Whether the GOP wants to admit it or not, the economy is advancing exactly as they want it to. The private sector is being left to its own devices; the public sector is shedding jobs quickly and scrapping investments; and the only permitted topic of conversation is about debt-reduction.
Though the trends might be better than they were in early-2009, the labor market is in much worse shape, and it's clear that more action, and perhaps even big action, is desperately needed. I do not, however, expect that to be the actual response to this news.
Again I know, causation and correlation and all that. But is anyone really going to make the argument that we haven't been essentially following the Republican plan over the last 6-8 months? Basically less government spending and leaving the private sector to its own devices?
Each approach runs into its own set of problems. The econometric studies have to deal with what social scientists call “endogeneity”: that is, the variable whose effect we’re trying to determine (the stimulus) could itself be affected by what we’re trying to study its effect on (the state of the economy). In this specific case, this means that econometric studies sometimes have to correct for the fact that harder-hit areas tend to get more stimulus spending. This says nothing about the stimulus’ effectiveness, but it can confuse attempts to evaluate that effectiveness statistically.I know this will not really change anyone's mind, but having data always makes me feel a little better on the subject.All of these studies have their own methods of overcoming the endogeneity problem, some of which are more effective than others. Whichever corrections one uses, however, one cannot run a perfect experiment with messy, real-world data, which necessarily limits what these studies can say. Of the five econometric studies detailed here, three conclude the stimulus had a significant positive effect, and two conclude it did not have much of an effect at all.
A new report (pdf) from the Tax Policy Center breaks it down. In 2011, about 46 percent of households won’t pay income taxes. For about half of them, the standard provisions of the income tax wiped out their liability. If you don’t make any money but you take a standard deduction and have a few dependents, you’re not going to pay any income tax. Roberton Williams, one of the report’s authors, gives the example of “a couple with two children earning less than $26,400. They get an $11,600 standard deduction and four exemptions of $3,700, and that takes their liability to zero. As he says, “the basic structure of the income tax simply exempts subsistence levels of income from tax.”So to reiterate, the reason the poor do not "pay" income tax, is because of credits that wipe out their tax liability. Or better yet, because they are fucking poor.
Pew goes into some detail about how the recession has hit minorities much harder then their white counter parts, but few have actually looked at the numbers. According to the study, the inflation-adjusted median wealth among Hispanic households fell 66% from 2005 to 2009. Black households suffered a 53% drop in net worth over the same period. By contrast, whites saw a decline of 16% in household wealth.
In 2009, the typical black household had just $5,677 in wealth. Hispanic families had about $6,325 in wealth. The average white household had a net worth of $113,149.
The study also showed that a third of black and Hispanic households had zero wealth, meaning that their debts were larger than the value of all their assets.
Overall, the study attributed much of the disparity to the decline in home values, which hit black and Hispanic households hardest.
In addition, the downturn in the housing market was most severe in states with large populations of Hispanics and Asians, including California, Arizona, Nevada, Florida and Michigan, according to the study.
What you are left with is an opposition that has no incentive to ever compromise. Think about that. Possessing a majority in 2/3rds of the government means you can not govern. The public has so little interest/knowledge in policy that this is an effective strategy.The president sold himself as the great post-partisan hope, the leader who could bring comity and peacefulness to a town riven by partisanship and rancor. When McConnell refuses to come to bipartisan agreements with Obama, he damages Obama’s brand. More than anyone else, McConnell has been responsible for his failure, and key in demonstrating how little any one leader can do to change the tone in Washington.
There’s supposed to be a curb on this sort of behavior: If you don’t participate in the legislative process, you don’t get anything out of the process. Here’s McConnell’s most important insight: That’s wrong. Withholding minority-party votes forces the majority party to hand its most moderate members — and the most moderate members of the other party — an effective veto, which drags the legislation substantively to the center, and in the current situation, to the right.
Health-care reform was more conservative than it would have been if more Republicans had been willing to support it. The stimulus was smaller than it would have been if conservative senators had been willing to back the whole in return for concessions on the parts. It turns out that a partisan political strategy results in more bipartisan policy. The opposition can have its cake and eat it, too. That doesn’t leave much reason for it to be bipartisan, of course. But for a minority party that wants to defeat a president who sold himself as a unifier, that’s a plus.
Self-defeating AusterityI have not seen a counter to this other then, "Austerity will increase confidence!". We have a demand problem. Until that is addressed confidence is the least of our worries.There’s a quite good case to be made that austerity in the face of a depressed economy is, literally, a false economy — that it actually makes long-run budget problems worse.
People like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer — but the heck with it, I’m going to lay it out.
So here’s the outline. Suppose you slash spending equal to 1 percent of GDP. That looks like a budget saving, right? But if you do it in the face of an economy up against the zero bound, so that the Fed can’t offset the demand effects with lower rates, it’s going to shrink the economy. Let me use a multiplier of 1.4; you can adjust the numbers as you wish.
Now, a weaker economy means less revenue. Assume that every dollar up or down in GDP means $0.25 in revenue, which is conservative. Then the fiscal austerity reduces revenue by 0.35 percent of GDP; the true saving is only 0.65 percent.
Now, the government has to borrow those funds; let’s say the real interest rate is 3 percent (it’s actually much lower now). Then the long run impact of the austerity on the fiscal position is to reduce real interest payments by 0.0195 percent of GDP.
But wait: what if there are long-run negative effects of a deeper slump on the economy? The WSJ piece showed one example: workers driven permanently out of the labor force. There’s also the negative effect of a depressed economy on business investment. There’s the waste of talent because young people have their lifetime careers derailed. And so on. And here’s the thing: if the economy is weaker in the long run, this means less revenue, which offsets any savings from the initial austerity.
