Tag Archives: economy

What if there’s no spending problem?

February 25, 2013 – 10:56 am

Conservative blogs often post a graph more-or-less like the one below, which I got from the blog of Keith Hennessy, who is currently at the Stanford Business School and used to be Director of the National Economic Council under George W. Bush. (So: not somebody I usually agree with, but probably not a dummy either.) He claims that the numbers were computed for him by Bush’s Office of Management and Budget in 2007. (So: probably not a fabrication.)

It looks bad. Taxes as a percentage of GDP have stayed in a relatively narrow band since World War II, only occasionally peaking over 20%. But starting in about 2016, spending as a percentage of GDP starts to take off, reaching the incredible level of 40% by 2080 with no end in sight.

The typical liberal response to this, which I have given myself, is not that graphs like this are wrong, but that they hide the real problem: Government spending goes out of control because healthcare costs go out of control. But just capping what the government spends on Medicare and Medicaid (i.e., the Ryan plan) doesn’t fix anything. If healthcare costs are unsustainable, then what does it matter whether we’re paying those costs through government, through private insurance, or out of our pockets? Personally, it’s all the same to me whether I go broke paying taxes, paying health insurance premiums, or paying my doctor.

So a liberal would rather imitate the countries who already get better healthcare for less money than we do and increase the government’s role, ideally with a single-payer system.

Summing up: Liberals and conservatives agree that we have a long-term problem, but they argue about what kind of problem: a government spending problem or a healthcare cost problem.

Recently I ran into a potentially game-changing question: What if there is no problem? In other words, instead of being trapped in the dismal liberal/conservative argument about which apocalypse we’re headed towards, what if we’re actually not headed towards an apocalypse at all?

“That’s crazy!” That was my first reaction too. I mean, look at that graph. But the guy making the claim (William Baumol in the recent book The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t) has a track record that earns him a hearing.

Baumol is an economist who is most famous for identifying Baumol’s Cost Disease in the 1960s. His observation is that although the economy as a whole becomes more productive with the advance of technology, not all sectors progress equally, and some don’t improve their productivity at all. For example, a 21st-century farmer feeds far more people than a 19th-century farmer. Likewise, a worker at a modern shoe factory makes more shoes than a 19th-century cobbler. But it still takes four talented musicians to perform a Beethoven string quartet, and they don’t do it any faster than they did in Beethoven’s day. String quartets have not seen a productivity increase.

The economic consensus of the 1960s said that wages were tied to productivity. If that were true, then classical musicians would have seen their incomes crash relative to farmers and shoemakers, who would by now be vastly wealthier than the lowly performers of the New York Philharmonic or the Boston Pops.

In fact that didn’t happen, because in the long run the labor market has a supply side as well as a demand side, the result being that every profession has to pay enough to induce talented people to make whatever sacrifices are necessary to enter that profession. But something has to give somewhere, so we see the productivity difference as inflation: The price of a New York Philharmonic ticket is going to rise much faster than the cost of a loaf of bread or a pair of shoes.

So Baumol’s observation is that industries with a large component of personal service are not going to increase their productivity as fast as the rest of the economy, and as a result those industries are going to see higher inflation than the economy as a whole. Year-by-year those higher inflation rates might just be a nuisance, but over time exponential growth works its dark magic: If two products each cost $1 today, but one is subject to a 2% inflation rate and the other 10%, in 100 years the low-inflation product costs $7.25 and the high-inflation product costs $13,781.

Health care. Health care has a high component of personal service. It does not have high productivity growth.

Now this part gets a little tricky, because we all know how much medical technology has improved over the decades. But the improvement is almost entirely on the outcome side rather than the productivity side. Adrian Peterson could tear up his knee and be better than ever the next season, where half a century before Gale Sayers was never the same. But the amount of attention patients need from doctors and nurses has not gone down. Health professionals are doing better for their patients, but they are not processing more of them faster.

And most of us wouldn’t want them to. If you heard that one local hospital had one nurse for every five patients and another “more productive” hospital had one nurse for every 50, which would you choose for your surgery? If one doctor sees 30 patients in an hour of clinic time and another doctor only six, which would you pick as your PCP?

So back in the 1960s, Baumol looked at this situation and concluded that medical inflation was here to stay. Not because doctors are greedy or health insurance companies are evil or socialized medicine is inefficient, but just from the nature of health care. While other factors undoubtedly matter, the exponential growth would happen anyway.

This is borne out by the inability of any country to tame medical inflation. France, for example, is often held up as a model healthcare system. But its costs are also rising exponentially.

Government spending. And it isn’t just health care. Government services in general tend to be in what Baumol calls “the stagnant sector” — not due to bureaucratic waste or the power of public-sector unions, but because the services themselves require one-on-one attention.

In education, we call productivity by another name: students per teacher. But nobody wants his third-grader in a 150-student lecture hall. Everybody’s happy when an hour of labor builds more cars or mines more copper. But it’s not necessarily a good thing if social workers, public defenders, parole officers, or cops on the beat handle more cases faster.

So Baumol predicts that over time government spending will rise as a percentage of the economy.

But we can afford it. So far this is just a different spin on Hennessy’s graph. But here’s the difference: In Baumol’s model, government spending isn’t crowding out everything else. As a society, we aren’t doing without manufactured goods because health care is soaking up all our money; we’re just using less of our labor to produce the manufactured goods we want.

