Of Brass Tacks and Phony CrisesPosted: January 3, 2013
Yes, yes … the fiscal bunny slope has been somewhat solved and the press has moved on to discussing the next big self-inflicted fiscal crisis coming up in February. ( I guess we’re adopting the term “March Madness” just to make it all exciting and discussable.) We’re still in the land of economic surreality instead of theory. It worries me. The basic problem is that this country has forgotten its economic history, lessons and theory. Fiscal policy should not be based on political memes and lurching from one crisis to the next. Here’s some things to think on from economists.
Economist Nouriel Roubini points out that we’ve been let down by our political leaders who just don’t get that our basic problem is really one of development. We’ve had substantial growth in upper incomes and corporate profits, yet we’re going nowhere in all the quality of life and economy numbers. We have a tax policy that encourages folks like Romney to strip money out of functional businesses, shut them down, and move the proceeds to offshore bank accounts to avoid paying taxes that support basic features of a civilized country. How is this kind of wealth creation helping our economy? How is treating speculative gambling to tax favors instead encouraging actual business building creating a future upon which we can sustain our civilization? Why isn’t the press looking at the fiscal drag this cliff solution creates a well as the bigger issue of austerity facing us in March? Austerity has done the UK no favors and is crushing parts of the Eurozone. Why are the media and the political elite focusing on policies that look like Herbert Hoover’s revenge? Why feed the drone economy while starving granny?
President Barack Obama and his allies will argue that the deal concluded on Tuesday raises only $600bn of revenues over 10 years rather than their initial target of $1.4tn – and therefore there is further room for tax rises, at least for the wealthy. Republicans will argue that spending should now be radically cut, since this week’s deal did not address that side of the national balance sheet. (Even the 2011 debt ceiling deal reduced prospective spending by $1tn).
In the meantime, the likely fiscal adjustment in 2013 will be about 1.4 per cent of gross domestic product. (Spread between the expiry of the payroll tax cut, the increase in the tax rates of the rich, and some eventual cuts to spending.)
This translates into a 1.2 per cent of GDP drag on the economy during the year. If the economy was happily growing above trend – at say 3.5 per cent – that would not be such a big deal, as growth would still be above 2 per cent. In the past few quarters growth already averaged about 2 per cent. So the US could quite easily come perilously close to stall speed this year – or worse, if the eurozone crisis worsens.
The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare. Even the typical Republican voter is not – being on average older and poorer than a Democrat voter – in favour of gutting the welfare state. Tea Party extremists are more noise than signal. That is why the plans of Mitt Romney and Paul Ryan, the Republicans’ losing presidential ticket, postponed all the tough spending cuts on Social Security and Medicare by a decade.
Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich. A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr Obama.
Yes, they continue to eye cuts in social security under the guise of tackling the deficit. Economist Dean Baker reminds us that Social Security has nothing to do with the Federal Deficit. Yet, there’s Simpson and Bowles yacking up that granny starving canard again! Let’s chain link our grandparents in the name of a lie, please!! Baker is right. Budget hysteria is a growth industry driven by lies and has nothing to do with what’s really happening in our real economy.
While the promotion of budget hysteria is one of the largest industries in Washington, the most important and widely ignored fact about the budget situation is that we have large deficits today because the collapse of the housing bubble sank the economy. This is not a debatable point.
The budget deficit was just 1.2 percent of gross domestic product in 2007. Before the collapse of the housing bubble the deficit was projected to remain low for the next decade and the debt-to-G.D.P. ratio was actually falling. This would have been the case even if the Bush tax cuts were allowed to continue.
When the bubble burst and the economy plummeted, tax collections fell. We also spent more on unemployment insurance and other benefits for unemployed workers. And we had further tax cuts and stimulus spending to try to boost the economy. The automatic and deliberate steps taken to counter the downturn fully explain the large deficits we have seen the last five years.
Record low interest rates on government bonds demonstrate that the current deficits are not a real problem. But even if they were, it is difficult to see how cutting Social Security could to be part of the solution. Under the law Social Security is not supposed to be part of the budget. It is an entirely separate program financed on its own.
