Archive for category Budget

It’s Up to the Voters

There was a time when something like the “Supercommittee” set up to cut a relatively modest $1.2 trillion over ten years at a minimum (with hope for a larger deal) would have been almost certain to succeed.  There was a time when the top political leaders would get behind closed doors and say “let’s do what needs to be done, and craft find a deal each of us can live with.”   They’d agree to split the political costs and put the country ahead of the next election.

Those days are long past.  Now DC is divided by a deep partisan rift.  That much isn’t new; partisan division has been the norm in the US since the founding of the country.   Now, however, it has led to political dysfunction as ideology creates a kind of jihadist mentality.   No tax increases ever!  Social Security must be untouched!  Ideology trumps rationality.

I’ve pointed out many times that ideology is a very poor way to interpret reality.  Ideologies are overly simplified visions of reality that, when taken as dogma, make it possible to interpret reality through that lens.  That doesn’t mean you can’t have some kind of ideological world view, it just means one needs to remember that the ideology itself both a simplified version of reality and only one take on it.

Take FOX news for example.   They are perhaps the most blatant “news” source that interprets what they report through a clear ideological prism.   The result: Fox viewers know less about what’s going on in the world than even those who watch no news.    Interpreting the world through an ideological lens without critically reflecting on that lens or the information means one has a poorer understanding of reality.   The survey cited isn’t extensive enough to prove that broader theme, but the evidence fits.

If mediocre minds (and most politicians fit this bill) get comfortable with ideology driven understandings of reality, they can feel they are on like a holy crusade to get the “right” policies passed.   Compromise is seen as weakness.   Yet compromise is the essence of the American political system.   We’ve always had hyper partisan political fights, but the politicians in the end built personal relationships with each other, recognized the need to problem solve, and did what was necessary.   Even the Republican hero Ronald Reagan was a pragmatist when it came to Congress — that’s what the founders intended; the founders were above all else pragmatists.

They looked to Montesquieu and took concepts such as checks and balances and separation of power — something Montesquieu learned about by studying the old Roman Republic — and shaped a system that could not easily be dominated by one party or person.   With frequent elections alongside such divisions of power, it is almost always a necessity that politicians compromise.   Even when one party controls all branches of government compromise can be difficult, as the health care battle of 2010 demonstrated.

However, the system requires the political leaders to want to govern more than just campaign.   The country has to be more important than the next election.   Getting the job done has to be more important than ideological purity.   There are still politicians like that in each party, but they’re getting drowned out by the ideologues.   In the case of the super committee the Republicans are more to blame for its failure, and they perhaps have the most to lose.

Democrats generally supported a plan like that of President Obama to mix dramatic cuts in spending with moderate tax increases, as well as some reforms of medicare and social security.   This would be a high stakes agreement, with the GOP losing the political weapon of saying “we never raise taxes” while Democrats could no longer say “we won’t touch entitlements.”   If done right neither side would be happy, but an important step in fixing the economic imbalances would have been taken.

The Republicans balked at any tax increase.   Even when members of the committee seemed to warm up to the idea it may be necessary to reach a compromise, the message from the rest of the GOP Congress was clear: don’t you dare.   The Democrats may have ultimately had problems with entitlements, but it never got that far — and without tax increases a budget deal is DOA.

When the Supercommittee was created it appeared that it was a victory for the Republicans.   Speaker Boehner said he got “98%” of what he wanted, and President Obama’s approval ratings sank.  He was seen as weak in standing up to the Republicans, and unable to lead in a time of crisis, leading to a downgrade of US bonds by Standard and Poor’s.    Yet now the Democrats find that the triggered $1.2 trillion cuts that get made without an agreement don’t look so bad.   They contain a lot of defense spending cuts that Democrats genuinely find more appealing than do Republicans.   Medicare and the entitlements are protected.    The cuts sting the GOP more than they do the Democrats, and they set up an election that could play into Democratic hands.

DC protesters mock the Supercommittee

First, one has a do-nothing Congress that can’t reach agreement.   The GOP in the House can pass their own plans, but that’s a kind of political masturbation.   The trick is to pass something that both can agree too.   The Democrats in the Senate could face similar criticism but they’ve appeared more willing to compromise and anyway, the House takes the lead on spending and revenue bills.

Second, as Americans start to wake up to how relative wealth has shifted away from the middle class to the wealthiest, the election will pose a simple question: given the crisis we’re in and the spending cuts that we know we need to make, should the wealthiest Americans play slightly higher taxes?   Recognizing that the cuts hurt the middle class and poor, and that even with higher taxes wealthy Americans will still be the least taxed wealthy of the industrialized world, that is an argument the Democrats are poised to win.

Finally, it will appear that the GOP class of 2010 blew its chance to make a difference.   People voted them in not to get a right wing crusade — many of these voters also voted for Obama in 2008.   They wanted to force the two parties to work together and felt that with health care and other issues the Democrats were using their control of Congress to push through their own agenda.   Indeed, the 111th Congress under Nancy Pelosi was one of the most effective in history at getting legislation passed.   But rather than forcing the Democrats to compromise the GOP put up a brick wall, and Congressional approval is lower than ever.   This means the Democrats have a small chance to take the House back in 2012.

It’s up to the voters.  If they vote out Obama and give the Senate to the Republicans, the GOP can start making cuts with no tax increases — and the Democrats will be ready to bounce back in 2014.   If the status quo is maintained the GOP will realize it has four more years of Obama and can’t stall hoping to have the White House soon.  If the Democrats regain power in the House it will be narrow enough that they may see a need to compromise in order to avoid a debacle by 2010.    But the politicians aren’t going to do anything major until they hear from the voters next year.


Obama Should Go to Wall Street

Pundits used to 20th Century politics are mystified by the growing “Occupy Wall Street” movement, now spreading to other cities.   Like the conservative tea party movement two years ago, its growth comes through new media, a real dissatisfaction with how things are going, and is not centered around specific demands and agendas.    Starting small and overlooked in the media, it has grown in breadth and scope and can no longer be ignored.

This creates a problem for President Obama.   Obama is a centrist establishment Democrat who despite achieving some significant reforms in health care, finance, stimulus spending and repeal of “don’t ask, don’t tell,” has tried to find common ground with the Republicans.   It appeared he was going to succeed too, until the “tea party” movement pushed John Boehner farther right then he originally wanted to go.  Fearing wrath from the right, establishment Republicans are running scared and engage in a more ideological and uncompromising rhetoric than any time in the past, including the years of hostility to President Clinton.

