Gearing up for the Fight

I don’t think there’s a person in the country that doesn’t know that many folks are gearing up to remove our earned benefits.  We should gear up to fight them.

I think we need to adopt “earned benefits” as description for Social Security and Medicare.  For some reason, entitlements has become one of those words that’s been co-opted to mean hand-outs instead of the true meaning which is that we are entitled to these benefits because we paid for them all of our working days. Yesterday, Bernie Sanders gave a speech that made it clear what our priorities should be when it comes to any bargain to decrease our debt and deficit.

Sanders said:

Deficit reduction is a serious issue, but it must be done in a way that is fair. We must not balance the budget on the backs of the elderly, the sick, the children or the poor.

We need to make it clear to people that Social Security has nothing to do with the deficit.   Social Security is not going bankrupt either.

Right now, Social Security does face a long-term funding gap, mostly due to the happy fact that we will be living longer, healthier lives in the future. The gap is quite small, does not appear for 36 years, and if the economy does even a little bit better than expected, will not appear at all. But it may appear. If so, we will have to tweak the system a bit, just as we have in the past. We could take longer life expectancies into account by raising the retirement age. Or, we could levy Social Security taxes on a person’s entire salary, not just the first $84,900 as we do currently. Or, as a last resort, we could very slightly raise Social Security taxes, by a percentage point or so. In any case, these fixes impose a much smaller cost on the typical American worker than exploding health care costs or the continued stagnation of wages — two real, and most importantly, current problems that ought to loom much larger on our national radar screen.

I think the Paul Krugman column today made clear that a lot of myths and memes that we’ll hear in the next few months about our fiscal problems are just myths and memes.  Krugman argues against raising age eligibility for either Medicare or Social Security.  The people that need the benefits the most and the retirement age have likely done very physical work.

And right now the most dangerous zombie is probably the claim that rising life expectancy justifies a rise in both the Social Security retirement age and the age of eligibility for Medicare. Even some Democrats — including, according to reports, the president — have seemed susceptible to this argument. But it’s a cruel, foolish idea — cruel in the case of Social Security, foolish in the case of Medicare — and we shouldn’t let it eat our brains.

First of all, you need to understand that while life expectancy at birth has gone up a lot, that’s not relevant to this issue; what matters is life expectancy for those at or near retirement age. When, to take one example, Alan Simpson — the co-chairman of President Obama’s deficit commission — declared that Social Security was “never intended as a retirement program” because life expectancy when it was founded was only 63, he was displaying his ignorance. Even in 1940, Americans who made it to age 65 generally had many years left.

Now, life expectancy at age 65 has risen, too. But the rise has been very uneven since the 1970s, with only the relatively affluent and well-educated seeing large gains. Bear in mind, too, that the full retirement age has already gone up to 66 and is scheduled to rise to 67 under current law.

This means that any further rise in the retirement age would be a harsh blow to Americans in the bottom half of the income distribution, who aren’t living much longer, and who, in many cases, have jobs requiring physical effort that’s difficult even for healthy seniors. And these are precisely the people who depend most on Social Security.

So any rise in the Social Security retirement age would, as I said, be cruel, hurting the most vulnerable Americans. And this cruelty would be gratuitous: While the United States does have a long-run budget problem, Social Security is not a major factor in that problem.

Medicare, on the other hand, is a big budget problem. But raising the eligibility age, which means forcing seniors to seek private insurance, is no way to deal with that problem.

It’s true that thanks to Obamacare, seniors should actually be able to get insurance even without Medicare. (Although, what happens if a number of states block the expansion of Medicaid that’s a crucial piece of the program?) But let’s be clear: Government insurance via Medicare is better and more cost-effective than private insurance.

There are many more things that need to be done to ensure our fiscal health.  Messing with Social Security is not one of them.  Medicare has issues but most of them could be dealt with by simply allowing the plan to bargain for drug prices.  The Bush deal with big Pharma while providing the part B benefits is the major source of Medicare problems.  Our federal deficit is primarily the result of our two decade long wars, reckless tax cuts, subsidies to folks that don’t need them, and reduced tax receipts/increased expenditures from our deep recession.

Here’s an example of something that could help with the long term health of social security.  Lift the cap.  At the very least, the cap should be subjected to an increase that’s adjusted for inflation just like the benefits.

Social Security is not in danger of becoming insolvent any time soon. According to the program’s actuaries, without any changes, Social Security will be able to pay out full benefits until 2033. And there’s reason to doubt that problems will arise even 21 years from now. As Jared Bernstein noted when the latest projections came out, the expected date when the Social Security trust fund will be exhausted has varied wildly over the past few decades.

Yet despite its medium-run sustainability, many deficit reduction plans target the program for cuts. For example, Bowles-Simpson introduces means-testing and raises payroll taxes for high earners, but also cuts benefits across the board by adopting a less generous inflation measure, known as “chained CPI,” and raises both the minimum age where retirees can claim benefits and the age when they can claim full benefits.

