With the release Friday of May's terrible jobs report (and let's not sugar coat anything-- 69,000 created is terrible, and the unemployment rate notched up a tenth as a result) Mitt Romney and other Republicans have been quick to say that it is proof that President Obama's policies are not working. Their solution is to (predictably) suggest cutting taxes on 'jobcreators' (meaning the very wealthy and corporations,) getting rid of regulations and slashing government spending.
Not so fast. Certainly the policies in place are failing to stimulate the economy, but let's take a look at the policies in place.
Let's begin with taxes. Federal taxes are now at their lowest rates since 1950. It's hard to remember that during the 1950's and 1960's, the top marginal rate got as high as 91% in the Internal Revenue Code of 1954. And there were far fewer loopholes than there are today, so 91% meant 91%. Contrary to what today's conservatives will tell you, this did not deter job creation at all, as the American economy boomed (for example, Ray Kroc bought a hamburger stand from the McDonald Brothers in 1955, fully aware that if he was successful in his plans to turn it into a national chain of fast food restaurants he would be taxed at 91%. He and others prospered anyway.) Conservatives love to claim that the Reagan tax cuts were responsible for an economic recovery in the 1980's. But the top marginal rate under Reagan was cut in 1981 to 50%. That was what was considered 'conservative' in those days. What we have now is a system of historically low tax rates (on everybody) and then we have enough loopholes so that last year more than twenty thousand billionaires and multi-millionaires paid no tax at all as did many of the most profitable corporations. In other words, we have created a tax system in which tax rates are historically low, and what tax is paid, is paid mainly by the middle class, not the very wealthy. So the GOP argument that cutting taxes on the very wealthy will spur jobs is FALSE. Both the official and actual tax rates on the very wealthy and corporations are ALREADY the lowest they've been in decades and they have not stimulated the economy. Cutting them further will not help any more than the past several years of very low taxes have helped. In fact, if I fault Obama here, it's that he bought into the tax cut argument. Recall that the Stimulus was 43% tax cuts (including a mixture of corporate and individual tax cuts) and that he has further cut payroll taxes, and agreed to an extension of the Bush tax cuts two years ago. Let's be clear. Cutting taxes on so-called 'job creators' has NOT created jobs (certainly not in America.) Mostly, they've stashed the cash in accounts someplace (it is no coincidence that offshore banking in places like Switzerland and the Cayman Islands has exploded since the Bush tax cuts were passed.)
What about regulation? It's certainly true that there are regulations out there that can stifle small businesses. Former Democratic presidential candidate George McGovern, after leaving the Senate, opened a Bed and Breakfast in South Dakota. He later said that he got overwhelmed by all the paperwork he had to deal with, and recognized most of it as stuff he had written, sponsored or voted for while in the Senate. As he notoriously told one interviewer, "If I realized what a pain in the neck it would be, I wouldn't have written half of that stuff." However, in getting rid of regulations or deciding not to write new ones, we want to be careful as well. Let's remember that it was the (bipartisan) vote in 1999 that repealed the Glass-Steagull act and opened the door to exactly the kind of wild speculation by the big banks in risky derivatives that led to the crash of 2008. Taxpayers are understandably irate at having to bail out these big banks after their own irresponsible behavior, especially since as long as the banks were making big money, it went to their own executives and investors, not to the taxpayers (historically low tax rates, remember?) Dodd-Frank is a start in the direction of regulating the banks, but even at that it was watered down by their lobbyists, ensuring that what happened in the early 2000's could potentially happen again. A part of the act which was removed in order to gain the vote of Senator Scott Brown (R-MA) and break a GOP filibuster, the so-called Volcker rule would prohibit banks from investing in hedge funds and private equity funds. This is exactly the kind of investing that got them into trouble in the first place. The CEO of J.P. Morgan Chase, Jamie Dimon, has argued against the Volcker rule and said that the rule could cost his bank $400 million, but then has said little since trading in a hedge fund cost his bank $2 billion, five times the amount he claims the Volcker rule would cost.
Certainly if a chain of interconnected large banks fail, it can destroy the economy for everyone. BUT EVEN WITH Dodd-Frank, and EVEN IF the Volcker rule is in effect, there would still be FAR LESS regulatory oversight than there was under Glass-Steagull. During the time that Glass-Steagull was in effect, between 1937 and 1999, recessions were far milder than they have been since then (even the 2001-2002 recession was much deeper than any other recent recessions before the current downturn.) So once again, conservatives have gotten their way with regulation of the banks. Suggesting more deregulation would be going in exactly the wrong direction.
