“Why Inequality Matters”: Rising Inequality Is By Far The Most Important Single Factor Behind Lagging Middle-Class Incomes
Rising inequality isn’t a new concern. Oliver Stone’s movie “Wall Street,” with its portrayal of a rising plutocracy insisting that greed is good, was released in 1987. But politicians, intimidated by cries of “class warfare,” have shied away from making a major issue out of the ever-growing gap between the rich and the rest.
That may, however, be changing. We can argue about the significance of Bill de Blasio’s victory in the New York mayoral race or of Elizabeth Warren’s endorsement of Social Security expansion. And we have yet to see whether President Obama’s declaration that inequality is “the defining challenge of our age” will translate into policy changes. Still, the discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.
They’re wrong.
The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?
Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.
Start with the numbers. On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.
And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.
Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.
It’s now widely accepted that rising household debt helped set the stage for our economic crisis; this debt surge coincided with rising inequality, and the two are probably related (although the case isn’t ironclad). After the crisis struck, the continuing shift of income away from the middle class toward a small elite was a drag on consumer demand, so that inequality is linked to both the economic crisis and the weakness of the recovery that followed.
In my view, however, the really crucial role of inequality in economic calamity has been political.
In the years before the crisis, there was a remarkable bipartisan consensus in Washington in favor of financial deregulation — a consensus justified by neither theory nor history. When crisis struck, there was a rush to rescue the banks. But as soon as that was done, a new consensus emerged, one that involved turning away from job creation and focusing on the alleged threat from budget deficits.
What do the pre- and postcrisis consensuses have in common? Both were economically destructive: Deregulation helped make the crisis possible, and the premature turn to fiscal austerity has done more than anything else to hobble recovery. Both consensuses, however, corresponded to the interests and prejudices of an economic elite whose political influence had surged along with its wealth.
This is especially clear if we try to understand why Washington, in the midst of a continuing jobs crisis, somehow became obsessed with the supposed need for cuts in Social Security and Medicare. This obsession never made economic sense: In a depressed economy with record low interest rates, the government should be spending more, not less, and an era of mass unemployment is no time to be focusing on potential fiscal problems decades in the future. Nor did the attack on these programs reflect public demands.
Surveys of the very wealthy have, however, shown that they — unlike the general public — consider budget deficits a crucial issue and favor big cuts in safety-net programs. And sure enough, those elite priorities took over our policy discourse.
Which brings me to my final point. Underlying some of the backlash against inequality talk, I believe, is the desire of some pundits to depoliticize our economic discourse, to make it technocratic and nonpartisan. But that’s a pipe dream. Even on what may look like purely technocratic issues, class and inequality end up shaping — and distorting — the debate.
So the president was right. Inequality is, indeed, the defining challenge of our time. Will we do anything to meet that challenge?
By: Paul Krugman, Op-Ed Contributor, The New York Times, December 15, 2013
“Ignoring The Elephant In The Room”: No, President Obama’s Policies Are Not Holding Back The Economy
Wall Street Journal columnist Daniel Henninger had fun this week arguing that President Obama’s problems implementing health reform pale next to his problems getting the economy back to health. The attack on Obama’s economic stewardship, however, looks just like the standard conservative attack on health reform: it’s light on sound arguments and ignores the elephant in the room — Republican obstructionism.
First, health care. As the president says, it’s on him that the rollout of HealthCare.gov and the health insurance marketplaces — where individuals can purchase health insurance to avoid the fine for not having it — has been, to put it kindly, rocky. But Republicans have provided no clear alternative to expand access to good quality, affordable health care, and they have made the rollout more difficult.
Many Republican governors and state legislatures have left implementation of their health insurance marketplaces (also known as exchanges) to the federal government rather than do it themselves — hardly the usual position of a party that believes in devolving as much power as possible to the states. And, at the moment, 25 states are not moving forward to implement the Medicaid expansions — which are a very good deal for them — leaving a significant coverage gap among low-income adults and complicating the determination of eligibility for coverage on the exchanges.
Finally, Republican proposals to “fix” the problem would undermine, not improve, health reform. The president’s proposal, while not perfect, is the best on the table.
Like problems with the health care rollout, the problems in the economy are plain to see. Henninger plays fair when he notes that the president did not cause the Great Recession, which is the source of the problems with which we’re still grappling. But, he’s wrong to say it’s the president who “has the economy on lockdown.”
First, he ignores what many economists and policymakers see as the main problem we still face – inadequate demand for goods and services. Second, he cavalierly dismisses the benefits of economic stimulus in such an economy. Third, he insists the main thing holding back the recovery is excessive business regulation. With that mindset, he naturally doesn’t acknowledge the drag on economic activity and job creation from the premature austerity that Congress has imposed on the economy since Republicans regained control of the House in the 2010 mid-term elections and the barriers that Republicans have put in the way of a budget plan that could boost the recovery in the short run while still putting deficits and debt on a sustainable longer-run trajectory.
