“Conservatives Have No Idea What To Do About Recessions”: Republicans Have Not The Wrong Answer, But No Answer
For the last five years, liberals have promoted three main economic policies to shorten or ameliorate the Great Recession and speed the recovery from it.
- Deficit-financed spending to compensate for demand gaps in the private sector.
- Easy monetary policy to raise inflation and support demand.
- Mortgage modifications to reduce foreclosures and support consumption.
Most conservatives hate this agenda. As Mike Konczal notes, they bizarrely portray these policies as “corporatist” efforts to enrich the rich. But what’s really weird is conservatives have no alternative to this agenda they loathe.
To be clear, conservatives absolutely do have an economic policy agenda. They favor lower taxes, less regulation, government spending cuts, more domestic energy production, school choice, free trade, and low inflation. They often cite these policies as ones that might alleviate recession and speed recovery. They favor these policies now, they favored them in 2008, and they favored them in 2004.
That is, conservatives favor the same set of economic policies when the economy is weak and when it is strong; when unemployment is high and when it is low; when few homeowners are facing foreclosure and when many are. The implication is that conservatives believe there is nothing in particular the government should do about economic cycles.
This is a big problem. Recessions are terrible. They create enormous misery by throwing people out of work and out of their homes. How can a political ideology have nothing to say about how to address recessions?
Perhaps conservatives believe that conservative economic policies will prevent recessions, making it unnecessary to have policies aimed at addressing them. That view would involve a distinctly unconservative degree of hubris.
Perhaps conservatives concede that recessions are terrible and sometimes inevitable, but genuinely believe that nothing productive can be done to address them. If that is so, how can they favor reductions in the social safety net? The argument for cutting welfare programs is that able-bodied people should work and will do so if denied the opportunity to receive benefits without working. But the defining characteristic of an economic down-cycle is that some people who would like to work cannot find work.
As with many economic issues, there is a gap between conservative wonks and conservative policymakers. Many conservative economic policy wonks break with the Republican party by favoring one or more recession-specific economic policies. Economists Luigi Zingales and Glenn Hubbard have called for aggressive programs to modify mortgages. Scott Sumner, David Beckworth, Josh Hendrickson and others have promoted monetary intervention to combat recessions. Michael Strain has promoted a suite of reforms, mostly aimed at the labor market, that would aim to cut unemployment in recessions.
But acceptance of these policies among actual Republican policymakers is near zero. The standard Republican answer for what to do about a bad economy is the same as their answer about what to do about a good economy. As with health care and bank regulation, economic recessions are a policy question to which conservatives have not the wrong answer, but no answer.
By: Josh Barro, Business Insider, December 16, 2013
“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
“The Biggest Losers”: Conservatives Continue To Impose Gratuitous Suffering On Working Americans
The pundit consensus seems to be that Republicans lost in the just-concluded budget deal. Overall spending will be a bit higher than the level mandated by the sequester, the straitjacket imposed back in 2011. Meanwhile, Democrats avoided making any concessions on Social Security or Medicare. Call this one for Team D, I guess.
But if Republicans arguably lost this round, the unemployed lost even more: Extended benefits weren’t renewed, so 1.3 million workers will be cut off at the end of this month, and many more will see their benefits run out in the months that follow. And if you take a longer perspective — if you look at what has happened since Republicans took control of the House of Representatives in 2010 — what you see is a triumph of anti-government ideology that has had enormously destructive effects on American workers.
First, some facts about government spending.
One of the truly remarkable things about American political discourse at the end of 2013 is the fixed conviction among many conservatives that the Obama era has been one of enormous growth in government. Where do they think this surge in government spending has taken place? Well, it’s true that one major new program — the Affordable Care Act — is going into effect. But it’s not nearly as big as people imagine. Once Obamacare is fully implemented, the Congressional Budget Office estimates that it will add only about 3 percent to overall federal spending. And, if you ask people ranting about runaway government what other programs they’re talking about, you draw a blank.
Meanwhile, the actual numbers show that over the past three years we’ve been living through an era of unprecedented government downsizing. Government employment is down sharply; so is total government spending (including state and local governments) adjusted for inflation, which has fallen almost 3 percent since 2010 and around 5 percent per capita.
And when I say unprecedented, I mean just that. We haven’t seen anything like the recent government cutbacks since the 1950s, and probably since the demobilization that followed World War II.
What has been cut? It’s a complex picture, but the most obvious cuts have been in education, infrastructure, research, and conservation. While the Recovery Act (the Obama stimulus) was in effect, the federal government provided significant aid to state and local education. Then the aid went away, and local governments began letting go of hundreds of thousands of teachers.
