Archive for August, 2011

Leadership and Libya

Monday, August 29th, 2011

While the conflict in Libya isn’t over, it appears to be nearing an end.

The coalition of NATO nations prevented what appeared to be an imminent slaughter of rebel forces and their supporters early in the conflict.  The coalition provided air cover which leveled the playing field for the rebels.  They also provided tactical advice which proved crucial in organizing a rag tag group of untrained amateur soldiers into an effective fighting force that could take Qadhafi forces in Tripoli by surprise.

Early in the Libyan conflict, Obama was widely criticized for doing too little.  Once he decided to engage he was criticized by some of the same Republicans for doing too much.  In the end he appeared to have charted a goldilocks “just right” course.  No US troops were in harm’s way.  The Qadhafi government is in its last days and running out of money to pay its troops.  While there was loss of life, the conflict ultimately did not become the bloodbath or quagmire predicted by Obama’s opponents.   Total cost is currently at $896 million dollars and we have had no casualties.  By way of comparison, that is less than three days of the Iraq war during the surge, and the average daily loss in just American troops during that conflict is just a tad shy of 20.

There is still a long way to go before Libyan rebels can declare victory and begin rebuilding their country.  That rebuilding process is also fraught with peril, as we’ve seen in Egypt.  While the political transformations of the Arab Spring continue, there is still the disturbing violence in Syria that may also ultimately require some international action.  But the fall of Qadhafi can only be viewed as a victory for Obama’s foreign policy.

Here’s a quick summary of President Obama’s international accomplishments in his first term.

  • Killed bin Laden
  • Marginalized al Quaeda as a threat to the US
  • Implemented troop withdrawls in Iraq
  • Daring rescue in Somalia
  • Foiled dozens of plots to commit terrorist acts on US soil
  • Took a clear stand against torture
  • Won the Nobel Peace Price

Finally, if we use the measure first proposed by George Bush for to justify his re-election in 2004, Obama has kept the country safe from terrorist attacks for the past three years.

State of the Union

Tuesday, August 23rd, 2011

The weaker the economy and the longer unemployment numbers remain above 8%, the better Republicans feel about their chances in 2012.  Their basic strategy is to wail about how bad the economy is and blame that condition on “out of control” spending by the Obama administration.

The truth is that economic fundamentals are the best they have been in the past 15 – 20 years.

American households are finally recovering from the debt overhang that has depressed consumer spending.  As a result we are starting to see the first signs of consumers returning to the marketplace.   Corporations have huge cash reserves. Banks are profitable and like their corporate brethren, have returned to robust capitalization ratios. Even the US government is in better shape than our European industrial peers because we have a proactive central bank (a real problem with the EU) and Obama was able to get big government recovery programs passed early in his administration when it mattered most. It isn’t clear that Europe will be able to muster the same political will.

Our problem is that while the private economy is on the mend, the public sector has imploded.

Part of this was a necessary response to the mortgage crisis and the recession. The federal government really didn’t have a choice. In order to hasten recovery, the debts of a sick private sector were transferred to the public sector.

But this one time cash transfusion is not the reason why S&P downgraded our debt. What has S&P and all of the other ratings agencies concerned is the ideological influence conservative Republicans have had for the past decade. At the core of this ideology is the theory that our government can manage both an expanding economy and an aging population without any increases in revenue.

Here’s how Roger Lowenstien describes it.

Ever since the Bush-era tax cuts of 2001 and 2003, the government has suffered from self-induced anorexia. Those oft-debated but never rescinded tax breaks have steadily drained the Treasury and added to its borrowings. Consider that in 2000, the total U.S. government debt (the net accumulation of its borrowings since the Revolutionary War) was $3.4 trillion. Today it is $11 trillion. This matters now because with the economy slowing again, the debt hugely constricts our options. The normal response to the bad jobs market would be increased deficit spending, but the government is already operating at a $1.5 trillion annual deficit (that’s equal to a tenth of the GDP). It is borrowing half of what it spends. That’s enough to have spooked S&P and reminded the stock market a bit too much of Europe.

Before Bush passed the first tax cuts in 2001, the government collected roughly 19% of the GDP in taxes and spending was slightly less than that so budgets were balanced. Since then spending swelled to 25% of GDP and taxes have fallen to 15% – the lowest since WWII.