As Nobel laureate Peter Diamond has explained, the latter change is hugely regressive, primarily targeting poor workers in physically demanding occupations. Domenici-Rivlin includes the inflation measure cut, means-testing and payroll tax increase, but leaves out the regressive retirement age increase.

But if one wants to make the program solvent indefinitely without endangering vulnerable seniors, there are options. A new bill from Sen. Mark Begich (D-Alaska), the Protecting and Preserving Social Security Act, provides one method.

The Begich bill would lift the current payroll tax cap, which exempts wages in excess of a certain amount ($110,100 this year) from the tax. In turn, it would give high earners, who would pay more, additional benefits upon retirement, just as benefits increase as wages do for workers below the cap.

According to the Congressional Research Service, a change like that would almost entirely wipe out the program’s long-run actuarial imbalance. Specifically, it would eliminate 95 percent of the shortfall, meaning that a mild increase in the payroll tax rate from 12.4 percent to 12.5 percent would be enough to cover the tiny remaining gap. And without any changes at all, the program would be able to pay out full benefits until after 2085. Indeed, the exhaustion date for the trust fund following such a change is so far in the future that CRS didn’t even calculate it.

I’ve always thought that letting folks pay for the privilege of opting into Medicare sooner would help with the Medicare plan. Also, separating the survivor benefits and disabled benefits and charging separately for this coverage would also help secure social security as it was intended to be.   Anyway, there are many things to do without hacking away at all the benefits that people have paid for a program that shouldn’t be changed due to myths and memes.  Plus, there’s the entire republican agenda of transferring every program–no matter how cost ineffective–to their cronies in the name of their all might gawd Privatization.

We should probably gear up for a fight.  It may be necessary to ensure that our Congress critterz understand the importance of these social contracts and  that they realize these are earned benefits and not just hand-outs.


Open Thread: Mitt Romney, Busybody

In a speech in Des Moines, Iowa today, Mitt Romney sounded like a fussy old gossip, claiming that President Obama probably has a “beef” with Bill and Hillary Clinton.

Almost a generation ago, Bill Clinton announced that the Era of Big Government was over.

Even a former McGovern campaign worker like President Clinton was signaling to his own Party that Democrats should no longer try to govern by proposing a new program for every problem.

President Obama tucked away the Clinton doctrine in his large drawer of discarded ideas, along with transparency and bipartisanship. It’s enough to make you wonder if maybe it was a personal beef with the Clintons….but really it runs much deeper.

President Obama is an old school liberal whose first instinct is to see free enterprise as the villain and government as the hero. America counted on President Obama to rescue the economy, tame the deficit and help create jobs. Instead, he bailed out the public-sector, gave billions of dollars to the companies of his friends, and added almost as much debt as all the prior presidents combined.

ROFLMAO!! Obama, “an old school liberal?” This guy is a laff riot!

At the Washington Post, Nia-Malika Henderson interpreted Romney’s odd invoking of the good old days of the Clinton administration as another effort to link Obama with Jimmy Carter. Henderson writes:

The strategy, of course, is obvious, if a little heavy handed—paint Obama as more like Jimmy Carter, rather than as a New Democrat in the mold of Clinton.

Clinton has already emerged as one of Obama’s most visible surrogates, appearing in a video marking the death of Osama bin Laden, and will likely be used to gin up support among so-called Reagan Democrats—white, blue collar workers, particularly—and Romney can perhaps mute some of Clinton’s power by suggesting that Clinton isn’t all in with Obama. (It’s a beef, not a bromance, Romney suggests.)

But by invoking Clinton, Romney risks poking the bear in some ways, and perhaps even casting himself as a version of Clinton. Praising Clinton, even in a backhanded way, isn’t exactly a way to solidify support among the religious right.

I don’t know about the reaction from the religious right, but Bill Clinton worked a few digs about Romney into his speech today at the Pete Peterson conference (why Clinton shows up for these things, I’ll never understand, but that’s for another post). According to the National Journal, Clinton said that Romney

shot himself in the foot with the broad tax-cutting budget he suggested during the primary. He said Romney should accept projections that his plan for deep tax cuts would add billions to the deficit while requiring huge cuts to Medicare, Medicaid and non-defense spending.

“If I were in his position I would, I think, use the Congressional Budget Office numbers saying my plan increased the debt and say that no responsible president can pretend an independent analysis of his numbers don’t matter,” Clinton said. “That’s, I think, his his best avenue back to the real world.”

Clinton also offered a few verbal pats on the head to Romney.

“I feel a lot of sympathy for him,” he said. “The whole primary was about finding somebody who was true conservative, but they’re going to vote for him anyway.”

Good one, Bill!


Monday Morning Reads

Good Morning!

I actually think this headline from Dean Baker is true:  “Supercommittee Democrats Insist on Not Giving Republicans Everything”.  Of course, that’s why Republicans want the President to enter the fray.  The same cannot be said for him.   That’s why the John Chaffee/Bob Dole/Mitty Romney/American Heritage Institute health care proposal of 1993 now goes by the moniker Obamacare.

