Washington is mesmerized these days with the two parties’ various stratagems to turn the deficit debate to their own advantage. But all this political maneuvering may carry a big cost for Americans, as it sidelines any serious action on our larger, more immediate economic problems. The U.S. expansion is in some danger today, but not from the deficit projections for 2015 and 2020. The economy continues to grapple with structural problems that have led to a decade now of weak job creation and stagnating incomes. Beyond that, we also face strong economic undercurrents coming from rising energy prices, the prospect of another financial shock from Europe’s growing sovereign debt difficulties, and the gathering economic aftershocks from Japan’s terrible disasters. And while the two parties in Congress scheme and struggle over deficit plans, the party (and person) most likely to win next year will be the one that uses the debate over spending and taxes to credibly address jobs and incomes.
A deficit debate designed to do that would look and sound very different from today’s charges and countercharges. For example, it would certainly include steps of some kind to stem home foreclosures and stabilize housing prices, because those are key factors for rebooting consumer spending and business investment. With the bottom 80 percent of Americans owning just 7 percent of the country’s financial assets, home equity has long been the only significant asset held by the most Americans – and the sharp decline in the value of most people’s home equity has left average Americans poorer on top of their long-stagnating incomes. Until home values turn up again, most people will continue to hold back on family spending, which in turn will continue to dampen business investment. And without strong business investments in technologies and other capital, most workers’ incomes can’t rise.
The deficit debate already includes a ready but very wrongheaded response to housing, namely cutting back on the mortgage interest deduction. Yes, it would raise some revenues; but it also would further depress housing values. Instead, we should figure out the best way to help people keep their homes out of foreclosure – for example, a temporary, two-year program of bridge loans to people facing foreclosures. And if we do it right, it could even help us out with the long-term deficit: For example, Washington could make itself the priority lender for repayment if a homeowner loses the house anyway or, if a later sale produces capital gains, taxpayers could claim a small share of those gains.
The President’s deficit plan does include gestures towards the country’s larger economic challenges, in his insistence on modest funding increases for education, infrastructure, and research and development. But those increases aren’t enough to move the needle on jobs and incomes, and so they’re also not enough to inspire broad support for smart public investment. To have a shot at doing both, these initiatives have to touch most Americans. For example, for less than a few hundred million dollars – almost chump changes these days – Congress could provide grants to community colleges to open their computer labs on the weekends to any adult who wants free training in computer and Internet skills. We also could ensure that this investment would more than pay for itself. For example, those who use the service could be required to return the favor to taxpayers, by paying an extra one or two percent income tax on increases in their incomes in the following two or three years.
The economy’s crying need to upgrade its infrastructure – from roads and highways, to city-wide wifi and a smart energy grid – also could be used to jumpstart job creation, and not just with temporary jobs at large construction companies. Since new and young businesses are the strongest engines of job growth, we could set aside 20 percent of the funding for these projects for newly-formed businesses that would then provide hundreds of goods and services for the projects. This kind of provision could stimulate the formation of thousands of new businesses, and the taxes on their profits and on the incomes of their new workers would go to the deficit.
We also could stimulate job creation more directly while raising revenues at the same time. Multinationals today keep overseas some $1 trillion in profits from their foreign operations, in order to avoid high U.S. corporate taxes. We could let them bring back those funds at a lower tax rate, if they expand their U.S. workforces. For example, any multinational that increases its U.S. workforce by 5 percent could bring back 50 percent of their foreign earnings at the preferential rate – or bring back 60 percent of those earnings in exchange for a 6 percent increase in their U.S. employees. And, yes, it should ease the deficit since otherwise, most of those earnings will remain abroad indefinitely, and so untaxed here. And on top of that, the new jobs generate income that also will produce additional revenues.
Whether or not you like these particular approaches, they provide a glimpse into how far off-target the current deficit debate has veered. The only economic justification for reducing any deficit is that doing so will in some way produce better times; and in this time, that especially means more jobs and higher incomes. Unhappily, any current debate about how to produce those better times has been hijacked by Paul Ryan’s radical plan to cut every program that Republicans have ever disliked, and by the tempting target it offers Democrats.