2001 seemed a perfect time to test the Republican theory that lower taxes would stimulate enough economic growth to allow collections to keep pace with spending. For whatever reasons you want to provide, it didn’t happen. But rather than increasing taxes or reducing spending, the Bush administration added $3T to the debt. By comparison the sum of the stimulus legislation passed during Obama’s first two years in office was $1T and much of that has been paid back.

The bottom line is that a responsible government raises sufficient revenue to fund its operations. Clearly spending must be reduced, but also just as clearly revenues have to go up. An underfunded government is ultimately an unresponsive government. An unresponsive government kills confidence, freezes investment, and kills jobs (as we’ve seen over the past year of budget wars). Eventually this path buries the economy in debt because businesses simply can’t fill the gap that government contraction/inaction creates. We are already seeing the challenges that our weak recovery faces in trying to absorb the public sector layoffs that have already happened.

If on the other hand, we allow the tax cuts to expire, phase-in entitlement cuts, implement the budget cuts already agreed to, and wipe out most all of the current tax deductions, we would quickly discover that revenues and spending would come back into line. The sooner businesses can again rely on government to return to its traditional role of building infrastructure, funding disaster recovery (natural and man made), keeping the peace, and educating the workforce the sooner business will regain the confidence they need to invest in the future.

 

 

Godverment

Saturday, August 20th, 2011

A recent article in the New York Times reveals survey information about the Tea Party that I found interesting.

Common wisdom is that the Tea Party spontaneously sprung whole from the minds of those across the country that were unhappy with what they saw as irresponsible spending by the Obama administration.  These were characterized as everyday apolitical folks who were finally so fed up with the federal government that they took to the streets.  The board of trade rant is a prime example.

The truth revealed in the survey is that Tea Party supporters are conservative Christian Republicans.  They are not political neophytes, but much more likely to have contacted their elected officials than the normal voter.  In fact, according to the survey, strong affiliation with the Republican Party was the single most accurate predictor of Tea Party membership.

These folks also did not suffer from the Great Recession in ways that were significantly different than anyone else.  So it wasn’t undo economic distress that drove them to activism.  Also concern over the size of government was not the primary motivation of most Tea Party members.

So what does distinguish Tea Party members from the run of the mill Republican or Democrat?

Tea Party members are overwhelmingly white, even whiter than Republicans.  They have an even lower regard for immigrants and blacks than regular white Republicans.  So having an African American in the White House is a problem for them.  Finally, next to being a Republican, the strongest predictor of being a Tea Party supporter is a desire to see religion play a prominent role in politics.  So having an African American in the White House with a Muslim-sounding name was more than many of them could take.

In contrast, according to the survey, the appeal to Tea Party supporters of Michelle Bachmann and Rick Perry has much more to do with their overt use of religious language and imagery than it does their position on the budget or taxes.

What is interesting is that as the rest of the country becomes more aware of what the real Tea Party agenda is, they are rejecting it.  What is fascinating about this shift of opinion is that it comes at a time when the American electorate IS moving strongly in the direction of the Tea Party on economic issues.  What the American electorate opposes is the injection of religion into politics.  As a result, the Tea Party has lost most of the support that it had at its inception and now ranks right alongside the Christian Right in popularity at about 20% of the population.  That level of support is now lowest among all political groups.  A curious irony is that even Muslims and atheists, two groups most hated by the Tea Party, are now held in higher regard by the rest of the country than the Tea Party.

The bottom line is that on everything except the size of government, Tea Party supporters are out of step with most Americans including mainline Republicans.  The Tea Party movement is now looking more and more like the anti-war movement of the 70’s.  That group brought a lot of energy to the Democratic Party and got George McGovern nominated.  They also alienated moderate voters, weakened the Democratic coalition that had successfully dominated American politics for forty years, and laid the groundwork for the Reagan revolution.  If the Republicans continue to embrace the Tea Party, they run the risk of repeating this history.

Balanced Budget

Wednesday, August 17th, 2011

Why not pass a balanced budget amendment?

That was the question posed by the head of the Iowa Tea Party to President Obama in a recent town hall meeting.  Unlike our previous President, this one is willing to engage with those who disagree with him.  He treated the questioner with respect and answered him directly.