What about other companies than banks? Certainly if most business fail whether because of lack of regulatory oversight or for some other reason they won't ruin the entire economy. No, but they can ruin a lot for a lot of people. For example, given the BP oil spill, does anyone suggest that we should relax regulations on offshore oil drilling (I'm not saying don't drill, but would 'deregulation' make sense here?) Regulations are generally written either to protect the safety of workers, to protect the environment or to protect the consumer. Which of these three should we protect less? Haven't we seen enough people die in mine disasters in the past few years? Don't we already have enough pollution? Do we want more unsafe products on the market?
Are there some regulations that could go because they are obsolete, unnecessary or needlessly burdensome? Of course. And we should remove unneeded regulation, but we should be sure it is unneeded first. If we don't the price will be paid in lives-- maybe even ours (Vioxx anyone?)
And what about government spending? Isn't the deficit dangerous to the economy? Shouldn't we learn from Europe? To a degree, yes. We do presently have a national debt that exceeds $15 trillion and our debt-to-GDP ratio is very high (though not a record; it was significantly higher in 1946.) However, it must first be noted that a deficit is caused when spending exceeds revenue (just like if you spend more than you make, you will end with a debt, that you will have to borrow to pay.) Republicans love to claim that we have spent our way into a record deficit. Doing so, however, ignores the effect of trillions of dollars less in tax collections (remember those historically low tax rates? That represents revenue not going to the government.) The truth is, that spending under the Obama administration has on average increased at 0.4% per year, the slowest since the Eisenhower administration. I even give the GOP Congress some credit for this, with their (at times unreasonable) insistence on spending cuts as the price for doing anything the past two years (not that we won't pay for it of course, but the price will be less accurate hurricane forecasts and tornado warnings a decade or more from now.) The reason why the deficit has grown so much over the past decade is because tax revenues coming into the government have dropped through the floor (historically low tax rates, remember?)
Well, what about cutting government spending as a means to stimulate the economy then? Unfortunately, as I explained last year, cutting spending in the middle of a recession has exactly the opposite effect. In fact, this is exactly what we SHOULD be learning from Europe. Greece, Spain, Portugal and Ireland have all implemented various types of austerity to combat the recession, which involves massive cuts in their public sector workforces. The European Central Bank and the IMF have helped bail them out, but on the condition they cut their govenrment spending so that they could pay back the loans. Only an unexpected (but entirely foreseeable) development happened-- the economies of the countries collapsed so fast that even with the cuts they are having trouble making the payments because with a collapsing economy less is being produced at all and so less can be collected in taxes no matter how high the rate is. For example, the Greek economy has shrunk by over 20% just this year. What about the U.S. economy? With May's report, it is a fact that over 600,000 public sector jobs have been lost during the Obama administration. This includes over 11,000 federal jobs and much larger cuts at the state and local levels. This is precisely the OPPOSITE of what would be called for in classical Keynesian economic theory. One can argue whether this is itself caused by the bad economy (since states have to operate on a balanced budget) or by a conscious GOP attempt to shrink government (the truth is probably some of both, and there are enough public sector job losses to be explained using both of these causes.) However, contrary to what conservatives will tell you, if the economy has not been stimulated, it is not because of government hiring, but rather the dumping of hundreds of thousands of teachers, police and other public sector workers into the job market. So what we see is the effect of government not hiring, but in fact doing the opposite and sandbagging any private sector driven improvement in the economy by adding to the number of unemployed people (with lower income and consumer spending to match.)
So is the economy not doing very well? Absolutely, the May jobs report makes it clear that it is not. And certainly the interconnectedness of global markets means that we are fools if we believe that problems in Europe or Asia won't eventually be reflected in the U.S. But don't let conservatives suggest that they can 'cure' it by cutting taxes, deregulation and cutting government spending. Because that's what we've been doing for YEARS, and where we are now is where it has taken us! MORE tax cuts, deregulation and cuts to government spending would be like trying to cure high cholesterol by eating cheeseburgers.
Showing posts with label deficit. Show all posts
Showing posts with label deficit. Show all posts
Saturday, June 02, 2012
Saturday, August 13, 2011
Government spending and jobs.
A friend of mine on facebook asked me the following question:
Can you help me to understand if FDR initiatives like the WPA would help to get America back on it's feet in these times? Congress is focused on only taxes and the budget and I just feel like America needs employment opportunities to turn this economic situation (recession, depression or whatever it is) around.
