“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
“Mooching Off Medicaid”: Conservatives Like Big Government Just Fine When It Lines Their Pockets
Conservatives like to say that their position is all about economic freedom, and hence making government’s role in general, and government spending in particular, as small as possible. And no doubt there are individual conservatives who really have such idealistic motives.
When it comes to conservatives with actual power, however, there’s an alternative, more cynical view of their motivations — namely, that it’s all about comforting the comfortable and afflicting the afflicted, about giving more to those who already have a lot. And if you want a strong piece of evidence in favor of that cynical view, look at the current state of play over Medicaid.
Some background: Medicaid, which provides health insurance to lower-income Americans, is a highly successful program that’s about to get bigger, because an expansion of Medicaid is one key piece of the Affordable Care Act, a k a Obamacare.
There is, however, a catch. Last year’s Supreme Court decision upholding Obamacare also opened a loophole that lets states turn down the Medicaid expansion if they choose. And there has been a lot of tough talk from Republican governors about standing firm against the terrible, tyrannical notion of helping the uninsured.
Now, in the end most states will probably go along with the expansion because of the huge financial incentives: the federal government will pay the full cost of the expansion for the first three years, and the additional spending will benefit hospitals and doctors as well as patients. Still, some of the states grudgingly allowing the federal government to help their neediest citizens are placing a condition on this aid, insisting that it must be run through private insurance companies. And that tells you a lot about what conservative politicians really want.
Consider the case of Florida, whose governor, Rick Scott, made his personal fortune in the health industry. At one point, by the way, the company he built pleaded guilty to criminal charges, and paid $1.7 billion in fines related to Medicare fraud. Anyway, Mr. Scott got elected as a fierce opponent of Obamacare, and Florida participated in the suit asking the Supreme Court to declare the whole plan unconstitutional. Nonetheless, Mr. Scott recently shocked Tea Party activists by announcing his support for the Medicaid expansion.
But his support came with a condition: he was willing to cover more of the uninsured only after receiving a waiver that would let him run Medicaid through private insurance companies. Now, why would he want to do that?
Don’t tell me about free markets. This is all about spending taxpayer money, and the question is whether that money should be spent directly to help people or run through a set of private middlemen.
And despite some feeble claims to the contrary, privatizing Medicaid will end up requiring more, not less, government spending, because there’s overwhelming evidence that Medicaid is much cheaper than private insurance. Partly this reflects lower administrative costs, because Medicaid neither advertises nor spends money trying to avoid covering people. But a lot of it reflects the government’s bargaining power, its ability to prevent price gouging by hospitals, drug companies and other parts of the medical-industrial complex.
For there is a lot of price-gouging in health care — a fact long known to health care economists but documented especially graphically in a recent article in Time magazine. As Steven Brill, the article’s author, points out, individuals seeking health care can face incredible costs, and even large private insurance companies have limited ability to control profiteering by providers. Medicare does much better, and although Mr. Brill doesn’t point this out, Medicaid — which has greater ability to say no — seems to do better still.
You might ask why, in that case, much of Obamacare will run through private insurers. The answer is, raw political power. Letting the medical-industrial complex continue to get away with a lot of overcharging was, in effect, a price President Obama had to pay to get health reform passed. And since the reward was that tens of millions more Americans would gain insurance, it was a price worth paying.
But why would you insist on privatizing a health program that is already public, and that does a much better job than the private sector of controlling costs? The answer is pretty obvious: the flip side of higher taxpayer costs is higher medical-industry profits.
So ignore all the talk about too much government spending and too much aid to moochers who don’t deserve it. As long as the spending ends up lining the right pockets, and the undeserving beneficiaries of public largess are politically connected corporations, conservatives with actual power seem to like Big Government just fine.
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 3, 2013
“The Big Fail”: Too Many Republicans Responsible For Economic Failure Retain Power And Refuse To Learn From Experience
It’s that time again: the annual meeting of the American Economic Association and affiliates, a sort of medieval fair that serves as a marketplace for bodies (newly minted Ph.D.’s in search of jobs), books and ideas. And this year, as in past meetings, there is one theme dominating discussion: the ongoing economic crisis.
This isn’t how things were supposed to be. If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues.
So what went wrong? The answer, mainly, is the triumph of bad ideas.
It’s tempting to argue that the economic failures of recent years prove that economists don’t have the answers. But the truth is actually worse: in reality, standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known.
The story, at this point, is fairly straightforward. The financial crisis led, through several channels, to a sharp fall in private spending: residential investment plunged as the housing bubble burst; consumers began saving more as the illusory wealth created by the bubble vanished, while the mortgage debt remained. And this fall in private spending led, inevitably, to a global recession.
For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.
So what can be done? A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.
At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.
But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”
Well, someone was incorrect, all right.
Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. Formally, the paper represents the views only of the authors; but Mr. Blanchard, the I.M.F.’s chief economist, isn’t an ordinary researcher, and the paper has been widely taken as a sign that the fund has had a major rethinking of economic policy.
For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake.
I’ve seen some reporting describing the paper as an admission from the I.M.F. that it doesn’t know what it’s doing. That misses the point; the fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence.
The really bad news is how few other players are doing the same. European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain. The current British government, which killed a promising recovery by turning to austerity, completely refuses to consider the possibility that it made a mistake.
And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling — a deeply illegitimate action in itself — to demand spending cuts that would drive us back into recession.
The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.
By: Paul Krugman, Op-Ed Columnist, The New York Times, January 6, 2013
“Ideology Displacing Facts”: Simpson-Bowles “Spending Problem” Voodoo Economics Ignores The Lack Of “Crowding Out”
Alan Simpson and Erskine Bowles – co-founders of the corporate lobby Campaign to Fix the Debt – were on Meet the Press this morning. I couldn’t drag myself to watch it because I am sick and tired of hearing every oligarch’s favorite lackeys argue that the national debt is a reason to gut the welfare state. Which is exactly what they were doing this morning:
“Yes, the president has taken some steps forward on the entitlement programs, but has he done enough? Absolutely not,” Bowles said.
But they and their disciples couldn’t be more wrong. The U.S. government has no “spending problem” from a macroeconomist’s point of view. Of course, the country can’t indefinitely continue to borrow more than it earns, but the idea that we must somehow tackle debt by cutting spending — and do it right now — is voodoo economics of the highest order.
For spending to be an immediate problem, it would have to be problematic. And the primary reason that government spending is problematic is due to “the crowding out effect.”
I could find some haughty economist to quote on the issue, but for simplicity’s sake here’s Wikipedia:
“…crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending.”
Yet interest rates are rock bottom and aren’t expected to rise anytime soon, and demand for U.S. Treasury bonds remains high.
Thus, government spending appears to be having no averse effect on financial markets, which, according to Treasury yields, actually seem to think that lending the U.S. government money is a wise idea. The debt “crisis” is only caused by a “spending problem” when one considers government spending to be an issue from an ideological standpoint.
If Simpson and Bowles were serious about tackling the debt without completely undermining the economy, they’d advocate higher taxes on those that can afford to pay more. Corporations are awash with cash, and capital is taking a larger slice of the pie than ever. But aggregate demand is lagging, and to undermine social safety nets would further weaken it. Sound economic policy would, therefore, have the rich finance deficit reduction — if it must be done in this fragile economy.
By: Samuel Knight, Washington Monthly Political Animal, January 6, 2013
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