The new issue of Democracy Journal is out today, and - as usual - makes a strong contribution to the national conversation around the economy. Of interest to followers of NDN Fellow Dan Carol's work on bottom-up economic development is Andrei Cherny's piece entitled "Individual Age Economics," Cherny writes:
The task ahead in the Individual Age is to create a Horatio Alger economy, a drive to rebuild the possibility of upward mobility that is at the heart of the American experience. For today's middle-class Americans, life is a game of "Chutes and Ladders" with more chutes than ladders. While individuals have been thrown back upon themselves, both progressives and conservatives have acted as if the economy still functions from the top down. If America is to recapture the economic growth that was Hamilton's concern and the broad equality of opportunity that was Jefferson's dream, our mission must be to forge a new economics for the Individual Age that rethinks our economy from the bottom up.
Ezra Kleinpoints out that Congressional Republicans are being penny-wise and pound foolish about deficits. It's a crazy situation, but taken in totality, the House Republican economic strategy of cuts this year, health care repeal, and making the Bush tax cuts permanent offers, by independent estimates, less growth, fewer jobs, and more debt.
Accordingto a new Gallup poll, 54 percent of Americans see either jobs/unemployment or the economy as the most important issue facing the country. That number compares to the 13 percent who see the deficit/debt as the number one issue.
And a poll conducted by the National Opinion Research Center at the University of Chicago shows that Americans overwhelmingly favor increased spending on domestic programs:
The public's top priority for increased spending - education - provides a contrast, with views across partisan lines holding steady despite sharper concerns about the deficit. Three-quarters favored higher spending on education.
Majorities also supported higher spending on assistance to the poor (68 percent), protecting the environment (60 percent), halting rising crime (60 percent), Social Security (57 percent), dealing with drug addiction (56 percent) or drug rehabilitation (52 percent), and assistance for childcare (52 percent).
In governing, there are generally two reasons political leaders make decisions: policy and, more often, politics. That's why the current obsession with near term budget cuts is so mind-boggling. While the long-term fiscal picture is an important policy question, there are not political or policy reasons to make anywhere near the cuts currently on the table.
From a policy perspective, we often hear that the United States is broke. If you only read one thing today, read about why the United States is not. Not only is the US not broke, it's not anywhere close. Bloomberg's David Lynch lays out why:
"The U.S. government is not broke," said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. "There's no evidence that the market is treating the U.S. government like it's broke."
The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007. Financial products that pay off if Uncle Sam defaults aren't attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.
From a political perspective, while, again, people care about debt, the fiscal picture is, at best, a secondary issue. From a new Bloomberg poll:
Americans are sending a message to congressional Republicans: Don't shut down the federal government or slash spending on popular programs.
Almost 8 in 10 people say Republicans and Democrats should reach a compromise on a plan to reduce the federal budget deficit to keep the government running, a Bloomberg National Poll shows. At the same time, lopsided margins oppose cuts to Medicare, education, environmental protection, medical research and community-renewal programs.
While Americans say it's important to improve the government's fiscal situation, among the few deficit-reducing moves they back are cutting foreign aid, pulling U.S. troops out of Afghanistan and Iraq, and repealing the Bush-era tax cuts for households earning more than $250,000 a year.
The results of the March 4-7 poll underscore the hazards confronting Republicans, as well as President Barack Obama and Democrats, as they face a showdown over funding the government and seek a broader deficit-reduction plan.
"Americans do not have a realistic picture of the budget," says J. Ann Selzer, the Des Moines, Iowa-based pollster who conducted the survey. "We all know people who are in debt yet cannot for the life of them figure out where the money goes."
Overall, public concern about the deficit -- which is projected to reach $1.6 trillion this year -- is growing, although it's still eclipsed by employment, with poll respondents ranking job creation as a higher priority.
I understand why a conservative movement would listen to a base obsessed with shrinking government. What I don't understand is why anyone else would.
