economic policy

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Obama’s Pointless Budget.

What, exactly, is the point of the Obama budget released today? We all know that, in the context of the American political process, it has very little – make that zero – chance of being enacted. People more astute than I tell me that it is a political statement. A matter of positioning. It is an announcement to the world of what Obama would like to see happen. And it dares his opponents, in this case Congressional Republicans, to respond. Which they have done preemptively by touting the much ballyhooed Ryan budget.

Ne’er the twain shall meet.

Obama is playing his silly games again.

His budget is supposed to be ‘serious’. That means, in Washington speak, that it hammers at everyone, that no one will like it, and that it doesn’t pander to any particular class of people or section of the electorate. It also is a signal to other serious people that he is one of them: his concern is about the deficit and our rising debt. So concerned is he that he is willing to be the first Democrat ever to cut Social Security benefits.

Let me rephrase myself: this isn’t a silly game to play. It is an absurd game to play.

This putative surrender to the Republicans of yet more ideological territory reveals, yet again, Obama’s deeper motivation. He is obsessed with the deficit, and wants to make a mark in history by striking a ‘grand bargain’ that eliminates it from the political dialog for a decade or more. He is a committed economic centrist who genuinely wants to solve the budget issue in order to switch attention to other issues for the remainder of his second term. For as long as the budget sits unresolved it will create endless opportunities for Republican legislative mischief, and thus consume valuable Congressional time and severely reduce the likelihood of any of his other agenda items making it into law.

In other words, solving the budget impasse is entirely driven by Obama’s political calculations, not by national economic interest. He is appealing to a very small group self-defined as being serious about the deficit. He wants members of that group to recognize his credibility as being serious also.

My objections to all this are well known:

  • We don’t have a budget problem. The deficit is already shrinking – perhaps a little too quickly – as the economy grows. More and quicker growth will reduce it even more .
  • The Republicans are unlikely to horse trade. Why would they? Obama has ceded great swathes of valuable political territory in his pursuit of a grand bargain before – the Bush tax cuts were traded for a modest tax increase on the rich, but lost in the confusion was the undoing of the temporary payroll tax cut, which has, arguably, a more direct and negative  impact on the economy. So Obama managed to slam the very 47% he is accused of pandering to, without winning much in the way of political capital with that group
  • Social Security is not a cause of our budget imbalance. The loss of revenue due to the recession and the Bush tax cuts are. So why cut something that is not a cause of our problem?
  • The economy is still weak in the aftermath of the recession. Monetary policy is largely ineffective, and is close to being a spent force. This leaves fiscal policy as our more effective tool. Yet Obama is proposing, not just ignoring fiscal policy, but throwing it into reverse
  • Appeasement never works with extremists. They don’t play the same game. Obama simply refuses to recognize this, and keeps on offering up bits of territory in the forlorn hope that at some point the extremist appetite will be sated. He will fail. Again.

But my friends in the Obama fan club will tell me that I am missing the cleverness of his ploy. They tell me he knows that the Republicans will continue to obstruct. And here’s the total cleverness: by offering up territory that gets refused he will win the great war of public opinion. He will expose the Republicans as the bluffing, insatiable obstructionists that they are. This will give him mystical powers to do other stuff. And quite possibly the occasional nice reference in the Washington Post editorial page. It may even earn him a Place In History. Which, of course, all presidents hanker after.

I am sorry. This is just daft.

The entire world already knows the Republicans are obstructionist. The last four painful years have taught us all that. Their agenda is vastly different from anyone else’s. Feeding them entitlement cuts as bait is not going to change them. It will induce, as it already has today, a call for more such cuts. After all, as the Republicans are now saying, Obama has both recognized that entitlements are a budgetary problem, and that they need to be cut. He has broken with eighty years of Democratic tradition. That’s radical. And, they continue, if entitlements are so much a problem – as Obama now acknowledges – why doesn’t he just cut them? Why propose all that other stuff, when we know what the problem is?

They stole Austria, we gave them Czechoslovakia. Now they want Poland. Who knew extremists were so difficult to appease?

We did. But not Obama. He is still playing games. Pointless and dangerous games.

I have no idea why he keeps this up. I know it isn’t helping the economy.

 

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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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Inequality Update

In case you missed it: the US is a wildly unequal society, and it’s getting worse by the hour.

No surprise at all, but nonetheless some of the data can be quite eye-opening. Allow me to point you to David Cay Johnston and some of his analysis.

  • Incomes have grown between 2009 and 2011. Great. But 149% of that growth has gone to the top ten percent of all income earners. Yes. More than all the increase has gone to a small minority. You knew that right?
  • How? Because income for the rest actually went down.
  • According to the Internal Revenue Service data you needed an income of above $110,651 to achieve top ten percent status. $366,623 gets you into the top one percent.
  • And it’s worth getting into that top one percent: 81% of all the extra income earned since 2009 has gone to that lucky group.
  • Even better if you can squeeze into the top of the top. The top one percent of the top one percent – bear with me here – managed to make off with 39% of all the income gains nationwide. That’s 15,837 households if you’re counting. Out of 158,400,000 households.

Now Johnston gets cruel:

  • If you are in the bottom 90% the average adjusted gross income – AGI to tax geeks – was $30,437. That’s going in the wrong direction, and is the lowest, when adjusted for inflation, since 1966. Read that again. Now weep.
  • To put this in context: allowing for inflation the AGI of the bottom 90% of tax paying Americans had risen precisely $59 since 1966. $59. Now weep again.
  • Let’s give this even more context: the increase in average AGI for the top 10% rose by $138,793, or 84%, over the same period. Do I need to say it again? Weep!

