"Austerity for Dummies"

A "layman's guide" to anti-austerity from Stephanie Kelton @ New Economic Perspectives that does a pretty good job of tackling the central arguments in non-econospeak terms:

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

"Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris"

Some key insights from a very "wonky" post-crisis commentary by Joseph Stiglitz @ the IMF Global Economy Forum, emphasizing the need for more effective structural reforms:

In analyzing the most recent financial crisis, we can benefit somewhat from the misfortune of recent decades. The approximately 100 crises that have occurred during the last 30 years—as liberalization policies became  dominant—have given us a wealth of experience and mountains of data.  If we look over a 150 year period, we have an even richer data set.

With a century and half of clear, detailed information on crisis after crisis, the burning question is not How did this happen? but How did we ignore that long history, and think that we had solved the problems with the business cycle? Believing that we had made big economic fluctuations a thing of the past took a remarkable amount of hubris.

Markets are not stable, efficient, or self-correcting

The big lesson that  this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting.

There are two parts to this belated revelation. One is that standard models had focused on exogenous shocks, and yet it’s very clear that a very large fraction of the perturbations to our economy are endogenous.  There are not only short‑run endogenous shocks; there are long‑run structural transformations and persistent shocks.  The models that focused on exogenous shocks simply misled us—the majority of the really big shocks come from within the economy.

Secondly, economies are not self-correcting.  It’s clear that we have yet to fully take on aboard this crucial lesson that we should have learned from this crisis: even in its aftermath, the tepid attempts to fix the economies of the United States and Europe have been a failure.  They certainly have not gone far enough.  The result is that we continue to face significant risks of another crisis in the future.

So too, the responses to the crisis have not brought our economies anywhere near back to full employment.  The loss in GDP between our potential and our actual output is in the trillions of dollars.

Of course, some will say that it could have been done worse, and that’s true. Considering that the people in charge of fixing the crisis included some of  the same ones who created it in the first place, it is perhaps  remarkable it hasn’t been a bigger catastrophe.

More than deleveraging, more than a balance sheet crisis: the need for structural transformation

In terms of human resources, capital stock, and natural resources, we’re roughly  at the same levels today that we were before the crisis.  Meanwhile, many countries have not regained their pre-crisis GDP levels, to say nothing of a return to the pre-crisis  growth paths. In a very fundamental sense, the crisis is still not fully resolved—and there’s no good economic theory that explains why that should be the case.

Can't get enough of Krugman waving his arms

The Professor on perils of low inflation @ NYTs:

Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.

Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become “inflation nation.” In 2010, the Paris-based Organization for Economic Cooperation and Development urged the Fed to raise interest rates to head off inflation risks (even though its own models showed no such risk). In 2011, Representative Paul Ryan, then the newly installed chairman of the House Budget Committee, raked Ben Bernanke, the Fed chairman, over the coals, warning of looming inflation and intoning solemnly that it was a terrible thing to “debase” the dollar.

And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low…at barely above 1 percent by the Fed’s favored measure...

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.

So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.

Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal with our short-run mess, we’re turning it into a long-run, chronic economic malaise...

The end of Ed DeMarco and help for underwater homeowners?

Good discussion of the Federal Housing Finance Administration on "All In W/ Chris Hayes":

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Low inflation isn't necessarily a good thing

Jared Bernstein digs deep into the problems brought by very low inflation:

The Fed announced today that they’ll continue to be the only ones in town trying to do something about the stubbornly high unemployment rate:

The Federal Reserve said Wednesday that its stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

Another symptom of our demand-weak economy, along with high unemployment and weaker job creation, is the recent deceleration in price growth, shown in the figure below.

The Fed’s “…statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.”

Me, I’m pretty concerned about that trend.  On the one hand, lower price growth means higher real wages, all else equal, and that’s important as slower nominal wage growth is another problem right now.

But on the other hand, low inflation is problematic in ways that are less obvious than the real wage story above.  First off, faster inflation means lower real interest rates, and since the Fed’s already at zero (and can’t go lower), a bit more inflation would help in that regard.  I’d bet we’d see more investment bucks move of the sidelines if that trend in the figure were to reverse course. 

Higher inflation also chips away at nominal debt burdens and thus hastens deleveraging.

But the deeper, and more interesting, reason one worries about too-low inflation right now comes out of the work of Ackerlof et al back in the mid-1990s.  It has to do with sticky wages, something Keynes recognized as contributing to intractably high UK unemployment back in the early 1920s.

Austerity - The beatings continue...

The Economist:

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

Individual country numbers inspire their own brand of horror. Greek joblessness topped

27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%. Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year? German unemployment, of course, has held steady at 5.4% since last summer.

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

There is blame to go around for this, but one has to reserve special criticism for the European Central Bank...

