Monday, September 27, 2010

The Morning After

Republicans hate government, they say. Conservative Grover Norquist famously said he wanted to shrink government so small it could be drowned in a bathtub.

The Tea Party wants to slash federal taxes and government programs--Department of Education, the FDA, and other "useless" agencies. They profess to believe that the only function of government is national defense.
Imagine the Tea Party taking power. Does anybody wonder what would happen the morning after? The recent Republican "Pledge to America" gave some hint of what they'd like to see: other than the military budget, Social Security, and Medicare, they advocate sharp cuts in every other area of government spending. But as Paul Krugman points out in "Downhill with the GOP," there is actually very little money in those discretionary areas:

So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid (one-third of its budget pays for long-term care for our parents and others with disabilities). No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress.”

When liberals get angry at the GOP for being so obstructionist in Congress, I think, "but that's because they don't think Congress should do anything. They think government is the problem, not the solution so they don't want to pass legislation to deal with the nation's problems."

The only problem with this is that when they are in power, they really don't act on their supposed convictions. In the first half of this decade when the GOP had the presidency and both houses of Congress did they really try and pull back the scope of the federal government? No of course they didn't. They deregulated some things, but federal spending increased, and the GOP sponsored a huge expansion of Medicare without ensuring that it be funded.

In other words, they mean their fiscal promises just as much as they mean their morality promises (e.g. banning abortion)--in other words not at all. It's just empty rhetoric.

What they want is power. They don't care about governing, they just want to hold power by being in government.

The Democrats aren't much better. They also want power, but they do seem to have some interest in creating policies to improve life for the average American. There's an interesting graph accompanying the excellent article about income inequality in the U.S. in Slate, by Timothy Noah, "The Great Divergence." The graph is entitled "Income Growth Rates 1948-2005" and it compares the increase in income for the five income quintiles (top 20%, next 20%, etc.) for presidents of the two political parties. Under Democratic administrations, the income gains are almost equal across all quintiles, with a slightly higher rate for the poorest, but under Republican presidents the increase in badly skewed towards, you guessed it, the rich, while the porr gain almost nothing. The accompanying text reads:

Did the United States grow more unequal while Republicans were in power? It sounds crude, but Princeton political scientist Larry Bartels has gone a long way toward proving it. Bartels looked up income growth rates for families at various income percentiles for the years 1948 to 2005, then cross-checked these with whether the president was a Republican or a Democrat. He found two distinct and opposite trends. Under Democrats, the biggest income gains were for people in the bottom 20th income percentile (2.6 percent). The income gains grew progressively smaller further up the income scale (2.5 percent for the 40th and 60th percentiles, 2.4 percent for the 80th percentile, and so on). But under Republicans, the biggest income gains were for people in the 95th percentile (1.9 percent). The income gains grew progressively smaller further down the income scale (1.4 percent for the 80th percentile, 1.1 for the 60th percentile, etc.).

Two other observations are worth making:

1) In all income categories except the 95th percentile, income growth rates under Democratic presidents exceeded income growth rates under Republican ones. That suggests greater income equality can coexist with (or even help create) greater prosperity.

2) The 95th percentile fared about the same under Democrats and Republicans. (This chart shows it doing slightly better under Democrats, but the margin of error erases the Democrats' advantage.) Bartels' party-based interpretation of income inequality can't address the Great Divergence, Part 2—the stratospheric rise in incomes at the very top—because for this group, it doesn't matter much whether a Democrat or a Republican inhabits the White House. Political scientists Jacob Hacker and Paul Pierson, of Yale and Berkeley, respectively, argue that the apparently nonpartisan solicitude Democrats and Republicans express toward the rich is the result of a massive increase in Washington's corporate lobbying sector since the 1970s—and that the growing power of big business in Washington has been a major contributor to the Great Divergence.

Monday, September 6, 2010

The Bill for Iraq

The latest talking point for the right-wing is that the total cost for the war in Iraq was$750 billion, less than we spent on the stimulus last year. This figure is a complete fabrication. It doesn't even come close to covering everything; it's just what Congress appropriated specifically for the war. There are a lot of costs of the Iraq war not contained in that figure, most importantly,the costs of caring for wounded vets.

Nobel-prize winning economist Joseph Stiglitz and Linda Bilmes have been working on establishing a more accurate figure for the cost of the war. In early 2008 they published articles that asserted the true cost will be $3 trillion. In this weekend's Washington Post they published an update, in which they state that further investigation has persuaded theythat the cost will be even higher.

