Which Spending Is Easier To Cut And By What Level Of Government?

Back from his break, our former co-blogger, Dean Baker at Beat the Press, takes down WaPo ed page editor, Fred Hiatt, for his pushing yet again for cutting Social Security because it is supposedly "easy to do" in contrast to medical spending, with Hiatt pinning the blame on Dems for not supporting cutting either.  Baker notes that putting med costs in line with those in other countries would alone completely eliminate the federal budget deficit, and that Dems are not the ones opposing cuts to drug companies or "overpaid medical specialists." http://www.cepr.net/index.php/beat-the-press/why-does-Fred-Hiatt-say-the-democrats-are-opposed-to-giving-less-money-to-drug-companies-and-overpaid-medical-specialists? .  Hiatt barely nods at GOP opposition to tax increases and the possibility of cutting defense spending, even though the US is winding down some of its current active wars.

Dean kindly avoids noting that Hiatt is part of a group of established media mavens in Washington who long ago convinced themselves that somehow not only is Social Security "in crisis," but that somehow it is the easiest program to cut (future) spending on politically, although that will do nearly nothing to limit near-term deficits and that there is nearly zero support among the public of both parties for such an action, and that efforts by various politicians of both parties in recent years to do this have ended up as embarrassing failures.  But this gang does not give up easily, including Hiatt, back at it yet again.

Unfortunately, the alternative appears to be a trick buried in Paul Ryan's budget proposal: send certain social safety net programs down to the states, with the leading candidate being Medicaid, which is already partly funded by the states.  As much as any program, this is one that should be solely funded by the feds as that would help even the playing field across states, given that the states that need it the most are the states with the most poor people and thus least able to support their poor people.  But no, Ryan thinks that Medicaid should be sent fully to the states, and some movement in this direction has already happened.

This hypocritical trend of Grover Norquist "no higher taxes" politicians sending important programs to lower levels of government so they can claim "savings" without tax increases is going on more widely, also reflecting Norquist's influence at even state levels.  So, in Virginia where I live, this most recent legislature, newly run fully by the GOP with our GOP governor, has in an effort to balance the state budget without raising taxes or appearing to cut programs, sent an unfunded mandate to the local governments, removing the funding but requiring that they contribute more to teacher pension funds.

This has led to a fairly astounding result, although the mayor or Harrisonburg, where I live, tells me that a lot of these legislators somehow convinced themselves it would not happen.  Nearly every local government in the state, including the vast majority of ones run by Republicans, has raised local taxes, mostly property taxes, but also others as well.  They have been cutting and cutting their budgets for the last several years, something manifesting itself nationally in the steady stream of layoffs at both state and local government levels.  The expectations by citizens for continuing to have basic local public services of some sort simply overrode this idiocy of no new taxes in the face of this unfunded mandate from the state, which in turn at least partly reflects the ongoing rise of Medicaid costs, exacerbated by the feds pushing even more of those down to the states.

As it is, here in Harrisonburg, property taxes are going up, along with a small increase in the rate on restaurant meals.  The alternative to the meals tax rise (much opposed by local restauranteurs) was to raise personal property taxes.  Around the state, different combinations of such increases have been implemented, and it will be interesting to see whether local voters punish their leaders for doing this or will figure it out that they have been pushed to this by the irresponsibility of state politicians.  This problem may well be worse for local Republican leaders than for Dems, given that in general the latter have not hobbled themselves so tightly with all these inane pledges about taxes, although so far, Grover Norquist has not gotten down to the local level guys with making them sign pledges and holding them publicly to them.  There are just too many of them for him to keep track of all of them.

Austerity in booms and now also in times of bust

Paul Krugman at the New York Times has an article entitled 'The Austerity Agenda' published on 31st May.  He quotes the economist John Maynard Keynes who said 75 years ago: “The boom, not the slump, is the right time for austerity.”  Krugman then poses the question as to why certain governments are pursuing an austerity agenda in this time of 'slump' rather than waiting to cut public spending and jobs when their economies are in better shape.