Yes, huge, long-term deficits do matter economically. If history is any guide – as it usually is in economics – we have two to three years to enact a credible glide path to more sustainable levels of federal borrowing for the following decade. That’s what Washington did in the 1980s and again in the 1990s, and it helped create tens of millions of jobs and, especially in the 1990s, healthy income gains. The task is harder today, because the economy in this period doesn’t deliver jobs and rising incomes the way it used to. That calls for two steps. First, protect existing jobs and incomes while the economy remains fragile and vulnerable to the outside shocks, by foregoing more cuts in this year’s deficit. And second, use the deficit debate to advance initiatives that address what Americans truly and properly care about, namely their jobs and incomes.
On Tuesday, April 26, NDN will host Under Secretary of Commerce for International Trade Francisco Sanchez for an address on the challenges and opportunities presented to America by an increasingly competitive global economy. In the days following his speech, Under Secretary Sanchez will attend the World Economic Forum on Latin America in Rio de Janeiro, Brazil, where he will meet with leaders from some of the world's most vibrant economies.
As new economic powers rise around the world, the prosperity of Americans increasingly depends on our ability to export to and do business in these fast growing markets. Under Secretary Sanchez, the International Trade Administration, and the Department of Commerce are central to these efforts to advance American economic interests abroad. Under Secretary Sanchez will be joined by Dr. Robert Shapiro, Chair of NDN's Globalization Initiative and former Under Secretary of Commerce for Economic Affairs.
Under Secretary of Commerce for International Trade Francisco Sanchez at NDN/NPI April 26, 12:30pm NDN: 729 15th Street, NW First Floor DC RSVP
For more on this event, including Under Secretary Sanchez's biography, please click here.
Yesterday’s presidential address on fiscal policy was a very striking scene. The venue was a small auditorium at George Washington University. Invitations went out just two days earlier; and with so little notice, GWU students made up more than half of the audience. Another row was filled up by former Democratic economic policy officials – myself and perhaps 10 others – directors of Democratic-allied policy shops (led by our Simon Rosenberg), and a smattering of CEOs and senior Senate staffers. Just before the President took the stage, his economic team filed in – Bill Daley, Tim Geithner, Gene Sperling, Jack Lew -- along with Vice President Biden and his new chief-of-staff, fresh from directing the Simpson-Bowles Deficit Commission. Alan Simpson and Erskine Bowles were there too, along with other Commission members – and here’s what added drama to the scene – including Representative Paul Ryan, this year’s Republican guru on the budget sitting uncomfortably in the first row. The moment the President finished – without exaggeration – Ryan bolted for the exit. Perhaps he suspected, like the rest of us, that the President’s plan is smarter, fairer, more balanced and more credible than his own.
Both blueprints would reduce deficits by $4 trillion over the next 10 (Ryan) or 12 (Obama) years, but the real difference lies in revenues. The Congressman would give away another $1 trillion in new tax cuts to high-income Americans and business, while the President would collect an additional $1 trillion in revenues. The consequent $2 trillion difference explains how the President, unlike Ryan, can stabilize federal debt as a share of GDP while preserving the basic guarantees of Medicare and Medicaid. And there was one telling moment during the speech which demonstrated how new revenues change the choices that Americans now face with the debt: The President was interrupted by applause only once, when he said, “They [Republicans under Ryan’s plan] want to give people like me a $200,000 tax cut that's paid for by asking 33 seniors each to pay $6,000 more in health costs. That's not right. And it's not going to happen as long as I'm President.”
Obama’s plan, then, recasts the issue from the GOP choice between spiraling debt and drastic cuts in Medicare, Medicaid and all domestic spending, to a new choice between higher taxes on the top one or two percent of Americans and preserving health care coverage for elderly and low-income people while also controlling the debt. That choice can be cast even more starkly: Control the debt by forcing seniors to pick up two-thirds of their own health care costs by 2030 (CBO’s estimate of the impact of Ryan’s plan) or deny wealthy Americans their most recent and future tax cuts. If you believe the polls, Americans today overwhelming favor President Obama’s priorities over Representative Ryan’s.