The new analysis includes these costs: we're still embroiled in Afghanistan which probably would not be so if we hadn't diverted our attention to Iraq; the wars were accompanied by tax cuts which caused a sharp rise in the federal debt which means higher interest payments; the price of oil jumped after the invasion of Iraq which slowed the world economy; and the global financial crisis was worse than it would have been and we had fewer options to combat it.

When the United States went to war in Iraq, the price of oil was less than $25 a barrel, and futures markets expected it to remain around that level. With the war, prices started to soar, reaching $140 a barrel by 2008. We believe that the war and its impact on the Middle East, the largest supplier of oil in the world, were major factors. Not only was Iraqi production interrupted, but the instability the war brought to the Middle East dampened investment in the region.

In calculating our $3 trillion estimate two years ago, we blamed the war for a $5-per-barrel oil price increase. We now believe that a more realistic (if still conservative) estimate of the war's impact on prices works out to at least $10 per barrel. That would add at least $250 billion in direct costs to our original assessment of the war's price tag. But the cost of this increase doesn't stop there: Higher oil prices had a devastating effect on the economy.

There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003 to $10 trillion in 2008 (before the financial crisis); at least a quarter of that increase is directly attributable to the war. And that doesn't include future health care and disability payments for veterans, which will add another half-trillion dollars to the debt.

The global financial crisis was due, at least in part, to the war. Higher oil prices meant that money spent buying oil abroad was money not being spent at home. Meanwhile, war spending provided less of an economic boost than other forms of spending would have. Paying foreign contractors working in Iraq was neither an effective short-term stimulus (not compared with spending on education, infrastructure or technology) nor a basis for long-term growth.

Instead, loose monetary policy and lax regulations kept the economy going -- right up until the housing bubble burst, bringing on the economic freefall.
Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.

The Iraq war didn't just contribute to the severity of the financial crisis, though; it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession.

With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war.

Saturday, September 4, 2010

Time for a Liberal People's Movement

Robert Reich has a very interesting op-ed in the New York Times this Labor Day weekend, "How to End the Great Recession." His basic point is that widespread prosperity is the only way to pull us out of the economic hole we are in. The Great Depression ended because of the New Deal programs that took money away from the rich and gave it to the rest of us. When money is concentrated in the wealthy as it is today, the result is a stagnant economy.

Reich states something that I have thought for some time now: our economists have become too adept at manipulating the economy and they fixed the 2008 meltdown too easily--which precluded the real reforms we needed from happening.

This time around, policymakers had knowledge their counterparts didn’t have in 1929; they knew they could avoid immediate financial calamity by flooding the economy with money. But, paradoxically, averting another Great Depression-like calamity removed political pressure for more fundamental reform. We’re left instead with a long and seemingly endless Great Jobs Recession.
THE Great Depression and its aftermath demonstrate that there is only one way back to full recovery: through more widely shared prosperity. In the 1930s, the American economy was completely restructured. New Deal measures — Social Security, a 40-hour work week with time-and-a-half overtime, unemployment insurance, the right to form unions and bargain collectively, the minimum wage — leveled the playing field.
In the decades after World War II, legislation like the G.I. Bill, a vast expansion of public higher education and civil rights and voting rights laws further reduced economic inequality. Much of this was paid for with a 70 percent to 90 percent marginal income tax on the highest incomes. And as America’s middle class shared more of the economy’s gains, it was able to buy more of the goods and services the economy could provide. The result: rapid growth and more jobs.
By contrast, little has been done since 2008 to widen the circle of prosperity.

Reich provides some ideas to achieve this widened prosperity, like a carbon tax replacing income tax for a large chunk of the middle class and free public universities. He hints at raising the income tax on the wealthy back to the levels it was in the 50's: 70-90%.

This is really what is meant by socialism: we all do better when we are all doing well. When only a tiny few are doing well the majority suffer.

This weekend I also saw an article about the Democrats trying to becoming more like Ronald Reagan and advocating austerity in a desperate attempt to win this fall I think in the Washington Post). Barack Obama will perhaps be remembered for being the person who proved that the Democratic Party is not liberal, and that if liberals want our ideas to be represented in our government we are going to have to start a movement analogous to the Tea Party and create a new, liberal, political party.