“The Story Of Our Time”: The Most Crucial Thing To Understand Is The Economy Is Not Like An Individual Family.
Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
My sense, however, is that many people still don’t understand what this is all about. So this seems like a good time to offer a sort of refresher on the nature of our economic woes, and why this remains a very bad time for spending cuts.
Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family.
Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.
And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.
Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.
Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.
O.K., I’ve just given you a story, but why should you believe it? There are, after all, people who insist that the real problem is on the economy’s supply side: that workers lack the skills they need, or that unemployment insurance has destroyed the incentive to work, or that the looming menace of universal health care is preventing hiring, or whatever. How do we know that they’re wrong?
Well, I could go on at length on this topic, but just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out.
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.
What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.
By: Paul Krugman, Op-Ed Columnist, The New York Times, April 28, 2013
Ever since he first proposed it in the same year Thomas Jefferson declared all men to be created equal, people have been delighted and beguiled by the hidden workings of Adam Smith’s famous “invisible hand.”
For a millennia or more, humans who marveled at the orderly movements of the heavens sought to invent some system to explain and predict the comings and goings of the planets. And so, it was entirely inevitable that in the fullness of time people would seek to impose the cosmic reliability of celestial mechanics onto more terrestrial phenomenon as well, like economics.
“Let the market decide!” That has been the battle cry of free market aficionados from the day Adam Smith first suggested that private avarice might transubstantiate into public virtue right through to the unspoken suppositions buried deep within Congressman Paul Ryan’s god-awful budget that tax cuts pay for themselves and the whole point of national fiscal policy is to lift from the minds of America’s job-producing investor class the dark clouds of “uncertainty.”
But what if the laissez faire conception of the free market doesn’t hold up any better than did the Ptolemaic vision of an earth-centered solar system that very nearly got Galileo burned at the stake for contradicting?
What if private vice doesn’t produce public virtue at all, as Adam Smith surmised, but rather invites a heedless and reckless pursuit of private profit that leads inexorably to public catastrophe? That was the conclusion which the Chicago-school conservative Richard Posner reluctantly reached after sifting through the rubble following the collapse of capitalism in 2008.
In his 2009 diagnosis of the most recent financial crisis, The Failure of Capitalism, Posner concluded that the fundamental problem with free market capitalism is that behavior which is perfectly rational when pursued by individuals, and individual firms, is disastrous when that behavior is aggregated across the entire society.
The micro-economic laws of supply and demand that tell an economic participant how to use the price mechanism to maximize profits, in other words, are worse than worthless as a macro-economic guide for the national policymaker whose aim is, not profits, but the productivity and prosperity of the economy as a whole.
It makes perfect sense for the consumer to buy when the market is strong and save when it is weak, “but by doing this they make the downturn worse,” says Posner, since from the standpoint of the overall society “we want people to save when times are good and spend when times are bad.”
Likewise, it can be rational to ride one of the serial economic bubbles that have become all too commonplace since high finance replaced making things as America’s signature industry — even if you know it is a bubble — since the individual investor can never know when that bubble will burst. And until it does, says Posner, there are lots of profits to lose if one climbs off the bubble too soon.
As a former Citigroup CEO put it: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing you got to get up and dance. And we’re still dancing.”
Because risk and return are positively correlated, Posner says a firm that plays it safe is, paradoxically, “courting failure because investors will turn elsewhere.”
Likewise, while a “cascade” of bank failures could bring the economy to a halt, Posner says “no individual bank has an incentive to take measures to avoid such a consequence.”
That is why, he says, it may be risky to follow the herd, but it is not irrational.
Since the 2008 collapse, the media has been on high alert (unlike the government) for the scoundrels and knaves who brought our economy to grief. But in apportioning blame, Posner says “there is no need to bring cognitive quirks, emotional forces, or character flaws into the causal analysis.”
The “rational maximization” of businessmen and consumers all legally pursuing their self-interest, together and intelligently, within a framework of property and contract rights, was all it took to “set the stage for economic catastrophe.”
It’s this “rational indifference” to the consequences of one’s own business and consumption behavior — an indifference baked into the very nature of the “free” market itself — that explains why government has a duty to do more than merely prevent fraud, theft and other infringements of property and contract rights, even though this “is the only duty that libertarians believe government has,” as Posner says.
Government also has an obligation to regulate financial behavior, says Posner, for without such regulation “the rational behavior of law abiding financiers and consumers can precipitate economic disaster.”
Given the structural deficiencies of the free market and the perverse, self-destructive incentives it creates, it was probably smart for conservatives to shift the focus of their cheerleading away from capitalism’s economic performance and towards laissez faire’s imagined moral underpinnings instead — freedom, liberty, individualism and all of that. That’s because, as an economic incentive that promises broad-based prosperity, greed, it turns out, has not been so good.
