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Trump Brings Back Reaganomics, But Worse

Trump Brings Back Reaganomics, But Worse

Reprinted with permission from WashingtonSpectator.

The tax cut proposals first announced by President Donald Trump this April are, simply put, a fraud. They are about greed and politics, not economic growth or true tax reform. The policy has been proved wrong twice already. As a broadly faithful rerun of the Reaganomics of the early 1980s, Trump’s policies, should they be passed, will end as Reagan’s “voodoo economics” did, a failure by virtually any measure. George W. Bush’s sharp tax cuts in the early 2000s also failed to generate a strong economy, one that was driven by speculation rather than strong investment.

Reaganomics was the name given to the self-serving claims of the wealthy that a huge tax cut for them would pay for itself—by creating incentives to invest and work that would lead to renewed economic growth. Tax revenues would simply rise with a growing economy to plug the revenue hole. Some call it trickle-down economics. John Kenneth Galbraith put it scornfully in The Culture of Contentment: if you give a horse enough to eat, some of the kernels will fall to the ground for the sparrows.

In the summer of 1981, Congress, including a Democratically controlled House, passed the Reagan tax proposal, which reduced the top income tax rate from 70 percent to 50 percent. Among other measures, it included a tax break for businesses. Reagan’s economists predicted the budget deficit—the size of which, under Jimmy Carter, was a major campaign issue for Reagan—would fall to $45 billion for that coming fiscal year as the economy recovered. Fiscal 1982 ended with the deficit not at $45 billion but at $140 billion.

The economy began to recover when Federal Reserve chairman Paul Volcker cut interest rates, and to a degree the tax cuts created some Keynesian stimulus. In the real world, growth could not magically rise to the heights needed. Reagan now started raising taxes, including the regressive Social Security tax, to stop the flow of red ink.

Trump has conned some of the electorate into thinking he knows how to channel their anger constructively by being vindictive himself.

It was not enough. When Reagan took office, American debt was $997 billion; when he left, it had reached $2.85 trillion. America became a net debtor nation for the first time in modern history.

Perhaps the debt would have been worth it, but Reaganomics was an abject failure as an economic program. Inflation came down but that was the only achievement. Growth returned but average wages, however measured, stopped growing altogether, whereas they had been growing steadily since the early 1950s. Income inequality started to rise rapidly from early in Reagan’s first term and didn’t stop. The greatest of ironies is that capital investment was tepid and the source of economic growth, productivity, grew only moderately, the opposite of the takeoff that was promised.

George W. Bush reinstated the Reaganomics philosophy with his own major tax cuts, again mostly funneled to the wealthy. The recovery and expansion that followed created the fewest jobs of any expansion since World War II. What economic growth there was had been fueled by the speculation in residential housing that led to the crash of 2008, the year Bush left office.

Trump’s proposed tax cuts are far more radical than those of Bush, and more on a par with Reagan’s. They would be another unjustifiable gift to the wealthy. Some progressives are saying tax cuts never stimulate growth, but this is untrue. They can be a potent Keynesian stimulus from time to time, as were the Kennedy-Johnson tax cuts of 1964. Reaganomics was steroidal Keynesianism—not at all what the master economist had ordered.

Unlike Reagan, Trump will try to impose tax cuts not during a severe recession, but in a fairly strong economy that has been growing for several years and in which the unemployment rate is below 5 percent. Reagan took over when the economy was in the midst of its worst recession and the unemployment rate had reached nearly 11 percent. There was slack that warranted fiscal stimulus.

There is still some slack in the economy. Effective stimulus should take the form of public investment or more robust social programs. A modest but not huge tax cut could be temporarily productive.

Trump’s initial tax cut proposal would cut top tax rates from 39.6 percent to 35 percent, but the major tax cut is reserved for business: from 35 percent to 15 percent. The estate tax and the alternative minimum tax would be eliminated, which benefits only the rich. The wealthy would benefit most, though the details of Trump’s slapdash program are too skimpy to estimate accurately by how much.