Despite their ever increasing costs, stagnant-sector services will never become unaffordable to society. This is because the economy’s constantly growing productivity simultaneously increases the community’s overall purchasing power. … If governments cannot be led to understand the ideas presented here, then their citizens may be denied vital health, education, and other benefits because they appear to be unaffordable, when in fact they are not.

In other words, even though orchestra tickets cost more now than in the 1800s, it’s ridiculous to claim that past societies could afford orchestras and our far richer society can’t.

Think about food. America’s Farmers estimates that an American farmer today feeds 155 people. By contrast, in colonial times a farm family barely did more than feed itself. Imagine going back to colonial times and telling people that by 2013 the non-farm part of the economy would grow so much that it would force a single farmer to feed 155 people! They would undoubtedly picture some cancerous expansion in the non-farm economy that could only be checked by mass starvation.

But that’s not what happened. The non-farm economy came to dominate GDP, but we’re not starving. That 1 farmer is providing his 155 eaters with too many calories, not too few.

This conclusion — that our descendants will likely be able to afford more health care and education as well as more of all the other goods and services they consume — may seem strikingly implausible … if health-care costs continue to increase by the rate they have in the recent past, they will rise from 15 percent of the average person’s total income in 2005 to 62 percent by 2105. This is surely mind-boggling. It means that our great-grandchildren in the year 2105 will have only a little less than forty cents out of every dollar they earn or otherwise receive to spend on everything  besides health care — food, clothing, vacations, entertainment, and even education! Yet as this book will show, this prospect is not nearly as bad as it sounds.

There are many possible objections to Baumol’s argument. (I wonder how it’s affected by the way that wages in general have come unstuck from productivity.) But here’s the message that I take from his book: When someone presents a graph like Hennessy’s and acts like the conclusion is obvious — say, that government spending can’t reach 40% of GDP by 2080, and so some catastrophe will have to intervene before that point — don’t buy it without a more compelling explanation.

The economy of 2080 or 2105 will be different from today’s in many, many ways. Maybe current trends will persist until then or maybe they won’t. But you can’t conclude anything from the mere fact that some statistic from the far future looks implausible.

The far future is going to look implausible to us, if we manage to survive long enough to see it. That’s the one prediction I have complete confidence in.

By weeklysift | Posted in Articles | Also tagged | Comments (5)

The Trillion-Dollar Coin Hits the Big Time

January 14, 2013 – 8:01 am

The notion that President Obama could avoid the debt ceiling by minting a trillion-dollar platinum coin and depositing it in the government’s account at the Federal Reserve has been around for a while now. (I first noticed it in July, 2011.) It sounds ridiculous because it is. (Even people who favor the idea understand that.) It’s a wacky solution that underlines just how wacky the whole debt-ceiling problem is in the first place.

Think about the situation President Obama will find himself in (by about mid-February) if the debt ceiling isn’t raised: Laws passed by Congress tell the President what taxes he can collect, what money he must spend, and that (even though these numbers don’t balance) he can’t borrow. Meanwhile, the Constitution tells him that his first duty is to “faithfully execute the laws”.

What’s he supposed to do? Several people, including Matt Yglesias, claim that the Budget and Impoundment Act of 1974* leaves the administration with no legal choices other than something off-the-wall like a trillion-dollar coin.

During the 2011 debt-ceiling crisis, the Very Serious Persons of the punditocracy did not stoop to comment on the trillion-dollar coin. Instead, they just refused to believe that our politics had gotten that dysfunctional. Congress might appear to be steaming headlong towards welching on all our nation’s commitments, but at the last minute wisdom would prevail. And lo: Congress temporized, giving a Super Committee of the Wise time to design an austerity plan.

Well, that worked out just dandy, didn’t it? The Super Committee deadlocked in the same place Obama and Boehner had: Republicans would not raise rich people’s taxes by a single dime, and Democrats refused to thrust all the sacrifice onto the old, the sick, and the poor. That deadlock set up the fiscal-cliff conflict that Congress again avoided at the last minute, but didn’t resolve. Now we’re looking at a second debt-ceiling showdown.

I think that sequence of events has been an eye-opener for the VSPs: Seriously? You want to do that again? [Yes, they do.]

Suddenly, the trillion-dollar coin doesn’t look so crazy. Well, it is still crazy. But picking a path into the fiscal future is starting to feel like picking a Bull Goose Loony at the asylum. Tom the Dancing Bug provides the proper level of seriousness:

So this week the trillion-dollar coin suddenly went from a fringy absurdity to a policy option that every VSP needs to have an opinion on. The WaPo asked financial types how the markets would react. Wednesday, NBC’s Chuck Todd asked about it at a White House press briefing, and Jay Carney dodged. “I would refer you to the Treasury.” Saturday, the Treasury issued an official denial.

Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.

But a lot of other VSPs regard it as a viable option. Paul Krugman was one of the few to comment during the 2011 debt-ceiling crisis: “Outrageous behavior demands extraordinary responses.” He came back to it this week, characterizing Obama’s options as:

one [the coin] that’s silly but benign, the other [default] that’s equally silly but both vile and disastrous. The decision should be obvious.

Thursday he added: “we need a strategy to deal with the crazies if they really do prove irredeemably crazy, which seems all too possible.”

