Archive for the ‘Finance’ Category

Economic Costs of Income Inequality

Saturday, January 25th, 2014

As a quick summary, the huge gap between the rich and poor is a fairly recent phenomena driven by changes in government policy that started with Ronald Reagan. We are now in uncharted territory. We have never had the level of income inequality that we are currently experiencing. There has been a huge transfer of wealth from poor and middle class families with no end in sight. Poor and middle class wages over the past 15 years have gone down while the wages of the wealthy have increased.

I will do my best to stay away from discussions of morality in this post and focus on how this affects our economy.

Narrow Spending Base

A majority of economists surveyed by the AP in December felt the current level of income inequality was unhealthy.

“What you want is a broader spending base,” said Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

That’s because discretionary spending by the wealthy tracks the stock market. When the market is up, they spend. When the market is down they don’t. This makes consumer spending much more volatile than it has been in decades past. This volatility leads to slower economic growth because businesses are less willing to invest as demand increases for fear that the demand spike is only temporary.

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

Scott Brown agrees that the current levels of income inequality are slowing economic growth, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

Warped Economy

It isn’t only that the spending base has narrowed.

The way that the wealthy spend their money is different from the way that middle and lower classes consume. That difference tends to increase the concentration of wealth at the top of the income range rather than spread it throughout the whole economy.

Here’s how that works.

Because the wealthy have already satisfied their basic needs, they spend their discretionary income on goods whose value stems from the talent of other top earners. Let me say that again in a slightly different way. The wealthy spend their discretionary income on goods and services that only they can afford. The producers of those goods and services are able to charge a premium for their services because they produce the best of whatever it is that differentiates them for everyone else. As a result, these “best of breed” producers also become wealthy.

Here’s how the NYT describes it.

Wealthy people don’t choose just any architects, artists, lawyers, plastic surgeons, heart specialists or cosmetic dentists. They seek out the best, and the most expensive, practitioners in each category. The information revolution has greatly increased their ability to find those practitioners and transact with them. So as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.

Technology has also made the best performers far richer than they could have been even a decade ago. That’s because the best musicians, athletes, and artists can now reach audiences of virtually unlimited size. Artisans can ship their products anywhere in the world. Which allows them to dominate their markets in ways never imagined possible.

Education markets are warped because the wealthy can afford the tutors, camps, travel, and exclusive prep schools that provide their children a distinct advantage in the competition for slots at the world’s best colleges and universities. Hunter Prep School in NYC was created to provide a public alternative to private prep schools for NYC children. In the 70’s the demographics of Hunter pretty much reflected the demographics of NYC. Now almost 80% of the Hunter students are children of alums. Their parents DID succeed because their Hunter education got them into Ivy League schools which turned into lucrative jobs on Wall Street. They were able to send their children to exclusive elementary schools and after school programs to prepare them for the Hunter entrance exam. It’s a perfectly understandable response, but that response is effectively destroying the meritocracy on which Hunter was originally based. In its place is an oligarchy, which is what Hunter was supposed to weaken.

Finally income inequality is warping the political process. The wealthy have more access to legislators than the middle class or the poor. The 2012 Republican Primary is a great example. Two of the three candidates in the final run for the nomination (Santorum and Gingrich) received virtually all of their funding from just one person. Gingrich from Sheldon Adelson. Santorum from Foster Friess. Not surprisingly, Gingrich’s platform reflected Adelson’s strong support for Isreal. Santorum’s platform reflected Friess’ conservative Christian views.

Summary

Income inequality is real.

It has accelerated over the past 30 years to the point that the wealthy represent the only group enjoying an increasing income share. Everyone else is financing that increase with their own decreasing shares.

Concentrating so much purchasing power in the hands of such a small number of people weakens our economy and slows economic growth.

It warps the consumer economy by creating a feedback loop where the rich only spend their money with organizations and individuals who are also rich. This isn’t necessarily the overt intent of the rich, but it is the practical outcome of their rigging the system for their own benefit.

It warps our educational system by limiting access to the best schools to those who parents can afford to send them to the best elementary and prep schools. The wealthy aren’t any smarter than anyone else. They are just way better educated, financed, and connected.

It warps our political process by making the votes of the wealthy more valuable that the votes of everyone else. Those votes have supported a system of lower taxes and reduced regulation which became the foundation for their success.

Next up, a brief analysis of how moral foundations also warp our view of the rich. Then a discussion of the economic value of a more level playing field and then finally what government can do to encourage a more level playing field.

Income Inequality Facts

Monday, January 13th, 2014

I’ve been looking for a way into this whole discussion of income inequality.

The challenge, based on what I’ve already discussed regarding liberal and conservative moral foundations, is that it can’t be solely a fact-based discussion.

That’s because the fundamental reason why there is the largest gap between the rich and poor in our history is BECAUSE conservatives believe in the concept of a Utopian Free Market. More importantly, they believe that it is the solution to ANY economic or political challenge we face in this country.

Too many people unemployed? Cut long term unemployment benefits and the unemployed will be forced to find a job or starve. This satisfies the moral “cheating” outrage conservative feel when it seems somebody is getting something they don’t deserve. Conservatives feel comfortable eliminating unemployment benefits because they believe that the Utopian Free Market will automatically create jobs because supply will drive down wages. Everyone who wants a job will be able to find one in this system. The only reason why people are unemployed is because they are lazy or stupid, in which case it’s their own fault if they starve.

But I’m putting the cart before the horse. There will be plenty of time to examine the emotional arguments about things like this.

The first thing we need to establish are the facts about economic inequality. Then we can discuss the causes and remedies.

The facts are best displayed in these graphs. They show how income was distributed between rich and poor from when we first started to collect income tax in 1917 up through the latest data available in this study, 2008. All of this data comes from a study done by Cal Berkeley economist, Emmanual Saaz.

These graphs are wonderful snap shots from an interactive graph posted by the Economic Policy Institute. Feel free to go there yourself and move the start and end points to see how income over that period was distributed.

The math on the first graph looks OK. Income gains over 90 years are basically split between the top 10% and the bottom 90%. That means that the top 10% got 5x more money than their demographics would command.

income-inequality-1917-2008

But the graph itself isn’t flat. If you look at the flat part of the graph from 1917 – 1981, the top 10% got only 31% of the income growth over that period of time. 69% of that growth went to the bottom 90%. That distribution was pretty consistent over that whole period. After 1981, this began to change dramatically.

income-inequality-1917-1981

From 1981 to 2008 the top 10% got 96% of the income gains generated by the economy. The bottom 90% got 4%.

income-inequality-1981-2008

Now here’s the real story, and it only tracks to 2008. The last six years it has only accelerated.

From 1997 – 2008 ALL of the income growth went to the top 10%. The incomes of everyone else DECLINED.

income-inequality-1997-2008

What is so important about 1981? That’s when Ronald Reagan and “voodoo” economics showed up. That’s when this whole unregulated low tax conservative economic experiment started. 30 years later, we are witness to the outcome. A massive transfer of capital from the middle class and the poor to the wealthy.

Middle class wages have been more or less flat for 45 years, but costs continue to go up. The result is that all except the top 10% are becoming poorer even though they are working hard and playing by the rules.

There are likely a whole list of causes besides the economic theories typified by de-regulation, low taxes on the rich, and erosion of labor rights. The issue is not cause, at this point, but simply the fact that this condition exists.

Next up, the economic perils of income inequality.

The Road Not Taken

Friday, December 6th, 2013

We’ve just gone through how the Great Recession caused a predictable populist uprising and how that uprising was hijacked by conservative Republicans and became the Tea Party.

In the interests of full disclosure, the Democrats had something to do with this too.

Here’s a short summary of how the Democrats missed the opportunity of a lifetime to make the case for government as the protector of the working man and the middle class. By failing to engage in a vigorous defense of the New Deal, Democrats lost an opportunity to re-educate another generation of voters on why free markets can’t be trusted to regulate themselves.

Background

After 8 years of Bush’s version of trickle-down economics, two wars, Halliburton, Black Water, Abu Grebe, an unfunded expansion of Medicare, Enron, torture, wiretapping, outing of CIA agents, a politically motivated purge of the justice department, Katrina, the housing bubble, and the inevitable burst of that bubble, ballooning deficits, dramatic job loss, the resultant rash of foreclosures, the collapse of the housing market, and the collapse of the domestic auto industry; the country was ready for a change. The collapse of the global financial markets only put an exclamation point to the cry for CHANGE!

