Thomas Friedman Despairs

From “Obama’s 1-2 Punch?,” Thomas Friedman, NYT:

“If election campaigns are supposed to be an exercise in coming to grips with our biggest problems, then the one we just went through was a dismal failure.  Our only real solution — a strategy to reignite consistent growth so we can narrow our income gaps and lift the middle class.  — never got a serious airing.  Instead, each side was focused on how to secure a bigger slice of a shrinking pie for its own base.

“On Sunday, The Times’s Annie Lowrey wrote a piece quoting [Harvard economist Benjamin] Friedman who wondered aloud whether we’re not now entering a reverse cycle, ‘in which our absence of growth is delivering political paralysis, and the political paralysis preserves the absence of growth.’

“I think he’s right and that the only way to break out of this deadly cycle is with extraordinary leadership.  Republicans and Democrats would have to govern is just the opposite way they ran their campaigns — by offering bold plans that not only challenge the other’s base but their own and thereby mobilize the center, a big majority, behind their agenda, to break the deadlock.

“[T]he mantra that if you ‘just work hard and play by the rules’ you should expect a middle-class lifestyle is no longer operable.  Today you need to work harder and smarter, learn and re-learn faster and longer to be in the middle class.  The high-wage, middle-skilled job is a thing of the past.  Today’s high-wage or decent-wage jobs all require higher skills, passion or curiosity.  Government’s job is to help provide citizens with as many lifelong learning opportunities as possible to hone such skills.

“I still believe that America’s rich and the middle classes would pay more taxes and trim entitlements if they thought it was for a plan that was fair, would truly address our long-term fiscal imbalances and set America on a journey of renewal that would ensure our kids have a crack at the American dream. … If only we had a second-term president, unencumbered by ever having to run again, who was ready to test what really bold leadership might produce.”  Emphasis added.

 

Our Limping Economy

GDP growth in the second quarter was only 1.5%, compared to 2.0% in the first quarter.

Our economy must grow between 2 and 2.5% just to keep unemployment, currently at 8.2%, from rising.

As for the third quarter, forecasts are for growth in the 1 to 1.5% range.

This is all good news for Mitt, and Mitt is bad news for us because he wants British-like austerity that would definitely send us back into recession*:

“The U. K.’s economy suffered a much larger contraction than expected in the second quarter, heightening questions about the pace and effectiveness of the government’s austerity program and fueling the broader debate across Europe about how to tackle the Continent’s economic woes.

“The deteriorating British economy is likely to intensify the debate both within the U.K. and other debt-laden countries in the West about cuts versus stimulus, amid increasing evidence that austerity is proving a major drag on growth.” Emphasis added.

* “U.K. Stumble Fuels Austerity Debate,” Ainsley Thomson and Cassell Bryan-Low, WSJ

 

A Couple of Interesting Stats

“In 1989, the chief executives of the seven biggest banks in the country made about 100 times the income of the typical American household, on average.  On the eve of the crisis, in 2007, they made more than 500 times the median.

“Economists know there is a point after which more lending stops helping and starts hurting growth.  One study puts it at about 110 percent of gross domestic product.  On the eve of the crisis, credit to the private sector in the United States reached 213 percent of G.D.P., up from 96 percent in 1982.  And all we got was a mass of busted residential mortgages.”

Eduardo Porter, “The Modest Worth to Society of Those Big Banks,” NYT

It Would Be Ironic If…

I think President Obama will be re-elected.  But one of the things that could cost him the election would be if the economic crisis in Europe spins out of control and has consequences here so dire that Americans lose turn to Mitt out of panic.

It would be ironic if Europe costs Obama the election because the same policies that are ruining Europe and causing further economic contraction and suffering — too much emphasis on austerity without enough emphasis on growth — are the ones the Republicans favor and Mitt wants to impose on us.

Refuting the Big Lie Against the Buffet Rule

Mitt and the GOP argue against President Obama’s Buffet Rule or any other tax increases for very rich people by claiming that if you tax the “job creators,” you both reduce revenue and destroy growth so that everybody suffers.  This is complete and utter garbage, this is their “big lie,” but they have to figure out how to convince more people to vote against their economic interests than just the abortion/gay marriage/guns crowd.  They need to con some people from the middle or they lose.

So that’s why I was thrilled to see an op-ed, in the Wall Street Journal no less, “High Tax Rates Won’t Slow Growth,” by Peter Diamond and Emmanuel Saez, that calls out the big lie.  Diamond won the Nobel Prize for economics and is an MIT professor emeritus.  Saez is an economics professor at U. C. Berkeley and winner of the very prestigious John Bates Clark medal.  From the op-ed:

“The share of pre-tax income accruing to the top 1% of earners in the U. S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s.  At the same time, the average federal income tax rate on top earners has declined significantly.  Given the large current and projected deficits, should the top 1% be taxed more?  Because U. S. income concentration is now so high, the potential tax revenue at stake is large.

“But will taxable income of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops?

“According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50% to 70%….  Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s.

“But will raising top tax rates significantly lower economic growth?  In the postwar U. S., higher top tax rates tend to go with higher economic growth — not lower.  Indeed, according to the U. S. Department of Commerce’s Bureau of Economic analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.

“By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory.  But that is no reason not to use this tool to contribute to addressing this problem.”

I wish every voter would read this op-ed.  Mitt and the GOP aren’t just wrong about taxing the rich, they know they are lying about it.  We need to send them a message in November that “Populus vult decepi” may have been true in ancient Rome, but it isn’t true here, and it isn’t true now.

A Self-Sustaining Recovery

Editorial in The Economist, “Can it be…the recovery?”

“For the year as a whole America’s economy will probably grow around its trend rate of around 2.5%.  That’s a lot lower than might be expected after a normal recession; but after financial crises, when consumers are weighed down by debt, recoveries tend to be anaemic.  That level of growth…could be the first step towards a self-sustaining recovery, thanks to the virtuous circle of stronger job growth leading to higher consumer spending, which in turn should generate more jobs.

“America’s priority should be to craft a medium-term plan which puts the budget deficit on a downward path without snuffing out the recovery.  There is, unfortunately, not a chance that it will do that before November’s presidential election.

“The reasons for optimism are real.  But if policymakers get it wrong again, the recovery could yet turn to dust.”  Emphasis added.

That phrase “self-sustaining recovery” captures my problem with both parties.  For me, the Democrats don’t know when to stop the government spending, while the Republicans don’t know when it’s necessary.  I believe in stimulus to get a recovery going, when consumer spending isn’t there, but when that recovery become “self-sustaining,” I want less government.  I believe that “expansionary austerity” isn’t just an oxymoron, it’s a dangerous and delusional myth.