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On Tuesday, the Peter G. Peterson Foundation will hold its third annual fiscal summit. We need this event like we need a mass outbreak of sado-masochism.

If you wonder why all right-thinking people seem to have concluded that austerity is the royal road to economic recovery from a severe financial collapse made on Wall Street, look no further than the Peterson Foundation. Pete Peterson, a Republican with prodigious Democratic and media connections, who made his fortune in private equity, has committed a cool billion dollars to the task of persuading less affluent Americans to tighten their belts. He is the cynical center’s answer to the Koch Brothers.

The Bowles-Simpson commission on deficit reduction, the idea of automatic triggers to cut deficits in a recession, the goal of a grand bargain to raise taxes and slash Social Security, the covey of bipartisan deficit hawks, the blurring of the issue of long term solvency for Medicare and Social Security with the issue of a recovery strategy, are all part of the Peterson Foundation’s grand design. The Washington Post‘s Lori Montgomery faithfully echoes Peterson’s line, as do one tedious column after another by the likes of Tom Friedman on the center-left and David Brooks on the center-right.

The Peterson Foundation has relentlessly promoted the idea that the main economic challenge today is to set a target ten years down the road for a reduced ratio of public debt to GDP, on the premise that this will somehow restore economic growth. President Obama has dutifully obliged, targeting ten year cuts of $4.4 trillion in his FY 2013 budget. The House Republicans, using far more inventive accounting, target $5.3 trillion. The two budgets are far apart in how they treat taxes and social spending. Obama would raise taxes and defend social outlay, while the Republicans would cut both. Yet, at a time when Democrats and Republicans agree on nothing else, they bizarrely agree on belt-tightening in a recession.

However, the fact remains that the very idea what we can specify budget cuts in a deflationary recession, and imagine that they will lead is to a predictable debt ratio, is economic fantasy. Why? Because the budget cuts themselves will reduce the economy’s overall purchasing power, leading to slower growth and reduced revenues — and larger deficits. (That’s the real analogy with Greece.) The reduced debt ratio thus is a mirage. (more…)

With the economy just barely on a path to durable recovery, some very dumb fiscal chickens are coming home to roost on January 1 of next year. This grim coincidence is known as the Triple Witching Hour.

First, the legacy of last summer’s ill-fated bipartisan fiscal bargain — an automatic set of budget cuts totaling $1.2 trillion — kicks in next January 1. Second, President Obama’s temporary payroll tax cuts expire. And third — this is a good witch — all of President George W. Bush’s tax cuts sunset.

Just for good measure, there is yet another witch. The temporary extension of the debt ceiling will also expire around the first of the year, giving the deficit hawks of both parties even more leverage.

The trouble is that all of this adds up to a massive fiscal contraction. If you want to snuff out a fragile recovery, there is no better way than to cut spending and otherwise shrink the federal deficit prematurely. If anything, the economy needs more public spending for at least a year or two to compensate for the hit to private purchasing power and the housing collapse.

The failed grand bargain of last summer was the result of the Republicans holding hostage the extension of authority to roll over the national debt. President Obama was very close to making a bargain that included cuts in Social Security and Medicare in exchange for some very modest tax increases. House Speaker John Boehner, mercifully, refused to take the deal. So the two parties agreed on automatic triggers.

Following the election, there will be tremendous pressure on Congress and the White House to re-open the deal. With a Republican president, the bargain could get even worse–smaller cuts in military spending, more cuts in domestic spending, and extension of the Bush tax cuts and other tax breaks.

If President Obama wins and brings a Democratic Congress with him, the Democrats should revisit not just the composition of the deal but the premise that we need big cuts in the deficit next year or two.

Interest rates have never been lower. This is the time for the Federal government to borrow a lot of money and to invest it in public improvements — not as a one-shot but as a multi-year program that does not have to be instantly shovel-ready.

The trouble with using deficit-reduction and ten-year debt goals as a recovery strategy is that the future deficit is itself a function of the growth rate. Squeeze too tightly, and economic growth slows down. Even though you cut spending, the deficit actually widens. This is the real lesson of Greece.

Congress recently offered three paths that perfectly illustrate what to do and what not to do. (more…)

The constitutionality of the Affordable Care Act, the subject of three days of oral argument before the Supreme Court that began Monday, could well turn on whether the Court concludes that Congress can compel a citizen to buy a commercial product, in this case health insurance.

At the heart of the Act is the “individual mandate” which President Obama campaigned against as a candidate, and then turned around and supported as president. The mandate was part of a deal with the health insurance industry, which stopped ferociously opposing the Administration’s bill once it became a source of additional business.