So let's answer it here. To begin with, let me agree with Republicans at least in principle about something. Republicans insist that to raise taxes in a recession is bad (though if they get their way and cut taxes to spur growth in hard times, they never suggest raising them back again in times of prosperity and surplus, instead advocating more tax cuts to 'give people their excess money back.') Their reasoning is that if you raise taxes then people have less to spend (because it's going to the government) and if we assume that government spending does not grow, there will be less money put into the economy to spend on goods and services, so demand will drop. When demand drops then there is excess supply, which causes prices to drop and the companies that produce things, facing a glut in supply and low prices, will lay people off; then those who are laid off will (even if they get unemployment benefits) get less money and therefore spend less, which will reduce demand some more and keep things cycling downward.
There is a seed of truth to the theory behind this argument, especially if (as just noted) you assume that spending by the government remains constant.
In practice however, keeping taxes at their lowest in decades has not spurred the economy at all, partly because companies (and individuals at this point) are hording money (most large companies have record amounts of cash in the bank) and partly because when they do invest the money they are not paying in taxes to grow their businesses, the lion's share of at least what large corporations have spent is being invested outside the U.S.; I'm not against a good economy in China or India, but I do question a policy by which U.S. taxpayers pay to develop it. In particular, following the passage of the Bush tax cuts in 2001, over 2.5 million jobs were outsourced over the next three years as the beneficiaries of those tax cuts spent them to build factories and call centers in Asia, and then shut down factories and call centers in the United States.
There is another alternative when depending on the private sector to carry the economy isn't working, and that's what we will talk about here. Government spending to take up the slack, as spelled out by the late economist John Maynard Keynes. Remember that the above argument assumed that spending by the government remains constant. But what if it increases? If it does, then Governments (federal, state and local) will hire people and purchase goods and services. An office computer, a car, or a bag of cement will bring in the same profit to the vendor whether it is purchased by a company or by a government agency. Therefore government spending, if it increases the level of demand, has the same effect on the economy as if the same amount of money is spent by private businesses (though government spending also offers the advantage of certainty and budgeting while whether private businesses spend money depends on factors often subject to uncertainty and fluctuation.) Beyond that, if government hires people (as in the Roosevelt New Deal programs) then they get paid a salary. Because they are the same people who otherwise would be unemployed, they get paid a salary in exchange for doing work which must be done (and I promise, if you go to any mayor in America you could be provided with a list of projects that the city or town in question needs to have done, but there is not enough funding to hire the people to do it.) And most of what people earning a working wage earn, they spend at local businesses to maintain their household-- again, no differently than if they were working for a private company.
The Roosevelt era New Deal programs are a great example of precisely this kind of government spending to replace money that was not being put into the economy by private industry. Millions of people who previously were not part of the economy (other than being a drag on it by consuming whatever they could get their hands on but not producing anything because nobody was giving them the opportunity to produce anything) were instead hired and began building all kinds of infrastructure (much of which is in use today.) I still remember walking down a sidewalk in Socorro in the 1980's and seeing stamped in the corner of the cement, "WPA 1936." The New Deal programs did a lot more than just build sidewalks in Socorro, of course. They created great works of infrastructure including hydroelectric dams, highways and flood levees. My wife's grandfather was in the Conservation Corps as a young man and helped build many of the roads and trails into our National Parks. Much of this infrastructure is still in use today, partly because it was well built but also partly because honestly we haven't made the investment to maintain and where necessary replace it. The Minneapolis bridge collapse a couple of years ago should serve as a wakeup call as to what can happen when we let things decay for lack of funding.
More importantly, the Roosevelt programs (many later continued under Truman, Eisenhower and other future Presidents) stopped the deepening of the Great Depression when they were first implemented in 1933 and began the slow climb out of it. Yes, there were those who bemoaned the cost, but let's not forget that Roosevelt listened to them in 1937, cut spending, and got slapped with a return to recession in an economy not yet ready to stand on its own. Luckily he learned his lesson quickly and resolved never to listen to that kind of thinking again. THE MAIN POINT TO MAKE IS THAT INCREASING GOVERNMENT SPENDING INCREASES DEMAND FOR GOODS AND SERVICES, and this increased demand spurs growth in the economy. This is exactly the same argument Republicans make about tax cuts. The only difference of course is that giving the money to poor people generally means that all or most of it will be spent in America, while if it is given to multi-national corporations then you can only hope they spend it in America because most of them haven't in the past.
So what about the Stimulus two years ago? Republicans will tell you that it didn't work, proving that a big government spending program won't rescue us from the recession.
In fact, they are wrong on three counts.
1.The stimulus did work and stopped the slide into another Depression.