Krugman's basic assumption is that our economies will recover; that economic growth will resume as we've always known it to.  But is this correct?

In 2005 something of a very fundamental nature changed in the world economy.  World energy supply stopped growing.  It was no coincidence that, in that same year, Wall Street began to bundle mortgages together into investment parcels, and then offloaded them as quickly as they possibly could by any means feasible.  This appears to be related to the fact that when the annual supply of world oil stabilised at a time of unprecedented and climbing demand the price of this vital commodity started to skyrocket.  Thus, sharply exacerbating a global liquidity glut (capitalism under 'limits to growth' = great financial profits for a select few and austerity for everyone else).

The US Federal Reserve then decided (also in 2005) to raise interest rates.  Families hit with rising oil prices then had to begin paying higher interest rates on their mortgages....

A period of conscious self-reflection on the results of our economic model is long overdue.

Brenda J Rosser.  Monday 4th June 2012.

John Cochrane Admits to Being Lazy

John Cochrane launched what appears at first to be a critique of Paul Krugman. Among the things that Cochrane insists economists do:

Economists should focus on the things they know something about ... More deeply, seeing some people as good and others as evil really is not that useful as social science or as a contribution to policy debate ... Economic analysis is more believable when it is non-partisan ... And economists should insist on precise language.

This is all a setup for his critique of this Krugman column:

in his exalted opinion New Jersey Governor Chris Christie is a "big fiscal phony," that Congressman Paul Ryan and candiate Mitt Romney are "fakers," who are "willing to snatch food from the mouths of babes (literally, via cuts [sic] in crucial nutritional aid programs)," all to serve the dark conspiratorial interests of their "financial backers." This column illustrates just about every desirable principle by embodying its opposite.

I guess this from Krugman offended Cochrane:

Mr. Ryan has somehow acquired a reputation as a stern fiscal hawk despite offering budget proposals that, far from being focused on deficit reduction, are mainly about cutting taxes for the rich while slashing aid to the poor and unlucky. In fact, once you strip out Mr. Ryan’s “magic asterisks” — claims that he will somehow increase revenues and cut spending in ways that he refuses to specify — what you’re left with are plans that would increase, not reduce, federal debt.

Maybe Cochrane missed the previous Krugman posts as well as other non-partisan reviews of Ryan’s budget which did fail to identify how his plan would somehow magically slash spending or find offsets to those tax cuts. And Cochrane insisted that we economists focus on the things they know about? But check out the comments section when a reader called him on this and you will see Cochrane writing:

On Ryan, I try to criticize things I actually read. I haven't criticized either budget because I haven't read them.

Really? Well those of us who dare to criticize Ryan on his magic asterisk budget have read it. So what Cochrane ultimately shows is that he is too lazy to research a topic before he offers his uninformed perspective. I guess the old motto “practice what you preach” applies here.

Unemployment During the Obama Years

Meet the Press had an incredibly stupid discussion of the economy this morning. The Republican governor of Ohio wanted to talk about how the unemployment rate now is higher than it was when Obama became President, while the host kept talking about how the unemployment in certain states (such as Ohio) has declined since October 2010. Our graph of the unemployment rate is illustrative. But suppose we also graph the employment to population ratio. Yes – President Obama took office in the middle of the Great Recession and that early fiscal stimulus kept a horrific situation from getting worse. But all Governor Kasich could talk about is the usual “uncertainty” spin. Alas there was little talk about how the early fiscal stimulus – which was clearly inadequate – has unfortunately turned to austerity.

Doom May Not Be At Nigh Regarding The Euro

Global growth rates are declining, the EU economies are falling into outright recession, and people ranging from Simon Johnson to Tyler Cowen are forecasting imminent breakup of the eurozone with broader catastrophic outcomes more globally (and just to make things even more fun, China, India, Brazil, and other major economies are also decelerating in their growth).  Funny, but for someone who has written a lot about catastrophe theory, I think things may not be quite as bad as all these doomsters are promulgating.

