Economics

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Simpson-Bowles: They’re Back!

Yes. Simpson and Bowles are back at it.

Erskine Bowles, former Clinton aide, and Alan Simpson former Republican Senator from Wyoming, are back in the headlines. Motivated by the onrushing sequester crisis – how we all love our crises nowadays – and infused with loads of cash from big business, our dynamic austerity duo snatched the headlines on more time today.

According to their website they have a new, modified, approach to deficit reduction. The urgency is greater, so is the pessimism. They say the need is greater because, well, umm, it is. And their pessimism is greater because, well, partisan bickering is getting in the way of deficit reduction.

If you’re like me and think that the deficit is just fine right now and needs attention only when we have a healthy economy so it can withstand the shock of cutting government spending, then there is no present urgency. Other, of course, to avoid any cuts. I suppose that puts me and the dynamic duo on the same side on that score. We both want to avoid the sequester cuts – they are just awful for the economy.

The problem is that any cuts in government spending will be awful for the economy. No matter when they occur. So I suggest that we go about that cutting, if at all, when we have growth robust enough to sustain a few hits.

Simpson-Bowles see things differently.

They say we need those cuts in order to get to robust growth. They don’t articulate why this is so. They have no theory to back up their thinking.

Well, that’s not true. they do. Let’s give them their due.

They subscribe to the view that we will get the economy going by reducing the deficit. This, their website tells us, will encourage private investment and mitigate the risk of a fiscal crisis. Here’s the relevant paragraph:

Promote, Don’t Disrupt, Economic Growth. The United States must pursue a growth agenda. As the economy recovers, one of the best ways to promote economic growth is to bring our debt under control, which will both encourage private investment and mitigate the risk of a fiscal crisis. However, sharp austerity could have the opposite effect by tempering the still fragile economic recovery. In order to protect the recovery, the sequester should be avoided and deficit reduction should be phased in gradually. At the same time, tax and spending reforms should be designed to strengthen current economic conditions, promote work, encourage innovation, improve productivity, and bolster investment in our future.

First let’s acknowledge that they admit ‘sharp austerity’ would not help matters at all. Good for them.

It’s their basic premiss that sucks.

How will less government spending encourage private investment? This, presumably, is a variant of the old idea that government borrowing sucks money out of the economy thereby less for business. There is no evidence to support this. There is, however, a lot of hot air. The credit markets seem quite capable of providing enough money to finance both government and the private sector. If that were not true we ought to be seeing some form of rate increase because limited supply favors creditors. This isn’t happening. Plus monetary policy has been lax to put it mildly driving down rates and making borrowing very cheap. The consequence has been that investment has been muddling along at a decent if not spectacular rate since the recovery began. Besides big business is sitting on an almost unprecedented hoard of cash. If it wanted to invest it could even without borrowing. And bank balance sheets are not so constrained that they cannot lend. Indeed the most frequent complaint I hear from the banks is that they have too few credit worthy opportunities.

Why is that?

Because business, and especially small business, has a very unsure revenue outlook. Yes, things a getting better, but not that much better.

We have too little demand. More demand means more revenues. More revenues means stringer balance sheets. Stronger balance sheets means better credit. And that means more lending.

All roads lead back to getting demand to rise.

I think Simpson-Bowles must agree: that’s why they argue, as I do, that austerity now is a bad thing. It would depress demand even more.

Their second point in support of austerity is the ‘fiscal crisis avoidance’ idea.

This is also nonsense. Again: where’s their evidence?

Were we on the brink of a fiscal crisis interest rates would be moving up as creditors become ever more wary of lending. This is just not happening. The claim of imminent rate increases has been a steady mantra of the austerity folks since 2009. You would think that after four straight years of being wrong they would re-think their ideas. But no. They simply repeat them more loudly. This is absurd. Not to learn form an error is the worst kind of mistake an analyst can make. It is to put ideology before thought. Simpson-Bowles have fallen into such a trap.

Then there’s the small matter of the fiscal crisis that caused the melt down. It wasn’t a government debt crisis. It was a private sector debt crisis. Over indebtedness on the part of business and households led to an over-reaction once asset values were exposed as fictitious. The subsequent furious saving has depleted demand so much that it has become self-fulfilling drag on growth. It is abating now, but has a long way to go before it is played out. And as long as the private sector is saving and reducing its indebtedness, the government needs to supply demand.

Once more I need to acknowledge that they are clear: any austerity now is a bad thing.

So why is ever a good thing?

Well. Umm. It just is.

At its heart the Simpson-Bowles argument is the usual supply side one. Bolster the supply side and good things will happen. How? It’s magic.

This is not an economic theory. It’s a political position. They are at pains to tell us that immediate and heavy handed austerity is a very bad thing, but then are very vague as to why it should ever be a good thing. Instead they resort to obscure and hopeful statements rather than solid analytical reasoning.

