7/29/11

The Primetime 'Debate' on the Debt Ceiling

It was disappointing when the President opened his primetime debt ceiling speech this week with the hackneyed living-beyond-our-means phrase and made an explicit analogy to household credit card debt. This underscores the assumption that all deficit spending/debt is bad but, for the government, that is definitely not the case. It spurs the economy, not stifles it.

The speech was lackluster--a certain malaise hung about it--and the President proposed nothing dramatic to end the stalemate. Obama just seemed weary of working with the Republican-led Congress. He recapped the course of the debt ceiling debate, outlined the repercussions of not raising the debt ceiling, and made the case for a balanced approach that increased tax revenue by closing tax loopholes for corporations, eliminating tax deductions that overwhelmingly favor the wealthy, and raising taxes on the wealthiest 2% of Americans. When he said that 98% of Americans would see no tax increase at all with the balance approach, I hoped he would repeat it to drive the message home that most people's taxes would not go up. The GOP are fearmongers about taxes and scared people don't listen well.

Obama wanted to keep calm to reassure markets that there is a steady hand at the wheel but he made it very clear that there was a vast gulf between his balanced plan and the other sides unbalanced approach. I got the sense that Left is Left, Right is Right, and never the twain shall meet. But it is an irate minority that is keeping the two apart. Boehner is scared shitless of the Tea Party. So scared that he is willing to risk default on the nation's debt to keep them on his side. His position is a politically calculated one. And this whole debt ceiling impasse is a win-win for the GOP. Any plan that passes will be an imbalanced one (no tax revenue) and, if they can't pass something, it will hurt the economy, which will be blamed on the President. Not the petulant Speaker of the House who demanded airtime to whine.

I appreciate that Obama was trying to rise above the partisan bickering of the whole debt ceiling debate, even going so far to note that he and Speaker Boehner had been working together, but he did not fully convey the recklessness of Republicans in using the debt ceiling increase as a choke point to force their ideological agenda of crippling government. If the US's credit rating is downgraded, the cost of borrowing--interest rates--will go up dramatically and Obama did not emphasize how widely and acutely that would impact the public.

And why was there even a Republican response to a primetime Presidential address? The bully pulpit followed by bullshit. Boehner disengenuously claimed that the President was asking for a blank check. By passing legislation for which it did not budget, the Congress (mostly by the GOP-controlled Congress under Bush) wrote checks it could not cover and raising the debt ceiling enable the federal government to cover those costs. Although the House just passed his debt ceiling bill, Boehner said that there was no stalemate in Congress because they had passed the Cut, Cap, and Balance bill, which has no chance of becoming law. But neither does the bill that just passed by party-line vote.

There have been hints from the Treasury Secretary that Obama would resort to executive action to raise the debt ceiling in the absence of legislation. It appears to be within his Constitutional authority to do so. Amendment XIV states that "the validity of the public debt of the United States...shall not be questioned" and Article III states, [The President] "shall take Care that the Laws be faithfully executed." In an ostensible violation of their oaths of office in which they swore to defend the Constitution, the GOP's intransigence on the debt ceiling has caused the debt of the U.S. to be questioned.

Further, Congress only needs to vote on appropriations; the debt ceiling increase is needed to meet the obligations already appropriated by Congress. They should vote to increase the debt ceiling almost automatically to ensure that they’re not appropriating more than is authorized by the debt ceiling (which appears to be itself unconstitutional). By the Congress not doing so, the executive branch may be forced to take action and it would likely be within its Constitutional authority.

That is far from the ideal solution to the debt ceiling impasse but it would buy our gridlocked Congress some time to come up with a more sensible deficit reduction plan.

7/21/11

The 'Living Within Our Means' Analogy

From Orwell's Politics and the English Language (1946):
The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns instinctively to long words and exhausted idioms.
According to some, the US needs to learn to live within its means. This hoary chestnut is the basis for the GOP's new rallying cry of cap, cut, and balance. The phrase itself doesn't appear insincere by Orwell's standards but it is insincere insofar as it neglects the means the government has to reduce the deficit.

Applying the logic of the analogy to the debt ceiling standoff, let's suppose that a household was near its [self-imposed] debt limit. What are their options? They could cut their household spending, a good first step. But wouldn't they want to use the means at their disposal to increase their income? Wouldn't they ask members of the household to kick in a little extra, if they could afford to? Republicans refuse to even consider raising tax revenues which belies the disingenuous nature of their call to balance the national checkbook. (Or stop charging the 'national credit card' as President Obama put it in his Op-Ed today.) He's using the same faulty analogy the GOP but at least he is looking at both sides of the balance book.

The analogy between household and federal government seems to make some sense. Plus, it's concrete so it resonates with people. As households have reduced their spending (maybe some members have lost their jobs), it is intuitive to apply this lean logic to the government. Like many households, the federal government has been coasting along on easy credit, the influx of cheap imports, and inflated revenue from illusory economic growth in the financial (un-real) economy. This has masked the lost tax revenue from tax rate cuts for those in the upper tax brackets (and the lost household income due to stagnant wages). The analogy breaks down because household deficit spending  income does not stimulate the economy in which the household is situated in the same way that government spending stimulates the broader economy. It can boost aggregate demand, as it did with the ARRA stimulus now ending, and when consumer demand is weak, as it is now. The spending could be financed by increased tax revenue from those whose tax rates have been cut decade after decade. Despite the shrill insistence of the GOP, there is little evidence that taxes on "the job-creators" (the new GOP idiom for the rich) will in fact stifle economic growth.

