Paging Don Quixote

Note: When confronted with an argument as ludicrous as this, I generally move on to something more fruitful. But given that this nonsense is spreading around at the moment, I felt it necessary to say something.

In one of the most poorly reasoned posts I've ever read, Patrick Walker & Kevin Zeese argue that Bernie Sanders could win the election as a third party candidate on a ticket with the Green Party's Jill Stein. They claim Sanders is “well-positioned for the general election campaign” because the largest group of voters is, like Sanders, independent; his “views...have become the national consensus;” and he's opposed by “the two most disliked major-party nominees in history” and “two divided parties.” Moreover, they claim that “[w]ithout Sanders in the picture, Trump could run to Clinton’s left.” Trump, they say, “has made some sensible statements against wars that contrast with Clinton’s militarist positions.” Lastly, they note that “Sanders has defeated Trump by more than 14 points in the last 10 polls measuring who would win if they ran against each other. And Sanders and Clinton are neck and neck in national polls.”

Walker & Zeese's argument has a multitude of problems. 

The fact that Sanders is an independent and that independents make up the largest bloc of voters does not mean independent voters are monolithic. In fact, as the Pew Center for the People and the Press notes,

Most of those who identify as independents lean toward a party. And in many respects, partisan leaners have attitudes that are similar to those of partisans – they just prefer not to identify with a party. (See this appendix to our 2014 polarization report for an explainer on partisan “leaners.”) 

The balance of leaned partisan affiliation has changed little in recent years: 48% identify with the Democratic Party or lean Democratic, while 39% identify as Republicans or lean toward the GOP. Democrats have led in leaned party identification among the public for most of the past two decades.

Assuming for the sake of argument that independents will vote as a bloc based on their prior party affiliation, Sanders could conceivably garner the votes of 49% of independents, if we assume that formerly Democratic independents would vote as a bloc for him alone. This might conceivably make some kind of sense (I find it far-fetched on its face) if we conveniently assume further that Hillary simply drops out of the race as a convenience to Sanders. But what evidence do Walker & Zeese have in support of such convenient assumptions? In reality, faced with a three-way race, the formerly Democratic portion of independents would split their votes between the two Democrats, giving the advantage to Trump.

Likewise, Walker & Zeese's assumption that Sanders' “views...have become the national consensus” is a bit of a stretch. While it is true that a large majority of the electorate agree very generally on the issues mentioned by the authors, such agreement dissolves fairly quickly when the conversation turns to remedies. Canvass the GOP on single payer health care, government action to break up the big banks and regulate the financial sector much more tightly than is currently the case, and you'll see consensus collapse in a heap. 

Amazingly, Walker & Zeese claim that “[w]ithout Sanders in the picture, Trump could run to Clinton’s left,” which, aside from a total absence of any inclination by Trump to do so, is belied by the obvious fact that were he to try it, he'd instantly lose the support of everyone within the GOP on whom he must depend to win the presidency and to fill appointments to government positions in his new administration. Moreover, Trump, they say, “has made some sensible statements against wars that contrast with Clinton’s militarist positions.” Presumably they weren't referring to Trump's statement that “I would bomb the [expletive deleted] out of [ISIS],” or his claim that he could force soldiers to ignore their oath of obedience to the constitution and perform acts of torture & kill their families. While it is true that Trump has made a few statements that were well outside traditional GOP warmongering boundaries, his inconsistencies are reflections not of any liberal impulses, but rather a total ignorance of politics, economics and everything else. Walker & Zeese may comfort themselves by redefining Trump as an occasional progressive. A more accurate interpretation of Trump's rhetorical teetering across the political spectrum is that a broken clock is right twice a day. 

Walker & Zeese note that “Sanders has defeated Trump by more than 14 points in the last 10 polls measuring who would win if they ran against each other. And Sanders and Clinton are neck and neck in national polls.” This, of course, conveniently overlooks the fact that while Clinton and Trump are known universally, Sanders himself is relatively unknown by the general public. And voters generally don't tune into the election contest until just before voting starts. Sanders has yet to undergo the kind of pulverizing Clinton has experienced at the hands of the GOP over the last 24 years. Tell me what his poll numbers look like after an avalanche of GOP slander. 

Why exactly an alliance with Jill Stein is supposed to be the vehicle for Bernie's accession to the presidency is never made clear in the post. Stein has far less name recognition than Bernie & no appreciable resources. The only possible effect such a quixotic candidacy would have is to siphon off votes from Hillary Clinton, thereby electing Trump. It is telling that Walker & Zeese assert that “It is also a myth that Nader cost Gore the election,” given that their ridiculous argument is a blueprint for a repetition of exactly the same folly.

Romney Economic Team Disgraces Itself

The Brookings/Tax Policy Center study released a few days ago showed that Mitt Romney's taxation plans to :

• Lower tax rates by 20%
• Offset rate reduction by eliminating tax expenditures (exemptions, deductions & credits)
• But excluding expenditures dealing with investment income & savings
• "[M]aintain the current level of progressivity by making sure that the top one percent pays no less in taxes and everyone else pays no more."

are impossible to achieve.

Breaking down tax expenditures by social class, Mike Konczal shows that of those aimed at the working poor, 60% go to the bottom 40%; of those aimed at the middle class and upper middle class, +50% go to those between 80th & 99th percentile; and of those aimed at the top 1%, over 50% go to the top 0.1%, while 75% go to the top 1%.

