economic policy

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Mid Summer Blues

No I haven’t disappeared. This is mid-summer and the living is supposed to be easy. And it would be were it not for the perpetual lunacy in Washington. I wonder whether America has ever been this ill served by its collective leadership.

Last week were treated to an outpouring of enthusiasm based upon the new GDP numbers. Growth was 1.7%. Wow. In normal times, back before the banks trashed the economy, the endless bailouts, various fiscal showdowns, tepid reforms, and Congressional gridlock – you know all those years ago – a 1.7% growth rate would have been greeted as the harbinger of bad times. Now, in our new world, people get almost giddy over it. Such is the distortion to our perspective that the failure of our leadership has wrought that we genuinely laud a weak report. It is as if we are so starved that any small morsel looks like a veritable banquet.

How did America get to be so small?

Small in attitude. Small in outlook. Small in opportunity. And small in scope.

The so-called land of opportunity is clearly gone. And we behave as if we want it gone. Nowhere is there the anger at the lack of leadership needed to break free of the mediocrity into which we have settled. Or, rather, the mediocrity into which we have been forced to settle.

I think if more people realized that our economic plight could be solved quite easily had we the courage to attack the problem they would rise up against the Washingtonian elite that throttles everything.

Within that elite, with it stunning lack of imagination and its numbing groupthink, lies the cause of our malaise. The rotten employment figures last week – 162,000 new jobs – and that weak GDP figure are the deliberate outcome of the actions of our leaders. Stagnation has become acceptable to them. They are scared. They are rudderless. They have no ideas. And they simply squabble.

The Republicans in the House have now voted forty – yes 40 – times to repeal Obamacare. This is farce. Worse, it isn’t humorous farce. They cannot succeed, yet they continue these entirely symbolic acts. At taxpayer expense. I have no clue in which world they now exist, but it isn’t this one.

The Republicans also continue their objection to each and every move the White House makes, no matter whether they previously espoused the same policy. This is not opposition. This is obstruction. Opposition is constructive and presents an alternative. Repetitive negation is no alternative.

This comes across starkly in the discussion – if that is what we can call the mud slinging – over the Federal budget.

The divisions within the GOP are now so deep that they cannot even bring a bill to the floor of the House. They disagree so strongly with each other. The extremists treat the sequester level of government spending as the starting place for further cuts – they want to get rid of all social spending if they can. Another group wants to roll back the sequester and start over at a higher, and less severe, level. This conflict produces gridlock within the Republican caucus, leaving the Democrats bemused onlookers.

It will get worse.

The budget is supposed to be in force by October 1st. That’s when the Federal fiscal year for 2014 begins. So we will be hearing about a succession of budget – aka appropriations – votes during September. Such is the gridlock, however, that it is extremely unlikely any substantive votes will take place. The Republican split prevents them bringing any of the multitude of annual appropriation bills to the floor for a vote. They failed just last week in such an effort. So the specter of a government shutdown looms once more.

Once we are beyond October 1st. Congress will fund government through what is called “continuing resolution” legislation. That is, they simply vote to keep that last budget continuing until they vote for a new one. This presents a sitting target for the extremists. All they have to do is to block a continuing resolution and funding ceases. This year is ripe for such obstruction. It is the first full year of funding for Obamacare, which the extremists revile. Any bill that includes health care reform funding will be fought over tooth and claw. This year, too, Speaker Boehner is demonstrably weaker – his control over the GOP caucus is diminished to the point of being negligible. This makes eruptions from the extremists very likely. Then, too, the gap between the House and Senate Republicans has widened. Indeed the dialog between them has almost vanished. The Senate GOP, or at least a big chunk of it, would like to adopt a more constructive approach and has thus lost patience for the trench warfare the House loves to toil away in. So we are likely to get two very different versions of Republican budgets, adding more confusion and reducing the prospect for progress.