The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain. Europe's governments have behaved badly, but American fiscal policy has hardly been better. The ECB faces a more complicated set of political constraints, but it has already proven how adroitly, aggressively, and inventively it can act when necessary.

The ECB meets this week. On Thursday it may announce an interest-rate cut; if it doesn't it is probable that a cut will be made in June. But a rate cut will not be enough, not remotely. As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany. The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

More fake data promoting deficit hysteria

Ezra Klein:

You’ve heard about all the problems with Reinhart and Rogoff. But how about the problems with Baker, Bloom and Davis?

On Sunday, Bill McNabb, Chairman and CEO of Vanguard, published an op-ed in the Wall Street Journal arguing that “since 2011 the rise in overall policy uncertainty has created a $261 billion cumulative drag on the economy (the equivalent of more than $800 per person in the country).” This is proof, McNabb says, that “developing a credible, long-term solution to the country’s staggering debt is the biggest collective challenge right now.”

Specifically, the policy uncertainty McNabb is looking at comes from “the debt-ceiling debacle in August 2011, the congressional supercommittee failure in November 2011, and the fiscal-cliff crisis at the end of 2012.” There’s no doubt that these episodes hurt the economy.

But the Vanguard study. McNabb says, is based on the “invaluable work” of Stanford University’s Nicholas Bloom and Scott Baker and the University of Chicago’s Steven Davis. The Bloom, Baker and Davis measure of policy uncertainty gets a lot of attention — but it’s shot through with holes.

Policyuncertainty.com

"The drive for austerity has lost its intellectual fig leaf"

 Professor Krugman sees some light @ NYTs:

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

austerity have

My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.

Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

America's #1 "Very Serious Person" on the Austerity Imperative

Colbert digs deep into the data:

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"The Jobless Trap"

Professor Krugman nails our central and persistent economic problem:

F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things.

For the overriding fear driving economic policy has been debt hysteria, fear

that unless we slash spending we’ll turn into Greece any day now. After all, haven’t economists proved that economic growth collapses once public debt exceeds 90 percent of G.D.P.? 

Well, the famous red line on debt, it turns out, was an artifact of dubious statistics, reinforced by bad arithmetic. And America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates. 

But while debt fears were and are misguided, there’s a real danger we’ve

ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.

Now, some unemployment is inevitable in an ever-changing economy. Modern America tends to have an unemployment rate of 5 percent or more even in good times. In these good times, however, spells of unemployment are typically brief. Back in 2007 there were about seven million unemployed Americans — but only a small fraction of this total, around 1.2 million, had been out of work more than six months. 

Then financial crisis struck, leading to a terrifying economic plunge followed by a weak recovery. Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found.

"Big Problems" in Little Denmark ... or Not!

Dean Baker catches fake journalism at The New York Times:

The NYT appears to be following the pattern of journalism practiced by the diatribe against the Danish welfare state that is headlined, "Danes Rethink a Welfare State Ample to a Fault." There's not much ambiguity in that one. The piece then proceeds to present a state of statistics that are grossly misleading and excluding other data points that are highly relevant.

Washington Post in openly editorializing in its news section. Today the news section features a

The first paragraphs describe the generosity of the welfare state then we get this ominous warning in the 5th paragraph:

"But Denmark’s long-term outlook is troubling. The population is aging, and in many regions of the country people without jobs now outnumber those with them."

oooooh, scary! Yeah people are living longer in Denmark, that's something that's been happening for a couple of hundred years or so. Like every other wealthy country people live longer in Denmark than in the United States. While they are projected to continue to see gains in life expectancy and further aging of the population, the increase is actually going to much slower than in the United States.

From 2012 to 2025 the percentage of the Danish population over age 65 is projected to rise from 17.8% to 21.2%, an increase of 3.4 percentage points. By comparison, in the United States the share of the population over age 65 is projected to rise from 13.6% to 18.1%, an increase of 4.5 percentage points over the same period, from a considerably smaller base. The impact of aging on the economy and the government budget will clearly be much larger in the U.S. than Denmark, especially since the government first starts paying for health care for people after they turn age 65 in the United States. (Like every other wealthy country, Denmark has national health insurance.)

The concern that, "in many regions of the country people without jobs now outnumber those with them," is especially touching. In the United States we have such a region, it's called the "United States." In March, 143.3 million people were employed out of a total population of 323  million for a ratio of workers to population nationwide of roughly 44.4 percent. In many parts of the country it would be much lower.

The piece then goes on to describe the extent of the Danish welfare state with its 56 percent top marginal income tax rate, telling readers:

"But few experts here believe that Denmark can long afford the current perks. So Denmark is retooling itself, tinkering with corporate tax rates, considering new public sector investments and, for the long term, trying to wean more people — the young and the old — off government benefits."

