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.

Links to Aid for Japanese Disaster Victims

Here's a great collection of links, courtesy of the NY Times.

At this point the tally is one earthquake, one tsunami, and three explosions plus a fire at a nuclear power plant. Millions of people have been displaced, many people have died or been injured.

Please do what you can to help.

A Message from Daily Kos on the Wisconsin Vote

The following message was sent to a friend of mine. It has taken on particular urgency given the Wisconsin Senate's vote tonight to end collective bargaining in that state, which is why I'm taking the liberty of re-posting excerpts from it:

You can support the recall [against Republican state Senators, ed.] by contributing to the Democratic Party of Wisconsin, which is the central organizing hub for the campaign. The DPW has already gathered 15% of the petition signatures required to force a recall election.

Please, contribute $5 to the recall.

...

The outcome of these recall campaigns will largely determine whether those who make policy decisions believe there is any political price to pay for gutting the middle class. So even beyond the rights of tens of thousands of public workers in Wisconsin, Ohio and elsewhere, the stakes in the Wisconsin recall campaign are very high.

Please contribute $5 to the Democratic Party of Wisconsin. If we do not complete even this first crucial step in winning the recall elections, then all of our efforts over these past three weeks will largely be for naught.