The country selected a young bright Ivy League-educated African American who promised change. He promised to end the wars in Iraq and Afghanistan. He promised to expand healthcare. He promised immigration reform. He promised a new era of political cooperation and focus on rebuilding the middle class. More than anything else, he promised that a vote for him was a vote AGAINST everything that the Bush administration stood for. Shortly after his election, however, he was handed a global financial crisis.

Bad Optics

His reaction was to retain many of the people that Bush had put in place to deal with the crisis and pass the basic recovery package that had been crafted by that team. From a financial point of view, you can’t argue with the results. The plan worked. The global financial system stabilized. Bad financial institutions were consumed by good ones. The domestic auto industry was restructured. Five years later the stock market is setting records and job growth is finally hitting numbers that will reliably reduce unemployment.

The optics, however, were bad. You had Larry Summers and Tim Geithner leading the charge. Summers was the guy under Clinton who had championed the repeal of the Depression-era Glass-Steagall law which prohibited financial institutions from mixing securities trading and FDIC-insured banking. Geithner was a disciple of Alan Greenspan who had famously believed that the captains of Wall Street could regulate themselves. The focus of this team was on restoring confidence in the markets.

The collapse of the mortgage derivative market had left many financial institutions holding assets of questionable value as collateral for loans that they weren’t sure were collectible. In self-defense most banks stopped lending and started hoarding cash to protect against having their own loans called. That caused the economy to essentially seize-up as we transformed overnight from a credit economy to a cash economy. Getting the credit economy going again while avoiding the panic bank runs we’ve seen in the past was a masterful accomplishment.

The team completely ignored the need to also restore voters’ confidence. This opened the door for movement conservatism to put their own spin on events.

The AIG Moment

The stage was set when the news broke that AIG planned to pay out $165M in exec bonuses, and company-wide bonuses that could exceed $1.2B. This after the government provided AIG a huge bailout (a credit line from the Fed and Treasury of up to $182B). The President and Congress expressed outrage, but the die was already cast.

It didn’t matter that the AIG bailout turned out to be a ridiculously good deal for taxpayers netting almost $23B dollars in two years.

It also didn’t matter that AIG was the lynch-pin in the financial structure supporting the derivative trading market that was at the core of this collapse. If AIG was allowed to collapse, the financial meltdown could have easily become a depression. That’s because virtually every financial institution holding mortgage-backed derivatives in their portfolio also had an insurance policy from AIG to hedge against the performance of those derivatives. If AIG failed to pay their insurance claims, ALL of those institutions would be forced to unravel the value of their holdings to determine what they were worth. In the meantime, no one would lend to them; and they wouldn’t lend to anyone else.

While the Obama team of financial all-stars worked feverishly behind the scenes to keep the fragile interconnected network of international financial institutions from collapsing, the public saw something very different. They didn’t see all of the deals and personal promises required to keep the all the leaks in the dike from becoming a flood that would drown the world. Instead they saw what appeared to be obvious evidence that those who had caused the financial meltdown had successfully gamed the bailout too. They saw a system that was still rigged to benefit the wealthy at the expense of everyone else.

What mattered to them was not that President Obama and his team of Wall Street insiders had masterfully kept the whole system afloat by propping up AIG. They saw a “crony” deal that ALLOWED AIG to reward themselves when they should have been punished.

The right were able to capture this sense of anger with “let it burn” irrationalism.

The Democrats were caught flat footed because they had lost their ability to speak to or empathize with the working man.

President Obama in Audacity of Hope describes the “modern” Democrats that he has met on the fund-raising trail.

As a rule they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing . . . in exchange for their checks. But they reflected, almost uniformly, the perspectives of their class. . . . They believed in the free market and an educational meritocracy. . . . They had no patience with protectionism, found unions troublesome and were not particularly sympathetic to those whose lives were upended by the movements of global capital. Most were adamantly pro-choice and anti-gun and were vaguely suspicious of deep religious sentiment.

The financial meltdown frightened these people too, but they did not lose their jobs or their homes. They had a deep and sophisticated understanding of the financial markets because they are generally well educated and well off. They knew why you couldn’t simply “let it burn”. They could probably even empathize with those who were losing their jobs and their homes, but they could not appreciate the abject terror, vulnerability, and rage that comes from having your future stolen. These Democrats simply could not understand why so many people were obsessed with finding and punishing the criminals when first priority had to be stabilizing the financial system.

Herbert Hoover or FDR

History has lost track of the fact that Herbert Hoover used bailouts extensively to try to jump start the economy after the 1929 stock market crash. They were massively unpopular because of blatant cronyism. FDR won the presidency in 1932 because he campaigned against them. It was FDR’s genius that he understood the plight of the working man even though he himself never experienced it. He was able to gain their confidence because he laid the blame for the Great Depression squarely on the shoulders of greedy business men and the unregulated free market.

His actions supported his words.

He used government to get money flowing again rather than working through financial institutions. He closed corrupt banks and regulated the rest. He created new investment regulations and imposed wage and cost controls. He supported the growth of unions. When that wasn’t enough to put everyone back to work, he printed money and hired the unemployed himself to build roads, develop parks, write books, record songs, and create public art. He was able to create the grand New Deal bargain between business and the workers because workers believed in him.

Instead, Obama and his team trusted their own expertise and intelligence. Their message to the public was that we’ve got the best economic minds in the world engaged in the managing this recovery. The recovery plan is based on solid Keynesian economic principles, so trust us. It’s going to work. It may take some time, but it’s going to work.

They were right. It did work.

They were wrong in assuming that people who were terrified, would feel better knowing that smart people were in charge. For many it was exactly the opposite.

What people were hungry for was a leader who not only told them that everything was going to be OK, but who also demonstrated by his actions that he understood their righteous wrath. They needed someone to take out after Wall Street, punish those who misbehaved, regulate the industries that couldn’t regulate themselves, and place the blame squarely on the failed philosophy of unregulated free markets. Democrats should have been promoting the role that government plays in times like this. Instead they found themselves protecting Wall Street from a larger collapse that could have plunged the world into depression. The recovery plan required cooperation from the insiders who helped cause the problem. The Obama administration secured that cooperation by reassuring insiders that the government’s primary concern was recovery rather than prosecution.

Instead of FDR, Obama became Hoover.

Elites

Movement conservatism took advantage of the opportunity that they helped create. Just as a segment of the population in the 1930’s turned to communism as the utopian alternative to capitalism, movement conservatism began promoting utopian market populism as the cure of our economic ills today. Market populism is the answer for everything and a potent defense against relativism. Whatever shortcoming conservatives confront, whether it be math, or science, or political reality can be explained away through the fiction of a “Randian” free economy.

The challenge that this presents for Democrats is, just as Republicans are becoming more fictional and conservative, Democrats have become more professional and pragmatic. Democrats live in the world of facts. Republicans live in the world of ideology. The world of ideology will trump the world of facts every day because ideology is about religion. You can’t argue religion.

The emergence of the cult of utopian market populism also made it much easier for Democrats to dismiss right wing zealotry as hysterical and illogical. That’s because Democrats themselves were becoming the equivalent of political atheists. Democratic political positions were grounded in fact rather than belief. Democrats trust and self-identify with academia and subject matter experts because that’s where facts come from.

Republicans identify with the conservative meme of revolting against the ruling elite class who are imposing an ideology (the world of facts) on them. They see themselves as heroic revolutionaries storming the barricades of conventional wisdom.

It doesn’t matter that overturning the status quo, as represented by the scientific method, is a the heart of virtually all academic research.

It also doesn’t matter that holding up the free market as the example of a revolt against the ruling class is completely backwards. The free market CREATES the ruling class. The ruling class use their wealth and power to warp the free market and preserve their position. The dramatic growth in a fabulously wealthy ruling class in this country is only the most obvious result of our willingness to give them free reign. The fact that Republicans chose a poster child for the ruling class as their nominee in 2012 was no accident. The religion of the right, however, tramples these facts with the free market fantasy that EVERY man could achieve the wealth of Mitt Romney if the market were simply allowed to function without limit.

What matters to movement conservatives is that there is an elite in this country who dare to question their religious beliefs in a free market utopia. They ASSOCIATE this elitism with academia. In a fit of moral intuitionism, they reject science and research that contradicts their views as part of a vast conspiracy to hide the truth and brainwash the unconverted. They attribute cronyism and self-serving classism to any political influence gained by those who live a fact-based life. They infer from that that the great ills in the economy today flow from the attempts by the elite to control and manipulate the otherwise pure and dependable free market to their own ends. These elites engage in this behavior because they fear what would happen to them in a truly free market utopia.

