Dean Baker on why the payroll tax holiday is a problem

Following up on two earlier posts today, one quoting Dean Baker and the other on the payroll tax holiday, I see that Baker has commented on the payroll tax holiday! From Obama's stimulus failure Guardian 12/19/2011, where he puts it into the context of the longer reluctance of the Obama Administration to apply the level of stimulus needed to create a strong economic recovery:

As stimulus, this [the payroll tax holiday] is not an especially good measure. On a per-dollar basis, tax cuts will be much less effective, especially with people carrying so much debt, than direct spending. Furthermore, many of these tax dollars will go to better-off tax payers who are less willing to spend than moderate income families. The Making Work Pay tax credit was much better targeted.

Finally, there is zero reason that this tax cut should be tied to social security in any way. As it stands, the trust fund is held harmless because the lost tax revenue is reimbursed from general revenue. But why even raise this as a potential issue for social security; why not just give everyone a tax cut equal to 2 percent of their wages up to $110,000? The only reason to tie the tax cut to social security is if the intention is to raise issues about the social security tax at some future point.

The response of the Obama people to this complaint is that this is the only tax cut that the Republican Congress will approve and that we badly need the stimulus. The second claim is definitely true and the first one may well be also. But if that is the case, it only speaks to the incredible failure of this administration to define the agenda and speak honestly about the economy. It's not surprising that they don't have the political support for more effective stimulus when they abandoned the effort to make the case almost two years ago. [my emphasis]

Tags: dean baker, social security

Dean Baker explains the eurozone mess

Dean Baker provides an accessible explanation of the euro crisis in The eurozone crisis is not about market discipline Aljazeera English 12/19/2011:

The eurozone crisis is most definitely not a story of countries with out of control spending getting their comeuppance in the bond market. Prior to the economic collapse in 2008, the only country that had a serious deficit problem was Greece. In the other countries now having trouble financing their debt, the debt to GDP ratio was stable or falling prior: Spain and Ireland were actually running budget surpluses and had debt to GDP ratios that were among the lowest in the OECD.

The [2007-8] crisis changed everything. It threw the whole continent into severe recession. This had the effect of causing deficits to explode since tax revenues plummet when the economy contracts and payments for unemployment benefits and other transfer programmes soar. Spain was hit especially hard by this contraction because it had a huge housing bubble. This bubble fuelled an enormous construction boom that went bust after the crash.

Ireland saw its debt explode because it got stuck with a huge bill from bailing out its free-wheeling bankers. It is possible that its financial system could have been kept intact at a lower cost to taxpayers by forcing creditors to take losses. [my emphasis]

Iceland did just that, let their larger banks in trouble go bankrupt, let their stockholders take losses and reorganized them as clean banks. Ireland, on the other hand, took the bad loans onto the books of the state and ran their debt much higher to do it. Even then, Ireland had not overborrowed. They just became a target of the bond speculators - after having been praised by fans of neoliberal economics as a deregulation success story.

He also describes the failures of the European Central Bank (ECB), both in allowing bubbles like the one in Spain to grow to the point they did and now in fighting against the entirely necessary and sensible policy of having the ECB act as the lender for eurozone countries' bonds. He doesn't mention that the ECB is constrained by law in that regard, though there are immediate workarounds. And if the EU-minus-one countries can change their treaties to enforce Herbert Hoover austerity economics that will only make the debt crisis worse, they could also have adjusted the law to allow the ECB to play that role in a direct and straightforward way.

Baker puts it into its broader social and political context, with reference to one of the political spin-offs in the US:

People should recognise this process for what it is: class war. The wealthy are using their control of the ECB to dismantle welfare state protections that enjoy enormous public support.

This applies not only to government programs like public pensions and healthcare, but also to labour market regulations that protect workers against dismissal without cause. And of course, the longstanding foes of Social Security and Medicare in the US are anxious to twist the facts to use the eurozone crisis to help their class war agenda here.

The claim that the countries in Europe are just coming to grips with the reality of modern financial markets is covering up for the class war being waged on workers across the globe.

It's a bit strange that "class war" has become a respectable term, I assume because the Republicans have been using it against any policy that might interfere with corporations plundering the country as they like. I guess "class struggle" is still taboo in political discourse. Even though "class war" is actually a more severe image!

Tags: dean baker, eu, euro, european union

S&P and the US credit downgrade

Dean Baker has a good analysis of S&P's ludicrous action in downgrading the credit of the United States in How to Think About Standard and Poor's Downgrade Huffington Post 08/06/2011.

We really live in strange times when it comes to policy. After their performance in the housing debacle and the financial collapse, it's only remarkable that anyone would pay attention to them at all.

Tags: dean baker, standard and poors

Why economist Dean Baker is good reading

Dean Baker has been cranking out the posts at his Beat the Press blog the last few days on the economy and the debt ceiling fiasco. Here are my summaries of several of his recent posts, the first from Data Bytes rather than Beat the Press:

Weak Consumption and Shrinking Government Slow GDP in Second Quarter 07/29/2011

While the Country Slept: Financial Industry Profits Go Through the Roof 07/30/2011: discusses the financial sector profits

The NYT Wants the U.S. to Have Slower Growth 07/31/2011: the projected future federal surpluses circa 2000 were based on an untenable assumption about private spending.

People Don't Move for Jobs When There Are No Jobs 07/31/2011: Rupert Murdoch's Wall Street Journal makes a sloppy and unsubstanitated claim about housing values and the willingness of people to relocate for work

Conservative Tea Partiers Oppose Cuts to Social Security and Medicare, not Just Liberal Democrats 07/31/2011: the national media is willfully clueless about the popularity of Social Security and Medicare.

The NYT Wrongly Asserts That Economists Want to Cut Social Security 07/31/2011: The New York Times pulls claim about economists wanting Social Security cuts out of the air

With All the Excitement Around the Pending Debt Ceiling Deal Fox on 15th (a.k.a. the Washington Post) Gives Up All Pretext of Objectivity 07/31/2011: The Washington Post's quality of reporting is ddescending to the FOX News level.

