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President Obama picked the very day that new job creation collapsed to propose a deflationary budget deal featuring cuts in Social Security and Medicare. This is perverse economics and worse politics, on several grounds.

The economy created just 88,000 jobs in March, down from close to 200,000 in other recent months, for one main reason: The January 2 budget deal and the March 1 sequester that hiked taxes on working people and cut public spending.

In the January deal, payroll taxes on working people were raised by some $120 billion. The more highly publicized tax hike on the top one percent raised less than $65 billion. The sequester added another $85 billion of budget cuts. The combined economic contraction will be about $270 billion this year, and according to the Congressional Budget Office the result will be to cut economic growth roughly in half.

But the deal that Obama is trying to coax the Republicans into accepting would cut the budget at this rate for an entire decade. The economics are just insane. There is no evidence that banks are waiting to lower interest rates (which are already rock bottom) or businesses waiting to invest, pending progress on a grand budget bargain. Businesses are hesitating to invest because customers don’t have money in their pockets — and a deflationary budget deal will only make the economy worse.

The politics are worse than the economics. President Obama, violating every rule of smart negotiating, has put his final proposal on the table — cuts in Social Security and Medicare in exchange for the Republicans’ (still imaginary) agreement to raise taxes — before the Republicans have made a single concession.

The Republican habit is well-established — take Obama’s “final” offer as the new starting point and demand further concessions. With this strategy, our president has let them take him to the cleaners for more than four years now, and is still hoping that sweet reasonableness will produce compromise. It never has and never will. (more…)

The economy faces a persistent budget crisis.

Pushback from Wall Street has gutted most of the banking reforms, unemployment is stuck around 8 percent, corporate profits have been soaring while there is no wage growth — and the newest White House proposal is… a free trade zone with Europe.

This idea of a Trans-Atlantic Free Trade Area was tossed in, reportedly at the last moment, to President Obama’s State of the Union, and is being promoted in the government’s latest report on trade.

You don’t know whether to laugh or cry. This is a classic case of changing the subject to a cause that will not address any of the economy’s deeper ills and could well worsen them.

It recalls the very old joke about the drunk looking for his keys under a lamp post. He mentions to a cop that he lost the keys somewhere else, but “this is where the light is.”

Bipartisanship is not doing so well this season, but the one thing that Republicans and Wall Street oriented Democrats can agree on is more free trade deals.

The fact is that there is already massive trade between the U.S. and Europe — about $650 billion last year, an increase of two-thirds just since the turn of the 21st century. Tariffs are already at very low levels.

The remaining issues dividing the U.S. and the EU are ones where no agreements are in sight. The Europeans, for instance, have much higher standards to protect their consumers from Franken-foods, and are not about to give them up. (more…)

If you want to appreciate just how conservative the fiscal conventional wisdom is, consider that hotbed of Bolshevism, the Federal Reserve. Yes, the central bank that progressives love to hate is today the most expansionist outfit in town.

Although they are arguing about the details, both President Obama and the Republican Congress have committed to another $1.5 trillion of deficit reduction over the next decade, just about guaranteeing a prolonged period of high unemployment, an under-performing economy, and flat or declining wages for most working people.

Consider this thoughtful speech by the Fed’s vice chairman, Janet Yellen, delivered last week at an event jointly sponsored by the AFL-CIO (!) and the German Social Democratic (!) Friedrich Ebert Foundation, titled “A Trans-Atlantic Agenda for Shared Prosperity.” It was light years more progressive than the sort of fiscal summits that the White House has blessed.

In the speech, Yellen began by reminding the audience that the Fed’s mandate is a society of high employment, not just low inflation, and she made several important points that seem to have eluded President Obama — all of which are implicit rebukes to the Administration’s fiscally deflationary approach to the recovery. Compared to all other postwar downturns, she said, “The Great Recession stands out both for the magnitude of the job losses that attended the downturn and for the weak recovery in employment that occurred after the recession ended.”

How come? First, Yellen reports, bad fiscal policy. In every other postwar recession, government helped the recovery along by increasing spending or cutting taxes, or both. But in this recession, the government has been more concerned to rein in deficits.

… [D]iscretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits.

So people, let’s not make things worse by even more belt-tightening while the recovery is still weak.

And in other recoveries, housing led the way. Not in this one.

