Social Security

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US Economy Grows 2.8%

Don’t get too carried away by today’s report on the economy. Growth of 2.8% in the third quarter is nothing to be happy about because it falls right in that range of ho-hum figures that neither excite nor disappoint. It isn’t sufficient to break the back of unemployment, but it is enough for do-nothing politicians to use as a reason to do nothing.

We are stuck., but at least inflation is nonexistent. I wish that were a good thing, but it isn’t. A little inflation, say around 3% per year, would help us enormously by easing the pressure on borrowers, and by introducing some elbow room into credit markets so that Fed policy would have more purchase against our problems.

When I think about it more I fear that 2.8% is almost exactly the kind of number we don’t want. Especially as the great conference in Congress is kicking off and exploring the possibilities of a grand bargain on the deficit. Had growth slumped it might have energized those few in Washington who actually care about our workers into action to end the lunacy of the sequester and the damage that austerity is doing to each and every one of us. Had growth been much higher it might have ben sufficient to reduce the deficit even more rapidly than it is reducing now and thus have relieved pressure on the need for further reduction.

But no. We are stuck in no man’s land still.

The colossal failure of recent economic policy is now so manifest I have to wonder whether anyone – anyone – down in Washington understands just how  poor their collective record is. The one thing we can be sure of is that they are so absorbed in ideological infighting that they no longer have any contact with reality. I have used the metaphor of trench warfare many times these past few years and I still cannot think of a better one. Just as the generals failed to think beyond the trenches and the stalemate they imposed on them, our current leadership cannot think beyond their fixation on the deficit, the debt, and the stalemate they impose on policy.

Boy are we stuck.

In any case the numbers today are not that good even if you accept 2.8% as being par for our rotten policy set. Too much of third quarter growth comes from an increase in business inventories. The problem with inventories is that an accumulation can be either good or bad. Good if it signals business is optimistic about future growth and is ramping up production ahead of sales. Bad if it signals that business missed a downturn in sales and will have to reduce future production to downsize and fit demand. Given the rest of today’s report I suspect it the negative message we should hear, not the positive.

True, trade improved, but with the shadow cast by the antics of the Republicans in Congress, the world economy can catch cold at any moment. So trade is no guarantee of a rosy future. Besides, no matter what you hear, trade is just not a large enough component of our economy to drive us to the promised land. Our issues are all domestic, which given the impasse in Washington, means we won’t resolve them any time soon. As case in point: today’s report tells us that consumer spending, the true engine of our economy, sputtered along at 1.5% in the third quarter. That’s down from a poor 1.8% in the second. Business investment, another key engine for growth, also fell – from 4.7% to 1.4% – so the private sector is not looking good.

Then there’s the continuing cut in government spending. Federal spending alone fell 1.7%, and has now fallen for four straight quarters. That’s what austerity look like. Those cuts mean fewer jobs and less cash flowing into the myriad of businesses that rely on government contracts to keep afloat.

Not that you would think the deficit is melting away were you to listen to the Republicans. Paul Ryan remains adamant that we need a “down payment” on deficit reduction – especially cuts in entitlement programs like Social Security – in order for the great conference to have any meaning. As if the recent precipitous decline in government spending was not a;ready a large – too large – a down payment.

I apologize if this all sounds repetitive or downbeat, but I think we all need to realize just how awful policy has been and how much damage is self-inflicted rather than “natural”. We have well and truly shot ourselves in the foot, and our politicians continue to relish the chance to shoot again. That is plainly stupid and antisocial. Especially when we have the policies, if we would use them, to stop the rot and build a brighter fixture for us all.

As I said, don’t get too excited over today’s report.