Romney's problem is that he wants to lower taxes on each group and offset the reduction by eliminating its tax expenditures--except for those related to capital gains, dividends and savings, which go almost entirely to the 1%. Ergo, he has to make up the gap by cutting deeper into tax expenditures for the poor and working class. The problem is that there aren't enough in tax expenditures to the latter two groups to make up the gap.

The Romney campaign responded with a white paper put together by its economic team: economists Kevin Hassett, Glenn Hubbard, Gregory Mankiw, and John Taylor,  "The Romney Program for Economic Recovery, Growth, and Jobs."

The white paper claims that Obama's economic stimulus plan was ineffective, and that "Uncertainty over policy – particularly over tax and regulatory policy – limited both the recovery and job creation."

Unfortunately Romney's economic team cherry-picked the studies it used. Out of 15 studies of the stimulus, 13 found it to be at least partly effective. Of the two remaining, one was by John Taylor, a member of Romney's economic team, and showed not that the stimulus didn't work, but that stimulus funds were diverted by states for other purposes. The other study focused on the "cash for clunkers" program, not the stimulus as a whole.

The white paper's claims that Obama tax and regulatory policies suppressed the recovery by creating uncertainty relies on circular reasoning and astonishingly shoddy methodology. The white paper creates an uncertainty index consisting of a news search, disagreement among economic forecasters, and "the number of federal tax code provisions set to expire in future years."

The latter essentially blames Obama for uncertainty created by the fact that the Bush tax cuts, constructed by (among others) Romney economic team member Glenn Hubbard, were designed to be temporary, with an expiration date coinciding with Obama's election.

The second part involves creation of a news search index constructed so as to function as a sort of echo chamber for conservative talking points, much like Fox News. As Mike Konzcal notes:

Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.

Lastly, the news search is constructed such that any story referencing the search terms will yield a positive result, whether the story reflects support for or opposition to the idea that uncertainty dampened the recovery, or whether the uncertainty in question had to do with supply or demand.

So aside from the fact that the white paper (1) cherry picks studies to give a misleading picture of the stimulus; (2) tries to hold Obama responsible for the temporary nature of a GOP-written tax cut plan; (3) creates a news search index that pushes GOP talking points and falsely inflates its results, it's all good.

And isn't this the perfect defense for a candidate who (a) tries to deny paternity of Obamacare; (b) has to hide from his record at Bain Capital; (c) had his gubernatorial staff destroy all e-mails prior to leaving the Massachusetts state house; (d) won't release his taxes; and most importantly, (e) won't tell the American public what he'll cut or by how much in order to pay for enormous tax cuts for the wealthiest?

Romney's Economic "Plan" in Brief

According to a recent poll, registered voters trust Mitt Romney more than Obama when it comes to managing the economy. Partly, this can be explained by the fact that the economy is still sputtering, with an 8.2% unemployment rate and slow GDP growth. Another cause may be the fact that hardly anyone knows what Romney actually has in store for our country's economy.

With that in mind, here's a brief rundown of the economic components of Romney's plan and its effects, budgetary and economic.

To put it simply, Romney combines Paul Ryan's economic plan, the tea party demands for "cut, cap and balance," and replaces Ryan's call for a reduced rate of increase in defense spending with a massive increase of 66% above current levels.

• Massive tax cuts, overwhelmingly to the richest 1%:
• Making the Bush tax cuts (all of them) permanent
• Cutting tax rates 20% across all brackets
• Elimination of the estate tax
• Elimination of the Alternative Minimum Tax (AMT)
• Reduction of corporate tax rate from 35% to 25%
• Elimination of corporate tax loopholes to offset the rate reduction above
• Changing corporate taxation so corporate earnings overseas are not taxable in the US

• Cap on federal spending at 20% of GDP (federal budget is now 24% of GDP)

• A huge increase in defense spending

• Repeal of Affordable Care Act

• Repeal of Dodd-Frank financial regulatory reform law

• Turning Medicare into a voucher system

• Turning Medicaid funding into block grants

• Balanced Budget Amendment to the Constitution

Key Points:

• Total reduction in federal revenues from the above: $10.7 trillion over 10 years.

• Eliminating tax loopholes won’t be enough to offset the huge loss of federal revenues. 

• To grow our way out of the deficit, as Romney claims, would require the economy to grow twice as fast--every year--as it has historically (on average). No credible economist thinks this can happen.

• The GOP is against raising any tax, of any kind, at any time. 

• So the only options are enormous budget cuts or even bigger deficits and much deeper debt.

What would be the economic effects of such huge budget cuts? To get an idea, look at what’s happening in the Eurozone. Drastic budget cuts have left the UK in a longer period without economic growth than during the Great Depression, and the UK has just gone back into recession. The unemployment rate in Spain is now 25%--for workers under age 25, it’s 50%. Ireland, Portugal and Greece are in recession, the latter having become an economic basket case with no hope of revival. 

Or consider this: Last summer's debt ceiling debacle led to an agreement in which huge cuts in domestic spending (17%) and defense spending (15%) would kick in automatically (a "sequester") if a congressional supercommittee failed to reach a deal on raising the debt ceiling and cutting the deficit. Republicans refused to allow tax increases of any kind and the deal fell apart. The non-partisan Congressional Budget Office has concluded that the combination of the sequester and expiration of the Bush tax cuts would push the economy back into recession for the first half of 2013, regardless who is in the White House. Or, to put it another way, withdrawing a large amount of money from an already weakened system is exactly the opposite of what should be done when economic activity has declined significantly.

Is that the kind of economic future we want?