Tight mortgage credit conditions are continuing to make it difficult for many families to buy homes, despite record-low mortgage interest rates that have helped make housing very affordable… For some households, the collapse in house prices has left them underwater on their mortgages, and thus less able to refinance or sell their homes. (more…)

President Obama is off to a good start in his second term. “We, the people,” he pledged in his second inaugural, “still believe that every citizen deserves a basic measure of security and dignity.” Amen to that.

But as the economy continues its agonizingly slow recovery, his greatest challenge will be to reverse the economy’s widening inequality. Ordinary working families are falling further and further behind the cost of living.

The picture is especially brutal for young adults, who are likely to find themselves saddled with college debt, facing jobs that offer neither benefits nor career security.

Though the unemployment rate is coming down, the deeper trends in job markets only intensify the trend of the past three decades — the lion’s share of the gains going to the top.

Corporate profits are up over 60 percent since Obama took office. Average earnings are just about flat, despite productivity gains, but that average conceals widening inequality. A new report by the Economic Policy Institute finds that income for the top one percent is up by 8.2 percent since 2009, while earnings are down by 1.2 percent for the bottom 90 percent.

There is a lot of blather about why our income inequality continues to widen — it’s the educational system; it’s the skills gap.

But think about it. Our incomes were far more equal in the golden age of the blue-collar middle class during the post-World War II boom — when most Americans did not go to college. Even though most of our citizens had only basic skills, we managed a much more equally shared prosperity.

You want to talk about skills? The lion’s share of America’s earnings increases in the past 30 years went to financial engineers — people whose “skills” cost the rest of the economy trillions of dollars of lost assets and output.

How should we fairly compensate those financial engineers? By my reckoning, they owe the rest of us about ten trillion dollars. What sort of skill does it take to give toxic mortgage-backed securities triple-A ratings? The most notable skill of these people was staying out of prison. The link between skills and earnings, always somewhat arbitrary, has evaporated.

The latest hot trend is the proclaimed renaissance of American manufacturing. The press is full of stories about how companies such as General Electric are bringing jobs and factories home.

Why is manufacturing coming back? It’s a combination of multiple factors. Higher energy prices have raised shipping costs; engineers and designers want to be closer to the factory floor; retailers don’t like delays; robotics have made the manufacturing process so much more productive that less human labor is needed — and American workers have substantially cut their wages. G.E., the star of a recent feature in The Atlantic magazine, for “insourcing” jobs back from China, pays workers about $13.50 an hour (or a lot less than a room-cleaner in a unionized hotel.) (more…)

The private sector created 155,000 jobs in December, almost exactly the average for the 11 previous months of 2012 and for all of 2011. Once again, it is a record far too weak to produce real progress towards either an adequate recovery or decent growth in wages and salaries. At this rate of job creation, according to the Economic Policy Institute, it will take another decade to get back to the employment rate of early 2008.

According to the Labor Department, there were 7.5 million net jobs lost in the recession, and a gain of only 3.5 million net jobs so far in the recovery. We have 4 million fewer jobs now than five years ago, and a much larger labor force.

Consider the connection between these tepid job figures and the debate that still occupies center-stage in Washington — deficit reduction. Supposedly, businesses are not creating enough jobs because business leaders are anxious about the Federal debt.

For months, we have been hearing that businesses have been putting off making new investments or hiring new workers for fear that Congress would fail to cut the federal deficit. The austerity lobby helpfully put reporters in touch with businessmen who claimed that the uncertainty about the budget was dampening their willingness to expand, producing stories like this one in the New York Times last August. The Times contended:

A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth in the coming months.

But this turned out to be just about total baloney. During the months when the Congress and the press kept everyone on the edge of their seats wondering about the dreaded fiscal cliff, business behavior went on as normal — and a mediocre normal at that. The lousy rate of job creation hardly changed. Detroit enjoyed a good fourth quarter as very low-interest rates stimulated auto sales. Christmas sales were about what was predicted, as consumers turned to their credit cards.

To the extent that the economy has remained stuck in first gear, it has everything to do with high unemployment and lagging wages, and just about nothing to do with the fiscal cliff or worries about the debt ratio 20 years down the road.

The sluggish recovery has intensified a power shift from working people to corporations that has eroded the standard assumptions about the nature of employment. What the Labor Department calls “payroll employment” — the basis for both its statistics and assumptions — is becoming every more scarce. (more…)

Four years ago Barack Obama prepared to take the oath of office as a Democratic president, at a moment when free market ideology and Republican incumbency were disgraced by events. But a year that should have marked the end of the laissez-faire fantasy and the resurgence of effective government instead began an era of muddle through.

