Macroeconomics

Public Debt and Economic Growth

Flickr/gentlepurespace
In the election of 1952 my father voted for Dwight Eisenhower. When I asked him why he explained that “FDR’s debt” was still burdening the economy—and that I and my children and my grandchildren would be paying it down for as long as we lived. I was only six years old and had no idea what a “debt” was, let alone FDR’s. But I had nightmares about it for weeks. Yet as the years went by my father stopped talking about “FDR’s debt,” and since I was old enough to know something about economics I never worried about it. My children have never once mentioned FDR’s debt. My four-year-old grandchild hasn’t uttered a single word about it. By the end of World War II, the national debt was 120 percent of the entire economy. But by the mid-1950s, it was half that. Why did it shrink? Not because the nation stopped spending. We had a Korean War, a Cold War, we rebuilt Germany and Japan, sent our GI’s to college and helped them buy homes, expanded education at all levels, and began constructing the...

Are Democrats Moving Away from "Debt Crisis" Rhetoric?

Jamelle Bouie/The American Prospect
Jamelle Bouie/The American Prospect Deficit reduction has been Washington’s obsession for the past two years, and the main approach of both parties is austerity—any combination of policies that raises government revenue and reduces its expenditures. On one side is the Republican Party, which wants to lower the debt and, eventually, balance the budget with large cuts to existing social services, from Medicaid—a health-care program for the poor—to food stamps, unemployment insurance, and other key services for low-income Americans. If this is full austerity, then you could call the Democratic approach austerity “light.” Like Republicans, most Democrats—including President Obama—want cuts to federal spending. But they reduce spending with cuts to Medicare—through adjusted payments to hospitals, manufacturers, and doctors—and defense spending. In addition, Democrats want higher taxes on the wealthiest Americans to “balance” these cuts and spread the burden across income groups. New taxes...

The STEM-Shortage Myth

Flickr/jasonandrebecca09
Flickr/jasonandrebecca09 The Economic Policy Institute published a report yesterday on the supposed shortage of professionals in science, technology, engineering, and math (STEM). You've probably heard of the crisis by now. America is not producing enough STEM degrees. This will be the death of innovation and global competitiveness. We must reorient higher education to convert more liberal arts students into STEM students. And so on. The problem with this alleged crisis is that it is not real. As the EPI report lays bare, the common wisdom about our STEM problem is mistaken: We are not facing a shortage of STEM-qualified workers. In fact, we appear to have a considerable STEM surplus. Only half of students graduating with a STEM degree are able to find STEM jobs. Beyond that, if there was an actual shortage of STEM workers, basic supply and demand would predict that the wages of STEM workers would be on the rise. Instead, wages in STEM fields have not budged in over a decade. Stagnant...

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...

Cash Benefit Programs Are Not Really Government Spending

Wikimedia/Social Security Administration
For accounting purposes, it makes sense to count programs like Social Security, disability insurance, and Temporary Assistance for Needy Families as government spending. But these kinds of programs are not really government spending because the government does not actually direct how the money is spent. Unlike building a road, for instance, where the government decides that a road should be built and then pays to make it happen, cash benefit programs involve the government distributing money to people and allowing them to decide where to spend it. This is an important distinction because many of the problems people often raise about government spending simply do not apply to cash benefit programs. For example, one common criticism of government spending is that the government is incapable of figuring out what people actually want, and therefore wastes a bunch of money on projects and services that do not deliver much value. Another common criticism is that directly spending money...

We Tried Austerity, and it Didn't Work

Wall Street Journal
From the beginning of President Obama's term, Republicans have attacked him for "growing the size of government" and creating a false recovery with higher spending. but it's hard to see what they're talking about. Yes, there's the Affordable Care Act and Dodd-Frank. At the same time, however, the United States has seen a record decline in the number of public workers—since the official end of the recession, state and local governments (as well as the federal government) have laid off hundreds of thousands of workers. In criticizing the administration, conservatives say they want steady cuts to the public sector, offset by private sector growth, and that's exactly what we've seen for the last three years. The results, unfortunately, have not been good. Here's The Wall Street Journal with more : Federal, state and local governments have shed nearly 750,000 jobs since June 2009, according to the Labor Department‘s establishment survey of employers. […] A separate tally of job losses...

Introducing Economic Stimulus Done Right

Flickr/Wisconsin Jobs Now
A new bill introduced today by Senator Tom Harkin and Rep. George Miller would raise the federal minimum wage to $10.10 per hour, and more importantly, peg it to inflation so that it would automatically adjust. The proposed wage hike is higher than the $9 per hour proposed by President Obama and is closer to what the minimum wage would be now if it had kept up with the rate of inflation. The bill also increases the tipped wage, which has not risen in twenty years. Increasing the minimum wage is as no-brainer of a policy as it can get. One, it is extremely popular with the public. A remarkable 73 percent of voters support increasing the minimum wage to $10 an hour and tying it to inflation. Two, it would impact millions of workers—more than 30 million workers would receive a raise if the minimum wage was increased. Three, it would create a significant economic boost. Recovery from the Great Recession has been sluggish because consumer activity makes up 70 percent of U.S. economic...