With his additional revenues, the President still has to find $3 trillion in spending reductions. One big chunk of cash would come from broadening and strengthening the cost-control measures in his signature health care reforms, including reimbursing hospitals and doctors based on results rather than volume and authorizing a new federal board to mandate rather than merely recommend the use of proven, cost-saving approaches to treating Medicare patients. He also calls for a new version of an old budget mechanism from the late-1980s, which would trigger automatic, across-the-board cuts in domestic spending whenever the deficit exceeds a certain level. In the end, OMB number crunchers believe that these and other measures would shave $2 trillion from spending over 12 years, and the lower deficits would save another $1 trillion in interest payments on the debt.
President Obama’s approach also allows him to preserve the substantial new public investments in education, infrastructure, clean energy and basic R&D which he called for in his latest budget. By putting together a plan to control deficits while increasing public investments – the “cut-and-invest” approach championed by Bill Clinton in the 1990s – he assumes an optimistic, can-do attitude that recalls Ronald Reagan. And the implicit contrast with the Republican “the sky is falling” recipe of large sacrifices may serve his reelection nearly as well as it did Reagan’s.
These choices will not be resolved anytime soon. GOP leaders immediately rejected the President’s blueprint. Yet, they and their Democratic counterparts know full well that any resolution will require real compromises that include both additional revenues and some paring of entitlements. Based on the deficit struggles of the 1980s and 1990s, they also know that it will likely take several years for both sides to find and comfortably claim some common ground. Even so, the President’s speech will have more immediate consequences, because it may well make the GOP’s position on the debt limit politically untenable. They no longer can argue credibly that they have to hold the full faith and credit of the United States hostage in order to force the President to get serious about the debt. The country now has a choice, and the Republicans can no longer say, our way or no way, when it would risk pushing up U.S. interest rates and possibly shaking the global economy. The current impasse over the debt limit will be resolved with some face-saving commitment by both sides to begin negotiating in good faith.
Today, NDN President Simon Rosenberg and NDN Globalization Initiative Chair Dr. Robert J. Shapiro issued the following statement on President Obama's fiscal speech at the George Washington University:
"In his speech today at George Washington University, President Obama offered the nation a thoughtful, balanced, and credible fiscal path forward. His plan should be the starting point for all future negotiations on spending and taxes between the two parties. His proposal achieves the $4 trillion in deficit reduction that the GOP plan purports to produce, and it does so while protecting the basic pledges of Medicare, Medicaid, Social Security. It also makes room for the critical investments in education, innovation, and infrastructure so necessary for Americans to succeed in the fiercely competitive global economy of the 21st century.
The contrast between the President's thoughtful fiscal approach and the reckless one offered by the Republican leadership last week could not be more clear. As the President said 'The debate over budgets and deficits is about more than just cutting and spending. It's about the kind of future we want.'"
Said Dr. Robert J. Shapiro, former Under Secretary of Commerce for Economic Affairs, chief architect of Bill Clinton's economic program in 1992, and now Chair of NDN's Globalization Initiative, "In the 1990s, we saw how a smart approach to restraining the fastest-growing areas of spending and raising additional revenues from those who can most afford it could balance the budget -- and create room for investments that drive economic growth. President Obama's vision is very similar, and it makes me optimistic again about America's future prosperity."
Once again, the nation’s big banks are working hard to have their own way with some of the most consequential issues before Congress. Tucked into the small print of Paul Ryan’s budget plan for 2012 and beyond are provisions to roll back the key regulatory steps taken to make another financial meltdown less likely, especially higher capital requirements tied to the riskiness of a bank’s investments. That’s not their only fight these days: They also are trying to roll back a critical debit-card reform enacted last year and just now about to go into effect. If they succeed — and the Washington airwaves are saturated with ominous ads calling for the rollback — it could cost many Americans nearly as much as what they have at stake in the ongoing squabbling over the 2011 budget.
