“The Fiscal Fizzle”: An Imaginary Budget And Debt Crisis
For much of the past five years readers of the political and economic news were left in little doubt that budget deficits and rising debt were the most important issue facing America. Serious people constantly issued dire warnings that the United States risked turning into another Greece any day now. President Obama appointed a special, bipartisan commission to propose solutions to the alleged fiscal crisis, and spent much of his first term trying to negotiate a Grand Bargain on the budget with Republicans.
That bargain never happened, because Republicans refused to consider any deal that raised taxes. Nonetheless, debt and deficits have faded from the news. And there’s a good reason for that disappearing act: The whole thing turns out to have been a false alarm.
I’m not sure whether most readers realize just how thoroughly the great fiscal panic has fizzled — and the deficit scolds are, of course, still scolding. They’re even trying to spin the latest long-term projections from the Congressional Budget Office — which are distinctly non-alarming — as somehow a confirmation of their earlier scare tactics. So this seems like a good time to offer an update on the debt disaster that wasn’t.
About those projections: The budget office predicts that this year’s federal deficit will be just 2.8 percent of G.D.P., down from 9.8 percent in 2009. It’s true that the fact that we’re still running a deficit means federal debt in dollar terms continues to grow — but the economy is growing too, so the budget office expects the crucial ratio of debt to G.D.P. to remain more or less flat for the next decade.
Things are expected to deteriorate after that, mainly because of the impact of an aging population on Medicare and Social Security. But there has been a dramatic slowdown in the growth of health care costs, which used to play a big role in frightening budget scenarios. As a result, despite aging, debt in 2039 — a quarter-century from now! — is projected to be no higher, as a percentage of G.D.P., than the debt America had at the end of World War II, or that Britain had for much of the 20th century. Oh, and the budget office now expects interest rates to remain fairly low, not much higher than the economy’s rate of growth. This in turn weakens, indeed almost eliminates, the risk of a debt spiral, in which the cost of servicing debt drives debt even higher.
Still, rising debt isn’t good. So what would it take to avoid any rise in the debt ratio? Surprisingly little. The budget office estimates that stabilizing the ratio of debt to G.D.P. at its current level would require spending cuts and/or tax hikes of 1.2 percent of G.D.P. if we started now, or 1.5 percent of G.D.P. if we waited until 2020. Politically, that would be hard given total Republican opposition to anything a Democratic president might propose, but in economic terms it would be no big deal, and wouldn’t require any fundamental change in our major social programs.
In short, the debt apocalypse has been called off.
Wait — what about the risk of a crisis of confidence? There have been many warnings that such a crisis was imminent, some of them coupled with surprisingly frank admissions of disappointment that it hadn’t happened yet. For example, Alan Greenspan warned of the “Greece analogy,” and declared that it was “regrettable” that U.S. interest rates and inflation hadn’t yet soared.
But that was more than four years ago, and both inflation and interest rates remain low. Maybe the United States, which among other things borrows in its own currency and therefore can’t run out of cash, isn’t much like Greece after all.
In fact, even within Europe the severity of the debt crisis diminished rapidly once the European Central Bank began doing its job, making it clear that it would do “whatever it takes” to avoid cash crises in nations that have given up their own currencies and adopted the euro. Did you know that Italy, which remains deep in debt and suffers much more from the burden of an aging population than we do, can now borrow long term at an interest rate of only 2.78 percent? Did you know that France, which is the subject of constant negative reporting, pays only 1.57 percent?
So we don’t have a debt crisis, and never did. Why did everyone important seem to think otherwise?
To be fair, there has been some real good news about the long-run fiscal prospect, mainly from health care. But it’s hard to escape the sense that debt panic was promoted because it served a political purpose — that many people were pushing the notion of a debt crisis as a way to attack Social Security and Medicare. And they did immense damage along the way, diverting the nation’s attention from its real problems — crippling unemployment, deteriorating infrastructure and more — for years on end.
By: Paul Krugman, Op-Ed Columnist, The New York Times, Julo 20, 2014
“Charlatans, Cranks And Kansas”: The Real Lesson From Kansas Is The Enduring Power Of Bad Ideas
Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Sam Brownback, the governor, proposed the legislation — in percentage terms, the largest tax cut in one year any state has ever enacted — in close consultation with the economist Arthur Laffer. And Mr. Brownback predicted that the cuts would jump-start an economic boom — “Look out, Texas,” he proclaimed.