At the private conference this week convened by the International Monetary Fund (IMF), 30 world-class economists talked for two days about “Macro and Growth Policies in the Wake of the Crisis.” Their discussions provided a reality test for the current economic debate in Washington, and the last decade of U.S. policymaking flunked. Economic ideology not only blinded American policymakers to the seeds of a financial crisis that never had to happen; it also has led to wrong-headed responses for both the short-run and the long-term.
While the United States and other advanced countries embraced large-scale stimulus in 2008 and 2009 to avoid a global depression, the panelists pointed out that the world’s advanced economies are now moving in the opposite direction, without regard for the consequences. Across a group of economists who normally argue over every assumption and decimal point, a genuine consensus emerged that the American and European economies remain too fragile today to successfully absorb major deficit cuts.
While congressional Republicans wield a meat axe over the budget, and many Democrats would apply a scalpel, nearly all of the economic notables gathered at the IMF concluded that additional spending and tax breaks would be much more sensible. The 2009 and 2010 stimulus programs came in for plenty of criticisms, especially for their emphasis on tax breaks for households: The financial meltdown and deep recession left most households with so much debt relative to their incomes that much of the stimulus just went to reducing their debt loads. Household debt today is considerably lower; but it hasn’t fallen as far as most people’s assets, because the value of their principal asset, their homes, has kept on declining month after month. This time, the experts agreed, any stimulus should be better targeted, for example through investment tax breaks and spending on education and infrastructure.
To be sure, there were repeated calls for a long-term “fiscal consolidation” program, which is how economists describe entitlement reforms and other measures that can limit a nation’s public debt to a reasonable share of its GDP. But they weren’t encouraged by what they’re hearing out of Congress, where politicians regularly conflatethe need for long-term deficit reduction with a short-term opportunity to roll back the size of government. Nowhere is this confusion more obvious, several noted, than in a misguided focus on cutting current discretionary appropriations. And particular scorn was heaped on calls for cuts in education and infrastructure investments, which economists have long promoted as the best way to support future expansion and provide a lifetime of healthy social returns.
The most stinging critique, however, was reserved for the years of policy and business misjudgments which brought on the financial crisis and ultimately triggered the worst recession in 80 years. Starting with the opening remarks by Dominique Strauss-Kahn, the head of the IMF, a long line of economic luminaries laid out how policymakers here and in Europe misunderstand the very nature of modern financial capitalism. Again, there was rare unanimity for the view that markets today, which work so well in allocating resources, lack the means and the information to recognize bubbles and evaluate the economic risk of complex financial instruments.
Nor do policymakers have the excuse that this challenge represents something new. Hundreds of savings and loans went under in the 1980s, because financial markets couldn’t evaluate risk very well. Moreover, the 1990s saw three bubbles slowly take shape and then explode, first in Japan, then across much of East Asia, and finally in the Nasdaq tech sector. Yet, policymakers at the White House, the Federal Reserve, the Treasury and their counterparts across Europe sat by placidly, just a few years later,as leading financial institutions recklessly accumulated enormous leverage for financial instruments based on an obvious bubble and whose riskiness they couldn’t begin to assess.
Yet, these misjudgments weren’t universal: The financial meltdown was limited to the advanced economies, while much of the developing world learned the painful lessons of the 1997-1998 Asian financial crisis. So, their policymakers imposed new limits on leverage, and their financial institutions passed on investing in the toxic assets that brought down the U.S. and European economies.That’s why, at least for now, the developing economies have become the engine of global growth.
The Great Depression produced a large sheaf of institutional reforms which have helped the world avoid a repeat ever since. Yet, the Nobel Laureates and other experts gathered this week by the IMF also agreed that the United States and Europe have yet to undertake comparable reforms that would make another global financial crisis less likely. If we don’t, they warned, another financial crisis almost certainly will befall America and Europe in the foreseeable future.
In the past weeks, NDN and the New Policy Institute hosted two major events on the economy. The first, a discussion with Rob Shapiro of NDN, William Gale of Brookings, budget expert Stan Collender, and Kevin Hassett from AEI, is called "The Budget and the Economy:"
At the second event, NDN's Rob Shapiro led a discussion on "Winning the Future" with National Economic Council Deputy Director Jason Furman:
Simon Rosenberg along with Brad Blakeman; former Deputy Assistant to President George W. Bush, discussed President Obama's remarks about Wisconsin's labor union debate at the National Governors Association's 2011 Winter Meeting.