The bipartisan debt and credit card reforms passed last year put the first real limits on how much the card networks and the large banks that issue nearly all cards can charge merchants when a consumer pays with a debit card. These charges are called “swipe fees,” and while they apply to all credit card as well as debit card transactions, the 2010 swipe-fee reforms apply only to debit card transactions. But if they save consumers as much as economists estimate, these reforms could well be extended to all credit card transactions too. And that could save the average American household some $230 per-year.
This is worth dwelling on, because it involves an ostensibly free market which, behind the curtain, a few huge companies actually manage to a significant degree — and now, behind the scenes, they’re also trying to manage the legislative process.
The facts, in a nutshell, are as follows. Merchants pay the three credit and debit card networks that account for some 80 percent of all charges a fee for every transaction using one of their cards that ranges from 1.5 percent to about 3.2 percent of the value of the transaction. A fee at some level makes perfect sense, since people buy more when they can charge or debit it, which benefits the merchants. But there’s no real economic basis for the actual levels of the fees. Less than 20 percent of the fees go to cover the actual costs of transaction for the banks and the credit card networks. Most of the rest goes to the four big banks that account for nearly 70 percent of all card transactions, with some going into higher profits and some for the advertising and rewards programs used to attract more customers.
We studied these fees last year. We found that in 2008, merchants paid swipe fees totaling some $48 billion. Those costs were tacked on to the price of everything they sold – clothing, computers, gasoline, restaurant meals, airline tickets, medications and so on. Moreover, the credit card networks forbid merchants from charging anyone using their cards a higher price to cover the fee, than those who pay cash. So, everyone pays for the swipe fees in higher prices every time they buy anything, whether or not they even use a credit or debit card.
We found that 56 percent of the swipe fees paid by merchants get passed along in higher prices, which in 2008 came to about $26 billion or $230 per-household. This year, it will be more, because we’re all charging more. And if the swipe fees were limited to the actual costs of processing debit and credit card transactions, plus normal profits, the lower prices for everything would expand real demand enough to create nearly 250,000 more American jobs.
In truth, the credit and debit card system operates more like a cartel than a genuine market. The fees are set by three companies that together account for 95 percent of consumer charges and two-thirds of business charges — Visa, MasterCard and American Express. Their actual customers are the banks that issue the cards, because the more cards are issued, the more swipe fees are generated. Moreover, four banks account for 70 percent of all cards and charges: JP Morgan Chase, Bank of America, Citigroup, and American Express (all of which, by the way, also collected taxpayer bailouts).
Since each of the networks and each of the banks account for a good slice of any merchant’s business, merchants have little option but to deal with them — again, much like a cartel. So, merchants can’t put normal market pressures on the networks and the banks to lower the fees by exiting the system. And since the networks forbid merchants from charging different prices based on whether a customer uses a card or cash, consumers have no incentive to pressure the networks and banks to lower their fees by using cash instead.
This not only produces higher prices, but higher prices that are applied in particularly unfair ways. More than half of all lower and moderate-income Americans don’t carry credit or debit cards at all. Yet they pay the higher prices along with everyone else. And most middle-class Americans with credit or debit cards pay higher prices to finance rewards programs largely restricted to more affluent card users.
So, last year, Congress gave the Federal Reserve authority to set rules for the swipe fees on debit card transactions. When Australia did much the same to cover both credit and debit cards, swipe fees there fell to 0.50 percent — and the system continued to work fine. The new rules are nearly ready to be issued here, and that’s what the banks and credit card networks are working so hard to stop. It will be another political test of whether big finance really can get anything it wants from Washington, regardless of the cost to everybody else.
I wrote a lot about the magic behind Ryan's budget and GOP economic strategy yesterday, so I'd like to round up some of the smart commentary and analysis about it.
After half the national media descended on their obviously ridiculous employment projections, Heritage scrubbed the numbers from their report - seriously shameful stuff. Here are the links (via Krugman):
Paul Krugman did a lot of work over the past two days breaking apart the economics and showing the of Ryan budget. As he writes, the part that hasn't gotten enough coverage is the fact that
the biggest source of supposed savings in the plan isn't actually health care, it's an assumption that federal spending on everything except health and Social Security can somehow be squeezed, as a percent of GDP, to a small fraction of current levels.
