It's 2011 all over again. House Republicans are once more threatening to force the country into default by not raising the government's debt ceiling. Markets are beginning to get nervous with default only a week away. Fidelity, the country's largest manger of money market funds, has sold off all its government debt maturing in late October and early November.
Unlike 2011, the government is shut down, throwing hundreds of thousands of government workers out of work and reducing gross domestic product by billions of dollars. On the good side, President Obama so far has refused to negotiate over the shutdown or the debt ceiling. Of course, he is haunted by his unforced error of negotiating in 2011, giving us the sequester that even a "clean" continuing budget resolution won't fix.
What we see is the Republican usurping governance of the country by making the nation ungovernable if their demands are not met. They lost the Presidency in 2012, they lost Senate seats, they got fewer votes in the House of Representatives than the Democrats did, but with brilliant gerrymandering they still have a House majority.
Amazingly, the Republicans no longer even seem to know what they want for their hostage-taking. At first it was clear, they wanted Obamacare repealed/defunded/delayed. Now, it appears they just want budget cuts, preferably to Social Security and Medicare. Inadequate as those programs are, they are still central to middle class economic security. We can't give them up.
I'm back to where I can't turn on the TV. I live in fear the President will cave as he did in 2011. But what will it take to actually end the crisis? I'm guessing a huge stock market drop will be required. And I think that's exactly what will happen. What do you think?
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Thursday, October 10, 2013
Friday, May 3, 2013
My appearance on "The Big Picture" with Thom Hartmann
Here is a link for my appearance on Thom Hartmann last night.
One of the things brought up was a new study by the Institute for Policy Studies and Campaign for America's Future showing that the CEOs behind "Fix the Debt" have benefited from tax breaks for executive compensation to the tune of about $1 billion in 2009-11, for just those companies. This tax break lets companies count pay using stock options -- which doesn't cost the companies anything -- as if it were cash pay and thus deduct it against corporate income. According to Citizens for Tax Justice (via Common Dreams and Huffington Post), the Fortune 500 saved $11.2 billion with this loophole in 2012. Apple alone profited by $3.2 billion from 2010 to 2012 from this tax break.
One of the things brought up was a new study by the Institute for Policy Studies and Campaign for America's Future showing that the CEOs behind "Fix the Debt" have benefited from tax breaks for executive compensation to the tune of about $1 billion in 2009-11, for just those companies. This tax break lets companies count pay using stock options -- which doesn't cost the companies anything -- as if it were cash pay and thus deduct it against corporate income. According to Citizens for Tax Justice (via Common Dreams and Huffington Post), the Fortune 500 saved $11.2 billion with this loophole in 2012. Apple alone profited by $3.2 billion from 2010 to 2012 from this tax break.
Thursday, April 25, 2013
Unemployment Hits New Highs in Spain and France
As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reports today that both Spain and France have hit new unemployment milestones.
In Spain, unemployment has jumped from February's 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was "only" 24.1% (see source in table below).
In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.
For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.
Date Eurozone Spain Greece Portugal Ireland UK USA EU-27
3/2012 10.8% 24.1% 21.7% 15.3% 14.5% 8.2% 8.2% 10.2%
2/2013 12.0% 26.3% 26.4% 17.5% 14.2% 7.7% 7.7% 10.9%
Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013
Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.
Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain's debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that's under 90%! What's happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.
Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.
Cross-posted at Angry Bear.
In Spain, unemployment has jumped from February's 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was "only" 24.1% (see source in table below).
In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.
For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.
Date Eurozone Spain Greece Portugal Ireland UK USA EU-27
3/2012 10.8% 24.1% 21.7% 15.3% 14.5% 8.2% 8.2% 10.2%
2/2013 12.0% 26.3% 26.4% 17.5% 14.2% 7.7% 7.7% 10.9%
Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013
Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.
Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain's debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that's under 90%! What's happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.
Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.
Cross-posted at Angry Bear.
Tuesday, April 16, 2013
Breaking: Reinhart/Rogoff Shot Full of Holes UPDATED X3
This story is rapidly making the rounds in the blogosphere today, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt" (ungated version here).
The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).