Gretchen Morgenson Is Right: Bankers Have No Shame 07/31/2011: major banksters are still reckless about mortgage securitization; they can also be real whiners.

Another Front Page Editorial at the Washington Post 08/01/2011: calls Washington Post "Fox on 15th"; WaPo talking smack about national debt.

The Impact of the Budget Deal for Those Who Don't Carry Around the Budget in Their Pocket 08/01/2011: Obama's Big Bad Deal with the Republican leadership would hammer discretionary spending and therefore be a real kick in the stomach to faltering economic growth

Does the President's National Economic Adviser Not Know That Democrats Controlled Congress Last December? 08/01/2011: Gene Sperling justifies Obama's agreement on extending the Bush tax cuts by whining about the Republicans.

Tags: dean baker, medicare, social security, us economy

Dean Baker on the causes of the current federal deficit

Dean Baker in President Obama Doesn't Understand the Origins of the Deficit FDL 07/26/2011 catches the President misstating the recent history of the federal deficit:

The Congressional Budget Office's projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."

This is what is known as a "gaffe" of enormous proportions. It indicates that President Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble. This misunderstanding of the origins of the budget deficit could explain President Obama's willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid. [my emphasis]

There is another aspect to this, too, to which I'm not quite economics-literate enough to explain the connection to the factors Dean Baker identifies. Because the dollar is the world's reserve currency, other nations can be expected to hold dollars for their foreign-exchange reserves as long as the dollar maintains that role. That means that the trade balance will be continually in deficit, as it has been for many years. There is an accounting identity between domestic and trade deficits; combined public and private deficits equal the trade deficit. Since most states are required to balance their budgets, the federal government and private savers make up the domestic side of the equation. If private savers spend more than their income in a given year (a net private deficit), the federal government will run a surplus. If private savers earn more than they spend, which has been very much the case in the current Lesser Depression, the federal government will run a deficit.

I do know enough to say that this factor is consistent with what Baker observes, which is that the current "huge deficits came about entirely as a result of the economic downturn."

Tags: dean baker, us economy

Debt ceiling play-acting

Dean Baker on what a phony show this whole business of Obama negotiating with the Republicans over the debt ceiling really is: The Endgame on the Debt Ceiling Huffington Post 06/20/2011. After painting a dramatic word picture of how Wall Street would beat the Republicans into line to vote for the debt ceiling if they were seriously trying to avoid raising it, he writes:

When everyone remembers that this is what the endgame looks like, they will realize that there is no need to put essential programs like Social Security, Medicare and Medicaid on the chopping block to get Republican support for raising the debt ceiling. The gun is pointed most directly at Wall Street's head, and this incredibly powerful lobby is not going to let Congress pull the trigger.

This means that at the end of the day, President Obama holds the cards. He could say that he wants a clean debt ceiling bill and no deals on cutting back the country's key social insurance programs. Of course, that may not be President Obama's agenda. [my emphasis]

Whatever cuts come out of those debt ceiling negotiations, in other words, will not be something the Republicans forced the Democrats to accept. They will be something the Obama Administration wanted to do and the Democrats in Congress were willing to accept. all the rest is theater.

Tags: dean baker, obama administration, us economy

National income accounting and the federal deficit

Earlier this month, Dean Baker gave a good summary of the concept of national income accounting in Has Anyone at the Washington Post Heard of National Income Accounting? CEPR 05/01/2011:

One of the identities in national income accounting is that the trade surplus (actually current account surplus, but these can terms can be used pretty much interchangeably for the United States) is equal to the net national savings. Net national savings in turn is equal to the government budget surplus (public savings) and the excess of private savings over private investment (private savings).

As a conscious policy under the Clinton administration (pushed by his second Treasury secretary, Robert Rubin) the United States begin to push for a high dollar. It used its control of the IMF in dealing with the East Asian financial crisis and subsequent crises in the developing world to put muscle behind the high dollar policy.

The high dollar in turn led to a large trade deficit. If the dollar is over-valued by 25 percent it has roughly the same impact as imposing a 25 percent tariff on all U.S. exports and giving a 25 percent subsidy to all imports. In other words, we expect a high dollar to be associated with a large trade deficit. This is exactly what happened in the late 90s, the high dollar sent the trade deficit soaring to record levels.

Using national income accounting, if the United States has a trade deficit of 4.0 percent GDP (roughly the 2000 level), then it must have negative national savings equal to 4.0 percent of GDP. There is no way around this, it has to be true. [my emphasis]

No doubt this is a bit on the wonky side. But it's something that should be a prominent part of any public debate over the federal deficit.

But what he describes in those paragraphs isn't really controversial. It's accounting. Jamie Galbraith does rely heavily on this accounting reality in The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008). Galbraith adds a couple of other steps in framing the federal deficit. One is that the US dollar is the world's reserve currency in a world with floating exchange rates. As long as those conditions maintain, he argues, other countries will hold substantial amounts in dollars as reserves and that will make the United States run a perpetual trade deficit.

The second step is the implication of that situation in combination with the national income accounting equation of Total Public and Private Deficits = Country's Trade Deficit. Given a trade deficit that will be negative as long as the dollar is the world's only reserve currency, that mean that the the sum of the public and private deficit in a given year will also be negative, i.e., spending more than saving in a given year (paying down debt counts as saving here).

Currently, annual private savings (including debt paydown) in the US are exceeding annual spending. So the private sector has a net surplus. That means the net of all public accounts will have to be negative (spending/borrowing exceeding savings/debt paydown). Since state and local governments are generally required to balance their budgets every years one way or the other, that means the federal deficit is going to be the whole public deficit, more or less.

In years where private spending exceeds private savings, there will be a net private deficit. That means the federal government will go into surplus. Because Total Public and Private Deficits = Country's Trade Deficit, and we have a continuing trade deficit. So far that's also accounting.

I'm not an economist and I don't know how controversial Galbraith's notion is that the US will run a trade deficit as long as the dollar is the world's reserve currency. I don't think most economists would consider it much of a stretch, though. The US has been running trade deficits for many years, confounding the conventional assumption that countries cannot run permanent trade deficits. This is the only explanation I know of how the US has been able to do that.

But even most liberal economists probably aren't ready to endorse the conclusions Galbraith draws from that. He argues that because of the national income accounting equation, the federal government doesn't control whether it runs a deficit or surplus. And also that, as long as the dollar is the world's reserve currency, that the size of federal deficits actually don't matter, whether the economy is depressed or booming.

Still, Baker in the quote above is pointing to how the dollar affects the federal deficit. The large deficits weren't primarily the result of Washington's tax and spending policies, but of what happened with the dollar. The ability of the government to drive the dollar up or down could, I suppose, be used as an argument against the idea that the federal government has no effective control over the deficit.

But it does point to another way in which the current discussion over the alleged menace of the federal deficits in the midst of a weak economy in a liquidity trap is divorced from economic reality. And even from the laws of accounting.

Tags: dean baker, james galbraith, us economy

What happens when the deficit deal gets done? How much of Social Security will be left?

Simpson-Bowles policy for seniors: Let them eat catfood!
I've come across several good items warning that we need to watch out for the next budget deals that Obama actually strikes with the Republicans, the one that is probably coming over raising the debt ceiling next month.

The notion that Obama has to negotiate budget deals with the Republicans over the debt ceiling is bogus. It's pure political theater. As Digby has been saying for months, if he negotiates over that it's because he wants to, not because he has to. Republican leaders know there's no choice but to raise the debt ceiling. Lots of the wealthiest Americans, the only constituency they truly care about, would lose serious money if the debt ceiling isn't extended on time. Obama does not have to deal with them over it.

But he's almost certainly going to. Gene Lyons uses sports analogies to discuss the debt limit fight in It's Time to Play Ball Cagle Post 04/14/2011. Gene thinks that Obama's budget deal from last week was a reasonable one for him to make, "the tactical equivalent of an intentional walk in baseball." In his reading, Obama preferred to stage a political confrontation with the Republicans' Ryan plan, proposed by "the Wisconsin Republican with the funeral director's demeanor and the zeal of an Ayn Rand enthusiast." He gives a great short summary of the Ryan proposal: "Reduced to a slogan, Ryan's ballyhooed plan is 'Back to the 19th Century': $4.5 trillion in tax cuts for millionaires and corporations, huge cuts in Social Security, Medicaid and food stamps, while privatizing Medicare."

But Gene is worried about what kind of ugly deals Obama will strike with the Ryan Republicans. He describes it on the explicit assumption that Obama is committed to the Democrats' own platform and campaign themes:

To the degree that it endorses Ryan's schemes, in a sane political climate the GOP would be risking political obsolescence. This was the same party that only a year ago pitched a fit over Sarah Palin’s imaginary "death panels." Now its leading thinker wants to control costs by asking grandma to bargain for cheaper heart surgery?

Standards, however, are anything but rational. The president faces a defining challenge. I often wonder whether Obama has mistaken the U.S. government for the Harvard Law Review, where the emollient balm of his personality persuaded rival factions to reason together.

Ivy League intellectual that he is, I’m afraid he definitely underestimates public ignorance on everything relating to the budget: where the money comes from, where it goes, and what’s at stake in the coming showdown over the U.S. government debt limit. It’s hard for somebody as obsessed with public policy as Obama to grasp how little his countrymen know.

Noting that trying to put the federal government into default is a non-starter even for the Teapartyized Republicans, he worries about Obama's willingness to act on that understanding:

Congress can repeal Medicare and Social Security, but it can't renounce their lawful debts. Ordinarily, an establishment Republican like John Boehner would refrain from even bluffing about the idea, which he dare not follow through.

Obama's seeming passivity, however, has made the GOP reckless.

Batter up. [my emphasis]

Robert Borosage of the Institute for America's Future observes in Obama's Deficits: Progressive Priorities, Conservative Context Huffington Post 04/13/2011 that Obama's Wednesday speech included some excellent statements of Democratic principles and vision of government. But he articulated them in a context in which he accepts the Republican framing and the economically destructive idea that cutting public spending is a good idea when the economy is in a weak recovery and is also in what economists call a "liquidity trap" - big corporate savings but domestic demand to weak to induce them to invest:

But it is worth understanding just how conservative this debate has become -- and how far the president has retreated. The most progressive president since Johnson has now embraced a center-right agenda -- even before entering negotiations with the Republicans.

The president effectively announced the demise of a reborn Keynesian era that has expired before the economy revived. 25 million Americans are in need of full-time work. Home values are still sinking; gas prices are at $4 a gallon and rising. Consumer confidence is plummeting. Europe's growth is slowing. But the federal government will join the states and cities in immediately cutting spending and laying off workers.

With this premature embrace of austerity, mass unemployment may become the new normal. Wages will remain stagnant. The concentration of wealth will grow and the middle class will continue to decline.

The president allowed that he was "sympathetic" to the view that we shouldn't cut spending until the economy is fully recovered. But he embraced the conservative argument that "doing nothing on the deficit is just not an option," because we could do "real damage to the economy" if we don't "begin a process now."

But mass unemployment and stagnant wages represent "real damage to the economy" that is here and now, not speculative. There's no sign of the potential harm that might be caused by deficits in the sometime future. Interest rates are low; America has no trouble financing its debt. The president started down this path prematurely in 2009; now he has forced the pace. [my emphasis]

Focusing on cutting deficits now is just Herbert Hoover economics. No better result can reasonably be expected from it in 2011 than in 1932.