This is not just a rhetorical point. We can talk about Social Security facing a financing shortfall in the future precisely because it is solely financed by its own revenue stream.
What we really need is a recovery. That will not happen with all the fiscal policies being placed on the table right now. Let’s review one simple thing. As long as you have a good currency, federal debt instruments in demand, and a vast array of taxable assets in your country, there is no such thing as a ‘bankrupt’ government or excessive debt. But, don’t take my word for it. Let’s again, look at the economic studies and look at the demand for treasury bonds and bills. Markets see no problem with debt levels in most industrialized nations because they know that with development and growth there comes decreased deficits and pay down of debt.
The sovereign bond markets in America, Japan, Britain, and the euro area’s “core” do not seem to think so. These governments can borrow cheaply for decades at a time. While it is certainly possible that the markets are wrong, policymakers should probably pay more attention to investors and less to the fear-mongers, especially since economists do not know how much government debt is too much. In fact, there is good reason to think that many countries with their own currencies could become far more indebted without risking trouble. One reason is that many private investors do not own enough sovereign bonds.
It is important to remember that there is an absence of evidence that governments with their own currencies are too indebted. Those who argue otherwise point to the work of Carmen Reinhart and Kenneth Rogoff, the celebrated authors of This Time is Different. Their paper “Growth in a Time of Debt” claimed that sovereign debt creates a burden on the rest of the economy. (They summarise their points here.) But, as Robert Shiller and Paul Krugman have pointed out, Ms Reinhart and Mr Rogoff never explain how public indebtedness restrains growth. There may be other forces at work, especially since sovereign debt ratios are usually at their highest after wars and financial crises. In countries with their own currencies, private interest rates are now so low that many investors have been grasping for yield wherever they can find it, such as in the revived CLO market. When he evaluated the evidence, my colleague concluded that “debt matters, but the precise way that it matters isn’t as clear-cut as Reinhart-Rogoff seem to indicate”.
Why would private investors want to buy more sovereign debt? A previous post on the shortage of safe financial assets mentioned how pension plans in many countries need to buy more government bonds to avoid mismatches between their assets and liabilities …
Nearly all the red states in our country may be Greece and Portugal–with the exceptions of Texas and Florida–but the blue states are overwhelmingly Germany and they continually bail out those loser states. That’s why we are not the Eurozone. However, those red states sure are trying to blow up the very arrangement that keeps them in roads, schools, and police forces. Economist Clive Crook points out how these idiots have now created a situation where governing means we lurch between crisis because none of them appear to be able to accept the lessons learned from the civil war, the Great Depression, or about 60 year of economic and finance theory.
The latest fiscal deal does little to resolve those uncertainties. The spending-cut part has merely been delayed by two months. The tax increase for couples making more than $450,000, together with other changes and estimated savings in debt interest, shaves about $700 billion from the 10-year deficit. Savings of about $2 trillion will be needed to stabilize the ratio of public debt to national income. Bringing that ratio down to a safer level requires spending cuts and tax increases worth $4 trillion — the original “grand bargain” ambition.
Instead of dealing calmly with the problem, fiscal policy has settled into a mode of perpetual phony crisis. Phony doesn’t mean harmless, however. The risk of a real fiscal crisis gradually builds. Meanwhile, the cumulative effects of simulated crisis might be almost as bad. It’s the difference between an acute illness and a chronic wasting disease — one that’s beginning to look incurable.
Don’t tell me the economy just had a lucky escape. Whatever happens next, it has been paying for the fiscal standoff for months. It’s paying for what Congress might do with the next debt ceiling, and the one after that. The “significant uncertainty” that Geithner referred to has already held back the U.S. recovery. Another temporary fiscal patch isn’t a remedy. It’s just more of the same.
The economy needs a lasting fiscal compact that commands broad, bipartisan support. I can hear the groans. Not another call for compromise. Many Democrats and almost all Republicans find the idea disgusting. On Capitol Hill, it’s no longer enough for one side to win; the other has to be seen to lose. That attitude is the growing burden the economy has to carry.