By: Ted Frier, Open Salon Blog, Salon, March 21, 2013
Have American liberals moved too far to the left? That’s long been the contention of conservatives contemplating liberal positions on a host of social issues, such as gay marriage and the legalization of undocumented immigrants. But opinion polls on these issues show that yesterday’s far-out liberal positions are quickly becoming today’s conventional wisdom.
A more nuanced conservative critique focuses on liberals’ support for a greater government role in the economy. To be sure, New York Times columnist David Brooks argued in a recent column, liberals have traditionally urged government to take up the slack in economic activity during recessions, but now, as the budget proposal of the Congressional Progressive Caucus shows, liberals believe that “government is the source of growth, job creation and prosperity” even when the economy has righted itself. The progressives’ budget, Brooks complains, proposes spending $450 billion on public works and sending $179 billion to the states so they, too, can provide more services and pave more roads. All this and more would be financed by increases in progressive taxation — draining the private sector of the capital it needs to grow, hire and produce prosperity.
Not surprisingly, liberal economists have jumped on Brooks’s arguments. Lawrence Mishel of the Economic Policy Institute argues that the economy is still performing so under par — $985 billion below its potential output if all our factories were going full tilt — that it needs a major boost from government-financed economic activity to increase production, employment and consumption. Coincidentally, the day after Brooks’s column was published, Gallup released a poll showing that 72 percent of Americans, including a majority of Republicans, would support a major federally financed infrastructure repair program and a federal program creating 1 million jobs. Nearly 80 years after Franklin Roosevelt created the Works Progress Administration, it seems the American people would like the government to re-create it.
But there’s a bigger problem with the conservative contention that government stands athwart the private sector’s capacity to create jobs and prosperity: It fails to acknowledge that the private sector no longer creates jobs and prosperity like it used to, completely apart from whatever effects governmental policy may have on job creation. Entirely on their own and well before Obamacare was a gleam in anyone’s eye, employers began cutting back or altogether dropping health coverage and retirement benefits for employees. Nor have government regulations compelled employers to increase the share of company revenue going to profits (which is at its highest level in decades) and reduce the share going to wages (which is at its lowest level in decades).
The U.S. corporations that make up the Standard & Poor’s index of the 500 largest publicly traded companies get almost half their revenue from sales abroad, according to a 2011 S&P analysis, and, despite all the hoopla about bringing manufacturing back to the States, much of their production is going to remain abroad. The rise of machines has, we all know, taken its toll on employment too. U.S. corporations are sitting on $1.7 trillion in cash, with share values and profits that render most of these businesses’ leaders happy campers. Even if the U.S. economy continues to fall far short of full employment, and even if the rate of workforce participation continues to decline, these businesses can still sell their products all over the world. Unlike in the 1930s, the shortfall in domestic consumption does not present them with a crisis but with perhaps nothing worse than a missed opportunity.
In short, the economy is working for our economic elites. The massive changes they would have to make to investment strategies and the division of corporate revenue so that the economy worked for the majority of the American people are nowhere on the horizon. The great growth machine that once was the U.S. private sector ain’t what it used to be — which is one reason each recession since 1990 has been longer, deeper and more intractable than the last. That’s the new economic reality in this country, and that’s what the budget of the Congressional Progressive Caucus responds to. It’s not that liberals have been prompted to move leftward through the readings of ancient socialist gospels or by smoking some stash left over from the ’60s. It’s that the economy has reached a dismal stability far short of its full employment potential or renewing the promise of widespread prosperity, and government investment is required to make up the difference. If anyone is smoking something, it is conservatives who foresee a rebirth of prosperity if only the private sector is left alone.
By: Harold Meyerson, Opinion Writer, The Washington Post, March 21, 2013
Just when I thought that the National Review Institute demonstrated that Republicans are ready to compromise, Paul Ryan outlined a somewhat apocalyptic vision of budget negotiations there on Saturday.
According to POLITICO, Ryan said “that the nation will face ‘tepid growth and deficits’ under President Barack Obama and Republicans must prudently ‘buy time’ and ‘keep the bond markets at bay — for the sake of our people.’” Like a third-rate objectivist action hero, he is.
“Unfortunately, the Democrats are unlikely to accept our proposals. They refuse to consider real reform. But we will lay the groundwork for future endeavors. So when reform is possible, we will be ready.
“The president will bait us. He’ll portray us as cruel and unyielding,” Ryan said. “Look, it’s the same trick he plays every time: Fight a straw man. Avoid honest debate. Win the argument by default.
But neither the President nor any other Democrats need to portray Ryan as “cruel and unyielding” because his policies do a fantastic job of that on their own.
Ryan has time and time again demonstrated that he isn’t interested in paying down the national debt or in “reforms to protect and strengthen Medicare and Medicaid,” as he claimed on Saturday. He’s interested in turning Medicare into a voucher program and in slashing Medicaid’s budget by over a trillion dollars — his logic reminiscent of that infamous Vietnam era talking point “destroying the village in order to save it.” And speaking of bombs, Ryan has repeatedly refused to consider cutting one of the most draining and unnecessarily large parts of the budget: defense spending. He also refuses to consider forcing those with mountains of idle or otherwise unproductive cash to pay for these programs, and isn’t content with Democratic compromises thus far, refusing to appreciate the $2.2 trillion in cuts agreed to during the 112th Congress, because he’s cranky about the $620 billion in tax increases.