But Kansas isn’t booming — in fact, its economy is lagging both neighboring states and America as a whole. Meanwhile, the state’s budget has plunged deep into deficit, provoking a Moody’s downgrade of its debt.
There’s an important lesson here — but it’s not what you think. Yes, the Kansas debacle shows that tax cuts don’t have magical powers, but we already knew that. The real lesson from Kansas is the enduring power of bad ideas, as long as those ideas serve the interests of the right people.
Why, after all, should anyone believe at this late date in supply-side economics, which claims that tax cuts boost the economy so much that they largely if not entirely pay for themselves? The doctrine crashed and burned two decades ago, when just about everyone on the right — after claiming, speciously, that the economy’s performance under Ronald Reagan validated their doctrine — went on to predict that Bill Clinton’s tax hike on the wealthy would cause a recession if not an outright depression. What actually happened was a spectacular economic expansion.
Nor is it just liberals who have long considered supply-side economics and those promoting it to have been discredited by experience. In 1998, in the first edition of his best-selling economics textbook, Harvard’s N. Gregory Mankiw — very much a Republican, and later chairman of George W. Bush’s Council of Economic Advisers — famously wrote about the damage done by “charlatans and cranks.” In particular, he highlighted the role of “a small group of economists” who “advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue.” Chief among that “small group” was none other than Art Laffer.
And it’s not as if supply-siders later redeemed themselves. On the contrary, they’ve been as ludicrously wrong in recent years as they were in the 1990s. For example, five years have passed since Mr. Laffer warned Americans that “we can expect rapidly rising prices and much, much higher interest rates over the next four or five years.” Just about everyone in his camp agreed. But what we got instead was low inflation and record-low interest rates.
So how did the charlatans and cranks end up dictating policy in Kansas, and to a more limited extent in other states? Follow the money.
For the Brownback tax cuts didn’t emerge out of thin air. They closely followed a blueprint laid out by the American Legislative Exchange Council, or ALEC, which has also supported a series of economic studies purporting to show that tax cuts for corporations and the wealthy will promote rapid economic growth. The studies are embarrassingly bad, and the council’s Board of Scholars — which includes both Mr. Laffer and Stephen Moore of the Heritage Foundation — doesn’t exactly shout credibility. But it’s good enough for antigovernment work.
And what is ALEC? It’s a secretive group, financed by major corporations, that drafts model legislation for conservative state-level politicians. Ed Pilkington of The Guardian, who acquired a number of leaked ALEC documents, describes it as “almost a dating service between politicians at the state level, local elected politicians, and many of America’s biggest companies.” And most of ALEC’s efforts are directed, not surprisingly, at privatization, deregulation, and tax cuts for corporations and the wealthy.
And I do mean for the wealthy. While ALEC supports big income-tax cuts, it calls for increases in the sales tax — which fall most heavily on lower-income households — and reductions in tax-based support for working households. So its agenda involves cutting taxes at the top while actually increasing taxes at the bottom, as well as cutting social services.
But how can you justify enriching the already wealthy while making life harder for those struggling to get by? The answer is, you need an economic theory claiming that such a policy is the key to prosperity for all. So supply-side economics fills a need backed by lots of money, and the fact that it keeps failing doesn’t matter.
And the Kansas debacle won’t matter either. Oh, it will briefly give states considering similar policies pause. But the effect won’t last long, because faith in tax-cut magic isn’t about evidence; it’s about finding reasons to give powerful interests what they want.
By: Paul Krugman, Op-Ed Columnist, The New York Times, June 30, 2014
“More Conservative Demonology”: Countering The Minimum Wage With More Help For “Lucky Duckies”
One of the key contributors and promoters of the “reform conservative” cause (and the new “manifesto” Room to Grow), Ramesh Ponnuru, has a Bloomberg View column making the fairly obvious suggestion about how Republicans might respond to the drive for a higher minimum wage:
One way to do so is to support expanding the earned income tax credit, an earnings subsidy that targets poor households much better than the minimum wage does and poses no threat of destroying jobs. That credit may not be as easily understood as the minimum wage, but it would give Republicans a way to show that they want to help the poor — and that their stated objections to raising the minimum wage are sincere.
He might have added that the EITC used to be a very popular initiative among conservatives, from Ronald Reagan to George W. Bush.
