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

At this point everyone who follows economic policy debates knows about the famous Reinhart-Rogoff spreadsheet error uncovered by a University of Massachusetts graduate student. When the error is corrected, there is nothing resembling the growth falloff cliff associated with a 90 percent debt-to-GDP ratio that had been the main takeaway from the initial paper.

There has been an interesting response from the mainstream of the profession. On the one hand, they have been quick to rebuke those on their political left for making a big deal out of a silly mistake (here, here and here). They have also assured everyone that it really doesn’t matter anyhow since no one actually used the Reinhart-Rogoff work as a basis for policy. Both points raise interesting issues.

Of course the fact that two well-known Harvard economics professors made a silly spreadsheet error should not be a big deal. However the beauty of a spreadsheet error is that it is something that everyone can understand.

We all know what it means to enter the wrong number or add the wrong columns. That doesn’t require advanced training in economics. (more…)

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

Bob Kuttner has been among the country’s most visible advocates of stimulus, having written several books and numerous columns arguing the case for an aggressive program of public investment as the best way to deal with the economic crisis. His new book, Debtors’ Prison: The Politics of Austerity versus Possibility (Knopf, 2013) is his latest shot at the austerity gang.

The central theme is the morality tale around debt. The proponents of austerity insist that the debtors be forced to suffer. This is part because of the obvious moral hazard problem, if people think that debtors can get off easy, then no one will pay their debts. It is also partly appeals to our sense of morality, we want people to work hard and meet their commitments.

As Kuttner points out, there are two big problems with the debt hardliners’ agenda. First, it is often bad economics. The book goes back to the days of debtor prisons in England, pointing out that throwing debtors in jail not only was cruel to debtors and their families, it generally was not good policy from the standpoint of creditors either. Once the debtor was in prison they had little opportunity to earn back any of the money needed to repay their creditors.

Kuttner shows how this desire for punishment has played a central role in shaping attitudes toward the crises countries in the eurozone as well as underwater homeowners in the United States. This attitude has helped to prevent an effective policy response in both places. In Europe the debtor countries have seen their unemployment rates soar even as their debt to GDP ratios continue to increase. Shrinking economies have reduced tax collections and increased demands on the budget. In the United States many homeowners have ended up in foreclosure when it would have been possible to arrange principle write-downs that would have both kept them in their homes and given creditors more money. (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…)

Kenneth Quinnell
AFL-CIO

Current laws in the United States allow corporations to use offshore havens to avoid paying their taxes and, if it’s up to many in Washington, the problem will only grow larger, particularly if the so-called “territorial” tax system is passed. The details of the use of such tax havens were discussed in a conference call with Campaign for America’s Future (CAF), Americans for Tax Fairness (ATF) and Citizens for Tax Justice (CTJ).

Current tax laws encourage the offshoring of America’s jobs, manufacturing and profit centers, which has led to the hollowing out of the middle class, manufacturing and much of the country, according to Dave Johnson of CAF. Changes in the tax code in recent decades have led to a series of dangerous statistics for America’s working families:

• Corporate tax revenues as a share of GDP are at near historically low levels.
• In 2009, the U.S. share of GDP made up of corporate tax revenues was only 1.7%.
• The top corporate tax rate in 1970 was 52.8%, now it is 35% (although the effective rate is much lower).
• The United States has the third-lowest effective corporate tax burden in the world.
• Corporate taxation as a share of total tax revenue was 26.4% in 1950 and was down to 7.4% in 2010.
• Personal income, Social Security and Medicare taxes were 51.4% of total tax revenue in 1950, now they are up to 83.4%.

Congress is now proposing lowering corporate taxes even more and even, possibly, eliminating taxes on earnings reported as having been earned outside the country. (more…)

By Bob Cesca
Author, “One Nation Under Fear”

Last week, the president released his 2014 budget and, among some solid line items like additional infrastructure spending, universal preschool and reductions in tax breaks for Big Oil, he also proposed the truly stupid idea of linking Social Security cost-of-living-adjustments (COLAs) to something called “chained CPI” (chained consumer price index).

Briefly put, Social Security benefits are routinely hiked by a few percentage points each year based on inflation. Lately, those bumps have been scarce and more than a little weak, but adjustments based on chained CPI would be even weaker because the government would presume that as retail prices increase with inflation seniors will substitute lower-cost items. In other words, the government currently calculates benefits based on inflation, but with chained CPI, the government would calculate benefits based on an assumed consumer reaction to inflation (buying cheaper stuff). Consequently, Social Security benefits would be reduced to follow this assumption.

Yeah, it sucks. And the president, while attempting to play the role of the grown-up in the room and apparently taking responsible steps toward deficit reduction and Social Security salvation, is only managing to wrap his entire presidency around the big political third rail. It’s not as huge as George W. Bush’s second-term embrace of Social Security tinkering, but it’s a bad move.

