Financial markets rallied when the Federal Reserve defied the rumor-mongers and resolved to continue its program of keeping interest rates very low until the unemployment rate improves. There was only one dissenting vote on the Fed’s policy-setting open market committee.
What’s going on here? Ever since the run-up to the collapse of 2008, what’s good for Wall Street hasn’t exactly been good for the rest of the economy. Are these ultra-low interest rates just pumping up more financial bubbles, as critics fear? Or does a still weak economy need this form of stimulus?
Think of it this way. There are risks to continuing a policy of very easy money, but premature tightening would be even worse.
The EU’s extreme version of budget cutting has pushed the European economy ever deeper into its worst recession since World War II. The United States, pursuing a bipartisan target of $4 trillion in budget cuts over a decade, is mired in an economy of slow growth and inadequate job creation. Our government’s failure to give debt relief to indentured college students and underwater homeowners functions as a multitrillion-dollar twin drag on a feeble recovery. The smart money knows just how weak this economy is. Federal Reserve Chair Ben Bernanke had only to suggest that he might nudge interest rates up a bit, and markets panicked.
A familiar tale: In a small country on the Mediterranean rim, the government chooses to solve an economic crisis by enacting an austerity budget. Regressive taxes will rise. Aid to families will be cut. Less will be left of the welfare state built decades ago. The novice finance minister promises this will heal the economy.
As the people of that unhappy land say: Happy are those who believe.
In case it slipped your mind during all this talk of scandal and impeachment, official Washington has spent the last couple of years gnashing its teeth about the budget deficit. Even as European austerity policies threw the continent into a period of extended despair, Republicans and their allies in the well-appointed conference rooms of "centrist" think tanks told us sternly that unemployment would have to wait; the most immediate crisis was the deficit.
In 1984, CompuServe launched the first “Electronic Mall,” a Pleistocene-era Amazon with which owners of a TRS-80 personal computer could browse and buy goods over the Internet. Such modern retailers as “The Record Emporium” and “The Book Bazaar” were given prominent virtual storefronts. A full page ad in the May 1984 issue of Online Today boasted, “By the year 2000, the world may catch up with the way CompuServe’s new Electronic Mall lets you shop today.” The world took less time to catch up than that: By 1995, eBay and Amazon had been incorporated; in Amazon’s first two months as an online bookstore, it averaged $20,000 per week in sales. Americans would go on to spend around $700 million online in 1996, and by 1999 sales had grown to $20 billion. Figures released earlier this year by the Commerce Department revealed that Americans spent $225 billion online in 2012—a 400 percent increase in only a decade.
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.
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.”
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.
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.
The latest fiscal showdown concerns the “sequester”—across the board cuts to (almost entirely) discretionary spending that will total just over $1 trillion in the next decade, and which are set to take effect on March 1. What should those who have better things to do with their life than follow fiscal policy debates know about the sequester?
Yesterday afternoon at the National Press Club (the standard Washington venue for events that need a little class), the Committee for a Responsible Federal Budget—a bipartisan debt-reduction group—rolled out its “Fix the Debt” campaign, an attempt to push deficit reduction to the top of the congressional priority list. It's hard to overstate the extent to which this was an almost stereotypical gathering of Beltway deficit scolds.
The top marginal income tax rate, a testament to our oppression. (Flickr)
When the Tea Party movement started in 2009, some of its adherents made signs that read, "Taxed Enough Already!", since the movement defined itself in large part as a reaction against the oppressive tax policies of the federal government, sucking ordinary people dry in its endless search for cash to fund its freedom-destroying schemes. This was always an insane inversion of actual reality—the truth is that as part of the stimulus bill, President Obama actually cut taxes for almost everyone, and the only tax increase he imposed in his first term was a hike in cigarette taxes. It's true that the Affordable Care Act contains a number of different tax increases (on things like "Cadillac" health plans), but those have not taken effect yet. But to many conservatives, it just feels like they're paying more taxes, because...well, because there's a Democrat in the White House.
Today, the Congressional Budget Office released a report on the taxes we have actually been paying, and guess what: the average federal taxes paid by Americans are at their lowest point in the last 30 years:
To a large degree, the stimulus was hampered by budget cuts on the state and local level. States have to balance their budgets, and in a recession, this means deep cuts to payrolls and existing services. Economists estimate that if public employment had stayed steady through the recession and into the recovery, the joblessness rate would be at or below 7 percent. As it stands, states are on a cutting spree—state and local spending is at its lowest point since the 1980s—and as USA Todayreports, this is exacerbated by receding aid from the federal government: