Economy

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 Sequester, Now What?

Flickr/Justin Sloan
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 Years 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. Obama, more than the...

The Lone Star State Left Out To Dry

Flickr/Jmtimages
When the sequester deadline came and went last Friday, it was hardly a surprise. In Congress, Republicans had repeatedly made clear they would be willing to let enormous cuts to discretionary spending take effect rather than compromise with the White House on raising revenue. But cutting off their nose to spite their face hasn’t quite worked. As it turns out, the GOP may be defacing its figurehead: the State of Texas. The economic impact of the sequester on Texas will be enormous. As a Pew Charitable Trusts study shows, Texas receives 8 percent of its state revenue through federal grants, well above the national average of 6.6 percent. Only South Dakota, Illinois, and Georgia receive a higher proportion. One study from George Mason University showed that Texas is among the top three states that will lose out most as a result of the sequester, both in terms of jobs and GDP. The cuts could cost Texas $16 billion in gross state product—1.23 percent of the state’s GDP—and as many as 159,...

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...

Euro Crisis Redux

Think sequestration is bad? Things could be turning disastrous in Europe.

When global leaders met in Davos, Switzerland this past January for the annual World Economic Forum, it was not just an opportunity to chatter about the state of the global economy, but also a moment for a collective sigh of relief. The fiscal cliff in the United States had just been avoided, Barack Obama was even able to raise some revenue by letting some of the Bush-era tax rates expire, and the currency crisis in Europe appeared to be on the mend. What a difference a month makes. As another battle over deficits and spending looms in Washington and threatens to pull the U.S. economy back into recession, a far greater worry is the ever-present crack-up of the euro, which would be an economic tsunami to the spring shower of sequestration. It all starts with Italy and the possible return of Silvio Berlusconi. Many thought the media mogul’s long strange trip as Italian prime minister had finally come to end in November 2011 when he resigned after pressure mounted to fix the ballooning...

Virginia, Say Hello to the Sequester

Official U.S. Navy Imagery, Flickr/Jo Naylor
Official U.S. Navy Imagery Tugboats guide the Nimitz-class aircraft carrier USS Harry S. Truman to its new berth at Norfolk Naval Shipyard. V irginia didn't just weather the Great Recession; it thrived. Because of its reliance on federal dollars, the state was insulated from the worst of the economic crisis. At no point over the last five years, for instance, did joblessness reach 8 percent. Its peak was 7.4 percent in January 2010, and since then, it's declined to just 5.5 percent—one of the lowest rates in the country. But that was before the sequester. Every state will lose funding as a result of the $85.4 billion in across-the-board spending cuts, but because of its close ties to Washington and the military, Virginia might see the worst of it. Already, Governor Bob McDonnell has warned the commonwealth risks falling into recession. "The automatic sequestration reductions mandated by the Budget Control Act of 2011 are already having a significant adverse effect on the Commonwealth...

Sequestration Nation and Remembering Robert Kennedy

Flickr/Kemon01
With the sequester now beginning, I find myself thinking about Robert F. Kennedy—and 46 years ago when I was an intern in his Senate office. 1967 was a difficult time for the nation. America was deeply split over civil rights and the Vietnam War. Many of our cities were burning. The war was escalating. But RFK was upbeat. He was also busy and intense—drafting legislation, lining up votes, speaking to the poor, inspiring the young. I was awed by his energy and optimism, and his overriding passion for social justice and the public good. (Within a few months he’d declare his intention to run for president. Within a year he’d be dead.) The nation is once again polarized, but I don’t hear our politicians talking about social justice or the public good. They’re talking instead about the budget deficit and sequestration. At bottom, though, the issue is still social justice. The austerity economics on which we’ve embarked is a cruel hoax—cruel because it hurts those who are already hurt the...

The Maximum Impact of the Minimum Wage

AP Photo/Mike Groll
Cristina Romer, Berkeley economics professor and the former head of President Obama’s Council of Economic Advisers, passed judgment on the merits of raising the minimum wage in Saturday’s New York Times , and in the process made clear why she wasn’t a member of the president’s de facto council of political advisers. She argued, as some mainstream economists do, that the merits of a heightened minimum wage were slight—that it may, for instance, raise prices, offsetting the gain to low-wage workers. The better solution, she argues, is to raise the earned income tax credit (EITC)—the government’s payment to the working poor—and to support universal pre-K education. “Why settle for half-measures,” she concludes (by which she means raising the minimum wage), “when such truly first-rate policies [by which she means the EITC and pre-K schooling] are well understood and ready to go?” Ready to go? Congressional Republicans are rarin’ to increase government spending on the working poor and...