Just a reminder to all who, like Henninger, parrot the shibboleth that stimulus did not work: the Congressional Budget Office finds that gross domestic product has been higher each year since 2009 than it would have been without the 2009 American Recovery and Reinvestment Act and unemployment has been lower (see chart).
CBO includes a broad range of estimates about the recovery act’s impact to encompass the views of economists who continue to doubt the mounting evidence that stimulus is highly effective under the economic conditions prevailing in recent years. But, that evidence suggests that act’s impact is quite likely much nearer the high than the low estimate.
Here’s what the International Monetary Fund says about that research, the expansionary effects of fiscal policy (tax cuts and increases in government spending) and the “old Keynesian mulitplier” that Henninger mocks: “While debate continues, the evidence seems stronger than before the crisis that fiscal policy can, under today’s special circumstances, have powerful effects on the economy in the short run [and] that fiscal multipliers are larger.”
The powerful effects of fiscal policy in today’s special circumstances work both ways. The economic forecasting firm Macroeconomic Advisers estimates that the economic uncertainty and policy choices to raise taxes and cut spending that we’ve made since 2010 have cost the economy up to a percentage point per year of slower economic growth and up to 2 million jobs.
It’s Republicans whose policy preferences have pulled policy toward greater near-term fiscal austerity through spending cuts; Democratic plans look more like bipartisan proposals for less spending restraint in the short term and more deficit reduction that’s balanced between revenues and spending down the road when the economy is stronger.
It’s Republicans who have the U.S. economy on lockdown.
By: Chad Stone, Chief Economist, Center on Budget and Policy Priorities, U. S. News and World Report, November 22, 2013
“The Mutilated Economy”: Anyone Who Talks About How We’re Borrowing From Our Children Just Hasn’t Done The Math
Five years and eleven months have now passed since the U.S. economy entered recession. Officially, that recession ended in the middle of 2009, but nobody would argue that we’ve had anything like a full recovery. Official unemployment remains high, and it would be much higher if so many people hadn’t dropped out of the labor force. Long-term unemployment — the number of people who have been out of work for six months or more — is four times what it was before the recession.
These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can’t spend more money on jobs, say these voices, because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!
The bitter irony, then, is that it turns out that by failing to address unemployment, we have, in fact, been sacrificing the future, too. What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come. Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them.
I’m actually writing this from the big research conference held each year by the International Monetary Fund. The theme of this year’s shindig is the causes and consequences of economic crises, and the presentations range in subject from the good (Latin America’s surprising stability in recent years) to the bad (the ongoing crisis in Europe). It’s pretty clear, however, that the blockbuster paper of the conference will be one that focuses on the truly ugly: the evidence that by tolerating high unemployment we have inflicted huge damage on our long-run prospects.
How so? According to the paper (with the unassuming title “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy”), our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.
What’s more, the authors — one of whom is the Federal Reserve Board’s director of research and statistics, so we’re not talking about obscure academics — put a number to these effects, and it’s terrifying. They suggest that economic weakness has already reduced America’s economic potential by around 7 percent, which means that it makes us poorer to the tune of more than $1 trillion a year. And we’re not talking about just one year’s losses, we’re talking about long-term damage: $1 trillion a year for multiple years.
That estimate is the end product of some complex data-crunching, and you can quibble with the details. Hey, maybe we’re only losing $800 billion a year. But the evidence is overwhelming that by failing to respond effectively to mass unemployment — by not even making unemployment a major policy priority — we’ve done ourselves immense long-term damage.
And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt.
This never made sense even in its own terms. As some of us have tried to explain, debt, while it can pose problems, doesn’t make the nation poorer, because it’s money we owe to ourselves. Anyone who talks about how we’re borrowing from our children just hasn’t done the math.
True, debt can indirectly make us poorer if deficits drive up interest rates and thereby discourage productive investment. But that hasn’t been happening. Instead, investment is low because of the economy’s weakness. And one of the main things keeping the economy weak is the depressing effect of cutbacks in public spending — especially, by the way, cuts in public investment — all justified in the name of protecting the future from the wildly exaggerated threat of excessive debt.
Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.
It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.