And, from the Center on Budget and Priorities, Robert Greenstein on President Obama's Deficit-Reduction Plan 04/13/2011, another warning on the likely results of Obama-style budget negotiations:

Another significant concern stems from the President’s proposal to limit the annual growth in Medicare costs per beneficiary to the per capita rate of growth in the Gross Domestic Product (GDP) plus only 0.5 percentage points and to require automatic cuts in Medicare if this target would otherwise be exceeded. This goal is laudable. But it may be unrealistic. Historically, Medicare costs per beneficiary have risen about 2 percentage points per year faster than GDP growth per capita. The health reform law will launch a series of demonstrations, pilots, and research projects to find effective ways to slow health care cost growth without reducing the quality of care or access to care. But we don’t know yet how much or how quickly we can lower health care cost growth, especially since the principal driver in cost growth is medical advances that improve health and save and prolong lives but add significant costs.

Finally, the President’s plan calls for a mechanism to trigger automatic reductions in programs and tax expenditures if the debt would exceed certain benchmarks (measured as a share of GDP). The goal of stabilizing the debt as a share of GDP is precisely the right one. But all triggers like this that have been designed in the past have suffered from a fatal flaw — they required the deepest budget cuts when the economy was weakest and the smallest cuts when it was strongest — the opposite of what sound economic policy entails. The President’s plan calls for the trigger to "include a mechanism to ensure that it does not exacerbate an economic downturn." No one has succeeded until now in producing a mechanism that meets this test, and it remains unclear whether it can be done. This new proposal bears some similarities to the trigger in the 1985 Gramm-Rudman-Hollings law, which was not successful and which Congress ultimately repealed.

To be sure, the President's plan represents an important step forward in the debate. But it should be recognized that this plan is a rather conservative one, significantly to the right of the Rivlin-Domenici plan. While we worry about some particular elements of the President’s plan, we worry much more that the deficit-reduction process that’s now starting could produce an outcome that is well to the right of the already centrist-to-moderately-conservative Obama proposal, by reducing its relatively modest revenue increases and cutting more deeply into effective programs that are vital to millions of Americans. [my emphasis]

Then there's this: Alexander Bolton, Some Senate Dems willing to consider Social Security reforms The Hill 04/13/11:

Sens. Tom Carper (D-Del.) and Sen. Dianne Feinstein (D-Calif.) and Sen.Joe Lieberman (I-Conn.), who caucuses with the Democrats, are all openly calling for reform, and making it plain that the party is disunited on the issue when a titanic debate over debt is gathering momentum.

The good news is that Senate Majority Leader Harry Reid continues to be a hardliner on the issue, at least in public:

But Senate Majority Leader Harry Reid (D-Nev.) refuses to give an inch on benefit cuts, arguing that the program has not contributed “one penny” to the debt.

There is currently a "Gang of Six" Senators working on a bipartisan budget proposal: Democrats Dick Durbin, Kent Conrad and Mark Warner, along with Republicans Saxby Chambliss, Tom Coburn and Mike Crapo. According to this report by Richard Wolf, 'Gang of Six' hopes to spur bipartisan action on deficit USA Today 04/11/2011.

The Gang of Six approach is based on Obama's commission, which called for a mix of spending cuts and tax increases. Obama never endorsed the plan, and his proposed 2012 budget called for only $1.1 trillion in deficit reduction over 10 years. But White House press secretary Jay Carney said the president knows much more is required.

That would be the Simpson-Bowles Catfood Commission, whose main focus was how to start the phaseout of Social Security. Wolf follows the now-standard journalistic convention of referring to the "plan" of the Catfood Commission, the actions which it "called for," etc. The Catfood Commission never issued a formal report, because not enough of the members could agree that old people should have to live on catfood. But apparently, since Obama appointed it stacked with Social Security opponents to provide those recommendations, our press corps has just decided to play along and pretend they did. Co-chairs and social Security opponents Alan Simpson and Erskine Bowles did issue a plan, which is typically what is referred to by the Commission's plan or report. I guess this just illustrates how phony the whole bipartisan Kabuki with the Catfood Commission really was. It's purpose was to recommend Social Security Phaseout, so it's now Beltway consensus that they recommended that. Even though formally, the Commission didn't recommend anything at all.

Joan McCarter writes in disgust (Durbin, Lieberman, willing to 'take action' on Social Security Daily Kos 04/13/2011):

It's hard to imagine why any Democrat ... finds they are in agreement with Joe Lieberman, whose sole purpose in political life is now to piss on anything remotely progressive or important to the Democratic base, particularly on something as important as Social Security.

She relates "Gang of Six" member Dick Durbin's expressed willingness to include discussions on Social Security in deficit-reduction consideration, even though Social Security doesn't contribute to the federal deficit. In Harry Reid 2010 Netroots Nation convention appearance in Las Vegas, he said that he got Dick Durbin appointed to the Catfood Commission to defend Social Security! But Democratic activists have been particularly skeptical of Durbin since he made this statement, as reported by Obama Tells Debt Commission 'Everything Has to Be on the Table' New York Times 04/27/2010:

Representative Dave Camp of Michigan took pre-emptive aim at a value-added tax, saying, "Washington has borrowed enough from the American people."

But Senator Richard J. Durbin of Illinois, the second-ranking Senate Democratic leader, denounced suggestions of an administration VAT plan as the "musings of right-wing cable shows."

He also admonished "bleeding heart liberals" to be open to program reductions to restore fiscal balance. An hour after the commission’s meeting, however, several liberal activists held a conference call with reporters to press for additional spending to create jobs, lower military spending, higher taxes for the wealthy and no cuts in Medicare or Social Security. [my emphasis]

That was Obama a year ago this month, when he still had a solid majority of Democrats in the House. That article is a good reminder of how the Obama White House has always seen the deficit issue and the work of the Catfood Commission. It even contained a hint that if the Commission didn't agree on a report, the White House would pretend they had anyway. In ObamaSpeak, "everything has to be on the table" means Social Security Phaseout:

President Obama told his bipartisan debt commission on Tuesday that "everything has to be on the table," while the Federal Reserve chairman, Ben S. Bernanke, suggested overhauling the nation’s tax code to raise more revenue. ...