In much of the media it is the rule that both parties are equally to blame regardless of what the facts of the situation are. Hence the lead sentence in the Post’s article on the supercommittee’s deadlock tells readers:

“Congressional negotiators made a yet another push Friday to carve $1.2 trillion in savings from the federal debt, but remained stuck in their entrenched positions on tax policy even as the clock was running down on their efforts to reach a deal.”

It would be interesting to know how the Post decided that the Democrats have an entrenched position. They have offered dozens of plans, many of which would not involve having the rates return to their pre-Bush level, as is specified in current law. By contrast, the Republicans have consistently put forward proposals that would keep the taxes on the wealthy at their current level or lower them further.

Even though the Democrats have shown every willingness to cave, the Post refuses to give them credit for it.

Let’s just post this next one under the heady of tacky is as tacky does. 

First Lady Michelle Obama and Dr. Jill Biden were grand marshals at today’s NASCAR season finale at Homestead-Miami Speedway, appearing as part of their charitable campaign to support military veterans and their families.

But their benign, bipartisan cause wasn’t enough to prevent public fallout from the nation’s polarized political climate as they were introduced before the crowd.

ESPN video from the event documented loud boos from some in the stands as the announcer named Obama and Biden, seconds before they delivered the “most famous words in motorsports,” telling drivers to start their engines.

What kind of people can’t shut up long enough to recognize the troops with a first and second lady for pity’s sake?  This sort’ve just played into those NASCAR fan stereotypes, didn’t it? There were also two children standing there receiving recognition as kids of a wounded veteran who volunteers time weekly at the local VA.  What kind of lesson does this teach them?  What has happened to manners in this country; not to mention common courtesy, decency and civility?  Fortunately, the pre-cermony reception with the drivers, crews, and NASCAR administration folks was polite and enthusiastic.

Here’s something interesting!  The National Lawyers Guild has filed a FOIA request asking for evidence of any federal role in the Occupy crackdowns. FBI or Homeland Security any one?

According to a statement by the NLG, each of the FOIA requests states, “This request specifically encompasses disclosure of any documents or information pertaining to federal coordination of, or advice or consultation regarding, the police response to the Occupy movement, protests or encampments.”

National Lawyers Guild leaders, including Executive Director Heidi Beghosian and NLG Mass Defense Committee co-chair and PCJ Executive Director Mara Veheyden-Hilliard both told TCBH! earlier this week that the rapid-fire assaults on occupation encampments in cities from Oakland to New York and Portland, Seattle and Atlanta, all within days of each other, the similar approach taken by police, which included overwhelming force in night-time attacks, mass arrests, use of such weaponry as pepper spray, sound cannons, tear gas, clubs and in some cases “non-lethal” projectiles like bean bags and rubber bullets, the removal and even arrest of reporters and camera-persons, and the justifications offered by municipal officials, who all cited “health” and “safety” concerns, all pointed to central direction and guidance.

Well, it looks like the WSJ is playing games again with us.

When Harry Truman and Lyndon Johnson accepted the reality that they could not effectively govern the nation if they sought re-election to the White House, both men took the moral high ground and decided against running for a new term as president. President Obama is facing a similar reality—and he must reach the same conclusion.

He should abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president’s accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton.

Never before has there been such an obvious potential successor—one who has been a loyal and effective member of the president’s administration, who has the stature to take on the office, and who is the only leader capable of uniting the country around a bipartisan economic and foreign policy.

Well, that’s the WSJ.  Jonathan Chait writes on Liberal Disappointment with Obama and says it’s the fault of liberals.

The cultural enthusiasm sparked by Obama’s candidacy drained away almost immediately after his election. All the passion now lies with the critics, and it is hard to find a liberal willing to muster any stronger support than halfhearted murmuring about the tough situation Obama inherited, or vague hope that maybe in a second term he can really start doing things. (“I’m like everybody, I want more action,” an apologetic Chris Rock said earlier this month. “I believe wholeheartedly if he’s back in, he’s going to do some gangsta shit.”) Obama has already given up on any hope of running a positive reelection campaign and is girding up for a grim slog of lesser-of-two-evils-ism.

Why are liberals so desperately unhappy with the Obama presidency?

There are any number of arguments about things Obama did wrong. Some of them are completely misplaced, like blaming Obama for compromises that senators forced him to make. Many of them demand Obama do something he can’t do, like Maddow’s urging the administration to pass an energy bill through a special process called budget reconciliation—a great-sounding idea except for the fact that it’s against the rules of the Senate. Others castigate Obama for doing something he did not actually do at all (i.e., Drew Westen’s attention-grabbing, anguished New York Times essay assailing Obama for signing a budget deal with cuts to Medicare, Social Security, and Medicaid that were not actually in the budget in question).

I spend a lot of time rebutting these arguments, and their proponents spend a lot of time calling me an Obama apologist.

Some of the complaints are right, and despite being an Obama apologist, I’ve made quite a few of them myself. (The debt-ceiling hostage negotiations drove me to distraction.) But I don’t think any of the complaints—right, wrong, or ­otherwise—really explain why liberals are so depressed.