Meanwhile, public investment fell sharply — so sharply that many observers refer to it as a “collapse” — as state and local governments canceled transportation projects and deferred maintenance. Researchers, like those at the National Institutes of Health, also took large cuts. And there was a major cut in spending on land and water conservation.
There are three things you need to know about these harsh cuts.
First, they were unnecessary. The Washington establishment may have hyperventilated about debt and deficits, but markets have never shown any concern at all about U.S. creditworthiness. In fact, borrowing costs have stayed at near-record lows throughout.
Second, the cuts did huge short-term economic damage. Small-government advocates like to claim that reducing government spending encourages private spending — and when the economy is booming, they have a point. The recent cuts, however, took place at the worst possible moment, the aftermath of a financial crisis. Families were struggling to cope with the debt they had run up during the housing bubble; businesses were reluctant to invest given the weakness of consumer demand. Under these conditions, government cutbacks simply swelled the ranks of the unemployed — and as family incomes fell, so did consumer spending, compounding the damage.
The result was to deepen and prolong America’s jobs crisis. Those cuts in government spending are the main reason we still have high unemployment, more than five years after Lehman Brothers fell.
Finally, if you look at my list of major areas that were cut, you’ll notice that they mainly involve investing in the future. So we aren’t just looking at short-term harm, we’re also looking at a long-term degradation of our prospects, reinforced by the corrosive effects of sustained high unemployment.
So, about that budget deal: yes, it was a small victory for Democrats. It was also, possibly, a small step toward political sanity, with some Republicans rejecting, provisionally, the notion that a party controlling neither the White House nor the Senate can nonetheless get whatever it wants through extortion.
But the larger picture is one of years of deeply destructive policy, imposing gratuitous suffering on working Americans. And this deal didn’t do much to change that picture.
By: Paul Krugman, Op-Ed Columnist, The New York Times, December 12, 2013
“A Love Story For The Ages”: Republicans And The Sequester
The deal allowing the government to reopen today included a mandate that the House and Senate engage in a new round of budget negotiations, with the lawmakers involved facing the unenviable task of reconciling the different tax and spending plans passed by each respective chamber. One contentious issue right off the bat is whether or not to preserve the spending levels under the so-called “sequester,” which were a byproduct of the 2011 debt ceiling debacle.
To review, when Republicans took the debt ceiling hostage two years ago, the deal crafted to avoid default – known as the Budget Control Act – mandated the creation of a “supercommittee” that was supposed to come up with a budget compromise. The sequester was meant to be the stick that would force a deal, as it included cuts that were supposedly so painful to each party that they would have no choice but to agree on something else.
Except that’s not what happened. The negotiations fell apart where they always fall apart: with Republicans refusing to accede to one dime in new revenue. The sequester went into effect and is now cutting an indiscriminate path through the budget.
Democrats, then, have made some noise about undoing the sequester, for at least a short period of time, during this new round of budget negotiations. But Senate Minority Leader Mitch McConnell, R-Ky., made clear on the Senate floor yesterday that he is not interested in such an idea.
“I’m also confident that we’ll be able to announce that we’re protecting the government spending reductions that both parties agreed to under the Budget Control Act, and that the president signed into law. That’s been a top priority for me and my Republican colleagues throughout this debate. And it’s been worth the effort,” McConnell said. “Some have suggested that we break that promise as part of the agreement. … But what the BCA showed is that Washington can cut spending. … And we’re not going back on this agreement.” Rep. Jim Jordan, R-Ohio, called sequestration, “one of the good things that has happened” and “an important thing that we have achieved.” Rep. Kevin Brady, R-Texas, even threatened another debt ceiling standoff in the new year should Democrats try to undo the sequester.
But when the sequester first went into effect, Republicans did everything they could to blame it on Obama. They even tried to call it the “Obamaquester.” In fact, here’s what McConnell had to say about the sequester back in February: “Take the Obama sequester as just one example. The president had a chance last night to offer a thoughtful alternative to his sequester, one that could reduce spending in a smarter way. That is what Republicans have been calling for all along.”
So in just eight short months, those spending cuts went from “the Obama sequester” to a “top priority” for the GOP. How the times change.
During his floor speech, McConnell also excoriated Obamacare for “killing jobs.” Not only is that false, but if McConnell wants to see a real job killer, he needs to look no further than his precious sequester spending levels. As I noted last week, the sequester has not only been gutting important programs, but is slowly strangling economic growth. According to the Congressional Budget Office, the spending levels under the sequester will cost up to 1.6 million jobs through fiscal year 2014.
Of course, the GOP to this point has been impervious to the mountain of evidence showing that cutting spending in a weak economy just makes for a weaker economy. So perhaps it’s best that McConnell and co. are just owning up to the fact that the sequester is something they desire and admire. It’s a love story for the ages: the sequester, once spurned, is now the one thing Republicans want to ensure will be staying around forever.