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Monday Blues

Meanwhile back in the economy …

I read with some amusement that Standard and Poor’s, part of the axis of evil that brought us the crisis, has now announced that it sees a brighter future for US government debt. It thus re-affirms its AA+ rating for that debt and spoke of the strengthening economy and the beneficial effects of the spending cuts and tax increases that have stalled the pace of the build up in debt. This is odd because those same things – spending cuts and tax increases – are the cause of a weaker recovery than some of the underlying data would suggest. Our government, primarily, but not exclusively, Congress, is doing everything it can to slow the economy down. S&P, possibly anticipating a turn for the better in policy making, intones against doing anything positive like adding debt to accelerate growth. That would highlight just how erroneous S&P’s basic analysis has been for ages. Remember those AAA rated derivative  junk bonds? They were put together by clever buddies of the analysts at S&P, so they were worth the AAA rating. US debt is issued by the dummies down in Washington so it’s only worth an AA+. This is odd given that the dummies own a printing press to make good on their debt, whereas the clever people don’t. But we shouldn’t allow such details get in the way of our super sophisticated ratings thought process – it might make us look foolish.

I must admit that I agree with S&P over one thing. This period of quiet in the Republican war on everything Obama touches cannot last. There is more stupidity in our future when the next debt ceiling debate starts in earnest.

Which reminds me: what is it about the debt ceiling that riles right wingers so much? Raising the ceiling has nothing at all to do with future policy. All it means is that the current policies – some of which hark back to George Bush days and even earlier – need to be funded by raising debt. It is not a sign of the runaway ‘socialist’ tendencies of Obama. It has everything to do with paying for things we’ve already bought. Given the torrent of homespun homilies about sensible budgeting and paying-your-way we are treated to from Republicans in Congress, you’d think they would understand the difference between reneging on your debt – which is what a refusal to raise the ceiling implies – and incurring that debt – which is what the budgeting process is for.

Then again how can we expect them to think clearly when the budget is improving so quickly, and the medium term debt situation looks so much better, thus eliminating their key argument.

There is no debt problem.

Poor dears, they’re going to have to think of something else to panic about.

Perhaps they should worry about Social Security.

Maybe not.

The latest report from the trustees of the Social Security system was relatively upbeat. Payments, as currently calculated, will be paid in full through 2035. Only after then does some adjustment have to be made to keep full payments being made.

This is hardly a crisis.

But I imagine we will still read impassioned arguments in the media, and especially in the right wing establishment media, about how we have to make draconian cuts in entitlements in order to ‘save’ the system.

I have to admit I have never quite understood the logic of the doomsayers. Reduced to simple terms their argument is that we need to make cuts in entitlements now in order to avoid making cuts in entitlements some other time. Got that? We need to make cuts so as not to be forced to make cuts. That’s plain weird. If the plan is underfunded out there in twenty or more years why don’t we top up the funding? That way we avoid making cuts of any kind. Now or then.

Besides twenty of more years seems like a very long time in which to think of something better to do. It certainly suggests we don’t need to panic right now.

Speaking of the long term. It never arrives. We all live in a long series of short terms. So making policies to fend off a potential problem out there in the murky future is silly. Who knows what will happen in the interim? No one. That’s who.

Apart from economists of course. They adore the long run. Their theories that look really stupid in the short run because all the evidence contradicts them are all said to be correct in the long run. This is convenient because no one ever goes back to check, and all the short term messiness hides the errors. So when a learned economist tells you that the so-and-so ‘law’ of economics works in the long run, you can safely ignore that law. What they are really saying is that they wish it would work in the short run, but it doesn’t, so they then want to pretend that it will all work out eventually. It’s an academically polite way of being clueless but sounding clever at the same time. Economics is chock full of laws and other phenomena that work in the long run. None of them are relevant to now, to today, or even to tomorrow, but we are all supposed to take it as an article of faith that sometime and somehow the long run kicks in and the heavens align differently so that all that mumbo jumbo becomes crystal clear accurate prophecy. So, for instance, we are assured that the economy, if left to its own devices, is headed toward some sort of equilibrium. All that turbulence you see around you, and all that manifest disequilibrium is just short term adjustment going on. That this short term adjustment has been going on since time immemorial is no reason to wonder whether it is the normal state of affairs that needs an explanation.

This would be useful if all the focus on those supposed long run things was simply a way of getting a fix on the short run mess. By shedding a light on it, for instance. But so enamored of the long run have economists become that they have drifted off into their idealized dreamland entirely. So they simply makes statements like ‘all well-informed economists know that such-and-such a law works in the long run’, and then promptly stop thinking. It’s a way of stopping debate by assertion.

