As you have probably heard by now, Standard and Poor's has downgraded U.S. debt one notch from AAA to AA+ with a negative outlook. This will be bad for the country because it will likely increase borrowing costs; in turn, this is bad for the middle class because it increases the deflationary pressures on the government.
The go-to analysis of the rating agencies in political science is the work of Timothy Sinclair of the University of Warwick, especially his book The New Masters of Capital (Cornell University Press, 2005). (Disclosure: he and I co-edited Structure and Agency in International Capital Mobility, Palgrave, 2001, and have known each other for over 15 years.)
Sinclair argues that credit rating has become a form of "private regulation," which governments have had to pay increasing attention to since the rapid internationalization of financial markets. This regulatory power is based on the agencies' perceived expertise, which comes into occasional question after spectacular failures like Enron (analyzed in his book) or the 2008 financial meltdown but persists after those analytical disasters.
As Sinclair has long argued, the role of the agencies is not neutral politically. They have pushed for market liberalization in Latin America, put enormous pressure on city governments like those of New York, and shown favor to financial orthodoxy generally. We have seen this in S&P's recent statements that a $4 trillion package of debt reduction was necessary to prevent a downgrade; and S&P has now followed through on its implied threat.
As Paul Krugman has discussed, most of the reasoning behind the downgrade stems from the ungovernability of the United States due to the intransigence of Congressional Republicans on increased tax revenue. He argues that after the failure of S&P on mortgage derivatives, it has no right to pass judgment on the US. However, Sinclair's analysis of the credit raters' failures on Enron, WorldCom, etc., suggests that S&P's power has probably remained intact despite its failure on mortgages.
Krugman is right to challenge the legitimacy of S&P's decision; this is an enormously important moment in the battle against deflationary policies being undertaken during a jobs crisis. Indeed, the agency has complained about the country's "ungovernability," while at the same time rewarding the very people who are making it ungovernable with a decision that ultimately promotes their preferred policies. We cannot afford for this to stand.
Saturday, August 6, 2011
Friday, August 5, 2011
I just got word that my article, “Regulating Investment Attraction: Canada's Code of Conduct on Incentives in a Comparative Context,” will appear next month in the journal Canadian Public Policy.
I will post a complete analysis then, but let me leave you with a teaser for now. In the US, we often see subsidies used to move existing jobs from one state to another, or even one city to another. Good Jobs First recently did an analysis of this problem in the Cleveland and Cincinnati metropolitan areas. I have also mentioned how both New York City and Kansas City have been targeted by neighboring states raiding successful companies there. This kind of poaching has no benefit for the country as a whole, yet states and cities continue to give up parts of their tax bases simply to rearrange the deck chairs.
In 1994, Canada's provincial and federal governments signed the Agreement on Internal Trade, creating freer trade among the provinces. The Commerce Clause of the US Constitution serves a similar function in this country. One provision of the Agreement, not explicitly in the Commerce Clause (though the case Cuno v. Daimler-Chrysler argued for such an interpretation), legally bans the provinces from giving subsidies to companies that are moving in from another province. The point of my article, which I researched as a Fulbright Scholar at Carleton University in Ottawa, was simply to determine whether this ban has worked in practice.
The short answer is no: I document at least eight subsidized relocations from one province to another since 1996, and one case where Nova Scotia had to pay a retention subsidy because Ontario was trying to poach the headquarters of the grocery chain Sobey's. The longer answer is “a little bit”: all the relocations were under 100 jobs, far smaller than the 1990s poaching incidents that had motivated the ban in the first place. The lesson for the United States is that if similar rules were in place and enforceable in US courts, they would work better than they do in Canada, where the enforcement mechanism is very weak.
In the course of my research, I also learned why some Canadians call Manitoba's capital, Winnipeg, “Winterpeg;” saw Paul Krugman give a speech to economic development officials in Edmonton; and went to West Edmonton Mall, the largest mall in North America, where I saw a casino, striking casino workers picketing inside the mall, and heard a word I won't let you use in the comments section broadcast on the mall's music system (in Green Day's “American Idiot”).
Thursday, August 4, 2011
David Cay Johnston (h/t Mark Thoma) has a new column up on the results of the latest income tax data (2009). With the economy back at stall speed, things probably won't look much better when the 2010 data becomes available next year. Or the 2011 data, either. Some excerpts:
(Reuters) - U.S. incomes plummeted again in 2009, with total income down 15.2 percent in real terms since 2007, new tax data showed on Wednesday.
The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009.