Here is my explanation: Liberals are dissatisfied with Obama because liberals, on the whole, are incapable of feeling satisfied with a Democratic president. They can be happy with the idea of a Democratic president—indeed, dancing-in-the-streets delirious—but not with the real thing. The various theories of disconsolate liberals all suffer from a failure to compare Obama with any plausible baseline. Instead they compare Obama with an imaginary president—either an imaginary Obama or a fantasy version of a past president.

Okay then.  Suppose it has nothing to do with Democratic presidents that basically pass and support Republican insanity agendas.  One more and then it’s the end of the post!  Paul Krugman tells the FT that ‘No one’s safe” in this economic crisis. It’s mostly on where to hide your money in this turmoil.  My favorite part is Krugman’s description of financial innovations.

Do you have any doubt that innovative financial products have made people better off?

I have substantial doubt. There’s almost a joke but it’s a slightly serious question to ask which financial innovation of the past 30 years was clearly beneficial – and you are not allowed to use ATMs. And the rest is all ambiguous.

The case for believing these financial innovations have actually enhanced welfare as opposed to giving people a false sense of security is very dubious. Collateralised debt obligations were clearly destructive. It was to fool people that risk was less than it was. AIG created a false sense of security via credit default swaps that was as it turned out completely unjustified by reality. Those are specific examples and you might argue they are just misleading, but we are already talking about a pretty large part of what the industry has been doing these past 10 or 15 years.

That’s my suggestions for the day.  What’s on your reading and blogging list?


Taxes are the solution, not the problem

As far as I can tell, if corporations and the top 1% paid anything like a fair share of taxes, budget problems would melt away.

I feel a bit like the recent physicists who seemed to find faster-than-light neutrinos in their data. (There’s the big difference that I’m an amateur at taxes, and they’re anything but amateurs at physics.) But, like them, I’m so boggled by the results that I want to throw it out there for people to pick apart.

Let’s begin at the beginning. The current US deficit is around $1.5 trillion per year. Current US GDP is around $14 trillion per year. Current yearly tax revenues are near $1.1 trillion (IRS pdf, 2008 numbers). In better years revenue is higher, deficits are lower.

An aside: Those numbers are smaller than the multiple trillions of cuts the Super Committee throws around. That’s because they say they need to come up with money for ballooning future costs of social insurance. (The powers-that-be didn’t seem to be worried about the future when tax cuts were implemented.) I don’t consider those future costs a real issue. Social Security doesn’t have any real problems. National health care costs could be cut in half with Medicare for All, based on the evidence from all the industrialized countries that do have national health care systems. (Link is to Congressional Research Service, 2004, pdf. See e.e Table 1, Fig. 1, Fig. 2.) So Medicare for All is the place to start for anyone who is actually concerned about future costs, and not some other agenda.

Further, a healthy deficit level is said to be around 2% of yearly GDP. In addition to other considerations, the ability to buy US Treasury bonds and bills is an important factor in global finance. Zero deficit means the end of that whole asset class, which is not a Good Thing. One wants a sustainable and easily carryable deficit, and 2% is a conservative estimate of that level. Two percent of $14 trillion is $280 billion. (I saw this most clearly expressed somewhere in Krugman’s writing, but all I can find right now is a passing reference here.)

So the yearly shortfall, in round numbers, is $1.2 trillion ($1.5T deficit – 0.280T healthy deficit).

If Fortune 500 corporations actually paid tax on their corporate profits, there’d be much less freeloading from that end. When even Marketwatch headlines “Big Profits, Zero Taxes” you know it’s not a small issue. It’s hard (for me) to find unequivocal numbers on how much difference that would make to revenue, but there are fairly clear data on corporate tax payments as a share of GDP. It’s now at a recent all-time low of 1% of GDP. Moving that back to 4%, about where it was in the 1960s would bring in an extra $480 billion (1% of GDP = $160B, 3% = 480B).

That would entail ending all the corporate loopholes, such as income-shifting in transnationals to whichever tax haven suits them that year, as well as ending special tax breaks for wildly profitable industries such as oil and finance. It would involve adding necessary new taxes, such as a financial transaction tax that would have other beneficial social consequences by slowing down market trading velocity. And it would involve raising rates on large corporations. (Update from comments below: 25 CEOs received more in compensation than their companies paid in taxes. Just mindboggling.)

Then, the other task is to raise taxes on the top 1%. According to the IRS (pdf), in 2008 the top 1% was composed of households making an average of $1.2 million per year. Their effective tax rate is 20% ±5% (CBO pdf, Table 3), and at that rate they contributed well over $350 billion in tax revenue. (For instance, in 2009 the top 1% contributed 36.7% of total income taxes. That proportion is typical during the last decade, plus or minus a few percent. Total income tax revenue in 2008, the last year for which I could find complete IRS data, was $1.081 trillion. 36% of 1.081T = $389 billion.) If their tax rates went to 60%, there would be an extra $700 billion revenue.

