government spending

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More Sideways Than Up

The economy just can’t get on a roll. We managed to get passed the slow down of late last year only to run full square into a self-inflicted slow down this year. Ugh. That’s a technical term for ‘I told you so’. The economy, as measured by Gross Domestic Product (GDP) grew at a 2.5% rate in the first quarter this year. The good news is that the economy gained speed – the last quarter of last year had seen anemic 0.4% growth. The bad news is that this acceleration is too slow to clear up all our excess capacity, especially our severe long term unemployment problem. It is also too slow to get us anywhere near back to our potential. Every day we slop about like this we leave wealth on the table unearned. And that matters to us all. Or at least it ought matter to us all. A lot.

Here’s the breakdown, as usual I show the contributions of each major part of the economy:

  • Personal Consumption grew at a 3.2% pace, contributing 2.24% to the total
  • Private Investment grew at a 12.3% pace, adding 1.56% to the total – of which 1.03% was in the form of inventory accumulation
  • Net exports reduced the total by 0.50% because the growth in exports was more than offset by growth in imports
  • Government spending continued to shrink and reduced the total by 0.80%

This is a really mixed bag.

As you can see, the biggest impetus to overall growth came from personal consumption, but no one expects this pace to carry forward much. Disposable incomes dropped 5.3% in the quarter due primarily to the rollback of the payroll tax holiday. Couple this with the continued decline in savings and it becomes very difficult to forecast strong personal consumption for the remainder of the year.

Then there’s the increasing negative effect of the decline in government spending. A large number of people, some in the media as well, seem not to realize that US government spending has been in decline for a while now. Right after the crisis hit, state and local governments around the country began to retrench in order to balance their books in the face of a collapse in revenues. The 2009 Federal stimulus meant that Federal level spending grew for a couple of years, but with that now fully worked through the system, and with the sequester cuts coming on line,  even Fed level spending is now declining. Add the two together and total governments spending is acting a strong brake on growth. Which is exactly not what we need to see. But Congress in its wisdom has decided to slash away at the economy. This is despite all the rapidly accumulating evidence that austerity doesn’t, can’t, and won’t work.

Let’s look at two charts:

Here’s GDP growth over the last few years …

Yes that dip was enormous.

Here’s how the total accumulation looks when we express it as a percentage the peak reached jut before the crisis …

As you can see we’ve managed to get back above the pre-crisis peak. But not by much. That’s because we are running well under a rate of growth enough to get us back to our potential. Here’s the gap between potential and actual …

 

And, last of all, here’s a look at the level of government spending as a percent of that potential GDP …

I think it correct to look at government spending in terms of potential, and not actual, GDP because the result gives us an idea of what that spending looks like were the economy in good shape and not impaired as it is now. Two points ought to leap out at you when you look at the last chart:

  1. Both the Reagan and Bush II years show sharper increases in government spending than the intervening Clinton years. Indeed if you look closely you can see that the Clinton era was one of good control over government spending.
  2. It is very clear that the leap in government spending associated with the crisis has not continued and that the Obama administration is overseeing the only non-recession caused contraction is such spending anywhere on the chart. In fact Obama is pursuing a tighter fiscal policy than any president of the past forty years.
  3. This Obama austerity movement is not something to applaud. Draining government spending from the economy before the private sector is back to full health makes matters worse, not better.

What does all this mean?

That the economy is not fully healed. That growth is more likely to slow than to accelerate. And that government fiscal policy is working in exactly the wrong direction.

This is not a good message. The first quarter’s 2.5% growth may well be the high water mark for the year. It’s most likely down hill from here.

Unless, of course, Congress decides not to be so stupid. That’s not happening though, is it?

 

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There He Goes Again

I have a friend who can be guaranteed to wax lyrical about anything Barack Obama does.

Me? Not so much. I have never been a big fan. I look at him as being the least worst option. Good on a few social issues, making a start on health care, botching bank reform [horribly], and generally allowing the Republicans to lead the way on the economy.

I think what vexes me most is his perpetually odd negotiating style. He stakes out the middle as his first move. No wonder I feel as if he concedes too much. He does.

From a different perspective Obama’s constant outreach to the GOP makes more sense: he agrees with them in principle of some important issues. He has major disagreements on things like gun control and gay rights, but on the economy he is remarkably centrist. Indeed in some ways he is just right of center. And he still can’t get a deal done.