Former CBO director Donald Marron more-or-less agrees: The coin option “lacks dignity”, but “might be better than the alternatives if we reach the brink of default”. Former Director of the Mint Philip Diehl says minting the coin would work and have no obvious bad effects on the economy. As a co-author of the law it takes advantage of, he writes:

Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess.

And Atlantic’s Matthew O’Brien adds:

If it’s a choice between defaulting on our obligations, and minting a trillion-dollar coin, I say mint the coin. In an ideal world, Obama would end the platinum coin loophole in return for the House GOP forever ending the debt ceiling, as Josh Barro proposed, but I’ll settle for anything that involves us paying our bills as we promised.

So far, most conservatives still refuse to take this idea seriously. But they want the rest of us to take their don’t-raise-the-debt-ceiling threat seriously, and threaten impeachment if Obama somehow circumvents it.

Continuing to stake their claim as the Party of Stupid, Republicans at the NRCC tweeted an image** of a coin made out of a trillion dollars worth of platinum — as if that’s how coinage works. And the Network of Stupid made the same mistake even after the NRCC had been widely lampooned.

But liberals have an objection also, which Ezra Klein expressed like this:

The platinum coin is an attempt to delay a reckoning that we unfortunately need to have. It takes a debate that will properly focus on the GOP’s reckless threat to force the United States into default and refocuses it on a seemingly absurd power grab by the executive branch.

The right way for this crisis to end, Klein believes, is for the remaining grown-ups in the Republican Party (i.e., the business community) to take back control in order to save the day. That will start a civil war inside the party, so they will only do it if they have no choice; if they think Obama can still pull a day-saving gimmick out of his hat — especially one that could make him vulnerable politically — they won’t.

That’s why wannabe Republican grown-up Philip Klein (no relation) says minting the coin “would be tossing a life preserver to Republicans”.

Obama apparently agrees. That’s why he’s steadfastly refusing to take the burden off Congress by embracing any executive-branch gimmicks. He thinks Congress should pass a clean debt-ceiling bill. If House Republicans want to tie the ceiling increase to unpopular spending cuts, they can spell out what those cuts are. He isn’t going to give them any political cover.

[I’ve explained the politics of this many times: The American people have only very hazy notions of how the government spends money. So “spending” in general is unpopular, but the particular things the government actually spends on — Medicare, Social Security, defense — are very popular. Republicans want to take advantage of this by opposing “spending” but getting Obama to specify which programs to cut.]

Here’s how I put all that together: The coin would be a last resort, and while Obama should hold it in mind to buck up his resolve, the administration is right to deny that they are open to it — until the public understands that we are in last-resort territory and clamors for any kind of solution.

“Last resort” means: The Republicans have blocked a clean bill raising the debt ceiling. The Treasury has run out of books it can juggle to keep paying the bills. The government has shut down all but the most essential services, furloughed its workers, and the public has felt the first pinches: Retirees find that there is no one to process their Social Security applications. Income tax refunds are delayed indefinitely. Defense contractors are filing lawsuits to get paid. And there’s a big interest payment due on the national debt that there may not be money to cover***. The stock market is crashing. Wall Street is begging its bought-and-paid-for congressmen to do something. But still the House majority refuses to raise the debt limit.

Then — and only then — does Obama go on TV, explain the coin loophole to the public, say he has reconsidered his decision not to use it, and promise to trade away that ridiculous power forever if Congress also eliminates the ridiculous debt ceiling.

If that scenario plays out, America will be a laughing stock to the rest of the world. But we will have taken a pratfall, not tumbled into an abyss.

*After President Nixon “impounded” money Congress appropriated to buy stuff he didn’t like, Congress passed a law demanding that future presidents spend whatever Congress appropriates.

**Their image contains a false frame I can’t let pass: It’s not “Obama’s spending”, it’s the spending of the United States of America, duly authorized and appropriated according the Constitution.

***As Josh Barro points out: It isn’t just that incoming revenue covers only 60% of expenditures over the course of a year. Both revenue and expenses are “lumpy”.

It would be impossible to give certainty to people and entities owed money by the federal government about when and whether they would be paid; they would have to wait and see how much money the government could come up with on any given day.

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Avoid the cliff, hit the ceiling

January 7, 2013 – 10:30 am

I admit it: I expected House Republicans to reject the last-minute Biden/McConnell deal (that passed the Senate 89-8) and send us over the fiscal cliff.

Instead, they did one of those having-it-both-ways things that makes people despise politicians: Within their own caucus, Republicans voted to let the bill come to the floor, where (led by House Majority Leader Eric Cantor) most of them voted against it. So they knew it was necessary and wanted it to pass, but they also wanted to be able to deny supporting it.

The WP’s Wonkblog summarizes what’s in the deal and charts how it affects the national debt. (Short version: The tax hikes and spending cuts that constituted the fiscal cliff would have cut the annual deficit more, but this is a middling path between that and the status quo.)

The chart on the right has way too much jargon, but it’s showing debt-as-a-percentage-of-GDP over time under various scenarios. The top line is roughly cancel-the-fiscal-cliff-and-let-things-go-on-as-they-were and the bottom is go-over-the-cliff. The red, green, blue, and purple lines are where we’re headed now under various scenarios.