Establishment Democrats have responded to this by shifting right; Obama is no exception.  He embraced lowering domestic spending to that of any time since the Eisenhower administration, calling for closing of loopholes for the wealthy (like Reagan did) rather than an increase in tax rates on the wealthy, and making regulatory calls which infuriate environmentalists and the left.     While his approval rating suffered — probably 15% of the ‘disapprove’ comes from the left — it appeared that liberals had no alternative.  There simply is no pressure from the left:  no movement, no leader and no alternative.

The calculus in the Obama camp is that an intense campaign combined with fear of the GOP will bring the base home.   Republican candidates are weak and vulnerable to negative campaigning that will scare independents into grudgingly vote for Obama as the safer choice.   If there is a strong movement on the left, however, Obama might find hostility growing much like Johnson did in the Vietnam war.   The most intense protests of 1968 were at the Democratic national convention, after all.

But while the protests are dangerous for Obama, they also represent an opportunity for him to harness the emotion and anger on the street and rekindle the kind of energy that brought him to office in 2008.    It won’t be easy — many on the left have become hostile towards a man they believe has drifted to the right of even former President Bush — but it is possible.

The first thing he should do is announce that he is going to Wall Street to talk with the protesters and give a major speech.   This should be scheduled for late October, assuring that the protest movement will continue and grow — they won’t give up if the President is planning to visit.    In the meantime the President should hone his populist rhetoric to support a key argument:  “I tried to meet the Republicans half way, recognizing that we need to work together to solve the problems we face.   They refused, saying it was their way or no way.   So now I’m taking the argument to the people — I’m asking the American people to send a strong message that things need to change.”

On Wall Street, a place where the Obama campaign raised so much money in 2008, and whose banks have benefited from Obama’s reluctance to anger the business elite, he should declare a new agenda:

1) Reform of the tax code to simplify and make more fair a system that currently taxes the middle class and poor too much, and allows the wealthy to use accountants and tax lawyers to evade paying their fair share.   Yeah, he’ll be charged with class warfare, but he should counter by saying it’s not the rich who are at fault, but the politicians.   The wealthy are simply acting rationally by trying to pay the legal minimum tax they owe — that’s what almost everyone does, Republican or Democrat.   If they aren’t paying their fair share it’s the fault of Washington for making a complex, screwed up and often absurd tax system.   The tax system should be made simpler, more fair and clear.

2) A jobs program that aims at rebuilding the middle class and America’s productive capacity.   The poor and unemployed aren’t lazy — they want to work.  The system that benefited unproductive financial industries who built bubbles based on bizarre financial instruments like Collateralized Debt Obligations and Credit Default Swaps should give way to a system that benefits main street businesses and people who want to produce stuff that other people want.    A strong middle class is the determinate of a state’s economic health.   Our middle class is battered and torn, and that damages the country.

3)  Honest talk about debt.   He should tell the young people gathered that their generation will inherit a country that has to sell itself off to foreigners thanks to the massive debt the last generation has built up.   Starting in 1982 the US has embraced “borrow and spend,” ignoring increased debt.   Government has done this, so has the private sector.    For a long time the problem could be ignored because unemployment was low and the bubble economy made it appear wealth was strong.    Now we see that global debt has created a crisis as bad as the last great depression, but one that cannot be cured with more debt or dismissing this as just part of the business cycle.

The US has to rethink its approach to everything from foreign policy to domestic programs; we can’t afford the kind of budget we’ve had in the past, but we also can’t afford to just cut, since spending cuts can slow the economy.    A smart mix of revenue increases, spending cuts, and investments in jobs can turn this around, though it will require global cooperation.

Obama needs to focus on these themes and embrace a populism that can appeal to independents as well as the youth.   The fact is that those who dismiss the protests as meaningless do not understand them.   It’s just like the old hands in the Arab world who couldn’t comprehend the changes being pushed by protesters from Egypt to Yemen.   This is no longer the 2oth Century.   Political activism is changing, and the ideas and energy being generated in New York is not going to dissipate.   Energy and activism may wax and wane, but a new movement is being born.

To win re-election, Obama needs to show the protesters that despite his slow start, he understands that the country needs fundamental change.    While one can say he’s blown the chance by being so establishment in his first four years, in the campaign he won’t run against Obama of ’08 but a real Republican candidate with whom he can compare himself.  He’ll also have a lot of money to get his message out.

Moreover, this message can appeal to independents.  Most aren’t ideological — if they were, they wouldn’t be independent.   They’ve shown they can vote Democratic or Republican, depending on their mood or assessment of whether what’s being done is working.   If Obama can make a credible argument that he stands for simpler taxes, a more ambitious jobs plan, and an honest discussion of debt, then as we get into the dog days of the campaign people currently disillusioned thanks to the economy may decide Obama is their best bet.

But he has to go to Wall Street.   He can’t ignore a movement driven by the same emotions and ideals that brought so much energy to his campaign in 2008.


Obama Channels Truman

President Obama put the Republican party on notice last night that while he would still talk the bi-partisan talk, he was done merely calling for unity and an end to bickering.  It was clear that was making him look weak as the Republicans rejected compromise and continued their unrelenting attack on the President.  From now on he’s going to “give ’em hell,” as evidenced by his speech before a joint session of Congress.

Besides evoking the same kind of blunt straight talk as President Truman, he also set the Congress up for the charge of being a do-nothing Congress.   The most important parts of Obama’s jobs plans — the parts that can genuinely reduce unemployment — cost money.   President Obama’s plan pays for this by closing corporate and individual tax loopholes.  It does not constitute a significant tax hike on the wealthy, and it’s easily defensible politically.

This puts the GOP in a bind.   If they reject Obama’s plan outright, labeling it just ‘the same failed policies,’ they’ll be refusing to act on the biggest problem Americans perceive in the country right now.   Obama’s approval ratings are low, but they are above those of the Republican Congress and especially the tea party!   His bit at the end about how there are 14 months before the next election so playing politics with this is wrong will resonate.   If the Congress doesn’t act, he can run against Congress and, as his speech showed, with a new kind of fire that will rally his base and bring independents sick of tea party rhetoric back.   He may not have the level of support and hope he had in 2008, but a vote is a vote.