Conservative Complaints about Obamacare--Deficits, Universality, Bipartisanship

A conservative comments on a friend's Facebook page:

I think most Conservatives are concerned that the plan offered will increase the debt, increase taxes, increase costs of healthcare for many, and was the furthest thing from a bipartisan effort. Everyone agrees that healthcare needs reforming, but there was little attempt to come up with a plan that works for both sides and contains costs. And, I think that most Conservatives disagree with Romney's assertion that the individual mandate is the answer... I, and many others, believe that it is an unconstitutional over-reach of federal powers. Even SCOTUS agreed that this was an unconstitutional used of the Commerce Clause. SCOTUS then said that this was constitutional based on Congress' taxing authority. Even Obama knew that backing the mandate with a tax would not be tenable. So, he did everything possible to convince everyone that it was a "penalty" rather than a "tax".

In re constitutionality, you have no argument, agreeing in your own comments above that the SCOTUS has declared the ACA constitutional. Whether the mandate is defined in re commerce or as a tax is a political decision, as it was for Romney when he instituted basically the same plan in Massachusetts.

Let's look at the rest of the points raised.

Debt & Deficits: The Congressional Budget Office (CBO) analyzed the Affordable Care Act & found it will produce a "net reduction in federal deficits of $143 billion over the 2010-2019 period." This is because the bill was crafted according to "Pay-go" rules in Congress, which were abandoned when the GOP regained control of the House.

Universality: The ACA does not result in universal health care. Neither did the GOP bill authored by Dave Camp. In fact, Kaiser Health News compared it to the Affordable Care Act & the 1993 GOP health care reform bill. It found that the Affordable Care Act is almost identical to the 1993 GOP bill. 

The November 2009 GOP bill:

• Makes Efforts To Create More Efficient Health Care System
• Includes Medical Malpractice Reform
• Prohibits Insurance Company From Cancelling Coverage
• Prohibits Insurers From Setting Lifetime Spending Caps
• Extends Coverage To Dependents (up to age 25)
• Would cost $8 billion over 10 years
• Reduces by deficit by $68 billion over 10 years
• Would have covered 82% of Americans by 2019

By contrast, the Affordable Care Act does the following:

• For Insurance Of Self-Employed
• Extends CoverageRequire Individuals To Purchase Health Insurance (this obviously is the most unpopular part)
• Requires Employers To Offer Health Insurance To Employees
• Provides Standard Benefits Package
• Bans Denying Medical Coverage For Pre-existing Conditions
• Establish State-based Exchanges/Purchasing Groups
• Offers Subsidies For Low-Income People To Buy Insurance
• Long Term Care Insurance
• Makes Efforts To Create More Efficient Health Care System
• Medicaid Expansion
• Reduces Growth In Medicare Spending
• Controls High Cost Health Plans
• Prohibits Insurance Company From Cancelling Coverage
• Prohibits Insurers From Setting Lifetime Spending Caps
• Equalize Tax Treatment To Dependents
• Cost: $871 billion over 10 years
• Reduces by $132 billion over 10 years (the CBO has since revised this estimate up to $230 billion)
• Will cover 94% of Americans by 2019

Then there's the Romney plan. Romney (1) won't act to reduce the number of uninsured; (2) will turn Medicaid funding into block grants, making the program vulnerable to, say, increased demand due to recessions; (3) use tax incentives to move people from employer-sponsored to private insurance; (4) encourage state-level risk pools--with less market power than a national pool; (5) eliminate parents' ability to cover children up to age 26; (6) allow denial of coverage due to pre-existing conditions--to those not already insured; (7) implement all of the above incrementally--essentially verifying that there won't be anything systematic about the resulting "system." Look at all this & ask yourself who gains & who loses. 

Bipartisanship: In a bipartisan process, Jon Perr outlines the 20-year GOP campaign to prevent health care reform.

I'd add to that record the following:

• 15 top Republican congressmembers met--on Inauguration Day--to plot out a plan to obstruct Obama's agenda--across the board. 
• Rush Limbaugh inaugurated the campaign of obstruction the day after Obama's inauguration with his declaration that "I hope hefails." 
• Eric Cantor declared on February 9, 2009, that the GOP strategy would be "justing say no" to everything. 

Note also that health care reform was one of the major issues in the 2008 campaign, and was discussed extensively during that campaign by Democrats & was argued extensively in Congress & across the country during the 18-month legislative process that ended with the bill being signed into law. And when Dave Camp's bill was introduced, the GOP congressional leadership didn't put its support behind it. Why? See above.


UPDATED: I included links in the last bulleted list & cleaned up some spacing irregularities.

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. 

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.

Yesterday, my friend Ben Yee posted this infographic on facebook with the comment, “It’s called investment.”

In response, one commenter wrote,

So all we have to do to get money is just spend more of it. Oh wow, and can I eat my cake and have it too?! Come on. This is totally disingenuous. Let's not pretend we are trying to optimize government fiscal health here. We're not going to consider the cost-cutting measure of executing this kid for his first misdemeanor because it's immoral. And the people who make posters like these would not be at all interested if it could be established that total tax revenue might actually increase if you just slashed programs and taxes and let successful business people keep more of the wealth they generated so as to provide bigger incentives to innovate. By all means, make an argument for statist social planning if you want, but don't peddle snake oil.

This is a classic example of reductio ad absurdum. What's actually being argued via the infographic is that prevention, in the form of social investments enabling the development of marketable skills, is much more cost-effective than denying such investments & dealing instead with the long-term consequences of such neglect. Underlying that is the standard economic concept of the multiplier effect--the process by which money spent by me in a store, for example, is then re-spent by the merchant on supplies, salaries, rent, utilities, etc., in each case then being spent again further on down the line. In this way, my spending contributes to stimulation of the economy.