I bring this up because today we started to get a solid read on his budget proposals. He is due soon to announce them more formally and so the current spate of leaks seems positioned to draw the sting out of opposition from the left.

Why is this necessary?

Because he seems set to keep up his futile search for what is called  a “grand bargain”, or a deal that would settle fiscal policy for a long while. That we have no such deal so far is easily explained: the Republicans don’t want one. Or, rather, they don’t want a deal with revenue – aka tax – increases in it. This has been the stumbling block all along and will remain so. It took enormous and dangerous brinkmanship to squeeze a tax increase on the very top income earners out of the recalcitrant right wing of the GOP, and the prospect of getting amore general revenue increase is dim to say the least. I still look at the last deal as a failure for Obama – he surrendered most of the Bush tax cuts in order to get minimal gains elsewhere. Now he seems set to trade away cuts in entitlements in a vain attempt to get what he already had: more revenue.

He already had it because if he had simply sat on his hands and allowed the Bush tax cuts to expire, as the law required, revenues would have jumped. He could then have traded from strength. Instead he gave away the same revenue he now wants to recapture. And in order to accomplish this he will have to give away even more. Namely those cuts to entitlements.

I realize that the political circumstances are tough. The Republicans are dug in and dogmatic. They want to hold us all to ransom. But why, then, seek a deal?

The deficit is already shrinking. Rapidly as it turns out. And of its own accord. Much of it was cyclical and will go away as the economy improves. Many of us have been predicting this all along. There is no need to settle long term fiscal policy issues at the moment. Especially in the face of an intransigent opposition. That opposition guarantees that Obama will be forced to give away far too much, right at a time when the winds are blowing in his favor.

Worse: his bungled attempts at getting a ‘grand bargain’ have led us along a path resulting in the sequester that is now adding to the cyclical deficit reduction already underway. Both the cyclical reduction and the sequester are acting to slow the economy down. The GDP growth prospect already looks slim for later this year. So what is Obama’s economic plan? To seek a ‘grand bargain’ that would slow us down even more.

This all annoys me no end.

Obama is setting out to strike a deal we don’t need  by trading away entitlement spending that doesn’t need cutting. If this sounds perverse, it is.

So why do it?

The only explanation I can offer is that Obama is just as deeply influenced by the false god of austerity as everyone else in Washington. He is dancing to the Republican tune because he happens to agree with them. In his mind there seems to be an urgency, unjustified by the facts but justified within Washington’s alternative universe, to cut government spending even if this means betraying hallowed left of center principles. Clearly he feels forced into this betrayal. Perhaps he imagines himself as being responsible. My friends who support him keep telling me that he is saving entitlements from deeper cuts. Maybe, but I don’t think so. That rather defensive posture is sound only if you buy the idea that our economy is so permanently impoverished that we can no longer afford those programs. But there is no evidence to support this. Not outside Washington. It is a right wing myth spread about by think tanks and echoed by the media. Besides, does anyone truly think the GOP will suddenly stop its seven decade long campaign to abolish Social Security? Of course not. Any concession made now is a permanent one. It will not be undone.

Obama is appeasing the extremists. He will fail.

And it is an enduring shame that a president elected largely by those who will suffer the most from budget cuts is offering up a budget riven through with such cuts. All without trying to go after those who got us all into this mess to begin with.

Why did we have that election then?

 

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Austerity Bites? Jobs Evaporate.

And some of you thought that budget cuts were a good thing.

We knew today’s jobs report from the government was going to be bad because of Wednesday’s ADP data on the private sector. But this bad? Not many went this far down in their forecasts. The US economy added a miserly 88,000 jobs in March, which is down sharply from any of the prior few months, and is well below even the more pessimistic forecasts. Worse still: the percentage of people active in the workforce – what is called workforce participation – has slumped to a low not seen in decades. Prolonged stagnation and awful work prospects seem to have induced a lot of early retirements and a large growth in the number of disaffected workers. This is a stark measure of policy failure.

So what’s going on?

Austerity. That one word ought now to be etched in your minds.

The US is about to toss away what small growth it has been seeing in the name of the false god of austerity. This adds to the continuing squeeze on the economy exerted by our recent reduction in the deficit. The deficit has already been shrinking – is about 3% of GDP smaller than it was at its peak. Indeed, just today, the Congressional Budget Office reported that the Federal deficit has dropped by about 23% in the first six months of the current fiscal year versus the same period a year ago. That reduction represents a significant withdrawal of demand from the economy and so it is no wonder that many of the recent reports on activity, and not just the jobs report, have been pointing to a slow down. That reduction also suggests that our deficit ‘problem’ is melting away as the economy improves. So what is Washington thinking of doing? Stop the improvement and make matters worse.