Healthcare Reform

Obama made a fateful choice when he decided to pivot from financial recovery to healthcare reform. Rather than engage in a battle to promote fundamental Democratic beliefs about the role of government to protect the little guy against the excesses of the market, Obama chose to fulfill his campaign promise of universal healthcare. Unfortunately this played right into the hands of movement conservatism. The government that was already guilty of cronyism on a massive scale, and racking up debt of historic proportion in the process, was now planning to take over the largest segment of the economy. What started as a populist backlash to the financial meltdown turned into a political movement called the Tea Party. That movement recaptured the House in 2010.

If healthcare reform does come close to its enrollment targets, significantly reduce the rolls of the uninsured, and sign up enough young healthy people to support its business model – the politics in this country will change again.

That political change will weaken Republicans, strengthen Democrats, and relegate the Tea Party into a fringe opposition group. That’s because a majority of voters will realize that just as the Republicans were wrong about the free market’s ability to regulate itself, they were wrong about healthcare reform. It did not kill people. It did not destroy jobs. It did not add to the debt. The Republicans, because they have invested so much into Obamacare opposition, will get punished at the polls until they find another issue. The Tea Party because they are likely to continue in their obsessive opposition to a program that they are not going to be able to repeal, will lose their ability to influence the Republican Party.

While the Tea Party figures out how to move forward, Republicans and Democrats will engage in the next big ideological fight. That will be the unfinished business from Obama’s first term – Economic Justice and Income Inequality.

Villain of Choice

Saturday, November 30th, 2013

Let no man deceive you by any means: II Thessalonians 2:3

This is the final installment in our attempt to answer how the biggest financial collapse since the Great Depression fueled by decades of financial deregulation turned into a full-throated defense by the Tea Party of the free market economy.

Capitalism

Capitalism can be a wonderful economic system. One of its weaknesses, however, is the boom and bust cycle. If you look at the economic history of this country, we have had boom and bust cycles since the beginning of our democracy. Some blame the cycles on the Fed, but the modern Federal Reserve Banking system was created in 1913 in response to the Financial Panic of 1907. Before the creation of the Fed, the country experienced 25 depressions. Since then, we’ve only had one. So the Fed must be doing something right. We DO continue to experience periods of expansion and contraction (recession) – 40 in all since 1940. Some recessions are mild and some, like the financial collapse of 2008, are catastrophic.

These cyclic economic periods are primarily triggered by private sector investment. As the economy grows there are natural pressures on prices, wages, and capital. Those inevitably lead to inflation and rising interest rates as demand exceeds supply. That increases the costs to expand as well as making it more expensive for consumers and businesses to purchase goods. As demand and expansion slow in reaction to increased prices, investor and consumer confidence wanes until expansion stops. Businesses cut back, individuals spend less and contraction begins. Businesses reduce their labor force. Prices, labor costs, and interest rates come down as supply exceeds demand. The contraction continues until costs become so low that new investment and a new cycle of growth starts. Recessions driven by contraction in the financial sector take longer to recover from because access to capital is a key factor in our investment driven economy.

Democracy and Capitalism

The problem that capitalism presents for a Democracy is that these cycles of expansion and contraction in an unregulated market can be extreme. Expansions can turn into economic bubbles. Economic bubbles are highly speculative periods where expansion is being driven by trading activity rather than production or consumption. When these bubbles inevitably burst, as was the case in the housing bubble, many innocent people can find themselves out of a job for no fault of their own. There is also an understandable outrage that the unregulated and sometimes illegal activities of a few greedy speculators end up hurting the much larger number of hard working people who WERE playing by the rules.

The normal reaction in a democracy is that the injured demand that the government do a better job preventing the sorts of excesses that lead to these severe economic downturns. The New Deal is a perfect example of this trade off. In return for preserving the basic tenants of capitalism after it ran amok in the 1920’s, FDR promised workers a social safety net. He also created a set of banking and investment regulations that until the 2000’s effectively prevented speculative bubbles to grow to a size that would threaten the economy.

The Great Recession

The financial collapse of 2008 was the result of a deregulated financial industry that created a bubble in the mortgage market. Financial deregulation started with Reagan, but continued in every subsequent administration through Bush II.

The 2008 financial collapse was broad, deep, and terrifying. The expected response from those who lost their jobs and their homes would have been a populist uprising against the free market economy in general and the deregulated financial industry in particular. Those individual traders whose irresponsible actions caused banks to stop lending would also have been in the line of fire. If it had followed the arc of the Great Depression, there would have been universal agreement that the free market was not able to regulate itself. People would have looked to government to step in and make sure something like this never happened again. Even Alan Greenspan who famously ignored all of the warning signs of the impending collapse because of his belief in the self-regulating forces of the free market, had to apologize to the American people.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

The populist outrage did occur. It began with the election of Barack Obama, but it got hijacked by movement conservatism and became the Tea Party.

The Wrong Villain

In the 2008 Presidential election, the Republican Party and the whole politics of free markets and deregulation were rejected by the voting public. The Republicans were famously the party that drove the economy into the ditch and had the temerity to ask for another turn behind the wheel. There were many who said that it would take decades for the party to earn back the trust of the voters. It was so bad that even the reliable Southern Strategy and wedge politics failed to prevent an African American liberal from Illinois from winning.

In the aftermath, the Republicans had a choice. They could move more to the center and remake themselves as a more moderate party, or they could double down on the methods that had worked so well for them in the past and become even more conservative.

They chose to double down on their old strategies. Minority leader Mitch McConnell said that his goal was to make Barack Obama a one term President. This appealed to his base on both racial and political terms.

Republicans thought they could use the government’s recovery legislation to accomplish that goal but they also needed someone to blame. They found the villain in all of those victims who lost their homes.

The famous Rick Santelli rant from the floor of the Chicago Board and Trade was the spark that lit this particular fire. He didn’t mention the mega-billion dollar entities that had conspired with government to rig the system in their favor at the expense of ordinary Americans. Instead the Santelli rant was directed against a (quite modest) government program to help distressed mortgage holders and against the so-called “losers” who couldn’t pay their mortgages. In Santelli’s self-serving logic, the traders on the floor who helped create this mess were the real victims.

This was a triumph of the old Big Tobacco PR tactic and the tried and true “Willie Horton” strategy. When your side is unpopular seek to redirect public ire toward other villains. Reagan’s fictitious welfare queens reappeared as poor black people who were sold “liar” loans.

Even though the TARP and other financial recovery methods were originally crafted by the Bush White House, Obama was held responsible because he implemented these policies in the first few months following his election.

Even though it was unscrupulous predatory mortgage lenders like Morgan Stanley who broke the law, lied to their customers, and recruited people who clearly could not afford mortgages with the promise of home ownership – conservative ire was redirected. It was focused squarely on greedy neighbors, buying too much house; or on the liberal state, which according to myth forced banks to hand out bad loans to poor people; or on society generally for tolerating debt at every level.

As Thomas Franks summarized:

The (conservative) movement succeeded by capturing completely the one part of the story that was very clear: the bank bailouts, which instantly eclipsed the financial crisis proper when they happened and which immediately got people out of their armchairs sputtering with rage. The bailouts were not confusing. They were very clearly the deed of the federal government, apparently being operated by cronies of Wall Street. It was a spectacle of almost unbelievable corruption, the kind of thing that crushes the faith of a nation. What the public craved at that moment was a form of idealism that would allow us to scream a convincing “no” at the whole thing, and the free-market people—spotting the opportunity like any good entrepreneur—immediately stepped in and delivered exactly such an idealism. (Because, in a pure free-market system, they said, government would never rescue or bail out anyone. The market would decide who prospered and who failed.)

It didn’t matter that the bailout strategy actually worked. The global financial market melt-down did not become a depression. Trust WAS restored relatively quickly. The insolvent institutions were merged with the remaining stable institutions. The domestic auto industry was saved. The restructured companies led the country back out of recession. Five years later the stock market is hitting record highs. The government has fully divested itself of the remaining GM stock. The net cost to the taxpayers was a remarkably low $60B. In comparison, Reagan’s S&L crisis which was significantly less damaging to the economy cost six times as much to clean up.

But it didn’t matter. The Tea Party rage over the financial bailouts spilled over into deep opposition to the Affordable Care Act and the debt that the country was piling up as a result of high unemployment, low taxes, two wars, and an unfunded expansion of Medicare.

It also didn’t matter that the real financial risk was the 3x GDP growth rate in the cost of healthcare. The Affordable Care Act was the only option on the table to reduce this rate of growth and as a result reduce our potential long term unfunded liabilities. The Tea Party viewed it as another irresponsible expansion of government even though it actually saved $109B in its first decade.

It also didn’t matter that this administration committed to ending the wars that were putting a huge strain on our military and on the budget.