Hmmm, it would be interesting to know what data the experts are looking at.

"A Tax System Stacked Against the 99 Percent"

Reflections on tax day by Joseph Stiglitz @ NYTs:

No one enjoys paying taxes, and yet all but the extreme libertarians agree, as Oliver Wendell Holmes said, that taxes are the price we pay for civilized society. But in recent decades, the burden for paying that price has been distributed in increasingly unfair ways.

About 6 in 10 of us believe that the tax system is unfair — and they’re right: put simply, the very rich don’t pay their fair share. The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.

Conservatives like to point out that the richest Americans’ tax payments make up a large portion of total receipts. This is true, as well it should be in any tax system that is progressive — that is, a system that taxes the affluent at higher rates than those of modest means. It’s also true that as the wealthiest Americans’ incomes have skyrocketed in recent years, their total tax payments have grown. This would be so even if we had a single flat income-tax rate across the board.

What should shock and outrage us is that as the top 1 percent has grown extremely rich, the effective tax rates they pay have markedly decreased. Our tax system is much less progressive than it was for much of the 20th century. The top marginal income tax rate peaked at 94 percent during World War II and remained at 70 percent through the 1960s and 1970s; it is now 39.6 percent. Tax fairness has gotten much worse in the 30 years since the Reagan “revolution” of the 1980s.

Foreclosures - A National Crime Scene

From "All In with Chris Hayes:

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"With a thousand lawyers on your payroll..."

He Who Makes the Rules - A long but very worthwhile piece in the Washington Monthly details how the banks are chipping away at Dodd-Frank:

In late 2010, Bart Chilton, one of three Democratic commissioners at the U.S. Commodity Futures Trading Commission (CFTC), walked into an upper-floor suite of an executive office building to meet with four top muckety-mucks at one of the biggest financial institutions in the world.
There were a handful of staff members present, but it was a pretty small gathering—one, it turns out, that Chilton would never forget.

The main topic Chilton hoped to discuss that day was the CFTC’s pending rule on what are known as “position limits.” If implemented properly, position limits would put a leash on speculation in the commodities market by making it harder for heavyweight traders at places like Goldman Sachs and JPMorgan Chase to corner a market, make a killing for themselves, and screw up prices for the rest of us. Position limits are also one of many ways to tamp down the amount of risk big institutions can take on, which keeps them from going belly up and minimizes the chance taxpayers will have to bail them out.

The financial institution Chilton was meeting with that day was a big commodities exchange, which is like a stock exchange except that instead of trading stocks they trade derivatives based on the value of actual products, like oil and gas. Chilton wouldn’t say which major commodities exchange he was meeting with that day, but suffice it to say two of the biggest—the Chicago Mercantile Exchange and Intercontinental Exchange—have a lot to lose from federally administered position limits. To them, the more derivatives traded, the better. They’ve been fighting the CFTC’s attempts to establish position limits for years.

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 seemed to promise meaningful reform on this front. The law includes Section 737, which explicitly directs the CFTC to establish position limits and lays out detailed guidelines on how they should do so. “The Commission shall by rule, regulation or order establish limits on the amount of positions, as appropriate,” it reads.

Still, even with the strength of the law behind him, Chilton waited until the end of the meeting to broach what he knew would be a tense subject. He began diplomatically. Now that the CFTC was required by law to establish position limits, his commission wanted to do so “in a fashion that made sense—one that was sensitive to, but not necessarily reflective of, the views of the exchange,” he told the executives.

Chilton’s gracious overture fell flat. His hosts, who had been openly discussing other topics moments before, were suddenly silent. They deferred instead to their top lawyer, who explained that the exchange’s interpretation of Section 737 was that the CFTC was not required to establish position limits at all.

Chilton was blindsided. While other parts of Dodd-Frank were, admittedly, vague and ambiguous and otherwise frustrating to those, like him, who were tasked with writing the hundreds of rules associated with the act, Section 737 didn’t exactly pull any punches. The Commission shall establish limits on the amount of positions, as appropriate.
 
“You gotta be kidding,” Chilton told the executives. “The law is very clear here. The congressional intent is clear.”

California Comeback - Lessons for the Country?

Krugman @ New York Times looks West:

Modern movement conservatism, which transformed the G.O.P. from the moderate party of Dwight Eisenhower into the radical right-wing organization we see today, was largely born in California. The Golden State, even more than the South, created today’s religious conservatism; it elected Ronald Reagan governor; it’s where the tax revolt of the 1970s began. But that was then. In the decades since, the state has grown ever more liberal, thanks in large part to an ever-growing nonwhite share of the electorate.

As a result, the reign of the Governator aside, California has been solidly Democratic

since the late 1990s. And ever since the the political balance shifted, conservatives have declared the state doomed. Their specifics keep changing, but the moral is always the same: liberal do-gooders are bringing California to its knees.