Former Senator Alan K. Simpson of Wyoming, the panel's Republican co-chairman, warned the panel, "The extreme right and the extreme left will savage our final product."

That assumes, however, that the commission will agree to one before its Dec. 1 deadline. Expectations are low given the party polarization, especially in an election year.

Still, administration officials have suggested that should the commission reach a deadlock, Mr. Obama could adopt proposals left on the table.

While Fed chairmen typically stick to monetary policy and shy away from advising elected officials about budget policy, Mr. Bernanke's remarks were the latest in his recent string of calls for elected officials to make "hard choices" soon, before debt threatens the economy’s recovery and growth.

"Choices regarding Medicare, Social Security and other spending programs cannot be made in a vacuum but must be combined with decisions about how much revenue the government will raise and how it will raise it," he said. [my emphasis]

Dean Baker's analysis of the Simpson's and Bowles' recommendations remains relevant, unfortunately: The Deficit Commission’s Parallel Universe Boston Review 11/11/2010:

The country in which most people live is experiencing an economic disaster. More than 25 million people are unemployed, underemployed, or have given up looking for work altogether. Tens of millions are now underwater on their mortgages, with millions facing the imminent loss of their homes. Furthermore, there is little prospect that the situation will improve anytime soon.

Many fewer live in the other America, the world of Wall Street and Washington lobbyists. This is where you’ll find former Wyoming Republican Senator Alan Simpson and investment banker-turned-Clinton Chief of Staff Erskine Bowles, the co-chairs of President Obama’s deficit commission, which on Wednesday outlined its plans for what it calls “fiscal responsibility.” In their world the key fact is that, today, corporate profits are back to their pre-recession peaks. As long as the bonuses on Wall Street are again hitting record highs, the economy must be just fine, so what else is there to do but worry about deficits?

Tags: catfood commission, dean baker, dick durbin, gene lyons, robert borosage, robert greenstein, social security

The Beltway Village agrees to declare economic reality null and void

I'm always aware that two-party politics in the United States gives political conversation a kind of binomial character. People can be quick to here a criticism of the Democrats as a plug for the Republicans, and vice versa.

But in real life, it's possible to walk and talk at the same time.

That's particularly important when a bipartisan consensus has gone off the tracks of the realistic and the sensible.

Dan Froomkin, one of the Huffington Post's best hires, has an important piece of reporting called Government Spending Goes From Hero To Goat 02/16/2011 in which he discusses a dangerous current case of bipartisan denial of economic realities. The notion that the federal government needs to slash spending in the middle of the worst prolonged economic slump since the Great Depression has become, for the moment, part of the definition of seriousness in the Beltway Village. As that anonymous Administration official put it, speaking for the Democratic Administration and the Republican Party, "We both agree we should cut. The question is how we cut and what we cut."

As Froomkin reports, this flies in the face of empirical experience and the basic perspective of the economics profession:

"The uncontested premise at the moment is that the federal government's spending is 'unsustainable,'" said University of Texas professor James Galbraith, one of a handful of progressives still willing to shout Keynesian economics from the rooftops.

"A wave of programmed conformity has swept over the Washington community on this question," he told The Huffington Post. "The substance of this issue has been placed on an index of forbidden thought. And anybody who expresses those thoughts is excommunicated.

"It's exactly the same phenomenon that led to the acceptance of the war in Iraq," Galbraith said. "Those who hold a different view are by definition ruled out of the discourse, and the fact that they are right will only be accepted later, when it no longer matters." [my emphasis]

Froomkin points out that "President Obama never successfully articulated the value of government spending in the first place." And he quotes others emphasizing how serious a problem this kind of reality-averse Herbert Hoover economics may turn out to be:

Luke Mitchell, the deputy editor of Popular Science and an observer of economic policy, wrote in an email that the new narrative in Washington appears to be "that everybody knows that something must be cut. And that struck me as extremely odd, given that just a generation ago even Richard Nixon knew that 'we are all Keynesians now.'

"It's as if people suddenly forget the world is heliocentric," Mitchell wrote (referring to the fact that the earth revolves around the sun). "An entire concept, one taught in every introductory economics course, has simply disappeared from our discourse."

"The basic Keynesian position is actually one that is held pretty widely in the economics profession," said Dean Baker, co-director of the Center for Economic and Policy Research. "Spending boosts the economy; that's not what we were arguing over, and it's not as if there's been any evidence going the other way."

The reason it's not talked about anymore is that "the Republicans took control of the debate," Baker said. "And [President] Obama, he just blew it in a really huge way."

Froomkin summarizes the level of denial involved in this as follows:

The laws of supply and demand haven't changed. Nothing has happened to suddenly put Keynesian economic theory in doubt. There is still an entirely plausible argument to be made that government spending cuts are absolutely the last thing this economy needs.

But in the Beltway Village, the Serious People have a consensus: "We both agree we should cut. The question is how we cut and what we cut."

At least in Herbert Hoover's day, there was good reason to think that when business corporations started making more money, that American companies would begin creating more American jobs. But as Harold Meyerson explains in Business Is Booming The American Prospect 01/28/2011, things have changed:

When he was CEO of General Electric, in 1998, Jack Welch pithily summarized his vision for corporate America: "Ideally, you'd have every plant you own on a barge to move with currencies and changes in the economy."

Since then, corporations have discovered that they don't need barges in order to unmoor themselves from the American economy. As corporate profits skyrocket, even as the economy remains stalled in a deep recession, Americans confront a grim new reality: Our corporations don't need us anymore. Half their revenues come from abroad. Their products, increasingly, come from abroad as well.

We need aggressive economic policies aimed at changing the trajectory of the US economy to be greener, more able to create jobs at home, less bound to chasing short-term quarterly stock prices, and not nearly so vulnerable to a reckless financial industry.

