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By Richard (RJ) Eskow
Senior Fellow, Campaign for America’s Future

Sure, we urgently need to repeal the sequester.  (You can tell your Representative that here.) But it’s even more important to repeal the insane thinking that led to the sequester.

That means repealing the deficit babble that still dominates Washington (and provided the theme for the President’s weekly Saturday address). It means repealing a conservative Republicanism which is based, not on economic philosophy, but on an atavistic hatred for government in any form.

Most of all, it means repealing the politics of deprivation and replacing them with the politics of growth. We’ve learned that contractionary policy based on government cuts is … well, contractionary.  And that expansion policy is needed if we want the economy to expand.

The argument shouldn’t be about where we should be cutting, but about where we should be spending more money.

Have You Hugged a Keynesian Today?

Pity the poor Keynesian. This benighted economist has been vilified, ridiculed, and marginalized for decades. What was the Keynesian’s crime? To imagine that the proven economic principles which fueled our post-Depression and postwar growth were still proven economic principles.

The assault on Keynesian thinking went hand in hand with other mythologies of the New Economy: You don’t understand our new theories, the Keynesians and neo-Keynesians were told. You’re mired in the thinking of the past.  You don’t understand the information economy. You can’t grasp financial innovation.

And your old models of government action in recessionary times are obsolete because they’re not creative enough. (That’s an especially objectionable word in this context. This is economics, not a university extension course on “Self Expression With Clay.”) (more…)

By Dean Baker
Co-Director, Center for Economic and Policy Research, Author

The controversy continues to simmer around the Reinhart-Rogoff (RR) paper and the now famous Excel spreadsheet error that led to claim that debt-to-GDP ratios above 90 percent led to sharply lower growth rates. The University of Massachusetts paper that exposed this mistake has led many people to reconsider their earlier acceptance of the Reinhart-Rogoff 90 percent debt cliff.

While that is a positive development, the re-examination should go a step deeper and ask why anyone ever took their argument seriously in the first place. It’s not just the arithmetic on debt-to-GDP ratios that tripped up RR; it was the basic logic of their argument.

If we accept the RR thesis, something bad happens to countries when their debt-to-GDP ratio exceeds 90 percent, which causes them to experience prolonged periods of slow growth. It is difficult to see how this could possibly be the case since debt is only one side of a country’s balance sheet; countries also have assets. For there to be any actual relationship between debt and growth it would seem that it would have to be debt, net of assets, and growth.

The RR story, where they purport to find a relationship between debt and growth, would be like finding a relationship between household debt and future income, without considering whether or not they own a home. In the RR approach to family finances, a family with $200,000 in debt who rented their apartment would be viewed as being in the same situation as a family with a $200,000 mortgage on a house that is worth $500,000.

While the second family would have $300,000 in assets after deducting their mortgage, like the first family it would also have $200,000 in debt. And since RR only concern themselves with debt, both families would count as facing equal debt burdens.

It would of course be absurd to imagine that these two families are in the same situation financially. And it would be equally absurd to imagine that countries with similar debt burdens but different amounts of assets are in the same position. (more…)

By Dave Johnson
Fellow, Campaign for America's Future

Austerity is beginning to hit and the economy is slowing as a result. The most immediate effect is that flights are delayed, but unemployment checks are smaller and there are fewer things We the People do to make our lives and economy better — also called “government spending.” But hey, as Dean Baker writes in, Deficits Are Bad and the Sun Goes Around the Earth,

…many people can profit from slow growth and high unemployment. The after-tax profit share of GDP is at its highest level more than 60 years. For those who own lots of stock and are at the top of the income ladder, times are good. These people may see efforts to lower unemployment as posing a risk. With lower unemployment workers may be able to get a larger share of productivity growth. This may be good for most of the country and mean increased economic growth, but it would mean less for the one percent.

Deficit Falling, Few Know

In February I posted Deficit Is Falling Dramatically, But Only 6% Know That,

There is no deficit problem. The deficit is down about 50 percent as a share of gross domestic product just since President Bush’s fiscal year 2009 deficit and is falling at the fastest rate since the end of World War II. Yet the Washington debate is about how and where to cut us back into recession. Why?

The post had a chart and some numbers… then,

Once again, because it might be hard to register due to the drumbeat of deficit-scare propaganda, this is a fact: the deficit is falling at the fastest rate since the end of World War II. It is down about 50 percent as a percent of GDP just since Bush’s huge $1.4 trillion fiscal 2009 deficit. And the deficit is projected to be stable for a decade.

… So let’s stop listening to the drumbeat of “deficit shock” propaganda and not be rushed into doing any more stupid, destructive cuts in the things We, the People do to make our lives better.