The simplest answer to the question is that it is bad policy.  The global economy is much more complex than balancing a household budget, your check book, or paying your credit card bill.  Governments need more tools than just a balanced budget to be effective.

World-famous macro-economist John Maynard Keynes documented the critical government role in reducing economic volatility.  The ability to stimulate economies during downturns can prevent financial collapse and accelerate economic recovery.

The United States spent massively to convert manufacturing infrastructure to weapons production in WWII.  This won the war and provided the stimulus for recovery from a decade of depression.   A balanced budget amendment foolishly limits the ability of our government to respond in times of need.

It’s also bad politics because during times of growth, governments shouldn’t just balance budgets.  They should also pay down debts.  For example, instead of paying down our debts and continuing the Clinton balanced budget, Bush cut taxes.  Those cuts did not stimulate the economy or create jobs.  They did add $2T in debt and helped create the current problem.   Fiscal conservatives, who want to restrict government policy now, could have easily punished Bush at the ballot box in 2004 for deficit spending.  Instead they helped re-elect him.

It’s also bad politics because it distracts focus from our REAL problem – too few people are working and much of our manufacturing infrastructure is idle.  We should be investing in getting people back to work making things that we need.  Instead we are cutting government spending at all levels and increasing the number of unemployed.  More workers are the solution to our near term deficit problems.  The sooner our government can focus on that, the better for all.

Jobs

Sunday, August 7th, 2011

It is now time for the Tea Party and Republicans to take ownership for the economic impact of their policies.  They’ve introduced the term “job killing” to the political lexicon and feel free to attach it to whatever progressive policy that they disagree with.  But I think that REAL job killers here ARE the Republican Party and here’s my proof.

  1. A decade of low taxes has failed to produce jobs.  We are in a net negative position regarding jobs since the Bush tax cuts were passed (2001 and 2003).  In every decade since the Great Depression employment has grown at least 20% regardless of who was in the White House.  Middle Class income, when adjusted for inflation, dropped in the last decade for the first time since statistics first started being kept in the 60’s.  The combined net worth of American households declined in the last ten years when adjusted for inflation for the first time since the 50’s when statistics were first kept.  There are plenty of reasons why we’ve experienced a “lost” economic decade, and both parties share the blame.  But CLEARLY lower taxes were not the effective method conservatives claim it is.  Historically low taxes that have remained low for more than a decade did not spur robust economic growth OR create jobs.  The only thing that lower taxes did is make the rich richer and everybody else including the government poorer.
  2. Smaller government at every level is putting hundreds of thousands of people out of work.  At a time when the US economy seems to be teetering on the brink of a second recession, modest growth in private sector employment is almost completely swamped by massive layoffs in public sector driven almost entirely by Tea Party-led fiscal austerity programs.  Fears about slow economic growth have caused the private sector to hire temporary and contract workers instead of full-time employees.  Temporary and contract workers do not receive benefits and can be terminated quickly.  Those workers, as a result, remain as cautious about spending as they did when they were unemployed.  All this contributes to uncertainty and slow economic growth.  Temporary and contract work also swells the rolls of the uninsured which adds more stress to individual budgets, hospitals who have to cover emergency room costs, and Medicaid.
  3. When faced with a choice between ideology and jobs, the Tea Party led Republicans consistently choose ideology.  The FAA debacle is the most recent example. The FAA was effectively defunded because Tea Party Republicans saw an opportunity to weaken the union voting rules that currently protect FAA workers.   They put 4,000 FAA employees on unpaid furlough, sent tens of thousands of construction workers home without a paycheck, and prevented the government from collecting more than $300M in ticket taxes.  The furloughed FAA employees included inspectors who are vital to aviation safety.  It was only the willingness of those inspectors to continue working without pay that prevented this from also becoming a public safety issue.The Tea Party controlled House used the same tactics that were successful in the debt ceiling debate.  The only difference was instead of holding the financial standing of the country hostage; they held the jobs of these workers, the tax revenue coming from the airlines, and potentially the safety of the airline passengers as hostage in an attempt to weaken the FAA employees union.

    Want to know where that $300M in lost taxes went?  Right into the pockets of the airlines who immediately raised their fares to cover the uncollected taxes as soon as the shutdown occurred.

So it is time to hold these people accountable.