The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:
Debt/GDP Ratio R/R Results Corrected Results
Under 30% 4.1% 4.2%
30-60% 2.8% 3.1%
60-90% 2.8% 3.2%
Over 90% -0.1% 2.2%
As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff's paper made it out to be.
The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.
Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.
Update 2: Paul Krugman's response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are "evading the critique."
Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:
It's obvious that the austerity crowd is still going to defend this paper, but that doesn't mean anyone else should be taken in by them.
Cross-posted at Angry Bear.
The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).
The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:
Debt/GDP Ratio R/R Results Corrected Results
Under 30% 4.1% 4.2%
30-60% 2.8% 3.1%
60-90% 2.8% 3.2%
Over 90% -0.1% 2.2%
As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff's paper made it out to be.
The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.
Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.
Update 2: Paul Krugman's response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are "evading the critique."
Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:
The 'gaps' are explained by the fact there were still gaps in our public debt data set at the time of the paper. Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.This is a very odd response from two authors who equated one year of New Zealand to 19 years of the far larger UK economy. Worse still when you add the fact that by excluding several years when New Zealand had a debt/GDP ratio over 90%, they got an "average" (actually only one year) growth rate of -7.6%, when the correct average, with all relevant years over 90% included, was 2.58%, a 10.18 point swing!
It's obvious that the austerity crowd is still going to defend this paper, but that doesn't mean anyone else should be taken in by them.
Cross-posted at Angry Bear.
Thursday, November 15, 2012
What the Fiscal Cliff Means for the Middle Class
Now that the election is over, it seems like all the politicians and pundits can talk about is the so-called "fiscal cliff." But the chatter around the fiscal cliff is deeply weird, so in this post I will explain what it is and what the issues involved mean for the middle class.
Just what is the fiscal cliff? It is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws. Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011. Yes, that would mean a recession, with obvious consequences for the middle class. But this is only true if we did nothing after January 1, and that's not going to happen.
To put it another way, $800 billion is a 72.7% cut in the government's budget deficit for the just ended 2012 fiscal year. You would think this would make the people calling for an immediate cut in the deficit happy, but nooooo. Just the opposite, which is the weirdest aspect of the entire debate. I'll come back to that in a minute; first, let's look at the main components of the fiscal cliff.
The biggest chunk is $426 billion from the final expiration of the Bush tax cuts, according to a Bloomberg analysis in July. Of this, $358 billion is for the first $250,000 of all taxpayers' earnings, and the remaining $68 billion is for the tax cuts for income above $250,000 ($200,000 for a single person) that President Obama wants to get rid of. Both Republicans and Democrats want to retain the tax break for 98% of households, but Republicans will try to hold it hostage to the cuts for the other 2%. Since the Bush tax cuts expire if nothing gets done (because they were originally passed through the Senate's reconciliation procedure, which gave them a 10-year lifespan; then renewed for 2 years in 2010), on January 1 the Republicans will have no more leverage on this. Thus, I expect that the middle class tax cuts will be made permanent and, by early January at the latest, the $68 billion will be all that will have expired. Since the wealthy spend less of their income than do the middle class or poor, this tax increase will have little contractionary effect on the economy.
Another set of tax provision affecting couples with over $250,000 and individuals over $200,000 is contained in the Affordable Care Act. These folks will have to pay an extra 0.9% tax on earnings over the thresholds for Medicare, and an extra 3.8% on investment income, starting in 2013. According to an Associated Press estimate, this will raise $318 billion over 10 years, so we'll call it $30 billion for 2013. Since this is part of the funding for Obamacare, the President is highly unlikely to budge on this. Again, as a tax hike on the top 2%, it will have relatively little contractionary effect.
There are $110 billion in automatic spending cuts scheduled in 2013 due to the so-called "sequester." These were triggered last year when no deal was made on long-term deficit reduction. With unemployment still at 7.9%, government spending cuts are definitely harmful to the middle class. To the extent that the $55 billion cut from the defense budget comes from overseas spending, there will be little contractionary effect in this country. That is, if we closed a military base in Germany, it would have more of an effect there than here. In any event, since the United States spends 41% of the world's total military expenditure,* we could afford to redirect quite a bit of this $711 billion annual expenditure (China is a very distant second at $143 billion) to other uses. Nation building at home, as the saying goes.