Finally the post linked to some polling news: only 6% of the public even knew that the deficit is down, most thought it is up, 94 percent of Americans don’t know the budget deficit is getting smaller. I got going about how our “news” media have to be actively misinforming us to get a number like that, only 6% of us even knowing the basic facts… (more…)

By Dean Baker
Co-Director, Center for Economic and Policy Research, Author

Most of us accept that the earth goes around the sun. This is impressive, since we can look up in the sky and see the sun going around the earth. We believe the opposite because we have been told about the research of astronomers over the centuries showing that what we can see with our own two eyes is wrong. Instead, we accept that the motion of the stars and planets can be much better explained by the earth going around the sun.

Suppose for a moment that astronomers and people who write on astronomy did not agree on earth or solar orbits. Imagine that a substantial group of these people, including many of the most prominent astronomers, insisted that the sun goes around the earth, as anyone can plainly see. In that case, there would likely be huge numbers of people who refused to accept that the earth goes around the sun. This is the state of modern economics.

A new study by three researchers at the University of Massachusetts found major arithmetic errors in the widely cited paper by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt” which purports to show high levels of government debt sharply slow growth. This study has been widely cited by political figures demanding deficit reduction, in spite of the fact that the unemployment rate remains high and interest rates are at extraordinarily low levels.

When the errors in the Reinhart and Rogoff study are corrected, the strong relationship between high debt levels and slower growth disappears. In other words, there is little obvious reason that we need to fear higher debt levels. We can have the government make investments in infrastructure and education that will boost growth, create jobs and increase future productivity.

If economics were like astronomy, the experts in the field would all be calling for the government to spend what is needed to boost growth. But economics is not like astronomy. When this key piece of evidence arguing for austerity was discredited, many experts just doubled down.

If any prominent economists reversed their support for austerity, they did so quietly, but the best comment came from Erskine Bowles, the co-chair of President Obama’s deficit commission: “What it doesn’t change is the common sense and my own personal experience in both the public and private sector that when any organization has too much debt that is an enormous risk factor and your risks go up then people lending you money will want more money for their money.” (more…)

By Les Leopold
Author, The Looting of America

Fear of debt is woven deeply into our culture. We associate debt with profligate spending, waste, gambling and overall sinfulness. As we learned during the housing bubble, it’s easy to get in over our heads. So naturally we assume that the same must be true for our country — government debt must be bad.

But is it?

For the past several years, this powerful cultural imperative received factual confirmation by two of the most renowned economists in the field, Harvard’s Carmen Reinhart and Kenneth Rogoff. They provided what seemed like rock solid evidence that increasing the national debt undermines economic growth. More importantly, they came up with a critical “fact” that everyone could understand: when a country’s debt surpasses 90 percent of it’s economic output (gross domestic product — GDP) bad things happen — the economy shrinks instead of grows. Below 90 percent all is well.

These experts assured us that their findings were supported by the facts on how 20 major countries fared between WWII and 2009. They claimed to have uncovered a sharp dividing line — countries with debt rates that ranged from 60% to 90% grew by 3.4%. Those with debt burdens above 90% saw their economies decline by an average of -0.1%. That’s a stark difference….if true.

Because U.S. debt today amounts to about 100.8% of GDP, the 90% cutoff line serves as a powerful political tool. It’s easy to understand and even easier to deploy as a weapon in the never ending battles over government spending and taxes. For example, Congressman Paul Ryan wields the 90 percent dividing line like an ax to justify slashing Social Security, Medicare and Medicaid. It also shows up in Congressional testimony and in hundreds of scholarly articles. European policy makers use it to justify severe austerity programs forced onto countries like Greece, even as those programs cause hunger among children. After all, it seems obviously true that if you go over that 90 percent line, you’re in serious economic trouble, and therefore you need to cut, cut, cut now to save your country from ruin.

But is the 90 percent line real?
No. Thomas Herndon, an economics graduate student at the University of Massachusetts Amherst tried to replicate the Reinhart/Rogoff findings in a term paper for his econometrics class. After receiving the data spreadsheet from the two eminent Harvard professors, he found enormous errors. As Reuters reports:

“I almost didn’t believe my eyes when I saw just the basic spreadsheet error,” said Herndon, 28. “I was like, am I just looking at this wrong? There has to be some other explanation. So I asked my girlfriend, ‘Am I seeing this wrong?’” (more…)

By Richard (RJ) Eskow
Senior Fellow, Campaign for America’s Future

Two recent news reports indicate that the President is “strongly considering” cuts to Medicare and Social Security in his upcoming budget, which is to be released in less than ten days.