By: Pat Garofalo, U. S. News and World Report, October 17, 2013
“The Engine Of American Inequality”: The Consequences Of A Free Wheeling, Unchecked Financial Industry
The past three decades have been a period of explosive growth for Wall Street and the financial industry. Meanwhile, a tiny slice of the population has claimed an ever-bigger share of this country’s economic rewards. The highest-earning one percent of Americans collected roughly 20 percent of total income last year; the top .01 percent – not enough people to fill a football stadium – had 5.5 percent of the income.
Could there be a connection here? Could our booming financial sector, which now generates an astonishing 30 percent of all corporate profits (more than double the figure of thirty years ago), help explain America’s rapid ascent to the highest level of economic inequality since the eve of the Great Depression, and the highest of any of the world’s rich nations? A growing number of economists and other authorities think the first trend may have more than a little something to do with the second.
The economic and political establishments long ago settled on a theory of rising inequality: technology and globalization, they told us, were carving a rift through the American labor force between those with and without the right kind of education and know-how. This idea was criticized from the start for ignoring a formidable corporate campaign to rewrite the rules of the U.S. economy at workers’ expense, and over time it has increasingly failed to account for the reality of who is getting ahead and who is falling behind.
In his 1991 book “The Work of Nations,” former (then future) Labor Secretary Robert Reich embraced a version of the “skills-gap” story. But in his recent film “Inequality for All,” Reich has more to say about discrepancies of power than of skill.
The longer this trend continues, in fact, the more it resembles the Occupy Movement’s picture of a soaring 1 percent and a lagging 99 percent. Out of every dollar of income growth between 1976 and 2007, the richest one percent of U.S. households collected 58 cents; and after taking a big hit in the financial crisis, they were soon back on track, capturing an extraordinary 95 percent of all the income gains between 2009 and 2012. To put it more plainly, since the beginning of the current economic “recovery,” the top 1 percent (who make upwards of $400,000 a year in household income) are pretty much the only ones who have recovered.
Within that small subset of Americans, executives, traders, fund managers and others associated with the financial sector loom large, comprising about a seventh of the one-percenters and accounting for about one fourth of their income gains over the past thirty-plus years. That’s not counting the many lawyers and consultants with financial sector clientele, or the growing number of executives of nonfinancial companies who seem to make most of their money these days through stock options and short-term financial plays. Together, corporate executives and financial sector employees account for well over half the post-1980 income growth of the top 1 percent and more than two-thirds of the even more remarkable gains of the top 0.1 percent.
Pinpointing the causes of an economic trend is a hard business. But there is global as well as historical evidence for a link between financial sector expansion and rising inequality. Studies of rich and relatively poor nations alike suggest that inequality goes up when societies tie their fortunes to a free-wheeling financial industry and the easy flow of global capital. There is also substantial research to suggest that much of the financial sector’s recent growth has come by extracting wealth from other areas of the economy, not by spurring innovation and opportunity for the society at large.
Several recent studies trace the industry’s pay-and-profit surge mostly to its success in the political and regulatory arenas. See, for example, this paper by Thomas Philippon and Ariell Reshef of New York University and the University of Virginia, who attribute between 30 and 50 percent of the financial sector’s recent gains to economic “rents.” That’s basically a polite way of describing the ability of many of today’s financial heavyweights to use their market clout, their inside knowledge and various explicit and implicit taxpayer subsidies to make money out of thin air.
Banking and finance were not always a road to fabulous riches in this country. As recently as the early 1980s – and throughout much of the 20th century – there was almost no pay differential between financial and non-financial professionals. Today, by contrast, financial workers make about 1.83 times as much as other white-collar workers. You’d have to go back to the Roaring Twenties, at the tail end of America’s original Gilded Age, to find another period when financial sector incomes and profits reached such conspicuous heights. That should tell us something.
In any case, these are pivotal questions for the country – and unavoidable questions for those seeking a path toward what President Obama has been calling a “middle-out” rather than a top-down economy. Broad prosperity, the president says, calls for greater public investment in education, infrastructure and other long-term needs, and for higher taxes on the wealthy to help pay for such things. That may be a worthy agenda. It has certainly proved to be a politically difficult agenda. But in a country that has let its financial sector become an engine of inequality, more will be required.
If we believe in our founding ideal of America as a land where children should start off on roughly the same footing regardless of history or ancestry, we will all have to screw up our courage and refocus on (among other challenges) the unfinished work of making sure we have a financial economy that serves the real economy, not the other way around.
By: Jim Lardner, U. S. News and World Report, October 11, 2013
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