The GOP could pass his plan pretty much as is.   While that would undercut complaints about a do-nothing Congress, it would also under-cut claims by Republicans that Obama isn’t a good leader.   Right now the GOP blocks everything Obama wants in the House, and then uses that to show that Obama can’t get anything done.   That’s a good gig — all they have to do is refuse to cooperate and he looks weak.   Obama has called them on that.   Yet passing his plan would also divide the GOP because either it would add to the deficit, or they’d have to accept closing tax loopholes.    Even if Boehner wants to do that, his party will not follow (he’s actually the weaker leader).

The GOP could decide to pass the plan, not include revenue increases, and make spending cuts elsewhere.   That would appeal to the tea party base, but force them to defend wanting to cut programs that might hurt in the coming election.   Moreover, such proposals would probably not get past the Senate and would take time to develop.   That would play into the image of a ‘do nothing Congress’ in the hands of extreme elements of the GOP.

Worse news for Republicans: the President plans to double down by offering a major deficit reduction plan.   This will undercut the argument that he wants to simply tax and spend, and again challenge them to do something other than just play politics.   No doubt this will also include tax increases on the wealthy, but those are not unpopular with the general public.    I know a myriad of average and even active Republicans who are open to some tax increases to share the burden of paying back the debt.   Again, the Republican party appears to be stymied by extreme elements in their own party.

Obama goes into the fall with a new deficit reduction plan, a new jobs plan, a firey attitude, and increased public dismay about the Republican House and the tea party movement in general.     While Obama’s approval rating has been down at about 43%, at least 15% of those are Democrats angry that he’s veered right.  If he wins back his base — which started to happen already with his speech last night — he’s still in good position even with his worst poll numbers of his first term.

While Republicans were right that this was in part a campaign speech, it also was a speech about the number one issue facing Americans and it is 14 months until the election.   Obama is framing the campaign to be about politicians in Washington acting responsible and not with partisan blinders.   He is positioning the GOP and the tea party as the villains, or at least as not being responsible and reasonable.   People may not love Obama in 2012 like they did in 2008 but they’ll find him a safer bet.

Even worse news for the GOP: the House may well be in play.   If the Republicans don’t rally around a reasonable candidate and Congress appears unable to act, tea party types that rode the anger of 2010 to victory will find that independents are disappointed by their desire to play politics rather than solve problems, and shift back.

I believe the bold and risky act of calling Congress back for a joint session will mark the point where Obama’s Presidency turned around and took on new vibrancy.   He’s now setting the terms of the argument, not the GOP.   He’s using the bully pulpit not just to plead for civility but to push for change.     He let the GOP paint themselves into a corner, and now he has the upper hand.


World of Class Warfare

This is perhaps the best Jon Stewart segment ever — or at least in a long time:—warren-buffett-vs–wealthy-conservatives

and especially part 2:—the-poor-s-free-ride-is-over

It demolishes the argument that slightly increasing the tax on the wealthy is class warfare, or the whining that “half the population” doesn’t pay any taxes.   (As Stewart points out, the bottom 50% of the population control only 2.5% of the wealth in the country).    This is classic, and it has punch.   It amazes me how many people are fooled by the argument that somehow the wealthy are being demonized (the Fox line on what asking for slightly higher tax rates is doing).   Middle and working class people are being manipulated into defending the wealthy.

I think that’s going to change.   The one quibble I have with Stewart is that he uses pre-tax and transfer GINI index numbers.  The post-tax and transfer numbers are even more powerful.   Enjoy the clip!   (And take it seriously — small tax increases on the wealthy are not in contradiction to true conservative principles).


Merkel’s Challenge

Europe's unlikely leader

Angela Merkel’s father Horst Kasner was a Lutheran Minister who lived in East Germany, but the family could travel to the West.  This suggests that her father had a solid relationship with the Communist party, focusing on his religious duties over political activism.  This kind of pragmatic “do what you can given the situation” attitude was passed on to his daughter.   Though she was a member of the Communist youth, she did not go through the coming of age initiation Jugendweihe that most East Germans participated in, she was confirmed in the Lutheran Church instead.

Although fluent in Russian, she was not political.   She studied science, ultimately earning a Ph.D. in quantum chemistry.   When the wall came down in 1989 the then 35 year old joined the party Democratic Awakening and won a seat in the last East German legislature.    She worked closely with Christian Democrat Lothar de Maziere who formed that last East German government, leading towards a unification agreement with the West.

She won a seat in the German Bundestag in 1990 as a Christian Democrat (CDU), and was chosen as Womens and Youth Minister in Kohl’s cabinet.   Most saw this as symbolic — Kohl wanted an “Ossi” (someone from the East), and to put a woman on what is one of the lesser cabinet positions seemed a kind of political show.   Yet in 1994 Kohl moved her to the more important post of Minister of Environment and Nuclear Safety.   Kohl jokingly referred to her as “mein Mädchen” (my little girl).    Most Germans still were skeptical, thinking Chancellor Kohl wanted to show off an East German woman in the cabinet to help the process of cultural unification (which came about at a much slower pace than political unity!)

She has been under estimated for much of her career.   She’s a scientist, not a politician, pragmatic rather than ideological, and her conservative Lutheran values seem out of place coming from the mostly atheistic former East German.   When Kohl lost in 1998 she became Secretary General of the CDU, second to the Party Chair, Wolfgang Schäuble (who is currently finance minister).   This was seen by many as simply a sop to Kohl, since she was clearly one of his favorites.   However, the CDU did very well in state elections in the coming years, and she built strong ties with the local parties.   She also distanced herself from Kohl when a party financing scandal broke out and it became apparent Kohl had an illegal slush fund.   She was elected to lead the party in 2000, a result that surprised many and was criticized by many in the CDU who thought her weak.

Normally the CDU leader challenges the SPD leader in the elections, but in 2002 the CSU, Bavaria’s sister party to the CDU (the CDU doesn’t compete in Bavaria, the CSU competes only there) put forth Edmund Stoiber as the Chancellor candidate in 2002.  He was extremely popular and she acquiesced.   In an election shocker Gerhard Schröder (SPD) held on and defeated Stoiber.   In 2005 Germany’s closest election took place (a year early due to coalition instability), with the SPD and CDU forming a “grand coalition” (usually one of the two major parties forms a coalition with a small party).   Schröder tried to hang on to the Chancellorship, but since the CDU/CSU had 0.1% more votes than the SPD, Merkel got the prize.