So who won? Nobody yet. This deal solved the question of the Bush tax cuts, but it delayed the spending-cut decisions until March, when they will run up against another debt-ceiling showdown.

Republicans are claiming that the debt ceiling is a better battleground for them, and believe they’ll get the kind of concessions out of Obama that they got in 2011. Obama thinks the public was disgusted with the 2011 shenanigans and won’t stand for the Republicans taking the world economy hostage again. (Until 2011, raising the debt limit was an opportunity to score rhetorical points, but no one ever seriously proposed not doing it or extracted any concessions in exchange for doing it.)

So who won in this deal depends on who is right about their advantages in the next deal. Greg Sargent writes:

the major fight at the heart of this whole mess — over the proper scope and role of the safety net of the 21st century, and who will pay for it — remains unresolved. Only the outcome of that battle can settle the question of whether today’s compromise was a good one for liberals.

And Kos of Daily Kos agrees:

Whatever argument we’re going to have, it shouldn’t be whether this deal is good or bad. It’s over whether Obama will eventually cave or not.

Do it like this, Mr. President

I’d like to see Obama include an Eastwood-like make-my-day paragraph in the State of the Union: “You want to blow up the global economy if you don’t get your way? Go ahead. Show the world what kind of people you really are.”

I think this is a necessary and (eventually) inevitable confrontation. For that reason, I’ve soured on tricks like the trillion-dollar coin to finesse around the debt ceiling. Kevin Drum explains how that trick distorts the intention of the law, and so puts Obama in the position of trying to pull something rather than calling the Republicans on pulling something. I don’t want him to sacrifice his integrity to avoid paying blackmail; that’s just another kind of blackmail payment.

Meanwhile, Republicans are trying to minimize the consequences of not raising the debt limit. Senator Cornyn writes:

The coming deadlines will be the next flashpoints in our ongoing fight to bring fiscal sanity to Washington. It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain. President Obama needs to take note of this reality and put forward a plan to avoid it immediately.

(President Obama, of course, has put forward a plan: Congress should raise the debt ceiling the way it always did until 2011.) And Senator Toomey said:

A temporary disruption because we have to furlough the workers at the Department of Education, or close down some national parks, or not cut the grass on the Mall, that’s not optimal, it’s disruptive, but it’s a hell of a lot better than the path that we’re on.

The problem is temporary and minor only if you assume that Obama quickly folds once he discovers that Republicans are serious. But what if Obama is serious too? The 14th Amendment (section 4) requires that the government keep paying interest on its debt and principle on bonds as they come due. But how long before we have to shut down the National Weather Service or the Center for Disease Control or the TSA?

I’m glad to see I’m not the only one who’s reminded of one particular movie scene. Greg Sargent quotes an email he got from former Solicitor General Walter Dellinger:

The whole thing reminds me of the great moment in “Blazing Saddles” when Sheriff Bart takes himself hostage by pointing a gun at his own head. The simple townsfolk of Rock Ridge were dumb enough to fall for it. Are we?

The Tea Partiers have talked themselves into the idea that this would be the Lesser Apocalypse compared to the spending binge that is about to turn us into Greece. Kevin Drum debunks:

The facts are pretty clear. Spending isn’t our big problem. The recession spike of 2008 aside, it’s about the same as it was 30 years ago. But instead of paying for that spending, we’ve repeatedly cut taxes, which are now at their lowest level in half a century.

You’ll see an early sign of who’s going to win in how the mainstream media identifies the hostage in this crisis. If the hostage is “government” — a separate entity unrelated to the rest of us — then the Tea Party will win. If the hostage is “the country” or “the economy”, then Obama will win.

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What do we know about Romney’s tax and budget plans?

October 8, 2012 – 12:29 pm

The first Obama/Romney debate on Wednesday had a playground quality to it: One contestant would say “You did X”, the other would say “No I didn’t”, and then either Obama would let it drop or Romney would repeat “Yes you did!”. Jim Lehrer refused to play teacher, so it was left to fact-checkers and other pundits to determine the truth afterwards.

On no subject was the truth less obvious than on Romney’s budget plans. President Obama laid it out like this:

Governor Romney’s central economic plan calls for a $5 trillion tax cut — on top of the extension of the Bush tax cuts — that’s another trillion dollars — and $2 trillion in additional military spending that the military hasn’t asked for. That’s $8 trillion. How we pay for that, reduce the deficit, and make the investments that we need to make, without dumping those costs onto middle-class Americans, I think is one of the central questions of this campaign.

And Governor Romney flatly denied it:

I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about. My view is that we ought to provide tax relief to people in the middle class. But I’m not going to reduce the share of taxes paid by high-income people.

Fact-checkers tried to apply their usual categories — true, false, misleading — but often they just added to the confusion. CNN, for example, said Obama’s charge was false, but graded Romney’s denial as “incomplete”, whatever that means.

Here’s what’s going on: The press is afraid of bias accusations, so it hides behind rules of objectivity that have gotten increasingly technical. Campaigns have gotten good at manipulating those rules, so the objective press has a hard time announcing simple judgments. Judgments, then, are left to the partisan voices, who just increase the noise.

The Weekly Sift makes a lesser claim: I’m not objective, I just try to be honest and give you enough links to check my accuracy. So let’s see if some common sense can cut through the confusion.

