Clowns to the Left of Me, Jokers to the Right

There may be more than one point on which the Tea Party and the Occupy Wall Street folks converge, but the most prominent one is the populist notion that Wall Street (big banks, etc.) should not have been bailed out. The Tea Party folks base their position on some amalgamation of free market economics and hatred of government, while the OWS protestors decry the bailouts as an inequitable wealth transfer. While there may be some truth to both strains of anti-bailout vitriol, they are each dangerously wrong in their policy prescriptions.

What would TP and OWS have the US government done instead? Simply let large banks and investment houses fold? Regardless of one’s policy views, it is impossible to envision a scenario in which the Bush administration (and the Obama administration) allowed Wall Street to fail without causing an economic collapse much greater than the Great Recession. In fact, it would have been more like the Great Depression. The losers would have been spread far and wide, and would have included tens of millions of middle and working class Americans. Would the Tea Party and the Occupiers really have wanted that?!

Look, I get the angst and outrage over Wall Street. I get that we have a financial elite in our country who have stacked the deck so much in their favor that they simply cannot lose (too big to fail, anyone?). But the same forces that allow them to stack the deck have also allowed them to become so entwined in our country’s economic well-being that allowing them to fail would have had enormous collateral damage.

I think that many who support the Occupy Wall Street movement (I count myself among them) get that the solution to reducing the power of the financial elite lies not in allowing them to fail and taking the rest of the economy down with them. Rather, we need to reform and re-arm our regulators to ensure there are no more too big to fail institutions. We need to eliminate the outsized influence of financial elites on the US government (better campaign finance disclosure laws, lobbying reform/end the revolving door).

I also believe that this is where the Tea Party and OWS part company, which gives me some hope. I have never been comfortable with populism, whether its roots are on the left or the right.

Let Them Eat Dirt

The poverty numbers out today are not only discouraging, but they highlight the growing chasm between the haves and have-nots in our society. Sure, it is hardly surprising that in a time of deep recession that poverty would increase. But we should be cautious not to write this off as a mere side effect of the Great Recession.

The problem we face is not merely poverty itself, but the yawning gap in income inequality. And while some of the policies we might enact to reduce poverty are short term in nature, the real effort must be focused on reducing income inequality. Programs such as unemployment insurance and food assistance are stop gap measures that do very little to ensure that a person, or family, remains above poverty. (In fact, such assistance programs do not even get a person or family up to the poverty level.)

What we really need are programs and policies that will reduce the enormous, and unsustainable, gap between the super rich and the poor. Adequate funding for primary and secondary education, scholarships and reduced tuition for public colleges and universities, public housing, and other social safety net programs must be strengthened. These types of programs help to promote upward mobility and poverty reduction over the long run.

Unfortunately, we live in a society and political climate where such investments are viewed as budget busters, despite their long term benefits. An entire political movement is fueled by the idea that someone, somewhere is getting something for nothing. And propelled by the rhetoric of personal responsibility, such that the poor are solely at fault for their plight. Never mind our legacy of discrimination, never mind an economic landscape tilted in favor of those who already have so much, never mind a political system bought and paid for by corporate cash. The true reason you’re poor or homeless or hungry is because you have some inherent character flaw, some type of malignant laziness.

And so we fail not only to address poverty in the short term, but we ignore or even exacerbate income inequality. The same people who refuse to adequately fund poverty reduction are the same who want to renew an enormous tax cut to the wealthiest Americans. And while they try to paper over the true motivation with economic arguments, the reality is that there is scant evidence that the Bush tax cuts created jobs. Yet there is loads of evidence that shows pumping those same dollars into poverty reduction efforts will increase aggregate demand now, and reduce poverty (thus ensuring economic growth) in the future. There is simply no sound policy argument to be made for extending the Bush tax cuts for the wealthy.

But the real rank hypocrisy on fiscal policy is that these same people who wish to continue a tax cut for the rich are the same ones who crowed about the impact on the deficit of extending unemployment benefits. So, increasing the deficit hundreds of billions of dollars so Paris Hilton can get a tax cut is good, ponying up $34 billion to help those without a job is going to break the bank?