The Tea Party was focused on the poor and big government as the villains of the financial meltdown. The fantasy of a utopian free market promised equity, justice, and prosperity for those who played by the rules. The fact that we weren’t seeing this utopia emerge was the fault of government. Worse yet, our exploding debt was at least in part due to the burden that the poor and unemployed were placing on the social safety net.

Tea Party Irony

What should have started out as a populist backlash to the failure of our decades-long experiment in free market deregulation was transformed into a protest movement demanding MORE of the free market that caused the problem and even LESS of the government that is the only solution.

Rather than complain that the government failed to keep the FDR’s promise to workers, this protest movement rejected whole premise. It wasn’t that the social contract the FDR made with the prosperous to support a social safety net wasn’t working. It was that the prosperous were able to convince those who benefited most from the social safety net, that it wasn’t fair to continue to expect the “winners” in our economy to pay for it.

Movement conservatism was able to convince small business owners that they were the backbone of a sort of free market populism instead of in a life and death struggle with larger and better funded competitors. In this conservative scenario, it’s the heroic small business person pitted against the parasitic elites who acquire their power through education or unfair government influence. It was the elites that were making it difficult for all businesses, large and small, to enjoy the fruits of their labors. The practical effects of this free-market idealism, however, is to bolster the power of big business. Big business is the real beneficiary of small business’s long war on organized labor and government regulation. It is big business that regularly feeds at the trough of government contracts, subsidies, and tax breaks that the rest of us including small business pay for. It is also big business that seeks to create monopolies which make it impossible for small business to compete.

The ultimate irony is that the Tea Party’s drive for fiscal responsibility has hurt the very people who support that movement. The states with the greatest concentration of Tea Party participation are the states that get the most money from federal programs. These are the states that have the highest numbers of people receiving Social Security and Medicare. These are the states with the largest amounts of people dependent on defense spending. These are the states that send the least amount of federal taxes to Washington and get the most amount of money coming back into their economies. These are the states where according to Thomas Frank, voters to struck a blow against elitism and received in return a social order in which wealth is more concentrated than ever before in our lifetimes, in which workers have been stripped of power and CEOs are rewarded in a manner beyond imagining.

The ultimate irony is that in the Tea Party’s eyes, CEO’s are the heroes and government is the villain. The reality is that the majority of the unprecedented growth in wealth that has occurred over the last 25 years has been in CEO pay. That pay came from a direct transfer of wealth from working people into CEO salaries combined with historically low taxes on the wealthiest people in this country. Those statistics are not an accident. This is the direct result of government policy. Government has in fact done exactly what the Tea Party has requested. It allowed the free market to operate without limit. That free market methodically suppressed middle class wage growth even though productivity, working hours, and profits hit all time highs. Under free market rules, CEO’s decided to keep all of those gains for themselves because they could.

Summary

The Tea Party is the construct of the same political operatives and tactics that gave us decades of tobacco company products that both those companies and the government knew were addictive and deadly. It is the same political operatives who promised from Reagan to Bush that showering tax breaks on the rich would result in economic gains for everyone else.

The Tea Party professes a deeply flawed looking-glass ideology that is ultimately the product of big business self-interest. That agenda is a continuation of the same unregulated free market capitalism that caused the Great Recession, unprecedented growth in wealth, and the largest income inequality in our history.

This agenda includes policies which have lead to an economy where only the very rich prosper, yet those supporting the Tea Party continue to insist that government is the problem.

Government is not the problem

Government is the solution. It is the only power left in this economy to oppose the influence of corporations and the wealthy. You don’t get to vote for how a corporation operates. Yet the agenda of the Tea Party trusts these corporations more than the only organization that they CAN influence – our government.

They portray government as the big evil, when in fact, government is us. It is teachers, first responders, and any number of middle class people trying to do the best job that they can. None of those who make up our government even come close to the 100 million dollar salaries of our top CEO’s.

Instead the Tea Party has allowed themselves to be manipulated by the same forces which caused government to relax regulations and implement a policy of allowing the free market to govern itself.

The ultimate irony is that Karl Rove, who helped create the Tea Party, no longer has use for them. While libertarian Koch money continues to support Tea Party causes, Tea Party shutdown and default tactics have terrified business leaders. As a result, Rove’s Crossroads fundraising juggernaut has announced that they will support moderate Republican candidates to oppose Tea Party incumbents in the 2014 and 2016 elections. It appears that at least Republican business interests have found a new villain.

The uncomfortable truth is that, though Republicans had both the motive and the means to hijack the populist uprising caused by the 2008 financial meltdown, the Democrats deserve some credit for the birth of the Tea Party too. Next up, how the Democrats fumbled what should have been a golden moment to reassert the basic tenants of Democratic Populism. In other words, we have met the enemy and he is us.

John Birch, Big Tobacco, Young Republicans and the Birth of the Tea Party

Wednesday, November 27th, 2013

The John Birch Society

The John Birch Society was founded in 1958 in Indianapolis, IN. One of the founding members was Fred Koch, founder of Koch Industries and father of David and Charles Koch. The Birch Society was viewed as a radical right wing organization because it espoused fundamental changes in government, eliminating institutions that they felt threatened their values or economic interests, and prosecution of those people who disagreed with them.

They opposed civil rights movement and subsequent legislation calling it communist. They opposed the United Nations calling it “one world government”. They opposed immigration reform and all free trade agreements. They accused both Eisenhower and Kennedy of being communist agents. They espoused a particular form of “frontier mentality” which incubated a virulent strain of reactionary thought.

Now, fifty years later, the Koch brothers are still the major funders of conservative and libertarian political movements including the Tea Party. The difference is that these organizations, who continue to advocate for smaller government, elimination of civil rights legislation, opposition to the UN, opposition to immigration reform, elimination of free trade agreements, and support of an unregulated free market; are now regarded as part of the mainstream political fabric. When they call a democratically elected President a socialist, a fascist (not sure how you can be both), or an illegal alien; it’s now accepted as part of normal political discourse.

What happened?

Big Tobacco

One of the lobbying strategies of the Big Tobacco in the 70’s was to assert that big corporations should have more political power. This strategy is reflected in the “market fundamentalism” that is one of the major pillars of Tea Party philosophy – unfettered capitalism is the best economic philosophy. This libertarian philosophy was embraced by Big Tobacco in an effort to prevent the sort of regulations that eventually limited their right to promote an addictive drug that kills people. One of the groups supporting this position and the Tobacco industry was Citizens for a Sound Economy founded by the Koch brothers in 1984. The primary funders of the Tea Party include FreedomWorks which is a spin-off of Citizens for a Sound Economy and Americans for Prosperity founded by David Koch.

Young Republicans

Karl Rove rose to fame in the Republican Party because of his reputation as a master of dirty tricks. Among other things his campaign for chairman of the College Republicans is legendary. It was during this period of time that he because friends with both the Bush family and Lee Atwater. Lee Atwater was an expert in the Southern Strategy that was the bulwark of successful national Republican campaigns starting with Nixon. That strategy was in stark display in the 1988 Bush election when Atwater said he would defeat Dukakis by making “Willie Horton his running mate”. Late is life, Atwater apologized and asked forgiveness.

In 1991 Rove began to work for Big Tobacco. In that role, he spearheaded a tort reform movement to weaken the ability for states attorney generals to litigate against the Tobacco industry. It was these legal cases that eventually brought down Big Tobacco. Rove’s activities included setting up state chapters of a tobacco industry funded astroturfing organization called Citizens Against Lawsuit Abuse. The Texas chapter of this group under the direction of Tom Delay was particularly effective in getting conservative judges elected and ultimately pushing through the gerrymandering that supported the 2010 Republican Congressional landslide.

The CALA blueprint honed in Texas included running TV and radio ads warning that the legal system was out of control, affecting the economy and the pocketbooks of average people. This blue print included generous funding from the Texas Chamber of Commerce and corporations seeking protection from consumer law suits. The Chamber of Commerce was running ads supporting Big Tobacco as late as 2002. This followed classic Tobacco Industry public relations rules – When your side is unpopular, as the tobacco industry is, seek to redirect public ire toward other villains – in this case, trial lawyers, taxes and big government. When the words “trial lawyers” are spoken in a spot aired by the U.S. Chamber of Commerce, the screen shows a black stretch limousine passing by the Capitol.

Finally Rove was also credited as the architect of the wedge politics that propelled George W. Bush into the White House. Thomas Frank, author of What’s the Matter with Kansas, summarized those politics.

