For years Michael Medved has written opinion pieces claiming
that liberals in Hollywood use films and TV shows to surreptitiously
indoctrinate America’s teenagers. Now he’s evidently decided to turn his
learned gaze in the direction of economics. I should add that I ordinarily
wouldn’t give an argument this shoddy the time of day, but given that (a) a
friend asked me to write a commentary about it and (b) the piece is loaded with
the kinds of accusations we’re likely to face from now until November, I
thought I’d better suck it up and respond.
In a typically ill-informed
column in The Daily Beast, Michael Medved
argues that (1) Obama’s claim that federal spending under his administration is
the lowest since the 1950s is false; (2) job creation has been poor under
Obama; (3) historically, deficit and debt reduction have only occurred when
Republicans controlled at least one house of Congress; and (4) therefore, if we
want to see the deficit reduced further, the GOP should control at least one
house of Congress going forward.
Before going further, let’s look at Medved’s claim about
Obama’s record on employment. Medved, after terming the idea that any president
can create jobs “dubious,” says
…[T]he nation unequivocally lost
jobs in the first 39 months of the Obama presidency: with 142,287,000 working
in May, 2012 (the most recent statistics available) compared with 143,338,000
at the end of December, 2008—the last employment numbers announced under
President George W. Bush.
He bases this on what he calls the “raw” numbers at the
Department of Labor. It’s not clear what Medved means by “raw” (he doesn’t
supply links to any sources) so I have to assume it means simple unemployment
figures. That’s problematic because "raw" number comparisons are
misleading in that they don't account for changes in the size of the
population. That's why economists use the employment-population ratio instead.
Regardless, Medved’s comparison is based on inclusion of
Obama’s first year in office—before most of his programs took effect.
If Obama’s first year is excluded,
4 million jobs were created by Obama—much
more than were created under Bush in 8 years (even excluding the losses during
the economic crisis). Yet in touting his own record as governor of
Massachusetts,
Romney
excludes the job losses that occurred during his first year in office—an
exclusion that draws no criticism from Medved. So why does he use a different
metric for Obama? I’ll comment more on the employment issue further on.
Medved cites Glenn Kessler of Politifact approvingly for
giving a “3 pinocchios” rating to President Obama’s claim that “federal
spending since I took office has risen at the slowest pace of any president in
almost 60 years.” The basis for Kessler’s
(and Medved’s) claim is hard to determine. Economists
Mark
Thoma,
Paul
Krugman and
Benjamin
Landy, and journalists
Derek
Thompson and
Sahil
Kapur have shown that Obama’s claim is fundamentally correct.
Underlying Medved’s criticisms of Obama is a vision of the
appropriate economic role of government shared with many in the GOP—i.e., a
role restricted to deficit reduction. This approach implies that the sole
economic role of the US government—even during the worst economic crisis since
the Great Depression—is a balanced budget. The obvious logical extension is
that no action is needed by the government to deal with the recession. This
completely misunderstands the difference between this recession and every other
modern recession.
For the current recession, unlike any we’ve experienced in
modern times, is a
balance
sheet recession, characterized by the following:
- An asset bubble bursts (i.e., real estate).
- Private sector balance sheets have much more
debt than assets.
- Businesses turn from profit maximization to debt
reduction as a result.
- Because all are reacting similarly, there are no
places to put accrued savings and debt repayments.
- The result is increasing pressure toward
depression.
Perusal of an
employment-population ratio
chart on the BLS website (for a really clear picture of the severity of the
crisis, select the period 1947-2010) shows the sharpest drop in employment in
the US ever recorded.
We lost 4 million jobs from the collapse of Lehman in
September 2008 until Inauguration Day, January 20, 2009. From December 2007
until the stimulus package started to take effect in June 2009, we lost a total
of 8.8 million jobs. We also lost 4% of GDP. That was one huge bubble bursting.
And the
overhang
of private sector debt was enormous. Total private and public debt in the US
rose by 75 percentage points from 2000 to 2008, reaching about 300%. It has
since declined by a higher rate than that of any other country, due entirely to
debt reduction in the private sector. Government debt has increased during that
time, due to emergency measures taken to counteract the effects of the economic
collapse, about which, more later. And as mentioned, the shift from profit
maximization to debt reduction has eliminated opportunities for investment, fueling
pressures toward deflation and, eventually, depression.
So here we are. The unemployment
rate currently is 8.2%. GDP growth, now 1.9%, is far below the historical
average of 3.4%. Millions of people are out of work, many for over a year, and
the poverty rate is now 15.1%. And
again, the private sector, due to its current devotion to debt reduction, is in
no position to create economic growth. Given that the states are mandated by
their constitutions to balance their budgets, state efforts to boost the
economy cannot be counted on, either. That leaves the only entity in a position
to do so: the federal government.