Ezra Klein explains why Ryan's projections of health care costs over time are completely unrealistic, and makes this very important point:
This is an important point: there's difference between cutting costs and shifting them. As the Congressional Budget Office noted, a lot of what Ryan's budget does is shift costs from the federal budget to someone else's budget: Medicaid's costs moves to the states, and then when the states cut it, to the people who need it, or to their families. Medicare's costs move to seniors, or to the families of seniors. The budget doesn't have a clear theory for how to spend less on health care. It has a clear theory for how the federal budget can spend less, and other people can spend more. But that's not good enough.
If you like the gory details, the Congressional Budget Office has analyzed Ryan's budget. It's not pretty.
Center on Budget and Policy Priorities President Robert Greenstein describes how two-thirds of Ryan's cuts come from low income programs.
While Paul Ryan and Alice Rivlin worked together on some Medicare reforms, she does not support the version he ultimately included in his budget, despite his implications to the contrary.
There's been a lot said and written in the last day describing Ryan's budget as an honest effort to address a major problem. Half the Members of Congress standing with Ryan yesterday called it "fact based." David Brooks wrote, "His proposal will set the standard of seriousness for anybody who wants to play in this discussion."
Here's the problem with all of that: the Ryan budget is simply not honest. The numbers in it and the economic analysis it relies on are wrong. You don't just get to put a bunch questionable numbers together, say it handles our deficit and debt issues, and declare victory. The tough part is that the plan has to actually handle the issues, and probably shouldn't do so on the backs of the most vulnerable. (One of the core principles of the Bowles-Simpson effort was to protect the truly disadvantaged.) So if Ryan sets the standard for seriousness, that standard is incredibly low.
When Paul Ryan unveiled his budget today, he touted it as a "Path to Prosperity" and he and his colleagues kept saying it was "based in fact." In reality, Ryan's claims of prosperity are based on an analysis - written at his request by the conservative Heritage Foundation - that has more basis in magic than economics.
For starters, the Heritage analysis's unemployment projections alone are utter nonsense. It claims that - under the Ryan budget - unemployment will plummet from the current 8.8% to 6.4% next year, 4% in 2015, and 2.8% in 2021. Each number is totally impossible - we'll never see 2.8%, and 4% would require run-away economic growth. As Matt Yglesias points out, the Federal Reserve would respond to that type of growth by raising interest rates to avoid inflation, so the levels forecast could never be reached. (As a reference point, full employment is around 5%, so 2.8% is a total fabrication.)
Furthermore, the Heritage report uses an almost comical conceptual explanation (under the heading "Economic and Fiscal Results" on page 3) of how the tax cuts in the Ryan plan pay for themselves and reduce the deficit. This would be great, if it were actually true. The Bush tax cuts did not come anywhere close to paying for themselves, nor have other large cuts to upper income tax rates. From the Chair of Bush's Council of Economic Advisors, Greg Mankiw:
I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.
The unfortunately truth is that this Heritage "analysis" represents the lack of reality in which conservative economic policymaking functions. Paul Ryan is getting a lot of credit today for pointing out a large challenge facing America. Sure, we do have a debt problem, but we need to view it in its proper economic context.
America has two large economic problems. The first is an economy that's just not working in the face of rising global competition: a lost decade of median household income decline and wage stagnation followed by a recession and financial crisis from which we have yet to fully emerge. The second is a long-term structural debt problem: the federal government's expenditures far exceed its revenue, and that trend will be exacerbated by rising healthcare costs. And debt is a problem because it can impact the economy itself; it's not right now.