2. The stimulus was too small, not too big.
3. The economy can't be rescued instead by cutting government spending to reign in the deficit; attempting to do so actually makes things worse instead of better.
Remember that when Obama took office, the economy was hemhoraging over 600,000 jobs per month and was headed straight down with a rocket. The stimulus clearly did work, beginning the month it was passed, February 2009.
It is hard to see that this worked without the visual, because most of the early turnaround represents jobs which were on track to be lost but which were instead saved. Most of the money went in lump payments to states who then used the money to avoid even deeper cuts to schools, police and other government agencies. In many cases the Governors of those states quietly took the money but did not want to be caught thanking the President for Stimulus money (cautionary tale: see what happened to former Florida Governor Charlie Crist, who was run out of the GOP after he did.) But just imagine: Two years ago Arizona implemented a series of deep cuts in order to appease a $3 billion budget deficit. After Jan Brewer got a billion dollars in stimulus money, the hole was only $2 billion. So translate the $1 billion difference into jobs that were saved, and it's quite a few. But to go back and point out now that all those people were preserved in their jobs by the Stimulus bill is largely self-defeating. The GOP won on how to frame that debate. Telling someone that without the Stimulus, "you would probably would have been laid off two years ago" is not likely to get many listeners, even if it's true.
It is also true that one reason why is a self-inflicted wound by the Obama administration. In trying to sell the Stimulus to Congress, an administration official made the now infamous statement that without the Stimulus, unemployment would top out at (a then-bad sounding) 8%. This was a very rosy projection, and clearly wrong. That goes to one of the most infuriating things about the Obama administration, to be honest. He took over during a crisis he didn't even have anything to do with starting and yet almost immediately started trying to talk up the economy (remember 'greenshoots?') I don't know why Presidents think that being a pitchman for the economy is part of their job. It's not. I think people would appreciate a President who would level with them a bit more. If the economy sucks right now, then say the economy sucks, and do it on television. Then, if things start to improve they will believe you when you say so. Roosevelt, in his 'fireside chats,' never claimed that things were getting better unless they were. He did not feel he had to 'sell' his programs-- he did win the election, after all. Had Obama proposed even twice the size of a stimulus he did and called it a 'jobs' program (because that's what it was, and 'stimulus' sounds like one of those Washingtonese words that Republicans could tee off on) then would they have dared to filibuster it back when we were seeing unemployment skyrocket? I don't think the President had to put a number on it at all, but if he did have to try and project where unemployment was headed without a jobs bill, something closer to 20% might have been more realistic.
This goes to the second argument. The stimulus was originally proposed at about $950 billion. Obviously this was part of a political attempt to be able to attempt crossing the 'trillion dollar' barrier. In exchange for this semantic concession we got a bill (which Republicans negotiated down to $797 billion after seizing the initiative within days after the President took office by threatening a Senate filibuster) that (as was pointed out at the time) was inadequate. The size of the Stimulus compared to what was needed to fully prevent a second Great Depression was like trying to haul a load in a trailer that weighs many tons up a hill using a compact car. Underpowered and therefore underperforming. Besides being too small, the Stimulus was loaded with 43% in both individual and corporate tax cuts (all to get the votes of three Republicans.) We know by now that the whole argument that tax cuts boost the economy is faulty; over the past decade we've had massive tax cuts in place, to where Americans are now taxed at the lowest rate in fifty years, so if low taxes produced a good economy then today our economy should be booming. Further, one price of getting the votes of the three GOP Senators who did vote for it, was to take out funding for school construction and repair projects (which is something that is clearly needed a lot more than more tax cuts, but it was taken out to appease Sen. Susan Collins, (R-Maine.) So by last year, it was plain that while the Stimulus had stopped the economic freefall, it was not enough to actually turn the economy all the way around and most economists said we needed a second, larger Stimulus. Though they were correct about the economics of the situation, this was clearly impossible in last year's "Tea Party" driven political environment. In addition to this, the Stimulus was only written to last for two years. The recession may be technically over but government support is still needed and is being withdrawn prematurely. To cite the most obvious example, state and local governments are now having to lay many people off because their tax revenues have not recovered to the level they were before the recession. What recovery they have had has not even been fast enough to compensate for the withdrawl of the stimulus funds. During the Lame Duck session last December, a de facto second stimulus was on the table with the new budget and had reached an agreement, when seven Senate Republicans walked away at the last minute and instead signed off on a much smaller budget package that preserved only 43% of the Stimulus-- you guessed it, the tax cuts.