Mark Zandi, chief economist at Moody's Analytics & former economic adviser to John McCain's 2008 campaign, ranked the various tools available to the government for use in stimulating the economy. 

The most effective? Food stamps, unemployment insurance & infrastructure spending, because they provide direct funding (the latter in the form of salaries to workers) for people in an economic position where they need to spend it immediately, thus contributing to the multiplier effect. The least effective? Accelerated depreciation allowance & making the Bush tax cuts permanent. Why is that? There are several reasons.

Recall that the financial crisis led to a freezing up of commercial credit. When businesses became unable to get short-term credit via the so-called shadow banking system, they became unable to meet payroll, pay rents & utilities, and began laying people off in droves. When Obama took office, we were losing 750,000 jobs per month. In that context, people across all income brackets began cutting their own spending in a perfectly understandable reaction to the worsening economy. Unfortunately, this had the unintended consequence of worsening the recession, as a balance sheet recession in which not enough money was flowing through the system combined with a drastic reduction in demand, further reducing the amount of money flowing through the system. Making the situation even worse was the fact that the states, mandated (in all but one case) by law to balance their budgets every year, began laying off thousands of public sector workers &cutting spending, again reducing the amount of money flowing through the system. By the way, all those laid-off workers were no longer paying taxes on their former salaries, further reducing the amount of federal revenues. Note that in addition to reduced federal revenues caused by a reduction in the number of taxpayers, the recession has been characterized by lack of demand, as explained above. Contra GOP claims that uncertainty is the main cause of continued economic doldrums, repeated quarterly business surveys have shown that businesses rate low demand as the main reason they're not hiring & expanding. Neither the Bush tax cuts or accelerated depreciation allowance will compensate for lack of demand.

The commenter also stated that "...if it could be established that total tax revenue might actually increase if you just slashed programs and taxes and let successful business people keep more of the wealth they generated so as to provide bigger incentives to innovate." This is a repetition of the by now all-too-familiar supply-side argument for austerity budgeting combined with tax cuts for the wealthy. But in a way, the wording above is more accurate than the commenter may have realized. Contra supply-side claims that high tax rates are depressing the incentive to create and expand businesses, James Kwak notes that a recent study by Christina & David Romer shows that "you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates." What actually happens when you lower the taxes of the wealthy in a recession is that, not being forced to spend the fruits of such largess (since their costs are already covered very well, thank you very much), they simply pocket the money. They're willing to pay lawyers & accountants more to hide their wealth from the taxman, but they don't invest in growing businesses. In short, they just get richer. 

Nor is there any correlation between capital gains tax rates and business investment, as noted by Len Burman in Forbes. He notes that

If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth, and vice versa–but there is no apparent relationship between the two time series.  The correlation is 0.12, the wrong sign and not statistically different from zero.  I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth.  There is never a statistically significant relationship.

Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as gains rates and many other factors affect  economic growth. But the graph should dispel the silver bullet theory of capital gains taxes.  Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.

Low capital gains tax rates do accomplish one thing: they create lots of work for lawyers, accountants, and financial geniuses because there is a huge reward to making ordinary income (taxed at rates up to 35%) look like capital gains (top rate of 15%).  The tax shelters that these geniuses invent are economically inefficient, and the geniuses themselves might do productive work were the tax shelter racket not so profitable.  And the revenue lost to the capital gains tax loophole adds to the deficit, which also hurts the economy.  

"Optimiz[ing] government fiscal health" is an interesting concept. What constitutes optimization? A balanced budget? Modern societies rarely achieve that; rather, there's ongoing fluctuation in levels of spending & income, dependent on numerous factors including tax receipts, the state of the economy, the state of imports & exports, inflation, interest rates, exogenous factors like wars, natural disasters, demographic changes, etc. A balanced budget amendment, which Paul Ryan, the Tea Party & Romney have proposed to bring the federal budget into balance, ignores all such things. By setting an arbitrary mechanism to achieve balance, a BBA (especially in combination with an automatic spending cap of 20% of GDP, also advocated by the same sources), would condemn the government (especially given the GOP's resistence to the raising of taxes under any circumstances) to perpetual budget cuts. In the context of the worst recession since Herbert Hoover, the combined effects of budget cutting & additional tax cuts would be to push us back into recession, possibly a depression. Here's the most recent analysis by the CBO of the massive cuts due to take effect at the end of 2012 (thanks to the debt ceiling fiasco), making the same point.

One last point. The reference to "statist social planning" implies a libertarian frame of reference. At root, libertarianism rests on the notion that the only unit of analysis in studying society with any validity is the individual & the only allowable focus is on the rights of the individual. But the answers we reach depend on the nature of the questions we ask, and excluding everything larger than the individual (i.e., the social & historical context within which each individual lives) obscures the influence of those larger phenomena on the individual, making it impossible to see those influences & therefore to create solutions to problems involving such influences. With that in mind, let's not pretend that individual entrepreneurs have been solely or even mostly responsible for the results of their efforts. The development of canals, railroads, highways, the electrical grid, the internet & the GPS technology underlying the functioning of your cell phone have all been central to the growth of technological & social change in the US, as they have been in other countries. Thomas Edison, Henry Ford & Mark Zuckerberg would never have been able to develop their businesses in the first place if not for technologies made possible by (gasp) the government.