The question’s been asked for four years: Why would Obama want to cut these popular and successful programs, especially when there are better solutions out there (and Social Security doesn’t even contribute to the deficit?)

It’s time to ask a new question: Why wouldn’t he cut them?

Bad News

Last Friday the Wall Street Journal reported that the President’s cuts would be “aimed in part at keeping alive bipartisan talks on a major budget deal.” No, you’re not experiencing déjà vu. We’ve heard this story before.

The Journal was vague on the President’s specific cuts, though it did cite the “chained CPI” cut to Social Security. (The Administration described those cuts as a minor “technical change,” although they’re technically less accurate than the current and already inadequate formula. They’d come to 6.5 percent of a 75-year-old’s benefits and 9.2 percent of a 95-year-old’s.)

The; New York Times reported that the President and House Republicans “have quietly raised the idea of broad systemic changes” to these programs as part of a broad “fiscal deal.” It also provided more detail on the President’s newest proposed Medicare cut, which would combine the deductibles for outpatient and hospital Medicare coverage. That would increase annual out-of-pocket costs for 80 percent of Medicare recipients (while typically lowering them for people who are hospitalized during the year.)

The rationale is that it will discourage the use of unnecessary medical care. That’s a misguided notion. But the President and his staff has shown a proclivity toward this kind of shallow wonkery in their support for misguided concepts like the excise tax on health insurance plans with higher than average costs.  The White House economic team may very well believe that this plan would “discourage people from seeking unneeded treatments” (as the Times puts it).

Bad Policy

Nevertheless, both cuts are bad ideas. The Medicare change is based on a model of health economics which fails to understand how health care decisions are made in the real world and relies on old (and challenged) studies, including one from the RAND Corporation, which claim such cuts reduce the use of unneeded services without reducing the use of necessary care.

As for the “chained CPI,” it’s already been dissected at length (we included a small compendium of critiques here).

Seniors and near-seniors today are facing a retirement crisis of tragic proportions, which a New York Times’ editorial outlines. That underscores the fact that these changes are both unwise and unkind. (more…)

By Dave Johnson
Fellow, Campaign for America's Future

A new study, Democracy and the Policy Preferences of Wealthy Americans, by Professors Benjamin I. Page, Jason Seawright and Larry M. Bartels sought to gauge the political and policy priorities of the wealthy, and how these concerns contrast with the concerns of the rest of us. Amazingly, the priorities of the 1% match up with the priorities of our political class, while the priorities and needs of the vast majorities of us are ignored.

The study questioned people with wealth that placed them in the top 1%. They were asked what they felt were the “very important problems” facing the country. The most common response was the budget deficit, with 87 percent believing this to me the most important problem. This contrasts with the rest of the population, with only 7% saying this is the country’s most pressing problem. Of course jobs and the miserable state of the economy for people what are not in that 1% were cited by regular people as the most important problem.

The 1%’ers want “entitlement programs” like Social Security and healthcare cut while the American Majority want (and need) them expanded.

The 1%’ers opposed raising the minimum wage, government help for the unemployed, government spending to ensure that all children have access to good-quality public schools, expanding government programs to ensure that everyone who wants to go to college can do so, and investing more in worker retraining and education. The American Majority supports all of these programs.

The 1%’ers also opposed more regulation of large corporations, raising the Social Security “cap,” using corporate taxes to raise revenue and taxing the rich to address inequality. The public supports these.

(Note – both the 1%’ers and the rest felt that the country needs to spend more on repairing and modernizing the country’s infrastructure.)

If the priorities of the wealthy seem to line up with the priorities of our DC elite, there is a reason. In an LA Times op-ed, The 1% aren’t like the rest of us, Professors Page and Bartels explained,

Over the last two years, President Obama and Congress have put the country on track to reduce projected federal budget deficits by nearly $4 trillion. Yet when that process began, in early 2011, only about 12% of Americans in Gallup polls cited federal debt as the nation’s most important problem. Two to three times as many cited unemployment and jobs as the biggest challenge facing the country.

So why did policymakers focus so intently on the deficit issue? One reason may be that the small minority that saw the deficit as the nation’s priority had more clout than the majority that didn’t.

This clout is further explained,

Two-thirds of the respondents had contributed money (averaging $4,633) in the most recent presidential election, and fully one-fifth of them “bundled” contributions from others. About half recently initiated contact with a U.S. senator or representative, and nearly half (44%) of those contacts concerned matters of relatively narrow economic self-interest rather than broader national concerns. This kind of access to elected officials suggests an outsized influence in Washington. (more…)

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Prominent Democrats — including the President and House Minority Leader Nancy Pelosi — are openly suggesting that Medicare be means-tested and Social Security payments be reduced by applying a lower adjustment for inflation.