Herbert Hoover economics won't get us there. And the stakes for the majority in the US are very high. Jacob S. Hacker, also writing in The American Prospect (Reclaiming Middle-Class America 02/16/2011) spells out the urgency of the Democratic Party articulating an effective vision of affirmative government, i.e., government that can do constructive things for people's lives:

For progressives, reclaiming the high political ground by addressing the bread-and-butter concerns of the middle class is the key to not just broadly shared prosperity but also long-term political success. As the last two years suggest, however, picking the ball back up won't be easy. Progressives will have to grapple with the decline of the organizations, like labor unions and broad-based civic associations, that informed Americans about what was at stake in political debates and helped them shape what government did. They will have to break the Democrats' unholy alliance with Wall Street. Above all, they will need to put forth a clear alternative to the anti-government mantra of tax cuts, deregulation, and programmatic cutbacks--one that is far more compelling than the grab bag of deficit reduction and modest new initiatives that defined the Democratic economic message for so much of the 1990s and 2000s.

Progressives will also have to confront an inconvenient truth: They are losing on economic issues not because Americans' judgments are clouded by social issues or racial animosity but because, battered by the economic trends just described and bombarded with mixed messages, many middle-class Americans are wondering whether progressives can really deliver a better economic life. And, perhaps most challenging, progressives are losing because the well of public trust in government has been so badly poisoned by the failures of government to deliver that life in the recent past.

It is a myth that Americans do not care about inequality or put unbridled faith in corporate America or believe they all will be rich one day. In fact, Americans are strikingly egalitarian in many respects (ask ordinary people how they feel about Wall Street) and relatively realistic about their own economic prospects. But one common presumption is true: Many Americans have lost their faith in government. A generation ago, the majority of Americans said they trusted public officials to do what was right. No more: In 2008, 69 percent of Americans agreed that "government is pretty much run by a few big interests looking out for themselves" rather than for "the benefit of all the people"; only 29 percent disagreed. In 1964--the first year this question was asked by the American National Election Studies--the numbers were reversed: 64 percent disagreed; 29 percent agreed. This loss of faith is the most destructive legacy of a cynical right that has torn down government to gain power and a feeble center that has too often gone along.

Today's anti-government tide is deeply corrosive. It feeds excess suspicion, fuels the disconnect between citizens and leaders, and pushes voters--who still overwhelmingly embrace current middle-class programs--toward tax cuts, spending cutbacks, and other policies that feed on anti-government sentiments. It is impossible to imagine a political movement centered on middle-class concerns that somehow avoids using activist government. Rebuilding the middle class requires rebuilding a sense that government can make a positive difference. [my emphasis]

Tags: dean baker, , jacob hacker, james galbraith, us economy

Obama, the Democratic base and the dilemma of Democratic progressives

Dean Baker succinctly summarizes the essential dilemma of base activists in the Democratic Party today - "base activists" being more-or-less synonymous with progressive activists - in The President as Storyteller-in-Chief Huffington Post 02/14/2011:

At the time of his election, many progressives hoped that President Obama could play the same transformational role in this crisis as President Roosevelt did during the Great Depression. The more limited hope was that he could be an inspirational leader to his base in the same way as Ronald Reagan was for the right. At this point, the best hope is that he doesn't open the door to unwinding 75 years of economic and social progress. [my emphasis]

Baker joins Robert Reich, Paul Krugman and others who recognize that Obama's just-announced budget fits in with his rhetoric and politics since the 2010 election of reinforcing the Republicans' gubment-is-the-problem narrative. Economists like those three are particularly distressed that when the country is facing years of the current Great Recession that Obama is pursuing policies that are as certain as anything can be in economics to impede the strength of what is technically an economic recovery and may well contribute to slamming the economy into another formal recession. When the informal one is already bad enough!

As Steve M puts it, "Keynesian is now discredited in America, across the political spectrum, for the foreseeable future." (Obama lacks the forehead birthmark, but ... No More Mister Nice Blog 02/15/2011)

The Obama Administration has declared a kind of postpartisan harmony into existence. As that anonymous Administration official told the New York Times about their budget strategy, "We both agree we should cut. The question is how we cut and what we cut."

The "both", of course, being the Obama Administration and the Republicans.

But, as Robert Reich put is so well in December, "Rarely before in American history has there been more disconnect between Washington and the rest of the nation. Washington is obsessing about the projected federal budget deficit. Everyone else in America is worried about jobs." (The Truth About the Federal Budget Deficit That Noone [sic] Is Willing to Tell 12/02/2010)

But even more telling is the gaping chasm between the public in general, for whom Social Security is a bedrock feature of American life and government, and our political and media elites, for whom it has become almost a truism that Social Security has to be phased out. (Yes, "phased out" is my translation of the weasel words about "entitlement reform" and it's an accurate translation.)

Sam Stein reports on how Democratic activists are relieved and happy to see signals that the Democratic President still supports Social Security - for the moment (Plouffe: Obama Won't "Slash" Or "Reduce" Social Security Benefits Huffington Post 02/14/2011):

"Until now, Sen. Harry Reid was the top Democratic leader on the record saying that cuts to Social Security benefits were off the table in any form -- big or small, slash or tweak," said Adam Green, co-founder of the Progressive Change Campaign Committee [PCCC]. "If Mr. Plouffe's words are true -- that the White House opposes all reductions in benefits for current beneficiaries and future ones alike -- it's huge news. Such a position is overwhelmingly popular with Democratic, Independent, and Republican voters alike, and is the kind of boldness Democrats will need to show to win big in 2012."

Even before the rare PCCC applause for an Obama administration motive, other progressive groups expressed encouragement over how the president approached Social Security in his budget. The Strengthen Social Security Campaign, a coalition of predominantly Democratic-oriented groups, put out a statement Monday night applauding the president both for "refraining from proposing" cuts and proposing an increase in Social Security Administration expenditures, which could be used to help with the backlog in disability determinations. [my emphasis]

Our star pundits assume that voters function along a strict left-to-right spectrum. Most of them revere a "centrism" that includes doing away with Social Security, which to most people sounds like drastic damage to their lives.

