About Peter Radford

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Obama-itis

I have a friend who is incapable of saying anything against Obama. It is truly astonishing. He loves Obama’s budget proposals. I hate them.

Right now the media is awash with breathless articles arguing that Obama has a great opportunity to ‘do a deal’ with the Republicans. After all he is now ‘concerned with his legacy’, and the GOP is, apparently, suddenly concerned that it has to do something vaguely constructive in order to look responsible in 2016. It’s their only hope of winning – to look like a responsible party! Who knew?

This marvelous confluence of short term desires is a perfect storm for those professional Kremlin watchers who misinterpret the minute details of Washingtonian infighting as some sort of geopolitical grand strategy.

Surely, they say, we can all break the dreaded Washington deadlock now. The time for progress has arrived!

Really?

Let’s keep this short.

A major plank in Obama’s budget proposal is that he is willing to trade a major tax break for big business in return for a one time windfall tax on foreign earnings they repatriate. The tax break being a heavy cut in the tax rate they incur going forward. For ever.

Where in here is a compromise?

It looks, to me, like a sell out. That foreign income ought to have been taxed anyway. And even though our corporate tax rate is very high by international standards, so are the tax wheezes and dodges that diminish that rate to next to zero when it comes to writing actual tax payment checks. Our biggest businesses pay hardly any tax. Why cut their tax rate? And why is it a ‘victory’ to get them to pay a tax they already owe?

I think that the allure of the faintest glimmer that we might invest something in our rotten infrastructure – which is what Obama is proposing that windfall corporate tax is used for – has confused my friend and his media buddies.

Think about it: we are so incapable of investing in essential infrastructure because of the pressure of right wing extremist opposition to all things governmental, that we have to lower – permanently – our revenue from taxes, in order to induce a modicum of sanity.

That is not compromise. It is capitulation.

As a nation these United States have become so dysfunctional and so beholden to right wing economic ideas that we radically underinvest in infrastructure. Our roads, ports, airports, railways, bridges, schools, and so on are decaying rapidly. Our internet services are deplorable and high cost. Our health care system sucks. We have spent the past three decades avoiding investment in order to give ourselves unsustainable tax cuts. We have gutted the future. We have deprived future generations of a world class base from which to compete.

We cannot fix it because infrastructure spending is an inherently governmental task, and ever since Reagan we have been led to believe that the government ought to be bled dry of cash. ‘Starving the beast’ has been the dominant right wing strategy since the old actor lied to us, and to this day the notion of raising taxes to pay for some of these services is an anathema to most voters.

So, in sallies Obama proposing to cave in on another battle front in order to appear above the petty fray.

With Democrats like him we don’t need Republicans.

But my friend persists in the adulation.

I have no idea why.

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Rats! History Does Repeat Itself

And clearly economists don’t learn from it.

Ponder this:

“It was all very well for the rich, who could raise all the credit they needed, to clamp rigid deflation and monetary orthodoxy on the economy … it was the little man who suffered, and demanded easy credit and financial unorthodoxy.”

That’s the voice of E. J. Hobsbawm in his book, “The Age of Revolution 1789 – 1848”, and he is talking about post Napoleonic Europe.

But how contemporary is that sentiment?

We are stuck in a similar situation. Our elite, both here and in Europe, is managing the economy  for its own ends. The disconnect with everyday folk is astonishing. The hubris and plain meanness of it all is equally astonishing.

Look at Greece: the attempt to impose a teutonic fiscal ‘discipline’ via stringent austerity has simply led to the debt that was the target of the policy becoming an even larger problem. It is an example of epic policy failure. The Greeks, for all their previous laxity and fiscal ineptitude, are to be applauded for calling for an end to the stupidity.

Except it isn’t stupid. It’s cruel.

For policy makers to ignore the human consequences of their initiatives is a monstrous ethical equivocation. Economists, in particular, are prone to sticking their heads in the sand and pretending that what they theorize is simply theory and that real world consequences are somehow not consequences but accidents. That is to say human devastation is not supposed to be a result of a theory that posits happy endings, efficiency, and the nirvana of optimality. Apparently, to those who propose policies based upon such theories, bad stuff is simply a cost of getting to that happy ending. The bigger the human catastrophe the bigger the gap between reality and utopia. And the stronger the argument, so those of such faiths say, for their proposals.

Burn the village to save it?

The economists who propose utopian theoretical constructs need to be held accountable for the human cost of their extreme faith. They are either unethical because they don’t care about the cost of what they propose; or they are complicit with the elite and want to partake in the oppression. Or both.

I find it disheartening that economics has become so insular that history is expunged from it. Not only economic history, but the history of economics itself.

How can that be?