To address the third point, you have to have blind faith that if the deficit went away that businesses would just open their wallets and start spending money, and further that when they do, they will begin hiring a lot of workers (because anything less than 300,000 per month won't bring the unemployment rate down at a significant rate.) At the same time cutting away at government at a time when we should be spending more to help the economy is a gamble. I'm not the only person who sees the economic policies of austerity and deficit reduction we are focusing on today as parallel to the disaster that similar policies caused in 1937.
Further, there is no evidence that the Federal budget deficit is what's preventing large scale hiring, and in fact it is instead misguided attempts to cut government that are having the opposite effect. What's happening in private industry is a little like a bunch of people standing on the beach after a shark has been spotted nearby. Even if the 'all clear' has been sounded, somebody has to go in first, and with the shock of the recession still recent and economic reports which seem to conflict each other weekly (but seem to point to a long, slow recovery with a significant possibility of a 'double dip' recession) employers are skittish to be the first ones in, spend a lot of money to expand, train and hire people and then get their heads cut off if there is a double dip. In fact, as far as there has been any growth in the economy a lot of businesses have figured out how to expand their businesses without hiring at all via productivity gains. Even in Congress we've seen this happen recently with the announcement of the end of the House page program (with the ability to now just send out a bill that's thousands of pages long instantly to every member of Congress, not to mention email and twitter accounts, there is no longer any need for high school students to walk around the halls of Congress carrying documents and bills with them from office to office.)
What is more, cuts in federal, local and state governments especially (since they are being pinched by the premature end of the stimulus) are undermining even what meager recovery there is in the private sector. This is exemplified by the July jobs report. In July, 117,000 nonfarming jobs were added (farming jobs are excluded from the jobs report because of the large monthly swings caused by different needs in farming.) However, this is a net of 117,000 jobs. Private sector jobs actually rose by 154,000 jobs. But jobs being lost in various levels of government ate up about a quarter of that as governments eliminated 37,000 jobs. In June, the initial report said that private sector employment was up by 53,000 jobs but government cut 39,000 jobs for a net gain of only 18,000 (later revised to upward to a net gain of 46,000 as more data became available.) So far from helping the employment situation, attempts to reduce government in the middle of the recession are actually slowing down the recovery and negating the effect of whatever private sector jobs are being created.
Common sense follows that this is true as well. If a man who has been unemployed in construction finds a job in a retail industry (perhaps for less money but he is at least employed) but his wife loses her job as a teacher due to state budget cuts, then it follows that there has been no net change in employment, and more importantly, no net change in demand for goods or services. This family is a microcosm of the recovery we are seeing: a few people are finding work in the private sector (though almost always in worse jobs with less pay and fewer benefits than the jobs they had before the recession) but because government is now dumping more people into the unemployment pool instead of taking them out, misplaced 'austerity' is actually dragging out and damping down the recovery.
Finally, let's consider the unemployed. If we do not hire them, then they either drop out of the labor market (whether through homelessness or finding someone else to become dependent on) or collect unemployment benefits. While unemployment benefits are generally meager, so were the wages for New Deal jobs. But returning to my wife's grandfather (which is where I will conclude,) his time in the Conservation Corps gave him more than the ability to put food on the table. Being involved in the construction of great works gave him a sense of pride in his accomplishments and self-worth that he had all the way until when I knew him before his death about a decade ago. It also gave him an education; after he returned from World War II he was able to use the skills he gained from the Conservation Corps to make a career as a heavy equipment operator. I'd say the government got a pretty good return on their investment in him of 25 cents per hour.
Can you help me to understand if FDR initiatives like the WPA would help to get America back on it's feet in these times? Congress is focused on only taxes and the budget and I just feel like America needs employment opportunities to turn this economic situation (recession, depression or whatever it is) around.
So let's answer it here. To begin with, let me agree with Republicans at least in principle about something. Republicans insist that to raise taxes in a recession is bad (though if they get their way and cut taxes to spur growth in hard times, they never suggest raising them back again in times of prosperity and surplus, instead advocating more tax cuts to 'give people their excess money back.') Their reasoning is that if you raise taxes then people have less to spend (because it's going to the government) and if we assume that government spending does not grow, there will be less money put into the economy to spend on goods and services, so demand will drop. When demand drops then there is excess supply, which causes prices to drop and the companies that produce things, facing a glut in supply and low prices, will lay people off; then those who are laid off will (even if they get unemployment benefits) get less money and therefore spend less, which will reduce demand some more and keep things cycling downward.
There is a seed of truth to the theory behind this argument, especially if (as just noted) you assume that spending by the government remains constant.