Analyses suggest the federal government would lose $5 to $7 trillion in tax revenues over 10 years under the initial plan. I think fears of deficits are often exaggerated, but an additional $700 billion a year of financial borrowing would unsettle the financial markets.

Unperturbed by the lessons of history, Trump’s advisers believe if economic growth is raised by one percentage point to 3 percent a year, enough federal revenue will be raised to fill the hole. Trump’s wish is their command. Americans should be aware that a sustained growth rate of 3 percent a year after a long expansion is almost impossible to achieve. It would require a productivity boom, the kind Reagan never got.

Still more disturbing, it would leave no room to invest in infrastructure, which almost everyone agrees America badly needs. It would require heartless cuts in the safety net and economic development programs—which Republicans covet—which would lead to more inequality. This disastrous outcome could be compounded if this wish list somehow improbably gets enacted, by limiting the deduction for state and local taxes. This measure would hurt states that provide generous social policies and economic development programs.

Deregulation also had a part in the failure of Reaganomics. Reagan defanged the Department of Labor, for example, which then couldn’t enforce fair labor standards. Trump is doing the same.

Trump has conned some of the electorate into thinking he knows how to channel their anger constructively by being vindictive himself. There is almost nothing constructive about his early tax plan. These details will change. But the plan reflects a mean-spirited, self-involved, and uninformed mind at work.

Workers beware. Trump’s reckless mimicry of Reaganomics is likely to lead to stagnating wages and growing inequality for another four years, and no recharging of the dynamics of the American economy will ensue.

Jeff Madrick is a fellow at the Century Foundation and director of the Bernard L. Schwartz Rediscovering Government Initiative.

 

America Can Attain Full Employment With A Bold Approach To The Jobs Emergency

America Can Attain Full Employment With A Bold Approach To The Jobs Emergency

A new report from the Rediscovering Government Initiative lays out 15 ways the government can create more and better jobs starting right now.

After five long years, the economy has at last produced enough new jobs to compensate for the 8 million lost in the Great Recession of 2009. But in that same period some 7 million more Americans reached employment age, and we have only produced about half the jobs we need to keep up with population growth. To make matters worse, the jobs created during the recovery pay on average much less than those lost. Yet rather than pulling out all the stops to create more and better jobs, too many politicians and economists tell us we can’t move too quickly. They cite limitation after limitation: inflation fears, budget deficits, skills mismatches, and so on. Americans deserve better than this defeatism. We deserve bold action.

In a new report, A Bold Approach to the Jobs Emergency, the Bernard L. Schwartz Rediscovering Government Initiative offers 15 ideas that could get us back to true full employment and at the same time build a foundation for rapid economic growth in the future. We are demanding a full-court press to recreate the economic opportunity that America once offered. We emphasize some ideas that have been heard before, but many that are forced to the back seat or are hardly talked about at all.

There are taboos among policymakers that are holding us back. Above all, we must take fiscal stimulus seriously again. Today’s economy operates far below its growth potential. The fiscal stimulus we need should not only make the social safety net whole but also be tied to aggressive investment in transportation, communications, and clean technologies that have been badly neglected.

The federal government can itself create useful, good-paying jobs in transportation, teaching, and health care. A carefully crafted federal job creation program, as was successfully enacted under FDR, can work today. Fifty billion dollars‘ worth of new jobs could go a long way toward helping Americans.

The repressive effect on jobs and wages that results from aggressive Wall Street practices is all but invisible in Washington. Academic economists are almost as bad as the Washington think tanks in paying too little attention to how Big Finance can undermine both jobs and wages. Our report highlights the findings of researchers such as Eileen Appelbaum, formerly of Rutgers, and Rosemary Batt of Cornell, who show that the leveraged buyout and privatization crazes have on average led to many lost jobs and significantly less spending on R&D. It also showcases the work of William Lazonick of the University of Massachusetts, Amherst, who has long called attention to how massive corporate stock buybacks may help shareholders in the short run but hurt the American economy by diverting investment.