The only explanation I have for their continued argument is that they just like the idea of spending cuts. No reason. Just cuts for the sake of cuts. They wrap this all up in little homilies, big warnings, and subtle suggestions, but they give no reasons. They say they want to protect the disadvantaged and then urge entitlement cuts. They want to burn the village to save the village. They want to encourage productivity growth but are silent on how to divide the fruits of that gain. Is it all for capital as it has been in recent decades? In which case demand will flounder some more. Or do they advocate wage increases? Unlikely I would say since Simpson-Bolwes are funded by big business.

There is one thing we can agree on, though.

They are clear that health care costs need to be reined in before they crush the economy. I agree. America’s antiquated health are system is a disgrace. It needs through renovation.

Good luck with that.

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The Market Gets Queasy

As we approach yet another of our self-inflicted crises, the ‘sequester cliff’, I find it amusing that the markets are reacting with surprising unanimity. Cutting government spending, apparently, is a jolly bad thing to do.

Why else would the stock market be in the beginnings of a panic?

Why else would the financial media obsess over the potential loss of business?

And why on earth would the Wall Street Journal be concerned at all?

The paradox and contradictions are acute.

On one hand big business lashes into Washington for running up debt and spending too much. On the other it gets vexed when it realizes that those cuts mean less business revenues.

On the one hand big business really, truly, wants supply side economics to work – it gets all the hand outs in that case. On the other it knows that it loses big time if demand stays depressed.

The acid test for anyone trying to figure out which side of the argument – austerity or stimulus – is correct is simple: follow the money. Or, rather, follow the lead of those who want to make a profit.

Business is sitting on scads of dollars of unspent profits. Corporate cash hoards are at historically high levels. It isn’t getting spent or invested. Why not? There’s no point. There is no point in investing in an economy where demand is already too low to keep our existing factories and workforce humming. We have excess capacity. That’s why we have high unemployment. We have lots of idle people and lots of idle factories.

The austerity folks imagine that by cutting government spending we will magically conjure a burst of business activity. They argue that less government means more private stuff. It doesn’t. In an economy where the average person pays more in payroll tax than in income tax, cutting income tax means nothing. Absolutely nothing. Worse, cutting government spending means cutting wages and cash flows. Those cuts mean fewer customers for business. So, faced with fewer customers and therefore even less demand, business will have no choice but to reduce activity further. Austerity will make the economy worse. Take a look at Europe to see how much worse.

Business executives know this. It annoys them no end.

They tend to be a conservative bunch. They would love it were right wing politics and right wing economics to work in unison. But they don’t. The economics sucks. It is bad for business. That throws business into a quandary. It makes the markets queasy.

With profits already sucking out a larger percentage of our national annual wealth than ever before – I know small business people have a hard time thinking that’s true – the only way to increase future profits is to make sure we have a population with money to spend. We need higher wages. And we need government spending to stay where it is.

That may no agree with your politics. But it ought to agree with your pocket book.

In fact, I know it will.

No wonder the market gets queasy: it has its politics and its economics in a muddle.

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What’s Missing?

A couple of days ago I complained about the misrepresentation of Federal spending under Obama. It hasn’t risen anywhere near as much as some folks say it has. Indeed it has been under control since that first burst during the heat of crisis.

That drew the ire of one or two of you who complained that the real issue is not the budget, but the economy and its chronic under performance.

I agree.

I look at this chart and wonder why our fearless leaders don’t see what’s missing:

 

 

 

 

 

 

 

 

Because it’s pretty obvious to me.

The economy is blundering along well below its potential. Every moment that it continues that way we are leaving money on the table. That’s iPods we didn’t buy. Or schools we didn’t build. Or bridges, railways, and roads left in disrepair. Or jobs not created. Or wages not paid. It is even profits not made.

Whichever of these you focus on, and no matter what your political persuasion there has to be something on that list you wanted to see happen, the sad fact is that we have foregone a lot.

More to the point we won’t get it back. That gap between the bottom red line and the top blue line in the chart is the gap between what wealth we created – the red line – and what wealth we could have created – the blue line – had the economy tracked its historic path.

Look back in time on the chart. In each recession – they’re the grey patches – you can see the economy drop below its potential. Subsequently you see the gap close and we return to normal. Once or twice, especially in the latter Clinton years, the economy breaks above its potential and creates wealth at a pace that is not sustainable given our resources and productivity.

It is that yawning gap in recent years we need to look at. The loss is immense. The Congressional Budget Office calculates the loss to have been in the region of $7 trillion. Or at least it will be by the time we finally get back on track, which the CBO suggests is a few years off.