The influence of thepernicious anti-government ideology promoted by Ronald Reagan, Ayn Rand et al has been central to the galloping inequality our society has been experiencing. It has also been the underpinning of the thinking that brought on the global financial & economic crises that started in 2007. As noted in a recent Guardian editorial,

At the heart of this calamitous strategy is a wholesale misdiagnosis of how the market economy functions and a complete failure to understand why the financial crisis took place, the profundity of its impact and its implications for policy. For a generation, business and finance, cheered on by US neoconservatives and free market fundamentalists, have argued that the less capitalism is governed, regulated and shaped by the state, the better it works. Markets do everything best – managing business and systemic risk, innovating, investing, organising executive reward – without the intervention of the supposed dead hand of the state and without any acknowledgement of wider social obligations.

The lesson of the financial crisis is that this is complete hokum that serves the political and personal interests of the very rich. It has been an intellectual carapace to permit the creation of dynastic personal fortunes while dismantling the social contract that underpins the lives of millions...

The lesson of the financial crisis is unambiguous. Risk – the existence of incalculable unknowns – cannot be handled by markets alone. It has to be socialised by the state, otherwise we encounter chronically low levels of investment and innovation, along with periodic systemic crises, the core message of John Maynard Keynes.

What we've had up to now is privatized profits & socialized risk. And the GOP politicians, who have been decrying federal spending to counteract the effects of the deepest recession since the Great Depression, are now campaigning on a program including repeal of efforts, however inadequate, to attempt to correct that situation. While we're on the subject of snake oil.

Mitt Romney's Supposed Moderation

On May 11, Scott Lemieux wrote, in re claims by some on the left, that Romney is a moderate:

“He’ll govern as the head of a very right-wing Republican coalition and will be working with a Republican Congress that will send him plenty of terrible legislation. He’ll be working with the Republican foreign policy apparatus that will be urging him to attack Iran and will probably succeed. We don’t even want to think about what will happen to the federal courts. What Romney really thinks about this stuff is beside the point. John Tyler isn’t a successful leadership model for someone who wants to run for re-election.” [http://tinyurl.com/bwn3rnv]

And I would like to elaborate on Scott’s elaboration. Mitt Romney’s economic proposals include:

1. Making the Bush tax cuts permanent;
2. Cutting tax rates across all brackets by 20%;
3. Eliminating the Alternative Minimum Tax (AMT);
4. Eliminating the Estate Tax;
5. Cutting the corporate tax rate from 35% to 25%;
6. Offsetting (D) by eliminating corporate tax loopholes;
7. Changing the US tax system to a territorial one, meaning that corporate earnings from overseas would be exempt from US taxation;
8. Repealing the Affordable Care Act;
9. Repealing the Dodd-Frank financial regulatory reform law;
10. Setting minimum defense spending at 4% of GDP & taking funding for wars back off the books, as was done by George W. Bush;
11. Capping federal spending at 20% of GDP;
12. A balanced budget amendment to the constitution.

The proposals above would reduce federal revenues by $10.7 trillion over 10 years & eliminate any US government flexibility in spending that any modern government would need in emergencies such as wars, natural disasters, or (ahem) recessions and depressions.

Economist Menzie Chinn has guesstimated the scale of across-the-board spending cuts Romney will need to balance the budget by 2022 (no one can do more than that, since Romney has stated publicly that he’s not going to say what he’ll cut until after he’s elected).

Excluding defense, Romney would have to cut every other federal program by 20% to achieve a balanced budget. Under that scenario, Social Security would be cut by $186 billion by 2016, and by $2 trillion in 2022. Three million people would be forced into poverty.

If Social Security is excluded from the cuts, every other federal program would have to be cut by 28%. Medicare, under this scenario, would be hit with $176 billion in cuts by 2016, and $1.9 trillion in cuts by 2022. There would be a sharp increase in premiums and changes in cost sharing. Medicaid and CHIP would be cut by $1.3 trillion as of 2022. SNAP, formerly the food stamp program, would have to drop 12 million recipients, overwhelmingly poor families with children, the disabled and the elderly. Discretionary programs (aside from defense, of course) would lose $166 billion by 2016 and $1.6 trillion by 2022. To put discretionary cuts in perspective, almost all other major industrialized nations spend about 10% to 12% of GDP on such programs as agriculture, commerce, education, energy, environmental protection, food safety, justice, labor, scientific research, disease control, transportation/infrastructure and veterans affairs. The Romney plan would (again, assuming across-the-board cuts) reduce total funding for those programs from the current 30-year average rate of 3.7% of GDP to 2.3% of GDP in 2016 and 1.7% of GDP by 2022–the lowest rate ever recorded.

Thus far, we’ve only considered the implications of the above cuts for specific government programs and the people they benefit directly. What about the broader economic picture? Recall that the immediate consequence of the run on the shadow banking system in September 2008 was the seizing up of the commercial credit market. With credit no longer available, businesses began massive layoffs, lacking the short-term funding needed for things like payroll. And as the layoffs mounted, people around the country began responding in a commonsensical way, by sharply reducing spending. With demand drastically reduced, businesses saw no need to expand or to hire. Four years later, that is still the case, although the recession is technically over and some hiring has resumed. Recent business surveys have borne this out. Despite GOP claims that the cause of reduced hiring is lack of business “confidence” supposedly due to the possibility of higher taxes, businesses have reported that the number one reason for lack of expansion is low demand. To put it another way, not enough money is flowing through our economic system from one transaction to another, boosting economic growth in the process. This is reflected in an unemployment rate of 8.1% and GDP growth under 3%, in a country with a historical average GDP growth rate of 3.4%.