A dozen years ago, the state was supposedly doomed by all its environmentalists. You see, the eco-freaks were blocking power plants, and the result was crippling blackouts and soaring power prices. “The country’s showcase state,” gloated The Wall Street Journal, “has come to look like a hapless banana republic.” 

But a funny thing happened on the road to collapse: it turned out that the main culprit in the electricity crisis was deregulation, which opened the door for ruthless market manipulation. When the market manipulation went away, so did the blackouts. 

Undeterred, a few years later conservatives found another line of attack. This time they said that liberal big spending and overpaid public employees were bringing on collapse. 

The Great (Income) Depression

Catherine Rampell @ NYT's Economix:

February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available...

 

Source: Sentier Research analysis of Labor Department data. Note that vertical axis does not start at zero to better show the change...

Corporate Profits Soar As Unemployment Persists

Lawrence Mishel @ Economic Policy Institute:

Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis.

""Hot Money Blues"

Paul Krugman wonders whether the era of unrestricted movement of global capital - which contributed to a financial crisis that hasn't ended - is beginning to fade:

Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.

That’s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.

It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s. 

Is a Medicare Cost Slowdown Closing the Budget Gap?

Peter Orzag, former White House budget analyst, points @ Bloomberg to a possible breakthrough in health care costs that could dramatically impact the debate over deficits - at least that part of the debate which is based on honest, informed analysis (which often appears, at least among our elites, to be the terrain amidst this brouhaha that is the smallest and least often heard):

Past Increases in Health Care Costs

New evidence that the slowdown in health care costs over the past five years is happening not only because of a weak economy comes from the Economic Report of the President, released last week by the President’s Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy.

Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it’s important to take more aggressive action to improve value in health care.

"America's Latest Phony Fiscal Crisis"

Former chief economist for the IMF, Simon Johnson @ Bloomberg:

In most countries that experience a fiscal crisis, there is no ambiguity about the situation. 

The government is unable to sell debt at a reasonable interest rate. This probably coincides with a broader shift out of domestic assets, as smart investors read the writing on the wall or in the newspapers. The currency collapses and, often, inflation accelerates. The government is forced to slash spending and, cap in hand, asks for help from the world’s least popular ambulance service: the International Monetary Fund.

British burn White House - War of 1812

No part of this description fits the modern U.S. Rates on government debt are very low, the currency isn’t depreciating rapidly and inflation seems stable. There is no imaginable circumstance under which the U.S. would need to borrow from the IMF. Yet this great land of innovation has undeniably invented its unique kind of fiscal crisis.

Or, to be more precise, we have reinvented the uniquely American way of ruining our fiscal affairs. At the beginning of the 19th century, Thomas Jefferson was obsessed with the idea that debt was bad and that the U.S.’s obligations -- inherited mostly from the War of Independence -- must be eliminated at all costs. (Jefferson himself had had some bad personal experiences with debt.)

Budget Wars: House Progressive Caucus v. Paul Ryan

Click "Read More" below for the complete PDF from National Priorities Project of the House Progressive Caucus budget analysis v. Paul Ryan's GOPers and the Senate Dems.

Who's Booming?

With a nod toward a nominal stock market rebound to what it hit 6 years ago (if you don't adjust for inflation) - from Economic Policy Institute we have a breakdown of who owns personal shares of the stock market and is benefiting from this "boom" :

Patriot Games

Think Progress:

Even as American corporations are raking in record profits, the largest among them are shifting larger amounts of money away from the United States and into offshore tax havens that allow them to pad their bottom lines even more, according to multiple analyses of legal filings made since the beginning of 2013.

The Wall Street Journal found that the 60 largest companies moved $166 billion offshore in 2012, shielding 40 percent of their earnings from American taxes and costing the U.S. billions in lost revenue:

The amount of money at stake is significant, particularly when the U.S. budget deficit is high on the political agenda. Just 19 of the 60 companies in the Journal’s survey disclose the tax hit they could face if they brought the money back to their U.S. parent. Those companies say they might have to pay $98 billion in additional tax—more than the $85 billion in automatic-spending cuts triggered this month after the White House and Congress couldn’t agree on an alternative.

"We do not, repeat do not, face any kind of deficit crisis either now or for years to come"

More from Professor Krugman @ NYTs:

People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.

Start with the raw numbers. America’s budget deficit soared after the 2008 financial crisis and the recession that went with it, as revenue plunged and spending on unemployment benefits and other safety-net programs rose. And this rise in the deficit was a good thing! 

Federal spending helped sustain the economy at a time when the private sector was in panicked retreat; arguably, the stabilizing role of a large government was the main reason the Great Recession didn’t turn into a full replay of the Great Depression. 