So, much attention is focused on two players: Greece and Spain.  Greece is in an unpleasant downward spiral that has been going on for several years, ever since former PM Papandreou admitted that Greece had been lying about its national income accounts and fiscal accounting.  The latest polls suggest that the Syriza party is leading by 6% for the June 17 election, with many tearing their hair out over this, given that Syriza opposes the "bailout," although they have not yet openly called for exiting the euro.  But that seems to be what is likely.  Doom appears to be at hand.

However, a Grexit may be just what is needed.  Large portions of Greek debt have already been devalued with creditors taking haircuts.  The immediate losses will not be all that great, and many are preparing for what appears to be Greece's likely exit from the eurozone, sooner or later.  Yes, the near term experience in Greece will be unpleasant, just as the decoupling of the Argentine peso from the US dollar in 2001 led to a massive devaluation that impoverished Argentines dependent on imported consumer goods.  But, Argentina later grew rapidly, given its more competitive exchange rate.  Yes, Greece faces technical difficulties in reimplementing the drachma that Argentina did not face, where the peso was still in place.  But after a few years, there is every reason to believe that a Grexit will lead to growth in Greece.

Of course the greater danger that many see flowing from a Grexit is that it will spill over in a contagion to other countries in the eurozone, triggering a run for the exits and a general collapse of the euro.  Yes, that might happen.  However, there is reason to believe that just the opposite might happen.  A Grexit will by its very crisis nature overcome the opposition of the Germans to the ECB engaging in more serious bailouts of banks in troubled periphery countries, which it can easily do.  The obvious case in question is Spain, whose size and travails have led to much market perturbation and freaking out.  A Grexit may be just what is needed to move the ECB to really stop the spiral in Spain.  The ultimate outcome might well be a stabilization of the euro as the decline in Spain is halted, thus removing the pressure on Italy and other nations.  A Grexit may well be just what is needed, both for the Greeks themselves (after a few years) and the rest of Europe as well.

Dismal Employment Growth?

The headline news from the May 2012 Employment Situation sounds awful:

Nonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent

But the household survey reported a much higher employment increase and these statistics:

The civilian labor force participation rate increased in May by 0.2 percentage point to 63.8 percent, offsetting a decline of the same amount in April. The employment- population ratio edged up to 58.6 percent in May.

While it is limited goods news that the employment-population ratio edged up, we have a long way to go. Alas policy makers don’t seem to have any real urgency in terms of passing the kind of fiscal stimulus we need.

High Interest Charges Guarantee the Need for a Bailout

At MarketWatch today there's an article entitled 'Spain up against a wall as borrowing costs soar'.


Of course, it's logical, that if an entity in financial trouble is charged higher and higher costs for its existing borrowings something will have to give.  A catastrophe is predictable!


The obvious solution is have a fair procedure for bankruptcy for all nations who are insolvent.  Such procedures exist for corporations, why not for nations?  What form should national bankruptcy take?  


Moreover, how much responsibility should individual countries take for the effects of a great pool of (out of control) global funds that cause speculative bubbles in every nation they invade?

Mitt Reagan

This news title says it all:

Romney marks Memorial Day with call for continued military strength

I guess he’ll pay for all the extra defense spending the same way President Reagan did – tax cuts for the rich. If someone votes for this clown – we should wonder if that person understands basic arithmetic.

But haven’t we already tried borrowing to stimulate?

Paul Krugman reacts to the following childish insult from The Telegraph:

To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

The Telegraph does note that Paul’s policy advice is entirely consistent with the writing of British economist Lord Keynes. My title is where this op-ed starts in on its own view of why Keynesian economics might be wrong headed. But let me suggest that the author of this op-ed does not understand Keynesian economics. Keynes was not in favor of the type of long-term fiscal irresponsibility that we have witnessed say in the United States during the Administrations of Ronald Reagan and George W. Bush. Yes I know proponents of the 1981 and 2001 tax cuts could argue that we were not at full employment when these tax cuts were passed. However, the 1981 tax cut was not needed to get us back to full employment. Volcker’s monetary policy – for better or worse (worse in my view) – was the main driving factor for the U.S. economy. And we know George W. Bush pursued a host of fiscal policies that were more long-term in nature and all fiscally irresponsible. If the author of this Telegraph op-ed thinks Lord Keynes would have approved these episodes of fiscal stimulus – I submit he’s very ignorant of the brand of economics that Lord Keynes and economists like Paul Krugman strive to describe.