To which the rest of us merely have to say that we experience the world as a never ending flood of short term events, and that to assert that we know for sure that something will work out in the long run flies in the face of our reality, infused as it is with uncertainty. By the way that uncertainty is not just about the future. It is also about the past. We are all just as vague about the deep past as we are about the long term future. We all know as much about our ancestors ten generations back as we know about our descendants ten generations forward. Which is to say we know nothing about them.

And, as a very wise man once said, in the long run we are all dead. Yes I know that’s not exactly what he said, but the meaning remains clear. We should worry about today’s, and the easily foreseeable future’s, problems as we can, and not be so arrogant that we know enough about the distant future – that long run – to fix it all now. Modest adjustments are all we can do. Sometimes that’s all we will ever need to do.

Like to Social Security, for example.

And we don’t need ‘grand bargains’ for budgets where there’s nothing grand to bargain about.

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Shrinking Deficit

We have been bombarded for the past few years by an endless stream of analyses, diatribes, and invectives about the horrors associated with the Federal deficit. The tide of red ink that began to flood Washington at the end of the Bush administration and which has abated only slowly under Obama became a feature of the great political stand-off that has frozen policy making and disrupted Congress since 2009. In response to the yawning gap in the nation’s finances politicians, academics, the media, think tanks, and sundry hangers-on all felt the need to opine on the merits and demerits of a deficit that peaked at 10.1% of GDP back in the darkest days of 2009.

We have been treated to a variety of sober plans to slash it back in the name of preserving the nation, avoiding a burden on future generations, and restoring the full faith and credit of the government. Folks like Alan Simpson and Erskine Bowles have re-emerged from obscurity to become stars amongst the cognoscenti the membership of which was limited to those who saw the dangers of debt and advocated astringent urgent remedies.

We became used to being told that we could no longer afford the goodies we wanted. That Social Security needed “saving”. That Medicare was a looming disaster, and that in our newly diminished state we all had to tighten our belts, forgo nice things, and suffer the consequences of austerity. This was the new America, austere, harsh, but with balanced books. Our creditors would love us. Confidence would flow, and eventually the tide of red ink would be replaced by one of business, industry, and – perhaps – a recovery in employment.

Perhaps the most enduring images of this discussion were the various budget proposals put forward by Paul Ryan. He shot to fame from nowhere because his ideas were deemed a serious conservative alternative to the left’s older, and deemed tired, economics built largely on a Keynesian foundation. Since the right’s leading economic ideas were the root of the crisis, conservatives and self-styled centrists alike were desperate for a new hero who could be the anti-Keyenes. Ryan adroitly fit the bill. That his plans were a sham and didn’t even add up was never a concern. What mattered was that he advocated a solid dose of puritanical, morally uplifting, austerity designed to wean us all off of the government’s largesse.

So the deficit debate turned into one about the size and scope of government. The Republicans managed to exploit the gloom and angst over the rising debt by using it as a bargaining chip. They threatened to shut down the government. They threatened to renege on the national debt. They opposed all and every measure proposed to lift the economy, unless said measure was attached to the introduction of “vital” austerity. As a result, Washington lurched from one political crisis to the next. The economy languished. And we became stuck in a surrealistic stand-off with each and every offer advanced by Obama being rebuffed, even if it embodied austerity measures hated by his own supporters.

And then …

Something funny happened.

The deficit began to melt away. Not completely, but enough. Just like some of said it would. The vast drop in revenues and the equally vast jump in spending that happened because of the drop in economic activity in 2008 was cyclical. It was always going to go away if, and when, the economy came back to life. Which it has done. Just enough to make a big difference in the deficit.

Yesterday the Congressional Budget Office (CBO), the bipartisan referee of Washington facts and figures, published its revised budget outlook. It makes for startling reading.

The deficit is expected to shrink to a mere 2.1% of GDP by 2015. That’s below the 2.4% average for the forty years ending in 2008 before the crisis erupted. Not only that, but the deficit is now projected to be only 4.0% of GDP this year, weighing in at $642 billion. This means that the rapid upward tilt in the debt to GDP ratio that we had been warned would ruin us all is now set to sputter to a halt and even turn down a little. Instead of hurtling across the dreaded 90% cliff of doom – recall Reinhart and Rogoff’s infamous paper – the debt ratio will hover around 71% for the foreseeable future.