The old saying, attributed to Marie Antoinette, about eating cake showed how out of touch an aristocrat was with the peasants. The GOP and the Tea Party have turned that into something even more despicable- let them (the poor, jobless and hungry) eat dirt.

Getting Past Econ 101

(In general, I use the space here to indulge in writing that is a bit more philosophical than what I had done on my prior blogs, where sarcasm and mockery were often the order of the day. Today I am going to revert to form, if only a little. )

Kevin Hassett, Director of Economic Policy Studies at AEI, has a piece up on Bloomberg that is so profoundly ignorant of reality and of economics. It seems the product of an overconfident C student in econ101, crossed with a pathological blindness to reality. Let’s dig in.

Hassett’s main contention is that unemployment levels remain high because of sticky wages. It’s unremarkable that wages are sticky. We know this, just as we know prices can be sticky. But wages are always sticky, so why should their stickiness be to blame for our current crisis? Wages were sticky during the recession in the early 2000’s, in the early 90’s and during every other recession in modern American history.

For Hassett, the central problem is that the sticky wages are preventing the labor market from clearing. Because every C student of micro101 understands that perfectly competitive markets should clear. (Of course, the A and B students also realize that there is no such thing, really, as perfect competition. And that there are a number of assumptions baked into the model that are nearly impossible to attain in the real world.) According to Hassett, the labor market is not clearing due to several factors- plain old wage stickiness, minimum wage laws, unemployment insurance, and union contracts (apparently non-union contracts, like those of managers and executives are not so pernicious).It should be noted that the latter three contribute to the former, but there is a type of stickiness that has nothing to do with minimum wage or contract issues.

Let’s take a look at each of these in turn.

1. Wage stickiness- Hassett argues that, “A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.” I’m not sure what world Hassett is living in, but I don’t think anyone would gleefully accept a 1/3 pay cut. However, in the real world we live in, hundreds of thousands (millions?) of workers have accepted pay cuts, benefit cuts and unpaid furloughs in order to retain their jobs.

2. Minimum wage- Hassett would like us to believe that the increase in the minimum wage has increased unemployment, especially among teens. In order to believe that, you’d have to ignore the fact that teens possess less skills and are often not as good as workers as their adult competitors. The real driving force for teenage unemployment is the high number of unemployed adults, whose work experience makes them much more attractive candidates. Though, in fairness to Hassett, he probably believes that the absence of a minimum wage would open the floodgates to teenagers working for $1.25/ hour.

3. Unemployment insurance- Hassett posits that the reason for geographic mismtach is unemployment insurance- “So why isn’t there a traffic jam of job-seekers trekking from Las Vegas to Fargo, and from other high-unemployment areas to high-employment ones? One reason is unemployment insurance.” This is similar to Casey Mulligan’s notion that the unemployed are just taking unpaid vacations in its foolishness and lack of understanding reality. Unemployment insurance provides, at best, roughly 40% of what a person earned while employed.

This raises two points. First, to imagine that unemployment provides some sort of strong incentive to not work is beyond silly. How many people can afford to subsist on 40% of their former wage rate? Second, how does Hassett expect people receiving a fraction of their former wages to be able to afford to move? Remember that bit above about perfect competition? Well, one of the assumptions is perfect mobility. Ooops.

4. Union contracts- Hassett writes, “because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.” Sure, contracts generally do cover multiple years. Yet examples abound of unionized workers accepting wage and benefit cuts and furloughs (as noted above). Though a good deal of this has been in the public sector, the folks in the UAW and other large unions have accepted wage concessions during this recession.

Either Hassett is truly this dumb, or he thinks Bloomberg’s readers are too dumb to see through his trope. This is standard issue conservative economics- blame unions and the government for the minimum wage and unemployment insurance- that is trotted out no matter what the economic situation. They will say it when the economy is humming and when it’s mired in recession and every point in between.

What is astounding is that Hassett seems intent on making this argument despite ample evidence to the contrary. Does he not know anyone currently unemployed? Does he not read a paper to see that plenty of people have taken pay cuts in some form?