This is even before they’ve started budget negotiations with Republicans — who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers’ “carried interest”), increase capital gains taxes on the wealthy, cap their tax deductions, or tax financial transactions.

It’s not the first time Democrats have led with a compromise, but these particular pre-concessions are especially unwise.

For over thirty years Republicans have pitted the middle class against the poor, preying on the frustrations and racial biases of average working people who can’t get ahead no matter how hard they try. In the Republican narrative, government takes from the hard-working middle and gives to the undeserving and dependent needy.

In reality, average working people have been stymied because almost all the economic gains of the last three decades have gone to the very top. The middle has lost bargaining power as unions have shriveled. American politics has been flooded with campaign contributions from corporations and the wealthy, which have used their clout to reduce marginal tax rates, widen loopholes, loosen regulations, gain subsidies, and obtain government bailouts when their bets turn sour.

Now five years after the worst downturn since the Great Depression and the biggest bailout in history, the stock market has recouped its losses and corporate profits constitute the largest share of the economy since 1929. Yet the real median wage continues to fall — wages now claim the lowest share of the economy on record — and inequality is still widening. All the economic gains since the trough of the recession have gone to the wealthiest 1 percent of Americans; the bottom 90 percent continue to lose ground.

What looks like the start of a more buoyant recovery is a sham because the vast majority of Americans have neither the pay nor access to credit that allows them to buy enough to boost the economy. Housing prices and starts are being fueled by investors with easy money rather than would-be home buyers with mortgages. The Fed’s low interest rates have pushed other investors into stocks by default, creating an artificial bull market.

If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor. This need not be “class warfare” because a healthy economy is in everyone’s interest. The rich would do far better with a smaller share of a rapidly-growing economy than a ballooning share of one that’s growing at a snail’s pace and a stock market that’s turning into a bubble.

But the modern Democratic Party can’t bring itself to do this. It’s too dependent on the short-term, insular demands of Wall Street, corporate executives, and the wealthy. (more…)

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

“Our biggest problems over the next ten years are not deficits,” the president told House Republicans Wednesday, according to those who attended the meeting.

The president needs to deliver the same message to the public, loudly and clearly. The biggest problems we face are unemployment, stagnant wages, slow growth, and widening inequality — not deficits. The major goal must be to get jobs and wages back, not balance the budget.

Paul Ryan’s budget plan — essentially, the House Republican plan — is designed to lure the White House and Democrats, and the American public, into a debate over how to balance the federal budget in ten years, not over whether it’s worth doing.

“This is an invitation,” Ryan explained when he unveiled the plan Tuesday. “Show us how to balance the budget. If you don’t like the way we’re proposing to balance our budget, how do you propose to balance the budget?”

Until now the President has seemed all too willing to engage in that debate. His ongoing talk of a “grand bargain” to reduce the budget deficit has played directly into Republican hands.

As has his repeated use of the Republican analogy comparing the government’s finances to a household’s. “Just as families and businesses must tighten their belts to live within their means,” he said of his 2013 budget, “so must the federal government.”

Hopefully, he’s now shifting the debate. (more…)

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

“Who is going to end up making all the money in the end if Obamacare continues to be in place?” Republican National Committee chairman Reince Priebus growled Monday on Sean Hannity’s Fox News show. “It’s going to be the big corporations, right? And who gets screwed? The middle class.”

The Republican Party makeover is breathtaking. Now, suddenly, instead of accusing Democrats of being “redistributionists,” the GOP is posing as defender of the middle class against corporate America — and it’s doing so by proposing to do away with the most progressive piece of legislation in well over a decade.

Paul Ryan’s new budget purportedly gets about 40 percent of its $4.6 trillion in spending cuts over ten years by repealing Obamacare, but Ryan’s budget document doesn’t mention that such a repeal would also lower taxes on corporations and the wealthy that foot Obamacare’s bill.

According to an analysis by the non-partisan Tax Foundation, Obamacare redistributes income from the wealthy to the middle class. This is mainly because it hikes Medicare taxes on the top 2 percent (singles earning more than $200,000 and couples earning more than $250,000, including their investment income).

This year, for example, families in the top 1 percent will be paying about $52,000 more in Medicare taxes, on average, than they paid in 2012.

And where will the money go? Not to pay for the healthcare of poor families; most of them already receive Medicaid. The rich will be helping middle and lower-middle class Americans.

Obamacare also imposes some taxes and fees on insurance companies, drug makers, and manufacturers of medical devices. Here again, most of this will be borne by affluent Americans, who own most shares of stock (assuming the taxes and fees come out of corporate profits). And, again, beneficiaries are in the middle and lower-middle class. (more…)