Moreover, he isn’t even right about the one thing that libertarian types are supposed to be intimately familiar with — the bond market. As I pointed out a few weeks ago, interest rates are about as low as they can be and aren’t expect to rise, and demand for U.S. Treasury bonds is robust. This suggests that the market has confidence in the U.S. government’s ability to honor its debts, and that federal borrowing isn’t “crowding out” private sector investment.
Who’s avoiding honest debate, Congressman Ryan?
POLITICO also reported that Ryan’s outlook contrasts sharply with Speaker Boehner’s. The latter is attempting to compromise with Democrats by forcing the Senate to pass a budget so that the two houses can find some middle ground. But if Ryan uses his budget committee chair to turn this into another fiscal knock-down drag-out fight — something that makes virtually no sense in light of his party’s November drubbing, and Congress’ low approval rating — the ensuing conference committee might make the super committee look like serious adults.
So much for learning from the past four years.
By: Samuel Knight, Washington Monthly Political Animal, January 26, 2013
The Perils of Pauline melodrama over the “fiscal cliff” will drag on as Washington heads toward another “debt ceiling” faceoff that will climax over the next eight weeks or so.
This farce captivates the media, but no one should be fooled. This is largely a debate about how much damage will be done to the economic recovery and who will bear the pain. There is bipartisan consensus that the tax hikes and spending cuts that Congress and the White House piled up to build the so-called fiscal cliff are too painful and will drive the economy into a recession. So the folderol is about what mix of taxes and spending cuts they can agree on that won’t be as harsh.
Largely missing is any discussion of how to fix the economy, to make it work for working people once more. Just sustaining the faltering recovery won’t get it done. We’re still struggling with mass unemployment, declining wages and worsening inequality. Corporate profits now capture an all-time record percentage of the economy; workers’ wages have hit an all-time low. A little constriction, or a lot, won’t do anything to change that reality.
So how about a New Year’s resolution for Washington’s political class: Vow to focus on what can be done to fix the economy, rather than on how much to lacerate it. That would require dealing with causes, not effects. And those surely would include:
Inequality: Clearly — as even the International Monetary Fund has recognized — extreme inequality saps the effective demand needed for a robust economy.
We need to rebuild a middle class if we want to again have a vibrant, growing economy. That requires a lot more than repealing the Bush tax breaks for the top 2 percent. We should be lifting the minimum wage, empowering workers to bargain for a fair share of the productivity and profits they help to generate, and limiting CEO pay packages that give them multimillion-dollar incentives to ship jobs abroad or plunder their own companies. Congress and the White House might also imitate the Federal Reserve and keep pressing the stimulus pedal until we move much closer to full employment.
Catastrophic climate change: Gross domestic product registers growth when people go to work picking up the pieces after a climate disaster, but Americans suffer rather than benefit. It’s long past time for the United States to get serious about global warming, make the investments needed to capture a lead in the green industrial revolution that is sweeping the world, end the subsidies to Big Oil and King Coal, and help the movement to clean energy.
Fixing health care: The wrongheaded agonizing over whether to cut scholarships for poor students or lay off food inspectors ignores the gorilla in the accounting books. Our long-term budget deficits are a consequence of our broken health-care system. If we spent per capita what other industrial nations spend on health care (with, incidentally, better health results), we would be projecting surpluses. This isn’t about stripping 65-year-olds of Medicare; it’s about taking on the drug and insurance companies and hospital complexes that drive up our costs. Affordable health care is a right, not a privilege.
Rebuilding America. While Washington hyperventilates about cutting spending, the excesses of this conservative era have starved society of essential building blocks. A high-wage economy needs a modern, efficient, world-class infrastructure to be competitive. Families depend on effective governance for clean air and water, safe sewage, enforcement of occupational safety standards, world-class schools and more. Our debate has deteriorated to the point that a Democratic president brags that domestic discretionary spending — which covers basic public services from the Coast Guard to child nutrition — will be cut to a share of the economy not seen since Eisenhower. That is, in a word, goofy.
Why not at least begin an informed discussion of the services we need and the ways we can afford them?
The Congressional Progressive Caucus has started that discussion with its “Deal For All” — a smart mix of fair-share taxes and cuts designed to ensure that those who never benefited from “shared prosperity” don’t get whacked unjustly by the prevailing mantra of “shared sacrifice.”
Americans, sensibly enough, will grow more disgusted with Washington whatever resolution is reached on the fiscal cliff over these next weeks. Politicians will continue to fight about how much damage to do, not how to build what comes next. What the country needs is legislators who will focus on building rather than dismantling.
By: Katrina vanden Heuvel, Opinion Writer, The Washington Post, December 31, 2012