In practice however, keeping taxes at their lowest in decades has not spurred the economy at all, partly because companies (and individuals at this point) are hording money (most large companies have record amounts of cash in the bank) and partly because when they do invest the money they are not paying in taxes to grow their businesses, the lion's share of at least what large corporations have spent is being invested outside the U.S.; I'm not against a good economy in China or India, but I do question a policy by which U.S. taxpayers pay to develop it. In particular, following the passage of the Bush tax cuts in 2001, over 2.5 million jobs were outsourced over the next three years as the beneficiaries of those tax cuts spent them to build factories and call centers in Asia, and then shut down factories and call centers in the United States.
There is another alternative when depending on the private sector to carry the economy isn't working, and that's what we will talk about here. Government spending to take up the slack, as spelled out by the late economist John Maynard Keynes. Remember that the above argument assumed that spending by the government remains constant. But what if it increases? If it does, then Governments (federal, state and local) will hire people and purchase goods and services. An office computer, a car, or a bag of cement will bring in the same profit to the vendor whether it is purchased by a company or by a government agency. Therefore government spending, if it increases the level of demand, has the same effect on the economy as if the same amount of money is spent by private businesses (though government spending also offers the advantage of certainty and budgeting while whether private businesses spend money depends on factors often subject to uncertainty and fluctuation.) Beyond that, if government hires people (as in the Roosevelt New Deal programs) then they get paid a salary. Because they are the same people who otherwise would be unemployed, they get paid a salary in exchange for doing work which must be done (and I promise, if you go to any mayor in America you could be provided with a list of projects that the city or town in question needs to have done, but there is not enough funding to hire the people to do it.) And most of what people earning a working wage earn, they spend at local businesses to maintain their household-- again, no differently than if they were working for a private company.
The Roosevelt era New Deal programs are a great example of precisely this kind of government spending to replace money that was not being put into the economy by private industry. Millions of people who previously were not part of the economy (other than being a drag on it by consuming whatever they could get their hands on but not producing anything because nobody was giving them the opportunity to produce anything) were instead hired and began building all kinds of infrastructure (much of which is in use today.) I still remember walking down a sidewalk in Socorro in the 1980's and seeing stamped in the corner of the cement, "WPA 1936." The New Deal programs did a lot more than just build sidewalks in Socorro, of course. They created great works of infrastructure including hydroelectric dams, highways and flood levees. My wife's grandfather was in the Conservation Corps as a young man and helped build many of the roads and trails into our National Parks. Much of this infrastructure is still in use today, partly because it was well built but also partly because honestly we haven't made the investment to maintain and where necessary replace it. The Minneapolis bridge collapse a couple of years ago should serve as a wakeup call as to what can happen when we let things decay for lack of funding.
More importantly, the Roosevelt programs (many later continued under Truman, Eisenhower and other future Presidents) stopped the deepening of the Great Depression when they were first implemented in 1933 and began the slow climb out of it. Yes, there were those who bemoaned the cost, but let's not forget that Roosevelt listened to them in 1937, cut spending, and got slapped with a return to recession in an economy not yet ready to stand on its own. Luckily he learned his lesson quickly and resolved never to listen to that kind of thinking again. THE MAIN POINT TO MAKE IS THAT INCREASING GOVERNMENT SPENDING INCREASES DEMAND FOR GOODS AND SERVICES, and this increased demand spurs growth in the economy. This is exactly the same argument Republicans make about tax cuts. The only difference of course is that giving the money to poor people generally means that all or most of it will be spent in America, while if it is given to multi-national corporations then you can only hope they spend it in America because most of them haven't in the past.
So what about the Stimulus two years ago? Republicans will tell you that it didn't work, proving that a big government spending program won't rescue us from the recession.
In fact, they are wrong on three counts.
1.The stimulus did work and stopped the slide into another Depression.
2. The stimulus was too small, not too big.
3. The economy can't be rescued instead by cutting government spending to reign in the deficit; attempting to do so actually makes things worse instead of better.
Remember that when Obama took office, the economy was hemhoraging over 600,000 jobs per month and was headed straight down with a rocket. The stimulus clearly did work, beginning the month it was passed, February 2009.