In short the panic is over. The deficit is under control. The debt ratio is high but just fine. We can relax.

We have no deficit problem.

This should make us all happy, right?

Well not really.

I think the deficit is too small. We have shrunk too fast too soon. We have drawn too  much demand from the economy before it was able to hum along without government help.

But that’s for another day.

The fun result of the CBO report is to watch all the austerity advocates scurry around to find new things to worry about, and new ways to justify inflicting pain on the poor, the sick, the young, and the less well off. After all, what’s a conservative to do if there’s no budget war to fight?

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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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Game Over

Let the new game begin!

You may have missed this weekend’s news. Here is the short version: the Republican party does not think there is a fiscal crisis. No. Not at all. What crisis there is resides well off in the future. So all those panics, fiscal cliffs, sequester debates, and assorted other dire emergencies of the last two years were not, I repeat not, about the deficit or the national debt. No. Not at all.

So said Speaker Boehner on television this weekend. As did Paul Ryan, he of the many emergency, deficit reducing budgets.

Ummm.

What do we make of this?

Well there’s no surprise. The Republicans have never been truly worried about either the debt or the deficit. Those issues were simply useful totems to rally public opinion around. Ever since Reagan, the GOP has been the less fiscally correct of the two major parties. It has indulged in both peacetime and wartime debt accumulation and, for all its anti-big government rhetoric, has acted to bulk up government spending – George W Bush’s extraordinary giveaway to the pharmaceutical industry on behalf of Medicare being the most recent example. Indeed a goodly percentage in the run up of government spending in recent decades has been the result of policies advocated by supposedly small government republican presidents. The facts are clear: the Republicans at the Federal level are not fiscally conservative. Remember Dick Cheney and his comment about deficits being of no concern?

Something has changed.

Now the truth is public. It isn’t debt reduction that drives the Republicans. It is government itself. They are getting perilously close to announcing what we all knew: yes, they really do want to get rid of Social Security, Medicare, and Medicaid. They want to abolish all forms of government insurance coverage of the elderly and the sick. they’d love to get rid of all of it except the military, which miraculously doesn’t count as government spending in GOP minds. So different is it that latest Ryan plan actually piles on more defense spending as it slashes everything else. You can never have enough generals it seems, but there always schools, roads, and hospitals to close.

The Republican problem is, of course, that being too public about this aim is not a very good electoral message. Voters love those programs. Hence the dissembling over the last few decades. Yet, as the GOP became more and more right wing, its purists became more emboldened. They became less and less inclined to hide their real intentions. They fought furiously all efforts to extend government insurance and insisted at every turn that it was those social programs that represented a dire threat to our fiscal health, not unfunded wars. Thus the incessant call to cut those programs. Thus the persistent resistance to fund them. Thus the torrent of alternatives from privatization to the current favorite of vouchers. While all the battles were fought under the rubric of deficit reduction, the real goal was to eliminate the safety net.

At last the lying is over. Now the battle is out in the open. And voters have a clear choice.

This is not about debt or deficits. Those issues can be dealt with in time and with the return to healthy economic growth. No. The next phase of war – over the federal budget – is about whether we keep the safety net, or whether we get rid of it.

In that context, here’s a quick question for all of you.

Would you prefer the government to guarantee your retirement and health care, as it now does, or would you like to rely on Wall Street? You know Wall Street, don’t you? The epicenter of the recent fiscal crisis. The home of those wonderfully socially aware mega-banks and those mega-bonuses. Just think: those CEO bonuses are coming straight from your retirement account. How nice of you to contribute. And what do you get in return? Risk. Lots of risk.

Having successfully made your private sector pensions riskier, they now want to get rid of the less risky part too. But at least you’d be free of the dead hand of government. And the banks would rake in fantastic fees.

What could be better than that?

You poorer. The banks richer. Sounds like a plan. No?

Well, it may not be your plan. But it is the Republican’s plan.

 

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