Stupid, I know, but that’s what’s going on.

The raise in payroll taxes at the beginning of the year seem to have hit retail sales quite hard, and this has had a knock-on effect with, for example, manufacturers reporting reduced orders and production. Remember that this is before any large scale damage from the sequester works its way into the numbers. Absent any change in policy it seems clear that the second half of the year will see much slower growth than the first half.

And what is the prospect for policy?

Not good.

Washington is gripped by deficit mania. It has become a bi-partisan disease. Obama is reported to be sending a budget proposal to Congress that includes cost to entitlements. There is no economic justification for such cuts. None. Indeed we ought to be thinking about expanding Social Security, not cutting it.

This is not a radical thought. It is based on simple observation. Over recent years businesses have succeeded in shifting the onus of saving for retirement onto employees. The old defined benefit plans have mostly been replaced now by defined contribution plans that expose workers to much greater risk. This increase in risk was not matched by an offsetting increase in reward – wages, as we all know, have been held constant for a very long time. So saving for retirement has become more and more difficult for a larger percentage of the workforce. So much so that, under normal circumstances, our conversation ought to be about how to increase the safety net, not its reduction. The result of deregulation and the bias towards business has been that we are now entering an era of impoverished retirees – exactly what we thought we had eliminated with the introduction of Social Security.

But these are not normal times. Austerity fever has taken away our ability to improve our lot. Even some on the left in our political landscape imagine that the economy cannot afford our entitlement programs. In the vain pursuit of a ‘grand bargain’ Obama is handing to the Republicans a landmark victory. Not only did he capitulate on the Bush tax cuts, but now he is, apparently, going to offer up entitlement cuts.

As I wrote yesterday the entire austerity drive is an assault on the poor and the lower echelons of our society. It will drive a wedge between the 90% and the upper 10% of income earners. It will destabilize our politics even more. And it is completely unnecessary.

We have embarked on a social experiment. The result of which will be the severe reduction of our middle class and the creation of a two track economy. One for the creditor or asset owning class. And one for the debtor  and wage earning class. This is not a land of opportunity. It is a land of privilege.

But it will still be a land of the free. For those who can afford freedom.

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Austerity: Democracy Versus Capitalism

That’s where we are. That’s where we’ve been for a while. That’s where we’re likely to stay. Get used to it.

Don’t get me wrong: the history of the past two hundred or so years have shown that capitalism – depending on how you define it – has been a good thing. Yes, it has. My ancestors were much the worse for living in the shadows of an aristocratic England, and it is only in the industrial era that their descendants, me included, have prospered. No, capitalism has not been a disaster, it has been beneficial.

And right there I stop endorsing it.

Because capitalism also unleashes horrible side-effects. These are the kind of consequences that its ardent admirers – like David Stockman whom I lambasted the other day – conveniently overlook. That oversight generally follows right after they’ve managed to make a decent living and so they adopt the posture and comport of a capitalist. They start asking different questions. They start seeking different solutions. They change sides.

It isn’t capitalism that created the American middle class. It was democracy. Which is a countervailing force pressing against capitalism. Democracy is the mechanism through which the likes of you and I prevent the pillage that unfettered capitalism encourages. And it is the method we use to make sure we get our fair share of the collective spoils.

So, you see, capitalism and democracy are locked in a fight against one another. They cannot abide each other.

The one concentrates wealth by encouraging greed, exploitation, monopoly, and conspiracy. The other distributes wealth by enforcing the tyranny of the majority, constraining liberty, establishing rules, and forcing apart those conspiracies.

Ironically true democrats love competition since it sanitizes the economy by opening it up and pushing back against the desire of capitalists to profit at all costs. Likewise, and equally ironic, capitalists despise competition because it prevents them from reaping undue rewards, colluding, and otherwise rigging the game.

It was democratic government that gave the birth to the middle class. It inoculated the masses from the risks of living in a  capitalist world: it protected them from the downside so they could enjoy at least a small part of the upside. It did this by creating ex nihilo a welter of programs and tax deductions aimed at creating an affordable middle class life untenable in a ‘winner take all’ deregulated pure capitalist world.

