One of the major growth industries in Washington is the promotion of budget hysteria. Well-funded groups have weekly, if not daily, events designed to hype the country’s budget situation. Much of the national media, most importantly the Washington Post, have enlisted in this effort, devoting both their opinion and news sections toward this goal.
Unfortunately for the deficit-crisis industry, the facts may stubbornly refuse to cooperate. Any discussion of the deficit requires separating out the short-term and the long-term story. The short-term story is very simple. The economy collapsed in 2008 when the housing bubble burst. That is the story of the large budget deficits that we have seen in the last five years: full stop.
Fans of the Congressional Budget Office (CBO) can go back to see their projections from January of 2008, before CBO recognized the consequences of the bursting bubble. The deficit had been a modest 1.2 percent of GDP in 2007. The deficit was projected to stay near 1.0 percent of GDP over the next three years until the end of the Bush tax cuts was projected to push the budget into surplus in 2012. Even if the Bush tax cuts had not been allowed to expire the country can literally run deficits of 1.0-2.0 percent of GDP forever.
There were no huge new permanent spending programs or tax cuts put in place in 2008 or 2009. The deficit soared because the recession sent tax revenue plummeting and caused spending on programs such as unemployment benefits to jump. There were also temporary measures designed to ...
Published: Tuesday 16 October 2012
The amount of damage being inflicted on countries around the world by bad economic policy is astounding.
There is an old story from the heyday of the Soviet Union. As part of their May Day celebrations they were parading their latest weapon systems down the street in front of the Kremlin. There was a long column of their newest tanks, followed by a row of tractors pulling missiles. Behind these weapons were four pick-up trucks carrying older men in business suits waving to the crowds.
Seeing this display, the Communist party boss turned to his defense secretary. He praised the tanks and missiles and then said that he didn’t understand the men in business suits. The defense secretary explained that these men were economists, and “their destructive capacity is incredible.”
People across the world now understand what the defense secretary meant. The amount of damage being inflicted on countries around the world by bad economic policy is astounding. As a result of unemployment or underemployment, millions of people are seeing their lives ruined. The current policies have led to trillions of dollars of lost output. From an economic standpoint this loss is every bit as devastating as if a building had been destroyed by tanks or bombs. And people have lost their lives, due to inadequate health care, food and shelter, or as a result of the depression associated with their grim economic fate.
If an enemy had inflicted this much damage on the United States, the countries of the European Union, or the countries elsewhere in the world that have been caught up in this downturn, millions of people would be lining up to enlist ...
Published: Tuesday 2 October 2012
Romney’s ads claim that he will declare China to be a currency manipulator and take retaliatory measures.
One of the themes that Governor Romney has been hitting at aggressively in his campaign ads is that he will get tough on China. The ads complain that China is a cheater, most importantly by “manipulating” the value of its currency. This means that China has been deliberately keeping down the value of its currency against the dollar.
A lower value for the yuan, which means a higher valued dollar, makes Chinese goods cheaper for people in the United States. It is the same thing as if China were to subsidize its exports to the United States. On the other side, the over-valuation of the dollar makes our goods more expensive to people in China, meaning that they will buy less of them. It is comparable to putting a tariff on U.S. exports to China.
Romney promises to be the tough guy who will reverse this situation. His ads claim that he will declare China to be a currency manipulator and take retaliatory measures.
President Obama has responded to Romney’s charges by pointing out that Romney personally has profited from dealings with China. His ads point out that Bain Capital, Romney’s former company, was a pioneer in outsourcing jobs to China.
While people will have to decide for themselves what they think of Romney’s business dealings in China, the Obama ad helps to clarify the issues in U.S. negotiations with China. The reality is that there are many U.S. businesses that are profiting enormously ...
Published: Tuesday 18 September 2012
If the backdrop to this question is not immediately clear, then you should be very angry at the reporters who cover the campaign.
That is a pretty simple and important question. Unfortunately most voters are likely to go to the polls this fall without knowing the answer.
If the backdrop to this question is not immediately clear, then you should be very angry at the reporters who cover the campaign. One of the items that continuously comes up in reference to the budget deficit is President Obama’s support for the plan put forward by the co-chairs of his deficit commission, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. On numerous occasions President Obama has indicated his support for this plan.