Now think of it this way: $7 trillion is a lot of cash. It would a great big pile were we ever to come across it. It would be unavoidable. We all can think of plenty of things we would like to do with it. So why aren’t we hell bent on finding and getting it back?

Because we can’t agree on how to go about the task.

In my opinion there’s only one sure way to get our money back. We need to stimulate demand. That would shift the red line upwards. But our private industry and households are busy digging out from the crisis. That’s why the red line collapsed. It was a private sector crisis. Businesses fired people. Households saved money instead of buying things. And that withdrawal of spending made business more worried, less profitable, and thus needing to cut more jobs. We fell into a vicious downward spiral where each step was sensible from a personal perspective, but destructive when we added it all up.

The result was that the economy dropped way below its potential. And it got stuck there because of the self-fulfilling nature of the cause.

The only way out was for the government to fill the gap temporarily by spending more. That’s what a stimulus does. It provides spending – and thus keeps that red line up – whilst the private sector gets its house in order.

There are a lot of people who disagree. They argue we need less government spending and more incentive for private businesses to invest and ‘create jobs’.

Think about that in terms of the chart.

Less government spending would move the red line lower. It would make the gap bigger. And more investment would add to potential. It would drive the blue line higher. That would also make the gap larger. Tinkering with the supply side is a fool’s game. It sounds great until you look at what effect it will have. None. In fact it will make matter worse.

No business worth its salt will invest heavily in the face of weak demand. Throwing all the incentives in the world won’t alter that. Think in terms of all the cash sitting on big business balance sheets right now. Profits and cash hoards at near all time highs. Business is wallowing in cash it doesn’t want to spend. Why? Because there’s no one willing to buy more. Wages are flat. Unemployment still lingers way too high. People are still worried about the immediate future.

Right now the only sector of our economy that has both the ability and the opportunity to help fill that gap is the Federal government. It needs to add to its deficit in order to succeed.

Which is why I keep arguing we don’t have a deficit or debt problem. To focus on those is to focus on symptoms not the disease. Our problem is a lack of demand. Crank that up and those symptoms subside of their own accord.

This is not magic. Nor is it a government take over of the economy. It is simply our only way of propping up activity until the private sector gets back on track. The sooner we can close that gap, the better off we will all be.

Or, of course, we can continue to shoot ourselves in the foot. The gap will only get bigger if we keep this up.

In which case that lost $7 trillion may seem like the good old days.

 

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Federal Spending Facts

Like many people I am perplexed by claims that federal spending has ‘exploded’ on Obama’s watch. The claim is generally made by someone on the right of center in politics and is stated as if it is a well known fact. So well known that no one can possibly refute it. The conversation is then meant to proceed immediately to what we can do about said ‘explosion’ and how we can restrain the Federal government.

The problem I have is factual.

Here is a chart of Federal spending from way back when:

 

 

 

 

 

 

 

Yes, spending has risen substantially through the years, but take a closer look. Let’s inspect that past decade:

 

 

 

 

 

 

 

 

Now the picture is somewhat different.

Instead of spending ‘exploding under Obama, it has been under control. The explosion, such as there is, took place under George W Bush. There was a sharp upward shift when the recession hit and safety net spending took off, but since then the trajectory has been fairly flat. Spending is clearly higher now than when Obama took office, but most of that increase occurred in the midst of crisis. There is no sign of the mythic explosion right wingers like to talk about.

So why do they? And where do they get their facts?

The first question is easy to answer.

Right wingers want there to have been an explosion because it allows them to argue for draconian cuts, especially in social programs. So inside their world the chatter is about a burst of spending that requires urgent cutting back. This is despite, as the charts show, that there has been no such burst. The ideologically pure position on the right, nowadays, is that government spending is way out of control and, that if left unattended, it will throttle the economy. Apparently runaway government spending is now a problem whereas during the Bush era it was not.

For the record: during the first four years of the Bush administration spending rose a cumulative 30%. In Obama’s first term it rose just 9%.

There is something extremely odd about this. The same folks in the Republican party who, presumably, felt fine with a 30% increase in four years, now think it is outrageous to have a 9% increase over the same timeframe.

That is absurd and hypocritical.

It would be reasonable to have objected to both. It is not reasonable under any circumstances to take the position we see today.

That second question is impossible to answer.

I have no idea where they get their facts. I have seen some right wingers claim spending has risen 37% under Obama. I cannot find such numbers. Not, at least, in any of the major databases of governments statistics. Perhaps they made it up. If so, it makes sense that the made up figure tops the Bush profligacy.

In any case, it simply isn’t true that federal spending has exploded.

Our annual budget deficit has grown sharply, not because spending grew, but because revenues slumped. That annual tax take shrank, as it always does in recessions, and it will recover in due time as the economy recovers.

We have no great immediate fiscal crisis. None.