But politics doesn't work that way. The Republicans will be happy to push Obama into supporting Social Security Phaseout and then turn around in 2012 and campaign as the defenders of Social Security. Republicans promote policies that substantively benefit billionaires and damage the interests of the majority of people. The only way they can pull this off consistently is by a combination of scams and using a deluge of advertisements, propaganda, demagoguery and media disinformation to represent themselves as the Party of jus' reg'lur folks.

Unless the Democrats can effectively challenge the Republicans' anti-government, pro-deregulation, anti-union narrative with a more constructive one built on a sound basis of policy, they aren't going to be able to effectively combat the Republican appeals for very long. It took two lengthy wars, a hurricane that devastated New Orleans and the worst financial collapse since the Great Depression coinciding with a cyclical business downturn to put the Democrats back in control of the Presidency and both Houses of Congress in the 2008 elections.

The Administration and the Democratic Party establish grumble about the "professional left". But their weakness is not among the "professional left". Their weakness is among their base voters, most of whom are not political junkies who obsess over the nuances of the wording of White House statements on Social Security. Between the ones who decide to stay at home on Election Day, the ones who are so disgusted at the state of the economy or the Administration's attitude toward Social Security that they vote for some third party out of protest, and the persuadables among Democrats and the small portion of actual independents, the risks are great in pursuing Republican policies on spending and the economy to capture that largely-mythical "center" our Pod Pundits love so much.

But the Administration's current strategy actually seems to welcome criticism from the Democratic base, not to create wider support for Democratic policies but to allow Obama to posture as a good Centrist. Digby quotes a good example from Richard Wolffe, who she calls a "White House stenographer". (Budget Triangle Hullabaloo 02/14/2011) Talking about criticism of Obama's budget plan from unions, Wolffe explained to Chris Matthews, "But actually that kind of criticism is going to help this president."

In order to play the "moderation" game with our star pundits, the White House needs to be able to point to criticism "from the left and the right." And, politics being politics, that's a standard part of the game all the time on individual issues.

The danger is that the Obama Administration seems to be pursuing a "triangulation" strategy based on how they perceive that Bill Clinton's triangulation strategy between Democrats and Republicans worked in the 1990s. But, as many have pointed out, we are looking at a very different economic situation in 2011 than in 1995. Here's Reich's explanation from The Obama Budget: And Why the Coming Debate Over Spending Cuts Has Nothing to Do With Reviving the Economy 02/13/2011.

To official Washington it seems like 1995 all over again, when Bill Clinton and Newt Gingrich played a game of chicken over cutting the budget deficit, the hawks warned about the perils of giant deficits, and the 1996 general election loomed over all. Washington politicians and the media know this playbook by heart, so it’s natural for them to take on the same roles, make the same arguments, and build up to the same showdown over a government shutdown and a climactic presidential election.

But the 1995 playbook is irrelevant. In 1995 the economy was roaring back to life. The recession of 1991 had been caused (as are most recessions) by the Fed raising interest rates too high to ward off inflation. So reversing course was relatively simple. Alan Greenspan and the Fed cut interest rates.

In 2011 most Americans are still in the throes of the Great Recession, which was caused by the bursting of a giant debt bubble. The Fed can’t reverse course by cutting interest rates; rates have been near zero for two years. [my emphasis]

It's always possible that a new financial bubble not now on the radar screen will pop up to change things soon. Or that the Confidence Fairy will soon make magic happen. But "the bursting of a giant debt bubble" means we're still in a period of deleveraging, i.e., people reducing their debt burdens. Falling housing prices, massive foreclosures which put even more downward pressure on housing prices, and heavy credit card debt don't leave a lot of slack right now for American consumers to go on a near-term spending binge. And while China and some other developing countries have resumed strong growth, the US exports to those countries aren't going to produce any immediate boom.

The Obama Administration is gambling an awful lot on super-optimistic economic expectations and a political strategy that essentially needs a rapidly-growing economy to be viable.

The other potentially misleading part of the Clinton 1995-6 analogy is that Bill Clinton was willing to fight the Republicans, and it took that fighting to make the triangulation strategy work to the extent that it did. As Joe Conason explained just after the 2010 election in Obama should push back -- like Bill Clinton Salon 11/04/2010, "compromising with the Republicans isn't exactly what Clinton did -- or not at first, anyway. Before he could do anything else, he had to push back."

Obama, on the other hand, is inclined to the sort of preemptive surrender that his budget proposal on Monday appears to represent, once again.

Tags: dean baker, obama administration, robert reich, us economy

Dean Baker describes the housing bubble and how it hammered consumer demand

Economist Dean Baker shares his calculations of how the housing bubble ended up in the current depression (or Great Recession, if you prefer) in Beating Up On Brad DeLong TPM Cafe 11/28/2010:

The story of the bubble is painful, yet simple. Beginning in the mid-90s nationwide house prices diverged from a 100-year long trend. By the peak of the bubble in 2006, house prices were more than 70 percent above their trend level. This created more than $8 trillion in housing bubble wealth.

This wealth drove the economy in two ways. It had a direct effect in propelling construction, which peaked at 6.2 percent of GDP, about 2.5 percentage points above its post-war average. The bubble wealth also lead to a huge surge in consumption -- through the long-known housing wealth effect. With a wealth effect of 5-7 cents on the dollar, the bubble would have been expected to lead to $400 billion to $560 billion in excess consumption demand.

When the bubble burst, consumption predictably plummeted. Throw in another $6 trillion in lost stock wealth and we get a decline of $600 billion to $800 billion in consumption. (The stock wealth effect is estimated at 3-4 cents on the dollar.) ...

This gets a total loss in annual demand of more than $1.2 trillion. Note that the financial crisis appears nowhere in this story. Exactly what mechanism do we have in the private economy for replacing $1.2 trillion in private demand in a short period of time?

If I read him correctly, his point is that the financial crisis of 2008 may have exacerbated the crisis. But the core of it is the collapse in consumer demand caused by the housing bubble. And I think there's a lot to be said for that view.