Poor wages are also part and parcel of America’s economic failure. Today’s typical household earns no more after inflation than it did almost 20 years ago. Only 44 percent of Americans think they are middle class, the lowest level recorded. However, until fairly recently, raising the minimum wage has also been taboo. The bill before Congress to raise the federal minimum wage from $7.25 to $10.10 may still not pass, but intelligently designed studies suggest such a hike could lift not just 1 million, as the Congressional Budget Office has too conservatively estimated, but 6 million people out of poverty and provide raises for about 25 million people. Similarly, we need an expansion of the Earned Income Tax Credit to childless adults, which the president supports.

Most tragically, we neglect our young. Six million or so Americans ages 16 to 24 are neither in school nor have a job. Dozens of local agencies have been created to place these “opportunity youth” on a middle-class track. But they badly need to be scaled up, and federal support is the only way to do so.

The new interest in funding pre-kindergarten in New York City and elsewhere is welcome. But help has to come much earlier in the lives of children in poverty. One in every five American children under the age of six live in poverty, the second-highest rate in the rich world. A growing body of research shows unambiguously how poor children are cognitively and emotional deprived—and how bleak their futures inevitably are. In America more than in any other rich country, inequality begins at birth. We need to address this crisis to begin building the economy of the future.

If America wants a strong future, it had also better invest more in technological research. Government research has been the heart of the innovation economy, as economists have increasingly shown. But Congress mindlessly cut such research last year. It must be revived and expanded. Other recommendations in our report include investments in energy, national paid family leave policies, and revamped workforce training.

The decline of work is not inevitable, and there are more ideas than the 15 we present in our report. We calculate that we can get the unemployment rate below 5 percent and raise wages with a combination of such programs, without incurring a dangerously growing budget deficit.

But bankrupt ideology, narrow politics, and bad economics are robbing the nation of its confidence and hope for the future. A comprehensive jobs plan is not even being attempted in America. Failure becomes contagious. Let’s end the fatalism about employment in America now and win back the nation’s hard-won optimism.

Jeff Madrick is the Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Cross-posted fromRediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Samuel Huron via Flickr

The Progressive Caucus Budget Makes The Right Decisions

The Progressive Caucus Budget Makes The Right Decisions

The “Better Off Budget” is the only budget proposal in Congress that really places people’s needs ahead of political compromise.

The Congressional Progressive Caucus has issued its annual budget and it is in different ways the antithesis of what both the Republicans and Democrats are offering. The Caucus calls it the “Better Off Budget,” and it puts its money where its mouth is. Thank goodness they’ve issued it, because it puts in perspective how much is actually within our nation’s reach. It is aimed right where it should be: at creating jobs. The budget acknowledges that our jobs crisis is far from over (I’d call it the jobs emergency budget, of course). And it rightly says we can solve our problems.

The proposals err slightly on the side of economic optimism, but that is as it should be. It stands in contrast to the modest improvements in social policy proposed by the Democrats, which won’t get unemployment down to 5 percent in the foreseeable future, and to the insensitive regression proposed by Paul Ryan and the Republicans. Those proposals are all politics, with little caring about the people’s thirst for jobs and opportunity. The progressives toss political compromise aside to do the right thing.

Their proposed budget does a lot of good in a lot of areas. It refuses to reduce entitlements; it provides a middle-class tax break; it raises income tax rates on the wealthy; it provides a lot of money for infrastructure investment. I could go on.

But in this brief analysis I want to focus on the question of how much stimulus the economy can stand, which is really a question about how much slack there is in the economy. Conventional analyses say that slack—the potential to grow—has fallen. It’s mostly not because the economy is growing and catching up with its potential. The reason is that people are dropping out of the workforce, maybe for good. They are losing skills. Some are retiring or getting close to retirement. Capital investment has been okay, but it has been far from stellar and therefore not likely to create exciting new products and industries that also increase productivity.

If the potential is not as high as typical economists, including the Congressional Budget Office, thought just a couple of years ago, we can’t push the economy up as fast as we might like, they argue.