Perhaps most troubling, though, is his inability to think through his argument. There is at least some reason to believe that large scale downward wage adjustments could crater aggregate demand. Even if we assume unemployment is reduced under his plan, it’s unclear that it would offset the decline in consumption caused by lower wages. And, of course, there is always price stickiness to deal with. Not to mention deflation.

It’s almost as if Kevin Hassett puts his ideology ahead of his intellectual honesty. At AEI? Quelle surprise!

Dear Prudence, Can We Have Good Fiscal Policy?

(For the sake of my argument, I will assume two things- (1) Democrats are willing to go to the mat for good policy; (2) Republicans are actually willing to govern and not just obstruct. Neither of these assumptions are true.)

The United States currently faces two major crises- (1) a stagnating economic recovery, and (2) a staggeringly large, and growing, budget deficit. Not only do both portend continued and future trouble for the US economy, but they generally run in opposite directions. Injecting additional dollars into the economy, via some type of stimulus, will grow the deficit. And, cutting spending, in order to shrink the deficit, will only further strangle what is a weak recovery.

Given what seems an impossible situation (addressing both problems simultaneously), there are limited fiscal policy options available. Of course, one could go full Keynesian and simply prime the pump with additional stimulus, regardless of whether or not it is financed by debt. Given the extremely low rates on Treasuries, such an option ought not be entirely ruled out of order. In fact, this is the argument made by Krugman and others. And while it is true that the cost of borrowing is near zero, our addiction to debt (going on close to ten years now, thanks to the Bush administration) needs to be checked at some point. One might argue that now is not the right time to do so, and it is a valid point.

What I would suggest is something that finds a compromise between the deficit hawks and the Keynesians. Allow the Bush tax cuts for the wealthy to expire, as they are scheduled, and use this revenue to finance other stimulative activity. It is important to note that it is only the tax cuts for the wealthy that would be allowed to expire. Those targeted at the middle class should be extended another two years.  What exactly would this revenue finance?

1. Off the top, some of the additional revenue must be used to finance the middle class tax cuts and a fix to the AMT.

2. Payroll tax holiday. I’m open as to the exact length of such a holiday, but feel that it needs to be long enough that people will not just smooth their consumption. Too short of a holiday will not provide much stimulus because people will either smooth consumption or use this short term increase in income to pay off debt. My best guess is that a holiday needs to be longer than 6 months.

3. Infrastructure investment. The President has called for a $50 billion investment in roads, rails and runways. While this is a good start, it is inadequate to really bring our transportation system into the 21st century. Decades of neglect cannot be remedied in a year or two. We must make a long-term commitment to modernizing our infrastructure, including transportation but also our power grid.

4. Backstop state revenues. One of the major shortcomings of the original stimulus bill was that it did not provide enough revenue to states. Unlike the federal government, states must maintain a balanced budget. Certainly, some creative accounting can be done, and personnel is sometimes moved over to the capital budget in order to avoid cuts, but it’s no secret that state budgets have been wracked by this recession. The original stimulus also structured aid to states the wrong way. Instead of providing a temporary increase in FMAP and money for education (and other minor support), the package should have been an open-ended commitment to close state budget gaps, for at least two fiscal years. (Obviously, there would need to be a maintenance of effort requirement so that federal funds were supplementing, not supplanting, state revenues.)

A key feature of all these proposals is their fixed term duration, with the exception of a permanent AMT fix. This ensures that any increase in the deficit will be temporary and not baked into out years. In addition, the final three recommendations all have a stimulative effect, which means more people working, less people collecting unemployment, and more income and sales tax revenues for state and federal governments.

It is clear that we should not simply spend our way out of the recession, but we must not cut our way out of the deficit. A prudent fiscal policy attempts to address both of these concerns, or is at least mindful of both. What I have offered here is such a plan. It’s not my ideal, nor is it perfect. But it is a reasonable attempt to jump start our economy while narrowing our deficit.