Because she is center-right, many likened her to Thatcher (who was also a scientist by training).   Her steely eyes and apparent immunity to political pandering seemed like that of the “iron lady.”   However, while Thatcher was a nationalist and had an ideological faith in markets, Merkel is a Europeanist and a pragmatist.   Rather than a radical program of budget cuts and privatization, she focused on reforming programs that didn’t work, and forcing Germany to try to get back to living within its means.   She not only deftly managed a very unstable grand coalition — one that lasted all four years, surprising many — but then won the 2009 election in a way that allowed a more traditional coalition with a smaller party (the FDP).   That put her clearly in charge as Germany’s leader.    People had come to appreciate her and no longer saw her as a symbolic sop to the East; Germans started calling her “Mutti” (mother), and given the recession in 2009, her ability to win the election speaks to the faith Germans had in her to guide the economy.

Now she faces her greatest challenge.   This could be seen this week as she went to her home state of Mecklenberg-Vorpommern to campaign on behalf of the battered CDU (now behind the SPD in polls) before that state’s election on September 4th (German states have elections scattered throughout the calendar, rather than the US tradition of all being on the same day).    Her goal is nothing other than to save the EU and the Euro, preserving what her mentor Helmut Kohl considered the crowning achievement of his Chancellorship after German unification.

It has not been easy.   Despite budget cuts and tax increases at home, Germany has paid a major share of bailout money to Greece and Ireland.   This has made her and her party less popular.   Ever the scientist, she puts policy ahead of politics; it may be unpopular, but its necessary (also for the German economy, given that German banks hold a lot of the questionable sovereign debt).  However she’s also rebuffed French President Nicholas Sarkozy who has suggested Euro-bonds as a way out of this crisis.

Right now every state finances its debt with its own bond — meaning countries that manage debt and their economies well get AAA ratings and low interest rates.   Countries like Greece and Italy, on the other hand, risk being forced to default.   Moving towards Euro-bonds may solve the crisis in the short term, but Merkel worries that it will weaken incentives for solid economic policies.   The EU can’t function if countries aren’t forced to deal with the consequences of their policy choices.   Good policy has to be rewarded, poor policies punished.

She tells Germans that the EU is on the right track.   The Euro is solid.  She’s instead pressuring the problem countries to pass a Schuldenbremse like Germany did in 2009 (during the Grand Coalition) — the functional equivalent of a balanced budget amendment.  That would show investors that the countries would be forced to get debt and deficits under control.     She’s kept pressure on the problem states to cut spending and raise taxes like Germany has.   In her view this is like a scientific problem — you analyze the variables, determine the proper course of action, and then implement the plan.   Political pressure, protests and unpopularity should not push you off course.

Merkel’s government should last until 2013 when the next election is scheduled.   That means she has the capacity to push ahead, despite opposition at home and abroad.   Europe is lucky that Germany has such a solid, pragmatic and fiscally conservative leader.   Despite proclamations about the death of the Euro and the fall of Europe, it’s just a few problem states that are in deep trouble, and Germany’s capacity to out perform the rest of the West makes it the central player in European politics.   As one friend quipped, “Germany may be winning in peacetime what they couldn’t win in war — dominance of Europe.”

That’s overstating it, but not by much.  If  Merkel again defies those who under estimate her and manages to guide Germany and Europe through the crisis with her steely, pragmatic and utterly rational resolve, the EU and Euro will not only be saved, but will thrive.   While Merkel’s not ideological, her Lutheran upbringing is clear in her attitude.   There is a moralism to her policy.    A united Europe is good, but individual states need to be responsible for their own budgets and policies.  Europe can only succeed if budgets are balanced, programs are rationally run, and states accept the reality of the current demographic and economic situation.

It may seem odd, but I can think of no better leader for this crisis than this 58 year old quantum chemist from just north of Berlin.   Her integrity and analytical mind suggest she won’t back down or get thrown off course by political intrigue.  She’s not blinded by ideology but grounded by core moral beliefs.   She’s one reason I think Europe will get through this crisis.

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A Bit of Optimism

It is now August 2011 panic grips the financial sector.   Despite budget cuts and new austerity, Italian bond yields rise and investors flee.    Will southern Europe take down the Euro?   Can and should the wealthy European states bail them out?  In the US politicians fight over simply approving the borrowing of money to pay bills that need paying; and bring the world’s largest economy on the edge of default, and to a credit downgrade.  The Dow gyrates at a pace not seen such the crisis began in 2008 as panic sets in on fears of further downgrades and a ‘double dip recession.’

Given my continual bearishness on the global economy, you might expect an “I told you so, now its really going to hit the fan.”    Yet I’m starting to think that the worst may be over.    Job growth was up in July, especially in the private sector.   New unemployment claims came in lower than expected in the last two weeks, under 400,000.   Corporations are starting to report plans to hire and that they are seeing an uptick in business.

Governments have recognized the seriousness of this crisis world wide and have proven remarkably capable of compromising and acting to try to change policies and turn the global economy around.   The idea that this is ‘just another recession’ has given way to the recognition that it is a ‘depression like crisis’ with no quick and easy answer.  Realism is trumping ideology in most of Europe, and I suspect it’s about to do so in the US.   Average people are making better choices too.  They are saving, planning, and adapting to new conditions in a very practical and sensible way.  Hyper-consumerism, rather than being a cultural depravity set to bring down the West, may have simply been a fad that blossomed due to the bubble years.

To core cause of this crisis is crystal clear and easy to understand.    We are in a recession that is a natural part of the business cycle.   However, this recession coincides with the fact that the accumulated debt of the industrialized West — public and private — has become unsustainable.     This debt helped avoid the recessionary corrections necessary in 1991 and 2001, but increases the scope and intensity of the one we are now experiencing.   Think of high debt as steroids — we’ve got a recession on steroids!

Originally, people thought the recession was simply another downturn and that much like the ones in 1991 and 2001; a strong stimulus along with cheap credit would again put us back on track.   This led to a belief that a stimulus alongside expansionary federal reserve policies would catapult the economy back into overdrive.   That didn’t work.   Debt had become unsustainable and counter-productive.