In the middle of all this Republican dysfunction we have the Democrats who appear to be losing patience, and are less likely to lend Boehner a hand in passing legislation. Given that the Republican majority is split so badly, to get any legislation passed will need a bi-partisan vote. Currently the Democrats see no need to help Boenher find a way out of the hole he dug for himself.

It gets worse.

The law governing the sequester budget cuts has them kicking in a few days after Congress adjourns. But the Republicans are fearful that Obama may use adjournment to tinker with appointments to some of the huge number of empty jobs that Congressional opposition has opened up. So they want to extend the legislative session as long as they can. This means that the fights over the sequester will most likely take place sometime in January or February – a good four or five months into the 2014 fiscal year. If nothing else this will add confusion for the media reporting on the budget wars because it adds another moving part to an already helter-skelter legislative program. And the media is not renowned for understanding these things when they are static, let alone when they are in motion.

Phew.

Then, naturally, there is the idiocy of the Obama administration and its obsession with discredited economists.

The bun fight that broke out over the Bernanke succession is both unseemly and unnecessary. Apparently Obama has a clear preference for Larry Summers. Equally apparently, most Democrats don’t. Summers will always be associated with the go-go years of Clinton, with Robert Rubin, with ill-fated bank deregulation, with opposition to derivative regulation, and a host of other errors. His arrogance has prevented him from any form of public contrition. His political ineptitude is legendary. And his intellectual vanity epic. Yet he continues to exert a hold over Obama. That his name even came up in the context of the Fed chairmanship – a position demanding diplomacy as well as an economic know-how – is baffling.

More baffling still is that Obama first turned to Tim Geithner to sound him out for the job. Really?

Between them Geithner and Summers created a bulwark within the administration preventing effective bank reform. Neither is qualified, on that score alone, to be Fed chairman.

Finally, in this list of gloom, we have Obama’s clockwork like calls for a “grand bargain” on the budget. By grand bargain he invariably means significant cuts to social programs in exchange for a few negligible tax increases. This time he is calling for a cut to the corporate tax rate and a concurrent reform of that tax to close loopholes.

By the way: I have never understood the logic behind social spending cuts. We are told these programs are somehow unaffordable at some future date, and are thus likely to need cutting back. And in order to avoid those future cutbacks we have to cut them back now. So we are being forced to make cuts … in order to avoid future cuts. And the logic here is what exactly?

Anyway, never has an Obama made a more pointless proposal. Most large corporations pay little or no tax. So the top line tax rate is irrelevant. Those same corporations have bought and paid for Congress through their lobbying and donation efforts. The chance that we get tax reform that isn’t twisted out of all recognition by special interest pressure is zero. So Obama’s call was senseless.

Then again, being the acute Washington insider that he is, Obama knows all this. He was simply playing to the audience, whilst knowing full well that he could have said anything and the Republican reaction would have been the same.

Which is to say they would oppose him.

And this is why the mid-summer blues are particularly blue this year.

We have all this to look forward to.

Time to go to sleep under the tree and to dream of when 1.7% GDP growth invoked concern and not good cheer. Those were the days. I wonder whether we will ever get back there.

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Simple Model Mania

Economics, as we all know, is a bit of a shambles. There’s plenty of good stuff sitting about, and there’s plenty of bad stuff. On any given day we can witness two Nobel prize winners disagree and put forward totally contradictory theories to support radically different sets of policy advice. One example at the moment is the continual warnings we gat about the imminence of high inflation. One side says we are doomed because all the money the Fed has been tolerating in the economy will cause prices to rise – this is a variant of the old “too much money chasing too few goods” argument. The other side says this won’t happen because the money is all idle in bank reserves and will stay there as long as the economy sputters and interest rates stay stuck at or near zero – no one wants to do anything with all that money, so it is irrelevant and certainly won’t end up chasing too few goods. So far the evidence supports the latter, but the former don’t stop, and they don’t revise their ideas either. The two sides just shout at each other. The public has a right to be bewildered.

Milton Friedman has always been associated with the “too much money chasing too few goods” idea. He is well known for saying that inflation is always and everywhere a monetary phenomenon. But that’s because he wanted it to be. It fitted his view of the world.