Tags: dean baker, us economy

What's up with that anti-Social-Security "fiscal responsibility" summit on Monday?

Jane Hamsher at FireDogLake has been actively pursuing the anti-Social-Security jihad being bankrolled by reactionary billionaire McCain-Palin supporter Peter Peterson. See If Ezra Klein Really Wants to End the “Entitlement Scare,” He Should Do It 02/19/09.

Isaiah Poole at the Campaign for America's Future has an recording up of Jamie Galbraith, Nancy Altman and Dean Baker talking about this thing: Economists, Hickey Discuss Fiscal Responsibility Summit 02/19/09.

The Democrats have to give up their obsession with balanced budgets. The Republicans don't worry about the deficits at all when a Republican administration is making deficits balloon with wars and huge tax cuts for the wealthiest.

William Greider provides an useful explanation of the anti-Social-Security scam in Looting Social Security The Nation 03/02/09 issue; accessed 02/13/09. I say he explains the scam well. But I have some reservations about how he explains the financial mechanics involved.

But the goal of the scamsters is ideological: to cut Social Security as part of a campaign to phase it out. It would be a boost to those mega-bonuses on Wall Street if they could do what Bush wanted to do, which is to start channeling some of the tax money now going out of the social insurance program that Social Security has always been and into IRA-like investment accounts.

But their goal is to wipe out Social Security, which is a social insurance program that provides a minimum pension payment to retired people.

But when Greider tries to explain the Peterson scam's pitch, he fails to make a clear distinction between what's the anti-Social-Security scam and what's real about how the program works:

Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes--whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are--around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.

That bit about how "the government has already spent their money" plays right into the anti-Social-Security con artists' pitch. This is basic stuff about how borrowing works, really basic. A depositor puts $100,000 in a bank. The bank doesn't put that money in a safe-deposit box in the vault and keep it for when the depositor wants to take some out. The bank keeps sufficient reserves to manage normal case demands and puts that money to work by lending it out. If a business gets a $100,000 loan from the bank, they can't get away with saying, "Sorry, I can't pay you back, I've already spent the money on the equipment I borrowed it for." That's just a silly way to look at it. (The Democrats' fiscal-responsibility pitch during the Clinton years about the "Social Security lockbox" unfortunately helped promote this kind of muddled thinking about the program.)

He also furthers this impression by calling the Trust Fund surplus "the money pot the establishment wants to grab". I'm sure they would love to. The polemical value sounds good on the surface. But that's not a good description of what's happening. What the Peterson crowd wants to do is cut the benefits of that program and eliminate the program itself as soon as feasible, i.e., make that money pot go away.

Yes, the federal General Fund borrows money from the Social Security Fund which is currently in surplus. And, as Greider writes, the General Fund "legal obligation to pay back the money with interest". But it's mystification to describe this as the federal government having "dipped into the Social Security trust fund". And also to say, "The Social Security surplus thus makes the federal deficits seem smaller than they are." Uh, no. The FICA (Social Security) tax is a federal tax collected by the federal government. In terms of measuring the overall federal deficit, the net amount contributed by the FICA tax has to be considered. This confuses the accounting for the General Fund with the real deficit of the whole government. (The way the federal deficit is accounted for is different than the way state deficits are accounting for, and that causes problems of its own. But that's a whole other story.)

That moment of reckoning is approaching. Uncle Sam owes these trillions to Social Security retirees and has to pay it back or look like just another deadbeat. That risk is the only "crisis" facing Social Security. It is the real reason powerful interests are so anxious to cut benefits. Social Security is not broke--not even close. It can sustain its obligations for roughly forty years, according to the Congressional Budget Office, even if nothing is changed. Even reports by the system's conservative trustees say it has no problem until 2041 (that report is signed by former Treasury Secretary Henry Paulson, the guy who bailed out the bankers). During the coming decade, however, the system will need to start drawing on its reserve surpluses to pay for benefits as boomers retire in greater numbers.

"Uncle Sam owes these trillions to Social Security retirees and has to pay it back or look like just another deadbeat"?!? Simplifying for the purposes of explanation is one thing. Dumbing down to the point of incoherence is something else. When Bush made the absurd claim in 2005 that the money is gone from Social Security, that's it's all been replaced with worthless IOUs, he was counting on virtually everyone in the world except for American voters knowing that he was blatantly lying. If the US government declared the General Fund unable to pay its debt obligations to the Social Security Trust Fund, China and everyone else would stop buying our bonds, the euro would become the world's reserve currency overnight, and the economic hit we are taking now would pale in comparison to the results of that. The framework Greider uses there is absurd.

But if the government cuts the benefits first, it can push off repayment far into the future, and possibly forever. Otherwise, government has to borrow the money by selling government bonds or extend the Social Security tax to cover incomes above the current $107,000 ceiling. Obama endorses the latter option.

This is getting closer to reality but could be much better. The General Fund has to pay back the money it borrowed from the Social Security Trust Fund. Period. How it finances the meeting of that obligation is another question. As the economists and accountants like to say, money is fungible. It can be used to buy a computer or to pay for a vacation or pay off a debt. The federal government gets money from taxes and fees and interest and other sources. It spends the money on lots of stuff. The General Fund doesn't have to get the money to repay the Social Security borrowing or any other general federal borrowing from the two particular methods Greider names.

Follow the bouncing ball: Washington first cuts taxes on the well-to-do, then offsets the revenue loss by raising taxes on the working class and tells folks it is saving their money for future retirement. But Washington spends the money on other stuff, so when workers need it for their retirement, they are told, Sorry, we can't afford it.

Here he gets to describing the scamsters' pitch, and he does a decent job with that.

In fairness, he may have also meant the preceding paragraphs more as a description of the scamsters' pitch, as well. But it doesn't come off clearly in the article.

Having said all that, it's a piece well worth reading to get an understanding of how the billionaires' anti-Social-Security pitch is being framed.

Tags: dean baker, james galbraith, nancy altman, social security