So, $700 billion plus $480 billion approaches $1.2 trillion, pretty much the entire yearly shortfall of $1.2 trillion.

That doesn’t pay down the debt. Nor does it provide funds for essential projects such as switching to clean, sustainable energy. But those are one-time charges, as it were, not permanent features of fiscal balance, which I gather is what the Super Committee is worrying about.

Raising taxes on the megarich is not the same as taxing the middle class. It’s not even taxing the upper middle class, such as the heart surgeons and mid-size successful business owners. It involves only having the massively wealthy corporations and households pay something vaguely like their fair share. What’s more, it wouldn’t make a bit of difference to their lifestyles. For an income of $1.2 million per year, that tax increase would drop them from living on $80,000 per month to living on $40,000 per month. They could still jet to Paris for the weekend. Anybody who feels deprived living on $40,000 per month needs therapy, not tax breaks.

All this is something to think about while the news covers the new super ways the Super Committee has found to shred the safety net. Nor is this just a classic “Don’t tax him, don’t tax me. Tax the fellow behind the tree.” The fellow behind the tree has been tax cheating for far too long, and it’s time to rebalance. If the megarich paid their fair share, we could have a future that was more than collapsing bridges and work on their plantations.

Crossposted to Acid Test


Breaking: Boehner, McConnell Announce Picks for Catfood Commission II

Politico has the names:

Speaker John Boehner has appointed Ways and Means Chairman Dave Camp (R-Mich.), Energy and Commerce Chairman Fred Upton (R-Mich.) and Republican Conference Chairman Jeb Hensarling (R-Texas) as the House GOP members of the panel.

Hensarling will be co-chairman of the committee. Senate Minority Leader Mitch McConnell also announced Wednesday the Senate Republican members: Jon Kyl of Arizona, Pat Toomey of Pennsylvania and Rob Portman of Ohio.

Politico says that Kyl, who is not running for reelection,

will likely be a conduit to McConnell to keep him apprised of the ongoing negotiations – as he did when he served as the lead Senate GOP negotiator during the unsuccessful budget talks led by Vice President Joe Biden this summer. Portman, a former White House budget director under George W. Bush and a freshman GOP senator, has been given increased responsibilities from the leadership, including earlier this year when he helped draft a GOP jobs initiative.

From CBS News Political Hotsheet:

In a statement, McConnell said the three senators he’s chosen understand the “gravity” of the current economic climate and will bring to the table “the kind of responsibility, creativity, and thoughtfulness that the moment requires.”

“The American people know that we cannot dig ourselves out of this situation by nibbling around the edges, and I am confident that each of these nominees can be counted on to propose solutions that put the interests of all Americans ahead of any one political party,” McConnell said.

Boehner said in a statement he appointed “proven leaders who have earned the trust and confidence of their colleagues and constituents.”

How very reassuring. The good news is that Boehner didn’t appoint either Paul Ryan or Eric Cantor–probably because he wants them to be reelected in 2012.

As we heard yesterday, Harry Reid has chosen Patty Murray (Washington), John Kerry (Massachusetts), and Max Baucus (Montana), with Murray to serve as co-chair. Nancy Pelosi has not yet announced her choices for the “super committee” AKA Catfood Commission II.

At FDL, David Dayen has some great comments on Harry Reid’s choices.

Patty Murray and John Kerry have defense industry ties, and as the head of the Finance Committee Baucus is no stranger to health care or tax lobbyists. But I don’t think you could find a Senator in the Democratic caucus without those ties. Then there’s this allusion to a stirring speech by John Kerry, which should immediately set off a BS detector:

A Democratic source told The Huffington Post that Kerry “made it into the discussion” of who should serve on the committee by delivering “some powerful speeches” to the rest of the caucus. The speeches, the source added, were in defense of Democratic Party priorities, focusing on the need to protect entitlement programs and Kerry’s desire to strongly push back against (what the source referred to as) “the right-wing agenda.”

That gives me a great idea to stall out the committee: have John Kerry give the opening speech.

Meanwhile, if Baucus is not liked for being parochial and sure to vote against any program that emerged, and given his performance during the health care debate, when he went into a room with a small bipartisan group and wasted four months not finding a solution, I’d say it was a great choice!

Please post any relevant background information you have on these Senators and Representatives in the comments.


Balanced Budget Amendments are Bad Policy

I always have to cover this topic in any introductory macroeconomics class I teach because usually one nutjob or another running for office always brings this up and people fall for it.  The arguments are usually based on complete fallacies and misunderstanding of the math of economics, but hey, for some reason balanced budgets sound ‘reasonable’ when they are anything but.