Because of the nature and depth
of the economic crisis (and the Obama administration did not know the full
extent of the crisis, since it was depending on available numbers, which were
inaccurate), Obama responded with the stimulus package, which included the
following:
- TARP (signed by Bush)
- Auto industry bailout (opposed by Mitt Romney at the time)
- ARRA (passed without a single GOP vote in the House; passed with 3 GOP votes in the
Senate)
- Health care reform (universally opposed by GOP. Romney has vowed to repeal it.)
How did those measures work out?
TARP, which was signed into law
by President Bush on October 8, 2008, is one of the most unpopular laws ever
enacted. It’s not hard to understand why—the prospect of paying taxpayer money
to the banks that primarily caused the economic crisis (and whose executives
then paid themselves enormous bonuses with the money) was infuriating to all of
us, as was the failure of the bailout deal to give the public a controlling
equity stake in the financial institutions we paid. However, given the depth of
the crisis, the intertwining of financial institutions across the globe via
complex deals based on mortgage-backed securities, the lack of federal laws
giving the government authority to wind down failed banks, and the sheer size
of the institutions involved, there was little alternative. The results have
been mixed. The economic freefall stopped. The surviving banks have returned to
profitability, but have not made credit noticeably more available. Moreover,
they are still laying off employees by the thousands.
The auto industry bailout was
much more straightforwardly successful. The industry has recovered and millions
of jobs were saved. Incidentally, Mitt Romney opposed the auto industry
bailout, although he has since tried to change his story.
According
to Alan Blinder, former member of the Federal Reserve Board, and
Mark
Zandi, chief economist at Moody’s Analytics and former adviser to Sen. John
McCain’s 2008 presidential campaign, the stimulus saved about 8.5 million jobs
and boosted GDP by about 6.5%. If not for the stimulus, they said, we’d be
experiencing deflation right now.
The
Congressional
Budget Office (CBO) recently analyzed the Affordable Care Act. They found
that the act will (1) provide 34 million more people with health insurance; (2)
end recission; (3) end denial of coverage due to pre-existing conditions; (4) end yearly and lifetime caps on coverage;
and (5) enable children to receive coverage under their parents’ plans up to
the age of 26, all at a net cost of just under $1.1 trillion over 10 years;
reduce the deficit by $210 billion over 10 years; and implementation costs to
the IRS and HHS will total between $5 billion and $10 billion over 10 years.
So what is our current economic
situation?
We are currently facing an
international economic slowdown, at best, with ominous implications for
economic recovery in the US. The Eurozone is on the verge of implosion due to
an inability to respond to their own balance sheet recession. Northern and
western Eurozone banks lent heavily to Greece, and the latter, an economic
basket case, is unlikely ever to be able to pay them back, especially under the
harsh austerity measures that have been imposed on that country. Eurozone
overhang also represents exposure by many large US banks, so we may experience
more turmoil as a result. The Eurozone fixation on austerity measures has greatly
increase misery in Europe.
- The UK, which has experienced drastic budget
cutting courtesy of the Conservative government of David Cameron, has
experienced the longest period of zero economic growth since the Great
Depression, and recently sank back into recession. Unemployment is skyrocketing
and social services have been slashed.
- Greece, as mentioned, is utterly dysfunctional
and will likely remain so for the foreseeable future.
- Spain, with a much larger economy than that of
Greece, has a huge problem with real estate overbuilding and has just sought a
bailout.
- Italy, Portugal and Ireland are all suffering
due to austerity measures.
All of this means the Eurozone is
increasingly unlikely to be a source of robust business for American companies,
many of which have extensive trade with the Eurozone countries. In addition,
instability created by the very real possibility of Greece’s exit from the
Eurozone may very well translate to economic instability globally.
- Meanwhile, the Chinese economy is slowing due to
lack of development of domestic markets to offset the recession-fueled decline
of international trade.
- India has likewise slowed down, and Brazil,
whose economy is closely tied to that of China in a number of ways, is also
slowing down.
In short, there are no global
alternative sources to which we can turn in efforts to boost trade.
As mentioned previously, in the
US we face 8.2% unemployment and GDP growth of 1.9%. During Obama’s first term
in office, 780,000 private sector jobs have been created, but due to cutbacks
at the state level, we’ve lost 660,000 public sector jobs.
This is because all
states (except Vermont) are mandated by their constitutions to balance their
budgets. Thanks to a deal in exchange for GOP Sen. Olympia Snowe’s vote, 40% of
the Recovery Act consisted of tax cuts. As a result of that and the previously
mentioned misunderstanding of the depth of the recession, the Recovery Act did
not contain enough direct financial aid to the states to offset budget cuts at
that level.
US government spending, as noted
by Obama, is now lower than at any time since the 1950s—this at a time when the
government is the only actor capable of offsetting the effects of the
recession. These cutbacks are, as Medved says, largely due to the influence of
the GOP in Congress, although the implications of that budget cutting
insistence are far different from the positive picture he paints.