That may be inconvenient to those who wish we did so that we would be forced to slash social spending. But the facts don’t lie.

Not the real facts at least.

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In Not Of?

Today’s New York Times has a reminder of the damage the crisis has done to the economy, and, more importantly, to enduring attitudes towards opportunity. The article summarizes the results of a survey conducted by Rutgers University.

The main thrust of the article is that this crisis was both deep and broad enough to involve almost eighty percent of the population in one way or another. Unemployment and its awful effects were that widely felt. People’s lives were often ruined permanently. The entire trajectory of some people’s lives will be changed forever. The damage is incredible. The downdraft from Wall Street’s extraordinary greed driven stupidity caught almost all Americans and has left enormous psychological as well as material scars.

Yet we still have not dealt with the causes and have not undertaken strong remedial action.

Why not?

Our elite, those people who make the key policy decisions in both the public and private sectors, and those who shape the discussion in the media and academia, are divorced from the reality that the Rutgers survey exposes.

Our elite may live in America, but it is not of America.

This leads to a profound separation.

The elite lives a life and inhabits a network that excludes the rest of us. It faces a different set of facts and so resolves its perceived difficulties in ways that are often perverse from our point of view. It was largely protected from the crisis and thus could see it more as an academic exercise rather than a raw everyday experience. It still fails to understand the erosion of opportunity that most Americans feel because its opportunities exist elsewhere. The elite shares a world with other elites. Its problems extend across borders. It sees and tackles problems with a shared set of values and ideas, not shared with us, but shared with those other elites. It cares little about the cost of education because it can afford that cost. It cares little about the cost of health care because it is well provided for. It cares little about a rotting infrastructure because it lives beyond it. It cares little about the loss of competitiveness because it is mobile and can move to the opportunity. Besides it has little national allegiance and can argue, without remorse, that adding jobs in China is still adding jobs. So what that they aren’t in the US? If only American workers were competitive. Meaning that cheap.

When American workers are that cheap the elite will, no doubt with much patriotic fanfare, repatriate those jobs. Until then it is the duty of our government to use taxpayer resources to subsidize the retention of jobs here at home.

To the elite the very word ‘home’ is an oddity. Which ‘home’?

This state of affairs is not unusual in history. It is quite usual to read the historical record and discover a nation ruled by an elite that shares little in common with the common populace. Just this week there was much fanfare over the discovery of the remains of Richard III of England. He was the last of the Plantagenet dynasty. They were a French family, most of whom spoke only French. They ruled England.

We have an an analogous elite.

Our’s speaks finance. It understands investment. It is highly bureaucratic. It is well educated and protective of its skills which are usually walled off by expensive professional requirements. It occupies the credit side of the balance sheet. Which is why it is pre-occupied with debt levels, interest rates, fears of inflation, protecting the banks, and increasing profits. It doesn’t perceive itself as being part of the ‘wage’ economy, so wages are unimportant. Nor are jobs. After all, it imagines, there are always jobs if the wages are low enough to justify hiring someone. If only workers didn’t want so much, there would always be jobs.

This isn’t the classic capitalist elite imagined by Marx. It is a newer and more diverse group created by the complexity of modern bureaucratic management and economic process. It lives in the network that links the diversity of our economy and makes its money by moving the parts around, or by providing ‘advice’ and ‘opinion’ to those that do. It is self-sustaining, self-reproducing, and almost immune to the reality it thinks it controls. It fills our leading universities with its offspring, securing that education with generous donations to the endowments that are then invested in the companies the elite manages. It directs the research agendas of those universities. It benefits from the learning produced. It buys what it can, and what it cannot buy is deemed insignificant. It sates its charitable instinct by donating heavily to the ‘arts’ that it wants to consume. And it mitigates its fear of being seen as rapacious by making bigger donations to those same arts – only this time as a tax deductible gift to the ‘public’.

All in all the elite socializes with itself in an incestuous ignorance of what lies yonder.

Until, of course, what lies yonder whacks it on the side of the head and demands attention. At which point the elite has no response or use because it has no explanation of, nor care for, what lies yonder.

And this is our problem.

No amount of whacking on the side of the head is getting us anywhere. The elite is still spewing out policy solutions that seem fine within its bubble but have no relevance outside.

It worries about debt when there is no reason to.

It worries about inflation even when there isn’t any.

It worries about profits even when they are historically high.

It protects the banks even when they mess the economy up.

It cares about immigration only to the extent it provides skilled workers.

It cares about health care only because it is an expensive benefit to provide to workers.

And it cares about workers only if they are cheap, and, well, do work that the elite needs done.

This is what we get for having an elite that lives in America, but is not of America.

Rotten policy and irrelevant policy debates about artificial crises.

We need jobs. And we need growth. Our elite is failing to deliver either.

 

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