I have often quoted the British historian A. J. P. Taylor. Speaking of the revolutionary year in Europe, 1848, when democratic revolutions broke out only to be crushed, Taylor observed, “It was a turning point of history, but history didn’t turn.” In many respects, that also describes 2008.

The Republicans were voted out, but the big banks that caused the collapse were propped up rather than broken up. Their basic business model was allowed to continue, with taxpayers guaranteeing billion dollar paydays for corporate moguls. The economic rules of the game continued to tilt against regular working families, who are more precarious than ever. Obama took most of his economic advice from the very people whose belief in complete license for finance caused the collapse.

The administration played softball with a Republican opposition determined to wreck the recovery rather than allow Obama any victories. Democrats were almost as thoroughly in bed with Wall Street as Republicans. The mantle of populist frustration, absurdly, passed to the tea parties. Democrats, in the 2010 mid-term, suffered the worst defeat since 1938, a year when President Roosevelt listened to the Wall Street deficit hawks of that era.

But two years later, even muddle-through managed to beat muddled thinking. Mitt Romney divided his own party, committed one mistake after another; and despite one decent debate performance, he couldn’t beat the incumbent even in a weak economy. (more…)

Public opinion is steadily moving away from the Republican Party, as is America’s demographic future. President Obama’s three-point re-election win understated that reality, while events since Election Day have underscored it.

Public opinion dramatically favors restoring higher tax rates on the top 2 percent. Large majorities oppose cutting Social Security or Medicare. Acceptance of same-sex marriage is increasing, and is already the overwhelming majority view of those under 40 — the future electorate. Most Americans don’t support the absence of any regulation of combat weapons.

It is hard to know who was the bigger fool of the week’s public debates, House Speaker John Boehner or NRA executive vice president Wayne LaPierre. No critic could have done a better job of discrediting the NRA than LaPierre himself. And Boehner, trying to corral a caucus divided between right-wingers and ultra-right-wingers, fell on his face.

And yet a Republican Party, as personified by the House Majority, is the zombie that has been overtaken by public opinion but will neither change nor get out-of-the-way.

So reforms desired by most American voters will be a long time coming. (more…)

It is literally possible to have more money than you know what to do with. Take the case of the private-equity billionaire Peter G. Peterson, who has bankrolled much of the austerity crusade.

Peterson has now spent over half a billion dollars out of his personal fortune to persuade Americans that austerity is the necessary road to recovery. But the debate seems to be getting away from him. Peterson was heavily involved in the corporate-led group, “Fix the Debt.” That effort has increasingly backfired. In Peterson’s world, CEO spokesmen are a source of great credibility. But out in America, it doesn’t looks so good when the millionaire CEOs who cut jobs and pay low rates of taxes lecture others to tighten their belts.

Time for a new set of spokesmen. Peterson’s latest front group is something called the Coalition for Fiscal and National Security, which ran full-page ads in major newspapers last week. The gimmick, as the ad declared, is that “U.S. National Security in the 21^st century rests on both economic and military strength.” So if you want to keep al-Qaeda at bay, it logically follows that we need to cut Social Security and Medicare. Well, it does in Peterson’s circle.

The ad was signed by doddering former national security officials such as Henry Kissinger, Zbigniew Brzezinski, James Baker, Sam Nunn, et al. They should know plenty about national security and the debt, having run up trillions of dollars in excess military spending.

Poor Pete Peterson is running out of categories of concerned citizens to associate with the austerity cause. What will it be next? Poodle breeders to cut the debt? Nascar racers?

At this rate, Peterson will soon join the club of people like Sheldon Adelson, the Koch brothers, and Karl Rove, who spent hundreds of millions of dollars and had just about zero influence for their trouble. Sometimes, money can’t buy you love. Sometimes, it only buys poor judgment and makes you look faintly ridiculous.

The idea that recovery depended on austerity was always foolishness. Peterson’s ploy was to make it a bipartisan cause, with Democrats agreeing to slit their own throats by agreeing with Republicans to cut Social Security and Medicare for the sake of reassuring the bond markets. But the bond markets are doing just fine, thanks to record low interest rates that turn out to have a lot more to do with Federal Reserve policy than with deficit projections. And President Obama has belatedly realized that the Peterson-Simpson-Bowles austerity axis doesn’t exactly serve his political self-interest.