The other $55 billion would come from domestic discretionary spending, so the middle class would bear the full brunt of this. Of course, neither party wants to see "their" favorite budget items cut, so there is a good chance that these spending cuts will be delayed, which would be a good thing, though not as good as shifting some military spending into the domestic budget.
There's more, of course, but the basic outline is clear: we are seeing a replay of last year's debt ceiling "deal," in which Republicans are trying to pass austerity measures the public does not support and did not vote for in the just concluded election. Indeed, a majority voted not just for a Democratic President and a Democratic Senate, but for a Democratic House of Representatives as well, with Republicans maintaining a majority only due to gerrymandering and compliant Republican courts. As Paul Krugman points out, the self-proclaimed "fiscal hawks" are tying themselves up in knots on why going over the cliff is bad when it achieves their goal of debt reduction. The answer, of course, is that they want to cut "low-priority spending," by which they mean programs benefiting the middle class. As Linda Beale argues, the right course for Democrats is to do nothing until January, when the Bush tax cuts will be gone and we can pass tax cuts more targeted to the middle class as well as redirecting spending from our bloated military to domestic programs.
* Source: SIPRI (Stockholm International Peace Research Institute) Military Expenditure Database 2011, http://milexdata.sipri.org
Cross-posted at Angry Bear.
Just what is the fiscal cliff? It is the combination of spending cuts and tax increases set to take place on January 1 based on several different laws. Estimates of the consequences run as high as $800 billion next year, or 5.2% of the country's $15.29 trillion gross domestic product in 2011. Yes, that would mean a recession, with obvious consequences for the middle class. But this is only true if we did nothing after January 1, and that's not going to happen.
To put it another way, $800 billion is a 72.7% cut in the government's budget deficit for the just ended 2012 fiscal year. You would think this would make the people calling for an immediate cut in the deficit happy, but nooooo. Just the opposite, which is the weirdest aspect of the entire debate. I'll come back to that in a minute; first, let's look at the main components of the fiscal cliff.
The biggest chunk is $426 billion from the final expiration of the Bush tax cuts, according to a Bloomberg analysis in July. Of this, $358 billion is for the first $250,000 of all taxpayers' earnings, and the remaining $68 billion is for the tax cuts for income above $250,000 ($200,000 for a single person) that President Obama wants to get rid of. Both Republicans and Democrats want to retain the tax break for 98% of households, but Republicans will try to hold it hostage to the cuts for the other 2%. Since the Bush tax cuts expire if nothing gets done (because they were originally passed through the Senate's reconciliation procedure, which gave them a 10-year lifespan; then renewed for 2 years in 2010), on January 1 the Republicans will have no more leverage on this. Thus, I expect that the middle class tax cuts will be made permanent and, by early January at the latest, the $68 billion will be all that will have expired. Since the wealthy spend less of their income than do the middle class or poor, this tax increase will have little contractionary effect on the economy.
Another set of tax provision affecting couples with over $250,000 and individuals over $200,000 is contained in the Affordable Care Act. These folks will have to pay an extra 0.9% tax on earnings over the thresholds for Medicare, and an extra 3.8% on investment income, starting in 2013. According to an Associated Press estimate, this will raise $318 billion over 10 years, so we'll call it $30 billion for 2013. Since this is part of the funding for Obamacare, the President is highly unlikely to budge on this. Again, as a tax hike on the top 2%, it will have relatively little contractionary effect.
There are $110 billion in automatic spending cuts scheduled in 2013 due to the so-called "sequester." These were triggered last year when no deal was made on long-term deficit reduction. With unemployment still at 7.9%, government spending cuts are definitely harmful to the middle class. To the extent that the $55 billion cut from the defense budget comes from overseas spending, there will be little contractionary effect in this country. That is, if we closed a military base in Germany, it would have more of an effect there than here. In any event, since the United States spends 41% of the world's total military expenditure,* we could afford to redirect quite a bit of this $711 billion annual expenditure (China is a very distant second at $143 billion) to other uses. Nation building at home, as the saying goes.
The other $55 billion would come from domestic discretionary spending, so the middle class would bear the full brunt of this. Of course, neither party wants to see "their" favorite budget items cut, so there is a good chance that these spending cuts will be delayed, which would be a good thing, though not as good as shifting some military spending into the domestic budget.