The Administration and its supporters contend that requiring people to purchase health insurance is a natural extension of the Constitution’s Commerce Clause. If government can regulate health insurance at all, they say, it can legitimately use a mandate as a policy instrument.

The Administration brief contends that the mandate and the prohibition of discrimination by insurers against people with pre-existing conditions are so logically connected that if the Court finds the mandate unconstitutional it must strike down other key aspects of the act. Otherwise, large numbers of young and healthy people would “free ride” and wait to buy insurance until they got sick, making the whole law financially unviable.

Opponents argue that the mandate represents a new, dangerous, and unconstitutional infringement on liberty. The decision will be treated by commentators as either a huge victory or momentous defeat for President Obama, and either another dangerous over-reach by a right-wing court, or a prudent retreat by the court’s conservatives.

But this may be a complete misreading of the logic and the stakes.

The individual mandate may or may not be unconstitutional, but it’s dubious policy. And it would not be a fatal setback if the Court did find that it violated the Constitution.

The Administration, in my view anyway, has made both a tactical and a Constitutional error in arguing that if the mandate is unconstitutional, so are other key provisions of the act. If the Court were to strike down the mandate but not the rest of the Act, the insurance industry would be all over Congress to find another way to solve the free-rider problem. As my colleague Paul Starr has demonstrated, that would not be difficult.

Instead of being required to purchase private insurance, people without employer-provided insurance or access to Medicaid could be given a choice — either buy affordable insurance through the exchanges, or deliberately opt-out of coverage. But if they opted out, they would be precluded from getting insurance through the exchanges for five years. This use of incentives would be constitutional, and would be sufficient to induce most people to get insurance, but less coercively than a mandate. Starr also proposes that people could pay an annual fee to preserve their right to buy insurance after a waiting period of only a year. (more…)

Last week, speaking at the White House, President Obama announced that he was joining the European Union in filing a major trade complaint against China, for its export controls on so-called “rare earth” minerals. These are used in everything from micro-electronic devices like smartphones to flat-screen televisions, hybrid car batteries, energy-efficient lighting and wind turbines. China dominates world production of rare earths and refuses to allow their export and sale to follow normal commercial principles.

Despite this get-tough stance, however, the administration’s main trade initiative towards Asia is a little known pending agreement, the proposed Trans-Pacific Partnership. This deal, which the White House hopes to conclude by year’s end, would sidestep the mercantilism of China and other Asian nations that is displacing U.S. manufacturing; it would do nothing to raise labor or social standards, and would make the outsourcing problem worse.

The deal, announced last November, is being sold as a way to create a U.S.-led, rival group of nations to Chinese domination of the Pacific economic region, through trading partnerships with several smaller nations including Vietnam, Malaysia, Singapore, New Zealand, and eventually South Korea and Japan. The deal is being negotiated in secret, using the “fast track” provision characteristic of trade agreements, so that there can be no advance scrutiny by Congress or the public. The final deal just gets an up or down quickie vote. However, more than 600 corporate representatives have been given access to the negotiating documents, which suggests whose interests the deal is really intended to serve.

Official pronouncements and leaked documents suggest the following:

The proposed TPP would make it easier for domestic and foreign corporations to challenge a broad range of health, safety, environmental, consumer, labor, and financial regulations as interfering with “trade.” Gretchen Morgenson, in Sunday’s New York Times, pointed to the danger that NAFTA poses to financial regulation by giving both foreign governments and trans-national corporations a rationale for challenging, say, the Dodd-Frank Act. The proposed TPP, which Public Citizen’s Lori Wallach calls “NAFTA on steroids,” would be far more damaging. Private firms could sue governments directly to challenge regulatory policies.

The deal would not improve on the weak labor provisions of recent bilateral trade deals.
Participating countries could continue to bash unions with impunity. There is no meaningful enforcement mechanism to enforce labor rights. Though corporations get to appeal to special tribunals if they feel that national regulations of corporations or banks interfere with their business strategies, there is no counterpart for direct appeals of violations of labor rights. (more…)

The economy added another 227,000 jobs in February, the Labor Department reported Friday. That’s good news, sort of. It means that the recovery is slowly progressing. At this rate, we will be back to pre-recession employment levels sometime around 2018.

However, this growth in jobs was not enough for wages to keep place with inflation; nor did the unemployment rate drop, but stayed stuck at 8.3 percent. Why? Because folks who had given up have started entering the labor force again, but the percentage of people in the labor force is still two points lower than it was before the recession began. A new study by the Economic Policy Institute reports that earnings declined over the past decade even for college graduates — so much for the education cure.

