Archive for December, 2012

Debt, Deficit, and Math

Monday, December 31st, 2012

Here’s a little bit of truth through facts about the current political turmoil over debt and deficit.

First some definitions

Deficit is the difference between what the government spends and what it takes in through various revenue sources every year.  The deficit has been going down every year that Obama has been in office.  In round numbers we are talking about $1T a year.

Debt is the total amount of money that the government owes.  Some of that money is owed to the public and some of that money is owed to itself (primarily through Social Security bonds).

One of the measures of the health of any economy is the ratio of public debt to GDP.  If the debt is growing faster than the economy, that ratio goes up.  If the economy is growing faster than the debt, that ratio goes down.  We are someone where in the 70’s right now and the debt is growing faster than the economy mostly because we are still recovering from a recession.

Now tactics

The goal is to reduce rate of growth in the debt, not the actual amount of debt itself.

You can attempt to reduce the rate of growth in the debt by simply attacking the debt side of the equation.  The problem is that austerity, as we’ve seen in Europe, generally causes recession.  Recession reduces the size of the GDP.  The result is no change in debt as a percentage of GDP, and the potential to make things worse.

On the other hand, there are also practical limits to the rate at which the GDP can grow over any sustained period without also raising the specter of inflation because things like labor and raw materials tend to become more costly as demand increases and supply decreases.

Goldilocks Path

Many economists suggest that 4% growth is the optimal target for US GDP.  At or around that level, we can easily sustain deficits in the range of $400B and still drive debt as a percentage of the GDP down to the 30% range.  If the economy starts to grow faster, raise taxes and lower spending.  If the economy slows, increase spending and decrease taxes.

The Clinton years are a good example of this.  Paul Krugman summarizes, “Federal debt was higher at the end of the Clinton years than at the beginning — that is, the deficits of the Clinton administration’s early years outweighed the surpluses at the end. Yet because gross domestic product rose over those eight years, the best measure of our debt position, the ratio of debt to G.D.P., fell dramatically, from 49 to 33 percent.”

How do we get there from here?

If we take the current $1B deficits that we are running and subtract the $400B that we agree is a reasonable level to run in the best of times, let’s see what happens to the other $600B of our current deficit if the economy continues to grow.

Recessions cause increased spending in means tested social safety net programs like food stamps and Medicaid because wages fall and people lose their jobs.  The result is more people unemployed or underemployed qualify for these benefits.  If we were at the sort of sub 6% unemployment levels typical in past periods of 4% economic growth, we would eliminate $150B in deficit spending without any other changes to these programs.  More people working means fewer would need these services.

Now let’s look at increases in tax revenues and reductions in short term stimulus spending going on today from a better employment picture and more robust growth.  That total is somewhere around $450B given what we are spending today.

Assuming these figures are correct, returning to full employment and a sustained period of economic expansion also fairly quickly returns us to $400B deficits and a reduction in the debt as a percentage of GDP equation.

The good news is that we are seeing very positive signs of growth across the economy.  To quote Paul Krugman, “Housing is reviving, consumer debt is down, employment has improved steadily among prime-age workers.”

We don’t have a spending problem or at this point even a growth problem.

We do have a political problem.  Again quoting Krugman, “Unfortunately, this recovery may well be derailed by the fiscal cliff and/or a confrontation over the debt ceiling; but this has nothing to do with the alleged unsustainability of the deficit.”

We’ll look at that political problem next and the REAL issue that threatens the economic health of the country.

We don’t negotiate with Terrorists

Thursday, December 27th, 2012

Let’s do a quick recap to figure out how where we are on negotiations to come up with a better spending and tax plan than the one set to take effect on January 1, 2013

The January 1, 2013 deadline was set two years ago by this same congress as part of a bargain to resolve another artificial crisis.  That artificial crisis was created by newly elected Tea Party Republicans who refused to allow the government to borrow the money required to pay for things that Congress had already approved purchasing.  At the time, both parties agreed to put in place a series of spending and tax cuts so severe that both parties agreed it would force a compromise.