Which brings me back to journalistic, political hacks that write columns like this one at Politico. (Glen Thrush and Reid J Epstein are the guilty wielders of the keyboards of ignorance here.) They just opine that Obama has a debt problem. Gee, guys, where did you get your doctorates in economics or finance? The place is aptly called Tiger Beat on the Potomac by Charles Pierce. They are all about being groupies to their DC stars. No Republican meme is too outrageously wrong for this e-dishrag.
The staggering national debt — up about 60 percent from the $10 trillion Obama inherited when he took office in January 2009 — is the single biggest blemish on Obama’s record, even if the rapid descent into red began under President George W. Bush.
Glenn Thrush and Reid Epstein’s Politico piece on President Obama’s “debt problem” helps capture a lot of what’s wrong with the larger debate and the political establishment’s confusion about fiscal matters.
It’s the same damn problem that happens when you watch MTP and Dancing Dave and Tom Brokaw discuss anything about economics. They don’t know a damn thing. They just repeat what they’ve heard from their local lying republican friends. Here’s more from Benen.
First, when there’s a global economic crash, and the government needs to invest to rescue the economy, large deficits are good, not bad, especially when borrowing is cheap and easy. Had the president focused on reducing the $1.3 trillion deficit he inherited from Bush/Cheney, instead of job creation and economic growth, the recession would have intensified, and yet, too many reports simply accept it as a given that higher deficits are worthy of condemnation.
Second, under Obama, as the economy started to improve, the deficit started to shrink anyway. Though the political establishment usually ignores these details, the deficit is $300 billion smaller now than when the president took office — marking the fastest deficit reduction since the end of World War II.
Third, Obama keeps pushing massive debt-reduction proposals on the table, as well as all kinds of policies that shrink the deficit (health care reform, cap and trade, Dream Act), but Republicans have opposed all of them.
For Politico, the fact that the national debt is nearly 60% larger necessarily makes this a major “blemish” on the president’s record. This only makes sense, of course, if one assumes that a larger debt is a bad thing — and given the circumstances, it’s not — and that it’s Obama’s policies that are responsible for the increase.
But as we’ve discussed before, that’s simply not the case. The facts are incontrovertible: towards the end of President Clinton’s second term, debt clocks that had been established in various U.S. locations had to be shut down — the deficit had been eliminated and the clocks had never been set to run backwards. By the time Clinton left office in 2001, the nation not only had a large surplus, it was also on track to pay off the entirety of its debt — roughly $5 trillion at the time — by the end of the decade.
Then the Bush/Cheney era happened. Republicans took a massive surplus and turned it into an even more massive deficit, adding the costs of two wars, two tax cuts, Medicare expansion, and a Wall Street bailout to the national charge card.
Sen. Orrin Hatch (R-Utah) later referred to the Bush/Cheney era as a time in which Republicans decided “it was standard practice not to pay for things.” In just eight years, GOP policymakers added $5 trillion to the debt in eight years.
But then Obama was just as reckless, right? Wrong. The key takeaway here is that it’s Republican policies, not the president’s agenda, that’s driving the national debt now and into the future.
Okay, so I’ve made this an extremely long, wonky post and your eyes are probably glazing over by now. The deal is this. We have a huge number of issues facing our country and we have press and a political party that just plain lies and spreads lies on the big ones. We can’t have a discussion on climate change science, or women’s health and reproduction and rape, or economics or a number of things because very few people bring data, science, statistics, and theory to the table. They bring hype and religious and ideological dogma. We continually see Republicans and press folks like Tom Brokaw say the economic equivalent of ‘women who get raped don’t get pregnant because their bodies shut down’ . They don’t even realize they are doing it and no one calls them on it because they get all the air time they want and economists get very little.
So, we’re on the verge of starving children and the elderly based on that level of discussion. How can we possibly get to a more fact-based reality and a healthier economy and democracy with this level of ignorance?