The irony is that potential is down, as conventional economists measure it, because of the Great Recession and historically slow recovery, not because of a structural change in the economy. In particular, labor productivity growth is not very good. Total factor productivity, which (allegedly) measures the productivity of capital and labor combined, is somewhat stronger by historical comparison. I say “allegedly” because total factor productivity is a pretty flaky number.

Now, there is a pretty good relationship between how fast demand is growing and productivity growth, both labor and total factor productivity. In any case, if the potential of the economy is reduced because growth is slower, people can’t get jobs, and investment in research is far from hot—well, then potential would likely rise if we got the economy growing rapidly again. There is good theory, partly Keynesian but also something called Verdoorn’s Law, to suggest this could well be the case.

So, in sum, that’s what this debate turns on. Will stimulus bump up against a genuine GDP ceiling and cause inflation, or is that ceiling only an artificial one based on recent data generated in a very slow economic recovery? I’d argue the CBO analysis and that of others is proposing an artificial ceiling. We can growth much faster, and we can get unemployment down to 5 percent. More demand can and often has led to faster productivity growth and more aggressive capital investment.

That’s what the Progressive Caucus Budget is all about. The nation can afford a decent social safety net and adequate investment in its future, and can get 5 to 10 million more people working again. If the progressives’ budget overstates the possibilities, it is not by much.

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Cross-posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Caroline’s eye via Flickr

The Congressional Budget Office Should Serve The People, Not Politics

The Congressional Budget Office Should Serve The People, Not Politics

The CBO’s projections often miss the mark, but its mandate is to produce a politically useful number.

The admirable Jared Bernstein entirely misses the point in his post about recent critiques of the Congressional Budget Office. Floyd Norris, Zachary Karabell, and Dean Baker have noted how often the CBO gets it wrong, and how it influences policy in damaging ways. I wrote last March in Harper’s Magazine that there should be a shadow CBO to correct and decipher CBO pronouncements.

Jared counters that CBO economists are simply following ”state of the art” economics most of the time. What state of the art? Hasn’t confidence in “economic science” been sorely tested by the 2008 crash? It should have been tested long before that tragic event. In 2003, Robert Lucas said that we had solved the problems of depression. In 2005, Milton Friedman said that he wondered why so many people were worried about the economy because to him it appeared so stable—this at the height of the subprime mortgage boom. In 2008, Olivier Blanchard said macro was in good shape.

Jared notes that the CBO assumes public spending will crowd out private spending as an example of how it follows textbook economics. That’s right, it does, and often entirely incorrectly. Textbook economics is getting a grilling by many macroeconomists these days.

The point is that the CBO’s mission is all wrong. Jared kind of acknowledges this; he adds in parentheses they should give ranges, not single-point forecasts. But that is not a parenthetical point. It is the heart of the matter.

CBO economists can’t make single-point projections with any confidence, so why do they? These forecasts are often terribly misleading. The recent minimum-wage report, as I noted on Next New Deal, is a perfect example. Everyone took the CBO’s midpoint number as an actual projection. Why? Because the CBO said it was in just those words. That is its mandate. In addition, the CBO’s “non-partisan” label is taken to mean “objective,” and to non-practitioners, its projections simply reflect some hard, politically unbiased analysis.

Just like Wall Street bankers, politicians want a forecast that is a single number they can use. A range of projections does not have as much political force as a single number with the authority of the “non-partisan” CBO. In other words, the CBO is meeting the needs of its clients, not the needs of the nation.

It’s time to change the CBO’s mandate fundamentally. These economists should produce ranges, they should explain as much as the project, and they should get over their habit of hiding the most important qualifications of their analysis in footnotes and appendices, thereby covering themselves (and perhaps relieving their guilt).

The state of economics simply doesn’t warrant the certitude that the CBO almost always implies—and then qualifies, as I say, in the footnotes. It would be very useful if Jared Bernstein himself led a charge in reforming the CBO’s mission. That doesn’t mean firing the economists there. It means having them do what economists can do, and not do what they can’t.