It is hard to see that this worked without the visual, because most of the early turnaround represents jobs which were on track to be lost but which were instead saved. Most of the money went in lump payments to states who then used the money to avoid even deeper cuts to schools, police and other government agencies. In many cases the Governors of those states quietly took the money but did not want to be caught thanking the President for Stimulus money (cautionary tale: see what happened to former Florida Governor Charlie Crist, who was run out of the GOP after he did.) But just imagine: Two years ago Arizona implemented a series of deep cuts in order to appease a $3 billion budget deficit. After Jan Brewer got a billion dollars in stimulus money, the hole was only $2 billion. So translate the $1 billion difference into jobs that were saved, and it's quite a few. But to go back and point out now that all those people were preserved in their jobs by the Stimulus bill is largely self-defeating. The GOP won on how to frame that debate. Telling someone that without the Stimulus, "you would probably would have been laid off two years ago" is not likely to get many listeners, even if it's true.
It is also true that one reason why is a self-inflicted wound by the Obama administration. In trying to sell the Stimulus to Congress, an administration official made the now infamous statement that without the Stimulus, unemployment would top out at (a then-bad sounding) 8%. This was a very rosy projection, and clearly wrong. That goes to one of the most infuriating things about the Obama administration, to be honest. He took over during a crisis he didn't even have anything to do with starting and yet almost immediately started trying to talk up the economy (remember 'greenshoots?') I don't know why Presidents think that being a pitchman for the economy is part of their job. It's not. I think people would appreciate a President who would level with them a bit more. If the economy sucks right now, then say the economy sucks, and do it on television. Then, if things start to improve they will believe you when you say so. Roosevelt, in his 'fireside chats,' never claimed that things were getting better unless they were. He did not feel he had to 'sell' his programs-- he did win the election, after all. Had Obama proposed even twice the size of a stimulus he did and called it a 'jobs' program (because that's what it was, and 'stimulus' sounds like one of those Washingtonese words that Republicans could tee off on) then would they have dared to filibuster it back when we were seeing unemployment skyrocket? I don't think the President had to put a number on it at all, but if he did have to try and project where unemployment was headed without a jobs bill, something closer to 20% might have been more realistic.
This goes to the second argument. The stimulus was originally proposed at about $950 billion. Obviously this was part of a political attempt to be able to attempt crossing the 'trillion dollar' barrier. In exchange for this semantic concession we got a bill (which Republicans negotiated down to $797 billion after seizing the initiative within days after the President took office by threatening a Senate filibuster) that (as was pointed out at the time) was inadequate. The size of the Stimulus compared to what was needed to fully prevent a second Great Depression was like trying to haul a load in a trailer that weighs many tons up a hill using a compact car. Underpowered and therefore underperforming. Besides being too small, the Stimulus was loaded with 43% in both individual and corporate tax cuts (all to get the votes of three Republicans.) We know by now that the whole argument that tax cuts boost the economy is faulty; over the past decade we've had massive tax cuts in place, to where Americans are now taxed at the lowest rate in fifty years, so if low taxes produced a good economy then today our economy should be booming. Further, one price of getting the votes of the three GOP Senators who did vote for it, was to take out funding for school construction and repair projects (which is something that is clearly needed a lot more than more tax cuts, but it was taken out to appease Sen. Susan Collins, (R-Maine.) So by last year, it was plain that while the Stimulus had stopped the economic freefall, it was not enough to actually turn the economy all the way around and most economists said we needed a second, larger Stimulus. Though they were correct about the economics of the situation, this was clearly impossible in last year's "Tea Party" driven political environment. In addition to this, the Stimulus was only written to last for two years. The recession may be technically over but government support is still needed and is being withdrawn prematurely. To cite the most obvious example, state and local governments are now having to lay many people off because their tax revenues have not recovered to the level they were before the recession. What recovery they have had has not even been fast enough to compensate for the withdrawl of the stimulus funds. During the Lame Duck session last December, a de facto second stimulus was on the table with the new budget and had reached an agreement, when seven Senate Republicans walked away at the last minute and instead signed off on a much smaller budget package that preserved only 43% of the Stimulus-- you guessed it, the tax cuts.
To address the third point, you have to have blind faith that if the deficit went away that businesses would just open their wallets and start spending money, and further that when they do, they will begin hiring a lot of workers (because anything less than 300,000 per month won't bring the unemployment rate down at a significant rate.) At the same time cutting away at government at a time when we should be spending more to help the economy is a gamble. I'm not the only person who sees the economic policies of austerity and deficit reduction we are focusing on today as parallel to the disaster that similar policies caused in 1937.