So democracy is the political solution to the problem of exploitation by capitalists.

Which why neither the extreme right nor the extreme left like democracy much. They pay token lip service, but behind the scenes they grumble about its invasive character. Democracy is indeed tyrannical, if, and only if, you mean tyrannical to be the enforcement of fairness.

This is precisely why the Founding Fathers got it so hopelessly wrong. They hated the prospect of majority rule. Or rule by the mob. Why? Because the mob might want something in return for all the hardship the few impose.

In contemporary America this contest is still being played out.

The last election was full of right wing indignation about the 47% – that part of America said to depend on government largesse for its survival. The moral indignation with which right wingers attack such ‘dependency’ betrays their contempt for democracy. It also displays a shockingly naive perspective. The kind of perspective that infects all traditional conservative political economy.  The notion that nearly half of all Americans don’t pay income tax was used to demonstrate the abundance of layabouts that decades of government largesse has fostered. Conservatives love this kind of morality play.

But they overlook a more simple explanation. One with a different moral twist. Half of Americans don’t pay income tax because they don’t have enough freaking income. Duh!

Which brings me to austerity and budget cutting.

Apart from defense most government spending goes into programs designed to foster our middle class. It reduces the risk of existing within a rapacious capitalist society where saving for retirement is well nigh impossible because wages have been stagnant for decades, or where health care costs are rising more rapidly than those stagnant wages. And those are very significant risks for anyone existing down the income scale. Without those programs, each a victory for democracy, the middle class would shrivel and America would be revealed to be just an oversized banana republic with a small ultra-wealthy plutocracy and vast poor underclass.

So by reducing the risks of capitalism for those who are not capitalists, democracy averts the danger of the emergence of fully fledged socialism. This is why Marx was wrong when he suggested that democracy opens the door for socialism. It doesn’t. It slams the door. His reading of history was wrong.

It is also why those preaching austerity need to be careful.

Because austerity is class warfare.

Say what?

It follows logically. The people who benefit most from all that government spending are going to be the ones who lose the most when those programs are cut. The poor, the sick, the elderly, and the average middle class family sitting on the edge between being decently prosperous and falling backwards into poverty. The 47%. They are the ones who will bear the brunt of the cuts. And they are the ones who drive democracy. Undermine them and you undermine their commitment to moderate politics. You undermine the quiescence that democracy buys.

This may sound cynical, but I don’t see it that way. Freedom constrained by poverty or sickness or lack of education is not freedom. It is an imposition. It is a form of subservience. So the commitment to the notion of freedom can get strained and extremist solutions begin to appeal whenever the specter of poverty, sickness or lack of education reappear strongly.

Furthermore: the collapse of the economy a few years back, the context for our current fixation on austerity, was not the creation of the majority. It was conceived and acted out by a few. The greed and error of the banks caused the recession. The consequent bail-out, and recession made the public debt soar. Instead of making those responsible for the problem pay for its clean up, we have ‘socialized’ it. We have moved the debt from the banks, the bankers, and their shareholders onto the public books. And now we are told that, because those public books are lopsidedly in debt, we all need to pay the price.

So austerity shifts the cost of private gambling, error, and greed onto the shoulders of the rest of society. Since those playing the game that blew up were, by definition, creditors with capital to play with, asking those without such resources to pay for the clean up is also, by definition, a form of class warfare.

The only way that the game gets played out this way is because the fine balance between capitalism and democracy has been tilted out of kilter. Society has been unbalanced. Democracy lost somewhere along the line. The constraints on capitalism were loosened too much. We valued liberty more than fairness instead of striking a balance.

Now the problem that the capitalists have is that the masses are noticing the inherent unfairness of austerity and are seeking fairness. They will look to protect themselves. This desire will either take the form of the continuance of the government programs that protect democracy. Or it will take the form of a more tyrannical show of force by the majority.

Either way, the attempt to shove the costs of the banking system’s stupidity and greed down the throats of society at large will end up destabilizing societies across the globe.

This I think is the logical end point of the decades of corporatist thinking, right wing dogma, deregulation, and the sustained attack on the underpinnings of the middle class.

Democracy will re-assert itself. We ought to hope. Before something else does.

 

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Where Our Spending [Really] Goes

We are into the silly season of budget debates in Washington. Dueling budgets are flying back and forth. Different ideologies are ensuring that the gulf between the right wing preferred budget and all the rest is enormous. As in unbridgeable. The reason is that our contemporary Republican party wants to dismantle ‘big’ government and reduce spending radically.