There's more, of course, but the basic outline is clear: we are seeing a replay of last year's debt ceiling "deal," in which Republicans are trying to pass austerity measures the public does not support and did not vote for in the just concluded election. Indeed, a majority voted not just for a Democratic President and a Democratic Senate, but for a Democratic House of Representatives as well, with Republicans maintaining a majority only due to gerrymandering and compliant Republican courts. As Paul Krugman points out, the self-proclaimed "fiscal hawks" are tying themselves up in knots on why going over the cliff is bad when it achieves their goal of debt reduction. The answer, of course, is that they want to cut "low-priority spending," by which they mean programs benefiting the middle class. As Linda Beale argues, the right course for Democrats is to do nothing until January, when the Bush tax cuts will be gone and we can pass tax cuts more targeted to the middle class as well as redirecting spending from our bloated military to domestic programs.
* Source: SIPRI (Stockholm International Peace Research Institute) Military Expenditure Database 2011, http://milexdata.sipri.org
Cross-posted at Angry Bear.
Tuesday, July 31, 2012
It's the Middle Class, Stupid! (Review)
When I saw that James Carville and Stan Greenberg had just published It's the Middle Class, Stupid! (Blue Rider Press), I knew that I would want to read it. I had always liked Carville's We're Right, They're Wrong and wanted to know his take on approaching the declining fortunes of the middle class.
While this book includes some diagnosis of the problems and has a very detailed and very good set of policy proposals, primarily it is a work on political strategy. Based on polling and focus groups the authors have conducted over the last several years (as well as their long experience running campaigns and polling), Carville and Greenberg analyze what they consider some of the political failures of the Obama Administration, particularly with regards to messaging.
For example, they argue that Americans are not persuaded by Team Obama's continuing emphasis on the fact that the President inherited a mess from the Bush Administration (Chapter 11). Although voters place much of the blame for the Great Recession on President Bush, Greenberg reports that his focus groups reacted very negatively to President Obama's car-in-the-ditch metaphor ("I'm still in the ditch!" many told Greenberg) and the participants expressed strong opinions that we needed to look forward, not backward.
As one said, "[Obama] is trying to say things are turning around, but the numbers are still bad." The premature declaration of victory by the Administration described here has been strongly criticized by Paul Krugman, among others. Economically effective policy is the best talking point. Carville and Greenberg also give a compelling litany of sophisticated responses to even "good" job creation news on pp. 103-7.
The second big, non-obvious, point is that Americans really are concerned about the deficit and debt (Chapter 8). Again, even though they recognize the role of the Bush tax cuts and unfunded wars in creating that debt, they are still leery about the possibility of spending our way to more economic growth, though not by huge majorities. Too many of them are convinced of the false analogy between households and governments, although Paul Krugman is doing his best to convince them with his new book, End This Depression Now! The framing the authors found most persuasive to middle class voters was an emphasis on "investments that will get our country back on track." Tellingly, as Carville and Greenberg note, their respondents did not see the debt as a reason to cut Social Security or Medicare.
Third, but more obvious, middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood. In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.
Not everything in the book is persuasive. At one point Greenberg says the popularity of raising taxes on the rich "is as close to an absolute truth you can have in polling" (p. 144). I have two problems with this. First, you could say the same thing for other industrialized democracies. Sven Steinmo, writing in the mid-1990s, has cited polling results for the U.S., U.K., and Sweden, all of which showed publics that thought the rich should pay more taxes, yet in none of these cases has that been the direction of policy over the last 30 years. To me, this suggests there is an international dimension that helped make government capture possible, but the book does not address globalization very much at all.
Second, the book devotes relatively little attention to another issue that also is overwhelmingly supported in poll after poll: raising the minimum wage. Yes, making work pay is an important theme in the book and the authors acknowledge that increasing the minimum wage is part of that, but they say nothing about how putting the issue on many state ballots helped increase Democratic turnout in 2006. In Missouri, for example, the minimum wage Proposition B passed by a 76-24 margin, helping Claire McCaskill squeak out a U.S. Senate win with less than 50% of the vote.