Further, there is no evidence that the Federal budget deficit is what's preventing large scale hiring, and in fact it is instead misguided attempts to cut government that are having the opposite effect. What's happening in private industry is a little like a bunch of people standing on the beach after a shark has been spotted nearby. Even if the 'all clear' has been sounded, somebody has to go in first, and with the shock of the recession still recent and economic reports which seem to conflict each other weekly (but seem to point to a long, slow recovery with a significant possibility of a 'double dip' recession) employers are skittish to be the first ones in, spend a lot of money to expand, train and hire people and then get their heads cut off if there is a double dip. In fact, as far as there has been any growth in the economy a lot of businesses have figured out how to expand their businesses without hiring at all via productivity gains. Even in Congress we've seen this happen recently with the announcement of the end of the House page program (with the ability to now just send out a bill that's thousands of pages long instantly to every member of Congress, not to mention email and twitter accounts, there is no longer any need for high school students to walk around the halls of Congress carrying documents and bills with them from office to office.)
What is more, cuts in federal, local and state governments especially (since they are being pinched by the premature end of the stimulus) are undermining even what meager recovery there is in the private sector. This is exemplified by the July jobs report. In July, 117,000 nonfarming jobs were added (farming jobs are excluded from the jobs report because of the large monthly swings caused by different needs in farming.) However, this is a net of 117,000 jobs. Private sector jobs actually rose by 154,000 jobs. But jobs being lost in various levels of government ate up about a quarter of that as governments eliminated 37,000 jobs. In June, the initial report said that private sector employment was up by 53,000 jobs but government cut 39,000 jobs for a net gain of only 18,000 (later revised to upward to a net gain of 46,000 as more data became available.) So far from helping the employment situation, attempts to reduce government in the middle of the recession are actually slowing down the recovery and negating the effect of whatever private sector jobs are being created.
Common sense follows that this is true as well. If a man who has been unemployed in construction finds a job in a retail industry (perhaps for less money but he is at least employed) but his wife loses her job as a teacher due to state budget cuts, then it follows that there has been no net change in employment, and more importantly, no net change in demand for goods or services. This family is a microcosm of the recovery we are seeing: a few people are finding work in the private sector (though almost always in worse jobs with less pay and fewer benefits than the jobs they had before the recession) but because government is now dumping more people into the unemployment pool instead of taking them out, misplaced 'austerity' is actually dragging out and damping down the recovery.
Finally, let's consider the unemployed. If we do not hire them, then they either drop out of the labor market (whether through homelessness or finding someone else to become dependent on) or collect unemployment benefits. While unemployment benefits are generally meager, so were the wages for New Deal jobs. But returning to my wife's grandfather (which is where I will conclude,) his time in the Conservation Corps gave him more than the ability to put food on the table. Being involved in the construction of great works gave him a sense of pride in his accomplishments and self-worth that he had all the way until when I knew him before his death about a decade ago. It also gave him an education; after he returned from World War II he was able to use the skills he gained from the Conservation Corps to make a career as a heavy equipment operator. I'd say the government got a pretty good return on their investment in him of 25 cents per hour.
Wednesday, October 21, 2009
CBO scores house plan with 'robust' public option to cut the deficit
The CBO came out today with projections for a House plan that does include a 'robust' public option.
Their score is that the plan would cost $871 billion up front and when savings are included would actually reduce the deficit.
Notice that this is not so far from what the Baucus bill produced after a two month delay in the Senate Finance Committee would cost and save, only that bill was claimed as some kind of a 'breakthrough' because of cost savings that could allegedly attract GOP support. Which it did, exactly one Republican.
The claims that health care reform with a public option will run up the deficit have been punctured by today's report, in fact deficit hawks should jump on it as a way to cut tens of billions of dollars out of the long term projected deficit. This means then that there is no longer any good reason for opposing health care reform, including a public option. The only real reason anyone would is if they are still putting the interests of the insurance industry ahead of the interests of American patients (which will sooner or later by virtually all of us.) A distressingly large number of members of Congress are indeed going to be doing just that, but this pretty much makes it clear that that is what they are doing in that case.
Their score is that the plan would cost $871 billion up front and when savings are included would actually reduce the deficit.
Notice that this is not so far from what the Baucus bill produced after a two month delay in the Senate Finance Committee would cost and save, only that bill was claimed as some kind of a 'breakthrough' because of cost savings that could allegedly attract GOP support. Which it did, exactly one Republican.
The claims that health care reform with a public option will run up the deficit have been punctured by today's report, in fact deficit hawks should jump on it as a way to cut tens of billions of dollars out of the long term projected deficit. This means then that there is no longer any good reason for opposing health care reform, including a public option. The only real reason anyone would is if they are still putting the interests of the insurance industry ahead of the interests of American patients (which will sooner or later by virtually all of us.) A distressingly large number of members of Congress are indeed going to be doing just that, but this pretty much makes it clear that that is what they are doing in that case.
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