Romney-Ryan Fiscal Policy – a Return to Reaganomics?

Brian Beutler offers a very good discussion on whether Obama or Romney is offering more austerity with Brian correctly noting the short-term fiscal restraint would be a disaster in terms of getting our economy closer to full employment. He notes the ambiguity of Romney’s proposals (no specifics on tax offsets or spending cuts) noting:

Because we can’t know for sure what will become of the unknowns in Romney’s fiscal plan, it exists simultaneously on both ends of the Keynesian scale. If the offsetting base-broadeners never materialize, and the spending cuts don’t happen as advertised, Romney’s plan amounts to a hugely stimulative tax cut. “A large amount of stimulative tax cuts, and no contractionary spending cuts would suggest the true Keynesian in the race is Romney,” says University of Pennsylvania economist Justin Wolfers.

In other words – a return to the spend&spend and borrow&borrow policies during Reagan’s first term. But we also get this from Paul Ryan:

Paul Ryan — the GOP’s official spokesman on fiscal issues — boasted that a Republican victory in November will give his party a mandate to turn his controversial spending-slashing budget into law. “If we make the case effectively and win this November, then we will have the moral authority to enact the kind of fundamental reforms America has not seen since Ronald Reagan’s first year,” Ryan said.

Funny thing – spending as a share of GDP never declined under President Reagan. Sure we got a few domestic spending reductions but they were offset by increases in defense spending. And Mr. Romney has already said he is for more defense spending. Short-term fiscal stimulus when we are in a liquidity trap may be a good thing but the lasting effects of the Reagan fiscal stimulus was higher real interest rates, less investment demand, and slower long-term growth.

Preannouncement of Paperback Edition of my Book

After letting my book languish for almost five years Palgrave let The Confiscation of American Prosperity, they are about to release a paperback edition.  In addition, they are featuring me as author of the month and reprinting my new introduction, which I explain why the book was constructed as a crime story.

My picture and the introduction are at the bottom.

 http://view.mail.macmillan.com/?j=fe5816787c6d057f7316&m=feee1c737d6c02&ls=fdd015717762057b7511777465&l=fe5c1575746d01757512&s=fe3010727564037b731171&jb=ffcf14&ju=fe1f1773716d027b721777&r=0

Romney on Unemployment: 2, 4, 6, 8 – Who Do Appreciate?

CNN has a good story on all the fuss about the latest from the GOP Presidential candidate on unemployment:

"I can tell you that over a period of four years, by virtue of the policies that we'd put in place, we'd get the unemployment rate down to 6%, and perhaps a little lower," the presumptive GOP nominee told the magazine. The number marked the first time Romney had talked about a specific rate during this election cycle, although he listed 5.9% as the number he would strive for in his 59-point economic plan released in September. Economic forecasts suggest Romney may not be too far off in his prediction. Based on the current rate of growth, the jobless rate is expected to fall to around 7% by the end of 2015 and 5.5% by the end of 2017, according to reports by the bipartisan Congressional Budget Office. In a conference call Wednesday, Obama campaign spokesman Ben LaBolt pointed to those predictions in criticizing Romney's statement. "Government economists have been clear that under current law their projection today is that unemployment will hit 6% by that point," LaBolt said. He went on to cite recent remarks in which Romney, chiding the president for his job creation record, said any unemployment figure above 4% was not worth celebrating.