The other weakness of the book is that the authors are too close to President Clinton to give a completely objective view of his Presidency. While they make a single parenthetical reference about how NAFTA may not have been such a great idea for the middle class after all, they say nothing about how "ending welfare as we know it" was bad for the middle class. This can best be seen by thinking about income determination as a massive bargaining situation. Anything that takes away one side's options reduces its bargaining power, and the 1996 welfare reform did just that. In addition, they seem blind to the fact that income inequality (top 1% vs. the 20th-80th percentiles) took off during the Clinton Administration far in excess of what had been seen under President Reagan, as a glance at their chart on p. 52 shows.
Finally, the book has no index, which is very annoying when you have 296 pages of text and 25 pages of endnotes.
Those caveats aside, this is a very good book that deserves a careful reading by progressive activists. I certainly learned something from it, and I'm sure you will, too.
Cross-posted at Angry Bear.
While this book includes some diagnosis of the problems and has a very detailed and very good set of policy proposals, primarily it is a work on political strategy. Based on polling and focus groups the authors have conducted over the last several years (as well as their long experience running campaigns and polling), Carville and Greenberg analyze what they consider some of the political failures of the Obama Administration, particularly with regards to messaging.
For example, they argue that Americans are not persuaded by Team Obama's continuing emphasis on the fact that the President inherited a mess from the Bush Administration (Chapter 11). Although voters place much of the blame for the Great Recession on President Bush, Greenberg reports that his focus groups reacted very negatively to President Obama's car-in-the-ditch metaphor ("I'm still in the ditch!" many told Greenberg) and the participants expressed strong opinions that we needed to look forward, not backward.
As one said, "[Obama] is trying to say things are turning around, but the numbers are still bad." The premature declaration of victory by the Administration described here has been strongly criticized by Paul Krugman, among others. Economically effective policy is the best talking point. Carville and Greenberg also give a compelling litany of sophisticated responses to even "good" job creation news on pp. 103-7.
The second big, non-obvious, point is that Americans really are concerned about the deficit and debt (Chapter 8). Again, even though they recognize the role of the Bush tax cuts and unfunded wars in creating that debt, they are still leery about the possibility of spending our way to more economic growth, though not by huge majorities. Too many of them are convinced of the false analogy between households and governments, although Paul Krugman is doing his best to convince them with his new book, End This Depression Now! The framing the authors found most persuasive to middle class voters was an emphasis on "investments that will get our country back on track." Tellingly, as Carville and Greenberg note, their respondents did not see the debt as a reason to cut Social Security or Medicare.
Third, but more obvious, middle class voters don't see government as the solution because they consider it to be captured by elite interests. The focus groups showed that this view led to some tendency to paralysis and disengagement from politics. It is from this point that Carville and Greenberg pivot to their most important policy recommendation: Amend the Constitution or obtain a Supreme Court that will overturn Citizens United and end corporate personhood. In addition, they call for public financing of elections, disclosure of campaign contributions, requiring broadcasters to cut the price of political ads, and ending the revolving door of office holders and lobbyists. All this is in support of a politics that makes rebuilding the middle class Job 1 for government, and for a consistent framing of all issues (including foreign policy) in terms of their impact on the middle class.
Not everything in the book is persuasive. At one point Greenberg says the popularity of raising taxes on the rich "is as close to an absolute truth you can have in polling" (p. 144). I have two problems with this. First, you could say the same thing for other industrialized democracies. Sven Steinmo, writing in the mid-1990s, has cited polling results for the U.S., U.K., and Sweden, all of which showed publics that thought the rich should pay more taxes, yet in none of these cases has that been the direction of policy over the last 30 years. To me, this suggests there is an international dimension that helped make government capture possible, but the book does not address globalization very much at all.
Second, the book devotes relatively little attention to another issue that also is overwhelmingly supported in poll after poll: raising the minimum wage. Yes, making work pay is an important theme in the book and the authors acknowledge that increasing the minimum wage is part of that, but they say nothing about how putting the issue on many state ballots helped increase Democratic turnout in 2006. In Missouri, for example, the minimum wage Proposition B passed by a 76-24 margin, helping Claire McCaskill squeak out a U.S. Senate win with less than 50% of the vote.