I used to talk theoretically about how balanced budget amendments will kill state economies when the next real recession hits.  Well, it hit a few years ago and we’re there.  States continue to make their own economies worse day in and day out but there’s still those people that insist that if a family has to balance its budget, then so should the country.  That’s even stupid considering most families have mortgages and car payments and probably student loans. Take Michele Bachmann as an example. She’s got all of the above plus farm subsidies and government grants.  Even the President is guilty of that false equivalency.  No person or family exists in perpetuity.  No person or family can print money.  No person or family has the power of taxation.  Because of these three things, you cannot compare government to a family.  Nor can you compare government to a business.  Businesses exist to make a profit.  Government exists to provide services and goods that the private sector will not provide or provides at an outrageous cost.  It exists to administer justice and ensure level playing fields and fair play exists.  Everything about a government is unique and is no way comparable to either businesses or households.

Macroeconomists know from years of study that the federal government can influence the economy at large.  It does so through its spending and taxing priorities and policies.  This is called fiscal policy.  We have found several economic laws that guide the relationship between taxes and government spending and the behavior of Gross Domestic Product (GDP) which roughly measures all the legal and reported spending by households, governments, foreigners, and businesses.  In our economy, household spending comprises about 68% of all GDP.

Investment or purchases by businesses is the smallest and most erratic component of GDP.  Keynes said that it is easily spooked and subject to animistic spirits.  Because it’s an unreliable source of growth, Keynes argued that in down turns, government should use its power to spend.  Business investment usually only does fine in good economies. Please note,  Keynes said deficit spend in recessions.  Keynes’ prescription also said that Federal governments should run balanced budgets during times when the economy is fully employed and surpluses during bubble or boom times to relieve inflationary pressure.  As usual, conservative politicians completely lie about the nature of Keynes and his highly proven and credible theories on fiscal policy.  A lot of what we know about Monetary Policy comes from Milton Friedman, however, that is not the subject today.  What I want to emphasize is that both men spent a lot of time analyzing panics and the Great Depression and are very much at the heart of accepted theory.  We are seeing a classical lack of aggregate demand today.  It is what’s driving the budget deficit.  It is what’s driving the joblessness. It is what’s driving the slow recovery.  Government must and will by automatic stabilizers be in a deficit position during downturns.  It is simple math.  More revenues come in during good times than bad.  More safety net spending increases during bad times than good.  We naturally run towards deficit in bad economies and towards surplus in good.

However, show me an economy that’s booming with high revenues and lower safety net spending and I will show you a group of politicians spending wildly.  This tends to create inflation and can lead to bubbles.  However, you never hear them complain at that point in time.   That’s because it should be relatively easy to balance a budget then, but they do not do so or if they do its by expanding programs that cannot be sustained without borrowing during bad economies.

With that short explanation, let me cite you some folks that tell you why balanced budget amendments are bad policy.  This first quote is from Simon Johnson who is the former chief economist for the IMF.  He asks us to keep in mind that GDP is a measurement that is fraught with problems.   He also mentions the fact that a balanced budget amendment makes the government make recessions worse.

Second and more seriously, imagine that this constitutional amendment were in place and that federal spending were roughly at its limit relative to the size of the economy. Then, what happens should the financial sector blow up again — either through no fault of its own (which, believe it or not, is the current prevailing myth on Wall Street about 2007-9) or because of some toxic combination of malfeasance and malpractice (the current predominant view of 2007-9 among many other people)?

The blame game is irrelevant when G.D.P. drops 10 percent; the issue is how to prevent a Great Depression. But note that with such a decline in G.D.P., a level of nominal spending that was 18 percent of G.D.P. is suddenly 20 percent, and now a constitutional crisis awaits – even before we get to the question of whether tax cuts or other forms of stimulus might be appropriate.

It makes no sense to take aim, as a matter of constitutional process, at two numbers that are both outcomes of deeper economic processes.

And to be frank, sometimes it makes a great deal of sense to apply an economic stimulus to an economy in free fall. One such moment was 1930 (and 1931 and 1932), when no stimulus was applied. Other moments were 2008 and 2009; both President Bush and President Obama initiated stimulus packages. When credit for and confidence in the private sector evaporates, do you really want the government sector to be forced to make quick cuts — or to raise taxes?

James Ledbetter at Reuters argues that even conservatives should oppose a balanced budget amendment (BBA).  His reasons are more pragmatic.  He argues that it won’t work.

Historically, conservatives have opposed extending government authority in places where it is not effective. You can find all the evidence you need to conclude that balanced budget requirements are useless by simply investigating the oft-repeated claim that 49 states have laws requiring a balanced budget. Leave aside the falsity of the claim and just consider the logic: if so many states are required to balance their budgets, why are so many states in the red?

The answer is that requiring state governments to annually balance their books simply encourages them to find clever ways to disguise debt and deficits. For example: California has both a Constitutional and a statutory requirement that its budgets be balanced. Would any sane person maintain that the state’s books have been anything resembling healthy for at least a decade? This year, after some brutal spending cuts, the governor’s office found that the state still had a short-term deficit of more than $9 billion and $35 billion in long-term debt. The governor’s budget report noted that California’s “massive budget deficits for most of the past decade…have been largely the result of a reliance on one-time solutions, borrowing, accounting maneuvers, and cuts or revenues that were illusory and therefore did not materialize.”