The date for that compromise as well as decisions about a number of related items including Bush tax cuts, exemptions from the Alternative Minimum Tax, FICA reductions, and extensions to unemployment benefits was purposely set after the 2012 election.  The thought was that the voters should have an opportunity to weigh in on these issues.

Republicans were so confident that they were going to win the 2012 election that they admitted that they didn’t have an alternate plan to deal with all of these issues if they lost.  Their plan if they won was to pass the Romney budget and make the Bush tax cuts permanent.

The voters DID express their opinion.

The Democrats won the election which included a promise to raise taxes on those making more than $250,000 a year.

After the election President Obama and House majority leader Boehner began negotiations. The following graph shows how those negotiations progressed.

When negotiations broke down, Boehner and Obama were $200B apart on tax revenue and $200B apart of spending reductions.  Boehner had conceded that taxes on wealthy people had to go up.  Obama had conceded that future spending on Social Security and Medicare should be adjusted.  All that remained to close this deal was split the difference on the numbers and work out the remaining details.  Obama still had to sell this deal to his reluctant Democrats in the Senate and Boehner had to do the same with his reluctant Republicans in the House.  It was those House Republicans who killed the deal when they refused to back the fall back “Plan B” bill that Boehner introduced to improve his bargaining position with Obama.  Rather than strengthen Boehner, this bill demonstrated that Boehner didn’t have the Republican support he needed any of the offers he made to Obama.

The same Republicans who wanted to put these questions to the voters now appear perfectly willing to ignore the will of 2012 voters.

At this point, the only deal than can pass in the few remaining days before this Congress ends, is one that comes from a compromise in the Senate that would allow a majority of Democrats to pass a bill that then would also pass the House.  This would require two things.  First, Senate Republicans would have to agree to allow such a bill to come to a vote rather than filibuster it.  Second, at least 26 House Republicans would have to support the bill along with the 191 Democrats.

The good news is that it if this Congress fails to get this done, the new Congress will have some time in January to act before these tax increases and spending cuts really take effect.  In the new Congress, Democrats only need 17 House Republicans to pass a bill.  Failing to get this deal done before the end of the year will continue to erode the confidence in the global community that the United States is capable of managing its own affairs.

The bottom line is that we live in a democracy.

We get the government that we vote for.

In 2010 voters sent a lot of “no compromise” Republicans to the House.  Those members exerted their power to create this crisis and don’t appear included even after their 2012 defeat to change their behavior.  While there are fewer of these sort in the new Congress, a significant number were sent back to continue the work that they began in 2010.  Many of those re-elected, benefited from 2010 Republican majorities in state legislatures who took advantage of the redistricting process to create “safe” Republican districts for their representatives.

Here are just a few recent examples of Republican dysfunction.

Senate Republicans recently rejected the UN Convention on the Rights of People With Disabilities.  This treaty was negotiated and signed by GW Bush.  Bob Dole came to the Senate floor in his wheelchair to lobby for its passage.  It essentially requires other countries to improve to our level of protection for the disabled, without requiring us to change any laws. It has already been ratified by 126 countries.  Rick Santorum, who holds no elected office, lead the Tea Party charge to defeat the bill based on some loony concept of U.S. “sovereignty” which essentially calls into question the whole premise of the United Nations.

We had the embarrassing moment earlier this month when Senate Minority Leader McConnell called for a vote on Obama’s proposal to change the method in which the debt ceiling is extended.  He was hoping to create an embarrassing moment for Democrats on the issue.  When Senate Majority Leader Harry Reid agreed to an immediate up or down vote, McConnell was forced to filibuster his own bill in order to prevent it getting passed.

Several days later, we have the Boehner Plan B debacle where he had to admit that he didn’t have the power to negotiate a deal with Obama on the fiscal cliff.