Others, mostly on the right, focused on debt as the sole cause of the problem, not recognizing the reality of a deep recession (correcting imbalances that began at the end of the last true recession in 1983) and the fact that spending cuts could spiral us down into depression.  To them the solution was to cut spending and get the budget in order.     They don’t get that alongside fiscal discipline there is a need for government to actively combat the recession and invest in the country.   Even though tax increases harm the economy less than spending cuts, ideology pushes them to demand only the latter, making it more difficult to reach political agreement.

In other words, many have very clearly seen half the problem, but ignore or deny the other half.  That’s starting to change.   The President embraced a strong and I believe relatively well designed stimulus program which has paid dividends.    The country was bleeding jobs in the early months of 2009, now it has gone to creating them.

And compare it with this longer term view:

(See these graphs came from this site, which also had an interesting discussion: Reflections of a Rational Republican.)

A couple of things stand out.   First, job growth late in the Bush Presidency (before the recession) was about the same as job growth after we came out o f the recession.   The recovery may be weak, but it’s symmetrical.  The decrease in job loses was swift in 2009 when the stimulus took effect.   With the good numbers for July and new unemployment claims dipping below 400,000 two weeks in a row, the economy is perking up.

Now, if you want it to grow faster you could say “add more stimulus” and expect the numbers to rise.   However, that ignores the debt issue, part two of this crisis.   There would be no down grades, no fear of defaults, and no difficulty in addding stimulus if the debt to GDP ratio was considerably lower.   That means that stimulus is not the answer to the second step of solving this crisis.   The budget must be restructured.

I expect job growth to continue into 2012, mostly because cuts will not take affect before then and the stimulus is starting to take hold.   Despite the fear and uncertainty on Wall Street, we have reached a point of capitulation where the markets stop reacting out of panic and start truly assessing the state of the world economy.

If the US passes a mixture of tax increases and budget cuts that promise a significant dent in debt, not only will the AAA rating be restored, but private investors will be more comfortable taking risks in the economy.   If the Europeans stabilize the Eurozone (or, less likely, make it smaller), countries like Germany, the Netherlands, Sweden and Norway — all of whom are handling the recession relatively well — can help motor Europe forward.   Lost in the whole controversy is that the unhealthy European economies are the minority, dragging the majority down.   As a continent, Europe is actually in better shape than the US.

However, the result will be continued slow growth as the global economy rebalances.   More power and wealth will shift to countries like China, Brazil and others.   Globalization will limit the impact of domestic policies — does a tax cut in the US stimulate the American economy, or does it stimulate the Chinese economy if the money is used to be Chinese consumables?   We won’t be partying like we did in 1999 (or 2006) when growth appeared permanent — bubbles create wild illusions!  That economy was a house of cards built on sand.   But a slow restructuring with jobs dribbling rather than surging back could mean the development by the end of the decade of a strong, restructured stable US and world economy.

Anyone who has read my blog for the last three plus years knows I’ve been pretty bearish on the economy.  I was a contrarian back in the heady days of 2006 when people believed that deregulation of financial markets and American innovation had heralded in a new economy.   It was debt, the current account deficit and hyper consumerism that caused that view.   Now the current account is back to just over 3% of GDP — too high, but tolerable.  Consumerism has given way to saving and paying off debt.   Both parties are serious about debt reduction.   In Europe and the US illusions of this being “just another recession” have given way to recognition that this is a time of systemic transition rivaling the 30s.

It’s always darkest before the dawn.  It may well be that August 2011 is remembered as the turning point in restructuring the global economy.   We won’t get the rah-rah consumerism and bubble games of the 00s, but we might get a sustainable economy and even learn that community trumps consumption.

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Downgrading America: Frustrati vs. Tea party

The historic downgrade of US Bonds by Standard and Poors — with a threat of a further downgrade if nothing is done to reduce debt, is a moment that should wake Americans up.   This crisis is serious and it’s real.   We can’t stimulate the economy with greater spending because bond downgrades will do more harm than the good any stimulus might do.  There are structural flaws in the US economy that need to be fixed, and the only politically possible way to do so is for both parties to find a way to compromise.

The economic imbalances are real.   Government debt to GDP is at 100%.   Private and government debt to GDP combined is near 400%, and foreign held US debt is between $14 and $15 trillion.    This is serious.   Years of debt, current account deficits and bubble economy delusions have led us into a pit from which there is no easy way out.   It’s not just “another recession,” or part of the business cycle.   It’s not something we can stimulate ourselves out of and return to growth.

President Obama should call on Congress to return and take decisive action.   Standing in the way of doing this are two groups.   The tea party folk are well known — they oppose all tax increases (and would prefer cuts) and many wouldn’t have minded if the US defaulted on its debt.  They generally believe government is bad and thus demand massive spending cuts.   Another group, called ‘the Frustrati’ by blogger Norbrook, believe that the President needs to stand up for purely progressive ideals, protect virtually all government spending, raise taxes and cut only defense.

Both the frustrati and the tea partiers think the establishment of their parties has sold out to “Washington insiders,” and by being more ideologically pure they can achieve true success.    Many on the left are furious with Obama for agreeing to spending cuts at all, and believe that if only he had been stronger and more forceful things would be different.

However, Obama has stared down the frustrati and made it clear that he isn’t giving in to their demands, no matter how much they threaten to withhold money and support.   He knows that the progressive wing of the Democratic party is no more popular than the tea party; Americans want compromise and centrism.   John Boehner, on the other hand, worried about the fragile state of Republican unity in Congress, has done everything he could to keep the tea party satsified.  Boehner has not led, he has followed.

Many on the left don’t really recognize the true scope of the crisis and tend to interpret things in partisan political terms.   They think the problems we face came from President Bush’s wars and tax cuts, and all we need to do is fix that and get back to the happy days of the late 90s when the country ran a surplus.   The problem is that the brief surplus was built on a bubble, while private debt, accumulated foreign debt, and the current account deficit continued to build.   Things weren’t all rosy and sweet in 1999.

The tea party, however, is even more off base.  During the last thirty years we’ve also seen a hollowing out of the middle class, a vast shift of wealth to the wealthiest, and a consumer base that survived on debt and cheap Chinese products at Walmart.    One chart that demonstrates how the growth we did have was misdirected is here:

Note growing productivity since 1989 — that produces more wealth and value.    But middle class and working wages stayed low, both public employees and private sector workers barely kept up with inflation.   This is not what happened in most other countries; in Germany working class wages have gone up significantly since 1985.    I’ve posted other charts that show the same thing: the gap between the rich and the poor has been growing dramatically, during the recent boom most of the country’s income hasn’t even kept up with inflation.