Or does it?

Well that depends on what you call ‘spending’.

I know, it ought to be pretty obvious. In a very famous case back in England a judge twas asked to define income tax. It was, he said sagely, a tax on income. But, as in all things that involve lawyers, income, or in our case spending, isn’t as obvious as it could be. The problem stems mainly from when you start to run the clock on what constitute ‘expenditure’. Is it after you have collected all the taxes and are ready to write checks? Or is it before you collect those taxes? Does ‘expenditure’ include all the giveaways in the tax code?

Of course it does.

Think about it. When the government writes a check for a Medicare payment it records that as an expenditure. As it does when it buys an aircraft carrier. As it does when it buys paper clips for its bureaucrats. And so on. Those kinds of government spending are clear and unequivocal. It’s all that hidden spending that can be confusing. And it’s hidden on purpose. Politicians want to spend on lots of pet projects. They want to reward loyal voters. Sometimes it is easier to get that money spent through the backdoor because that way it is less easily computed and the economic impact harder, though never impossible, to estimate. In other words if you have made a lifetime of beating up layabout welfare queens it is a little difficult to syphon off government money to a special pet constituency overtly. It’s better to hide it.

So hide it they do.

In spades.

They do it by devising all sorts of tax credits and deductions. There is no difference between the government writing a check for something, and it giving you a break on your taxes for the same thing. Either way the net revenue of the government is reduced by the cost of the expenditure.

So, to take an egregious example, the US government likes to encourage home ownership. It is seen as a jolly good thing. It helps build communities. And so on. But instead of sending you a check to help you buy a house – that would look a lot like welfare for relatively well-off folks – the government subsidizes your mortgage by giving you a break on the interest cost. It amounts to the same thing.

Welfare is welfare. Spending is spending. And tax breaks are a way of spending the government’s money without drawing too much attention to what’s going on.

And these so-called ‘tax expenditures’ add up. They add up big time. Indeed they are the biggest single thing the US government spends its money on. Bigger than Social Security. Bigger than Medicare. Bigger, even, than defense.

Let me shamelessly borrow a chart from the CBPP:

 

 

 

 

 

 

 

 

 

 

Yes that big.

We spend a lot on ourselves through that backdoor.

The mortgage interest subsidy isn’t alone of course. There’s a ton of others. The biggest is the tax deduction given to businesses on the cost of health care plans they provide their employees.

Think about that for a moment and weep.

The government subsidizes – it pays for – a proportion of every single so-called ‘private’ health care plan provided by employers. And the Republicans think we have a ‘private’ health care system! No we don’t. The government chips in. It chips in a whole lot.

Then there’s the reduced tax paid on capital gains. A gain is income by another name, but it somehow sounds special if we call it a gain. It sounds kind of thrifty. Plus it makes it easier to subsidize by reducing the tax on income from ‘gains’, as opposed to, say, income from wages. So people who get their income from gains rather than wages get a government subsidy. It’s actually welfare for the rich, but that’s difficult to sell at election time, so instead of writing the Rockefeller’s a check at from Welfare office, we give them a tax break instead.

The list of popular tax expenditures is long: employer health care plans; pension plan contributions; mortgage interest rate relief; accelerated depreciation for business; deductions for state and local income taxes; charitable contributions; lower taxes on qualified dividends and capital gains; etc, etc.

And here’s the really important part of the story: the people who benefit the most are the wealthiest. The top 1% of income earners get about 13.5% of all the spending. The rest of the top 20% get another 11.5%. By comparison the bottom 20% – part of the so-called moochers that Mitt Romney referred to – get only about 6.5%. In other words our so-called ‘progressive’ income tax, where the rich are supposed to pay more than the poor, is substantially reversed and made regressive by these hidden welfare programs for the rich and upper middle class.

So who’s mooching most?

This is important. Very important. Because as we prepare to enter the battle to decide what to cut the focus is on the obvious. We are told that we cannot afford those entitlement programs, and that we need to curtail Social Security or Medicare. But we never are told we cannot afford to subsidize capital gains. Or mortgages. Or healthcare plans. Or dividends. Or charitable donations. Or any of those other backdoor expenditures.

Why not?

Because they benefit the rich? The people who donate at election time?

Guess.

We are not having an honest discussion.

What a shock.

 

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