Fixing Social Security

We are, once again, in the midst of another debate about Social Security. This is being fueled by contemporary fears about the deficit and debt. And lurking behind the scenes, as always, are the professional Social Security haters like Pete Peterson.

First off, we should dispense with the notion that Social Security is any sort of crisis. According to the trustees, the fund has sufficient revenue to last until 2037. While that is nearly thirty years away, it is not a bad idea to be proactive about ensuring Social Security’s long term stability. However, as I will argue below, raising the retirement age is not the right policy choice.

Current law dictates that the Social Security payroll tax is capped at an earnings level of $106,800. This presents policymakers with a host of revenue options, but two that are most appealing- (1) eliminate the earnings cap and pay out higher benefits to reflect the higher taxes collected; eliminate the earnings cap and pay no additional benefits. It is estimated that the first option would close roughly 95% of the trust find’s 75 year projected shortfall, which would necessitate a 0.1 percentage point increase in the payroll tax. Option 2 would actually do more than close the 75 year projected shortfall, and give policymakers the option of lowering the tax rate or banking the surpluses. (for full explanation, see here)

Either one would be a sensible, and simple, solution to addressing Social Security’s longterm soundness. Unfortunately, we live in a time where a tax increase is seen as some great scourge that will ruin our economy. Never mind that if given the option most voters would support lifting the earnings cap rather than cutting benefits.

Bolstered by an alliance between Tea Party, Republicans (yes, one in the same, I know), “fiscally responsible” Democrats and professional entitlement opponents like Peterson, we are now having a debate about raising the retirement age. The debate is dishonest from the get-go, as the retirement age at which someone can receive full benefits has increased since the 1930’s. It currently sits at 67 and provides incentives to wait until 70.

The notion of officially raising it to 70 seems to have the most appeal to people who, like myself, hold at least a four year degree and work in a white collar industry. It is particularly attractive to members of Congress and the wealthy, though. You see, retired Representatives and Senators enjoy a very generous defined benefit retirement plan. They do not have to rely on Social Security, even to help get by, as most other Americans do. And the wealthy, of course, have been able to bank significant retirement assets outside of the Social Security system.

But there are many others who support an increase in the age who are neither wealthy nor members of Congress. People who are not unlike myself. We work in offices, doing work that may be at times mentally stressful, but is never physically difficult. It’s easy to work that type of job until you’re 70 or 75 or maybe even 80+ if you wanted. But the key here is that people like me would be making a choice to work beyond normal retirement age because our jobs have not left us bruised and battered. Or worse.

If only the age-raisers would spend some time in the coal fields, or on an oil rig, in a factory or any other number of places where millions of Americans engage in backbreaking labor everyday maybe, just maybe, they would see that raising the retirement age to 70 is no solution at all. Do we really, as a society, want to tell 67 year old laborers- hang on, just a few more years, and you’ll be there? If so, then we are no society worth living in.

Reasonable People May Disagree

And indeed they often do. Examples abound, from the right way to deconstruct and decode the human genome to the proper method of bleeding a brake line, etc. But each of these things are predicated upon a certain amount of knowledge and more than a minimal dose of reason. After all, reasonable does lead the rest of the sentence. And while we might, as I often have, argue about just what reasonable means, we can probably accept that it is at least somewhat context dependent.

For the sake of the argument I am about to make, one about politics and policy, reasonable shall be taken to mean a willingness to expose one’s beliefs to reason. Then by reason I mean rational thought, whereby one’s beliefs, when in conflict with objective reality, fall.

Partisans off all stripes often have a tenuous relationship with rationality. This is not unique to America, nor to democracies. However, a healthy functioning democracy requires reasonable people in a way that an authoritarian regime never will. As much as I personally despise the median voter theorem, it does hold some explanatory power vis-à-vis American politics. It is such that, at least theoretically, politicians will seek some middle ground between the two polar extremes. In short, let us assume that there is a relatively strong centralizing tendency present in  American politics (I think this is generally true, while missing much fine detail, but suffices here).