The other weakness of the book is that the authors are too close to President Clinton to give a completely objective view of his Presidency. While they make a single parenthetical reference about how NAFTA may not have been such a great idea for the middle class after all, they say nothing about how "ending welfare as we know it" was bad for the middle class. This can best be seen by thinking about income determination as a massive bargaining situation. Anything that takes away one side's options reduces its bargaining power, and the 1996 welfare reform did just that. In addition, they seem blind to the fact that income inequality (top 1% vs. the 20th-80th percentiles) took off during the Clinton Administration far in excess of what had been seen under President Reagan, as a glance at their chart on p. 52 shows.
Finally, the book has no index, which is very annoying when you have 296 pages of text and 25 pages of endnotes.
Those caveats aside, this is a very good book that deserves a careful reading by progressive activists. I certainly learned something from it, and I'm sure you will, too.
Cross-posted at Angry Bear.
Monday, March 12, 2012
Basics: Real Wages Remain Below Their Peak for 39th Straight Year
The release last month of the Economic Report of the President has elicited a great deal of commentary, but none that I have seen touches on what I consider the best measure of long-term income trends, real weekly wages of production and non-supervisory workers, which is contained in Appendix Table B-47, "Hours and earnings in private non-agricultural industries, 1965-2011." According to a Bureau of Labor Statistics staffer I spoke to some years ago (so the percentages may have changed slightly), this covers 62% of the entire workforce and 80% of the non-government workforce. This lets us focus on average workers and excludes what is happening to high-salary workers. Using weekly rather than hourly real wages takes out the impact of varying hours worked per week over the years. The table below extracts from B-47 to reduce its size. The inflation is adjusted using 1982-84 dollars as its base.
Year Weekly Earnings (1982-84 dollars)
1972 $341.83 (peak)
1975 $314.75
1980 $290.86
1985 $285.34
1990 $271.12
1992 $266.46 (lowest point; 22% below peak)
1995 $267.07
2000 $284.79
2005 $284.99
2010 $297.67
2011 $294.78 (still 14% below peak)
Thus, we have 39 straight years where real wages have yet to get back to their 1972 peak and, indeed, they are a long way from that peak still. This is doubly surprising when we consider that productivity has been increasing steadily throughout that period, approximately doubling from 1970 to 2011, as shown by the Federal Reserve Bank of St. Louis' data:
Due to the convergence of rising productivity with falling wages, we should not be surprised to see that labor's share of non-farm income has fallen:
There are other ways to track the income of average workers. The Economic Report of the President highlights median household earnings in its Figure 1-1, but these data are affected by changes in the number of incomes per household, primarily the result of increased women's labor force participation. The bottom line is that the increase in incomes per household obscures the fall in individual income for most workers.
Some conservative economists, such as Martin Feldstein, have argued that we should instead use real compensation instead of real wages and use the same inflation adjustment ("price deflator") when analyzing trends in compensation and productivity. There are multiple problems with his analysis. First, he claims that the growth of compensation (1.7% per year) is almost as high as the growth of productivity (1.9% per year) over the 1970-2006 period, but ignores the power of compounding. The 0.2 percentage point difference may not sound like much, but over 36 years productivity grew by 96.9% (1.9^36) and compensation by only 83.5% (1.7%^36) using his preferred measure (and I can't comment on its correctness), so workers' compensation should still have grown by substantially more than it did.
An even bigger problem is that the compensation series includes all workers, not just average workers, so it lumps CEOs and janitors together in a single measure even though we know that the 1% soaked up most of the income gains before and after the Great Recession. Moreover, the nonwage portions of compensation, such as health insurance and defined benefit pensions, have eroded much more for average workers than for the 1%. Thus, this measure is completely unsatisfactory for understanding what has happened to the average worker.
So, we come back to Table B-47 and the real wages of production and non-supervisory workers. The fact that, adjusted for inflation, wages still remain almost 14% below what they were 40 years ago, despite a doubling in productivity, is a national disgrace. It is one of the roots of the increase in multi-income households, in higher levels of indebtedness needed to maintain consumption levels, and of the sharp increase in inequality we have seen over recent decades.