Tom Friedman summarized it best quoting James Carville in a recent column entitled “Send in the clowns”.

The political obsessions of the Republican base — from denying global warming to defending assault weapons to opposing any tax increases under any conditions, to resisting any immigration reform — are making it impossible to be a Republican moderate, said Carville. And without more Republican moderates, there is no way to strike the kind of centrist bargains that have been at the heart of American progress — that got us where we are and are essential for where we need to go.

And

But if Republicans continue to be led around by, and live in fear of, a base that denies global warming after Hurricane Sandy and refuses to ban assault weapons after Sandy Hook — a base that would rather see every American’s taxes rise rather than increase taxes on millionaires — the party has no future. It can’t win with a base that is at war with math, physics, human biology, economics and common-sense gun laws all at the same time.

 

The problem is NOT one of leadership.  Clearly both Obama and Boehner made significant concessions and had a deal on the table that made both parties uncomfortable.  But that deal didn’t get done because a significant portion of the elected Republicans in the House blocked it.

If some voters continue to reward the sort of terrorist behavior that we’ve seen from Tea Party Republicans, there is precious little that can be done.  Our system allows them to effectively shut down the government, if that’s what they choose to do and they have the votes to do it.  At this point, this group appears determined to raise taxes on everyone, cut spending, and likely cause a recession rather than accept a compromise with a President they despise.

As far as what we do in the meantime, we trust in the wisdom of voters to fix the problems created in 2010.  Ronald Reagan said it best during his debate with Jimmy Carter, “We don’t negotiate with Terrorists”.

Open Letter to Obama Critics

Monday, December 17th, 2012

This is an open letter to all those who have criticized President Obama’s visit to Newtown, CT.

Some characterized it as a publicity stunt. Some suggested that it was evidence that he was a poor leader shirking his Washington DC duties. Some felt it was hypocritical to express such sorrow over the deaths of these innocents while supporting things like abortion or drone strikes. Some have even suggested that this is part of a larger government conspiracy to take away our guns and leave us vulnerable to invasion by the UN.

If you have entertained or expressed any of these opinions, this is not day for them. Pick another day in another week. But not this day, not this week.

Are you REALLY that cynical and heartless? Have you become so twisted by your hatred of this one man that you are blind to the purpose of his visit?

It isn’t always about you and your issues, and it isn’t always about politics.

This was a NATIONAL tragedy. It tore at the fabric of our society by suggesting that we can’t protect those that we cherish most, those that are most vulnerable.

President Obama was there carrying out his highest duty, which is representing us.

He carried our collective sorrow with him to CT. He was there to represent the empathy that we all feel for those who are grieving. He was there to offer help to those that survived, but now have to learn to live with loss. He was there to give voice to the questions we all have about what can be done to bring an end to these massacres.

This event demands more than a few days of headlines and news reports. It requires more than a moment of silence. In fact silence on the underlying issues of violence and mental illness and easy access to weapons designed to quickly kill large numbers of people lulled all of us into a false sense of security.

He was there to promise that we aren’t going to let this incident fade from our memory as so many others have. He was there to express our collective outrage that this is enough. We are better than this. We are more responsible than this. We are not going to allow our country to deteriorate into armed enclaves and raise a generation of kids who are afraid to set foot outside their door. We have to have a higher concept of freedom than the mutually assured destruction of the wild west or the false security of a police state.

Yet for you, this was just another opportunity to express some petty partisan political snipe.

Shame on you!

 

 

Right to Work (for less)

Sunday, December 9th, 2012

I’m sad to report that Michigan will likely join the list of right to work states in the near future.

You only have to look at the labor history of this country to understand the value of collective bargaining.  Child labor laws, the 40 hour work week, workplace safety, minimum wage, Social Security, unemployment Insurance, and vacation and health benefits among others.  Unions are largely responsible for the growth of the middle class in this country.  The ONLY reason that these benefits exist for ALL workers today is because union members were literally willing to risk their lives to gain collective bargaining rights.