One of the reasons economics is a shambles is that economists have an obsession with simple models. This is not new. It goes all the way back to the subjects roots. Quesnay’s obsession was a model that showed the flows of activity through three sectors of the economy. As if everything could be reduced to just three such sectors, and as if each sector was predictable, stable, and no one went off the script prescribed by Quesnay. This was in the mid 1700’s just before Adam Smith inadvertently shoved economics lurching off into deep unreality by mentioning – just once mind you – something about the effects of an invisible hand.

This is s brilliant metaphor. It is an awful basis for a model. Ever since he wrote about it economist have been obsessing over it. They see order everywhere on the surface and disorder everywhere beneath. They ask: how come? And, as they say the rest is history. What’s worse is that Smith made this remark right as the real sciences – let’s not dignify economics with that moniker – were careening off into a deterministic, mechanical, and ultra certain cul-de-sac. Well not really a true cul-de-sac. Newtonian physics remains very useful for some explanations and predictions. It just isn’t complete and it needed gentle correction, which is what Einstein did.

The problem is that economics never had its Einstein. It has stayed stuck in the past. It works relentlessly on adding ever more epicycles to its rational, reductionist, and ultra-certain view in order to accommodate the inconvenience of empirical contradiction. It stays simple. Very simple. This is so it can break things apart and study the pieces. Then it hopes that the bits just modeled behave nicely when they are thrown back into the pool.

Which they rarely do. The world is vastly complex and not amenable to simple modeling. Things may mimic the model for a while, but sooner or later the relationship changes and a new simple model is called for. There aren’t many, if any, truly lasting phenomena that economics explains well. And it can’t predict for toffee. Not that prediction is the be all and end all. It would nice, however, to get things right more consistently.

Let’s get back to Milton Friedman.

He has an undeserved reputation. He was very good at self promotion, and managed to have the good fortune to possess a simple model to present as an alternative to the Keynesian view losing its gloss in the late 1970’s. He was in the right place at the right time.

One of his ideas, the one for which he won the Nobel prize, is the Permanent Income Hypothesis. In a nutshell the PIH says that consumers make decisions about how much to spend or save based upon their estimate of their lifetime income, and not their current income. This is because people generally earn more later in life, and, knowing this, are willing to overspend – i.e. borrow – when they are young, and underspend – i.e. save or pay down debt – when they are older. This is important because it helps explain why consumption patterns are less volatile than incomes. People keep spending despite a drop in temporary income.

An alternative idea to explain consumer habits is the Relative Income Hypothesis first put forward by James Dusenberry back in the late 1940’s. It has a distinctly Veblen like flavor. It says that consumers are influenced, not by their lifetime incomes, but by what others are spending. People, it argues, want to keep up with the Jones’s.

Now. Friedman had to reject RIH. That’s why he invented PIH.

Why did he have to?

Because one implication of RIH is that consumers are influenced by social and institutional factors. This is the Veblen flavor coming through. It implies that consumers are not behaving purely along rational lines, and, worse, that economics has to take into account social and institutional stuff Friedman and his followers want to chuck out. This is so offensive to the simple world view Friedman built all his thinking up from that it had to be rejected and replaced with a hypothesis in line with that simple world view.

In my view neither PIH nor RIH is correct in and of itself. There are decisions, home buying for instance, where PIH looks pretty good. There are other’s, fashion and iPods, where RIH seems to come into play. The point being that the obsession to reduce everything to simple ideas that can be put into simple models, condemns economics to misunderstand, and therefore not explain, reality. People are far too nuanced and unpredictable to be shoved completely into either PIH or RIH. They bounce about. The truth is that there are likely plenty more explanations as well. Perhaps there are twenty hypotheses each explaining a little bit. But, since that makes modeling complicated, economists stay well away from reality.

So scared are economists of abandoning their simple views and simple model mania that they would, apparently, prefer to become irrelevant rather than change.

One last example, one that might shock. Growth.