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Cross-posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo of CBO Director Doug Elmendorf: University of Michigan’s Ford School via Flickr

A CBO Report Shows How Obamacare Will Help The Working Poor

A CBO Report Shows How Obamacare Will Help The Working Poor

Never mind the conservative fear mongering. The Affordable Care Act’s subsidies will boost the economy and free workers who were locked into their jobs.

The attack on the Affordable Care Act by conservative Republicans after the release of the Congressional Budget Office’s new report was desperate. Bravo to much of the media for setting the story straight almost immediately. But so strong is the anti-government bias involving social policy that critics hardly stopped to think.

No, businesses were not about to issue a couple of million pink slips, as Senate Republicans put it. Rather, because of the subsidy to buy health care, people could choose to quit their jobs or work fewer hours and lead a marginally better life. Heaven forbid.

And that’s the real rub. Republicans must think this is a new dole for the undeserving. But actually, it’s another example of how perverse and unfair the health care system in America is. In other words, according to CBO estimates, 2 million people or so were basically working so they could get insurance. Working makes acquiring health care cheaper because you are in a group plan and the employer will often help subsidize the price. (Of course, that subsidy partly results in lower wages for the worker.)

Because many Americans work just to get health care, they are locked into their jobs. And this may reduce their desire to bargain for higher wages out of fear of being fired.

A few points should be kept in mind. The determinedly objective CBO is by no means always right. It is a peculiar construction, in fact. The CBO is not allowed to make sensible assumptions about the economy, but instead has to stick to the current law. So it can’t anticipate, except as an exception to the main forecast, a change in tax rates or stimulus. The CBO builds in a recovery from a recession automatically—a clockwork interpretation of what economists know as Say’s law, which holds that economies will bounce back automatically as wages, prices, and interest rates stagnate or fall. This notion was anathema to John Maynard Keynes. The CBO makes absurdly precise projections of events 10, 20, and 30 years out. All the while, it wears the mask of objectivity.

The CBO’s estimate that Obamacare will result in 2 million people or so leaving the workforce, it admits, is “substantially uncertain.” There’s an understatement. Just a couple of years ago, it figured the number to be much less. But it says it did a more comprehensive analysis and included a few more recent studies, mostly about cuts in Medicaid. Some studies show that when a couple of states cut funding for Medicaid, people started looking for work. Other studies show little impact, however.

A subsidy for the poor, as Obamacare is, benefits the poor. As the working poor make more money, however, the subsidy diminishes. They may leave their jobs as a result, now able to afford health care on their own.

The CBO also said, however, that Obamacare “will boost overall demand for goods and services over the next few years because the people who will benefit from the expansion of Medicaid and from access to the exchange subsidies are predominantly in lower-income households and thus are likely to spend a considerable fraction of their additional resources on goods and services.” In contrast, people who will pay the modest increase in taxes to support the subsidies “are predominantly in higher-income households and are likely to change their spending to a lesser degree.”

Just what the doctored ordered for a sick economy!

In addition, the drop in total labor compensation as people quit their jobs will be less than the drop in the number of hours worked. Fewer hours worked but not as much lost in income. Pretty good policy.

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Cross-posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

AFP Photo/Karen Bleier

Lesson From December’s Jobs Report: Turn On The Fiscal Jets

Lesson From December’s Jobs Report: Turn On The Fiscal Jets

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what’s really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

Waiting another three or four months to tighten policy and reduce quantitative easing will not change the course of America’s destiny. But moving now, as they have done ever so slightly, could easily pull the rug out from under this modest recovery.

The sharp fall in the unemployment rate to 6.7 percent was just about entirely accounted for by people dropping out of the workforce. The employment-to-population rate is roughly at its lowest level in more than 30 years. Too many people are not working in America. For all the economic weakness in Europe, they have higher participation rates than the U.S. does.

The drumbeat of optimism emanating from most economists recently will now be muted until the next set of data. The jobs numbers are the most telling indicator of economic strength. Economists turn on a dime when they are issued, but only because they can, given the computerized models that shift modestly with every piece of economic news. They should have a stronger analytical thesis than to depend on one month’s data.