By: Paul Krugman, Op-Ed Columnist, The New York Times, November 7, 2013
“Econ 101 For The Party Of Sore Losers”: Tea Party Politics And Policy Limit Economic Freedom And Growth
Our businesses, markets and citizens are breathing sighs of relief. After wasting billions and toying with America’s creditworthiness, the so-called tea party has ceased, for the moment, holding our democracy and our economy hostage. Nevertheless, the fringe faction that calls itself by this name has made it abundantly clear that it lacks the character to own up to its folly. This Party of Sore Losers (POSERS, for short) has hacked at the proverbial cherry tree and, learning nothing from young George Washington, has failed to own up. In fact, it is holding the axe behind its back, ready to hack again.
This past month, attention was appropriately focused on the short-term consequences of the government shutdown and the POSERS’ game of chicken with sovereign default – default at the national level. This is serious. As Warren Buffett emphasized during the crisis in an interview with Fortune, we’ve spent hundreds of years building up our credibility; it takes but a moment to ruin it. Worldwide, markets have enormous confidence in our financial integrity and the functioning of our government. To date, the free market believes in America’s capacity and commitment to make good on its obligations. Let’s keep it that way.
During the Reagan years, it was liberals who thought the world was ending because of mounting federal debt. Eventually the country paid it down. We must do this again, but if we’re serious about it, first we need policies that support enterprise and growth. We have come through long wars and a stubborn recession. More of our veterans need employment in the private economy, and more of our businesses need to be able to hire and to invest in innovation again.
It is under such conditions that the Party of Sore Losers thought it would play with default at the national level. This shows a blatant disregard for growth and what growth means to our nation. In their zeal, they have put the economic cart before the horse. It’s as if they truly don’t understand that the horse – private enterprise and the growth and employment it generates – pulls the cart.
Much has been written in recent weeks about what the shutdown cost the nation and what a default would have cost. If the brinksmanship that brought us there were only a one-time tactic, it would have been bad enough. As it is, this tactic was merely the latest instance in a consistent pattern of fixation on cuts and obstruction, to the exclusion of growth. If you were out of a job, would it do you much good to stop showering, doing the laundry or paying rent and utilities, all in an effort to cut expenses? It would bring your costs down, to be sure. But it wouldn’t help you get a job.
As vivid as this analogy might be, it makes the point. POSER policies block investment in infrastructure, financial transparency, food safety, pollution controls and education. These are our Internet, our shower, our breakfast, laundry and rent; these fundamentals provide the stable conditions we need to get back to work. Investment in them is something business owners repay many times over. When a stable and functioning government does its job, we entrepreneurs can do ours: creating value and hiring people without unnecessary hindrance.
There are significant dangers when the government starts doing what private industry does best. Think of the last time you were in line at a government agency, and of the level of customer service you received, compared to what you got from a company that would lose you as a customer if it did a bad job. You can vote your representatives out, but the staff at your local government agency isn’t typically up for re-election.
There are, of course, many dedicated civil servants who give you their very best. Still, overall, beware the performer playing to a captive audience. Private companies that succeed in locking you in as a customer only underscore the point. Think of the last time you were on hold with, or tried to use the latest software from, a business with which you as a customer were more or less stuck. When a company becomes the only game in town, or seduces you into signing that contract, a certain disdain for your needs often follows.
The POSERS who call themselves the tea party appear to be seized by a great fear that we will all be waiting in line at government health clinics. The trouble is that they’re forcing their version of free choice down our throats. It can be hard to see the irony in this when you’re convinced that you’re channeling the will of the people. In an interview in Business Insider just days before the recent debt-ceiling deadline, POSER Rep. Ted Yoho claimed to know what “the people” wanted. He broke it down for the rest of us: “They have chosen not to fund the government.”
How did we get to this point? Did the POSERS get so good at dismissing their perceived political opponents on ideological grounds that they started to hear nothing but their own voices? Was it the hay this faction made by obstructing government, while screaming that the president was a socialist, that allowed its arguments to become divorced from what a functioning market economy is?
However they talked themselves into it, the POSERS have demonstrated their readiness to play havoc with the most basic needs of the business owner in America. They have shown their disregard for what it means to carry on our work with some confidence that government will do its job, while we do ours. What’s so tragic about this, among other things, is that it discredits legitimate efforts to keep government out of places it shouldn’t be.
In view of what the POSERS have put us through of late, Americans of all mainstream political persuasions should be on guard. The so-called tea party may pose the greatest threat to free enterprise in decades. The POSERS would block moves to reestablish the financial transparency on which savers and investors rely. They would make us pay the costs of other people’s pollution. They would restrict the economic opportunity for immigrants on which this country’s success is based. And they would rob us of our right to enjoy or to suffer from that which we have chosen for ourselves in free elections.