Economics is, after all, supposed to be explaining economies. And economies are in constant flux. So economics ought to be about flux, and it ought to be able to change in step with the economy. A theory that worked in a primitive industrial setting might not do too well in our advanced, more complex, interconnected, and yet highly bureaucratic setting. To expend great intellectual energy on timeless truths is, in my opinion, a waste. Not that there are no constants, it’s just that those constants are usually buried under a pile of more ephemeral and urgent other effects.

And many of those other effects are political, cultural, institutional, geographic, epistemological, or, gasp, just human, in origin.

Anyway, I think that one constant we can all believe in is that the rich will err on the side of deflation. They will preach the virtues of being creditworthy. They will complain about the slightest hint of inflation. And they will do their utmost to steer policy to aggrandize themselves.

One of the common themes of those doing the political agitating back in the immediate aftermath of the Napoleonic wars, whether they were in France, Britain, or these United States, was their desire to follow heterodox economics. Orthodoxy is an intellectual defense of the elite.

Same as now. Right?

 

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2016 Here We Come – Or Is It 1980?

Here we go. The early speeches are being made. The media is getting breathless. Serious people everywhere are practicing their serious positions. The next presidential race is underway.

How many times will we be told that America has to face its ‘fiscal challenge’? By which, naturally, serious people always mean that we have to cut social spending because, obviously, we just can’t afford it.

Well it’s obvious to them.

It’s way too early to tell what issues will dominate the race – lots of war talk, and middle east confusion notwithstanding – but we are already getting a few hints.

Apparently the Republicans are terribly concerned over inequality, the decline in median incomes, and the generally dilapidate state of our middle class. Who knew they were so worried?

No one who has paid attention for the past three decades, that’s who.

Here’s a quote from a recent Jeb Bush speech:

“Six years after the recession ended, median incomes are down, households are, on average, poorer … and millions of people have given up looking for a job altogether … Roughly two out of three American households live paycheck to paycheck. Any unexpected expense can push them into financial ruin. We have a record number of Americans on food stamps and living in poverty. The recovery has been everywhere but in the family paychecks. The American Dream has become a mirage for far too many.”

This litany of disaster is, according to the Republicans, firmly and unequivocally Obama’s doing. It was him, they say, and his awful inattention to the middle class.

This sudden outburst of empathy for the 99% of Americans is, I imagine, a proactive effort to distract our febrile media and make sure that the Democrats cannot use inequality as a major electoral weapon. Not that the Democrats seem to have much of a position on anything. Yet anyway.

Anyone who has followed economic policy since Reagan launched his attack on the middle class will notice just how amazing this switch is. For thirty five straight years the Republicans have advocated policies based on the basis of orthodox economics – it’s a toxic mix of deregulation, neutering government, and steady diminution of social spending. The idea being that market magic will create enormous growth and that, equally magically, those self same markets will ensure wealth flows to those who ‘deserve’ it. It’s a great story. It has such a morally superior sound to it. Why on earth would we not go all in?

We did.

And it was shown to be the fallacious nonsense it always was.

Markets are unreliable to begin with. They are especially unreliable when they are twisted to favor a lucky and greedy few. Which is what deregulation fostered. In our case the lucky and greedy few being the 1% and the big corporations. They have certainly boomed under the rules set out by orthodox economics and the Republicans.

The middle class? Not so much.

In fact, I think it’s now pretty clear that those policies are the root cause of the middle class decline and the rise of inequality that the Republicans are now suddenly so worried about.

Hence the urgency of the need to divert attention away from the cause of the problem.

But, at least in the case of Jeb Bush, the Republicans can’t escape the pull of the allure of market magic, and, more precisely, the allure of protecting the 1%. Here’s what Bush said about Obama’s recent tentative attempt to change the tax rules on what are known as ‘529’ savings plans – the ones that allow tax advantages savings for college tuition:

“Just last month, he [Obama] thought it was a good idea to tax 529 college savings plans. Remember: 529s were created to be tax-free ways to save for college. Millions of people started them for their kids and grandkids … So it’s no surprise people hated the president’s idea. And he dropped it. But it was an instructive lesson in the liberal and progressive mindset.”

Well, well.

Whilst millions of people may have started such accounts, it is no secret that the people who benefit the most, as it is with all tax dodges, are the 1%. It is our already well off. Our well off and their kids raised such a stink when Obama proposed the tax change that he backed down quickly.

And, yes, it is an insight into our contemporary progressive mindset: there was not enough courage to cut an obvious giveaway to the rich.

Which means that as we enter the 2016 electoral cycle we have no one – as yet – who is truthfully committed to protecting the middle class.

In other words: expect lost of blather, misdirection, and nonsense, with very little actual action.