The path forward is clear. We should keep in mind that the economy is not doing badly. On average, there has been moderate job growth over the last three months, just not nearly enough to justify an end to monetary stimulus now. We should wait at least a few months to make sure this recovery and expansion is truly solid.

The good news is that the disappointing employment data will reduce pressure on the Fed as Janet Yellen takes over the reins. The bad news is that it will unleash the anti-Obama forces who blame the slow economy on Dodd-Frank’s costs to the financial community, future fears of inflation, and of course the federal budget deficit. Tune in to Fox News after the employment data release and you’ll find them saying “Obama did it.”

Larry Summers offers the best advice: we have to turn on the fiscal jets. The first words out of anyone’s mouth about the economy should be that sequestration did it. Fiscal de-stimulus was huge in 2013. Government spending fell sharply. The deficit is no longer an issue, given unemployment around the current level.

Summers is being criticized by economists and commentators from across the political spectrum for claiming the nation may be in a period of secular stagnation. Summers noted that the economy was disappointing even before 2007. How could that be, ask some, if the unemployment rate got down to roughly 4.5 percent?

John Taylor of Stanford is especially vociferous about how good the economy was under George W. Bush. Of course, he worked for Bush. But even apart from that, it is hard to take his claims seriously.

Three points here. The labor participation rate under Bush never rose to the heights it reached in the second half of the 1990s. Had it done so, the unemployment rate would likely have been around 5.5 percent.

Second, wages rose very slowly. The low unemployment rate—to the extent that it fell—had a lot to do with slow-rising wages. And the wage share of GDP fell significantly, to levels well below what they were in the 1990s. The rise in consumption to support growth was based on borrowing, as we know, not strong incomes.

Third, capital investment was weak before 2007, never even close to returning to the levels of the second half of the 1990s. The right wing loves to blame lack of business confidence on low levels of capital investment today, but how do they explain the Bush era?

So, to reiterate, Summers is right. We are wading in dangerous territory. On top of all this, there has been a confusing and disturbing downturn in productivity growth for several years—starting, again, before 2007.

We have a tool to deal with this: more government spending. But we get the opposite. Obsession with the budget has led to full-fledged austerity policies in America, as well as Europe.

There are some sweet spots in the economy. I am skeptical of fracking, but it is helping the economy now. Housing is picking up.

But any increase in interest rates without serious fiscal stimulus now is outright dangerous. The inflation fearmongers are still out in force, of course. So let me repeat this: There is no appreciable inflation right now. And one last point: More growth in output could stimulate growth in productivity as well, a well-known economic relationship known as Verdoorn’s Law.

Will America do what’s necessary? Not enough of it. But at the least it should not reverse monetary policy yet. And there may be a little political room to push Washington toward spending in 2014. If so, the nation had better take advantage of it.

Jeff Madrick is a Senior Fellow at the Roosevelt Institute and Director of the Bernard L. Schwartz Rediscovering Government Initiative.

Cross-posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

AFP Photo/Brendan Smialowski

Good News On The Deficit Makes Social Security Cuts Even Worse

Good News On The Deficit Makes Social Security Cuts Even Worse

The deficit is already shrinking rapidly, and Social Security won’t add much to it anyway.

The reason President Obama’s proposal to cut Social Security benefits is tragic is that it is simply not necessary. His plan is to use a different method to compute how much benefits are raised to offset inflation. But Social Security will add very little to federal spending over the next 30 to 40 years. As a proportion of national income (GDP), It will rise from 5 percent to 6 percent. At the same time, retirees are set to get much less money from their pensions because so many were forced to depend on 401(k)s and defined contribution plans rather than traditional pensions with defined benefits.

But a new report from Goldman Sachs economists puts the Obama decision in an even harsher light. The federal deficit is coming down rapidly on its own. In a piece entitled, “The Rapidly Shrinking Federal Deficit,” Goldman notes that the deficit averaged 4.5 percent of GDP in the first calendar quarter, compared to 10.1 percent in fiscal year 2009. The reasons are faster economic growth, higher taxes, and reduced government spending.