If that sounds familiar, it may be because, as Richard Quest pointed out on CNN Sunday evening, we’ve witnessed numerous Congressional attempts in recent decades to rein in federal deficits—including Gramm-Rudman in 1985 and the Budget Enforcement Act of 1990—all of which fell victim to legislative legerdemain. Why would a federal balanced budget amendment be any different?

Here’s something from The Economist on “Fiscal Rules”.  Some fiscal rule–rather than a balanced budget amendment–would better stop congress from spending during booms and full employment cycles rather than balancing its budget via a BBA. This would be a rule that attaches the spending mandates to what’s going on in the economy.  But again, I doubt they’d follow it since they’ve ignored a good portion of the Keynesian prescription for years any way.

It is difficult for Congress to tie its own hands. Any law that can pass Congress can later be undone or changed. In the rare cases that Congress puts together a near-perfect piece of legislation, that’s a bad thing. In the vastly more common occurrence that Congress passes highly imperfect legislation in need of significant future tweaks, that’s a very good thing. Support for an amendment to the constitution is a spectacular vote of confidence in the ability of a legislature to design near-perfect legislation, because the only thing rarer than an amendment to the constitution is a subsequent amendment undoing or clarifying a previous amendment.

I see the argument for a well-designed, over-the-business-cycle balanced-budget amendment. But the idea of enshrining this Congress’ pathologies into the constitution is terrifying. Let’s see Congress design some quality fiscal rules using the normal legislative process first, and then we can talk about adding those to the constitution.

Bruce Bartlett has some excellent analysis up for the current go round of balanced budget amendments.  Mark Thoma explains how a BBA is a very bad idea. His analysis includes looking at the destabilizing effects that states’ BBAs have had on their economies. There’s a nifty graph that I did not include here if you’d like to go view it.

I’ve argued on many occasions that one of the big lessons we need to learn from this recession is that state-level balanced budget requirements are highly destabilizing. When a recession hits, spending goes up for social services and taxes fall as income, sales, property values, and other sources of revenue for state and local governments decline.

The result is a big hole in state and local government budgets, and that forces either increases in taxes or cuts in spending both of which make things even worse. And though some state and local governments were an exception to this, far and away the choice is to cut spending. We can see this in the state and local government employment statistics:

That’s not what we want to have happening when we are trying to recover from a recession. It would be much better if states had rainy day funds to rely upon, and if the rainy day funds fall short, the federal government could backfill the budget holes to prevent the destabilizing downsizing.

So have we learned the lesson? Nope, at least not if you are a Republican. They’d like to impose the same destabilizing rules on the federal government:

You really would have to search high and low for an economist that actually supports a BBA.  The more conservative ones go for the fiscal rule that attaches spending to business cycles but even they believe that it would be unenforceable and easy to avoid. Can you imagine some District Judge trying to look over a complex macroeconomic model and figure out if the government forecast was correct or not?

A group of leading economists, including five Nobel Laureates in economics, today publicly released a letter to President Obama and Congress opposing a constitutional balanced budget amendment. The letter outlines the reasons why writing a balanced budget requirement into the Constitution would be “very unsound policy” that would adversely affect the economy. Adding arbitrary caps on federal expenditures would make the balanced budget amendment even more problematic, the letter says. The Economic Policy Institute and the Center on Budget and Policy Priorities organized the letter.

“A balanced budget amendment would mandate perverse actions in the face of recessions,” the letter notes. By requiring large budget cuts when the economy is weakest, the amendment “would aggravate recessions.”

The signatories of the letter are Nobel Laureates Kenneth Arrow, Peter Diamond, Eric Maskin, Charles Schultze, William Sharpe and Robert Solow; Alan Blinder, former Vice Chair of the Federal Reserve System’s Board of Governors and former member of the Council of Economic Advisors; and Laura Tyson, former Chair of the Council of Economic Advisors and former Director of the National Economic Council.

I’ll let former Reagan economist Bruce Bartlett have the last word here. He looks at the recent debate in Congress on the BBA.

Next week, House Republicans plan to debate a balanced budget amendment to the Constitution. Although polls show overwhelming public support, it is doubtful that many Americans realize that the measure to be debated is not, in fact, a workable blueprint to enforce a balanced budget. In fact, it’s just more political theater designed to delight the Tea Party.

We really need improved economic literacy in this country.  I genuinely can’t get over what some of the morons in congress can get away with saying.  Economists call them on it but it appears no one every listens.


Deficit Debacle: Live Blog on the Murder of Middle Class America

Everything is on the table.  Except taxes.  WTF?

I’m watching Bernie Sanders trying defend our precious safety nets right now.  The debate over this horrible capitulation to right wing extremists is carried on CSPAN .  Sanders is reminding the president that all the polls call for shared sacrifice.  He’s saying the proposal is bad and unfair.  He’s just announced on the floor he will not vote for the package.  What were getting is sacrificed on the alter of greed. At least some one recognizes this.

They’re taking a senate quorum call right now.

Here’s some headlines for you to  think about.

From former Biden economic adviser Jared Bernstein: Lousy Negotiation skills are not the problem.