Average income in 2009 fell to $54,283, down $3,516, or 6.1 percent in real terms compared with 2008, the first Internal Revenue Service analysis of 2009 tax returns showed. Compared with 2007, average income was down $8,588 or 13.7 percent.
Average income in 2009 was at its lowest level since 1997 when it was $54,265 in 2009 dollars, just $18 less than in 2009. The data come from annual Statistics of Income tables that were updated Wednesday...
The share of households filing a tax return but paying no income tax results from two key factors:So, we have a full 12 years of no income growth. (Remember, this is average income; it would be useful to see what happened to median income as well.) Millions of jobs lost. And the priority out of the White House and Congress is fixing a long-run deficit problem caused primarily by rising health care costs rather than doing anything about the immediate job deficit. Depressing.
* One is the drop in incomes because a married couple does not pay income tax until they make at least $18,300, and families with two children pay no income tax until they make more than $40,000 under policies started in 1997 and since expanded at the behest of Congressional Republicans, many of whom complain that too many households do not pay income taxes....
Wednesday, August 3, 2011
John Boehner says he got 98% of everything he wanted. That's a bad sign. More concretely, the Economic Policy Institute estimated that between the cuts in the deal, and the expiration of two stimulative measures that could have been renewed as part of the deal, the country will lose 1.8 million jobs in 2012 alone. Hint: those won't be high-finance jobs.
If EPI is too left-leaning for you, J.P. Morgan (via Calculated Risk) estimates the “fiscal drag” on the economy from federal fiscal policy to be 1.5% of GDP in 2012. That's a big deal. Economic growth is critical for the middle class.
Going forward, Mitch McConnell (“the most honest man in Washington,” according to Ezra Klein) says that taking the debt ceiling hostage will now be the norm. There's also the budget resolution vote coming up in September, with the possibility of a government shutdown. Lots of hostage taking opportunities lie ahead.
Then there's the “Super Congress” tasked with determining another $1.5 trillion in deficit reduction. Since the six Republicans on that committee will reject any revenue increases, that means $1.5 trillion in cuts. Remember, Y = C + I + G + (X – M), so that's another $1.5 trillion hit to GDP over the next 10 years, ignoring any multiplier effects.
If this committee cannot reach agreement and Congress does not pass a balanced budget amendment (“the worst idea in Washington,” again according to Ezra Klein, and he is absolutely right), we get $1.2 trillion in cuts anyway. Social Security and Medicaid are exempt from budget slashing, but Medicare is on the table, perhaps with the self-inflicted wound of the President's offer to raise the eligibility age from 65 to 67. As has been pointed out by Sarah Kliff, doing this hurts the health exchanges by putting relatively expensive 65- and 66-year olds into the pool, driving up rates for everyone else and giving the healthy more incentive to drop out and game the system.
Supposedly, about half of the $1.2 trillion will come out of the Defense Department, but I think Markos Moulitsos might be on to something when he predicts Republicans will turn around and offer a separate bill to cancel those cuts, and accuse the Democrats of “not supporting the troops” in an election year.
Bottom line: bad for middle-class jobs, bad for Medicare, bad for health care reform. We're likely to be in recession again come the 2012 elections. This is not the time to get discouraged: the stakes are much higher in the 2012 elections, where we've got to elect a lot more people attuned to middle-class needs or a lot worse things will happen than were in this debt deal.
Tuesday, August 2, 2011
Matt Yglesias has a good post up on how the debt ceiling debate has obscured the fact that the big driver of increased federal expenditures into the future is due to the growth of health care costs.This pairs well with my last post, which shows the same thing in a comparative perspective.
He writes, “The thinking here, which drove administration policy during its first 30 months in office, is based on the reality that high projected government spending is driven almost entirely by the rising cost of health care.” He then goes on to describe some of the health care aspects of the deficit reduction plan developed by his colleagues at the Center for American Progress.
For now, though, I'd like to pivot to some other aspects of the plan. CAP's plan aims to balance the budget by 2030, and it has several important tax provisions that would help the middle class. It institutes a flat 15% tax rate on income up to $100,000 for joint returns, raises the top bracket back to the 39.6% it was under the Clinton Administration, and it adds a 5% surtax on millionaires until the budget is balanced.
In addition, it incorporates a financial transactions tax (often called a “Tobin Tax,” after its early proponent, Nobel Prize-winning economist James Tobin). Beyond Tobin's idea of a tax on foreign currency transactions, the CAP proposal would apply as well to stock, bond, and derivatives sales. This proposal would simultaneously raise revenue and reduce the financial speculation that contributed to the 2008 crisis.