Vote to stop abortion; receive a rollback in capital gains taxes. Vote to make our country strong again; receive deindustrialization. Vote to screw those politically correct college professors; receive electricity deregulation. Vote to get government off our backs; receive conglomeration and monopoly everywhere from media to meatpacking. Vote to stand tall against terrorists; receive Social Security privatization. Vote to strike a blow against elitism; receive a social order in which wealth is more concentrated than ever before in our lifetimes, in which workers have been stripped of power and CEOs are rewarded in a manner beyond imagining.

It was this policy of “deceive, divide, and conquer” that also sowed the seeds which later grew into the Tea Party.

Summary

The Tea Party and to a large degree the dysfunctional politics that the Tea Party represents were a long time coming.

It started with Big Tobacco’s desperate attempt to save themselves from the inevitable outcome of selling an addictive drug that kills people. They developed many of the political techniques now in common use particularly by movement conservatism. Those include Partners in Crime, Astroturfing, Junk Science, and Lobbying.

Radical conservatism in the form of the John Birch Society eventually joined forces with the Tobacco Industry. The common interest here was a particularly twisted form of libertarianism called free market capitalism. This appealed to the Tobacco Industry because they wanted to be able to continue to sell their products even though they were addictive and deadly. The libertarian capitalists liked the money that the Big Tobacco brought with them. They and organizations like the Chamber of Commerce were happy to make a deal with Big Tobacco if it meant advancing their own cause of smaller government and fewer regulations.

The Koch family has been underwriting libertarian and conservative causes for two generations. They are really the invisible hand manipulating this whole political movement. Fred Koch was a founding member of the John Birch Society. David and Charles Koch have become the bankers of the Tea Party movement, major funders of the movement to oppose climate science, and promoters of libertarian free market philosophy. Their fortune is closely tied to the fossil fuel industry.

Karl Rove became the chief apparatchik of this new philosophy of politics. He refined the political use of the tools that Big Tobacco created. He added Lee Atwater’s racial politics and expanded it with social issues which appealed to the evangelical right. He wrapped it all up in the flag and the Bible (even though he himself is an admitted agnostic) and used it to win two national elections for George W. Bush. In response to Obama’s election in 2008, Rove went to work for Fox News and helped start the astroturfing opposition movement that later grew into the Tea Party.

Next up, we’ll try to connect the dots to show how these historical forces have twisted an otherwise completely predictable populist uprising into what has become radical conservatism and the Tea Party.

Madness

Wednesday, October 16th, 2013

‘‘Of all the damage to be done politically here, one of the greatest concerns I have is that somehow John Boehner gets compromised,’’ said Sen. Lindsey Graham, R-S.C., a former House member and a Boehner supporter.

Something interesting happened over the past couple of weeks.

First a little bit of background.

Congress failed to pass a budget this year. The result of that failure was predictable. The government ran out of budget authority to continue to operate.

At the same time, the government was also exhausting its ability to borrow money through the sale of bonds in order to pay its bills. This was also predictable based on the rate at which the government was authorized to spend money compared with the rate at which tax revenues were coming in.

While these two things are related, they reflect two VERY different dynamics. In the first case, budget authority reflects the government’s ability to incur NEW debts. In the second case, the credit limit is the government’s ability to borrow money to pay bills that have come due as a result of the exercise of the budget authority that the government already had.

In other words, raising the government credit limit DOES NOT affect the deficit.

Giving the government more budget authority potentially DOES affect the deficit.

Ted Cruz seized on these two financial events as a political opportunity to enhance his standing with conservatives and perhaps position himself for a 2016 presidential run. He did this using the Madman Theory by suggesting that Republicans in the House and Senate were willing to shut down the government AND prevent the government from paying its bills if Senate Republicans and the President didn’t agree to their demands. They then made good on their first promise and shut down the government.

What happened next was also predictable.

Tea Party Republicans rallied around Ted Cruz.

More seasoned politicians questioned whether this plan would work based on past history and the fact that there weren’t even close to enough votes in the Senate to support the plan.

As the reality of the government shutdown spread throughout the country, Ted Cruz and his supporters including Glenn Beck and Fox News tried to convince the country that it was the fault of the President and the Democrats.

Everyone suffered losses in the polls, but Republicans suffered the most with historic new lows in popularity.

“The only reason why the Democrats don’t look terrible is we look even worse,” said Sen. Roy Blunt (R-Mo.), a member of Senate GOP leadership.

As it became obvious that the President and the Democrats were willing to call the Republican’s bluff, House Republicans began distancing themselves from this plan. At last count there were more than enough with Republican support to pass a simple bill to re-open the government and raise the credit limit.

Republican Senator Kelly Ayotte called the tactic of tying Obamacare to the shutdown legislation “an ill-conceived strategy from the beginning, not a winning strategy.”

“It’s very, very serious,” Senator John McCain, Republican of Arizona, warned on Tuesday. “Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable.”

“We took some bread crumbs and left an entire meal on the table,” said Senator Lindsey Graham, Republican of South Carolina. “This has been a really bad two weeks for the Republican Party.”

“Let’s just say sometimes learning what can’t be accomplished is an important long term thing, and hopefully for some of the members they’ve learned it’s impossible to defund mandatory programs by shutting down the federal government,” Republican Senator Burr said.

The last steps are now playing out.

Boehner failed to craft a bill in the House because the 30 or so Tea Party Republicans were unwilling to support any compromise even though it would further weaken the political position of their party.

Democrats and Republicans will pass a bi-partisan bill in the Senate. Ted Cruz will vote against it, but he won’t filibuster it because he isn’t a Madman, just an opportunistic politician.

That bill will come up for a vote in House and will pass with a comfortable majority comprised of all the Democrats and a large number of Republicans.

This particular bill will set up another potential confrontation in six months, but it will not be a repeat of what we’ve just seen. Those who would threaten to use this strategy again will not have the support to even start.

Finally after five years of political dysfunction, Congress will start working again. That’s because more Republican members are now more afraid of the voters in their districts than they are opposition from Tea Party. Mitch McConnell will be the hero and emerge as the leader of “rational” Republicans. Compromise will become the new badge of honor with the Senate modeling that behavior. Getting things done will become the new measure of success.

It will prove, however, too little and too late. The Tea Party will run candidates in Republican primaries against those they feel betrayed them. It won’t matter whether they win or lose because voters in November are NOT going to re-elect anyone who behaved like a Madman. The Democrats will win the seats they need to take control of the House and retain control of the Senate and government will begin operating again. Unemployment will come down. The economy will grow robustly in the last two years of the Obama administration. Immigration reform will pass. Healthcare will roll out. The tax code will get re-written and address income inequality. We’ll fix Medicare and Social Security and take the first substantive steps to deal with climate change. Deficits will come down and debt as a percentage of GDP will drop to safe manageable levels. As long as the Democrats can avoid shooting themselves in the foot, they will be well positioned to retain their majorities and the White House in 2016 regardless of who Republicans choose.

On the Republican side, we’ll see if the Tea Party retains enough influence to get one of their candidates nominated in 2016. If so, it will be a Democratic landslide. If not, there is a very real possibility that the Tea Party may align with the libertarians or start their own third party. If that happens, it will virtually guarantee a Democratic win and confirm what we have known about the Tea Party from pretty much the beginning. They ARE mad.

Democracy will again begin to work in predictable ways as the Tea Party retreats back to the shadows of fringe politics. History will later attribute this moment in time as the point at which conservative radicalism was defeated by Obama’s firm resolve.

Frankenstein Party

Saturday, September 21st, 2013

“Beware; for I am fearless, and therefore powerful.”
― Mary ShelleyFrankenstein

Bobby Jindal, the governor of Louisiana, made headlines earlier this year by telling his fellow Republicans that they needed to stop being the “stupid party.”

This week Republicans are demonstrating to the voting public that they not only rejected Jindal’s characterization, they embrace it.

Here’s how Tom Friedman describes it.

We’ve got messes aplenty abroad and the Republican-dominated House of Representatives is totally paralyzed. Indeed, the G.O.P.-led House has become a small-minded, parochial place, where collaboration is considered treason, where science is considered a matter of opinion, where immigration is considered a threat, where every solution is a suboptimal compromise enacted at midnight and where every day we see proof of the theory that America is a country that was “designed by geniuses so that it could be run by idiots.”

Before we proceed let’s recap to put this in perspective.  The Republican Party failed to win the White House in the last election even though voters were living through the worst economy since the Great Depression.  They failed to retake the Senate after winning the House in 2010 and even though there were more Democratic seats being contested than Republican.  They even lost the popular ballot for the House by 1.4M even though through gerrymandering they managed to retain their majority.

The past two elections proved that the Republican base is shrinking while the Democratic base is growing.  The Chairman of the Republican Party addressed this issue earlier this year.