This state of affairs is very bad for the economy.   The wealth imbalance fed the bubble economy, but didn’t grow the economy at home.    A huge chunk of that wealth goes to consumption of  foreign produced goods; even the argument that it gets invested back in the economy is misguided — in our global age most investments do not stay in our borders.   If that wealth was being spent by a viable middle class consumer base it would do far more to stimulate growth and create a sustainable economy.   This shifting of wealth to the elite resembles third world economic relations, and has led to a fundamentally dysfunctional economy.

This is where the tea party is way off base.   We need to address this imbalance in part by taxing the wealthy in order to create incentives for job creation and increased wages for the middle class.   To cut government spending in a way that hurts the poor and elderly while protecting the wealth gains of those who have made off so well in the last twenty years is utterly insane.   The tea party’s core ideals are based on a complete fantasy — it’s ideology on steroids, resistant to facts, evidence and reality.

The President needs to address the nation again and lay out the seriousness of the challenge.   He has to tell Congress that they must undo the damage done by the downgrade by agreeing to his $4 trillion deal and accepting tax increases.  He has to make it a priority to not just create jobs, but to assure that the working and middle class get paid fairly.   Relying on the market to do it alone doesn’t work; markets are not magic.    The frustrati have to accept entitlement reform, cuts to programs they believe are valuable, and a downsizing of federal government.    The tea party has to accept higher taxes, more regulation of the financial sector, and cuts to military spending.

That’s not easy.  If a couple has been living beyond their means, how do they adapt?   At first each one might want to keep doing what they’ve been doing and have the other cut back.  Ultimately, that doesn’t work.    Politically there is no other alternative then a compromise than neither side finds acceptable — but one that actually works to address the problem rather than put it off.

Restructuring the economy will take time.   As I noted in January, power may shift from the federal government to state and local control.    It may be years before we get back to unemployment levels back at 5 or 6%.   It may be a decade before we see the economy described as “healthy.”   This is real and the longer we wait to do something significant, the harder it will be to pull ourselves out of the hole we’ve been digging.


Modell Deutschland

The term “Modell Deutschland” was coined by the Social Democratic party for the 1976 election campaign: Germany as a model economy.   Europe and the US had endured a recession in 1974-75 that had a whiff of the deeper recession that would come in the early 80s — stagflation, an oil shock, and high unemployment.   In Germany, however, Helmut Schmidt’s Social Democratic party managed to handle the recession with aplomb.   Germany fared well, and in fact the Social Democrats expanded worker co-determination (giving workers a say in how companies are run, and seats on the boards of directors).

Based on this New York Times piece, the phrase still fits, this time with Angela Merkel’s Christian Democratic party.   Germany’s success so far in handling the recession even while paying the lions’ share of bailouts for Greece and Ireland is the envy of the industrialized world.   While Germans themselves grumble about the difficulties of the Euro and trying to keep the economy going during a global depression, they’ve managed to keep growth going and out perform most other countries.

Chancellor Angela Merkel (CDU – the right of center Christian Democratic Party) was in a “grand coalition” with the left-of-center Social Democrats when the crisis hit in 2008.   Together the two parties passed a balanced budget act, requiring the Bundestag and German Länder (states) to limit budget deficits to .35% of GDP by 2016 and to have them balanced by 2020.   There are exceptions in the case of national disasters and emergencies, but the point was clear: there is German consensus that debt has to remain under control.

Most economists are uncomfortable when debt to GDP ratios rise above 60%.   By that point increasing the debt does little to stimulate the economy (and actually becomes counter-productive when you get to about 100% of GDP) and creates long term damage.   After getting budgets under control by 2007, the recession pushed them back up over 70% of GDP.   Given that 60% is the proscribed (but ignored) Eurozone limit, the high debt level was embarrassing.    The Germans wanted to send a clear message that this was short term, with both the left and the right united in vowing to cut debt moving forward.

President Obama urged the Germans to pass a stimulus in 2009 to help get the European economy going.  Merkel, a physicist by profession, simply could not see the logic in Obama’s view.   While the US with the dollar as a global reserve currency and massive economic clout might be able to get away with debt to GDP ratios nearing 100% (though she had her doubts on that too), it would be reckless for Germany to take that approach.  Instead, after securing re-election and joining the FDP in a new center-right coalition, her government passed an austerity program at home, even as it had to pay to help the Greeks and Irish.   Merkel was hesitant to help (her hesitancy was criticized as making the situation worse), but it’s hard to tell your own citizens to take cuts while paying for countries that had little economic discipline.

Merkel’s program was what Obama would call balanced — revenue increases and spending cuts.   However, the Germans did things differently than the Americans.   First, they weren’t driven by ideology.    You didn’t have people condemning government “as the problem” and trying to blame either the right or the left for the situation, making it a political football.  They approached it rationally.

There is a recession.   The debt is too high.   Our demographics show our population is aging.   It is a part of Germany’s moral and ethical character to have a stable social welfare system that guarantees health care, helps the unemployed and assures that the elderly do not suffer.   It is essential for Germany to educate its children well in order to compete in the future.   How can we make reforms that allow us to adapt to the recession, cut debt, but not endanger our population and our social welfare system?

The answer, of course, was to look at their spending and determine where there were inefficiencies, what areas could be cut, and to set priorities.   Yes, a modern industrialized state without a quality social welfare system may be barbaric, but you can’t allow social welfare programs to remove incentives to work, to cost more than the people can afford, and undercut rather than support social solidarity.     Of course, cuts aren’t all it takes – when you’ve got debt, you also have to increase revenue, so taxes had to go up.   This also was done pragmatically — rather than just a “tax the rich” vs. “taxes or evil” debate, they had to figure out how to raise revenues in ways that didn’t hurt the economy or create inequities.

Tax increases are a less harmful way of reducing debt than spending cuts.   Spending cuts slow the economy more than a tax increase.    But too many taxes alongside wasteful spending creates a lose-lose situation.    These are not decisions for ideologues or political pontificators, they are decisions to be reached with a cool rational eye on the facts.