We live at the latter end of an extraordinary event. Humanity has just gone through an unprecedented period of growth. Over two hundred years and counting. In the context of our entire history this is so abnormal as to scream for an explanation. Average incomes and wealth did not change much for centuries. Thousands of years of near subsistence for the vast majority of our ancestors, and a not much better life even for the kings, queens and sundry elites. At least by our standards. Then a sudden rush to wealth. Why?

Given this outrageous anomaly you would think economics would have a water tight explanation for growth. It doesn’t. It really doesn’t. Textbook economics cannot explain, from within its set of ideas, how that rush to wealth came about. It cannot explain the Industrial Revolution. It cannot explain why it began in England. It cannot explain its consequences. And it is hopeless at explaining whether growth is the new normal. Robert Solow had a shot at it in 1957. He wrote a paper that is regarded as ‘seminal’ by economists. It is relatively straightforward in its thinking, but better at its math. So of course it is famous. The problem with Solow’s theory is that it fails to explain well over half of all growth. About two thirds of growth seems to be caused by something that falls outside of the basic parameters of economics. It just sits there as a residual. Solow’s Residual. Yes, this is the economy we are talking about.

Let’s not be too harsh. Solow didn’t think he would get an explanation, he wanted to highlight to extent of the impact of technology and other stuff that sat outside economic theory at the time. Plus people like Romer and Lucas have embellished and expanded on Solow. Romer, for instance, had the temerity to make technological innovation an economic factor inside the economy and not something that dropped from the skies onto it. Clever that. Whoever would have thought that businesses innovate to try to make a buck? Certainly not economists. Well, not all anyway. And not the sort that write the basic textbooks.

Keeping technology outside and not inside the economy is another example of what happens when you allow your simple view and your desire to keep your models simple, drive your thinking.

By the way, that 50% to 60% of all growth that Solow couldn’t explain is still a bit of a mystery. But now it has a clever sounding name: Total Factor Productivity.

Here’s what I think: until we drop the obsession with simplicity, and until we embrace the complexity of reality we won’t resolve this conundrum. By that I mean that the causes of Total Factor Productivity are just as much social, institutional, cultural, and political as they are economic. That is to say that economics needs to change to incorporate those things alongside complex ideas, or it needs to admit it cannot explain the economy.

Then again much of economic theory has little to do with the economy and a lot to do with itself. So, maybe, we are stuck with simple model mania.

That’s embarrassing. We have to ask sociologists, political theorists, and historians what’s going on in the economy?

What are economists for? Wall Street model building?

Simple!

 

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After Bernanke

It is fairly well accepted now that Ben Bernanke will decide not to stay at the Fed next year when his current term is up. By and large I fall into the neutral camp when assessing his tenure. He was woeful at identifying the likelihood of crisis. He has been pretty good at reacting and doing what he can to solve it.

He needs to go back to Princeton and work on upgrading orthodox economic theory in light of its errors, general lunacy, and current irrelevance.

It is very hard to convey the messed up state of economics to outsiders. Economists, after all, speak with such utter conviction and litter their ideas with tons of clever looking math. Most of them know the foundation is rotten and needs replacing, but that is a major upheaval none want to undertake, so they plod along perpetuating the errors while hoping no one notices.  Bernanke typifies this part of the profession – self-referential, vaguely aware of its fatal flaws, yet determined not to get out of line lest he appear apostate. To paraphrase an eminent economist of the past: Bernanke is one of those economists who would prefer to be wrong with precision rather than right with a degree of uncertainty.

Anyway, the silly season is upon us as the chatter builds about ‘after-Bernanke’. Who will take his place?

Larry Summers is shamelessly canvassing for support. Summers is one of those people who jumps about, never stays anywhere long enough for us to assess his impact too clearly, is good at networking in the circles of power, and can be relied upon to join whichever team looks like it’s winning. His abiding sin, in my opinion, was his wholehearted advocacy of bank deregulation. It was a catastrophic policy straight from the free market Milton Friedman playbook, and led directly to the crisis. Yet here is Summers running around town trying to be Fed Chairman.