Meanwhile, it is dawning on Peterson’s Republican Party allies that they are painted into a corner of their own creation. The Bush tax cuts expire January 1. If the Republicans hold out for tax cuts on the top two percent, they are responsible when taxes go up on everyone else — and this time President Obama isn’t blinking first. (more…)

The Boston Globe, Politico, and Huffington Post are all reporting that Senator-elect Elizabeth Warren has been granted her wish to get a seat on the Senate Banking Committee.

This victory for progressives is huge. It means that Senate Majority Leader Harry Reid—who makes the committee selection, later ratified by the Democratic caucus—did not cave to pressure from either the financial lobby or from Senate Banking Committee Chairman, Tim Johnson of South Dakota, who is effectively part of that lobby. (South Dakota gutted its usury laws decades ago to make the state hospitable to the back office operations of the biggest banks.)

It isn’t just that Warren is a resolute progressive. It’s that she knows so much about the financial industry, from her years as chair of the Congressional Oversight Panel for the TARP, and before that as one of the leading scholars of bankruptcy and consumer abuses. And it’s that she’s incorruptible, as well as very smart.

More than your typical freshman senator, Warren is also a very astute politician. She used those skills very well in calling Treasury Tim Geithner on the carpet for his management of the banking crisis, while keeping lines open to President Obama, who tapped her to be interim head of the Consumer Financial Protection Bureau.

As the Dodd-Frank Act gets eviscerated by regulatory capitulations, the Banking Committee will need to do tough oversight hearings, and nobody knows these complex and arcane issues better than Warren. There is also the matter of the weak enforcement by the Securities and Exchange Commission of the protections against multiple ways that insiders can fleece investors.

There also the issues of mortgage debt relief, and student debt relief, and the larger problem of the private debt burden on consumers. Warren literally wrote the book on this, The Two-Income Trap. So the public interest and the progressive cause will be well served by having her on the Banking Committee, where the progressive members have often been seriously outgunned. (more…)

President Obama has belatedly grasped that holding firm on tax increases for the top 2 percent, and defending Social Security, Medicare and Medicaid against needless cuts, is good politics and good policy. As his Treasury Secretary, Tim Geithner put it on Fox News Sunday, “Why does it make sense for the country to force tax increases on all Americans, because a small group of Republicans want to extend tax rates for 2 percent of Americans, why does that make any sense? There’s no reason why it should happen.”

Geithner was even more explicit on CNN, when interviewer Candy Crowley pressed him on whether the Administration was really prepared to go “off the cliff” if Republicans refused to raise tax rates on the top 2 percent.

“If Republicans are not willing to let rates go back up [on the top 2 percent” Geithner said, “and we think they should go back to the Clinton levels when the American economy did exceptionally well, then there will not be an agreement.”

In his budget proposal, the president offered no cuts in Social Security, and only $400 billion over 10 years in Medicare and other savings, money that can be gotten by allowing Medicare to negotiate bulk discounts with drug companies and other administrative savings, without raising the eligibility age or otherwise cutting into benefits.

The Republicans, meanwhile are revealed as the people who would push the economy off a cliff in order to fight for tax breaks for the richest 2 percent; the party that would rather cut benefits in Medicare and Social Security than have the wealthy pay even the relatively low tax rates of the Clinton years.

It was Winston Churchill who said that you can always count on Americans to do the right thing, after they’ve tried everything else. Obama, belatedly, is doing the right thing.

He tried taking big savings out of Medicare in order to finance his Affordable Care Act. The Republicans pilloried him for it.

He tried pivoting to fashionable austerity, appointing the Bowles-Simpson Commission to propose far deeper budget cuts than the economy required. The commission majority report offered a deflationary program of cuts in Medicare, Social Security, and no rate increases on the taxes paid by the rich. Mercifully, the commission failed to get the necessary super-majority for its proposals.

And he tried offering cuts in Social Security and Medicare in order to get a budget deal in 2011 with House Speaker John Boehner. But the refusal of the Republicans to consider even a penny of tax increases saved the President from himself.

Now, as a last resort, President Obama has come around to sensible economics and smart politics — no cuts in social insurance benefits, no backing down on tax hikes for the rich, no deeper deficit cuts until the economy is stronger. His plan even proposes $50 billion in new public investments — not enough but a big step in the right direction.

What’s so heartening is not just that Obama is helping voters appreciate what Republicans really stand for but that he is turning his back on the echo chamber of deficit hysteria ginned up by Wall Street as a way of cutting social insurance and protecting low tax rates on the richest. Seeing Pete Peterson and his corporate deficit-hawk cronies lose this fight is as satisfying as seeing the Republicans lose.

So what happens next? (more…)