Not only is the idea a punitive one for seniors, but the president is also fueling a series of inside-D.C. myths. They are:

1) Social Security is broke! IEEE! This might, in fact, be biggest D.C. myth of all D.C. myths. It originated with Republican concern trolls who pretend to care about Social Security but, in reality, are trying to kill it. The strategy is to weaken it to the point of being unpopular and unsalvageable — ripe for a private takeover or total shutdown. And so we get this on-going panic-button freakout that echoes through the complacent false equivalence press corp, and is ultimately fueled by Democrats like the president. But according to the Social Security trustees, the program will be capable of paying full benefits based on the current COLA formula for the next 20 years. Actually, the outlook is even better than that: the trustees also reported that Social Security will run a surplus until 2033. Can you imagine if any program in the federal government was projected to run a surplus for even half of that time? Budget hawks would crap their cages demanding immediate action to give back the taxpayers’ money by slashing the program to the line. Furthermore, once 2033 rolls around, Social Security will be capable of paying 75 to 80 percent of total benefits in 2033 money, which, accounting for inflation, is more than Social Security recipients receive today.

2) We have to tinker with Social Security because of the deficit. Whenever deficit hawks suffer from one of these routine fits of apoplexy, they always manage to loop Social Security, Medicare and Medicaid cuts into the mix, along with cuts to minor spending areas like foreign aid. Put another way, a gaggle of super-wealthy politicians and pundits who will never really need Social Security are always way, way, waaaay too eager to dump these programs onto the chopping block. In a budget crisis that’s ginned up by multi-millionaires, we should demand that they get in line first — cut programs and spending on areas that effect the wealthiest Americans, including corporations, before anyone else is forced to pitch in. (more…)

By Paul Buchheit
Author, editor, expert on income inequality

The first step is to learn the facts, and then to get angry and to ask ourselves, as progressives and caring human beings, what we can do about the relentless transfer of wealth to a small group of well-positioned Americans.

1. $2.13 per hour vs. $3,000,000.00 per hour

Each of the Koch brothers saw his investments grow by $6 billion in one year, which is three million dollars per hour based on a 40-hour ‘work’ week. They used some of the money to try to kill renewable energy standards around the country.

Their income portrays them, in a society measured by economic status, as a million times more valuable than the restaurant server who cheers up our lunch hours while hoping to make enough in tips to pay the bills.

A comparison of top and bottom salaries within large corporations is much less severe, but a lot more common. For CEOs and minimum-wage workers, the difference is $5,000.00 per hour vs. $7.25 per hour.

2. A single top income could buy housing for every homeless person in the U.S.

On a winter day in 2012 over 633,000 people were homeless in the United States. Based on an annual single room occupancy (SRO) cost of $558 per month, any ONE of the ten richest Americans would have enough with his 2012 income to pay for a room for every homeless person in the U.S. for the entire year. These ten rich men together made more than our entire housing budget.

For anyone still believing “they earned it,” it should be noted that most of the Forbes 400 earnings came from minimally-taxed, non-job-creating capital gains. (more…)

By Robert Creamer
Political organizer, strategist and author

The big lie in American politics today is that “America is broke” or “in this time of austerity we have to tighten our belts.” America is not broke. We are not in a time of “scarcity” and when we buy into this fallacy, we contribute to political decisions that actually will do damage to our standard of living and that of our children.
This lie is used relentlessly to argue that “America just can’t afford” investments in education, or infrastructure, or jobs programs. It is used as the justification for the need to cut Social Security benefits, shift the cost of Medicare to senior citizens, increase the costs families bear to send children to college, or cut back on food for low-income children.

The fact is that for ordinary people times are tough. Median per-person income for ordinary Americans hasn’t increased for 20 years. And the federal, state and local governments are short of revenue.

But America is not broke — far from it. Ask the gang on Wall Street. Ask the bankers whose recklessness caused a massive financial collapse, yet continued to get multi-million dollar bonuses, if America is broke.

The reality is our economy is producing a higher gross domestic product per capita — the best measure of the sum of goods and services produced by our economy per person — than at any other time in American history. Gross domestic product per capita slumped after the Great Recession that was caused by the recklessness of the big Wall Street banks. Then it once again began to increase and has now reached record levels.

Overall, America is still the wealthiest nation in the world — and wealthier today than it has ever been.

In fact per capita gross domestic product increased over eight times between 1900 and 2008. That means the standard of living of the average American today is over eight times higher than it was in 1900. Average Americans today consume eight times more goods and services than they did at the beginning of the last century. We are eight times wealthier today than we were then.