The succession discussion will also give us insight into the way in which our economic elite protects its self interest and ignores the rest of us. Today’s Financial Times offers up a good example of this. Philipp Hildebrand, a BlackRock bigwig, and former head of the Swiss National Bank, writes that the imperative for Bernanke’s successor is to pursue ‘price stability’. This means that fighting inflation is paramount. Of course this is what Hildebrand wants. His constituency consists of bankers and other creditors who fear inflation – they lose money when it rises. So damn the unemployed, and look after the money lenders. This is despite the lack of inflation, and in face of chronically high unemployment. When you read his article you get a great insight into the divergence that bedevils economic policy making. The elite lives in a different world – the current spate of record profits at the big banks is testimony to that – and its issues are not those of the 99%. So, naturally, the policies they advocate are focused on what ails them not us.

Actually, if you read the article carefully you will identify a nod to the 99%. This shows that Hildebrand is aware both of his elitism, and his indifference to the ordinary folk. Here it is:

Therefore Mr Bernanke’s successor must bring to the job rock-solid credentials as someone who will be a central banker committed to price stability. There must be no doubt in the minds of those in company boardrooms, on trading floors and on main street that whatever else happens, the Fed will keep inflation low and stable.

Notice it?

Apparently boardrooms, trading floors, and main street, are all in this together. Not. Main Street tends to be in debt. And debtors benefit from mild inflation – it makes paying debt back cheaper. The banks lose by the same token. So they are not in the same boat. Plus one of the reasons that we’ve had such low and stable inflation over the past three decades is that wages have been squashed. Profits, though, have soared. Boardrooms, trading floors, and main street do not always have the same policy goals. In fact, right now, they are have very different needs.

Bernanke, to his credit, has helped stave off deflation, which would have hammered main street relentlessly, but his successor, according to Hildebrand, needs to plot his or her way (Janet Yelling would get my vote to chair the Fed) away from that and back to old fashioned anti-inflation policy. Even if there isn’t any inflation.

The single minded pursuit of ‘price stability’ is killing Europe, I hope that Bernanke’s successor ignores Hildebrand and doesn’t fall into that same trap. Unemployment matters. Indeed it matters more.

I wonder how many articles the FT will print with that sentiment in mind?

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Employment Numbers: Endless Drift

This morning we have been treated to an odd spectacle. Wall Street was very wrong about the number of jobs generated by the US economy last month, and is now scratching its head about what it all means.

First the figures: the economy added 195,000 new jobs to non-farm payrolls in June. Moreover, both the prior months were revised upwards, so that the average for the entire second quarter came in at 196,000 per month, only a little down on the first quarter’s 207,000 per month average.

Second the Wall Street view: by and large analysts had been expecting a much weaker figure – something in the region of 155,000. This comparative weakness was based on recent data that suggested the economy was slowing down somewhat from its first quarter pace. Manufacturing reports had indicated a slowdown, as had some of the other reports. Add in the view that the combination of tax increases and sequester spending cuts will slow growth down from its already anemic pace – 1.8% in the first quarter – and the prospect for strong job growth evaporates. Oh, and there’s the widely held opinion that the steady unrolling of Obamacare will inevitably stunt hiring because it requires businesses to provide health care coverage. This latter factor looms particularly large within the minds of those within the generally right wing oriented echo chamber that is Wall Street analytics.

Third: then there’s the bizarre way in which Wall Street analysts express themselves. Put bluntly: they say nothing, but talk a lot. Here’s Jane Foley of Rabobank:

“Very strong data should be good for risk appetite. However, the market’s likely reaction is complicated by the interpretation of what the numbers will mean for the Fed’s decision to taper QE. 

On June 26 the market celebrated the downside revision of US Q1 GDP on the assumption that this would lead to continued QE. This implies that a lacklustre improvement in US June payrolls could conversely fail to offer support to investor sentiment”

Or some anonymous source at Societe Generale:

“The Bureau of Labor Statistics’ (BLS) update on the employment situation in June will be the first of a trio of such reports that the Federal Open Market Committee (FOMC) will consider in advance of its 17-18 September meeting.