American voters handed these guys a majority in the House in the last election because they promised a more fiscally responsible government that would create more jobs.  It hasn’t happened.  Instead what we are seeing is “terrorist” politics which effectively caused the gears of government to seize up.  We see a party that is willing to hold the economy and jobs hostage to maintaining a purist ideology that only a small minority of the country even cares about.  They are hell bend on pursuing an economic policy that would slow even a good economy down.  Investors have already shown that they are terrified of the potential damage the Tea Party is inflicting on our weak economy.   Here’s what Standard and Poors said caused their recent downgrade of US debt.

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”

Donna Brazile had a good summary in a recent CNN article.

“Could there be a clearer illustration of the difference in tone between congressional Democrats and Republicans? Democrats understand the difficult state of our economy but also understand that Washington can’t throw in the towel on protecting and creating jobs. Just as on the debt deal, Democrats have been willing to compromise, to tackle sacred cows and to put the American economy first.”

The Tea Party has between now and next November to meet the Democrats somewhere in the middle on a series of job enhancement legislation.  If they continue to stonewall and employ the hostage tactics that we’ve seen them use, the American voters will punish them in November.  Hopefully the Tea Party won’t take the economy down with them in the meantime.

Taxes

Tuesday, August 2nd, 2011

Now that the dust has settled a little bit on the debt ceiling crisis, let’s see where we’re at.

The ratings service response was mixed.  Most accepted this move as a good first step and didn’t downgrade our debt.  Standard and Poors did downgrade our debt because they are concerned that we not are going to be able to take any more steps based on how difficult this first step was.

The goal of this whole exercise is to reduce the growth of the debt to somewhere around 60% of GDP. Anything in excess of 60% on a long term basis starts to unsettle deficit hawks.

So let’s assume the both the Republicans and the Democrats get everything that they want out of the Super Commission Process. For Republicans that means cuts of $900B now and $1.5T later. That’s more than the White House says they will accept, but let’s assume that in return for concessions on cuts, the Democrats are able to roll back the Bush tax cuts for everyone making more than $250K/year. Which is something that the Republicans bitterly oppose.

The big question is, does that get us to the magic number of debt less than 60% of GDP? According to an article in the Washington Post, The Center on Budget and Policy Priorities says no. Ten years from now, the debt would be 75% of GDP and growing.

The bottom line is that you just can’t get there from here without more aggressive increases in tax revenue and/or more robust growth in GDP. But if the plan also includes big cuts in federal spending, it’s going to be difficult to stimulate extraordinary economic growth over the next ten years.

So we’re back to that thorny question of more revenue.

It’s not surprising that both the Simpson-Bowles Commission and the independent Rivlin-Domenici commission came to the same conclusion. You have to rework the tax code to provide more revenue to pay down the debt. Simpson-Bowles did it by letting the Bush tax cuts for the rich expire and closing loopholes. Rivlin-Domenici did everything Simpson-Bowles outlined and added a value-added tax.

A third option that might prove easiest to accomplish politically is to just let the Bush tax cuts expire for everyone. That would add $3.6T in additional revenue which would exceed the debt reduction target.

As it turns out, the Democrats don’t even have to work that hard to get this deal done. They just need to take a page from the Republican play book. That’s because Congress has to act to extend the cuts. If Congress fails to act, the cuts expire. The Democrats just need to retain 41 seats of the 59 or so they have now to be in the position to block any legislation they choose in the Senate.

Raising taxes wouldn’t win the Democrats any popularity contests, but the threat does allow them to turn the tables on the Republicans. This is particularly interesting since Senate Minority Leader McConnell has already said that the recent brinkmanship is the “new template” for all future requests to raise the debt ceiling. By using these same tactics the Democrats can potentially pass what is really needed – tax reform.

The White House should campaign in 2012 against an outdated, unfair, inefficient tax code and the unique opportunity to rewrite this code to both reduce the deficit and distribute the tax burden more equitably.  As long as that tax reform increases government revenues at least $2T over the next decade, we’ll have a good shot at hitting the 60% GDP target.

Based on the outcome of that election, the Democrats  can hold the Bush tax cut extension hostage in the Senate and force the Republicans to chose between two evils, a $2T tax increase with no corresponding spending decrease or a $3.6T tax increase with no corresponding spending decrease.

It is interesting in politics how turnabout is almost always fair play.