And note that GDP per capita has increased six fold since Social Security was passed in 1935 and 2.3 fold since Medicare was passed in 1965. Demographic trends, like the number of seniors in society, have been massively outstripped by increases in our per capita gross domestic product — or standard of living. Those who claim that while we might have been able to afford Social Security and Medicare when they were passed, we just can’t afford them anymore, are just plain wrong. (more…)

By Jared Bernstein
Senior Fellow, Center on Budget and Policy Priorities

And the point about that is this: we tend to obsess about whether the economy is growing (good) or shrinking (bad). But clearly, contracting at 0.1 percent last quarter, as in the initial GDP report, is hardly different than growing at 0.1 percent, as in today’s revision. Crossing zero is a lot less important than growing fast enough to create enough demand to actually nudge down the unemployment rate.

For that, you have to grow above trend and trend is probably a bit north of 2 percent right now. That’s considerably higher 0.1 percent, of course, but as I noted when this report first came out, we’re probably doing better than that. The quarterly numbers are volatile so I like to look at year-over-year; by that measure, GDP is up 1.6 percent over the past year. Add in the sequester and other headwinds I worry about here, and it’s hard to envision much progress on jobs, wages, and most people’s incomes in the near term.

Once again, and much like the jobs’ reports that keep showing the loss of state and local employment, the GDP report shows that contractionary fiscal policy, which shows up as less government spending, has been pretty relentlessly whacking away at real GDP growth since the Recovery Act faded out. The figure shows the government sectors’ — fed, state, and local — contribution to real GDP growth. In the most recent quarter, that impact was particularly large, subtracting 1.4 percentage points off of growth.

By Dave Johnson
Fellow, Campaign for America's Future

There is no deficit problem. The deficit is down 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?

Congress should just repeal the sequester – we don’t need it. We have 10 years to fix the long-term deficit situation. We should not be stampeded by deficit-scare propaganda and instead take the time to carefully consider the right approach. That way we won’t make the mistakes that Europe is making.

Deficit Falling

Here is a chart of the deficit as a percent of GDP: (Data sources below)

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 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.

All of that means that no, we do not have a “deficit emergency,” the deficit is not “out of control” and we have 10 years to decide how best to fix things.

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.

Medicare Cost Growth Way Down, Too

You probably hear again and again that Medicare is the driver of future deficit trouble.

Here is something you probably didn’t know because of the drumbeat of deficit propaganda: Medicare cost growth is way down. From 2000 through 2009, Medicare spending climbed by an average of 9.7 percent a year. Now those increases are down to 1.9 percent and are still falling.

Take a look at this report from the U.S. Department of Health and Human Services, Growth In Medicare Spending Per Beneficiary Continues To Hit Historic Lows:

The very slow growth in Medicare spending in fiscal year 2012 follows slow growth in 2010 and 2011. In 2010, spending grew at only 1.8 percent per beneficiary, and in 2011 at 3.6 percent. Over the three year period from 2010-2012, Medicare spending per beneficiary grew an average of 1.9 percent annually, or more than 1 percentage point more slowly than the average annual growth of 3.2 percent in per capita GDP. (more…)

By Scott N. Paul
Director, AAM

There was an unfortunate bit of news lost in the headlines yesterday morning: For the first time since the second quarter of 2009, the economy has shrunk.

That’s right: It shrunk. Shriveled. Those are ugly words, but they pack a little more punch than the sanitized term, contraction.

But let’s use it anyway: In the last quarter of 2012, the size of our economy actually contracted by 0.1 percent, according to numbers released by the Commerce Department. While a tenth of a percent doesn’t sound like much to the headline writers of the world, this is nothing to shrug at. The economy grew at 3.1 percent in 2012′s third quarter. That makes for a substantial drop-off in activity at the end of the year. It means a lot of transactions lost; a lot of contracts unsigned; a lot of economic activity that never took place.

So what happened?

This didn’t come out of the blue, of course. Late in the year, Superstorm Sandy and its after-effects severely slowed economic activity in the New York-Metropolitan area. Plus, austerity seems to be the name of the game when it comes to government spending. And a slower-than-expected shopping season can put a dent in the way we total our GDP.

But there’s one crucial factor in the GDP equation that no one is talking about: jobs. Our unemployment rate stands at 7.8 percent.

We spent plenty of time talking about jobs in the run-up to the November elections — so much so that jobs were the topic of more political advertisements than any other issue during the campaign cycle. The presidential contest alone featured more than 975,000 spots on the subject.

But now our focus has shifted. There are plenty of worthy debates to be had on immigration reform, gun control, and our national debt. But we need to keep our priorities straight. If Washington’s chattering class spent a sliver of the time talking about smart ways to create jobs as it spends obsessing over the debt, we might actually put some Americans back to work and put a dent in that deficit total. (more…)