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Back to the Budget

One of the least remarked upon aspects of the President’s State of the Union address last week was that it made no reference to the federal budget or to the deficit. Nor, for that matter did any of the seven – yes seven! – official or quasi-official Republican rebuttals.

Why has the budget become a non-issue?

Well, because the deficit has shrunk at a rapid rate. This is what it looks like expressed as a percentage of the economy as a whole:

 

Fed Deficit

In terms of dollars the deficit was $483 billion in 2014 and is expected to shrink slightly to $467 billion in 2016. As a percentage of GDP the deficit is now down to 2.8% in 2014, which compares with an average of 2.7% for the past fifty years. So after its extraordinary run-up because of the crisis of 2007/2008 the Federal deficit is pretty much back to normal.

A couple of days ago the Congressional Budget Office released its latest long range forecast for the Federal budget, and announced that the red ink will begin to swell again in the not too distant future, with deficits inching back up towards between 3% and 4% of GDP over the next decade.

A consequence of this is that the amount of Federal debt owned by the public will also start to rise again, from its current level of about 74% of GDP towards close to 80% by 2025. Just for reference that ratio was around 37% before the crisis began.

Why is this worthy of comment right now?

Because the President will submit his annual budget to Congress next week and rumor has it that he looking for an increase in spending somewhere in the range of $70 billion. This will undoubtedly bring the deficit back into focus, and will cause the usual rumpus from the GOP.

So as we set the stage for the next round of budget battles we ought to reflect on a few significant points:

First, let me remind you of the famous comment by Dick Cheney: “deficits don’t matter”. This was standard Republican thinking back in the 1980’s when Reagan tax and spending policies caused outlays to grow much faster than revenues. You can see this effect clearly in the cart above, where the 1980’s are a decade of large deficits – much larger than anything seen since those of the wartime economy of the 1940’s. It is always fun to poke Cheney’s line at any Republican who now claims that it is Democratic policy making that created the deficits.

Second, as the chart also shows, apart from the recent post-crisis years the only period of consistent reduction in the deficit was during the Clinton era. I don’t count the Bush administration for the simple reason that the reduction in later years was from a larger deficit that was a deliberate consequence of profligate tax policy at the onset of the Bush era. I realize that some Bush apologists will claim that deficit increase of 2001/2002 was in reaction to the recession around that time, but I don’t buy it: the Bush administration’s early policy was built around reducing revenues, and the infamous tax cuts of that era reflect, not a Keynesian style stimulus, but a Grover Norquist driven attempt to “starve the beast”. Those of us enamored with Clinton, however, would do well to remind ourselves that the deficit reduction during the 1990’s and more to do with the dot-com bubble than it did with intentional policy.

Third, a significant factor in driving the recent reduction in the deficit has been the notorious sequester of 2011 [aka: The Budget Control Act].  This legislation imposed strict spending guidelines on Congress, which, after a so-called Super-Committee failed to find any common ground for cuts, kicked in with full force in 2013. So sequester is still driving budget policy and the two sides in Congress both tear their hair out over the damage being done to pet projects – the defense budget is now down to about 3.3% of GDP and is expected to fall further to about 2.8% over the next couple of years. The effect of the sequester will be to drive discretionary spending – i.e. that part of spending not mandated by specific legislation – down to levels unheard of since records were first established for such spending in 1940. We are already back to levels not seen since 1962. Obviously this untenable: it leaves no room at all for increases in infrastructure spending, which has been moribund for years now.

Fourth, this all leaves the field open for continued war over the mandatory part of the budget which largely consists of Social Security, Medicare, and Medicaid. These programs together comprise a large majority of total Federal spending and are due to increase gradually over the next decade as the baby boom generation ages and retires. According to the CBO, Social Security spending will rise to about 5.7% of GDP by 2025 [from around 4.9% in 2015 and 4.2% in 1990], while spending on the various health care programs will rise to about 6.2% of GDP [from around 5.1% in 2015 and 2.3% in 1990]. Only a couple of weeks into the new Congress and the groundwork has been set for the next battle over Social Security: the House GOP leadership changed the rules covering the way in which internal transfers between the two Social Security accounts are agreed to by Congress. The account covering the disability portion of the program was set up at a different time from the main account, and is expected to need replenishment in 2016. In that past votes to authorize such a replenishing move were pro-forma and perfunctory. Now the new rule allows a single member of Congress to veto them. So instead of being routine, as they have been in the past, they will become hostage to right wing attack.

Fifth, the CBO’s forecasts of a renewed deterioration in the budget in the years beyond 2020, are heavily affected by interest rates. The CBO expects interest rates to return to ‘normal’ levels quite quickly. This will, inevitably, raise the cost of the accumulated debt, so that it gets back to about 3% of GDP by 2025 up from around 1.3% now. This is, however roughly what interest costs were in the early 1990’s before the Clinton era reduction in debt.