The way we communicate our principles isn’t resonating widely enough…Focus groups described our party as ‘narrow-minded,’ ‘out of touch,’ and ‘stuffy old men.’ The perception that we’re the party of the rich continues to grow.

When Republicans lost in November it was a wake-up call….We know that we have problems. We’ve identified them, and we’re implementing the solutions to fix them.

If the last week is any indication, the Tea Party elected representatives in the house are still asleep.

In no particular order, here’s what we’ve seen.

SNAP cuts

The House cuts $40B cut from the food stamp program.  Conservative Republicans claim that there are people receiving food stamps that should be working, but the data doesn’t support that view.  The SNAP program (current version of food stamps) already has provisions which require those who can work to at least demonstrate that they are trying to find work or suffer the consequence of losing their benefits.

Studies have shown that SNAP is one of the most effective government programs we have.  It has an abuse rate of about 1%.  Most of that is private retailers buying SNAP benefits for cash rather than providing approved groceries.  It has a stimulus multiplier of 1.73, which means that every dollar of benefits generates $1.73 dollars in economic benefit.  That is the highest of any government program.  It’s better than corporate tax giveaways.  It’s better than military spending.  It’s better than bailouts and stimulus.

It also provides essential public health benefits to low-income people and that has an economic impact also.

The Trust for America’s Health, a health advocacy organization that focuses on disease prevention, warned recently of the consequences of cutting food stamps: “If the nation continues to underfund vital public health programs, we will never achieve long-term fiscal stability, as it will be impossible to help people get/stay healthy, happy and productive.”

Indeed, according to a 2011 study by the U.S. Department of Agriculture, “research shows that low-income households participating in SNAP have access to more food energy, protein and a broad array of essential vitamins and minerals in their home food supply compared to eligible nonparticipants.”

According to the Centers for Disease Control and Prevention, “good nutrition can help lower risk for many chronic diseases, including heart disease, stroke, some cancers, diabetes and osteoporosis.” As it is, public healthcare expenses for diet-related diseases such as diabetes and heart disease cost taxpayers more than $100 billion annually.

Cutting SNAP will impact the economy, cost jobs, reduce health, and increase the healthcare costs.  I’ve also posted that the stress associated with food insecurity actually affects brain development in children.  That inhibits academic success and ultimately affects employment prospects.  72% of those receiving benefits today are families with children.

We have enough food.  What we suffer from is a misguided ideology that suggests that benefits create a culture of dependency. According to the Congressional Budget Office, 30% of SNAP recipients worked in 2010, up from fewer than 20% in 1990. Most of the rest are either elderly, children, or disabled.

Fortunately the Senate will not pass this massive reduction in SNAP and a more modest reduction will likely emerge from the conference process.  House Republicans know that too.  This was an ideological vote to re-enforce the conservative Republican position that hungry people chose to be in that state because they are too lazy to find a job.

Defund Obamacare

This is a similar bit of Kabuki Theater.  Senator Ted Cruz was elected based on his pledge to defund Obamacare.  His rants and accusations finally goaded the House into action.  They passed exactly the bill that Cruz has been asking for.  That bill will expose what people have been silently saying for a while.  Cruz isn’t even close of having the votes in the Senate to accomplish what he promised to deliver.  He has already tried to lower expectations.

Harry Reid will no doubt try to strip the defund language from the continuing resolution, and right now he likely has the votes to do so….At that point, House Republicans must stand firm, hold their ground, and continue to listen to the American people.

Boehner would have none of it. He responded.

We’ll deliver a big victory in the House tomorrow. Then this fight will move over to the Senate — where it belongs. I expect my Senate colleagues to be up for the battle.

So at the end of the day, Cruz’s bluff is going to be called.  He doesn’t have the votes and will go down in flames as a result.

John McCain told CNN on Thursday: “In the United States Senate, we will not repeal, or defund, Obamacare. We will not. And to think we can is not rational.”

Senator Richard Burr, Republican of North Carolina, said of the House Republicans’ strategy of threatening a government shutdown to force the defunding of Obamacare, “I think it’s the dumbest idea I’ve ever heard of.”

Senator Jim Risch, Republican of Idaho, has said: “There isn’t anybody that thinks that Obamacare is going to get defunded. It cannot happen.” He added, “It is as impossible as anything can possibly be in Washington, D.C.”

Republicans may have gained some points in the process with their base, but the rest of country will be left scratching their heads over the spectacle.

Regulating Sexual Relationships

Finally last week in Michigan, Republican AG Bill Schuette argued in a brief supporting Michigan’s ban against same sex marriage that states have the obligation “to regulate sexual relationships between men and women so that the unique procreative capacity of such relationships benefits rather than harms society.”

This is really a simple calculation for any rational Republican.

How many of the 47M people receiving SNAP are going to vote for Republicans in 2014?

When the Republicans shut down the government or force the government to default on its debt obligations in an effort to stop Obamacare, how many voters are going to blame Democrats – particularly given what even some Republicans are saying?

Finally, how many people are going to support a party that claims the government has the right to “regulate sexual relationships”?

This is the logical conclusion of the cynicism that began with Nixon’s southern strategy.  Republicans exploited racial backlash to promote the economic goals of low taxes for the rich and deregulation.  They were remarkably successful in convincing low information whites to vote against their self-interests.  Instead they blamed four decades of middle class wage stagnation on the poor, liberals, and unions.  Sustaining this strategy, however, required morphing from racial fear to an embrace of fringe conspiracy group paranoia.  These fringe groups have always existed in US politics, but only gained credence as their apocalyptic fears of a black man in the White House came to pass.

Now the monster that Karl Rove and Fox News created to take back the House in 2010 and continue to promote the agenda of low taxes for the rich and deregulation has broken loose and is running amok.  Even Karl Rove can’t control it.

Any strategy to repeal, delay or replace the law must have a credible chance of succeeding or affecting broad public opinion positively. The defunding strategy doesn’t. Going down that road would strengthen the president while alienating independents. It is an ill-conceived tactic, and Republicans should reject it.

When ideology leads to extremism, it always demonizes its opponents.  Ultimately its opponents includes its previous allies.  It narrows its focus and base of support until it finally collapses under the weight of its own self-destructive rage.  Tea Party driven conservative Republicanism has reached this point.  They are willing to alienate hungry voters and shut down the government to demonstrate the purity of their ideology.  We will suffer the consequences of their actions between now and 2014.  Then voters will hold them accountable and the Tea Party will become another footnote in history.  Frankenstein died because he couldn’t figure out how to live in this world.  Tea Party-backed Republican Conservatism is going to suffer the same fate.

Sequester the Sequel

Thursday, August 22nd, 2013

While many are suggesting that the first year sequester cuts weren’t that bad, they are generally unaware that the sequester bill included five years of scheduled across the board spending reductions.

So let’s take a look at what has happened already and then what is coming.

According to the U.S. Bureau of Economic Analysis, over the first half of 2013, the federal government has subtracted 0.8 percentage point from GDP growth—this as the economy grew a paltry 1.1 percent in the first quarter and 1.7 percent in the second.

The CBO has projected that if the next round of sequester cuts were canceled, we would see another .7% in GDP growth and add another 900,000 jobs by Q3 2014.

As Business Week says, this isn’t rocket science.  “We’re living through the biggest contraction in federal spending in 60 years, and this is one of the weakest recoveries on record. Coincidence?”

Conservatives counter that every dollar that isn’t spent by the government goes back into the pockets of taxpayers.  The implications are that individuals will spend that money in the same ways that the government will, we will see the same growth, and we will be better for it because the government is inefficient and political.  The problem with this simplistic view is that in uncertain times like this individuals DO NOT spend their money.  Instead they reduce their debt and increase their savings.  Businesses respond to reduced demand by doing the same thing.  So we end up with a lot of cash sitting on the sidelines and economic growth slows, which is where we are today.

The CBO says we are operating 6% below our capacity right now.  That is $1T in economic capacity that is sitting idle because of lack of demand.  The problem, for anyone willing to take a look, is clearly NOT too much government spending.  It is too little consumer demand.

Here are a few more quotes if you remain unconvinced.

“The idea that spending cuts generate growth in a demand-constrained economy is nonsense,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities.

“To say the sequester is good for the economy is wrong on a scale that’s impressive,” says Neil Dutta, chief U.S. economist at Renaissance Macro Research.

“I don’t know how you can make that claim,” says Stuart Hoffman, chief economist at PNC Financial Services Group, who estimates that the sequester has stolen about 30,000 jobs from each month’s payrolls total since it was enacted in March.