The $5 trillion tax cut. Mitt Romney has proposed a tax plan, sort of. On his web site, the full plan to “create 12 million new jobs” has four “economic pillars”, one of which is:

Reform The Nation’s Tax Code To Increase Growth And Job Creation.

o Reduce individual marginal income tax rates across-the-board by 20 percent, while keeping current low tax rates on dividends and capital gains. Reduce the corporate income tax rate – the highest in the world – to 25 percent.
o Broaden the tax base to ensure that tax reform is revenue-neutral.

The idea is that people pay a lower tax rate, but that more income gets taxed (“broaden the tax base”), so the government winds up with the same amount of money (“revenue neutral”).

There’s no reason that can’t work in theory, but notice that the marginal-tax-rate cut (the attractive part of the plan) is specified at 20%, while “broaden the tax base” (the unattractive part) is left vague. Elsewhere, Romney promises to eliminate the alternate minimum tax (which falls almost entirely on the wealthy) and the federal estate tax (which only applies to multi-million-dollar estates).

So if you evaluate Romney’s plan by what he has specified — the tax cuts — it’s a $5 trillion tax cut over the next ten years. Now, that’s not entirely fair, because whatever plan he eventually proposes to Congress would also specify the base-broadening part. The rate-cut is part of a “revenue neutral” tax plan in the same way that Cocoa Puffs are “part of this complete breakfast”.

So Romney is technically correct in saying “I don’t have a $5 trillion tax cut.” But let me flesh that out by putting true words in Romney’s mouth: “I don’t have a plan to cut government revenue by $5 trillion. I have a revenue-neutral plan, but the only part of it I’m willing to spell out before the election cuts federal revenue by $5 trillion.”

So he still needs to specify what currently untaxed income will be taxed in order to raise the $5 trillion that his plan needs to fulfill his revenue-neutral pledge.

Growth or funny money? If you read the details on the web site, a big chunk of that previously untaxed income is money that just wouldn’t exist otherwise. Romney’s plan estimates that the economy will grow at a 2.5% rate with the current tax system, but that under his plan (including his similarly vague plan to de-regulate business and other plans he considers growth-inducing) the economy will grow at a 4% rate.

When you compound that over ten years, the difference is huge. Current GDP is around $15 trillion per year. Ten years of 2.5% growth get you to $19 trillion, but ten years of 4% growth get you to $22 trillion, which is almost 16% bigger. So in the tenth year, the 20% rate cut is almost balanced by the growth alone. The extra income you need to broaden the tax base is almost entirely manna that fell from Heaven.

The question is whether you believe any of that. The idea that tax cuts create growth is dogma among conservatives, but recent history doesn’t bear them out. We were promised the cornucopia of growth when Bush cut taxes in 2001 and 2003, but it didn’t arrive. Even with a bubble-based illusion of growth, median household income declined. Atlantic’s Ronald Brownstein reports:

When Bill Clinton left office after 2000, the median income — the income line around which half of households come in above, and half fall below — stood at $52,500 (measured in inflation-adjusted 2008 dollars). When Bush left office after 2008, the median income had fallen to $50,303. That’s a decline of 4.2 per cent. That leaves Bush with the dubious distinction of becoming the only president in recent history to preside over an income decline through two presidential terms, notes Lawrence Mishel, president of the left-leaning Economic Policy Institute.

In the debate, Romney refused any historical comparison. (“My plan is not like anything that’s been tried before.”) But his web site justifies the growth assumptions by looking at the recovery from the 1981-82 recession during the Reagan administration. The problem is that this recession (like the one before it) looks nothing like the 1981-82 recession. The Reagan recession was brought on by the high interest rates (over 20%!) that the Fed imposed to kill off the inflation plague of the 1970s. As the Fed cut rates back to more normal levels, the economy could resume a normal growth pattern, plus make up for lost time.

The last two recessions were set off by popping bubbles: the dot-com bubble of the late 90s and the housing bubble of the Bush years. Recoveries from bubbles are slower, because the previous level was illusory. Let me repeat that: The Obama Recovery is slower than Reagan’s because the level we are trying to recover to was a mirage.

Even if we grant Romney’s 4% growth assumption, the difference in the first year would be small, while the tax-cut hit would be as large as ever. Would the Tea Party types in Congress really accept a budget where the deficit continued to climb for several years while we waited for growth to catch up?

I personally have no confidence in Romney’s growth assumptions. If he’s really going to broaden the tax base, he’s going to have to extend taxes to real income, not imaginary income from the growth fairy.

Deductions. The one real base-broadening idea Romney has floated is to cap deductions. In the debate he said:

But in order for us not to lose revenue, have the government run out of money, I also lower deductions and credits and exemptions, so that we keep taking in the same money when you also account for growth.

One trial balloon suggested that deductions be capped at $17,000, though in the debate Romney refused to be pinned down to any specific number:

what are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people.

That approach has a problem: If you don’t accept Romney’s growth assumption, eliminating all deductions for upper-income people doesn’t replace the $5 trillion in revenue. So he’s forced to break his pledge not to raise taxes on middle-income people — not all middle-income people, but quite a few. When you add up mortgage interest, state and local taxes, medical expenses, and so on, it’s not hard for a household of slightly-above-average income to hit a $17,000 cap, and even easier to hit some much-lower cap that would really raise $5 trillion.

I know because I did my parents’ taxes last year. In 2011, my parents were in “the 47%” of people who paid no federal income tax. My mother died that year, and both parents spent time in nursing homes, so their medical expenses wiped out their $50,000 of income. Under the Romney plan, with a $17K deduction cap, they’d have owed thousands.

So Al Sharpton is right: “This election isn’t about Obama, it’s about your momma.”

Tax fairness. Romney’s pledge not to favor the rich in his tax plan is very carefully worded: “I’m not going to reduce the share of taxes paid by high-income people.”

This echoes a common conservative framing of taxes. Over the last 30 years, the share of the national income that has gone to the very rich has skyrocketed. Under Romney’s policies, it would presumably continue to skyrocket, because of de-regulation, non-enforcement of antitrust laws, and so on. But all he pledges is to keep their share of taxes the same.

Think about it this way: Imagine a two-person economy that makes $10, with $6 going to the richer guy and $4 to the poorer guy. Imagine their government collects $2 in taxes; let’s say $1.50 from the richer guy and 50 cents from the poorer guy, so that their after-tax incomes are $5.50 and $4.50.

Now imagine that inequality increases, so that the rich guy makes $8 and the poor guy $2. But suppose the government keeps their taxes the same: The rich guy still pays $1.50 and the poor guy 50 cents, so that their after-tax incomes are $6.50 and $1.50.

That system would fulfill Romney’s tax-fairness pledge: the rich guy still pays 75% of the taxes.  But it isn’t fair at all. The rich guy’s tax rate goes down from 25% to 18.75%. The poor guy’s goes up from 12.5% to 25%.

In short: When the rich make more of the money, their share of the taxes should increase, not stay the same.

Spending cuts. The situation on the spending side of Romney’s plan is similar: He has spelled out his spending increases — defense, mostly. And he has pledged not to cut Medicare of Social Security benefits for anyone currently over 55. In other words, even if he serves eight years, he will never submit a budget that shows a spending cut in either of those two giant entitlements.

But he also pledges to get federal spending down to 20% of GDP by 2016, which (even with his optimistic 4% growth assumption) means $500 billion of annual cuts. The only sizable cut he identifies on his web site is $95 billion by repealing ObamaCare. But repealing ObamaCare also repeals the cost savings and tax increases it contains, and so increases the deficit rather than decreasing it. And “I want to take that $716 billion you’ve cut and put it back into Medicare.” not use it to decrease the deficit. And he was open to retaining the improved drug benefits ObamaCare adds to Medicare.

So the ObamaCare cut is illusion. It won’t cut the deficit.

Romney’s other specified cuts are Amtrak; the national endowments for art, humanities, and public broadcasting (bye-bye, Big Bird); the Legal Services Corporation; family planning; and foreign aid. By Romney’s own account, the total savings (other than ObamaCare) is only $2.6 billion of the $500 billion he says he needs.

So he has specified about half a percent of the cuts his budget needs under his optimistic assumptions. And the biggest parts of the budget — defense, Social Security, Medicare — are off limits. The non-ObamaCare cuts he has specified are insufficient even to cover the increase he wants in defense spending.

That’s why Obama accused him of “gutting our investments in schools and education”, and how Romney was able to deny it: “I reject the idea that I don’t believe in great teachers or more teachers. … I’m not going to cut education funding. I don’t have any plan to cut education funding and — and grants that go to people going to college.”

“I don’t have any plan to cut …” is a universal dodge for Romney. Because he doesn’t have any plan to cut spending, Romney can deny any specific thing you imagine must be cut to plug the huge hole in his budget. The Ryan budget is a little more specific about cuts, but Romney disclaims that as well. His campaign says “as president he will be putting together his own plan.” And Romney has emphasized that he, not Ryan, is “the guy running for president.”

In short, what Romney has given us is a lot of specifics that cut taxes and raise spending, coupled with vague promises to make it all come out right somehow. So electing Romney is sort of like hiring a trainer who promises you can eat more and lose weight. He has pictures of the lavish meals his plan will let you eat, and a graph of how your weight will go down.

How does it work? “Exercise” he says. What exercise? When? How much? “We can work all that out later.”

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Is a Boom Coming in 2012?

January 2, 2012 – 1:17 pm

One of the big debates on the economic blogs right now is whether the upbeat end of 2011 was just a blip or the beginning of a genuine trend.

“What upbeat end to 2011?” I hear you ask. So let’s back up and start there.

Recent numbers. The most obvious thing was the decrease in the unemployment rate from 9.1% in September to 8.6% in November.

By itself, though, that number isn’t too impressive, particularly since it’s only partly due to new jobs and partly to people leaving the work force. But other numbers support the idea that things are turning around: In November and December, housing starts began to increase and more people bought new cars. Plus, Christmas spending was up.

The optimistic view (championed by Karl Smith at the economic blog Modeled Behavior and popularized by Slate’s Matt Yglesias) says that (1) these things are important, and (2) they will continue.

Houses and cars matter. At the most immediate level, recessions happen because people stop spending. That causes production to drop, so other people lose their jobs. Then they also stop spending, and things spiral downward.

But this is like saying that you’re hungry because you haven’t eaten enough — it’s true, but it ignores any underlying causes. You might be dieting or hunger-striking. Or maybe there’s a famine or you’re poor in a rich country or your jailer has cut your rations. Telling a hungry person “You should eat more” isn’t wrong, but it’s not always helpful.