To their credit – even Republican leaning economists were critical of any claim we could get the unemployment rate down to 4% by the end of 2016 but why retreat to a goal of 6% unemployment when even the CBO is forecasting we’d get close to 5.5% by then. CBO seems to be saying: (a) that the GDP gap won’t fully close until the end of the decade; and (b) that the unemployment rate will be north of 5% when it does close. So is Mr. Romney promising to do worse than what is expected under current policy? Given the state of the economy and our dismal fiscal policy which is akin to doing nothing, I could almost vote for a Republican who decided to both promise a more vigorous return to full employment and put forth a credible plan to get there. CNN outlines what Mr. Romney claims is his plan:

"Well, there are a number of things," Romney said on Fox News. "You start off by saying, let's stop something that's hurting small business from creating jobs and that's 'Obamacare.' Get rid of it. No. 2, have an energy strategy that takes advantage of our natural gas and oil and coal, as well as our renewables. Those low cost energy fuels will ultimately mean jobs come back here, even manufacturing jobs that left here. And finally, get a handle on the deficit so that people understand if they invest in America, their dollars will be worth something in the future."

#1 is a return to a failed health care system and #2 is continued reliance on fossil fuels. Both are bad policies but neither has much to do with the current macroeconomic mess. So had he stopped there, I could understand his not so ambitious goal of reaching a 6% unemployment rate. But then he had to mention #3, which is austerity. Which is working so well in the UK and Europe – not! We have heard from the CBO that allowing the fiscal cliff will lead to another recession. I guess the Republicans are promising some other variation on austerity, which if implemented would mean a continued high GDP gap and high unemployment. Is Mr. Romney running for the office of President or Head Cheerleader?

Neoconservatives Wildly Misrepresent Iran (What Else Is New?)

On today's Washington Post editorial page, Marc Reuel Gerecht, formerly of the CIA, and Mark Dubowitz, current Director of the Foundation for Defense of Democracies and its Iran Energy Project (where Gerecht now works also), have a column titled, "In Iran Talks, one side ready to bend," neatly timed to coincide with the beginning of negotiations between Iran and the Group of Six, and just after Iran announced a willingness to open to outside inspections some previously blocked sites and programs.  The authors argue that the West, European countries particularly, will be looking for the least excuse to relax the economic sanctions against Iran for only stopping their uranium enrichment to 20% activities.  They argue that the sanctions should be maintained to "crater" the Iranian economy so that even enrichment to 5% (far below the 90+% needed for nuclear weapons, but needed for their domestic electricty producing reactors) is shut down as well.

Quite aside from the authors not noticing the existence of the Iranian domestic civilian reactors needing the 5% enriched uranium (with them presumably wanting those reactors shut down as well), or that the Iranian nuclear program dates back to the pro-US regime of the Shah, they make several simply outrageously incorrect claims.  The clearest is a claim that Supreme Leader Ali Khamenei has been actively supporting a nuclear weapons program since "when it was still covert" in the mid-1980s, before he became the Vilayat-el-faqih (Supreme Jurisprudent), although Rafsanjani is identified as the "true father" of the nuclear weapons program.  Quite aside from the fact that what program they had was shut down about a decade ago, this ignores that after that shutdown and also very recently and publicly, Khamenei has issued religious edicts, fatwas, against nuclear weapons.  That he had done so earlier was widely ignored in the US media, with only people like Juan Cole reporting on it.  This most recent utterance did get public attention, however, presumably because it coincided with the decision to move to this round of negotiations.  Most of the reports failed to mention that this was nothing new on Khamenei's part.

The other is a claim, based on quoting Anthony Cordesman, to the effect that pursuing nuclear weapons has been the "main focus of Iran's military strategy for the past quarter of a century."  This claim also runs into the same problem already mentioned above, that Iran gave up its half-baked pursuit of nuclear weapons a decade ago, with its Commander-in-Chief Khamenei issuing his fatwa against nuclear weapons not too long thereafter.  Of course, for much of this more recent period, it was fashionable to ignore Khamenei completely and focus on President Ahmadinejad, who conveniently issued periodic semi-insane remarks that could be focused on.  However, as it has become increasingly clear more recently that he is not in charge at all (and never was of military programs) and Khamenei is, we now have this weird drumbeat of focusing on Khamenei and actually presenting the beaten down Ahmadinejad as a "reformer."  I cannot begin to describe how ridiculous and misleading all this is, but this particular column is really far out there in terms of its egregious and hysterical misrepresentations of basic facts.