One last trick: if we make that $59 gain the majority managed to eke out equivalent to a one inch line, the gain the lucky 10% received is a line extending 163 feet. And the line the even luckier top 1%? Well, their line goes on and on. For nearly five whole miles.

OK enough weeping.

Clearly something is amiss in the land of opportunity.

The game is rigged.

Is that a problem?

You bet it is.

Addendum:

The chain of analysis on which Johnston depends has its origins in the work by Thomas Piketty and Emmanuel Saez. You can find an example here.

 

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Deficit Realities: No Cuts Needed

It seems like the entire economic discussion is now about the Federal deficit and what we ought to do about it. You all know my position by now: nothing. The deficit is going to melt away, or at least back to manageable proportions. So there is no need to do anything. Really.

But, in the interests of science, and to give you some context, I ought to pass along to you some facts and figures. That way you can keep score for yourselves at home.

Since Obama arrived in the White House the accumulated deficits have been approximately $5,100 billion. That’s a lot by any standards. To put that in perspective: accumulated GDP has been $59,231 billion dollars. So the deficit has been about 9% of GDP throughout.

Deficits are always large during an economic downturn because tax revenues plunge as wages and profits take a hit. This was the mother of all recessions and so of the $5,100 a substantial part is due, not to policy – Obama being a closet socialist trying to take over the entire economy –  but to the downturn itself. This is the bit we can expect to go away through time as the economy recovers and tax revenues get back to normal. A rough estimate produces about $1,500 as this effect. This is about $375 a year or 30% of the deficit. So if we do nothing, we can expect the deficit to shrink by that much.

Then there’s all the short term and one time spending enacted to shore the economy up during the crisis. This includes the stimulus and things like the bank bail outs. These add up to about $1,600 over the last four years or about $400 billion a year. Obviously these are also going to go away, indeed the stimulus is already down to a trivial level.

Then there’s the Bush wars. Don’t forget about them. They weren’t paid for by extra taxes, they were paid for by borrowing and thus added to the deficit. Over the past four years their cost has been about $720 billion or $180 per year. One of these days those costs will go away, even though, for now, they still linger on.

And then there’s the impact of the Bush tax cuts. Even after the recent tax hike for high end wage earners there is still a huge drag on the budget from those cuts. To the tune of about $1,400 over the last four years. That’s $350 a year.

Now let’s add this all up.

The annual deficit since 2009 – the four years of Obama’s administration so far – has been approximately $1,275 billion. Makes your head spin, right?

Take away the effects of the crisis itself or $375 billon a year. Take away one time crisis related costs that will go away or another $400 billion a year. What do we get? A deficit of around $500 billion a year.

End those wars and that reduces us further. To around $320 a year.

Now.

In 2012 GDP, unadjusted for inflation, was about $15,700 billion. So this adjusted deficit of $320 billion is just about 2% of GDP. Compare that with the average of 4.23% during the Reagan administration. Yes, I know. Reagan had to deal with a recession too. So let’s be fair. Let’s add back to the Obama score that part of the deficit due to the downturn itself and to the stimulus. That means we have to add back about 3% of GDP making the average Obama deficit around 5% compared with Reagan’s 4.23%. Not a big difference. Especially when we take into account to the enormity of the recent recession.

So if we do nothing at all we can expect the deficit to shrink back to below the average we saw during the Reagan years when, as you no doubt recall, Dick Cheney famously said that deficits don’t matter. If that is so, the future Obama deficits will matter less.

Or ought to.

But the Republicans don’t seem to agree. While they loved those Reagan deficits, voted for them, and embraced them wholeheartedly. The Obama deficits, which are around the same totals and have the same impact, are, apparently a threat to the very soul of America.

Odd that.

Somewhere along the road to today Republicans had an epiphany. They saw the balanced budget light. And did a total U-turn. Whereas once deficits were the work of God, now they are the work of Satan. And like all born again folks their fanaticism for their new cause is extreme.

Well. Almost.

You see, I don’t think for one moment that the likes of Paul Ryan actually worry about deficits  as deficits. They just adore the war spending after all. No. They only ever object to deficits when their cause is social spending. Then all hell breaks loose and Republicans are beside themselves with angry fiscal rectitude. In the GOP’s eyes we cannot afford deficits when the spending is on the poor, only when it is on war. Social spending, bad. Military spending, good. Since both are government sending we can’t quite make out what Republicans think of that. Perhaps they’re just confused.

Anyway. The point of all this is to give you some context. Our deficits, labeled as a cause of crisis and imminent disaster by the media and right wingers, are under control. They need no action. The arithmetic says so. You saw it with your own eyes.

Oh. wait.

There’s that last bit. The Bush tax cuts. Let’s see. We had whittled the ongoing deficit down to around $320 billion a year by subtracting all the odds and ends associated with the recession and the Bush wars. The Bush tax cuts add about $350 billion a year to the deficit. Huh? $320 billion minus $350 billion  is … roll the drums … a surplus of $30 billion a year.

Yes. You see without the impact of the extraordinarily reckless George W Bush, our ongoing deficit wouldn’t be there at all. We’d have a surplus. Small, but definitely a surplus.

Eat your heart out Paul Ryan. We have a better budget plan than you do. All we have to do is eradicate the impact of Bush  and his Republican friends on history and we are all square.

Too bad we didn’t think of that at the time. Well some of us did. But I won’t brag about that.

 

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