A reversal of May’s labour-force induced rise in the civilian jobless rate, combined with yet another above-consensus payroll print, likely will reinforce expectations of an asset-purchase tapering announcement at that time.”

Then there’s Paul Dales of Capital Economics:

“The recent survey evidence leaves us content with our forecast that US payroll employment (13.30 BST) rose by around 150,000 in June. That would be slightly smaller than May’s 175,000 gain. The 188,000 rise in the ADP measure of private payroll employment in June and the rebound in the employment index of the ISM non-manufacturing survey in the same month bode well for official payrolls. But the employment index of the ISM manufacturing survey fell to a four-year low. If the alternative household measure of employment and the labour force also both rose by around 150,000, then the unemployment rate would have been stable at 7.6%. A pick-up in jobs growth in the coming months would leave the Fed’s QE3 tapering plans on track.”

I lifted all three quotes from the Guardian this morning. I can’t quite make out whether the Guardian thought these quotes meant anything, or whether it was spoofing Wall Street.

None of them actually talk about the meaning of the numbers in any real sense. They are all obsessed with what the numbers mean for the Fed’s potential relaxation of its current QE policy. I understand this is important to the world of finance, but it would be nice to hear what analysts thinks about what the numbers mean for the rest of us. Let’s face it the financial world is long departed these shores and now seems more inclined to trade amongst its own based upon gossip, and reactions to interpretations of hearsay and insider tips exchanged at the bar last night. What’s going on in the real economy matters not a lot. What matters is how other traders will react to the expectation of how other traders will react.

Yes, I just said that.

The obsession with the Fed is understandable within such a byzantine world. Money is made by judging the meaning of nuances, innuendos, style, and the way in which Ben Bernanke combs what’s left of his hair. Money is made by watching and guessing the next move of the ratio between two indices, not by giving a hoot about the substance of what is driving those indices. In other words, money is being made by speculating in mid air, with the speculators not needing an understanding of what’s going on down there on planet earth.

Hence the vapid analytical statements.

For the rest of us, here’s what I think of this morning’s figures:

They are not very good.

They show that the economy is withstanding the negative impact of current economic policy. But only just.

They indicate that we are limping along in quasi stagnation and that the economy is generating just enough activity to keep the employment situation out of the panic zone.

They suggest, to me at least, that the economy would be about 0.5% to 1.0% better off were it not for the lunacy that is Washington policy.

They are too weak to push the Fed into changing its mind on QE any time soon. So interest rates will stay low for a while longer.

And, given that the job market is usually the epicenter of inflationary pressure, they suggest that the prospect for higher inflation is close to zero – despite what the right wingers keep saying.

Let’s all face it: a 196,000 per month hiring average is not very good given where we were. It barely keeps up with population growth and is not enough to bring the unemployment rate down – the headline unemployment rate is stuck at 7.6%.

Perhaps the biggest problem we have is that this limping along is just sufficient to prevent anyone in Washington having to dig in and do anything. Policy can stay anti-growth, and high unemployment can elicit a shrug rather than any concern. Remember: there are plenty of studies that show the unemployment rate doesn’t have much impact on elections. What matters to voters is the change in unemployment in the run-up to an election. Apparently voters can get used to high unemployment, and only worry if a shift seems to signal a threat to their own job. That makes sense, but it means that policy can sometimes allow for endless drift.

And endless drift is where we are.

 

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The Debt Non-Problem

You may have missed it but we are fast approaching yet another deficit/debt ceiling showdown. The real fight will be this fall, but the early posturing is beginning. As usual all the serious people in the media and elsewhere will be chiding the White House for its apparent lack of leadership, where ‘leadership’ means giving the Republicans pretty much everything they are asking for. This must be the case since Obama has already sent Congress a budget that goes more than halfway towards the Republican position, and yet still gets rebuked by those serious folks as being too partisan and being unwilling to negotiate.

