Sequester Prediction

My expectations about the sequester are based on what happened in the Great Recession.  We saw companies lay off people and divide their tasks up among the rest of their workforce.  People didn’t complain and did the extra work because they were afraid of being fired.  But aside from the extra responsibilities, workers also saw opportunities to become more efficient.  Each fired worker was one less person’s email to read and respond to, one less person to drone on at meetings and keep everyone else from getting back to their desks. As the economy has improved, many of those jobs haven’t returned as businesses have realized that all the work is getting done and they are making more money.  That’s why both corporate profits and unemployment are so high.

If you think private companies could make do with fewer workers, that’s true for the federal government many times over.  Many of these people are bright and conscientious, but the truth is that getting rid of their emails and memos and presence at meetings won’t make a damn bit of difference to their departments, the government as a whole, or our society.

In terms of making the federal government function more efficiently, I think that the sequester is not a bad thing.  But if it goes on, it will definitely lead to job losses in the private sector and to a contraction in our economic growth.  So good for the government as an isolated, bloated, inefficient sector, bad for the country as a whole.

Our Lost Generation

From “In Shovels, A Remedy For Jobs And Growth,” Eduardo Porter, NYT:

“At the end of last year, according to the nonpartisan Congressional Budget Office, the economy was still about 5.5 percent smaller than it would have been had it avoided the recession and kept growing along its long-term potential path, making full use of the workers and equipment currently sitting idle. … By the time we recover to our potential — which the C.B.O. expects will take until 2017 — the Great Recession set off by the implosion of the housing bubble more than five years ago will have cost us nearly half of one year’s entire economic production:  about $7.5 trillion.

“We will be paying the price for years.  The slump is hindering capital investment, stunting the careers of college graduates and encouraging workers to drop out of the labor force….”  Emphasis added.

Every time I hear some Republican apoplectic about the debt we’re placing on our kids and the high taxes they will have to pay, I think of my own Millenial son who does not have a job commensurate with his education and is not on the career path he should be.  I believe his earnings and achievements will be adversely affected for the rest of his life.  I’m sure he would much, much rather pay higher taxes down the road on an income higher than what now seems in store for him.  It’s not just the loss of money that’s so sad, it’s the loss of career satisfaction as well.

Scolding the Scolds

From “Deficit Hawks Down,” Paul Krugman, NYT:

“President Obama’s second Inaugural Address offered a lot for progressives to like. … But arguably the most encouraging thing of all was what he didn’t say: He barely mentioned the budget deficit.

Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

First, they have cried wolf too many times. They’ve spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.

“But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit.

Second, both deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

“The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which, therefore, led both to low tax receipts and to a rise in unemployment benefits and other government expenses.

“And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression. Which brings me to the third reason the deficit scolds have lost influence: the contrary doctrine, the claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice.

Consider, in particular, the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies, it received fulsome praise from many people on this side of the Atlantic. For example, the late David Broder urged President Obama to “do a Cameron”; he particularly commended Mr. Cameron for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.”

“Sure enough, the sudden, severe medicine cut short Britain’s economic recovery, and threw the nation back into recession.

“At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But that’s not all: there was also clearly a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout.”  Emphasis added.

Maybe We Should Abolish the Fed…

Just kidding!  But they really did miss the Great Recession.

From “Most Fed Officials Saw Economy Weathering Subprime Crisis,” Craig Torres, Bloomberg:

“Federal Reserve officials in August 2007 saw the beginnings of the crisis in subprime mortgages and concluded that the U. S. economy would be able to withstand it, even as some Fed members warned that it could trigger a downturn, transcripts from their 2007 meetings show.

“‘Well-capitalized banks and opportunistic investors will come in and fill the gap, restoring credit flows to non-financial businesses and to the vast majority of households that can service their debts,’ Donald Kohn, then vice chairman of the board, said in Aug. 2007….

The transcripts show the committee’s slow grasp of the enormity of contagion that was to spread throughout global markets as a result of billions of dollars in low-quality housing assets that had been securitized into bonds and sold to banks and investors worldwide.  Several FOMC participants such as then-San Francisco Fed President Janet Yellen sounded alarms in the first half of 2007.  Still, the FOMC…showed reluctance to alter policy until August.

“‘The odds are that the market will stabilize,’ [Ben] Bernanke told the committee in Aug. 2007….

“[O]n June 27028, Yellen said the biggest risk to economic growth was housing, which she called the ‘600-pound gorilla in the room.'”  Emphasis added.

It turns out that housing was more like an entire wildlife preserve filled with gorillas…


Krugman Scolds the Deficit Scolds

From “Fighting Fiscal Phantoms,” Paul Krugman, NYT:

“But we’re not  Greece, and it’s almost impossible to see how this [a run on Treasuries, a spike in interest rates and a return to recession] could actually happen to a country in our situation.

“For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars.  So our government, unlike the Greek government, literally can’t run out of money.  After all, it can print the stuff.

“But if the U. S. government prints money to pay its bills, won’t that lead to inflation?  No, not if the economy is still depressed.

“Still, haven’t crises like the one envisioned by deficit scolds happened in the past?  Actually, no.  As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies.