In short, the recession made a bad problem worse, but the economy on the eve of the recession was nothing to be proud of. Throughout the first decade of the new century, before the recession hit, wages lagged behind living costs for the vast majority of Americans — because those in the top one percent were capturing such a large share of the economy’s total productivity gains.

Some of this trend was the result of globalization undercutting the bargaining power of U.S. workers; some of it resulted from weakened trade unions and minimum wage laws lagging behind inflation.

Flat or declining wages did not result from declining average productivity. So when we finally climb out of this jobs recession, perhaps we can belatedly confront these deeper trends.

I have been writing about the hotel workers union in New York City.

Thanks to an extraordinarily effective union, Local 6 of the hotel and restaurant workers union, nearly every large hotel in Manhattan is unionized, and everyone who works in these hotels, from dishwashers to room cleaners to doormen to banquet waiters earns a middle class wage. The union recently signed a seven year contract giving workers a 27 percent wage.

Local 6 is an exceptionally effective union, and New York is a unique tourist destination. But since the vast majority of jobs in America will soon be service sector jobs, not vulnerable to global competition, there is no good economic reason why they can’t all be middle class jobs. The challenge is political. We as a society simply need to decide, as President Obama famously told “Joe the Plumber,” that we want to “spread the wealth around” rather than having it concentrate at the very top. All service jobs could pay a living wage. How to do that? Unions, wage regulation, progressive taxation, and government using existing powers over contractors that it seldom exercises.

But what about manufacturing? This brings me to the other Jobs of my title, the late Steve Jobs. (more…)

The bizarre comments of Rick Santorum on everything from contraception to JFK, combined with the tin ear of frontrunner Mitt (“Ann drives two Cadillacs”) Romney, have been a gift from the gods to Barack Obama and the Democrats. And not just a random gift. Character, as the ancient Greeks said, is Fate. And the character of today’s Republican Party is self-destructive.

Comparing the Romney-Santorum slugfest with the protracted Obama-Clinton contest for the Democratic nomination in 2008, you have to appreciate that 99 percent of the Hillary Clinton supporters were prepared to vote enthusiastically for Obama as eventual nominee, and vice versa. Not so with Romney and Santorum.

The final 2012 election could see three or even four candidates — a centrist fiscally conservative but socially moderate independent candidate, plus a far right or right-libertarian one, any or all of whom would draw more votes from the official Republican nominee than from Obama.

And yet, this election year is replete with wild cards. A continuing European crisis or an oil price spike could derail the recovery, and with it the prospects for an easy Obama re-election. And the most consequential of the wild cards is in Washington right now, Israeli Prime Minister Bibi Netanyahu.

Obama, in remarks to AIPAC yesterday and in his meeting with Netanyahu today, is endeavoring to walk a tightrope. On the one hand, Obama doesn’t share Netanyahu’s view that an Iran with nuclear enrichment capability is the same is an Iran with nuclear weaponry. He and Netanyahu have very different “red lines” that would trigger war. Obama is resisting the escalating war fever for a pre-emptive strike either by Israel with the tacit backing of Washington, much less by the United States itself. On the other hand, the price of this is a hardening of his own posture. (more…)

The proposed $25 billion “settlement” of the mortgage servicing mess, scheduled to be made public any moment, must be a way station to much larger reductions of mortgage principal for underwater homeowners and much more serious consequences for the banks and their allies whose fraudulent actions created the mortgage meltdown. If the settlement turns out to be the final installment of relief for homeowners, it will be a colossal failure, both as economics and as justice.

However, while the settlement talks among state AGs, the Obama administration and bankers were in their final phase last week, New York Attorney General Eric Schneiderman filed a massive lawsuit against three of the largest players, Wells Fargo, Bank of America, and JPMorgan Chase. This bodes well for further enforcement actions, settlement or no settlement.

The lawsuit minces no words in alleging that the big banks fraudulently used the electronic system known as MERS to “evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse.” According to Schneiderman, the illegal scheme saved banks $2 billion directly in recording fees, and the banks could be subject to much more money in fines. Schneiderman’s suit also seeks to block the ability of the banks to foreclose on some 70 million properties held in the name of MERS.

Much of this same fraudulent misconduct is also the subject of the proposed settlement talks. Schneiderman signed onto the talks, and to a newly activated federal task force on criminal wrongdoing in mortgage securitization. So how can he file this case without blowing up the talks? (more…)

The activation of the administration’s long dormant task force on criminal misconduct in the financial collapse, with New York’s progressive attorney general Eric Schneiderman as co-chair, could be the most fateful political and economic development of the election year. There are still immense pitfalls ahead, as Wall Street allies inside the administration and on Wall Street itself try to reduce Schneiderman’s role to that of symbolic fig leaf.