What did we just go through and what does it mean for our national politics, our fiscal and economic policy?

–First, a small but influential group of extreme conservatives are so intent on shrinking the federal government that they would credibly threaten national default;

–Second, Democrats, including the president, do not have a strategy to counteract such extremism, so they accepted a plan far less balanced than they would have liked—the final deal could well turn out to be $3 trillion in spending cuts over ten years, with no revenue increases to offset the cuts.

–Third, and perhaps most importantly, like every debate about the size of government, it’s impossible for normal people, if not the “experts,” to figure out what anyone is really talking about and therefore to judge the deal.

What does it mean to cut $3 trillion in government spending?  How will it affect retirement security?  Education? Jobs in the short run and investment over the long run?  Does it put us on a sustainable fiscal path.

We’re about to agree to cut $1 trillion from something called discretionary spending.  That probably sounds great to some folks and bad to others.  But what does it mean?

The President bragged on this very point last night, telling America that discretionary spending as a share of the economy will come down to its lowest level since Eisenhower.  As if we’ve all been walking around thinking, “if only we could get this budget category down to Ike levels, everything would fall into place.”

In fact, these cuts will hurt our ability to pursue what I view as most positive aspects of the President’s economic agenda—investment in infrastructure, clean energy, research, education.  They will pinch programs that are already budget constrained…programs that help low income people with child care, housing, and community services.  (One piece to watch for here—defense spending is also in this category, and is supposed to account for about one-third of the cuts…that helps, of course, take pressure of these other parts.)

Then, in part two of the deal, we unleash the gang-of-twelve who are assigned to come up with $1.5 trillion more in deficit savings.

They’ll be hitting the entitlements—Social Security, Mcare, Mcaid—and more defense, but if they deadlock—a non-trivial probability—automatic cuts ensue.

My thought is that the political game has become all important in this negotiation and no one is really thinking about the outcome.  The Teabots are insane so they can be discounted, but all of this fall-in by senators and representatives that know what’s going on has got to be the most painful thing I’ve ever watched.  Can’t some of them use their brains and consciences for a change instead of checking their labels and owner dog tags?

Paul Krugman: The President Surrenders

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts.

They are killing any hope we have of a decent recovery.  We don’t have one now.  The US Manufacturing Index just fell to a two year low.  This is one of the first leading indicators to show a looming recession. One of the most telling signs this morning about this is that the stock market is going down and now there is a flight to safety.  Oddly enough, the flight to safety is to US Treasury bonds.

“We’ve turned from budget crisis to economic crisis,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “We’ve gone from worrying about a budget and default to the economy long term. Higher prices are bringing in buyers, not sellers.”

Still, what about the JOB crisis?

Kevin Drum at MOJO: Why the Debit Ceiling Deal Sucks

It’s a shit sandwich no matter how you look at it. And it’s a shit sandwich in at least two very specific ways: (1) It means we’ll continue to live in a fantasyland that says we don’t need any tax increases even though our population is aging and we’re plainly going to need higher revenues to support this demographic reality; and (2) we’ll continue to live in a fantasyland that says our problems are primarily caused by discretionary spending. This is, of course, exactly the opposite of reality, which means we’re going to screw the poor and do nothing serious about the long-term deficit. Nice work, adults.

Easy-to-Hate Debt-Ceiling Compromise Called “Sugar-Coated Satan Sandwich” By Some

Cuts to Social Security and Medicare are also possible within the plan. Representative Emanuel Cleaver (D-MO), the chairman of the Congressional Black Caucus, called the deal a “sugar-coated Satan sandwich,” which itself deserves $1.2 trillion.

We’re seriously f’d on this one folks.

Notable tweets:

daveweigel

I haven’t seen this many pissed off Democrats since the last time I saw some Democrats. #beenatoughyear
tbogg

Gene Sperling: Obama ‘didn’t give one inch’ : politico.com/news/stories/0… So Obama’s people say he owns this shit sandwich. Jesus. #Quitdigging

SatanSandwichSugar Coated
The moment I convinced President Obama of the virtues of austerity: bit.ly/nbv5C6 #FYEAH
ThePlumLineGSGreg Sargent

House Dem leaders NOT pressing Dems to vote for the debt deal, potentially complicating passage: http://wapo.st/o3wyDP

nytimes The New York Times
How the Debt Plan Would Work

Read this CBO letter to Congressional Leaders.  They’re putting discretionary funding caps on Social Security, Medicare, SCHIP, Medicaid, et.  Iraq and Afghanistan are exempt from spending caps.  This is AWFUL!!!  Worse than I thought … Please read this analysis from the CBO to congress!!!

House DEBATE and vote on package: running here at CSPAN. They are voting on the debate rules right now at 3:30 pm cst.  Progressive Caucus leaders talking right now saying they will not support the deal because it’s incredibly wrong and worse than the Reid Compromise.  Lynn Woolsey and Barbara Lee announcing they will vote no.


Please report on who you know is voting for or against below so we can keep track of who needs to face a real democrat in a primary,