“For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U. S. bonds, clearly believe that such a crisis won’t happen; economic analysis says that such a crisis can’t happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen.”

Two Words from the Election Results — Patience and Contradictions

I’ve been reading thousands and thousands of words about the election results, but I come away with two — patience and contradictions.

Obama won because voters were willing to be patient with him about the economy.  They realized that we had an economic meltdown, not a garden-variety recession, and so we weren’t going to have a garden-variety recovery.  More voters still blame Bush for the current economy than blame Obama.  And people vote trend more than current conditions.  The economy is getting better, albeit slowly.  This patience won’t last till 2016, but that’s Hillary’s problem.

Mitt lost because aside from that patience with Obama, he was stuck with his party’s contradictions.  They said they wanted to save Medicare by destroying it (that worked really well with those villages in Vietnam).  They said we had to drastically cut Medicaid and food stamps, but we could easily afford more tax cuts for the rich.  They said we needed more personal responsibility, but not when it came to expecting Americans to buy health insurance.  They said they wanted to get government off our backs, but they had to get government into our vaginas with their ultrasound wands.

The GOP talks about being “common sense conservatives.”  They make no sense at all, common or otherwise.

A Short, Stark Reality Check

Andrew Sullivan at The Daily Beast on Obama and the GOP:

“He inherited an economy in free-fall; he put a bottom on it and over 4 million private sector jobs have been created since and the unemployment rate is actually lower than when he took office. It would be much lower if Republican governors had not been slashing government payrolls. He ended the war in Iraq; he has brought the Iranian economy to its knees; he decimated al Qaeda and found and killed Osama bin Laden; he enacted universal healthcare – an historic change that eluded even that political master, Bill Clinton.

“What he didn’t imagine… is that the party that drove this country into the biggest fiscal, moral, diplomatic and military ditch since the 1970s would immediately turn around and, instead of constructively attempting to help in the worst recession since the 1930s, opted for total obstructionism and party before country. I think the GOP recognized the profound threat Obama represented, the magnitude of their failure, and have done all they could to stop him getting the second term he always needed to fulfill his promise and check them for a generation.”

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


Mitt and GOP Offer Voodoo Economics Again

From “What the war over ‘didn’t build that’ is really about,” Greg Sargent, The Plum Line:

“As it happens, mainstream economic consensus is closer to Obama than to Romney on the broader questions here.  Many economists believe the stimulus worked (albeit not as well as we’d like); that tax cuts for the wealthy won’t magically create enough growth to pay for themselves; that more spending now would indeed create jobs; and that more austerity now could make things worse. The public’s views on these matters are not nearly as clear cut.  But on the question of the relationship between government spending and job creation, Romney’s positions are at odds with mainstream economic opinion. ‘The debate in Washington has become completely unmoored from this consensus,’ Betsey Stevenson and Justin Wolfers write today.  ‘Republicans have pushed their representatives to adopt positions that are at odds with the best of modern economic thinking.’

Romney does not have a plan to fix the short term crisis, in the sense that he’d be proposing exactly the same things if the economy were doing great.  But the politics of the presidential race are such that Romney needs to promise that electing him would fix the crisis.  To make this case, he has to sell the American people on the idea that government — and Obama’s hostility towards individual initiative and American free enterprise — are to blame for holding back the recovery, and that shoving both of those things ‘out of the way’ will reignite the economy.  That’s why Romney continues to falsely claim that stimulus spending only succeeded in growing government and didn’t help the private sector at all. That’s why he continues to falsely claim that Obama ‘demeans success.’  That’s why he continues to falsely claim that Obama thinks only government, and not individual initiative, creates jobs — and that this is why you’re suffering.

“These ideas are essential to Romney’s entire argument. Without them, he doesn’t have one.”  Italics in original; emphasis added.

The austerity the GOP wants to push in this country is failing in Britain.  The latest numbers there show a double-dip recession.  That’s what Mitt offers. 

I think the question for this election isn’t so much “Are you better off now than you were four years ago?” (although clearly we are, because the economy was losing 750,000 jobs a month then), but “Could you be much worse off four years from now?”


Different Approaches, Same Result

If the far-left Syriza party had won in Greece, they were going to tell Angela Merkel where she could stick the harsh terms of her bailout.  The conservative New Democracy party, which will form a coalition with the Socialist PASOK for 162 seats in the 300-member Parliament, will tell Merkel they support the bailout, but ask “pretty please” if she can just ease the terms.

Different approaches, but the same result.  Merkel isn’t going to save Greece.

Greeks hope the election results can lead to further negotiation because they fear the unknown of leaving the euro.  Bad as things are, they fear making them worse, although worse seems unavoidable.  But trying to negotiate with Merkel fiscally is like trying to negotiate with Hitler militarily.  The only way Merkel will help is if Greece completely cedes its fiscal sovereignty to the EU Germany.

It seems inevitable that at some point soon Syriza will take power.  It finished a close second to New Democracy with 27% of the vote, having won only 12% in the May election.  New Democray and PASOK, the “mainstream” parties, have brought Greece to her knees and five years of recession.