The serious people evidently are not that serious.

Still the economy will be held hostage again sooner rather than later, so I think it is time for a sober – as opposed to serious – recap of the game so far.

In this light I find it interesting that the Center for American Progress, a well respected centrist Democratic party think tank, has done a complete volte-face with respect to the need to strike a deal on the budget. It has walked away from its previous pro-austerity position and now advocates growth. Some of us have been arguing this was always the correct position, but the CAP shift signals that at least part of the serious center no longer sees the national debt and the Federal deficit as being the central economic issue to resolve.

Phew.

So where are we? Let’s recap the CAP position:

Recall the argument from back in the depths of the crisis: the collapse in Federal revenues blew a gaping hole in the annual budget; spending rose as safety net programs kicked in; borrowing soared; and the debt ratio to GDP started climbing. This was a perfect fiscal storm that conservatives and serious centrists all latched onto and started calling for dramatic action in response. Add in the apparent – back then – never ending climb in health care costs and the US medium and long term budget situation looked dire enough to require radical change. We witnessed a torrent of plans, schemes, and alternative budgets. The so-called Simpson-Bowles plan was one. The infamous, and math challenged, Ryan budget was another. We bounced from debt ceiling crisis to budget negotiation breakdowns to yet more debt ceiling crises and the impression emanating from Washington was the end of the fiscal world was nigh. Not surprisingly the national debt became a more commonplace topic of discussion than it had ever been before, and almost always in the context of imminent disaster.

Three years later we can reflect on what has happened.

Coming out of all the mean spirited confrontations between an intransigent Congress and pliant White House has been series of cobbled together kluge-like fixes that culminate in budget deficit cuts of around $2.5 trillion. This means that per capita Federal spending is now 8% lower than it was three years ago – the largest three year reduction in spending since the post-Korean War demobilization. This is major austerity program by any measure.

That run-away health care spending problem is now not so run-away. The key issue was that health care costs escalated more rapidly than the economy bin general. Since two of the government’s biggest programs are health care insurance programs – Medicare and Medicaid – this escalation was portrayed as devastating for budget stability. The gleam in right wing libertarian eyes was that those programs could be called ‘unsustainable’ and few if any objections could be made. Indeed it became accepted dogma on the right and in the center: something had to be ‘done’ to contain health care costs. But those costs have started to regress back towards the average. They no longer outstrip other cost inflation by much. The difference is dramatic. Government spending on those programs is no longer the long term threat it appeared. those programs are perilously close to sustainable as they are. This may change again, but any deficit debate today must take into account the radical shift of the past three years.

We have now exposed the debt to GDP ratio panic as false. The research on which the right and center hung its hat has been exposed as incorrect. Sufficiently so that the cause and effect they relied upon to call for radical cuts has been reversed. Instead of high debt being the cause of slow growth, more and more evidence is piling up that slow growth is the cause of high debt. If you want to get debt down, then you find ways to accelerate growth. You don’t cut spending which slows growth.

The CAP report is more comprehensive than this and is well worth reading, but I want to add one more observation.

The libertarian and right wing attacks on spending were never about the debt or the annual deficit. Those issues were simply convenient and sanitized ways to pursue the deeper and more far-reaching goal of reducing government under any circumstance. With the debt and the deficit now under control in the medium and longer term, those right wing efforts to re-shape the nation will have to be carried out in a more overt manner. The debate will be more real as a result. And it will be more intractable.

Which means, in turn, that this fall’s debate could end up being more mean spirited and partisan than anything so far. The debate will be about real ideological differences and not muddied by specious debt panics. It would be nice if the White House started preparing the country for this fight by making sure that everyone realizes that the last three years have seen a lot of change, and that the change implies we need a new debate, not the same one once more.

What the CAP is saying, sotto voce, is that centrists need to define a compromise for the role of government in the economy. This, of course, assumes there is a center in such a debate, and that the libertarians have enough respect for the thing called “we the people” to go along.

Fat chance.

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