But slashing federal spending will bleed out the weakly recovering economy.

The grand bargain that will be struck at the 11th hour will be disappointing to the both sides but I suspect it will be more disappointing to Democrats. It will cut spending without necessary or sufficient changes to the tax code or social programs to increase tax revenue or control costs, respectively. But those are longer-term issues that should be addressed on a longer time scale. In the near term, economic recovery would actually require more stimulus to boost aggregate demand (yes, increased government spending on unemployment benefits, jobs programs, infrastructure, innovation, etc.) that could be coupled with some tax policy changes (like reducing payroll taxes) to encourage job creation at the outset of this foray into long-term spending reductions. Again, this neglects the means.

Returning to the 'living within our means' analogy, spending cuts without revenue increases is an irresponsible way to attain that supposed standard. Households carry debt and, so long as that debt stays within a certain ratio to income, it is fine. The United States' ratio of debt to GDP is well below the equivalent threshold and its spending can actually grow the economy and reduce that ratio from the other side. Spending cuts will reduce the debt but they will likely shrink GDP, thereby keeping the ratio just about the same.

The faulty analogy everyone's using constrains the logic of what the federal government should do about the debt ceiling. A household cannot raise its credit limit nor can its spending actually reduce its debt-to-income ratio, as can the federal government's. It is unreasonable for certain members of our 'national household' to hold its creditworthiness hostage to an ideological agenda of neutering the government's ability to serve its consituents.

And why constrain our nation's means by forgoing tax revenue while cutting spending that encourages the growth of GDP? The static ratio belies the analogy.

7/15/11

Size of Government Subtext to the Debt Ceiling Debate

In his book of the same name, Jeff Madrick makes the case for big government. Ultimately he concludes that the size of government is irrelevant but the choice of provocative title was meant to counter what's become conventional knowledge of late, namely that big government is bad. The main thrust of Madrick's case is that the US government has been heavily involved in the economy throughout the history of this country. Periods during which prosperity grew most rapidly were usually preceded and accompanied by active intervention by the federal government in the economy to set the conditions for prosperity and ensuring that it was shared equitably among members of society.

An article in the paper today highlights the incommensurable views of Democrats and Republicans about the 'proper' size of government in their approach to the debt ceiling increase (which has been raised 39 times since 1980 without the minority party holding the United States' creditworthiness hostage to its ideological goals, but I digress). 

The GOP's slashing of tax rates since Reagan has starved the beast of government and they appear to have no intention of feeding it again. But its weakened state increases the likelihood that it will be ineffectual, which, in turn makes people question its legitimacy. It has been a beautifully orchestrated downward spiral and now we're gasping at the bottom of the drain. But we have to examine on what basis they refuse to allow tax rates to return to the levels that facilitated the broad-based prosperity and increased social spending of the decades following World War II. Without tax revenue, the government cannot do what people expect it to do.

Madrick cites Peter Lindert's analysis of the correlation between social spending and economic growth throughout US history. About the common knowledge that Republicans have successfully promoted and by which they abide, Lindert concludes that "it is well-known that higher taxes and transfers reduce productivity. Well-known--but unsupported by statistics and history." And the GOP is willing to risk the solvency of the United States to defend this unwarranted belief by refusing to raise taxes a penny to reduce the deficit and offset the deep spending cuts they are demanding in the debt ceiling negotiations.

Madrick states unequivocally that such claims are bogus, saying:
"The empirical problem with the economic claims [of conservatives] is that the economies of nations with high taxes and big governments have grown rapidly, are highly productive, and provide their citizens with a standard of living every bit the the equivalent of America's." 
Reiterating his point and emphasizing the vital role of judicious government intervention in setting the conditions for economic growth, the author states:
"Judging by the careful assessment of economic achievements by nations with high taxes and large governments, and judging by American history itself, active and sizable government has been essential to growth and prosperity among the world's rich nations, including America."
These statements are based on the evidence presented in his book. As we know, evidence that does not fit our understanding of the world is filtered out by our brains. This is demonstrated vividly by the GOP's unrealistic refusal to increase government revenue and the dearth of evidence that supports their worldview. It is a result of motivated reasoning. Although we are all susceptible to it, I think we can be aware enough of our biases to take consider evidence of how things actually are. Let's settle that; then argue about what should be done in light of the agreed-upon facts. Those is the current negotiations cannot even do the former.

Aside from the fact that it is the subtext to the deficit/debt ceiling standoff, the size of government really is irrelevant to the economy.
"Big or small government is not the critical criterion in economics. To the contrary, government's management of change is what is critical. Without an active government, a nation cannot respond adequately to its times."  
True, a more active government will tend to be larger than one that lacks the will or resources to improve its citizens' well-being. We are living in turbulent times and Republicans would like to hobble the institution that history shows has been vital to our society's adaption to economic change and mitigating its disruptive impact on society.

Large or small, that government is best which governs to the benefit of the majority of its constituents. Not the select few who refuse to share the benefits they receive.