If there is good news in this story, the economy appears to have survived the assault with a blunt instrument that the first sequester administered.  We are now in a position where the GDP can grow faster than the debt.  That means simple focus on short term economic growth will likely complete the recovery and put us back in a situation where debt as percentage of GDP is going down even though the debt in absolute terms may be going up.

So what is the Republican agenda?

First, threaten to shut down the government if Obama doesn’t repeal Obamacare.

Second, threaten to throw the government into default, if the Obama administration doesn’t agree to ANOTHER round of spending cuts in addition to what is already on the books.

So it doesn’t sound as though there is much political appetite at the moment to replace the sequester with something more constructive and there is certainly the possibility that it will get worse before it will get better.

That said, here’s a short list of the impacts we’re dealing with beyond those already mentioned.

States

This next round is going to impact states even more than the previous cut.  States will see $4.2B less in federal funding.  Targeted programs include public housing assistance, money for schools with low-income students, food inspection, scientific research grants, and environmental protection programs.  While states absorbed a $4.6B cut last year through reductions is staff in reductions in programs, this year they will be forced to start eliminating programs completely.

The other state complication is that most states are required by law to balance their budgets and the 2014 budgets have already been passed.  If the next round of sequestration is implemented, most states will start their fall legislative terms with significant budget shortfalls.

From a USA today article

“They are already in a difficult spot because they already have imposed major cuts to their schools and other public services,” Leachman said. “If they enter those legislative sessions having to deal with additional cuts in federal funding for schools or law enforcement or clean water or programs that help low-income families, that makes their job even more difficult.”

Pennsylvania budget secretary Charles Zogby said his state managed to get through the first round of sequestration budget cuts without massive cuts in personnel—but that may change. “Thus far, that hasn’t been part of the challenge. It may be in round two,” he said.

Headstart

Headstart, one of the most successful programs we have to alter the future of poor kids, is going to have to cut fall enrollment by 57K because of sequestration cuts.

Public Defenders

The federal public defender system has been decimated by the sequester cuts.  According to the WSJ, this ends up costing tax payers more than what has been saved through the cuts because our constitution guarantees that those who cannot afford an attorney will have one appointed for them.  When public defenders are not available, court dates are delayed and courts ultimately hire private attorneys.  We pay for all that.

Overburdened defenders also make mistakes and miss evidence that could have cleared their clients.  These mistakes create more appeals.  As Supreme Court Justice Stephen Breyer noted in March in congressional testimony about the effects in general of the sequester, it is “cheaper to have a decent lawyer in the first place.”

Medical Research

Even George Will decries the effects of reductions in basic medical research caused by the sequester.

For Francis Collins, being the NIH’s director is a daily experience of exhilaration and dismay. In the past 40 years, he says, heart attacks and strokes have declined 60 percent and 70 percent, respectively. Cancer deaths are down 15 percent in 15 years. An AIDS diagnosis is no longer a death sentence. Researchers are on the trail of a universal flu vaccine, based on new understandings of the influenza virus and the human immune system. Chemotherapy was invented here — and it is being replaced by treatments developed here. Yet the pace of public health advances, Collins says, is being slowed by the sequester.

This will be, Collins believes, “the century of biology.” Other countries have “read our playbook,” seeing how biomedical research can reduce health costs, produce jobs and enhance competitiveness. Meanwhile, America’s great research universities award advanced degrees to young scientists from abroad, and then irrational immigration policy compels them to leave and add value to other countries. And now the sequester discourages and disperses scientific talent.

Forest Management

The sequester has also reduced our ability to manage our forests which has contributed to the unprecedented scale of wildfires that we’ve had to fight.

The Hazardous Fuels Reduction Program was $500 million last year, went down to $419 million this year under the automatic budget cuts, and has been proposed to go to $292 million next year.

“The fires that are ripping through Oregon and Idaho and California and the West are just proof that the fire prevention policy is broke,” Sen. Ron Wyden, D-Ore., chairman of the Senate Natural Resources Committee, said from Lincoln City.

“There are years of neglect. The fuel load builds up and it gets hotter and hotter on the forest floor. Then you get something like a lightning strike and a big inferno. Then the bureaucracy takes money from the prevention fund to put the fires out and the problem gets worse. The cycle just repeats itself again and again.”

This brings us to the basic question of why.

The only answer I can come up with is that Republicans have lost touch with reality.  They have won the war against debt.  Rather than take a victory lap and set themselves up for a potential change in control in the senate, they are determined to pump another bullet into the wounded economic recovery.

Their fantasy that cutting government spending would stimulate economic activity has failed.  We can now document the damage it did to the economy.  With the second round of sequester cuts looming, we have an opportunity to reduce the damage.  Just stopping the austerity program will have a positive economic effect.  But we can’t seem to even have a rational discussion on how to do that simple thing because of ideology and politics.

Since it is unlikely that Republicans will unilaterally abandon the ideology that is driving their actions, the only other possible solution is a political one.  If Republicans suffer another defeat in 2014 similar to what they experienced in 2012, maybe then the survivors will finally realize that there are real political consequences to imposing a minority agenda on an unwilling majority.

A More Perfect Union

Sunday, August 4th, 2013

A More Perfect Union

But I say unto you, Love your enemies, bless them that curse you, do good to them that hate you, and pray for them which despitefully use you, and persecute you; That ye may be the children of your Father which is in heaven: for he maketh his sun to rise on the evil and on the good, and sendeth rain on the just and on the unjust.

For if ye love them which love you, what reward have ye? do not even the publicans the same?

And if ye salute your brethren only, what do ye more than others? do not even the publicans so?

Be ye therefore perfect, even as your Father which is in heaven is perfect.  Matthew 5:43-48 

Jesus was pretty clear here.

God loves everyone.  His Son Jesus advises us, for our own good, to do the same.  He was also pretty clear about who that “everyone” included.  Not just those that agree with us, but all those who treat us badly, make us mad, and may even persecute us.

The political situation in this country is pretty good evidence that people aren’t taking that advise.

CBS released a poll which shows that there are very few people left in the middle of our political spectrum.  The rancor of the past 13 years or so has forced most people to take a side.  The result is that everyone thinks that the other guy is crazy.

Is-the-other-party-too-extreme

 

Compared to partisans, independents actually don’t appear stuck in the middle: just 29 percent of them see both parties as too extreme. Independents instead tend to pick only one of the parties as too extreme, so this isn’t really a case of an alienated center watching both parties move further away. (And it also squares with the fact that many people who call themselves independent do in fact lean to one side.)

Here’s how that affects our politics.

Americans want deals and compromises in principle, and from both sides -eight in ten say they’d like to see more of it. But when those Republican voters back home see congressional Democrats as too extreme, and vice versa for Democratic voters, then members to who cut deals across the aisle are bound to face suspicion: has that extreme other side really changed its stripes? Did our side really get more than we gave? And it’s easy to see why activists on both sides are turned off by the very thought of cooperation with another party that’s so (seemingly) out of touch.

The result is that voters have given their representatives an impossible task.  They dislike deadlock, but they are so skeptical of the motives of the other side, that they question any concessions that necessarily have to be made in order to reach a compromise.  In other words, voters say that they want compromise, but they punish the politicians who in fact attempt to make a deal and reward those who, in principle, refuse to support anything but the party line.

Because the extremes appear to outnumber the middle, our government has lost the ability to compromise.  Instead it is all about maneuvering for power and counting the “scalps” that can be accumulated along the way.  We have replaced practical reality with political gamesmanship and obsessive ideology.

Here are a few recent examples.

Obamacare Obsession

The House recently voted for the 40th time to repeal Obamacare.  It passed on a strict party line vote, but will have no practical effect on the law.  The only value of this vote is to provide Republican members of the House a “scalp” to take home with them and show to their supporters.  The vote may help Republicans build the case for electing more Republican Senators in 2014, but Senator Tom Coburn summarized reality when he said, “The only way you get rid of Obamacare is winning the 2016 election.”

Republican Senators Lee and Rand Paul have been circulating a letter threatening to shut down the government in the fall if President Obama doesn’t stop the Obamacare rollout.  This is another activity, like the previous one, that is perilous for Republicans.  The last time Republicans shut down the government, they paid a dear price at the polls and single-handedly rescued Bill Clinton’s Presidency from the Lewinsky scandal.

Sen. Richard Burr, R-N.C., called it the “dumbest idea” he had ever heard, while Sen. John McCain, R-Ariz., warned against more shutdown “shenanigans.” Some senators who initially backed the idea, like Sen. John Cornyn, R-Texas, have rescinded their support for it.