One of the items in the Bowles-Simpson plan is a reduction in the annual cost-of-living adjustment of roughly 0.3 percentage points. This would be accomplished by using a different index that, by design, would show a lower measured rate of inflation. It is important to recognize that this is an annual cut that would accumulate over time. After a retiree has been receiving benefits for 10 years the cut would be 3.0 percent, after 20 years it would be 6 percent. If a typical retiree lives long enough to get benefits for 20 years the average benefit cut over their years of retirement would be 3 percent.
This is the most immediate cut to Social Security in the Bowles-Simpson plan but not the only one. The plan also would gradually raise the ...
Published: Tuesday 11 September 2012
In short, the Clinton-era policies sent the U.S. economy on a seriously wrong path. They created an absurd obsession with budget deficits, a pattern of bubble-driven growth, an incredibly bloated financial sector and an unsustainable trade deficit.
Bill Clinton is clearly the most talented politician of our era. It is difficult to imagine Clinton losing an election to any of the people who have run for office in the last two decades. But his skills as a politician should not prevent us from understanding the track record of his economic policies. In fact, until we get a clear understanding of these policies, it unlikely that we will be able to restore the economy to a path of sound economic growth.
The mythology of Clintonomics is that Clinton took the hard steps to bring the deficit down. He cut spending and raised taxes. This supposedly shifted the budget from large deficits to large surpluses and led to a booming economy. In the late 90s we had the lowest unemployment in three decades, and we saw real wage growth up and down the income ladder for the first time since the early 70s. There was in fact much here to celebrate.
However the reality is quite different from the mythology. The reduction in the deficit was supposed to lead to an increase in investment and a fall in the trade deficit. These are the two components of GDP that increase our wealth for the long-term, the former by increasing out productive capacity and the latter by giving us ownership of more foreign assets.
It turns out that the investment ...
Published: Tuesday 4 September 2012
“If you want to see what the country would look like without unions, watch re-runs of the Republican convention.”
In polite circles in Washington it is common to view unions as a quaint anachronism. They may have made sense back when most workers had little education and worked in factories, but there really is no place for them in a 21st century economy. From this perspective, the sharp decline in union membership that we have seen in the last three decades is simply a natural process, sort of like the development of more powerful computers.
There is evidence that suggests otherwise, most notably that many other wealthy countries still have very high rates of unionization. The share of the workforce represented by unions is 80 percent or higher in many European countries. While some may want to attribute the eurozone crisis to factors such as high unionization rates (as opposed to inept central bankers) they face the problem that non-eurozone countries like Denmark and Sweden seem to be doing just fine. In Denmark 80 percent of the workforce is represented by a union and in Sweden the share is 91 percent. According to the most recent OECD data, their unemployment rates are both 7.8 percent. That isn’t great, but it’s still half a percentage point below ours. And, both countries are able to borrow at the same or lower interest rates than the U.S. Clearly, high unionization rates have not led to catastrophe.
But many still view Europe as being fundamentally different than the United States. And of course they don’t speak English in Denmark and Sweden, or at least not as a first language. This is why it is useful to look at Canada, a country that is culturally and economically very similar to the United States, and a place ...
Published: Tuesday 28 August 2012
“In the absence of a stimulus program that was 2-3 times the size of the one President Obama put forward and considerably longer lasting, the economy was doomed to a prolonged period of unemployment.”
Washington is the mecca for people across the country and around the world who have difficulty seeing the obvious. The economy tanked because the country had a huge housing bubble that burst. The collapse sent the economy into a long and severe recession because there was nothing that could replace the $1.4 trillion in annual demand that was generated by the housing bubble.
In the absence of a stimulus program that was 2-3 times the size of the one President Obama put forward and considerably longer lasting, the economy was doomed to a prolonged period of unemployment. None of this is 20-20 hindsight; some of us said it repeatedly as clearly as possible in advance (e.g. here, here and here).
So, naturally, in Washington, when events turn out exactly as predicted, leading policy wonks turn to alternative explanations. Hence we have
Published: Tuesday 21 August 2012
“However, Biden also lives in a city where calling for cuts to Social Security is the way to demonstrate your manhood. The bigger the cuts and the more frequent the calls, the higher your status.”
Last week Vice President Joe Biden did a courageous thing, he promised an audience in southern Virginia that there will be no cuts whatsoever to Social Security in a second Obama Administration. He used the strongest possible language, telling customers at a local diner: “I guarantee you, flat guarantee you, there will be no changes in Social Security. I flat guarantee you.”
That was good to hear from the Vice President. Since the Obama Administration had several times indicated that it would be willing to cut Social Security as part of a “Grand Bargain” on the budget, it was encouraging to hear Mr. Biden make such an unambiguous commitment. While nothing in politics can be taken as 100 percent certain, this is about as good as you get.