These are definitely reforms worth pursuing, and the CAP link above gives you multiple options for how deeply you want to follow up on them.
Monday, August 1, 2011
Dylan Matthews at Ezra Klein's blog put up a nice chart showing where the US spends its health care dollars compared to other rich countries that are members of the Organization for Economic Cooperation and Development (OECD). What we find is that the US spends more on hospitals and other providers, drugs, and administration than other rich countries, with the biggest dollar gap in spending on providers. This means that controlling health care costs in the future will have to focus on this category.
You can find the underlying data for this chart (except the OECD average, which in this case appears to have been computed by Matthews himself) at OECD Statistics. The category referred to by Matthews as “hospitals” is called “curative and rehabilitative care” by the OECD, which includes outpatient service by doctors and other providers such as occupational therapists and physical therapists. As Matthews says, “The U.S. spends nearly three times as much on hospital care and almost five times as much on administration.” As his chart shows, the US also spends about twice as much on drugs and other “medical goods dispensed to out-patients” the specific OECD term. One other important point for interpreting the OECD data is that the US does not break out “ancillary services” such as out-patient lab and diagnostic work from “curative and rehabilitative care,” whereas most of the other countries listed do, so we should add these two categories together when making comparisons.
We can make this more concrete by comparing the US and Canada. Overall, the US spent $7960 per capita on health care in 2009 versus Canada's $4362.6, or $3597.4 more.
Providers + Ancillary Services: US $5278.8, Canada $2199.2. US + $3079.6
Nursing Care: US $446.7, Canada $602.6. US - $155.9 (Denmark, the Netherlands, and Norway all spend over $1000 per capita on nursing home care.)
Drugs, etc.: US $1069.7, Canada $859.8. US + $209.9
Prevention and Public Health: US $271.6, Canada $303.2. US - $31.6 (Canada is the only country that spends more than the US in this category.)
Administration: US $531.5, Canada $153.3. US + $378.2 (due to fragmented, for-profit insurance)
Not specified by function: Canada $20.5
Capital formation by provider institutions: US $361.7, Canada $224.0. US + $137.7
As we can see, then, higher payments to providers equal 85% of the extra cost in the US. Preferably sooner rather than later, high costs here have to be the main focus of health care reform. That isn't to say that reforms to insurance and covering the uninsured aren't necessary; they are matters of basic justice. But the long-term solvency of Medicare depends on controlling spending on providers, and that's a political fight that goes well beyond the “doc fix.”
(By the way, the OECD Statistics website is a gigantic treasure trove of information that can be configured in a variety of ways. If you are interested in taxes, education, GDP, or just about any political economy topic, the OECD has the definitive data for the industrialized countries.)
Sunday, July 31, 2011
Or the radio, or look at news on the Internet. The reason, of course, is the debt ceiling “negotiations.” I think Calculated Risk is correct that the debt ceiling will get raised on time, but I don't think it is inconceivable that the Tea Partiers in the House could screw things up.
I know Paul Krugman is right that negotiations are in la-la land where the negotiators are talking about cutting government spending when the economy needs more demand. How do I know this? Because elementary macroeconomics tells us so. It's the most basic equation in macroeconomics: Y = C + I + G + (X-M). In English, national income (gross domestic product) equals private consumption plus investment plus government spending plus net exports. If you reduce government spending, you reduce GDP, all other things equal. And right now, with companies sitting on trillions of dollars in cash, government spending is not crowding out private spending and investment, so cutting government spending really will reduce GDP.
The losers from those government spending cuts will be middle class and poor people. With Social Security, Medicare, and Medicaid all potentially on the chopping block, the cornerstones of middle class economic security are under assault (and it's a self-inflicted wound for Democratic negotiators, starting with the President, to allow this). Reduced GDP means that unemployment will go up even faster than it already is. It's a multidimensional defeat for the middle class unless, by some miracle, a clean debt ceiling increase passes.
Who wins? Perhaps the biggest group is what Paul Krugman calls the “rentiers,” individuals “who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” These finance types benefit from low inflation, which maximizes the value of the interest they receive and the assets they hold, so they fight any policy which might increase inflation enough to expand the economy and reduce middle class debt loads. I'll have more to say about who wins and who loses from moderate inflation in a future post.
I hurt my head every time the debt ceiling gets discussed, from banging it against the wall. I wonder if I can self-nominate for the Order of the Shrill.
Wake me up on August 3rd.