But after peaking in 2009 at $1.4 trillion, the deficit began coming down. The Congressional Budget Office expects the deficit for fiscal 2013 (which began in October and is almost half over) to be $845 billion. That may still sound like a big number, but given the state of the economy it really isn’t. 

Bear in mind that the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy. To take the classic example, America never did pay off the debt from World War II — in fact, our debt doubled in the 30 years that followed the war. But debt as a percentage of G.D.P. fell by three-quarters over the same period. 

Krugman v. "The World"...again

The Professor explains - @ NYTs - why our "smart people" - who among other things claim to listen to "the market" as arbiter of their reality - pretty much don't have a clue about much of anything other than their recycled insider-elite ideology:

Four years ago, as a newly elected president began his efforts to rescue the economy and strengthen the social safety net, conservative economic pundits — people who claimed to understand markets and know how to satisfy them — warned of imminent financial disaster. Stocks, they declared, would plunge, while interest rates would soar.

Even a casual trawl through the headlines of the time turns up one dire pronouncement after another. “Obama’s radicalism is killing the Dow,” warned an op-ed article by Michael Boskin, an economic adviser to both Presidents Bush. “The disciplinarians of U.S. policy makers return,” declared The Wall Street Journal, warning that the “bond vigilantes” would soon push Treasury yields to destructive heights. 

Sure enough, this week the Dow Jones industrial average has been hitting all-time highs, while the current yield on 10-year U.S. government bonds is roughly half what it was when The Journal published that screed. 

O.K., everyone makes a bad prediction now and then. But these predictions have special significance, and not just because the people who made them have had such a remarkable track record of error these past several years. 

No, the important point about these particular bad predictions is that they came from people who constantly invoke the potential wrath of the markets as a reason we must follow their policy advice. Don’t try to cover America’s uninsured, they told us; if you do, you will undermine business confidence and the stock market will tank.

Don’t try to reform Wall Street, or even criticize its abuses; you’ll hurt the plutocrats’ feelings, and that will lead to plunging markets. Don’t try to fight unemployment with higher government spending; if you do, interest rates will skyrocket. 

And, of course, do slash Social Security, Medicare and Medicaid right away, or the markets will punish you for your presumption. 

(Long Past) Time for a financial transaction tax

Katrina vanden Heuvel @ WaPo:

(A)fter years of Wall Street excess, and at a moment when new revenues are badly needed, the time has surely come for a financial transaction tax .

Indeed, support for such a tax has never been stronger — or broader. Many on the progressive left have long favored it . Now, though, another group of bleeding-heart liberals, otherwise known as the American people, is on board. When it comes to cutting the deficit, 6 in 10 Americans prefer taxing the financial industry to cutting social spending.

But this idea doesn’t just have the masses on its side; it has the elites, and even some Republican elites. Once championed by the granddaddy of liberal economics, John Maynard Keynes, the banner of a financial transactions tax has been picked up by conservative economists including Sheila Bair, George W. Bush’s appointee to the Federal Deposit Insurance Corp.

"Corporate Profits Are Eating the Economy"

Derek Thompson @ The Atlantic:

Here are two things that are true about the economy today.

(1) The Dow Jones industrial average is poised to set a new record as corporate profits stretch to all-time highs.

(2) There are still fewer working Americans today than there were before the start of the Great Recession.

The fact that these two things can be true at the same time might outrage you. But it shouldn't surprise you. In the last 30 years, there has been a great divergence between growth and workers' incomes, as the New York Times reminds us today. Corporate profits have soared, in the last decade especially, particularly because of three things:

Globalization has pushed down the cost of labor available to multinational corporations; technology has allowed companies to make more with fewer workers, in general; and Big Finance has gobbled up the economy, as the banks' share of total corporate profits has tripled to about one-third since the middle of the last century, according to Evan Soltas.

Here's the short story of corporate profits, GDP, and workers' income since the Great Recession. As you can see, corporations rode a wild roller coaster, but they quickly found their way back on top. GDP has been sluggish and overall labor income has struggled to keep up with even that sluggish pace.


Here's the longer view. Zoom out to the turn of the century, and you can see that this isn't a "recession" trend. It's just a trend that the recession has amplified. Corporate profits starting eating the economy around 2003, around the time the housing market started delivering massive profits to finance companies.

"The Sequestering of Barack Obama"

Robert Kuttner @ The American Prospect takes a hard look at the economics and politics of the sequester in the context of President Obama's overall strategic and substantive performance on the economy - a sobering critique:

President Obama has miscalculated both the tactical politics of the sequester and the depressive economic impact of budget cuts on the rest of his presidency. The sequester will cut economic growth in half this year. But it’s now clear, one way or another, that we will get cuts in the $85 billion range that the sequester mandates this fiscal year. All that remains are the details.