On the one hand, Biden’s commitment may not seem very courageous. After all, he is running for office and Social Security is the most popular program on the table. It draws approval ratings close to 80 percent from Republicans, conservatives, and even Tea Party supporters. Backing Social Security in this context might just seem like cheap politics, which it may well be.
However, Biden also lives in a city where calling for cuts to Social Security is the way to demonstrate your manhood. The bigger the cuts and the more frequent the calls, the higher your status. And, there are plenty of rewards for those politicians who go down fighting for Social Security cuts. Just check out the salaries for the lobbying jobs of the Blue Dog Democrats who have left office in recent ...
Published: Tuesday 14 August 2012
“What do you give a government program that has everything ... except a secure future of its own?”
Today, August 14, is Social Security's 77th birthday. That presents us with a difficult challenge: What do you give a government program that has everything ... except a secure future of its own?
Let's take a look at the options for this year's celebration.
The Gift Pile
Talk about an embarrassment of riches! Look what Social Security can already list among its gifts. It's got:
Hundreds of millions of people who love it. Polls consistently show that Social Security, along with Medicare, is one of our most popular government programs.
The best balance sheet in the entire government. Despite all the scare talk (which we'll get to shortly), no program in U.S. history is on a firmer financial footing than Social Security. It's a stand-alone program which isn't allowed to contribute to the overall government deficit, and is absolutely solvent until the mid-2030s.
No other program can say that.
A great profile. There's no way to say this delicately, so we'll come right out with it: Social Security has the slimmest, sleekest look in Washington. We don't like to encourage our society's fixation on thinness as the ideal of beauty, but let's face it -- Social Security is so cost-effective in delivering its benefits that it's got the most streamlined chassis around.
The Social Security Administration beats every private benefits program in the country when it comes to low overhead and efficient administrative design. One of the main reasons for that is the fact that everybody who pays into the system receives its benefits at qualification time.
There's no "means testing," no gamesmanship, no trick—just trim, no-overhead service delivery.
Great polls. Time and time again, overwhelming majorities of Americans have made it clear that they don't want this program to be cut. That means a lot: Of all the gifts in the world, the best ...
Published: Tuesday 7 August 2012
“The CEOs want to do this behind closed doors because they know that politicians who have to answer to their constituencies will never be able to get away with these cuts. The key is to force the debate into the sunlight.”
Last week I wrote about the conspiracy of corporate chieftains to impose a budget plan involving large cuts to Social Security and Medicare, regardless of who wins the elections in November. According to veteran Washington Post columnist Steven Pearlstein, who wrote approvingly of these efforts, many of the top executives of the country’s biggest companies are meeting behind closed doors to design such a budget plan.
This plan is expected to follow the designs of the plan crafted two years ago byMorgan Stanley Director Erskine Bowles and former Senator Alan Simpson, the co-directors of President Obama’s deficit commission. The Bowles-Simpson plan called for a reduction in the annual cost-of-living adjustment for Social Security that is equivalent to a 3 percent cut in benefits. It also called for gradually raising the normal retirement age to 69 and phasing in lower benefits for workers who earned more than $40,000 a year. The Bowles-Simpson plan would also raise the age of eligibility for Medicare to 67.
Published: Tuesday 31 July 2012
“Many of the same folks who brought the economy to ruin just a few years ago are now going to come up with a plan that is supposed to set the budget and the economy on a forward path. ”
Many people are following the presidential election closely with the idea that the outcome will have a major impact on national policy. However, according to Steven Pearlstein, a veteran Washington Post columnist and reporter, it may not matter who wins the election. In a column last week, Pearlstein told readers that the top executives of some of the country’s largest companies are getting together to craft a budget package that they will try to push through Congress and get the president to sign.
While Pearlstein clearly sees these backroom meetings of corporate chieftains in positive terms (he refers to them as “grown-ups” who have been noticeably absent from the conversation about the budget), the rest of us might view this plotting a bit differently. As Pearlstein openly acknowledges, this corporate coup is an end-run around the electorate. As corrupt as the political process may have become, at least we will get a vote in the election. Pearlstein’s plotters are not inviting the rest of us into the conversation.
Many of the same folks who brought the economy to ruin just a few years ago are now going to come up with a plan that is supposed to set the budget and the economy on a forward path. At the center of their proposal are big cuts in Social Security and Medicare.
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