Hoping to avoid the fate of other leaders in the Arab world, the King of Saudi Arabia has introduced a number of welfare measures targeting unemployed or poor young people.
Martin Wolf, in the FT, tells us why youth are in such a revolting state of mind.
David Leonhardt looks back on the debate between Germany and the United States on stimulus versus austerity. Turns out austerity didn't really work - Why Budget Cuts Don't Bring Prosperity. Now if only there were an ongoing debate to which this evidence could be applied...
Mother Jonessays "It's Inequality, Stupid" and has some snazzy charts to back it up.
Jonathan Chait tries to understand why Republicans are moving things in the direction of a government shutdown.
The National Journalcounts down to government shutdown.
The conventional Washington wisdom is that the key to economic policy today is deficit reduction for 2011, and battles over spending cuts almost certainly will dominate our politics for the next several months. This so-called wisdom is the economic-policy equivalent of snake oil. Britain and Germany both tried it, and now both are struggling with significant slowdowns. The U.S. recovery remains modest, and the tax stimulus passed last December is the main reason why our economy should be able to take the fiscal drag from spending cuts without stumbling – and might well pick up if we forgo significant reductions. Don’t take my word for it – just look at recent economic data.
The most important signals are coming from finance and housing, the two areas that ignited the financial meltdown of 2008-2009 and the deep recession that followed. The Federal Reserve knows the real story, which is why it pumped another $200 billion into the long end of the bond market early this year. The Fed’s goal is to keep long-term interest rates low so housing and business investment can pick up. Well, it’s not working, at least not yet. John Mason, a Penn State economist, has sifted through the latest banking data and found, as expected, that the cash assets at commercial banks increased by some $280 billion since early January. Here’s the rub: Only one-third of that increase shows up on the balance sheets of American banks, while two-thirds are logged to the accounts of foreign-owned banks operating here.
The second round of the Fed’s “quantitative easing” program has made foreign banks here cash flush, but they aren’t serious lenders to American businesses or consumers. The main business of these foreign-owned banks is to keep credit flowing for the American operations of their big corporate customers from back home. As for our own banks, loans and leases generated by the 25 largest U.S.-chartered banks dropped by $50 billion since the New Year, mostly in shrinking consumer lending. The loan portfolios of the rest of the U.S. banking system expanded a little, but not in residential lending or commercial real estate, each of which declined by more than $20 billion. More important, overall commercial bank lending is contracting. The big banks also dumped $67 billion in Treasury securities since the first of the year, while smaller U.S. banks expanded their Treasury holdings nearly as much. The big banks know what they’re doing: They sold to take their profits as Treasury rates inched up.
The data on business investment since January 1, 2011, aren’t out yet, but the trend isn’t very bullish. Business investments (not including inventories) grew throughout 2010. But their rate of growth has slowed since mid-year, from gains of over 17 percent in the second quarter of 2010, down to 10 percent in the third quarter and down again to 4.4 percent in the fourth quarter. That trend closely tracks the winding down of the 2009-2010 stimulus, which was largely spent out by mid-year. Consumer spending has been rising since the end of 2009 – again, thanks largely to the stimulus -- but the increases have been too modest to drive strong gains in business investment or jobs.
The main reason why consumer spending remains pretty weak, even with the big stimulus, is housing. Once again, you can take the Fed’s word for that. The primary asset of most Americans is their homes – the bottom 80 percent of U.S. households hold 40 percent of the total value of all U.S. residential assets, compared to just 7 percent of the total value of all U.S. financial assets. And the value of those residential assets continues to fall. According to the latest data, housing prices fell another 0.5 percent last December and stood 2.4 percent below their levels a year earlier. That’s why 27 percent of all single family homes with mortgages today are worth less than their outstanding mortgage loans. And the most powerful force driving down those home values are the home foreclosures which have been rising steadily since 2008 -- and are expected to increase another 20 percent this year. The Fed’s latest $200 billion quantitative easing was designed to revive housing and business investment. But that can’t happen when two-thirds of it is taken up by foreign-owned banks to meet the weekly credit needs of foreign-owned companies here.