Obama’s miscalculation began in his fist term, with his embrace of the premise that substantial deficit cutting was both politically expected and economically necessary, and his appointment of the 2010 Bowles-Simpson Commission as the expression of that mistaken philosophy. Although the Commission’s plan was never carried out, its prestige and Obama’s parentage of it locked the president into a deflationary deficit reduction path.

This past week, we’ve seen how the Republicans took advantage of Obama’s self-inflicted wound. With the March 1 deadline looming, the White House assumed that if the president gave enough publicity to the harm of pending automatic cuts, the Republicans would just cave. But the Republican leadership calculated that the ensuing political and economic damage would be worse for Obama, so they hung tough.

Obama also assumed that military cuts would be enough to move Republicans to  compromise. But with two wars winding down, most Republicans decided that this year they were deficit hawks more than defense hawks.

The president also played the populist card, calling for tax increase on the wealthy to spare the rest of the country program cuts. But that didn’t move the Republicans either.

The Republican leadership also deftly evaded the risk of being blamed for shutting down the government. They offered the Democrats a continuing resolution to allow government to keep operating, but at $85 billion below current spending levels. That shifted the onus to Democrats if they refused to take the deal and Congressional leaders advised the president that they were not prepared to take that risk.

Finally, Republicans took some of the sting—and responsibility—out of the sequester by offering to give Obama new flexibility in how he implemented it, thus making it even more his problem.

Next to come is the long awaited grand bargain of the austerity lobby, in which Republicans agree to close some tax loopholes (which start out grotesquely swollen) and Democrats agree to breach the previously sacrosanct fortresses of Social Security and Medicare.

On all counts, advantage: Republicans.

Long term, colluding in the politics of budget austerity has left Obama with no real capacity to offer the public investment that the economy needs for a robust, broadly-based recovery, and leaves him with the prospect of a weak economy between now and the end of his term--unless he drastically shifts course and repudiates the entire view of the budget and the economy.

Hippies

Professor Krugman @ NYTs:

We’re just a few weeks away from a milestone I suspect most of Washington would like to forget: the start of the Iraq war. What I remember from that time is the utter impenetrability of the elite prowar consensus. If you tried to point out that the Bush administration was obviously cooking up a bogus case for war, one that didn’t bear even casual scrutiny; if you pointed out that the risks and likely costs of war were huge; well, you were dismissed as ignorant and irresponsible.

It didn’t seem to matter what evidence critics of the rush to war presented: Anyone who opposed the war was, by definition, a foolish hippie. Remarkably, that judgment didn’t change even after everything the war’s critics predicted came true. Those who cheered on this disastrous venture continued to be regarded as “credible” on national security (why is John McCain still a fixture of the Sunday talk shows?), while those who opposed it remained suspect. 

And, even more remarkably, a very similar story has played out over the past three years, this time about economic policy. Back then, all the important people decided that an unrelated war was an appropriate response to a terrorist attack; three years ago, they all decided that fiscal austerity was the appropriate response to an economic crisis caused by runaway bankers, with the supposedly imminent danger from budget deficits playing the role once played by Saddam’s alleged weapons of mass destruction. 

Now, as then, this consensus has seemed impenetrable to counterarguments, no matter how well grounded in evidence. And now, as then, leaders of the consensus continue to be regarded as credible even though they’ve been wrong about everything (why do people keep treating Alan Simpson as a wise man?), while critics of the consensus are regarded as foolish hippies even though all their predictions — about interest rates, about inflation, about the dire effects of austerity — have come true. 

So here’s my question: Will it make any difference that Ben Bernanke has now joined the ranks of the hippies? 

Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn’t really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before — and what he said, translated from Fedspeak into plain English, was that the Beltway obsession with deficits is a terrible mistake. 

The Sequester's Impact on Recession and Recovery

The New Republic asked a range of economists whether the sequester will throw us back into recession. Here are some answers:

With $85 billion in budget cuts set to take effect Friday, when the sequester kicks in, there's been plenty of debate about whether the economy will spiral back into a recession. In search of some clarity, The New Republic asked economists from across the political spectrum a simple question, "Will the sequester start another recession?"...