The President's budget is a credible response to the economic challenge: investments in education, infrastructure, innovation, and industries of the future represent a viable economic plan. It also makes down-payments - if incomplete - on long-term debt issues. Let's not forget though, that he already passed the most significant piece of deficit reduction legislation in recent memory - the Affordable Care Act, which the GOP wants to repeal. As former Obama OMB Director Peter Orszag often said, health care reform is entitlement reform. And the Simpson-Bowles fiscal commission report, which Ryan voted against, recommends building on the ACA's cost-controls as a major form of deficit reduction.
Let's contrast the President's approach with the House Republican approach of massive cuts in the near-term and Ryan's budget, which focuses on dramatically reducing the size of government. In the near-term, the House GOP agenda of $61 billion in cuts would, according to McCain campaign economic adviser Mark Zandi, cause 700,000 jobs to be lost by the end of 2012, and, according to Federal Reserve Chairman Ben Bernanke, cause the loss of 200,000 jobs. Goldman Sachs estimates a 1.5 to 2% reduction in GDP.
In the long term, Ryan offers no strategy to make America more competitive, increase employment, or make people's lives better. Rather, he offers reduced benefits, namely to the elderly, the poor, and the handicapped, and cuts taxes for the wealthy. (His one sop to competitiveness is corporate tax reform, which President Obama also favors.) Forget about the immorality of his budget for a moment, (well, don't, it's pretty appalling) the fact is that Ryan's budget offers no real path to economic growth, other than fudged numbers from the Heritage Foundation, and a questionable, slash and burn approach to deficit reduction.
Taken together, it's clear that the GOP isn't focused on the real problems facing the country. At a time when Americans want more jobs and more growth, the GOP strategy - if you believe the analyses of George W. Bush's Federal Reserve Chair, a McCain economic adviser, and Goldman Sachs - is to create less. And, if you believe the analysis of Bush's Council of Economic Advisor Chair, their deficit reduction strategy is deeply flawed too. Unless, of course, you believe the Heritage Foundation's analysis that Paul Ryan's budget is made of magic.
Washington today, especially the Congress, has a textbook case of cognitive dissonance. A confluence of black swan developments may well threaten the American and global recoveries. There’s the civil war in Libya and unrest across much of the Middle East that could disrupt world energy supplies, the natural catastrophes in Japan may upend the world’s third largest economy, and several European governments are flirting with junk-bond status. On top of all this, recent data on housing, investment, and consumer spending all point to a still-fragile U.S. expansion. Yet, with all of this, Congress spends its time bickering over funds the federal government needs week to week just to keep operating.
This debate has become almost willfully wrong-headed. An economy not yet recovered fully from a historic financial meltdown and deep recession, and now facing possible major shocks from three directions, is no candidate for budget cuts. In fact, a new National Journal survey of 44 Washington economists and “economic insiders,” Democratic and Republican, found only one of the 44 who sees immediate spending cuts as the highest priority. (Full disclosure: I am one of the 44 surveyed.) If there are still any doubts about what happens when governments ignore this basic economics, consider Great Britain and Germany. Both embraced the austerity snake oil and plowed ahead with sharp spending cuts and tax increases. Two quarters later, the recoveries in both countries are stumbling badly.
Of course, these debates are not about economics at all. Here and in Europe, they’re driven by anti-government factions inside the base of each country’s conservative party. Congressional Republicans might take note, however, that this approach no better politics than it is economics. After enacting their programs, the governments of David Cameron and Angela Merkel find themselves hemorrhaging public support.
There is a time for serious debate about the role of American government in our economy and daily lives. The 2012 elections could provide a platform for real public deliberation about how much the government should do in the future to provide health care for elderly and poor people, ensure access to higher education for young people unlucky enough not to be born into affluence, or support the weapon systems, manpower and womanpower needed to wage multiple wars. At a minimum, the campaign should include some serious talk about whether the Obama administration did the right thing in driving health care coverage for most Americans.