But what does good (read: rational) policy making require? Well, rational actors, quite obviously. Just who do we mean by actors, though? Will it suffice to have rational, reasonable elected officials and agency heads? Without getting deep in the weeds about degrees of freedom, agency issues, etc. it ought to be clear that policymakers (politicians and agency personnel) are necessary but not sufficient. They are not sufficient due to their source of power (voters and the people elected by voters), which means that our rational policymaking regime requires a reasonable polity.

Again, the emphasis is on reasonable, not unanimity of beliefs/values, etc. What is necessary is a common vocabulary, some core shared knowledge and a willingness to expose one’s beliefs to objective truth, insofar as such a thing exists. This civic dialogue helps to make finding that median a bit more clear. And ensures that such a point still sits within the realm of rational policymaking.

Unfortunately, one of our two major political parties has long ago abandoned rational thought, preferring instead a series of slogans, fearmongering and religious hucksterism. All of these are the sworn enemy to reasonableness. The examples are legion, but let’s think about just a few things one has to believe in order to be a Republican in good standing.

  1. Obama is secretly a Kenyan Muslim, despite his birth record from the state of Hawai’i and his attendance of a Christian church.
  2. Global warming is a secret plot by scientists who hate capitalism and want the world to return to the Stone Age.
  3. Two people of the same gender who love each other and wish to get married are secretly plotting to undermine the institution of marriage.

Let us just accept that the modern GOP is a party built upon a frighteningly large number of conspiracy theories (Hofstadter’s Paranoid Style on steroids, if you will). Nearly of these “theories” are easily falsifiable. Yet they persist, not merely on the fringe of the Republican Party, but in the very mainstream of it.

This makes rational policymaking nearly impossible. Not only does it prevent the type of civic dialogue necessary for democracy to exist (how does one have a dialogue with someone yelling socialist at you?), but it has the potential to drastically shift the median voter to a point well outside of what would be objectively good policymaking (see, for example, polling data on the lower Manhattan mosque).

All of this does not bode well for the future of our democracy or our country. We have come to a point where knowledge and expertise are cast aside for religion and gut feeling, by at least one-third of our population. Will we look back on this time as an aberration in a great country’s trajectory, or will future historians cite 21st century America as they do Rome- a once great empire that lost its way.

Prudence Should Trump Politics

When my boss came back to the office from a briefing this morning, he told me about the December revenue numbers and my comment was something to the effect of you know they’ll spend it ASAP. Apparently, I was right. While I am overjoyed that MA revenues have exceeded projections, especially in December, I don’t think that now is the time to restore some of the 9c cuts. Between the Governor’s commitment to restore regional school transportation and the $14 million restoration of TAFDC, the money is already spent.

Now, it should come as no surprise that I favor spending on social safety net programs and believe that we (in MA and nationally) spend far too little money on these programs. So then why do I think that restoring some cuts is bad policy? Well (and hopefully I am not speaking out of school) close to half of the increase in the December revenue numbers is due to tax settlements. This is not actual revenue growth, but merely one time events. And, one or two months of okay revenue numbers does not make a healthy fiscal year. There are no guarantees that January through June will meet, let alone exceed, the October projection (new revenue projection for FY10 is due out about the 15th and it will be interesting to see how DOR/ANF view the world).

The danger here, in case it is not yet obvious, is that the state’s fiscal picture could worsen between now and the close of the fiscal year. Then what? Do we go back and make further 9c cuts? Do we take back the money we restored in January?

What the administration ought to do is put the higher revenue into the stabilization fund. I do not advocate that as a means of replenishing, but rather as a safe place to store cash in the event that it becomes necessary between now and July 1. Of course, as we get closer to the end of the FY, if revenue numbers continue to improve then we ought to consider restoring some of the painful cuts that have been made. But only insofar that those funds are not going to be needed simply to provide level services in FY11.

Alas, this just is not politically feasible. First, everyone on Beacon Hill likes to spend money. Especially given the drastic cuts that have been made this year. Plus, it’s an election year and putting money into the stabilization fund, though prudent fiscal policy, is not sexy politics. It’s really just that simple.