You only have to look at other countries where workers are NOT organized to appreciate what happens when workers don’t have the rights to organize and collectively bargain.  China has workers making iPhones committing suicide because they fear losing their jobs.  India has 12.6M children under the age of 14 working in sweat shops and 70M working in the cotton fields.

Unions did grow fat and corrupt in this country and the pendulum swung way too far in their direction.  They paid the price for their excesses as manufacturing declined and their ranks shrunk.  Now they have rededicated themselves to the basic mission of social justice for all workers.  They forged a new collaborative working relationship with the auto companies, for example, and the result is the rebirth of domestic manufacturing which is driving our economic recovery.

There is nothing wrong with a company wanting to maximize its profits.

That is a core component of our capitalist system.

But we have learned that we also have checks to prevent the excesses inherent in that system.

We make sure that companies report their earnings in a fair and accurate way to prevent Enron-type scams.

We created the EPA to make sure that companies don’t exploit the environment and create toxic sites like Love Canal.

Unions are the check on corporations “natural” temptation to exploit their workers.

With union backing, the government makes sure that the workplace meets minimum standards for safety.  The government enforces a minimum wage law.  The government manages an unemployment program which provides companies the flexibility to adjust their workforce while protecting workers who may lose their jobs through no fault of their own.  The government manages a series of retirement benefits which insure that those no longer able to work are able to enjoy their retirement years with a degree of economic stability.  That’s important because we’ve seen that companies are also not reliable retirement program managers.

The data proves the right to work (for less) does not deliver any economic benefit to the states that adopt those rules or the workers that work in unorganized factories.  Michigan right to work (for less) supporters point to economic growth in Indiana as a reason for changing Michigan law.  The economic growth in nearby Ohio, has been even better than Indiana and they defeated right to work (for less) laws.

The rebirth of robust domestic manufacturing in Michigan and Ohio is evidence that businesses locate and expand where they can maximize their profits because of access to skilled workers and proximity to their customers.  That’s because manufacturing these days requires highly skilled workers.  Whether they are unionized or not is not nearly as important to those building new plants.  What is important is whether or not the local workforce can do the job.

The current right to work (for less) activity in Michigan and across the country has nothing to do with competitiveness and everything to do with politics.  Unions helped get Obama re-elected.  Now Republican controlled legislatures in the rust-belt states are attempting to weaken the political power of unions.  The money behind this comes from ALEC, the shadow legislature funded by the Koch billionaires.

ALEC is exploiting a fundamental distrust of unions born of the larger conservative rugged individualist ethos and the reputation that unions protect bad employees.  In other words, unions hold workers back, make them dependent, and add no value to the process.  The reality is that the individual worker has no chance against the power of big employers.

If you work for a living, you should educate yourself on unions and right to work.  Look at what has happened to middle class wages over the past decade as union power has waned.  I’m not saying that unions are perfect, but take a minute to evaluate how your work has changed.  Your company has probably recovered from the recession and may be reporting record profits.  Your wages on the other hand barely keep up with inflation, but you are working at night and over the weekends just to keep up with increased demands from your employer.  That’s because your company has discovered during the downturn that they could keep their production levels high with a much smaller staff by simply working their existing staff harder.  That’s because those who kept their jobs were worried about the losing them and were also happy to work harder to keep the company afloat.  Now, though the company is no longer in danger, but they have also not hired back the people they need to allow everyone to work a normal 40 hour week.

That is just one example of what happens when companies feel as though they can exploit their workforce and maximize their profits.  If all workers said that 40 hours is enough or demanded overtime pay or overtime work, companies would have to hire more or pay more. Wages would go up. Unemployment would go down.  Company profits might suffer a little in the short term, but in the long term more people working would mean more people buying. That is a much more sustainable model than what we have today.

That’s why we need unions and that’s why big money is trying to snuff them out.