Global trends in an era of diminishing returns

In 1996, Lester Thurow's book entitled 'The Future of Capitalism' was published.  I found his book a very interesting read in the context of the global financial crisis which is continuing to unfold since 2007.  On pages 8-10 Thurow describes, what he terms as, 'five economic tectonic plates' crashing together and providing an ominous trend that helps to foretell capitalism's crisis.  They are:

1. The end of Communism (leading to an increase of one third of humanity operating under capitalism's umbrella, "with a very different set of criteria for success and failure..."
2. Technological shift to an era dominated by manmade brainpower industries which "don't have natural predetermined homes.  They are geographically free - capable of being located anywhere on the face of the earth..."
3. A demography never before seen.  "Population is booming in the poorest countries [leading to] "the pull of higher standards of living abroad" where "unskilled labour is not needed". Thurow also mentions the development of "a new 'class' of human beings - a very large group of elderly, relatively affluent people, most of whom do not work, and who are dependent upon government social welfare payments for much of their income."
4. A global economy.  "Shifts in technology, transportation and communications are creating a world where anything can be made anywhere on the face of the earth.....Thurow notes that this creates a 'disconnect' between "global business firms with a worldview" and national governments.
5. An era where there is no dominant economic, political or military power.  How (Thurow asks) is the economic world to be designed or organised in a multipolar world?

By looking at the trends outlined above one is able to predict a few other things occuring simultaneously in the global economy.  With the very large increase in the world's workforce it is probable that the global unemployment would rise significantly, and wages would decline.  The deepening of globalisation would, in turn, lead to difficulties for national governments to secure a big enough tax (revenue) base from the incomes of dominant corporations (who can flit money across national boundaries at the tap of the keyboard.) I would also expect financial regulation to become almost impossible under the laissez-faire mentality created by the emergence of powerful global (self-interested) corporate giants.

Indeed, on page one of Thurow's book he writes: "In all of Western Europe not one net new job was created from 1973 to 1994."  And the International Labor Organisation reported a few years back that in Europe between 1970 and 2005 the financial sectors share of corporate profits climbed from 21% to 42% [1].

But why are the trends that Thurow outlines above happening in the first instance? Have we entered an historical era of 'diminishing returns'?

It looks quite possible that, for decades now, global economic growth has actually coexisted with a steadily declining general standard of living. 

Brenda J Rosser, 23rd May 2012.

REFERENCES:

[1]  World of Work 2009.  Snapshot of the European Union

http://www.ilo.org/public/english/bureau/inst/download/eu_region.pdf

GDP Gap by End of 2013 if the Fiscal Cliff is Allowed to Occur

The Congressional Budget Office has considered the effect on real GDP growth in 2013 under two alternative fiscal policies:

Under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending—a development that some observers have referred to as a “fiscal cliff.” Today CBO released an analysis of the economic effects of that fiscal restraint. Under those fiscal conditions, growth in real (inflation-adjusted) gross domestic product (GDP) in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law.

Using the CBO estimate of potential GDP, the gap as of 2012QI was 5.4%. CBO also expects GDP to grow by a mere 2% during 2012, which would mean that the gap at year end would still be 5.3%. If policymakers allow the fiscal cliff to occur, this CBO forecast says that the gap will grow to 6.6% by the end of 2013. If policymakers avoided the fiscal cliff in such a way that GDP grew by 4.4%, however, the gap would fall to 3% by the end of 2013. While many economists might prefer some fiscal stimulus so as to close the GDP gap even faster, maybe our best hope given this dysfunctional Congress is that they don’t impose even more austerity.