Year Weekly Earnings (1982-84 dollars)
1972 $341.83 (peak)
1975 $314.75
1980 $290.86
1985 $285.34
1990 $271.12
1992 $266.46 (lowest point; 22% below peak)
1995 $267.07
2000 $284.79
2005 $284.99
2010 $297.67
2011 $294.78 (still 14% below peak)
Thus, we have 39 straight years where real wages have yet to get back to their 1972 peak and, indeed, they are a long way from that peak still. This is doubly surprising when we consider that productivity has been increasing steadily throughout that period, approximately doubling from 1970 to 2011, as shown by the Federal Reserve Bank of St. Louis' data:
Due to the convergence of rising productivity with falling wages, we should not be surprised to see that labor's share of non-farm income has fallen:
There are other ways to track the income of average workers. The Economic Report of the President highlights median household earnings in its Figure 1-1, but these data are affected by changes in the number of incomes per household, primarily the result of increased women's labor force participation. The bottom line is that the increase in incomes per household obscures the fall in individual income for most workers.
Some conservative economists, such as Martin Feldstein, have argued that we should instead use real compensation instead of real wages and use the same inflation adjustment ("price deflator") when analyzing trends in compensation and productivity. There are multiple problems with his analysis. First, he claims that the growth of compensation (1.7% per year) is almost as high as the growth of productivity (1.9% per year) over the 1970-2006 period, but ignores the power of compounding. The 0.2 percentage point difference may not sound like much, but over 36 years productivity grew by 96.9% (1.9^36) and compensation by only 83.5% (1.7%^36) using his preferred measure (and I can't comment on its correctness), so workers' compensation should still have grown by substantially more than it did.
An even bigger problem is that the compensation series includes all workers, not just average workers, so it lumps CEOs and janitors together in a single measure even though we know that the 1% soaked up most of the income gains before and after the Great Recession. Moreover, the nonwage portions of compensation, such as health insurance and defined benefit pensions, have eroded much more for average workers than for the 1%. Thus, this measure is completely unsatisfactory for understanding what has happened to the average worker.
So, we come back to Table B-47 and the real wages of production and non-supervisory workers. The fact that, adjusted for inflation, wages still remain almost 14% below what they were 40 years ago, despite a doubling in productivity, is a national disgrace. It is one of the roots of the increase in multi-income households, in higher levels of indebtedness needed to maintain consumption levels, and of the sharp increase in inequality we have seen over recent decades.
Tuesday, January 31, 2012
Expensive Subsidies Help State and Local Governments Drag Down Recovery
The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below.
Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.
As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.
It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.
While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.
Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.
As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.
It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.
While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.
Tuesday, November 8, 2011
Republicans Prepare Ground to Renege on Debt Reduction Agreement
Looks like Markos Moulitsas was right, as I suspected. Ali Gharib is reporting at Think Progress Security that Congressional Republicans, including Senators John McCain and Pat Toomey, are laying the groundwork for weaseling out of the August debt ceiling accord provisions that if the Super Committee reaches no agreement, it triggers $600 billion in defense cuts over 10 years. Gharib quotes McCain yesterday (emphasis Gharib's):
We are looking at a stand-alone bill to negate what Republicans supposedly gave up in the debt ceiling negotiations, canceling the $600 billion in defense cuts. If it passes, Democrats will have given up $600 billion in cuts to domestic programs -- for exactly nothing in return. Yet another Lucy pulls away the football moment. Gharib recommends that President Obama issue a veto threat against such a bill now, but it's not like $1.5 trillion in cuts is good policy in a jobs recession. But Gharib may be right, on the grounds that the President needs to hold Republicans to their deals. Will the President hold his ground? Get ready for the cries of "You don't support the troops."
The sequestration is not engraved on golden tablets. It is a notional aspiration. And those of us — and I think we’d have sufficient support to prevent those kind of cuts from being enacted because of the impact it would have on national security.
We are looking at a stand-alone bill to negate what Republicans supposedly gave up in the debt ceiling negotiations, canceling the $600 billion in defense cuts. If it passes, Democrats will have given up $600 billion in cuts to domestic programs -- for exactly nothing in return. Yet another Lucy pulls away the football moment. Gharib recommends that President Obama issue a veto threat against such a bill now, but it's not like $1.5 trillion in cuts is good policy in a jobs recession. But Gharib may be right, on the grounds that the President needs to hold Republicans to their deals. Will the President hold his ground? Get ready for the cries of "You don't support the troops."
Saturday, August 6, 2011
S&P Downgrades U.S. Debt
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.
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.
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