Whether “Obamacare” turns out to hurt businesses and employees more than it helps them, we’re going to find out in practice. Far more threatening to private industry is the way the POSERS would cut off our economy’s nose to spite its face. One can only assume they earnestly believe themselves to be in a mortal struggle to keep government from interfering with our choices. In reality, of course, POSER economic policies limit those choices, in the ways I’ve described.
Moreover, these policies function to keep the private economy small and constrain recovery and growth, thereby perversely increasing our dependence on debt spending. We badly need to teach these ideologues the basics of cash flows, debt and investment, value generation and growth. Alas, the Party of Sore Losers has been busy teaching the rest of us a course of its own design. The textbook is titled, “Converting Resilient American Innovation into Entirely Unnecessary, Government-Induced Economic Paralysis (A Sore Loser’s Approach: 2013 Edition).”
By: Alejandro Crawford, U. S. News and World Report, October 29, 2013
“The Damage Done”: Estimates Of Damage From GOP Hostage-Taking Understate The True Harm Done
The government is reopening, and we didn’t default on our debt. Happy days are here again, right?
Well, no. For one thing, Congress has only voted in a temporary fix, and we could find ourselves going through it all over again in a few months. You may say that Republicans would be crazy to provoke another confrontation. But they were crazy to provoke this one, so why assume that they’ve learned their lesson?
Beyond that, however, it’s important to recognize that the economic damage from obstruction and extortion didn’t start when the G.O.P. shut down the government. On the contrary, it has been an ongoing process, dating back to the Republican takeover of the House in 2010. And the damage is large: Unemployment in America would be far lower than it is if the House majority hadn’t done so much to undermine recovery.
A useful starting point for assessing the damage done is a widely cited report by the consulting firm Macroeconomic Advisers, which estimated that “crisis driven” fiscal policy — which has been the norm since 2010 — has subtracted about 1 percent off the U.S. growth rate for the past three years. This implies cumulative economic losses — the value of goods and services that America could and should have produced, but didn’t — of around $700 billion. The firm also estimated that unemployment is 1.4 percentage points higher than it would have been in the absence of political confrontation, enough to imply that the unemployment rate right now would be below 6 percent instead of above 7.
You don’t have to take these estimates as gospel. In fact, I have doubts about the report’s attempt to assess the effects of policy uncertainty, which relies on research that hasn’t held up very well under scrutiny.
Yet it would be a mistake to conclude that Macroeconomic Advisers overstated the case. The main driver of their estimates is the sharp fall since 2010 in discretionary spending as a share of G.D.P. — that is, in spending that, unlike spending on programs like Social Security and Medicare, must be approved by Congress each year. Since the biggest problem the U.S. economy faces is still inadequate overall demand, this fall in spending has depressed both growth and employment.
What’s more, the report doesn’t take into account the effect of other bad policies that are a more or less direct result of the Republican takeover in 2010. Two big bads stand out: letting payroll taxes rise, and sharply reducing aid to the unemployed even though there are still three times as many people looking for work as there are job openings. Both actions have reduced the purchasing power of American workers, weakening consumer demand and further reducing growth.
Putting it all together, it’s a good guess that those estimates of damage from political hostage-taking understate the true harm done. Elections have consequences, and one consequence of Republican victories in the 2010 midterms has been a still-weak economy when we could and should have been well on the way to full recovery.
But why have Republican demands so consistently had a depressing effect on the economy?
Part of the answer is that the party remains determined to wage top-down class warfare in an economy where such warfare is particularly destructive. Slashing benefits to the unemployed because you think they have it too easy is cruel even in normal times, but it has the side effect of destroying jobs when the economy is already depressed. Defending tax cuts for the wealthy while happily scrapping tax cuts for ordinary workers means redistributing money from people likely to spend it to people who are likely to sit on it.
We should also acknowledge the power of bad ideas. Back in 2011, triumphant Republicans eagerly adopted the concept, already popular in Europe, of “expansionary austerity” — the notion that cutting spending would actually boost the economy by increasing confidence. Experience since then has thoroughly refuted this concept: Across the advanced world, big spending cuts have been associated with deeper slumps. In fact, the International Monetary Fund eventually issued what amounted to a mea culpa, admitting that it greatly underestimated the harm that spending cuts inflict. As you may have noticed, however, today’s Republicans aren’t big on revising their views in the face of contrary evidence.
Are all the economy’s problems the G.O.P.’s fault? Of course not. President Obama didn’t take a strong enough stand against spending cuts, and the Federal Reserve could have done more to support growth. But most of the blame for the wrong turn we took on economic policy, nonetheless, rests with the extremists and extortionists controlling the House.
Things could have been even worse. This week, we managed to avoid driving off a cliff. But we’re still on the road to nowhere.
By: Paul Krugman, Op-Ed Columnist, The New York Times, October 17, 2013
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