To be sure, Germany has advantages.   It does not have the gap between the rich and the poor that the US has.   While America’s middle class has had stagnant wages the last thirty years, all Germans have seen consistent income growth.   While the gap between the rich and and poor has been growing here, that hasn’t happened in Germany.  There are still people who are very rich, and there are poor people — and there are incentives to innovate, produce and invest.  But the power hasn’t shifted completely to the wealthy elite.    Strong labor unions especially assure that more equitable relations are maintained — business and labor have more a partnership than separate classes.   Germany proves that those who hate or demonize labor unions are misguided.

Germany also avoided the housing bubble, even if many of its banks invested in dubious CDOs.   Germany’s financial and economic sectors are heavily regulated, and therefore resist the kind of wild fiascos that engulfed Ireland, the US, Iceland, Spain and all the others who believed the 1990s myth that de-regulation was good and the ‘market gets it right.’   A good strong regulatory regime has helped Germany stay afloat.

Finally, Germany didn’t let it’s industrial sector die off in the last recession like the US did.  While the US went towards service industry and financials — producing less and consuming more through debt — Germany maintained a current account surplus (consumed less than it produced), and supported its industrial base.   That means that Germany lacks the huge imbalance the US suffers; the US has been living beyond its means, for the most part the Germans have not.

Germany has challenges — if you talk to Germans they’ll be vociferous in the need to still reform the health system, concern about the Euro, worries about high subsidies to industries, etc.   There are ideological differences between the left and right, though not usually pitched in the emotional ‘good vs. evil’ way of American politics.   There are vast differences between the US and Germany, and the US does do many things better.   Still, given the situation, there’s a lot we can learn from “model Germany.”

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The Age of Austerity

It wouldn’t make for a good song by the 5th Dimension, but the “Age of Aquarius” is giving way to the “Age of austerity.”  This is a dramatic shift.   The last time we faced such a dilemma was when the great recession of 1980 hit, and President Carter gave a much maligned, but now prophetic speech on the dangers facing the US at that time due to consumerism, oil dependence and an emphasis on material self interest rather than community values.   Carter was ignored.   The solar panels he installed on the White House were taken down.   Ronald Reagan defeated President Carter in the 1980 election with the promise that we can ‘have it all.’   There is no need to cut back, we only need to cut taxes!

Reagan succeeded, thanks to declining oil prices and a massive increase in debt.   Private debt, credit card debt and government debt all took off in the 80s, while the current account went into deficit.   Reagan’s “morning in America” was the start of a country  living beyond its means.

Private and public debt increase dramatically after 1980 - it is now about 400% of GDP

The first question, and one many liberals are asking, is why can’t we do what Reagan did?   Why can’t we just stimulate the economy with more debt until it starts producing jobs and economic growth.? (Conservatives refuse to acknowledge that this is what Reagan did — they want to hold on to the myth that he was fiscally conservative, not the reality.)

There are economists who think that a new stimulus could work.   They recognize we can’t use the kind of hyper-stimulus Reagan employed, but believe that another jolt of spending could get the economy moving, with the debt to GDP declining due to a higher GDP.    This argument relies on speculative and technical economic models which ignore political reality.   Due to almost certain credit downgrades and a devaluation of the dollar should such a route be taken, the risks to the economy are enormous — and could create long term stagnation.   Russian President Putin called the US a “parasite,” noting that we get away with high debt while pushing costs on to other states due to the reserve currency status of the dollar.   Countries aren’t going to let us get away with that; if we add yet more debt we’ll see countries dump dollars and treasury notes.  Again, this would damage the economy severely — and aren’t considered as variables when economists try to make the “more stimulus” argument.

Thats why most analysts who take into account both politics and economics say a decline in growth due to less government spending and higher taxes is preferable to running up a higher debt.   And if we do it right, it doesn’t mean that a recovery will be stymied.

First, though, a bit of cold water.   Remember the heady consumer utopia of the mid-00’s?  You know, low interest rates, home values rising (cheap home equity loans!), easy credit, buy buy buy!?   Those days are gone.   If by recovery you want to go back to the world of 2006, it’s not going to happen.   Recovery now simply means more people getting back to work producing goods and services people value.   The current account has to go into balance, and personal as well as public debt needs to decline.  We also have to come to grips with the fact that the number of people retiring will go up dramatically in coming years — needing social security and medicare, and the sad fact is over half of the people retiring have debt.

That’s why this will feel like the “age of austerity.”   The military will be forced to cut back its global role as the US will realize we cannot afford to try to dominate world affairs.    The dollar’s value will decline, and as foreign goods ultimately get more expensive, American products will rebound.   If government programs can effectively target spending into areas that create production and jobs, recovery can build even without increased government spending.  It will take time, and instead of flipping houses even well to do households will start to pay down debt and build savings.   The uncertainty factor is high, no one wants to be caught out of work and out of money.

As long as the re-balancing takes place with safety nets in place and government action to help facilitate growth (what Obama calls ‘investments in America,’) it won’t feel like the Great Depression.   The government and the federal reserve board have enough policy options to prevent massive unemployment and reliance on soup kitchens.    The tax rates on the wealthy are so low that raising them will not harm investment or stifle growth.  Yet it won’t be the booming bustling economy we’ve been used to.   Prices will likely go up faster than wages.  People will stay in their homes longer, keep cars until they start to wear out (and buy used ones rather than new ones), and live a bit more like we used to before the consumerist binge took off with the ‘something for nothing – borrow and spend’ mentality.

Ultimately, we will not be in good shape until the debt to GDP ratio is back under 60%, and even at that point we’ll still need to continue reducing debt.  I’ll be comfortable only when we hit about 30%.  To reach just 60% will require growth, cuts and tax hikes.  There is no other way.   And if wild cards like global warming or peak oil enter the fray, they’ll create more risk, but also provide opportunities.

The bubble growth that defined so much of the last 30 years was unsustainable.   The wealthiest benefited most, people were deluded into thinking they had more wealth than they did through bubble investments, and the apparent “growth” was built on the finance industry and services that offered little in real value.   It was a kind of “fake economy” which addicted us to the illusion that we could have something for nothing.

Although Americans think we’re immune to the kind of collapse states of Europe experienced in the early 20th Century, the massive gap between rich and poor plus the growing partisan divide and hyperbolic rhetoric, do show risk.  If the wealthy try to pay as little as possible and ignore social responsibility, the poor and middle class may turn on them in class warfare.  The right will then demonize minorities and foreigners, creating a  kind of neo-fascist rhetoric to keep the support of the working poor against intellectuals and “liberal elites.”  (One sees signs of this already in some of the more extreme tea party rhetoric).     If both left and right think that the need for austerity is false, foisted upon them by the ill will and misdeeds of the other side, the country’s bickering will prevent real solutions to fix our broken economic and political systems.