Even if House Republicans WERE successful in shutting down the government, that action, like the votes in the House, would only be symbolic.   The Congressional Research Service has reported that a government shutdown would not slow the Obamacare rollout.  That’s because Obamacare has other sources funding that are beyond the reach of the sorts of annual appropriations controlled by the House.

So why try?  According to Senator Ted Cruz, who is backing the government shutdown gambit, “No major entitlement, once it has been implemented, has ever been unwound,” he said. “If we don’t do it now, in all likelihood we never will.”

The reality about Obamacare is that the game is over.  By 2016, the law will be fully implemented.  State exchanges will be up and running.  Somewhere around 20M people who previously couldn’t afford to purchase insurance themselves, will be insured.  Those people are not going to vote for anyone who promises to take away their health insurance.  The margin of victory in 2012 was 5M.  It will be political suicide for any candidate for national office to start the race with a 20M deficit.  The 2012 election was the best opportunity for Republicans to repeal Obamacare, and they failed.   Their base, however, won’t allow them to admit defeat.  Instead they may inflict some very real economic damage to the country.

Scandal Obsession

Republicans are convinced that there must be a scandal somewhere.  The harder they look, however, the less they find.  Yet they continue to dig, because the digging itself supports the conservative partisan view that Democrats are corrupt.  So we have the spectacle of Rep Issa issuing subpoenas for more documents from the IRS, the state Department, and the Justice Department while the information that they are supplying only continues to support the administrations original claims.  Issa claims that the agencies involved are holding back valuable information, but that is also more political grandstanding.  The IRA has 170 people including 70 lawyers working on delivering the documents that Issa has requested.   His demands deliberately exceed their ability to respond.

Here’s what the documents that have been delivered so far have shown.

There was no executive branch involvement in the methods the IRS created to screen applications for non-profit status.  In fact, both liberal and conservative groups were subjected to the same types of screens.

While mistakes were made in Benghazi, there was no conspiracy to misrepresent the information shared with the public.

The failed attempt to trace guns being traded across the Mexican border was just that.  There was no attempt by the White House to cover up what was a poorly designed operation from the start.

The failures in each case were bureaucratic, not political.

Republicans aren’t particularly interested in what has the potential to be a real scandal – domestic spying.

Debt

We’re going to see this spin up again this fall when there is another discussion about spending.

The reality is that the sequester has cost both jobs and economic growth, but it has slowed the growth in debt to the point where it is possible with additional economic stimulus that we could grow our economy faster than our debt.

This should be good news.  Instead we are going to see more attempts to cut spending rather than stimulate growth because it was never about the debt.  It was always about reducing the size of government and weakening the traditional Democratic base.

Immigration Reform

Republicans of almost all stripes have admitted that if they are to have any hope of competing in future national elections, they have to repair their dismal image with immigrants.  The Senate in a brief moment of clarity managed to pass an immigration reform bill, but only after committing to spend $30B to build more fences and hire more border control agents.  Some have estimated that this cost works out to $40K per immigrant and may only serve to redirect the flow of immigrants from the border to other coastal locations.

The CBO estimated that the Senate bill would reduce the debt over the next decade by $135B and cut the flow of illegal immigrants by 50%.  Because of the path to citizenship, it would also reduce the number of undocumented workers living in this country over the next decade to 5M.

Yet it was not enough for House Republicans who rejected the whole thing.  They want to focus on questionable enforcement measures first.  Some reject the whole notion of a path to citizenship.

Why?

Because they have a base that has been supporting candidates with xenophobic positions against all immigration.  This even though President Bush proposed a similar plan in his administration and Reagan signed the Immigration Reform Act in 1986 which legalized 3M undocumented workers.

Summary

For those interested in history, what we are seeing in politics today is fascinating.  Ideas that Republicans created and promoted for decades are no longer recognizable to that party.  Obamacare was a Republican alternative to single-payor healthcare reform and was actually successfully implemented by Mitt Romney in MA.  Cap and Trade, monetary stimulus, tax reform, and entitlement reform were ALL originally Republican ideas.  The have ALL been proposed at one point or another by this administration as “common sense” approaches to solve problems.  They have ALL been rejected by today’s Republican Party.  This used to be the party promoting the intelligence of the free market.  It has become the party of opposed-to-whatever-the-Democrats- support.

There is a solution coming because demographics are running in the direction of Democrats.

The problem is that even this doesn’t resolve the underlying erosion in democracy as an effective method to resolve differences between political extremes.  Instead we appear to be drifting towards more of a parliamentary democracy where the only times things get done is when one party controls the government.

While I would prefer that Democratic ideas prevail, I would not want that to happen as a result of the death of the Republican party.  If that’s what occurs, it will be a dark legacy for our troubled time.

Failure to Communicate

Wednesday, March 27th, 2013

The Republican Party recently released an analysis of their shocking Presidential campaign loss last November.

“Our message was weak; our ground game was insufficient; we weren’t inclusive; we were behind in both data and digital; our primary and debate process needed improvement,” Party Chair Priebus said of Mitt Romney and the GOP’s 2012 loss. “There’s no one solution. There’s a long list of them.”

The report outlines the need to reach out to women, African-Americans, Asian, Hispanic, and gay voters.  They are going to do this by hiring staffers across the country to begin engaging those communities.  They support comprehensive immigration reform, shortening the primary process with fewer debates, moving the convention date earlier in the summer, and investing in more technology.

“To be clear, our principles are sound, our principles are not old rusty thoughts in some book,” Priebus said, but the “report notes the way we communicate our principles isn’t resonating widely enough.”

Sally Bradshaw, a GOP strategist who was also on the committee, added that the GOP “needs to stop talking to itself” and needs to open the tent in order to win presidential elections in the future.

So the Republican Party is admitting that it can no longer win elections depending exclusively on the votes from old angry white men.  That is progress.

The problem is that they are blaming their loss on a failure to communicate.  They continue to insist that if women, minorities, young people, unions, and educated professionals voted for Obama ONLY because they didn’t understand what the Republican message really was.

A wonderful example of this delusional thinking is how Chairman Priebus handled the question of marriage equality.  He held up Republican Senator Rob Portman’s recent public support of same sex marriage as an example of this new philosophy of inclusiveness.

“I think it’s about being decent,” Priebus said. “I think it’s about dignity and respect that nobody deserves to have their dignity diminished or people don’t deserve to be disrespected.

“I think that there isn’t anyone in this room, Republican, Democrat or in the middle, that doesn’t think that Rob Portman, for example, is a good conservative Republican.

“He is. And we know that. … I think that party leaders have to constantly remind everybody that we can’t build a party by division and subtraction. We can only build the party by addition and multiplication. We get that and that’s going to be our endeavor.”

When asked if the Republican Party supported Portman’s position, Prebius said, “It’s his decision. It’s not a matter of whether I support his decision. I support him doing what he wants to do as an elected person and as an American. If that’s his opinion, then I support him having that opinion.”

In other words, the Republican Party is going to continue to oppose marriage equality but will allow some who hold opposing views on the subject to still call themselves Republicans.  The fact that this is newsworthy is testimony to the depths of the problem.

Conservative Republicans are so invested in their positions, that they can’t imagine why anyone familiar with those positions could oppose them.

They can’t imagine why women would object to being told that rape isn’t that bad, only whores use contraception, or if they become pregnant, regardless of the circumstances, they lose the right to make decisions about their own health.

They can’t imagine why Hispanic and Asian citizens object to being told that their efforts to fix a broken immigration system are just a thinly veiled attempt to secure amnesty for criminal behavior.

They can’t imagine why young people reject a party that says that homosexuality is sinful and college education should be available only to those who can afford it.

They can’t imagine why educated people reject a party that says that says that creationism is a science and climate change is a hoax.

The Republican Party doesn’t have a communications problem.  Voters clearly understand where the Republican Party stands.  The real problem is that voters REJECT Republican Party positions.

The best evidence of this is the most recent budget debate.  House Republicans passed a reworked version of the Ryan budget that voters had just rejected in November.  In fact, this new budget was, if anything, more cynical than the previous one.  If you recall, the campaign budget had a math problem.  This new budget solves some of the math problem by KEEPING the recently approved tax increases that Ryan and Romney campaigned so hard against.  It also kept the taxes included in Obamacare, which Ryan claimed were job killers, while repealing the rest of the healthcare bill.

The Republican Party doesn’t have a communication problem.  In fact, some of the steps they have recommended (fewer debates and a shorter primary season) may be intended to reduce the amount of information the party shares with the public.

The Republican Party has a philosophical problem.  They underestimate the intelligence of the American voter and their ability to tell the difference between what the party says and what it does.