Tuesday, June 19, 2012

GOP Economic Genius, Chapter 537,629

The GOP wants to cut $2 billion a year from the SNAP program (formerly known as food stamps), ostensibly to reduce the deficit. A few questions are in order: 

Does the GOP care about reducing the deficit? They say so (loudly & often) but if so, why do they resist raising a single penny in taxes, regardless of circumstances, to increase revenues? And why do they continue their push to make the Bush tax cuts permanent & (in Paul Ryan's--and Romney's budget) to give even more tax cuts to the wealthy, further reducing federal revenues? 

The GOP makes two claims in defense of tax cuts: 
  • Cutting taxes on the wealthy (sorry--I mean, "job creators") will lead to a rush of investment, causing a dramatic increase in GDP growth. But that was tried under George W. Bush & we had the slowest growth in GDP & job creation since Herbert Hoover. 
  • Behind the scenes, many in the GOP (such as Grover Norquist) argue that intentionally creating the biggest deficits possible will force the government to stop spending, thereby making it, as Norquist put it, "small enough to drown in the bathtub." 

The GOP has managed to create the biggest deficits in history, but they faces a conundrum: The public hates government spending in the abstract, but they love the programs that provide them with benefits (Medicare & Social Security, for instance). Luckily for them, Obama tried to make a grand bargain with the GOP last year over the debt ceiling issue that includes cuts to Medicare, complicating Democratic efforts to draw clear distinctions between the two parties. The difference is that Obama seeks to reduce Medicare spending via a combination of guaranteed issue, quality metrics & other measures reducing costs by increasing the efficiency of delivery, while the Romney/Ryan plan simply hacks away at Medicare, Medicaid & Social Security with a hatchet. The problem for us is that explaining the difference is complicated while obfuscating it is easy. 

Meanwhile, there are the macroeconomic effects of the proposed GOP cuts to SNAP. Mark Zandi, chief economist of Moody's Analytics and former adviser to John McCain's 2008 campaign, has analyzed the tools available to government in boosting economic growth & ranked them in order of effectiveness. At the top? SNAP, unemployment insurance & direct aid to the states. At the bottom (just above accelerated depreciation)? Making the Bush tax cuts permanent. 

Ask yourself whether a party devoted to imposing the least effective economic stimulus while opposing all the most effective stimuli is more committed to improving the economy or to creating misery for their own electoral purposes. Is that patriotism? It's loyalty to something, but country seems to come second to the GOP. 

Sunday, June 10, 2012

Medved's Latest Folly

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.