I hope it doesn’t come to that.   Re-balancing our economy will take years, but not decades.   We may not have the hyper consumerism of the 00’s, but we can have the comfortable middle class life styles that had been eroding even as the bubble economy grew.   Things seemed grand, but the reality was life was getting more difficult for the middle class and poor.    We can do it.   But the first step is to recognize the crisis is real, we’re entering a new era whether we like it or not, and we can’t just blame the other side for the problems.     There is no quick fix.

But given the consequences of hyper-consumerism on the environment, community, peoples’ psychological states and the political system, these changes could turn out to ultimately lead to a better place than where we’ve been.

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Political Pragmatism

You want to make me dictator?  OK, here’s what I’ll do:

1) Slash US military spending, start an orderly but fast withdrawal from Iraq and Afghanistan, leave the NATO alliance, and instead focus on enough military to defend the homeland, and a long range plan of intelligence sharing and operations to counter terrorism and other threats;

2) Abolish the current tax code and create a progressive fair tax that had marginal rates lower than the current ones, but wipes out almost all tax breaks and loopholes.   The new system would be a revenue generator, but would not place a greater burden on families earning less than $125,000 a year;

3) Restructure the health care system to guarantee care to every citizen through state run programs with federal benchmarks and requirements.   States will have considerable leeway how they do this, and we can learn from their different experiences.   Medicare as we know it will be subsumed in this new system.   Costly duplications and pharmaceuticals will not be covered unless absolutely necessary (and generics will be the only drugs covered where they’re available);

4) Social welfare programs would be restructured to be results-driven — not simply transfers of income but actual opportunity creators focused on jobs, education/apprenticeship, and community action.  This would be done with a focus of community organization rather than federal bureaucracy with the idea of building community solidarity;

5) A blue ribbon panel of economists will focus on economic investments that are designed to return the country to sustainable economic production to replace the hyper consumerism of the past thirty years (especially the 00’s).

Of course, I’m not about to be made dictator, and even if President Obama privately agreed with all that, he couldn’t do much to turn it into reality.

The US was founded on the core governing value of political pragmatism.   The founders knew that competing interests and ideals meant that conflict and disagreement would be at the core of the American political soul.   Moreover, they felt that such conflict and disagreement could be good — it could force people to have their beliefs critically challenged, and have to find common ground with people of different interests.   The only way the US can undertake major political initiatives is through compromise.

The right wing of the Republican party and the so called “tea partiers” (at least the radical ones) are the most virulent and dangerous wing of the current anti-pragmatists.  Using that old canard of “standing on principle” (which all too often means ‘calling my subjective beliefs principle and refusing to look at any evidence that might call them into question’) they enthusiastically and with the demeanor of a self-righteous crusader out to slay Satan’s hordes hoped to force the country into a crisis.   They lied to themselves that the US “wouldn’t really default” and that they could somehow bring back fiscal sanity.   They wanted to get their way completely.   If they couldn’t then they’d cause so much damage that the whole system would collapse.   One person equated it to an alcoholic whose life has to hit rock bottom before he changes.   The country needs default and a currency collapse before it will change its habits.

President Obama and House Speaker John Boehner learned that if a large enough contingent of such radicals make it into Congress and refuse to play by the tradition of American pragmatism, they can make the entire government dysfunctional.   On the left, a lot of liberals want to reject the agreement for only slightly less insane reasons.   They’re mad that a radical cadre of Republicans could force this down their throat, and believe that they only way to respond is in kind.    The President should do what’s necessary to fight them — risk default, risk a constitutional crisis by invoking a 14th amendment not meant for this kind of case, and go the mattresses in partisan war!

In some ways this is typical for the House.  It’s always more partisan and rowdy than the stoic Senate.   The President, by comparison, is meant to be a unifying symbol and has to look out for the long term good of the country.   If the US didn’t raise the debt ceiling, and more importantly if the US didn’t show signs of making progress cutting the debt, our credit rating would have sunk.   That sounds bland, but the consequences would have been severe, perhaps catastrophic.   Pushed by their own core constituencies into a difficult situation, they realized they had to compromise.

The compromise is the essence of pragmatism.   No major decisions were set in stone — the cuts they agreed to were agreed upon early on in the process and were probably a minimum to avoid a downgrade.   A no-cut scenario was out of question, without progress on the debt a downgrade was virtually certain.  The bi-partisan commission who will report recommendations includes all the top players, assuring no one can get steamrolled by something like the “Gang of Six” Senate moderates who had true independence.   They rigged the deck further by making consequences for not acting on that bi-partisan committee report painful to both parties.     They had enough votes to allow the more partisan in both parties to complain loudly.  But they did what they had to do.

The left simply cannot get its way in this political environment.   Not only is there no chance for tax increases or a new stimulus, but not cutting deficits will lead to a downgrade with a further drag on the economy.   The right is simply out of touch with reality — they’ll never get entitlement reform and deeper cuts without tax increases and the closing of loopholes.  It cannot happen.

Little was decided with the debt ceiling compromise.  This was an opening skirmish in a political battle that will continue.   The 2012 election will be a war, followed by diplomacy to determine how the relative balance of power decides what kind of policy will prevail.  It’ll be slow, agonizing, and the advantage will shift from left to right quite often over coming years.  There will be emotion, anger, and new compromises and deals that will satisfy no one.

Leaders will be blamed for the political reality they inherit.   Populists will make it sound like an easy solution exists if only the politicians would grasp it.   I don’t know how the future will turn out, who will win in 2012, or where the economy is going.  I do know that if political pragmatism ever loses out partisan warfare of the kind we saw flashes of here, we may shift to a very destructive phase of America’s democratic experience.

The tradition of pragmatism is strong; it is the American way and has been for generations.   Tradition and political culture are resilient, especially in a country this stable and old (yes, in terms of functioning democracies we’re older than European states).   The spectacle was exciting, the anger on the left and right over a compromise neither like is palpable.   But pragmatism won the day, and assures that the battle over the future simply moves to another venue down the line.   That’s what the founders intended.