Given the above mentioned situation, what are the likely economic results of withdrawing $10.7 trillion from the economy over 10 years? And does the combination of budgetary, economic and human consequences described above strike you as moderate?

Three Decades of Economic Insanity

Yesterday, Steve Benen posted a timeline on his blog. I'm posting it below in its entirety:

Let’s take a stroll down memory lane, shall we?

1980: Ronald Reagan runs for president, promising a balanced budget

1981 - 1989: With support from congressional Republicans, Reagan runs enormous deficits, adds $2 trillion to the debt.

1993: Bill Clinton passes economic plan that lowers deficit, gets zero votes from congressional Republicans.

1998: U.S. deficit disappears for the first time in three decades. Debt clock is unplugged.

2000: George W. Bush runs for president, promising to maintain a balanced budget.

2001: CBO shows the United States is on track to pay off the entirety of its national debt within a decade.

2001 - 2009: With support from congressional Republicans, Bush runs enormous deficits, adds nearly $5 trillion to the debt.

2002: Dick Cheney declares, “Deficits don’t matter.” Congressional Republicans agree, approving tax cuts, two wars, and Medicare expansion without even trying to pay for them.

2009: Barack Obama inherits $1.3 trillion deficit from Bush; Republicans immediately condemn Obama’s fiscal irresponsibility.

2009: Congressional Democrats unveil several domestic policy initiatives — including health care reform, cap and trade, DREAM Act — which would lower the deficit. GOP opposes all of them, while continuing to push for deficit reduction.

September 2010: In Obama’s first fiscal year, the deficit shrinks by $122 billion. Republicans again condemn Obama’s fiscal irresponsibility.

October 2010: S&P endorses the nation’s AAA rating with a stable outlook, saying the United States looks to be in solid fiscal shape for the foreseeable future.

November 2010: Republicans win a U.S. House majority, citing the need for fiscal responsibility.

December 2010: Congressional Republicans demand extension of Bush tax cuts, relying entirely on deficit financing. GOP continues to accuse Obama of fiscal irresponsibility.

March 2011: Congressional Republicans declare intention to hold full faith and credit of the United States hostage — a move without precedent in American history — until massive debt-reduction plan is approved.

July 2011: Obama offers Republicans a $4 trillion debt-reduction deal. GOP refuses, pushes debt-ceiling standoff until the last possible day, rattling international markets.

August 2011: S&P downgrades U.S. debt, citing GOP refusal to consider new revenues. Republicans rejoice and blame Obama for fiscal irresponsibility.

There have been several instances since the mid 1990s in which I genuinely believed Republican politics couldn’t possibly get more blisteringly ridiculous. I was wrong; they just keep getting worse.

Kevin Drum's comments on the above:

Congratulations, modern Republican Party! That was spectacularly fast work. The Bush-era party needed seven years to drive the economy into a ditch.

We Had to Destroy the Economy in Order to Save It

According to Ezra Klein, the thinking behind the Obama administration's push for the biggest possible budget cutting deal they can get includes this:

The deficit stands in the way of any potential spending increases. And

if you finish the deficit conversation in a way that convinces the American people you’ve made sacrifices and forced government to live within its means, you have, at least in theory, more credibility when proposing new initiatives that would expand the size of government again.

President Obama confirmed the first point in his 7/15/11 news conference, saying:

...if you are a progressive, you should be concerned about debt and deficit just as much as if you're a conservative. And the reason is because if the only thing we're talking about over the next year, two years, five years, is debt and deficits, then it's very hard to start talking about how do we make investments in community colleges so that our kids are trained, how do we actually rebuild $2 trillion worth of crumbling infrastructure.

The implication is that there's a causal connection between the empirical situation and the narrative around it. Eliminate the deficit and GOP bloviating about it will supposedly subside. Greg Sargent is unsure about this; Jonathan Bernstein thinks Obama's position is reasonable but risky; but Joan Walsh sees Obama's assumption that elimination of the deficit will end the GOP assault on his presidency as misguided.

Walsh bases her argument on the record of GOP behavior during the Clinton administration. I don't think we have to look that far back--just consider what's happened over the past two years.

• According to the CBO, the GOP is responsible directly for about 70% of the deficit. This includes the Bush tax cuts, two wars fought without raising taxes to pay for them, and the Medicare Part D unfunded mandate. Obama is responsible for extending the Bush tax cuts and the two wars, 20% of the deficit. Obama's much maligned stimulus package, which the GOP has treated as fiscal suicide, accounts for about 7% of the deficit. All other Obama programs combined add up to 3% of the deficit. Yet the GOP has spent the past two years running around with their hair on fire, accusing Obama of irresponsible spending. Please tell me what relationship exists between GOP claims about the impact of Obama policies on the economy and the reality?
• Obama's health care reform package was, according to the GOP, a "socialist" scheme that would be risky, unaffordable, and would interject the government between patients and their doctors. There were also claims that the plan included "death panels." They neglected to mention that it was based heavily on a GOP plan put forth during the Clinton administration and on the system Mitt Romney set up in Massachusetts. Again, what was the relationship between GOP rhetoric and reality?
• Since 1980, the GOP has consistently expressed the view that cutting taxes spurs economic growth. Yet George W. Bush implemented enormous tax cuts and had the worst record for job creation and GDP growth since Herbert Hoover--and that was before the financial crisis and resulting economic collapse, both of which occurred during his term in office (yes, the GOP even lied about the timing of the economic collapse). Conversely, Bill Clinton implemented modest tax increases and presided over an enormous economic expansion. So much for the supposed stimulative effects of tax cuts and the alleged "job-killing" effects of tax increases. Did that stop the GOP from repeating robotically that tax cuts boost the economy while tax increases depress it?
• The GOP has become increasingly driven by the notion that by cutting taxes, they can shrink the government to a size small enough to "drown in a bathtub," as tax cutting fanatic Grover Norquist famously put it. Yet the only administration to shrink the size of government in the past 40 years was Bill Clinton's. So it seems there's no relationship between the level of taxation and the size of the government. Yet the GOP persists in pursuing this goal.
• Despite unanimous agreement among climate scientists that climate change is real and is in fact happening more rapidly than predicted, the GOP persists in claiming that climate change is a "hoax," as GOP Sen. James Inhofe puts it. Again, what is the relationship between rhetoric and reality?
• Repeatedly since 1980, the GOP has responded to criticism that their policies favor the wealthy at the expense of the middle class and the poor with claims that such criticism amounts to "class warfare." Meanwhile, as a result of those policies, the income of the richest 0.1% of Americans increased 60% while that of the bottom 40% fell by 10%. What is the relationship between GOP statements and the reality?