But not any more, as both Jonathan Chait and Ezra Klein quickly pointed out. Here’s Ezra’s brisk summary of the Republican revolt against the EITC:
The most recent Republican budget lets a stimulus-era boost in the EITC to expire and, on top of that, includes huge cuts to the part of the budget (the “income security budget function,” for wonks) that houses the EITC.
But it’s worse than that: the EITC has been largely responsible for eliminating federal income tax liability among low-income Americans. And that has become a deep source of grievance, and even of conspiracy theories, among conservatives at both the elite and grassroots level. The classic slam at the EITC was articulated by the Wall Street Journal editorial board, which got into the habit of referring to poor people who didn’t owe federal income tax as “lucky duckies.” This in turn became integral to the popular conservative theory that people who didn’t pay income taxes didn’t bear the cost of governing (an argument, of course, that ignored all the other kinds of taxes the poor pay, often at regressive rates), and thus represented looters who voted themselves more and more of other people’s money.
I personally became convinced this had become an important part of conservative demonology when watching Rick Perry make his statement of presidential candidacy in 2011, at a RedState gathering in South Carolina. In the midst of an extended tirade about the need for lower taxes, Perry suddenly blasted “the injustice that nearly half of all Americans don’t even pay any income tax.” The crowd responded with what I described at the time as a “feral roar.” So it wasn’t surprising a year or so later when Mitt Romney got caught buying into the same idea in his “47 percent” comments, about “people who pay no income tax” but nonetheless receive federal benefits.
Even if they didn’t rely on EITC cuts to pay for upper-end tax cuts in their budget schemes, Republicans seem to have developed a moral aversion to the EITC that’s more important to them than finding a sensible alternative to minimum wage increases. So Ponnuru is almost certainly barking up the wrong tree.
By: Ed Kilgore, Contributing Writer, Washington Monthly Political Animal, May 23, 2014
“His Policies Speak For Themselves”: Rand Paul Can Try To Be His Party’s Bill Clinton, But He’ll Never Be President
Rand Paul continues to fling any turd he can find at the Clintons for pretty obvious reasons.
The first-term senator from Kentucky has to do something to show the GOP establishment he can be competitive in a general election, and he’s trying to keep the former president out of his home state’s Senate race so that Rand didn’t sell out to Mitch McConnell for nothing.
There’s no doubt that the younger Paul is a savvy tactician. The proof of this is that he’s ironically trying to follow Bill Clinton’s path to the presidency by staking out a series of “Sister Soulja moment“-like strategic breaks from his party.
Last week, he noted that the GOP’s repulsive attempts to stop minorities from voting are “offending” people. Paul was the first Republican to call out Ted Nugent’s “sub-human mongrel” slurs against President Obama. And he’s built lots of credibility with civil libertarians on the right and left by focusing on “drones,” which has become a code word for “civilian casualties,” which happen to be down under this president, along with military casualties and wars.
Though Paul’s own drone stance is complicated by the fact he thinks it’s cool for a drone to take out an American suspected of robbing a liquor store, his non-interventionist tendencies and willingness to negotiate with Iran do all Americans a favor, providing a hedge against the far right’s recent destructive tendencies toward war.
These anti-war stands will also lead to a deluge of attacks funded by hundreds of millions of dollars should he become competitive in the 2016 Republican primary, which has been designed to give Jeb Bush the nomination, should Jeb want it.
However, these stands are not why Paul will never be president. America is as nearly non-interventionist as he is these days. His Aqua-Buddha past and support for ending some of the drug war have seeped into the mainstream, too. Rand probably can even get away with a dad whose “institute” publishes the work of 9/11 truthers.
What voters won’t tolerate are Rand Paul’s key actual policies:
- He released a budget that calls for the immediate privatization of Medicare and Social Security along with raising the retirement age;
- He favors a flat tax, which would cut taxes for millionaires and raise them on the middle class;
- He supports personhood, which would ban all abortions and some forms of birth control, a stand so unpopular it was even defeated in Mississippi.
Bill Clinton’s strategy was to make the Democratic Party appear more moderate. Rand Paul gets that rhetorically, perhaps.
But single women aren’t going to elect a president who would appoint Supreme Court justices who believe a fertilized egg has 14th Amendment rights. The middle class and seniors aren’t going to trade the Medicare promise for more tax breaks for millionaires. One decent comment on voter ID isn’t going to erase Paul’s opposition to immigration reform — just as one trip to Detroit won’t make him an “inner city” hero.
The usual caveats apply. The economy could go bust or we could find out that #Benghazi is worse than Iraq, 9/11, Watergate, Iran/Contra, Donald Sterling and Cliven Bundy combined.
But Democrats have a natural advantage in 2016, and Rand Paul would take that advantage and put it on steroids.
UPDATE: In a statement to Slate‘s Dave Weigel, Rand Paul’s Super PAC director backed off the senator’s criticisms of voter ID laws: “At no point did Senator Paul come out against voter ID laws. In terms of the specifics of voter ID laws, Senator Paul believes it’s up to each state to decide that type of issue.”
By: Jason Sattler, The National Memo, May 13, 2014
“Obama’s Transformational Presidency”: He Should Be In The “All-Time-All-World Politics Hall Of Fame”
Is it safe to say that Barack Obama’s presidency will be remembered as the most consequential since Ronald Reagan’s — a presidency that “changed the trajectory of America” and “put us on a fundamentally different path”?
That was the audacious goal Obama set for himself during his 2008 campaign. Now is a useful time to assess his progress because the sixth year of any president’s tenure tends to be seen as a low point. Familiarity breeds impatience and frustration — among commentators, at least, whose narrow focus on which party is perceived as “winning” the day or the week misses the bigger picture.
In both the domestic and foreign spheres, Obama has had transformational impact. And there is more to come.
Reagan’s great achievement at home was to shift the political spectrum to the right. People tend to forget how radical his ideas once seemed. Tax cuts and massive deregulation were somehow going to produce more revenue? Wealth would inevitably trickle down and benefit the middle class and even the poor? It was not a Democrat but a fellow Republican, George H.W. Bush, who mocked the whole concept as “voodoo economics.”
That’s what I’d still call Reagan’s program, but he altered the political debate to such an extent that what once were fringe ideas came to be seen as centrist. By the time Obama took office, the combination of Reaganite policies — taken to extremes the Gipper might never have contemplated — and globalization had produced a nation where the rich were becoming obscenely rich and everyone else was struggling to tread water.
Obama’s impact has been to bring the words “fairness” and “equality” back into the political lexicon.
His biggest legislative accomplishment, the Affordable Care Act, is a landmark because it establishes the principle that health care should be considered a right, not a privilege. Democrats such as Harry Truman — and Republicans such as Richard Nixon — sought for decades to move the nation toward universal care. The fact that Obama succeeded where others failed is, in itself, a huge achievement.
Perhaps as important, however, is the fact that while Republicans still claim they want to repeal Obamacare, the debate within the party centers on how best to expand health insurance coverage. Returning to the way things were before the ACA is not an option.
Health care is part of a larger suite of issues on which Obama has swung the pendulum back to the left. He made the case, for example, that more regulation of the financial sector was needed. Republicans were forced to give way. The president has been hammering away in speeches about the need for an increase in the minimum wage. Republicans haven’t caved on this yet, but in the end they almost surely will because of widespread public support for it.
Whether Democrats lose the Senate or not, Obama will have a tough time getting significant legislation passed in his final two years. Please don’t tell me he simply needs to be a better politician, like Bill Clinton. Obama ran rings around both Clintons in 2008. A black man with the middle name Hussein who gets elected president twice should be in the all-time-all-world Politics Hall of Fame.
But he can still have transformational impact. Working through the Environmental Protection Agency, Obama can take major steps to limit carbon emissions. I don’t know whether he’ll go as far as I believe he should, but whatever he does will be, by definition, a big deal.
In foreign policy, Reagan applied pressure to the weak points of the Soviet empire and helped break it apart. Obama has taken on an equally big and important task: redefining the U.S. role in a vastly changed world.
Obama is not the first president to endorse multilateralism, but he may be the first to mean it. He agreed to use force in Libya only after France and Britain nominally took the lead. He has kept the NATO allies together in cautiously dealing with the Ukraine crisis. He has refused to be drawn into Syria because he is unsure whether intervention would make the situation better or worse.
The president realizes that even the most powerful nation on earth cannot mediate every dispute, take sides in all wars, alleviate all suffering. He acknowledges our limitations and more narrowly defines our national interest. The public approves, even if some foreign policy sages are apoplectic.
Obama can be reserved and introspective. Usually, however, I find him energized, confident, determined — and fully aware that he is shifting the ground.
By: Eugene Robinson, Opinion Writer, The Washington Post, May 8, 2014
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