But President Obama has done something potentially momentous for which he deserves our praise, even if he himself does not fully grasp the implications. The significance of the shift is still in play, of course, and will be made clearer as events unfold over the next several weeks.

Some skeptics in the progressive community have raised questions both about the upside for Schneiderman and his motives. Given the administration’s feeble record on prosecutions to date, the critics are right to flag the likelihood that people like Attorney General Eric Holder and SEC enforcement chief Robert Khazumi will try to sandbag Schneiderman. But my reporting suggests that they underestimate both the man and the dynamics that have been set loose.

The surprising move raises several questions.

First Big Question: Why did Obama, after letting the Treasury, Justice Department, and SEC sit on potential criminal prosecutions for three years, do this now? There was, after all, an inter-agency Financial Fraud Enforcement Group appointed in November 2009, and it contented itself with going after small and medium-sized fraudsters and settling mostly for slap-on-the-wrist civil fines, rather than getting to the bottom of the systemic crimes and bringing major cases.

The answer is in a harmonic convergence of three forces.

First, as illustrated by the larger themes of his recent State of the Union Address, Obama belatedly recognized an urgent political need for a more populist posture. What better bogeyman than Wall Street? Polls show that the single most damning factor that leaves voters skeptical about Obama’s economic credibility is his coziness with the big banks. Pecking Paul Volcker on the cheek once a year just doesn’t do it. Obama needed Schneiderman — and not just as a symbol. (more…)

President Obama is exceptionally lucky when it comes to the weaknesses of the Republican field and its stunning penchant for mutually assured destruction. Who would have expected, for instance, that Newt Gingrich’s billionaire-backed super-PAC, aiming to destroy front-runner Mitt Romney, would produce a documentary advertisement on private equity slightly to the left of what we might have expected of Michael Moore? Or that Gingrich, reprimanded by leading free-market ideologues, would then request that the ad be pulled? In this hilariously bungled caper, Marx meets the Marx Brothers.

But it remains to be seen whether Obama will be as lucky when it comes to the shape of the economy as the election year unfolds. Some of what will occur this year is partly within the president’s control; much is not.

Consider the several vulnerabilities of the still fragile recovery:

The Jobs Mirage. Democrats were cheered and Republicans caught off guard when the Labor Department’s December jobs numbers showed a net increase of 200,000 jobs — a nice improvement over previous months. However, a closer look showed that some 42,000 of these were seasonal courier jobs — all the people hired to deliver holiday gifts purchased via Amazon and other online vendors.

Jared Bernstein, the former senior Administration economic advisor now at the Center on Budget and Policy Priorities, calculates that the 200,000 jobs number should be deflated by about 30,000. This brings it closer in line with other recent months, and suggests that the economy is still a ways from a strong recovery.

The biggest problem retarding a strong recovery is that wages are lagging far behind the economy’s productivity growth. Recent Federal Reserve statistics show that consumers increased their borrowing to finance their holiday spending, but that can’t last unless wages begin following. (more…)

Whenever President Obama starts sounding like an economic progressive, as he did when he used his constitutional power to make recess appointments, or when he vowed to extend the payroll tax cuts without harming Social Security or Medicare, you can count on his critics to accuse him of resorting to “populism” or “class warfare.”

David Brooks, writing in the New York Times, warned that Obama had been elected to be a conciliator, not a populist (look at what his conciliator phase got him).

When Obama had kind words for the Wall Street protesters, Bloomberg BusinessWeek warned that, “populism shouldn’t be Obama’s battle cry.”

Obama, warned Karl Rove in the Wall Street Journal, “pits American against American on the basis of their bank accounts, saying it’s time for ‘millionaires and billionaires’ to ‘pay their fair share.’”

Typically, the people who disparage “populism” either have a self-interest in damping down popular comprehension of just who has been wrecking the economy, or they are supporters of a perverse austerity agenda, or they worry that Obama’s “populism”, more consistently applied, just might work.

Yet it’s a pity that the defense of working people and the policies that help them gets described by a word that has ugly overtones. Populism, in the late 19th Century, described a movement that sought to protect farmers and artisans from bankers, tight money policies and the economic influence of railroads and other monopolists. One wing of the populist movement was also racist, though the other wing was remarkably integrationist.

In recent years, far-right nationalists in Europe and elsewhere who scapegoat immigrants and appeal to narrow-minded nationalism are also described as “populist,” as are economic radicals who criticize rules of international trade that benefits multinational corporations but not workers.

So when a newspaper column or conservative politician describes a liberal leader as resorting to “populism,” there is usually an undertone of disapproval, and the implication that the leader is appealing demagogically to people’s baser instincts. (more…)