It could. And either way, it's dumb policy.
"My reaction is possibly, but improbably. That said, it's pushing policy in exactly the wrong direction. At a time when the economy still needs a stimulus to promote recovery rather than restrictive policies to prevent overheating. I think job one economically today is to restore full employment, that is today's problem. Tomorrow's problem will be to deal with long term budget imbalances, but trying to curb long term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline and, were that to happen, it would be a major misfortune for the nation." — Henry Aaron, senior fellow of economic studies at the Brookings Institution

Probably not. But we'll notice a difference.
"In my view it will have a noticeable hit on the growth rate of between 0.5 and 0.9 percentage points. That won't put us in a recession but it will definitely slow improvements to unemployment and the job market." — Austan Goolsbee, professor of economics at the University of Chicago and former chairman of the Council of Economic Advisers

It's certainly not good for the economy.
"It's not helpful. However, trading the sequester for long-term Social Security and Medicaid/Medicare benefit cuts would be worse. Short-term cuts are fairly easy to reverse if it's done quickly." — James Galbraith, economist, University of Texas at Austin

The Racial Wealth Gap

Neil Shah @ Wall Street Journal:

White families build wealth faster than black households, a phenomenon economists call the “racial wealth gap.” What explains this growing divide?

The biggest drivers, new research shows, are home ownership and income levels. Tracking 1,700 working-age households from 1984 to 2009, researchers at Brandeis University’s Institute on Assets and Social Policy found that, among households whose wealth grew over the period, the number of years owning a home accounted for nearly 30% of the difference in the relative growth in wealth between white and black families.

Family income accounted for another 20% of the widening gulf in wealth. Other factors include college education, inheritances and unemployment. All told, these five factors accounted for 65% of the increasing wealth gap, researchers said.

The findings are the latest evidence that barriers in workplaces, schools and communities — rather than personal attributes and cultural factors — may be making it harder for blacks to accumulate wealth than whites over time. Wealth, the sum of assets like homes, cars, stocks and bank and retirement accounts, minus debt, is a key gauge of economic well being — and can be passed on to future generations.

Bernanke: Conservative Voice of Reason to Crazy Fellow Republicans

John Cassidy at The New Yorker:

With about eighty-five billion dollars of across the board spending cuts due to take affect in a few days, Fed chairman and former Princeton prof Ben Bernanke was up on Capitol Hill this morning giving his fellow Republicans a much-needed lesson in austerity economics. Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. “To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

Ideology over Empiricism among "conservatives", aka "The Crazy"

Steve Benen @ Maddow Blog on the GOP's reality issue:

For the Republican Party establishment, the only meaningful lesson to be learned from 2012 is rhetorical. Sure, polls show Americans rejecting the GOP line on every major issue, but, the argument goes, that's only because the party has failed to come up with persuasive sales pitches. Republicans believe they have a rhetorical problem, not a policy problem.

But just outside the establishment, there's a fair amount of discussion among Republican pundits, strategists, and thinkers about their party's systemic challenges and what the GOP should do about them. It's led to some thoughtful critiques from the likes of Ramesh Ponnuru, Kathleen Parker, Michael Gerson and Peter Wehner about how to "save" the Republican Party.

But it was this item from Bloomberg's Josh Barro, a self-identified "reluctant" Republican, that really got me thinking.

I don't want a Republican Party that's just like the Democratic Party, even though some people on both the right and the left see that as the upshot of Republican critiques like mine.

Political parties should differ on normative questions. They ought to strive for agreement on positive questions -- questions such as, what policies cause gross domestic product and median incomes to rise, how unemployment insurance affects the unemployment rate, or how global temperatures are changing. Currently, Republicans make a lot more errors on these kinds of questions than Democrats.

Correcting errors on positive questions should cause conservatives to revisit some of their top policies....  Conservatives say tight money and lower top tax rates would enrich middle-class families. But that's wrong, and if they figured that out, they might stop supporting tight money and lower top tax rates.

And that, right there, that very last sentence, helps shine a light on what I believe plagues the Republican Party more than anything else: they've abandoned empiricism, leading to a governing philosophy that puts ideological goals over pragmatic ones.

St, Reagan's grand fail

In the context of a response to column by conservative commentator Ramesh Ponnouru, Paul Krugman @ NYTs makes a compelling case with...uh...data:

Reaganomics was not a success!

Look at median family income. The basic story of postwar America is one of big gains in the first generation, near-stagnation in the second and after, with fluctuation due to the business cycle. And Reagan did not break that pattern:

If you want a better assessment, you can look at growth between business cycle peaks. (Peaks are much more similar than troughs; all happy economies are alike, each unhappy economy is unhappy in its own way.) Here’s what you get (treating the 1979-82 double dip as a single recession):

These periods don’t match up neatly with presidential terms. Still, if Reaganomics had been such a spectacular success, you would have expected the results by 1990 to have been families doing better than in the horrible 1970s; actually, not. The only clear things we see here are that the Clinton era was pretty good, while the Bush era was lousy even before the crisis.

