gains loopholes.

The Public Opines

Washington Post poll on "Fiscal Cliff" negotiations:

Q: In order to strike a budget deal, would you accept Cutting spending on Medicaid, which is the government health insurance program for the poor or is this something you would find unacceptable?

Accept    28%

Unacceptable    68%

Q: In order to strike a budget deal that avoids the so-called 'fiscal cliff', would you accept Cutting military spending or is this something you would find unacceptable?

Accept    42%

Unacceptable    55%

Q: In order to strike a budget deal that avoids the so-called 'fiscal cliff', would you accept Raising taxes on Americans with incomes over 250-thousand dollars a year or is this something you would find unacceptable?

Accept   74%

Unacceptable    24%

Q: In order to strike a budget deal that avoids the so-called 'fiscal cliff', would you accept Raising the age for Medicare coverage from 65 to 67 or is this something you would find unacceptable?

Accept   36%

Unacceptable  60%

Q: In order to strike a budget deal, would you accept Changing the way Social Security benefits are calculated so that benefits increase at a slower rate than they do now or is this something you would find unacceptable?

Accept  34%

Unacceptable  60%

The only way that Social Security and Medicare can go “bankrupt” is if we let them.

James Surowiecki at The New Yorker:

One of the most influential ideas in Washington these days is that Social Security and Medicare are on the verge of going bust. Earlier this month, Senator Lindsey Graham warned of the “imminent bankruptcy” of these insurance programs for the elderly, and Republican leaders are citing the threat of insolvency as a reason that entitlement reform must be part of any fiscal-cliff deal. The argument sounds reasonable enough, but it’s really a bid to turn the great political strength of these programs—the fact that they were designed to be self-supporting—into a weakness.

Unlike most government programs, Social Security and, in part, Medicare are funded by payroll taxes dedicated specifically to them. Some of the tax revenue pays for current benefits; anything that’s left over goes into trust funds for the future. The programs were designed this way for political reasons. When F.D.R. introduced Social Security, he calculated that funding it through a payroll tax rather than out of general tax revenue would make people think of the program not as welfare but as an entitlement—as something that they had paid for and had a right to. Many liberals initially opposed the idea, because payroll tax rates aren’t progressive (everyone pays the same rate) and because they tax only labor income. But the system proved as resilient as F.D.R. had predicted, and when Lyndon Johnson introduced Medicare, in the nineteen-sixties, he adopted it, too. Over the years, Social Security and Medicare taxes have risen sharply, to the point where payroll taxes account for thirty-six per cent of all federal revenue. Today, most American households pay more in payroll taxes than in income tax. Yet there’s little public hostility to these taxes, and the programs they fund remain enormously popular.

But the trust-fund strategy has an Achilles’ heel: funds can run out of money. Projections show that, owing to an aging population and rising health-care costs, the Medicare Trust Fund will become insolvent in 2024 and Social Security in 2033. The image of empty coffers is a powerful one: half of all Americans aged between eighteen and twenty-nine don’t think that Social Security will exist when they retire. That’s a bizarre thing to believe about an important government program. No one ever says, “I don’t think the U.S. Army will be there when I get old” or talks about the Defense Department “going broke.” We assume that there will always be a need for the military, and that we’ll end up paying the taxes that are necessary to fund it. But, because Social Security and Medicare have always been self-supporting, it’s easy to believe that they’ll just vanish if the trust funds dry up. This isn’t the case. Relatively minor tweaks to Social Security will allow it to keep paying full benefits for many decades. And, if we wanted, we could supplement funding for both programs with general government revenue. That’s what most European countries do, and, indeed, parts of Medicare are already paid for out of general revenue. The only way that Social Security and Medicare can go “bankrupt” is if we let them.

"Preserving Medicare Benefits by Controlling Health Care Costs"

From Campaign for America's Future:

The Challenge:

To "fix the debt," we should focus on fixing the economy. Investment in jobs and growth will a) reduce the costs of high unemployment, b) raise more revenue, and b) reduce the debt burden. Instead, a small but well-funded and loud group of "deficit hawks" is demanding to "cut entitlements," including Medicare. Now, as President Obama seems to be on the verge of forcing Republicans to accept tax increases on the wealthy, conservatives are demanding a large payoff in return: cuts to Medicare benefits that would raise costs for seniors now and undermine the program for future retirees.

The trade-off is morally offensive: Why should fairer taxes from the rich be allowed only if accompanied by less health care for the old or vulnerable?

Their cuts are aimed at the wrong target. We don't have an "entitlements" problem; we have a broken health care system. The rising costs of publicly funded health care programs like Medicare will consume a larger portion of the budget in the future if nothing is done. But the real problem is runaway health care costs generally, driven by the entrenched corporate interests – the drug and insurance companies and the private hospital complexes – that have made our health care the most expensive in the world.

Make the Case:

Voters overwhelmingly rejected the right's plan to turn Medicare into a "voucher" in the 2012 elections. Now conservatives have another strategy to weaken Medicare: raise the age of eligibility; that is, eliminate benefits for 65- and 66-year-olds. (Republican leaders in Congress don't want to admit that publicly, so they propose $600 billion in Medicare and Medicaid cuts without any explanation of how they arrived at that number or which specific policies they have in mind to reach that number.)

Denying Medicare to 65- and 66-year-olds will actually cost more money than it saves. The best estimate is that $5.7 billion in projected federal savings in Medicare will end up forcing individuals, states and employers to pay an additional $11.4 billion for health care...

There are also reports that House Republicans want to increase Medicare costs for people with higher incomes. But three out of four people with Medicare have incomes under $40,000, and the very small number of seniors with incomes over $80,000 already pay considerably more for Medicare.