Bearing in mind that why we haven’t been spending might matter, a huge part of how we haven’t been spending is that we haven’t been buying cars and houses. Smith points at this graph of domestic spending with (red) and without (blue) housing and transportation.

The blue graph looks like a relatively mild recession, while the red one reflects the deep recession we really had. Smith says that the drop in (red) spending amounted to $400 billion, of which $200 billion was decreased construction. Over a somewhat longer period, the construction-spending drop was $500 billion and the automobile-spending drop was $240 billion.

And that makes sense: If (like most people) you continued to have an income during the recession, you probably didn’t stop eating or paying your utilities. But you quite likely did get anxious enough to put off buying a new car or house.

Why the up-tick might continue. Trends always spread too far and last too long. People who are honestly worried about losing their jobs really shouldn’t buy new cars or houses. Once a recession gets going, though, even people who need, want, and can afford new stuff will delay buying it out of a general sense of uneasiness.

But eventually those people get tired of waiting for the sky to fall, and go out and buy stuff anyway. When they do, a virtuous cycle replaces the vicious cycle of recession: Their spending gives other people jobs, so those people also spend more, and so on.

Smith and Yglesias see pent-up demand that is about to burst out. Seattle TV station KOMO reports:

Back in 2008, when Consumer Reports asked people about their primary vehicle, the average age was 5 years old. Today, it’s 9 years old.

Ditto for housing: We more-or-less stopped building houses in 2008, but new households keep forming. Smith believes the household-to-house ratio is approaching 1, and that any uptick in the economy will increase household formation even further. He predicts:

this is at least suggestive that there is a looming outright housing shortage.

And Yglesias amplifies the point:

But every downward tick in the unemployment rate is another twentysomething moving out of his parents’ basement, stimulating a return to a more normal level of construction. … This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.

Why it might not. Yglesias suggests one reason his rosy scenario might fail: The boom would also increase inflation, which the Fed might decide to resist by raising interest rates, thereby smothering the boom in its cradle.

But other economic bloggers (and even other Smiths) doubt the whole scenario. Naked Capitalism’s Yves Smith, for example, gets back to that underlying-cause thing:

People and businesses are not going to borrow and invest if they are not confident of their future. With short job tenures, over 30 years of stagnant real worker wages (and falling in the most recent 12 months), exactly what is there for the bulk of the population to be optimistic about?

We’ve had a very successful three decade effort to break the bargaining power of labor, and covered that up with rising consumer debt levels. That paradigm is over, but no one in authority seems willing to go back to an economic model where rising worker wages drive economic growth. Until we get policies that address that issue, I don’t see a reason to be expect robust growth levels.

She also doubts that house-construction will make any serious move until the overhang of foreclosed properties gets sold to people who can afford them.

The business cycle. At its root, the Smith/Yglesias boom prediction is a classic business-cycle argument: Things only go so far up or down before natural forces turn them around.

Like Yves Smith, I’ve been arguing for a while (here and here) that we don’t have a classic business cycle any more. As wealth gets more concentrated, our booms and busts have more to do with investment bubbles than with production and consumption. We don’t “recover” quickly, because what we’re “recovering” to was never real.

Some of Karl Smith’s pent-up demand isn’t real either. For example, I am one of those people driving an old car: My 2002 Saturn Vue has 168K miles on it, more than I’ve put on any other vehicle. But because quality has improved, it still runs great. I’m not pining to get rid of it as soon as I have a little money.

I also have a 5-year-old laptop computer. Not so long ago, a 5-year-old laptop was a museum piece, a 286 in a Pentium world. But in the cloud-computing era, 5-year-old laptops also work just fine.

Then we come to housing, and those under-employed 20-somethings who want to get out of their parents’ houses — my nephew, for example. The career path of most 20-somethings I know doesn’t resemble anything my generation would have called a “career” thirty years ago. Today’s “career” is a string of temporary jobs, possibly united by some kind of theme.

If we have a boom, those temporary jobs will last longer and pay more — maybe even a lot more, if things really get rolling. But they won’t become pre-Reagan-era careers, so buying a house still isn’t going to make sense. The argument that housing always goes up — people really said that not too long ago — isn’t going to ring true for a long time to come. And if your next temporary job is a thousand miles away, that house you can’t sell is an albatross, not an asset.

So I agree with bankruptcy lawyer Max Gardner: “We’re turning into a Nation of renters rather than homeowners.” We can’t invest in stable housing because (even in good times) we don’t have stable jobs.

Split the difference. When I examine my objections, though, they mainly say that the forces the optimists point to aren’t as strong as they think, not that those forces don’t exist at all. My Vue and my MacBook aren’t going to last forever. And maybe my nephew will rent an apartment rather than buy a house, but somebody will still have to build that apartment and make the appliances to fill it.

So even if the business cycle isn’t the only thing happening any more, there still is a business cycle, and it does seem to be pointing up.

So are happy days going to be here again in 2012? Probably not. Has the country solved its long-term economic problems? No. But I think it’s as if we’re in the spring of a cold year: We’re still going to get a summer, and it will be warmer then than it is now.

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Suck It Up: Using Our Pride Against Us

October 17, 2011 – 1:03 pm

Last week I talked about the role of shame in maintaining an unjust system: A lot of people are losers in such a system, but who wants to identify with losers? The closer you are to the abyss, the stronger the temptation to deny that you bear any resemblance to the people who have already fallen in.