Given the above examples (there are many more), what possible reason can there be for believing that giving the GOP what they want will have the slightest effect on their well-established record of lying about everything?

The Debt Ceiling Debate in Plain English

First off, what exactly is the debt ceiling? Most people seem to think it's a license for the federal government to take on deeper debt, but Bruce Bartlett has the clearest explanation I've read:

The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses. These expenses, and the deficit they've wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.

Failure to raise debt ceiling will mean:

• The US currency is no longer the world standard
• We'll have to pay much higher interest on everything we borrow as a country
• And after a short time juggling the books, government spending for everything will be instantly cut by 44%.

Despite this, the GOP has insisted that any vote to raise the debt ceiling be accompanied by huge cuts in federal spending and they are adamantly opposed to raising any taxes to increase federal revenues (this extends to ending any existing tax cuts as well). On June 23, House Majority Leader Eric Cantor (R, VA) walked out of the talks due to the inclusion of some revenue increases. There was then some talk about returning to the earlier plan involving $2 trillion in budget cuts, but again, the GOP was insistent that no new revenues be included in the package while Democrats were adamantly opposed to cuts in Medicare, Medicaid and Social Security.

On July 7, Obama changed the equation. According to the Washington Post,

Obama and Boehner have emerged as the most enthusiastic proponents of a big deal that would save as much as $4 trillion over the next decade by overhauling the tax code and tackling all the major drivers of federal spending, including the Pentagon and health and retirement programs.

However, resistance to revenue increases in the proposed package led to abandonment of the idea by the GOP.

Today, Obama announced that Social Security payments would be delayed if the debt ceiling was not raised, and 470 CEOs of many of America's largest corporations signed a statement urging Congress to end the impasse. This afternoon, Senate Minority Leader Mitch McConnell (R, KY) announced a new plan to give the President authority to raise the debt ceiling himself. Congress would then be free to vote on a resolution of disapproval, which the President could then veto, after which President Obama would raise the debt ceiling in three increments over the next year. Essentially, this would pass responsibility for raising the debt ceiling to the President and would draw attention to the raise throughout 2012, an election year. As Kevin Drum put it, "This is possibly the most juvenile, most buck passing, most transparently mendacious proposal I can recall from any party leader in recent memory."

What’s behind the political battle over the debt ceiling?

Since most people’s eyes glaze over when the subject is economics, here’s a plain English explanation of the ideas and interests underlying the debt ceiling debate.

Does Deficit Reduction Stimulate the Economy?

1. Would it be safe to say that progressives believe that if the government spends money, the economy will be stimulated and grow, and more people will have jobs?

Well, not just that it spends money, but that it does so in targeted ways. According to Mark Zandi, chief economist at Moody's, the most effective government spending to counteract a recession is food stamps & unemployment insurance (see chart below). Why? Because people who get that aid need it, so they spend the money right away & it starts circulating through the economy.

Zandi found that among the least effective government spending would be the Bush tax cuts (see chart below). Why? (i) The Bush tax cuts were never targeted to boost the economy. They were set up, quite literally, to reward Bush's biggest donors (i.e., fat cats). (ii) Nobody spends money they don't need to in a recession. Our natural tendency is to hunker down. Do rich people have to spend the money they get in tax cuts? No. Do they? No. Ergo, no additional money circulates through the economy, so it doesn't grow.

2. Government spends on people, people spend money, other people receive that money, the economy is stimulated. This is good.

Basically, yes. In economic terms, government spending in a recession starts the process. The rest of the process you mention is called the multiplier effect.

3. Republicans believe that we have to reduce the deficit by cutting government spending in order to reduce the deficit because we have to reduce the deficit because....you get the point.

Republicans SAY they believe that, but they're the ones who created 90% of the current deficit, directly or indirectly, in the first place. They held an extension of unemployment insurance hostage over their demand for continuation of the Bush tax cuts at the end of 2010, further deepening the deficit. And they're now insisting that (a) no taxes be raised to reduce the deficit and (b) any increase in government revenues via elimination of tax loopholes be offset by additional spending cuts. So there's no reason to take seriously any statements they make about their supposed concern about the deficit. They love deficits. So if they're not concerned about the deficit, what are their ulterior motives for all the posturing?