Right now, however, is the time to focus on the clear and present dangers to the jobs and incomes of average Americans. The President made a good start this week with proposals to make the U.S. economy less energy intensive and especially less dependent on imported oil. Dealing with the continuing problems in Japan and Europe will be tougher. As we outlined last week, if the crisis in Japan persists for another month or longer, it will disrupt production here of everything that uses parts or elements made-in-Japan, from automobiles and electronics to medical equipment and even pharmaceuticals. Congress should take this time to consider steps that will help our manufacturers keep their U.S. workforces intact through such supply chain disruptions — for example, a temporary tax break on foreign earnings brought back home by manufacturers who expand their U.S. jobs. If Japan’s crisis deepens, it also will absorb all of Japanese saving, and then some. That development would likely drive sales of U.S. stocks by Japanese investors and sales of U.S. government securities by the Japanese government, creating new downward pressures on U.S. stock prices and new upward pressures on our interest rates. All of this means that the Federal Reserve and Treasury should take this time to prepare for another round of quantitative easing.
A new debt crisis in Europe would threaten the balance sheets of our large financial institutions, yet one more time. They don’t have large holdings of Greek, Irish, Portuguese, Belgian or Spanish government debt, all of which now hang in the balance. But our big banks do have hundreds of billions of dollars in normal business with the large European banks that do carry huge portfolios of those bonds — and which might find themselves unable to carry out their contracts with our banks if another crisis hit. That’s what happened, in reverse, in September 2008, when American banks couldn’t honor their contracts with many European banks in the post-Lehman panic. Today, instead of arguing about PBS funding, congressional leaders should be quietly talking with the administration about ways to contain another financial crisis without bailouts which the public would never support again.
If the Congress and administration could refocus their current debate around these real and pressing issues, perhaps they could then move on to the longer-term problems that matter to most Americans outside the Tea Party. To begin, what can Washington do to help American businesses create new jobs at the vigorous rates we all considered merely normal, until the last decade? There might even come a time for a serious public discussion about what steps might help reverse the corrosive income patterns of the last 30 years, which have seen a small minority of very rich and very highly-skilled Americans capture nearly all of the nation’s income gains, while middle class people stagnated and poor people lost ground.
And one point should be very clear: Budget cuts are no more of an answer to these long-term issues than they are for the more immediate problems facing the American economy.
Jonathan Chait argues that Speaker Boehner has no choice but to shut down the government because the Tea Party won't let him compromise with the White House and Democrats.
Politico's David Rogers updates on the latest in the budget wrangling. The facts on the ground seem to confirm Chait's thinking:
For Boehner, the great challenge is to hold his party together for a final deal and the GOP is still pursuing a strategy of first maximizing its Republican vote before reaching out to House Democrats.
Aides dismissed suggestions that there is already an active campaign to solicit moderate Blue Dog lawmakers-however much their votes may be needed. Instead the leadership feels it must prove its loyalty first to its large, conservative freshmen class, since even tougher party votes lie ahead this spring with the debate over the 2012 budget and raising the federal debt ceiling.
Eric Cantor seems to be having a very difficult time with these budget negotiations, so difficult that he has no idea what's actually going on.
David Leonhardt writes that the Federal Reserve is consistently overestimating both growth and the likelihood of inflation, and has therefore done too little to address unemployment. He explains why:
Why is this happening? Above all, blame our unbalanced approach to monetary policy.
One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.
There is no equivalent group - at least not one as influential - that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.
The similarities between the budget battle and limited action by the Fed are striking. In both cases, priorities are being misplaced because of a lack of political gravity on the side of unemployment and growth, so almost theological fears of inflation and the size of government are winning the day. And, in both cases, the frightening severity of current economic conditions - high unemployment, weak demand, a weak housing market, rising energy prices, global instability, and the aftermath of the Japanese earthquake and tsunami - are not being fully accounted for.
At least in the case of the Fed, inflation hawks have an actual policy case. In the case of the budget battle, however, there's zero chance that the GOP's cuts will create jobs or growth or address the national debt.
As the damage to Japan and its economy from the recent natural disasters deepens, we can begin to see serious potential aftershocks for our own economy. In certain respects, the United States relies on our broad and intricate financial and trading relationships with Japan. China has surpassed Japan as the world’s largest buyer of U.S. Treasury securities. But Japan remains the world’s largest, diversified investor in the United States, counting its large holdings of U.S. stocks, corporate debt, real estate, and plants and factories, as well as government securities. Now, in an unanticipated downside to globalization, the aftereffects of the natural disasters are beginning to disrupt the two countries’ normal financial and trading relationships. And that will create new upward pressures on U.S. interest rates, put new downward pressures on U.S. stock prices, and cause unexpected losses for many U.S. companies.