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...

Dear White House, You'll Regret This

Olivier Douliery/AP Images
The latest dust-up in the descent of Bob Woodward from fearless investigative reporter to manipulative media celebrity began with his contention in a Washington Post column that President Obama, by asking for revenue increases as part of a deal to defer the sequester, was “moving the goal posts” from the 2011 budget deal (in which Obama got thoroughly hosed by the Republicans). When the White House pushed back and an unnamed “senior official” told Politico that Woodward would “regret” those comments, someone, presumably Woodward, leaked an e-mail between himself and White House top economic strategist Gene Sperling. Since then, the political class has been abuzz with chatter about Woodward’s modus operandi, the ethics of burning a source, his longstanding strategy of trading access for friendly treatment, and so on. But far more revealing (and appalling) is the content of the e-mails . Here's what Sperling told Woodward: The idea that the sequester was to force both sides to go back...

The U.S. Budget, By the Numbers

AP Photo/Ed Andrieski
AP Photo/Ron Edmonds I n the argument over the "sequester," the across-the-board cuts to both domestic and military programs that are about to take effect, everyone in official Washington seems to agree that the government's budget is bloated. Despite the economists telling us that this is still a terrible time for austerity (just look how well it has worked out for Europe), the argument between Republicans and Democrats seems to be whether we need to just slash the budget mercilessly, or slash the budget somewhat less and raise some taxes. But is the federal budget really so big? Let's take a look at some graphs. If you look just at raw dollars, it's true that the size of government has increased steadily in recent decades (there are a lot of reasons why that's the case). It's also true that spending went up at the beginning of the Obama administration, but it's important to understand why and how. The answer to why is simple: the Great Recession. When a recession hits, government...

The Five Most Terrifying Things about the Sequester

AP Photo/J. Scott Applewhite
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? 1. The sequester will hurt job-growth As we pointed out during the debates raging in the run-up to the “fiscal cliff," the sequester was the second-most damaging component of the austerity bundle set to take effect on January 1, 2013. The worst component was the non-renewal of the payroll tax cut, which is already dragging substantially on the economy . All told, if the sequester kicks in the economy will likely end the year with roughly 500-600,000 fewer jobs than if it were repealed. These are jobs the economy desperately needs . To be clear, the sequester alone won’t drive the U.S. economy back into outright recession, but it surely will make...

Lockheed, Stock, and Barrel

Do we truly need brand new aircraft carriers? Nope, but try telling the Pentagon and their many contractor friends.

AP Photo/Northwest Florida Daily News, Devon Ravine
AP Photo/Eric Talmadge This is the third in a three-part Prospect series on what an ideal military budget might look like. Read Part One on the military's current responsibilities here . Read Part Two on the real threats that our military should be protecting our country from here . W hat stops the United States from crafting a military budget that makes sense? As this series has shown, to defend Americans and to protect American economic interests—even if broadly defined—the military would need vastly less resources than it currently enjoys. Sure, people in our defense establishment will complain about "bloat" and "waste" and "inefficiency," but when it comes to actual cuts, they just aren't done. "Now's not the time," they say, and considering the harm that sequestration cuts will likely do to many people's jobs and possibly to our economic recovery, there might be something to it—but they always say that. So, why do conversations about possible—and advisable—cuts always end up a...

The Sequestering of Barack Obama

AP Photo/Susan Walsh
AP Photo/Susan Walsh President Barack Obama urges Congress to come up with a plan to avert the automatic spending cuts set to kick in on March 1, 2013 last week. P resident Obama has miscalculated both the tactical politics of the sequester and the depressive economic impact of budget cuts on the rest of his presidency. The sequester will cut economic growth in half this year. But it’s now clear, one way or another, that we will get cuts in the $85 billion range that the sequester mandates this fiscal year. All that remains are the details. Obama’s miscalculation began in his fist term, with his embrace of the premise that substantial deficit cutting was both politically expected and economically necessary, and his appointment of the 2010 Bowles-Simpson Commission as the expression of that mistaken philosophy. Although the Commission’s plan was never carried out, its prestige and Obama’s parentage of it locked the president into a deflationary deficit reduction path. This past week,...

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