This week we got to see the slip side of the same phenomenon: how the rich and powerful take advantage of the legitimate pride many struggling people feel in the virtues that keep them afloat.

It started a week ago Wednesday with a cruel joke: Erick Erickson, founder of the right-wing blog Red State and recently a CNN commentator, started the We Are the 53% web site to parody the emotionally powerful We Are the 99% site I linked to last week. He posted a photo of himself disguised in a working-class t-shirt and holding up his story:

I work 3 jobs. I have a house I can’t sell. My family insurance costs are outrageous. But I don’t blame Wall Street. Suck it up, you whiners. I am the 53% subsidizing you so you can hang out on Wall Street and complain.

The “53%” are from a right-wing talking point that is debunked here and in more detail here: 47% of American households pay no net income tax, mostly because they don’t make enough money to qualify. (They pay plenty of other taxes, however, some at a higher percentage of their income than many rich people.) The point of “the 53%” is to evoke an image of a hard-working majority that pulls the weight of everyone else. It is part of the right-wing argument that minimum-wage-earners (and not the rich) should be paying more taxes.

And in Erickson’s case, it is ridiculous. His “jobs” consist of doing what he enjoys, and he could stop any time he wants. The only things he “sucks up” are money and fame, not abuse or anxiety. But one of the talents that puts Erickson firmly in the 1% is his understanding of working-class resentment and how to turn it against the weak rather than the powerful. So people with legitimate stories to tell have followed his example and posted to his site. Like this guy:


I am a former Marine. I work two jobs. I don’t have health insurance.

I worked 60-70 hours a week for 8 years to pay my way through college. I haven’t had 4 consecutive days off in over 4 years.

But I don’t blame Wall Street. Suck it up you whiners. I am the 53%. God bless the USA!

Minus the suck-it-up closing, this could be a 99% posting. This guy is a victim of the economy, but he doesn’t like being a victim, so he identifies with the lords rather than the serfs. Damn those whining serfs, for claiming to be like him.

A similar (if less in-your-face) story has been forwarded all over Facebook:

Like the ex-Marine, this woman (the fingers and handwriting look female to me) has virtues worth taking pride in: She’s talented enough to get a scholarship, hard-working, and with enough self-control to spend less than she makes. Her version of “Suck it up, you whiners” is less insulting, but just as distancing: “I am NOT the 99%, and whether or not you are is YOUR decision.”

Really? I don’t think so. We can all decide not to identify with the people who work more and more for less and less, but we can’t decide not to resemble them.

I picture this student sitting in her cheap apartment, maybe watching somebody’s cast-off picture-tube TV rather than going to the movies with her friends, eating something sensible that she cooked herself, planning to get back to her homework in another few minutes — and identifying with the 1%.

“That’s how it’s supposed to work,” she writes. She’s supposed to “work my @$$ off” for whatever she gets, and hope that she doesn’t get sick, and hope that when she picked her major she didn’t guess wrong about where the jobs would be. Meanwhile, the ever-increasing bounty of this rich planet goes to other people — many of whom aren’t as talented, didn’t scrimp and save, and don’t work their asses off.

That’s how it’s supposed to work?

It’s tempting to pour scorn on these two, but that’s just falling into Erickson’s divide-and-conquer trap. The 99% are supposed to fight each other. The field slaves are supposed to resent the house slaves, and vice versa.

So what is the right response? Max Udargo nailed it in Open Letter to that 53% Guy. It’s absolutely worth reading in its entirety (it has become the most shared post in the history of Daily Kos), but this is the key point:

I understand your pride in what you’ve accomplished, but I want to ask you something.

Do you really want the bar set this high? Do you really want to live in a society where just getting by requires a person to hold down two jobs and work 60 to 70 hours a week? Is that your idea of the American Dream?

… And, believe it or not, there are people out there even tougher than you. Why don’t we let them set the bar, instead of you? Are you ready to work 80 hours a week? 100 hours? Can you hold down four jobs? … And is this really your idea of what life should be like in the greatest country on Earth?

It would be one thing if life was just that hard, if producing enough for everybody to get by required everybody to work 70 hours a week and never make a wrong move. But that’s not true. We know it’s not, because things used to be different. Americans used to have secure 40-hour-a-week jobs that paid well enough to raise a family on one income. Per capita GDP has gone up considerably since then, but the surplus has all accumulated at the top.

That’s not natural; it didn’t happen to nearly the same extent in other countries. It happened here because the very wealthy got control of our political system and ran it for their own benefit. It happened because we changed the rules to reward financial sleight-of-hand over making things and serving people. It happened because we devalued the public sector — the schools, the roads, the parks, the safety net — and let our whole society get split into First Class and Coach.

Fixing that is what the 99% movement is about. It’s not about making talent and hard work and wise choices irrelevant. But how talented, how hard-working, how wise — and how lucky, never forget the role of luck in your success — should a person need to be to have a decent life? How unforgiving do we want to make our society?

If the 99% win and the system changes, the economic race will continue and some people will still outrun the others. Nobody grudges them that. But we don’t have to live in a society where the Devil takes the hindmost. And we can still have empathy for the people we pass. That’s a virtue too.

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