If the overall U.S. health care system controlled costs as well as most European countries, both Medicare and overall health care costs would be fully affordable. To do that, you have to take on the drug companies, insurance companies and hospital complexes that drive up costs. Cutting benefits - or eliminating them for 65- and 66-year-olds - doesn't control costs. It simply shifts the costs from the public budget to individual seniors or their families.  (Economist Dean Baker of the Center for Economic and Policy Research documents this.)

Cliff notes...

Laura D'Andrea Tyson @ New York Times:

...The economy continues to operate far below its capacity. The unemployment rate is at least two percentage points higher than what most economists consider consistent with a full recovery. Other measures, such as the high rate of long-term unemployment and the low labor-force participation rate, reflect an impaired labor market.

According to the Congressional Budget Office, gross domestic product is still about 6 percent, or about $973 billion, below the potential level the economy is capable of producing at full capacity. This is the largest gap between actual and potential output following a recession in modern American history.

The weakness of government spending at the state and local level and more recently at the federal level has been a significant factor behind the slow recovery. The phasing out of earlier federal stimulus measures, the expiration of temporary payroll-tax relief and extended unemployment benefits scheduled at the end of the year, and the tight caps on discretionary federal spending already in force mean more federal fiscal drag on the economy’s growth next year even if the fiscal cliff is averted...

"The pirates behind the campaign to fix the debt"

The wonderfully ascerbic Mr. Charles Pierce @ Esquire:

There are many more important topics out there than The Deficit, the scary, hairy monster that haunts the dreams of David Gregory and only the blood of the poor and elderly can appease its wrath. Climate change comes immediately to mind, as do income inequality, the vast inequities of our tax code, the ongoing upward translation of the nation's wealth, why more bankers aren't in federal prison, and whatever did I do to the baby Jeebus that he allowed Notre Dame to play for a national championship. But the biggest reason why we should shut the national piehole on the topic is not that we have more serious problems, or even that any discussion violates the blog's first rule of economics — Fk The Deficit. People Got No Jobs. People Got No Money.

The real reason we should stop talking about it for a while is that the people who are insisting that it will eat us and our posterity on toast are lying swine who would sell your white-haired granny to the Somali pirates for another three points on the Dow. Until we all acknowledge the fact that organized wealth in this country has become downright sociopathic in the heedless damage it does, any discussion of The Deficit can and will be hijacked by that quarter in order to gain absolution for its grievous sins and the right to go on committing them against the rest of us, over and over again.

Listening to these people talk about the national economy is like listening to a burglar tell you that you should really polish the silver more often.

Mea Culpa!

Conservative Bruce Bartlett @ American Conservative writes a fascinating "I told you so" & "Mea Culpa" combo:

I know that it’s unattractive and bad form to say “I told you so” when one’s advice was ignored yet ultimately proved correct. But in the wake of the Republican election debacle, it’s essential that conservatives undertake a clear-eyed assessment of who on their side was right and who was wrong. Those who were wrong should be purged and ignored; those who were right, especially those who inflicted maximum discomfort on movement conservatives in being right, ought to get credit for it and become regular reading for them once again.

I’m not going to beat around the bush and pretend I don’t have a vested interest here. Frankly, I think I’m at ground zero in the saga of Republicans closing their eyes to any facts or evidence that conflict with their dogma. Rather than listen to me, they threw me under a bus. To this day, I don’t think they understand that my motives were to help them avoid the permanent decline that now seems inevitable.

For more than 30 years, I was very comfortable within the conservative wing of the Republican Party. I still recall supporting Richard Nixon and Barry Goldwater as a schoolchild. As a student, I was a member of Young Republicans and Young Americans for Freedom at the height of the Vietnam War, when conservatives on college campuses mostly kept their heads down.

In graduate school, I wrote a master’s thesis on how Franklin Roosevelt covered up his responsibility for the Pearl Harbor attack—long a right-wing obsession. My first real job out of graduate school was working for Ron Paul the first time he was elected to Congress in a special election in 1976. (He lost that same year and came back two years later.) In those days, he was the only Tea Party-type Republican in Congress.

After Paul’s defeat, I went to work for Congressman Jack Kemp and helped draft the famous Kemp-Roth tax bill, which Ronald Reagan signed into law in 1981. I made important contributions to the development of supply-side economics and detailed my research in a 1981 book, Reaganomics: Supply-Side Economics in Action.

After Reagan’s victory, I chose to stay on Capitol Hill, where I was staff director for the Joint Economic Committee and thought I would have more impact. I left to work for Jude Wanniski’s consulting company in 1984, but missed Washington and came back the following year. Jude was, of course, the founding father of supply-side economics, the man who discovered the economists Robert Mundell and Arthur Laffer and made them famous.

I went to work for the Heritage Foundation, but left in 1987 to join the White House staff. I was recruited by Gary Bauer, who was Reagan’s principal domestic policy adviser. Gary remains well known among religious conservatives. Late in the administration I moved over to the Treasury Department, where I remained throughout the George H.W. Bush administration.

Afterwards I worked for the Cato Institute and the National Center for Policy Analysis, a conservative think tank based in Dallas. I wrote regularly for the Wall Street Journal editorial page, National Review, and other conservative publications. For 12 years I wrote a syndicated column that ran in the Washington Times, Investor’s Business Daily, the New York Sun, and other conservative newspapers.

I supported George W. Bush in 2000, and many close friends served in high-level administration positions. I was especially close to the Council of Economic Advisers and often wrote columns based on input and suggestions from its chairmen, all of whom were friends of mine. Once I even briefed Vice President Dick Cheney on the economy.

But as the Bush 43 administration progressed, I developed an increasingly uneasy feeling about its direction. Its tax policy was incoherent, and it had an extremely lackadaisical attitude toward spending. In November 2003, I had an intellectual crisis.