How big do these negative effects have to be to turn austerity into a net negative for the budget? Not very big. In my example, the real interest payments saved by a 1 percent of GDP austerity move are less than .02 percent of GDP; if the marginal tax effect of GDP is 0.25, that means that a reduction of future GDP by .08 percent is enough to swamp the alleged fiscal benefits. It’s not at all hard to imagine that happening.
In short, there’s a very good case to be made that austerity now isn’t just a bad idea because of its impact on the economy and the unemployed; it may well fail even at the task of helping the budget balance.
It’s important to realize that I’m not saying that government spending always pays for itself, and that saving money is always counterproductive. These kinds of effects are specific to a liquidity trap situation. But that’s the situation we’re in.
In 2001, the Bush administration inherited a few years' worth of budget surpluses, so it decided to cut income tax rates, double the child-care credit, and sharply reduce the levies on investment income. The economy then slowed, even entering a brief recession. As a form of stimulus, the administration doubled down, expanding and hastening the 2001 changes. Bush promised that the tax cuts would do a whole lot more than put money in people's pockets—which, in fact, they did. He said they would "starve the beast," forcing Congress to reduce the size and scope of government. He promised they would increase the prosperity of all Americans. He also vowed: "Tax relief will create new jobs. Tax relief will generate new wealth. And tax relief will open new opportunities."
.....What about the president's claims? Take his pledge that the cuts would spur job growth. To be fair, we'll ignore employment changes during 2008, the year the Great Recession seized the economy. During the 2001 to 2007 business cycle, America's economy enjoyed 52 straight months of job growth. But it was sluggish—in fact, the slowest rate of jobs growth on record since World War II, and just one-fifth the pace of the 1990s.Then there's wealth. Put simply, the aughts were a decade of income stagnation: The tax cuts failed to bolster most taxpayers' earnings, even before the recession hit. Median real wages actually dropped from 2003 to 2007. Household income from business-cycle peak to business-cycle peak declined for the first time since tracking started in 1967. As documented by my colleague Timothy Noah in his series "The United States of Inequality," this did not hold true for the nation's billionaires and millionaires. Garden-variety high-wage earners saw their income go up. And incomes for the top 1 percent skyrocketed. For some people, obviously, the cuts "generated new wealth," in the president's phrase. But overall, inequality got worse.
When economic times are good, households should spend and invest more, while government should spend and invest less. When they’re bad, households need to cut back, and the government needs to step in. But as Karl Smith says, that’s not the only place where the analogy breaks down. Another — and one that’s increasingly relevant — is “not realizing your personal control over spending versus revenues is essentially the exact opposite of the governments control over spending versus revenues.”Mr. Smith goes on to explain the different relationship governments and households have with revenue and spending:
Most middle class folks can cut back on their spending with relative ease. They probably won’t get sick, malnourished or injured from exposure as a result of spending cuts. What this means is that if revenues are running higher than spending – a necessary condition for building up debt – the most obvious choice is to cut spending. Therefore, as a rule of thumb people develop the notion that debt comes from living beyond your means...to the government, the exact opposite is true.
It is much easier for the government to raise revenue than to cut spending. Moreover, most of the movement in the deficit is tied to movements in revenue, not movements in spending. Thus the exact same reasoning that leads you to associate debt and spending in your personal life should lead you to associate debt and revenue for the government.This is not to say that that government can not spend too much. But that the primary reason the deficit has grown so much over the last decade is mainly due to a massive drop off in revenue, Bruce Bartlett explains:
I know it won't stop people from saying it, but it is a bad analogy. Reality works the opposite of what is implied.Revenues were 20.6 percent of GDP in 2000 and 18.5 percent of GDP in 2007, at the peak of the business cycle before the recession reduced them to 14.9 percent of GDP, where they have been for the last two years. (The postwar average is about 18.5 percent of GDP.) Without the Bush tax cuts – and those added by Obama – revenues would likely be more like 17.5 percent of GDP, which is where they were at the trough of the last three recessions.
If revenues had been 2 percent of GDP higher over the last 10 years, the federal debt would be about $2.5 trillion smaller. Instead of having a debt of about 60 percent of GDP last year, it would have been about 44 percent. And that doesn’t take into account all the interest that would have been saved that now adds about $60 billion to the deficit annually. Together, higher revenues and lower interest spending would have reduced last year’s deficit by one-third.
More when we have some details. But two key points:
Ezra Klein talks a bit about it as well this morning:1. Privatizing and voucherizing Medicare does nothing whatsoever to control costs. We’ve seen that from the sorry history of Medicare Advantage. I’m sure that the Republicans will claim savings — but those savings will come entirely from limiting the vouchers to below the rate of rise in health care costs; in effect, they will come from denying medical care to those who can’t afford to top up their premiums.
Oh, and for all those older Americans who voted GOP last year because those nasty Democrats were going to cut Medicare, I have just one word: suckers!
The House GOP’s 2012 budget, prepared by Rep. Paul Ryan, will privatize Medicare, block grant Medicaid, and cost $4 trillion over a decade, reports Naftali Bendavid: “Republicans will present this week a 2012 budget proposal that would cut more than $4 trillion from federal spending projected over the next decade and transform the Medicare health program for the elderly, a move that will dramatically reshape the budget debate in Washington...The plan would essentially end Medicare, which now pays most of the health-care bills for 48 million elderly and disabled Americans, as a program that directly pays those bills...Mr. Ryan’s proposal would apply to those currently under the age of 55, and for those Americans would convert Medicare into a ‘premium support’ system...The proposal would also convert Medicaid, the health program for the poor, into a series of block grants to give states more flexibility.”First they targeted unions, now they come for the social safety net.
