Budget

Reinhart and Rogoff's Theory of Government Debt is Dead

NBER
Carmen Reinhart and Kenneth Rogoff wrote a wildly influential book four years ago called This Time Is Different .* The thesis of the book is that when a government has a debt-to-GDP ratio above 90 percent, it is terrible for economic growth. The authors also followed up with a couple of papers arguing the same thing. Pro-austerity forces here and elsewhere in the world have seized upon the book to push their favored policies. From the beginning, the paper was met with extreme skepticism among the left. The theory could have gotten the causation backwards: perhaps low growth drives high debt, not the other way around. The theory also seemed hard to understand within any macroeconomic frame. It would follow from it that a government that holds assets instead of selling them to reduce debt somehow caused growth to decline, which is just a very confusing idea. The conceptual problems could iterate on and on. Beyond those problems, other researchers also had a hard time replicating their...

What Does "Balance the Budget" Even Mean?

Flickr/ferntech
This is a story about the deficit scolds who substitute attitude for argument and how they use the public’s ignorance about the federal budget to their advantage. It comes from sparring over the House Republican budget, which Republicans claim will achieve a balanced budget within ten years, and Barack Obama’s budget, which he will be submitting to Congress this week. Neither gets us to a zero deficit. The White House spin has been that balancing the budget isn’t an important goal by itself—deficits, surpluses, or balance are only means to the end of a growing economy or creating jobs. In line with that thinking, last week White House spokesman Dan Pfeiffer said, “You don’t want to balance the budget for the purposes of just balancing the budget.” As Slate’s Matt Yglesias points out , the White House is correct: There's no magic economic reason to run a balanced budget every year. Reducing the debt really is only a good idea if it is done in the service of some other goal. Less debt...

Jack Lew: Obama’s Austerity Ambassador

AP Images
There is something seriously off about the mission of the new Treasury secretary, Jack Lew, to Europe. Secretary Lew has been visiting European capitals to persuade leaders there to ease up on the austerity. He has not had a good reception. Speaking at a joint press conference with the chagrined Lew in Berlin, Wolfgang Schauble, the German finance minister and uber-austerity enforcer, dressed down Lew thusly: “Nobody in Europe sees this contradiction between fiscal consolidation and growth.” Nobody among the elite, that is. Ordinary people in Greece, where output has declined by nearly 25 percent since the austerity tonic began, surely see the contradiction. So do young people in Spain, where the youth unemployment rate has reached 56 percent. Even if the cure should eventually work—which it won’t—we will have lost a whole generation. Only in the rarified power precincts of Brussels and Berlin is austerity “working.” But Jack Lew doesn’t exactly come to this mission with clean hands...

Where's the Change?

AP Photo/Lauren Victoria Burke
AP Photo/Alex Brandon, File T he Democratic Party’s long-term prospects have dramatically improved since the November election. They will control the White House for another four years. The Republicans, who lost the total vote for the House of Representatives, remain captive of an unpopular reactionary right wing. The “Obama Coalition” of minorities and single women is growing faster than the GOP’s white male base. If demography is destiny, Democrats—and the progressive interests that they are supposed represent in the two-party system—are the wave of the future. But the American dream is about upward mobility. Ultimately, “The economy, Stupid” trumps identity politics. If the Democrats are not the champions of expanding jobs and incomes for the majority of voters who work for a living—whatever their gender, color, or sexual orientation—their claim to being the natural majority party will amount to little. So it made political sense that Barack Obama began his 2013 State of the Union...

Destroying the Economy and the Democrats

AP Photo/Susan Walsh
AP Photo/Susan Walsh President Barack Obama speaks at the Police Academy in Denver yesterday. J ob creation slowed to just 88,000 in March, signaling a sluggish economy. And President Obama, with unerring timing, picked this moment to put out an authorized leak that he is willing to put Social Security and Medicare on the block as part of a grand budget bargain that will only slow the economy further. The deterioration in economic performance was all too predictable, given the combined lead weights of the March 1 $85 billion of budget cuts in the sequester and the January deal to raise payroll taxes by about $120 billion. (The tax hike on working people was almost double the much-hyped tax increase on the top one percent, which totaled a little over $60 billion.) Taken together, these twin deflationary deals cut the deficit by around $270 billion dollars this year. That’s close to two percent of GDP. And according to the Congressional Budget Office, this combined contractionary...