In a balance sheet recession, any
quick government action to boost the economy, such as lowering interest rates,
will not produce discernible results in the short run. This is particularly
true given that interest rates are already close to zero—the lowest we’ve seen
in our lifetimes. Inflation is at record lows, too, which can actually be
dangerous given the tendency of a balance sheet recession to push toward
depression. However, austerity policies in the face of such a crisis are
virtual guarantees of return to recession or worse. The financial crisis begat
the economic crisis when credit markets froze up. Without access to short-term
credit for things like payroll, businesses began laying people off. Those laid
off were no longer in a position to engage in consumer purchases, meaning that
businesses lost more customers. In the context of huge layoffs, individuals and
businesses cut back across the economy, which makes perfect sense at the
individual level. The problem is that the combined effect of this mass
withdrawal from participation in the economy is a substantial decrease in
economic activity, meaning far less money flowing through the system, reflected
in lower GDP.
Into this mix the GOP has added severe
budget cutting while giving additional tax cuts to the wealthy. Both represent
a decline in federal revenues at precisely the time when our government faces
the most severe economic crisis in 70 years. On top of that, the GOP has used
various extortion tactics to get their way, despite having a majority in only
one house of Congress. This brinkmanship resulted in the debt ceiling fiasco of
last summer, the result of which was the looming sequester at the end of this
year—automatic cuts of 17.1% of non-defense spending across the board, and
automatic cuts of 15% of defense spending across the board. Leaving aside the
arbitrary nature of the cuts, we’re facing, at a time when not enough money is
flowing through our economic system, further withdrawals of about $1 trillion
from that system. The
CBO
analyzed the combination of sequester and expiration of the Bush tax cuts,
concluding that it would cause a return to recession in the first half of 2013,
regardless who gets elected in November.
This, evidently, is Medved’s idea
of responsible economic stewardship. Excuse me for thinking that his (and the
GOP’s cure is more damaging than the disease.
I especially love this: Medved then goes on to say,
“Statistics show the dramatic difference in fiscal performance between
Congresses controlled by Republicans and those dominated by Democrats.” I assume he must be referring to the enormous
deficits and debt racked up by first Ronald Reagan and then, especially, George
W. Bush. He must have in mind the Bush tax cuts, which turned the biggest
surplus in US history into an enormous deficit; or fighting two wars without
raising taxes to pay for them; or Medicare Part D, an unfunded mandate. Those
three alone made up about 70% of the $1.2 trillion deficit Obama inherited from
Bush and almost every Republican whose been howling about debt and deficits
for the past 3 years voted to create them—undoubtedly urged on by Medved
himself. Or maybe Medved has in mind the GOP’s taking hostage extension of
unemployment insurance at the beginning of 2011 in exchange for—you guessed
it—extension of the totally non-stimulative Bush tax cuts—which continue to
gouge a huge (and growing) hole in the budget. Then there’s the debt ceiling
extortion by the GOP, resulting, as previously noted, in the upcoming sequester.
Yes, Medved, tell us more about those differences in fiscal performance between
the GOP and the Democrats.
Then Medved really jumps the shark, claiming that “partisan
majorities in the House of Representatives (where the Constitution stipulates
that spending bills must originate) seem to matter more to the scope of deficit
spending than whether a donkey or an elephant occupies the Oval Office.” To
which I say, Balderdash. The only time in modern history when a majority in one
house of Congress has been enough to dictate federal policy has been during the
current administration, thanks to the combination of a House dominated by right
wing fanatics and a Senate in which continual filibuster threats by the GOP
have created a new de facto Senate requirement of 60 votes to pass any
legislation or even to have a debate about a nomination. And again, when it
comes to deficits, George W. Bush is in a class by himself. And Mitt Romney's
economic plan threatens to dwarf every predecessor when it comes to debt and
deficits.
Medved goes on:
“President Obama rightly chides his
Republican presidential predecessors for disappointing records of fiscal
management, but fails to note that for all 12 years of the Reagan and first
Bush administrations, and for the last two difficult years of the second Bush
administration, Democrats wielded big majorities in the House.”
One might draw from this that Medved has never heard of the
veto. In fact, many Democrats, to their eternal shame, went along with Reagan
and Bush policies. Back then, you see, we had a thing called
bipartisanship—which, as these examples show, is not always an unalloyed Good
Thing. Sometimes, the content of policies really is more important than the
nature of the process—but that’s a story for another day. Medved then continues to cherry-pick history,
attributing the boom economy under Clinton to the alleged economic stewardship
of the House GOP, conveniently omitting Clinton's first economic plan, passed
without a single GOP vote amid GOP predictions of economic ruin. Medved's
account also omits mention of the TARP bailout of the banks--signed into law by
Bush and continued by Obama. Given the magnitude of the crisis and the legal
constraints on the government, any president would have done the same,
regardless how distasteful it was.
The great economist-cum-historian then gives a good news-bad
news assessment and ends with this:
Based on historical patterns, the
deficit might well continue to decline in a second Obama term—as long as the
GOP maintains control of Congress and exercises stern supervision of the
administration’s credit card.
A faulty major premise leads to a faulty minor premise,
which leads in turn to a faulty conclusion. Perhaps Medved should learn
something about economics—not to mention economic history and logic—before he
decides to write about the subject again in the future.
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