These concerns reflect the prospect that the terrible earthquake and tsunami will prove to be unusually destructive for the Japanese economy. The damage to the country’s power grid may extend the economic costs far beyond the communities directly devastated by the disasters, slowing agriculture and industrial activity across up to one-third of the country. And with the frightening news that Tokyo’s water supply contain radioactive iodine dangerous to infants, the radiation from crippled nuclear power facilities could bring economic activity to a halt in much more of the country, and for some time to come.
If this comes to pass, the aftershocks for the U.S. economy could be quite serious. The disaster and its disruptions for the Japanese economy have already begun to cut into the earnings and incomes of Japanese companies and citizens. To cover rising debts and other unexpected expenses, Japanese investors have been converting some of their foreign assets to yen, and then bringing those yen back home. Most of these liquidations involve American assets: Japanese investors hold some $211 billion in U.S. stocks and another $134 billion in U.S. corporate debt. Moreover, if the earnings of Japanese companies and the incomes of Japanese investors continue to shrink with the crisis, private saving in Japan will fall — and that’s just as Japan’s budget deficit soars. The result will be that most of the savings that Japanese companies and individuals manage to accumulate will go to finance their own government’s deficits, not to buy our assets. And if the crisis deepens and persists, rising outflows of Japanese holdings will depress U.S. stock prices and raise the interest costs for U.S. corporate borrowers.
The largest Japanese investor in the United States, of course, is the government in Tokyo, which holds some $1 trillion in U.S. government securities. As a long crisis drives up government spending in Japan and drives down revenues, a budget deficit already equal to over 8 percent of the country’s GDP will rise sharply. At a minimum, Japanese government purchases of U.S. Treasury securities will dry up. And if the crisis worsens, Japan may become a major seller of U.S. government securities. This will put considerable pressure on U.S. interest rates, potentially increasing our own deficit (through higher interest costs), and almost certainly slowing our economy.
The potential problems are not limited to finance. Japan accounts for about 5 percent of U.S. exports; and major exporters will feel the pinch. Those likely to feel it first include makers of aircraft and their parts, medical equipment, pharmaceuticals, and computers. It’s not all bad news for U.S. exporters, because the current strong yen tied to Japanese investors cashing out some of their foreign financial assets will leave Japanese producers less competitive in other markets. More grimly, while U.S. exports of foodstuffs also are taking an early hit; U.S. food producers will step into the breach if more of Japan’s domestic food supply becomes contaminated.
The potential costs for the U.S. economy also include disruptions in U.S. supply chains that involve Japan. With holdings of $260 billion in U.S. industrial and commercial operations, Japan is the second largest foreign direct investor in the U.S. economy, just behind Britain. Sony, Toyota, Honda and other large Japanese enterprises operate here to serve the American market; but they still produce most of their most sophisticated parts in Japan. Japanese production of many of those parts already is disrupted. If conditions worsen, it will cost U.S. jobs as Japanese production and assembly here slows or even stops. And by the way, American companies are also the largest foreign direct investor in Japan, so a deepening crisis in Japan also will reduce the earnings of U.S. businesses operating there.
The United States is not the only economy exposed to economic aftershocks from the Japanese earthquake and tsunami. Japan is the largest foreign direct investor in China, having transferred a good part of its manufacturing base there over the last decade. Unlike U.S. companies which have invested in China mainly to serve the Chinese and third-country markets in Asia, Japanese enterprises in China produce mainly for the home, Japanese market. The sharp downturn already beginning to unfold in Japan, then, will cost China jobs and growth, especially in southern China.
In the end, it’s the American economy that is most interconnected with Japan’s, so the United States is most exposed to collateral economic damage from the recent, terrible natural disasters.