Overall lamentable tax policy over the past thirty years – and especially under Reagan and Bush –  has seen Federal revenues drop to only 17.5% of GDP. Whilst this is around the average for the past fifty years it is well below the level of spending, which, at around 20% of GDP, is also right at its fifty year average. In other words we have arrived, accidentally rather than deliberately, at a budget whose income and expense components reflect long term attitudes. The net result being a return also to the long term amount of deficit.

What throws this into the political battleground is that spending on social programs is mandated to increase simply because of the aging of the population. We are thus confronted with a dilemma: do we fund that increase? Or do we cut into spending – essentially reneging on the deal we made with future retirees when they were working and contributing to the programs?

So, although the budget wars might seem to have faded from view, they will assuredly pop right back up. Perhaps as early as next week’s Presidential budget proposal.

Stay tuned.

 

 

 

 

 

 

 

 

 

 

 

 

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The Greek Experiment

Let me congratulate the Greeks for taking the first, but only the first, step towards a more civilized economic policy. I am intrigued by the prospect of Yanis Varoufakis as economic minister deep in argument with any of the large number of radicals that infest European economic posts. And, yes, they are the radicals. The notion that aggressive austerity measures can engender growth and can be mostly benign with respect to employment, wages, and other immediate aspects of economic life is a radical, almost extreme, idea honed most recently to protect wealthy elites from having to engage with the rest of the societies inside which they exist. Against this form of radicalism people like Varoufakis, despite being smeared as radicals themselves, are more orthodox than not. At least they realize that economies are not mere models to manipulate, but are collections of people whose futures and dignity are surely worthy of consideration alongside such abstractions as markets or efficiency.

Any economy that is suffering 28% unemployment and which has experienced a drop of about 25% in GDP is a candidate for a shift in economic policy because it is evident that the existing policy – the one that produced those levels of unemployment – is not working. The experiment of imposing extreme austerity in order to protect the Greek banking system, which is what the Greek crisis resolves to, is an absurd and inhuman failure.

The austerity imposed on Greece in return for financial support was supposed to achieve a twofold result: Greek debts were targeted to decline as the government’s budget was brought into balance; and the Greek economy’s competitiveness was expected to recover making it possible to eliminate Greece’s chronic trade account deficits.

While it is true that Greek competitiveness has recovered somewhat – the trade balance now has a modest positive balance – the recovery is an illusion: it is more a function of the collapse of Greek demand for imported goods than it is a sudden recovery for Greek exports.

What about that collapse of an appetite for imports?

When your economy sheds nearly one million jobs in the space of a few years, demand is bound to plummet.

And when you deliberately create such an implosion all sorts of other bad things happen. Such as the pernicious decline in prices called deflation. Whilst the notion that prices are declining may seem attractive to those of us still living with memories of 1970’s double digit inflation, they are, in fact, a very bad phenomenon. The most obvious nasty outcome being that it makes the repayment of debt more difficult: since, under deflation, the real purchasing power of wages has risen [you can buy more goods with the same amount of cash], and since the debt is denominated as a fixed quantity at the moment it is created, the implication is that the inflation adjusted value of debt also rises. The result being that someone has to forgo more goods in future to pay down the same amount of debt as in the past. Not only this but cashflows for businesses diminish – they are selling the same number of things but at lower prices – this forces employers to reduce wages and/or employment, which, in turn reduces the purchasing power within the economy and hence demand.

It is easy to think through why deflation is so harmful potentially.

Yet those who seek to impose austerity blithely ignore the deflationary threat. Indeed they often imagine that they are fending off the precise opposite. The delusion is extraordinary.

More to the point the entire construct of austerity fueled growth is an imaginary one that is both novel and bizarre. All the evidence suggests it being a total illusion, yet it has a grip on the minds of key policy makers, especially in Europe.

So the Greek experiment is not what Varoufakis might start to suggest as sound economic policy, but what has been enforced on Greece these past few years.

We are not entering a period of economic experimentation, we are exiting one.

It is a lesson we ought to learn here in the US where the experiment of extreme economics has, for the past thirty years, resulted in a whole host of bad outcomes for average American families. It is time to return to an economics that acknowledges the purpose of policy being to enhance the lives of those who comprise the economy, and not to treat those lives as just one variable in an elegant equation where the ultimate goal is efficiency and not dignity.

People will choose dignity over efficiency more often than orthodox economists want to believe. This does not mean people will avoid tough trade-offs, it means that people need to be assured that policy makers take them into account when prescribing policies that have life damaging outcomes.

In a nutshell: if we had more unemployed economists we might, possibly, have an economics more sensitive to the human condition than that which now dominates policy. Perhaps the Greeks can lead the way.

 

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