Why Politicians Aren't Sensitive to Public Opinion on the Economy

Flickr/Alex E. Proimos
Flickr/Alex E. Proimos Who says American politics is gridlocked? A tidal wave of politicians from both sides of the aisle who just a few years ago opposed same-sex marriage are now coming around to support it. Even if the Supreme Court were decide to do nothing about California’s Proposition 8 or DOMA, it would seem only matter of time before both were repealed. A significant number of elected officials who had been against allowing undocumented immigrants to become American citizens is now talking about “charting a path” for them; a bipartisan group of senators is expected to present a draft bill April 8. Even a few who were staunch gun advocates are now sounding more reasonable about background checks. It’s nice to think logic and reason are finally catching up with our elected representatives, but the real explanation for these changes of heart is more prosaic: public opinion. The latest ABC News/Washington Post poll finds support for marriage equality at the highest in the ten...

Take That, Political Science!

AP Photo/Lawrence Jackson
AP Photo/Lawrence Jackson Senator Tom Coburn, a Republican from Oklahoma and author of legislation designed to cut off the vast majority of federal support for political-science research T his week, ten years after swearing to destroy Saddam Hussein and build democracy in Iraq, the United States took a step toward dismantling its investment in studying how democracy works. For more than 15 years, congressional Republicans have been trying to do away with federal funding for political-science research. Every time until now, political scientists successfully fought back. One reason they could: The pot designated for political science in the National Science Foundation (NSF) was a tiny percentage of overall research money—about $10 million out of a $7 billion budget. That's less than two-tenths of a percent. But it's also the majority of total grant funding for political-science research. The field provides us with much of what we know about how democracies, including our own, function (...

The Contest Over the Real Economic Problem

flickr/Starley Shelton
“Our biggest problems over the next ten years are not deficits,” the president told House Republicans Wednesday, according to those who attended the meeting. The president needs to deliver the same message to the public, loudly and clearly. The biggest problems we face are unemployment, stagnant wages, slow growth, and widening inequality—not deficits. The major goal must be to get jobs and wages back, not balance the budget. Paul Ryan’s budget plan—essentially, the House Republican plan—is designed to lure the White House and Democrats, and the American public, into a debate over how to balance the federal budget in ten years, not over whether it’s worth doing. “This is an invitation,” Ryan explained when he unveiled the plan Tuesday. “Show us how to balance the budget. If you don’t like the way we’re proposing to balance our budget, how do you propose to balance the budget?” Until now the president has seemed all too willing to engage in that debate. His ongoing talk of a “grand...

The Smart Strategy Behind Paul Ryan's Stupid Budget

Flickr/Donkey Hotey
For an ambitious politician, a spot on your party's presidential ticket is fraught with danger. On one hand, you immediately become a national figure, and if you win, you're vice president and you've got a good chance to become president. On the other hand, if you lose, you may wind up the target of contempt from forces within your own party and quickly fade away. Look at the list of recent VP losers: Sarah Palin, John Edwards, Joe Lieberman, Jack Kemp. None of them had any political future after their loss. And then there's Paul Ryan. You have to give him credit for one thing. Unlike, say, Palin, he didn't let his time on the national stage give him delusions of grandeur. Instead of proclaiming himself the leader of a movement, he went right back to what he was doing before: using the budgeting process to push an extraordinarily radical agenda, all couched in enough numbers and figures to convince naive reporters that he's a Very Serious Fellow, despite the fact that his numbers and...

When Public Is Better

Flickr/Mirsasha
L ong before we thought of founding The American Prospect in 1989, I came to know Paul Starr through a prescient article titled “Passive Intervention.” The piece was published in 1979, in a now-defunct journal, Working Papers for a New Society . As Paul and his co-author, Gøsta Esping-Andersen, observed, the American welfare state is built on terrible, even disabling compromises. Progressives often lack the votes to pass legislation to deliver public benefits directly. So they either create tax incentives or bribe the private sector to do the job, thus inflating a bloated system. “The problem is not too much government activism,” they wrote, “but too much passivity.” Their two emblematic examples were housing and health care. In housing, tax advantages became an inflation hedge for the affluent and drove up prices. Low-income homeownership programs, run through the private sector, had huge default rates. In health care, the political compromises necessary to enact Medicare excluded...