Automatic Stabilizers: There When Congress Isn't

Flickr/JMazzolaa
As we approach sequestration today the dominant narrative continues to be that the huge run-up in the deficit since the Great Recession has been our greatest political—perhaps even a moral—failure. But it isn’t a failure. This is exactly how the system was designed to work if the economy ever saw a downturn on the scale of the 2008 financial crisis. The deficit is collapsing through the same planned process. As the economy recovers, it is falling quickly, down to 7 percent in 2012, and an estimated 5.3 percent in 2013. These are our "automatic stabilizers" at play. Though it sounds vaguely hydrologic or like a bad steampunk creation, it’s straightforward: The economy will naturally suffer from periods of slack demand in which there isn't enough purchasing power in the economy to produce goods and employ all of our resources, including people. Automatic stabilizers then kick into motion in to counteract this. One important automatic stabilizer is the tax code, which has people pay less...

Trading The Blame Game for The Bully Pulpit

Flickr/Neon Tommy
The White House apparently believes the best way to strengthen its hand in the upcoming “sequester” showdown with Republicans is to tell Americans how awful the spending cuts will be and blame Republicans for them. It won’t work. These tactical messages are getting in the way of the larger truth, which the president must hammer home: The Republicans’ austerity and trickle-down economics are dangerous, bald-faced lies. Yes, the pending spending cuts will hurt. But even if some Americans begin to feel the pain when the cuts go into effect Friday, most won’t feel it for weeks or months, if ever. Half are cuts in the military, which will have a huge impact on jobs (the military is America’s only major jobs program), but the cuts will be felt mainly in states with large numbers of military contractors, and then only as those contractors shed employees. The other half are cuts in domestic discretionary spending, which will largely affect lower-income Americans. There will be sharp...

Why Republicans Should Want to Index the Minimum Wage

Flickr/FiddleFlix
If Republicans have any political sense at all, they’ll support not just raising the minimum wage, but indexing it. The economic case for raising the wage, at a time when economic inequality is rampant, working-class incomes are declining, and Wal-Mart sales are falling through the floor, is overwhelming. But while Republicans may blow off the economic consequences of not raising the federal standard, they can’t be so cavalier in dismissing the political consequences. The constituency that today’s GOP most desperately seeks to win, or at least neutralize, is Latinos—the ethnic group most clustered in low-wage jobs, and most certain to benefit from a minimum wage hike. In swing districts with substantial Latino populations, Democrats are certain to highlight Republican opposition to raising the wage in the 2014 elections. Nor is support for a higher wage limited to Latinos. On each occasion in the past decade that a state minimum wage increase has been put before voters as a referendum...

The No-Brainer Argument for $9 an Hour

flickr/B Unis
Raising the minimum wage from $7.25 to $9 should be a no-brainer. Republicans say it will cause employers to shed jobs, but that’s baloney. Employers won’t outsource the jobs abroad or substitute machines for them because jobs at this low level of pay are all in the local personal-service sector (retail, restaurant, hotel, and so on), where employers pass on any small wage hikes to customers as pennies more on their bills. States that have a minimum wage closer to $9 than the current federal minimum don’t have higher rates of unemployment than do states still at the federal minimum. A mere $9 an hour translates into about $18,000 a year—still under the poverty line. When you add in the Earned Income Tax Credit and food stamps it’s possible to barely rise above poverty at this wage, but even the poverty line of about $23,000 understates the true cost of living in most areas of the country. Besides, the proposed increase would put more money into the hands of families that desperately...

The Return of the Balanced Budget Amendment

Flickr/Gage Skidmore
S enate minority leader Mitch McConnell says Senate Republicans will unanimously support a balanced-budget amendment, to be unveiled Wednesday as the core of the GOP’s fiscal agenda. There’s no chance of passage so why are Republicans pushing it now? “Just because something may not pass doesn’t mean that the American people don’t expect us to stand up and be counted for the things that we believe in,” says McConnnell. The more honest explanation is that a fight over a balanced-budget amendment could get the GOP back on the same page—reuniting Republican government-haters with the Party’s fiscal conservatives. And it could change the subject away from social issues—women’s reproductive rights, immigration, gay marriage—that have split the Party and cost it many votes. It also gives the Party something to be for , in contrast to the upcoming fights in which its members will be voting against compromises to avoid the next fiscal cliff, continue funding the government, and raising the...

History Lesson: Tax Cuts Are No Magic Bullet

No idea is more central to conservative economic thinking than the belief that cutting taxes leads to higher economic growth. One can certainly understand the appeal of this belief: It would be great if government could collect the same amount of revenue, but with much lower tax rates, because those rates fostered strong growth. Alas, the historical record doesn't offer much validation of this sunny supply-side vision -- as I have noted here repeatedly. David Leonhardt discussed the record yesterday in the New York Times. One interesting point he noted was that cutting taxes may make a difference when taxes are extremely high, but the rate changes of recent years are relatively small and thus it's no surprise that the effects would be modest. Listening to today's tax debate, you'd think our political leaders were debating capitalism vs. socialism. In fact, though, going back to the Clinton-era tax rates would mean raising the top income tax bracket by less than 5 percent. That's not...

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