Republicans believe several different things that underlie what they say they believe about the economy, all of them wrong:

a. The smaller the government, the greater the individual freedom. Conversely, the bigger the government, the greater the encroachments on individual freedom: This sounds straightforward. In fact, it has deep roots in American culture, having been expressed directly by Thoreau in the early 19th century. More recently, Friedrich Hayek enunciated it when he predicted that the development of Britain's National Health Service (universal health care to you & me) would turn the UK into another Soviet Union. His prediction obviously was wrong, but that didn't stop conservatives from continuing to believe it with their typical fervor. There are lots of other problems with this (what measure is used to determine the size of government? i..e, how do we know if a government is too big or too small?), but limits of space & time preclude further elaboration.

b. Tax cuts pay for themselves by increasing economic activity: Reagan tried it with huge tax cuts in 1981. The enormous resulting deficits led him to pass 8 consecutive tax increases (yes, increases), but nobody in the GOP seems to remember that part of the story. Bush, as we know, gave us the closest thing to a pure scientific test of this we're ever likely to have: With the GOP in control of all 3 branches of government, he passed enormous tax cuts & didn't subsequently offset them. He had the worst economic growth record of any president since Hoover. Conversely, Clinton raised taxes & had the biggest economic expansion in our country's history. So much for tax cuts stimulating growth. Again, the evidence has had no influence on GOP thinking.

c. Starve the beast: Grover Norquist famously said he wanted to shrink government to a size that would enable him to "drown it in a bathtub." Again, see Bush. He cut taxes, waged two wars without paying for them, & passed the Medicare Part D unfunded mandate. Money was drained from the Treasury, but did government shrink? No, it grew. The only president to preside over a shrinkage in the size of government was Clinton, who raised taxes, as previously noted. Again, no correlation backing up the claim, and no acknowledgment of the fact by the GOP.

Lastly, remember who funds their campaigns. The GOP always knows which side their bread is buttered on.

4. Obama believes that we have to reduce the deficit by cutting government spending because ________?

See my answer to #7 below.

5. Obama wants the economy to be stimulated because if more people have more money they will vote for him. Also theoretically he does actually want people to have more money.

One would think...

6. Does Obama think that cutting the deficit is going to stimulate the economy?

I guess he must, but I don't know.

7. Does deficit reduction stimulate the economy?

For an economy stuck in a severe recession? Hell, no. See #1 above. Just as there's a multiplier effect, there's also a negative multiplier effect. Think about it like this: As rain falls on crops, the water circulates into the soil, around the roots of plants, and the plants are fed, enabling them to grow. Imagine what happens when there's a drought. Water no longer circulates, plants are not fed, and they die.

Right now, not enough money is circulating through the economy--at least, not to ordinary people (the banks have oodles of the stuff--much of it from the bailouts--but they're not issuing much credit, businesses are not expanding & hiring, unemployed people are not making ends meet, so they're not spending, so there's little demand, so businesses aren't expanding & hiring, rinse & repeat). Since interest rates are near zero, the Fed can't lower interest rates any more to stimulate the economy. And the consensus in Washington is that we don't dare--no, no, no--do further stimulus spending to boost the economy. So we're stuck.

All deficit reduction will do in this context is remove more money from an economy that already has too little circulating through it. Take a look at what's happening to public service employees. State employees are being laid off right & left. All of them have families, most have houses, cars, bills to pay, etc. but there's no money to be had. All this is creating enormous strain on state budgets because the demand for Medicaid is going through the roof due to all these people becoming unemployed. So what are the GOP & now Obama talking about? Making enormous cuts to the federal budget (including aid to the states, which is already failing to meet the exploding need). But all the Very Serious People to whom Obama seems to be listening in DC make 6- or 7-figure salaries. None of them know anybody who's unemployed, I'd venture to guess. Economists have declared the recession over (that's the recession defined in technical terms, not in terms of what's actually happening to ordinary people). So I guess Obama thinks that if the technocrats say it's over, it's over, & it's time to start reducing the deficit. Now that I think of it, this brings to mind a recent thread about epistemic closure among conservatives that appeared in blog posts by Henry Farrell, Julian Sanchez & some other smart people. But obviously, conservatives are not the only ones susceptible to that dynamic (of course, reasonable people may disagree about whether Obama is a liberal, a conservative or something else).

One Final Note

As Kevin Drum and others have remarked tonight after Mitch McConnell's plan was announced, it seems that the GOP may have boxed themselves in with their insistence on drastic budget cuts with no revenue increases under any circumstances. Speaker of the House John Boehner himself told fellow House Republicans earlier today that they were going to lose leverage steadily as the August 2 deadline drew nearer. Judging by McConnell's announcement, that leverage may be ebbing more quickly than they'd anticipated. It's always a stretch to try to read the minds of others, and some of my comments above may go further in that direction than the evidence supports. Whether Obama is a fool or a genius (or both) is probably best evaluated with greater temporal and emotional detachment than I possess. My own perceptions of him are susceptible to changes in the political winds so I'm probably well advised to restrict my analyses to the economics and politics of the issues at hand. That said, I do think that allowing the entire debate over the budget to take place on GOP terms--i.e., with a focus on the deficit rather than on job creation--is a huge unforced error on Obama's part. We still don't know how the whole debt ceiling debate will play out; nor do we know what will happen vis a vis the deficit. But it's hard to see how we get from our current situation of high unemployment and low job growth to one that returns our economy to health. This short-term deficit obsession is a detour that doesn't help us get where we need to go, and may actually make the situation far worse.

An earlier version of this was cross posted at http://www.greaternycforchange.org/?p=676.