The Walmart World

George Packer @ The New Yorker  takes a look at the fragility of the Walmart consumer economy after decades of increasing income inequality and years of Great Recession:

If you were to write a social history of America through the story of business, what would be the most significant companies in the years since the Second World War? I’d divide the period into two: from 1945 to the mid-seventies, I might name General Motors and Woolworth’s. They set the standard for corporate success and behavior during a period that could be called the Roosevelt Republic, when a social contract underwrote American life. It included an expanding middle class, a strong safety net, high marginal tax rates, a white male establishment that grudgingly made way for other groups, a bipartisan approach to legislation in Washington, and a business culture that was cautious, loyal, hierarchical, and unimaginative.

In the decades since the mid-seventies—you could call it the Reagan Republic, but I prefer the “Unwinding”—the social contract has frayed to the point of disintegration. The middle class has shrunk; tax rates (especially on upper brackets) have plunged; inequality has exploded; the safety net (especially for the poor) has weakened; the old power structure has given way to a more diverse and broad-based upper class based on education; bipartisanship—well, you know; and business culture has become entrepreneurial, fast, risk-taking, and harsh. The trade-off: more freedom, less security.

Two companies have defined the years of the Unwinding: one is Apple, the other, Walmart. Steve Jobs’s genius for design and marketing helped create the consumer taste of that educated upper class—the spare, sleek, Bauhaus-inspired devices; the turtlenecks and jeans; the self-congratulatory language of revolution and inspiration; the Einstein fetish—with the Apple Store a kind of secular temple for devotees in prosperous cities and suburbs, mostly along the two coasts.

Jobs’s stylistic and philosophical opposite was Sam Walton. He came out of the heartland, where he saw the potential for a strategy of low cost and high volume in overlooked backwaters like Siloam Springs, Arkansas, and Coffeyville, Kansas. Walmart’s period of explosive growth coincided with decades of wage stagnation and deindustrialization. By applying relentless downward pressure on prices and wages, the company came to dominte both consumer spending and employment in small towns and rural areas across the middle of the country. The hollowing out of the heartland was good for Walmart’s bottom line: its slogan might have been an amoral maxim attributed to Lenin—“The worse, the better.”

Joe Scarborough is an idiot

 Jon Chait @ New York magazine makes the case:

The deficit scold cause has suffered significant intellectual erosion over the last year or so. In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for  bug-eyed, table-pounding terror is growing increasingly ridiculous.

But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough, who may have launched the new catchphrase on Twitter, has a new op-ed in Politico brandishing the epithet. Meanwhile, the anti-deficit lobby “Fix the Debt” — for whom Scarborough has served as one of many media spokespersons — has taken up Scarborough’s favorite label with a new campaign, debtdeiners.com, which, alongside its latest attempt to generate a viral dance video, amounts to a concerted counteroffensive against Paul Krugman and others who have ever so slightly mitigated the tone of apocalyptic hysteria surrounding the fiscal debate. They even have their own debt deniers hashtag. They are trying very hard to make “debt deniers” happen.

Let’s examine their case on the merits, not merely as an attempt to create a viral meme.

Analyzing the argument in a Joe Scarborough–authored op-ed is inherently challenging. (The written word in general is just a terrible medium for Scarborough, hiding his winning personality while exposing his inaptitude for analysis.) It mainly consists of using variations of “debt denier” repeatedly to describe his opponents. To his credit, Scarborough finally cites one actual economist who shares his view, a welcome departure from his usual method of answering charges that he is in the grips of an incestuous groupthink driven by non-economist elites by citing the agreement of his non-economist elite friends.

Dr. Krugman v. GOP Starlet Rubio

The Professor @ New York Times:

"Marco Rubio Has Learned Nothing"

Because his party has learned nothing.

Kool-Aid?

OK, back up: this morning the papers and the web are full of nuance-sniffing, as people try to find omens in the SOTU and the GOP response. I don’t think I can add anything useful to all that. But there was one important point in Marco Rubio’s remarks that I don’t think has been highlighted. It’s true, as Andy Rosenthal says, that Rubio mainly reminded us that Republicans don’t like government or taxes; surprise! But he also reminded us that Republicans don’t like reality.

Here’s the passage:

This idea – that our problems were caused by a government that was too small – it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.

OK, leave on one side the caricature of Obama, with the usual mirror-image fallacy (we want smaller government, therefore liberals just want bigger government, never mind what it does); there we go with the “Barney Frank did it” story. Deregulation, the explosive growth of virtually unregulated shadow banking, lax lending standards by loan originators who sold their loans off as soon as they were made, had nothing to do with it — it was all the Community Reinvestment Act, Fannie, and Freddie.

Look, this is one of the most thoroughly researched topics out there, and every piece of the government-did-it thesis has been refuted; see Mike Konczal for a summary. No, the CRA wasn’t responsible for the epidemic of bad lending; no, Fannie and Freddie didn’t cause the housing bubble; no, the “high-risk” loans of the GSEs weren’t remotely as risky as subprime.