There is another cloud forming on the economy’s horizon, and that’s rising energy prices. The uprisings in the Middle East have rattled oil markets, and oil prices are up 25 percent since Thanksgiving. Four of the last six U.S. downturns were triggered by oil price shocks, including the first phase of the 2007-2009 recession. If the revolutions stop at Libya, they shouldn’t have any major economic effects on our economy. But if they spread to the really big producers like Iran and Saudi Arabia, an economy still beset by weak business investment, falling housing prices, and fragile consumer demand could take a big hit. The most positive news is that last December’s tax stimulus – which, by the way, doesn’t include the Bush tax cuts, since they were already in place – should bolster consumer and business spending later this year. The only reasonable conclusion is that the last thing the American economy needs right now is more spending cuts.
Today at 12pm NDN and the New Policy Institute will host Dr. Jason Furman, Assistant to the President for Economic Policy and the Principal Deputy Director of the National Economic Council, for an important discussion of the Obama Administration’s economic strategy. The conversation will focus on President Obama’s budget and efforts to "Win the Future" in the competitive, global economy of the 21st century. Dr. Furman will deliver brief remarks and NDN Globalization Initiative Chair Dr. Robert Shapiro will lead a discussion.
The event will be held from 12-1:15pm at NDN/NPI headquarters – 729 15th St NW, First Floor.
On Tuesday, February 22, NDN and the New Policy Institute will host Dr. Jason Furman, Assistant to the President for Economic Policy and the Principal Deputy Director of the National Economic Council, for an important discussion of the Obama Administration’s economic strategy. The conversation will focus on President Obama’s budget and efforts to "Win the Future" in the competitive, global economy of the 21st century. Dr. Furman will deliver brief remarks and NDN Globalization Initiative Chair Dr. Robert Shapiro will lead a discussion.
The event will be held from 12-1:15pm at NDN/NPI headquarters – 729 15th St NW, First Floor. Lunch will be available. Click here to RSVP. The event will be live webcast.
The President and Senate Democrats are calling it from the same playbook. Today leadership released their plan to "Win the Future" by, you guessed it, "Out-Innovating, Out-Educating, and Out-Building" and out-deficit reducing, as they signed on to the President's five year freeze on domestic discretionary spending.
The Federal Reserve now projects economic growth in 2011 to reach 3.4 to 3.9 percent. That's a nicely upgraded forecast from the previous range of 3.0 to 3.6. The employment picture is less good - 8.8 to 9 percent projected unemployment.
Former Bush speechwriter David Frum explains the conservative budget conundrum as follows:
Today though it's more relevant to think of conservatism as an attempt to draw a line connecting four points:
1) No tax increase 2) No defense cuts 3) No Medicare cuts 4) Rapid move to a balanced budget.
Obviously it's impossible to meet all four of those commitments. It would be difficult enough to combine #4 with even two of the first three.
Much of the struggle within the conservative world can be understood as a quiet debate over which of those commitments to jettison.
Steven Pearlstein declares the beginning of the budget fight by imagining what would have happened if the President had proposed a 60 cent hike in the gas tax a year ago. (The increase came anyway, but just because of increased gas prices.)
Since its budget time, and people are out there complaining about deficits and debt, here's the Most Important Budget Graph in the World, courtesy of the CBO:
What's it say? If you want to control deficits and debt, you've got to tackle healthcare.
For more on the budget and the economy, join NDN and the New Policy Institute for two major events. On Friday, February 18, we will host a discussion with a group of budget experts and economists, and on Tuesday, February 22, we will host a converastion with National Economic Council Deputy Director Jason Furman. Details on both available here.
"Older politicians will have to get beyond their ideological blinders to recognize the opportunity waiting for any candidate or political party that can embrace both halves of the Millennial era civic ethos paradox."