What We Have Here Is a Failure to Communicate. Sort Of.

Congressional Republicans, apparently. (Flickr/jumbledpile)
Like any number of liberals, I have from time to time complained about the difficulty of having substantive arguments about politics when your opponents refuse to acknowledge plain facts about the world. It's hard to have a discussion about what to do about climate change, for instance, if the other person refuses to believe that climate change is occurring. It's hard to discuss how to handle market failures in health insurance when the other person holds that markets are always perfect and government health insurance is always more expensive. As frustrating as those kinds of impasses are, at least you're talking about complex systems that require at least some investment of time to understand. But there's a rather incredible dance going on right now in the dispute over the budget that takes every stereotype liberals have about know-nothing Republicans and turns it up to 11. To sum it up, Democrats are being forced to negotiate with a group of people who are either so dumb they can't...

Few Waves in California

Flickr/msun523
Flickr/msun523 Cuts on overtime for customs inspectors at the Port of Long Beach in Long Beach, California, may hinder its ability to process cargo. I f the sequester had come to California 25 years ago, its effect would have been catastrophic. Today, its effects are decidedly less draconian. Nonetheless, California has a considerably less robust economy than that of the late '80s, and the sequester will cool off the state’s already tepid recovery. In considering the effects of the sequester, the difference between the California economy of 1942-1992 and its economy today is critical. For the half-century beginning with the attack on Pearl Harbor, California was the centerpiece of the American defense industry. Southern California in particular was a home base for much of the aviation industry even before World War II, but wartime and Cold War spending built up aviation and then aerospace to the point that they employed more Californians than any other industry. When the Cold War...

Bull Market for Stocks, Bear Market for Workers

Flickr/Michael Aston
Today the Dow Jones Industrial Average rose above 14,270 — completely erasing its 54 percent loss between 2007 and 2009. The stock market is basically back to where it was in 2000, while corporate earnings have doubled since then. Yet the real median wage is now 8 percent below what it was in 2000, and unemployment remains sky-high. Why is the stock market doing so well, while most Americans are doing so poorly? Four reasons: First, productivity gains. Corporations have been investing in technology rather than their workers. They get tax credits and deductions for such investments; they get no such tax benefits for improving the skills of their employees. As a result, corporations can now do more with fewer people on their payrolls. That means higher profits. Second, high unemployment itself. Joblessness all but eliminates the bargaining power of most workers—allowing corporations to keep wages low. Public policies that might otherwise reduce unemployment—a new WPA or CCC to hire the...

The Sequester: Now What?

flickr/Penn State news
flickr/Penn State news President Obama gambled that the threat of the automatic sequester of $85 billion in domestic and defense cuts would force the Republicans to accept major tax increases, and so far he is losing the wager. The Republican leadership, which was badly divided over the New Year’s deal that delayed the fiscal cliff, is now re-united around the proposition that Republicans will accept no further tax increases. So the president is left to court individual Republican House members to support loophole closures in exchange for the restoration of some popular domestic and military spending. But for the moment, Republicans got what they wanted—big spending cuts, party unity around no tax increases, and a weakening of a newly re-elected president. For Obama and the Democrats, there are three big risks going forward. First, the sequester slows down economic growth—cutting it in half this year from about 3 percent to 1.5 percent according to the Congressional Budget Office...

The Once and Future Gov

AP Photo/Eric Risberg
AP Photo/Eric Risberg A merica’s most futuristic governor seems borne back ceaselessly into the past these days. As he shows me around his office on a crisp winter morning, California Governor Jerry Brown points out not just the desk that his father, Edmund “Pat” Brown, used during his own term as governor from 1959 to 1967 but also photos of his grandparents and his great-grandfather, who came to California in the gold rush years. “He knew John Sutter,” Brown says. The only two governors in the past half-century who were native Californians, he points out, were he and his father. At 74, Brown has lost little of the intensity that impressed and occasionally discomfited voters during his first tenure as governor nearly 40 years ago. His outfit—an open-collar shirt under a white pullover sweater, blue jeans—may be West Coast casual, his shaved head may call to mind the Zen monks with whom he’s studied, but Brown’s emotional repertoire does not include laid-back, except when he’s talking...

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