More importantly, Goldman thinks the deficit will fall to 3 percent or so over the next two years, mostly because business and households will begin spending again. They think so-called deleveraging—that is, paying back debt—is coming to an end.

And here’s some additional good news: deglobalization! McKinsey reports that deglobalization has plagued the world since the financial crisis. The cross-border flows of capital are down sharply. The good news, McKinsey admits, is that they probably should be. Such border flows were often hot capital, financing speculation more than long-term investment. Now foreign direct investment, usually stable investment in business, is a much higher proportion of capital flows.

And financial deepening—the proportion of GDP that is in debt and stocks–is also down. What sticks out like a sore thumb is that the financial deepening of the preceding two and a half decades—which was huge–went far less to households and business than is to be expected. Even McKinsey says this is astonishing, because what else is finance supposed to do but supply funds to individuals and businesses? Instead, an enormous proportion went to finance itself—that is, financial firms borrowed at dramatically higher rates. And an awful lot of that must have gone into speculative activities, especially highly risky mortgage securities. From my point of view, this financialization was the disease created by the triumphalism of globalization. Globalization, to be sure, had benefits, but they were overshadowed by the financial instability of capital flows, which grew enormously since Ronald Reagan was president.

McKinsey warns that this deglobalization of finance could go too far. As noted, cross-border flows, especially long-term investments, can be highly benefical for world growth. But for me, it is now welcome.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-posted from Rediscovering Government

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo: Donkey Hotey via Flickr.com

Obama’s Other Message: Times Change And Government Changes With Them

Obama’s Other Message: Times Change And Government Changes With Them

The president didn’t just make a case for big government; he argued that the government must adapt to meet its citizens’ needs.

Almost hidden in President Obama’s second inaugural address was a key idea that received little if any attention. The focus has been on the president’s eloquent defense of collective government, and who couldn’t be gratified by that? Time and again, he used the world “together” to describe the nation’s purpose. Government is about working together, and Obama very nicely made the case for it in the face of 40 years of pronouncements by those who disparage government and want to cut it down, if not out. Democrats, not just Republicans, have been leaders in this quest.

But for me, what was most interesting about Obama’s speech was the emphasis on how we must change with the times. I was interested because I wrote a book about this. I take no credit for Obama’s point, because my book was titled The Case for Big Government. I doubt he would be caught even in the privacy of his own bedroom reading a book with that title.

Seeing the title, many presumed I was writing about Keynesian policy. In fact, my argument was that the size of government is not the issue, the need for government is. I cited the work of economists who show that size and high taxes have not automatically deterred growth. But when I published this before the crash, Republicans in particular, but also some Democrats, kept talking about the original intentions of the Founders and were urging us not to go beyond the early purposes of government. That is where I focused my attention: the needs of government change as society, science, social thought,  technology, and expectations advance.

To say government must be small is nonsense. Government must be the size necessary to make a society and economy work, and that is not fixed — nor could it possibly have been known by farmers in the late 1700s.

Here is what Obama said about change on Monday:

[W]e have always understood that when times change, so must we, that fidelity to our founding principles requires new responses to new challenges, that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today’s world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias.

Let me re-emphasize that this has been said before, but not often enough. Surely it is not part of the media discourse and it is not part of the thinking of those budget writers in Washington who claim the federal government should be a fixed proportion of GDP. I refer of course to the Bowles-Simpson budget balancing plan that so many think is the height of good sense. They’d like to limit federal spending to 21 percent of GDP — no matter that our society ages, that health care is more costly, that we need to educate preschool children and better educate those in higher grades as the world gets more competitive, that our poverty rate is still high, that our ability to create jobs is under severe challenge, and so on.

There are no fixed rules for what government should do because we can’t anticipate the future. The colonial writers of America’s Constitution did not know we’d need high schools or highways, electricity or polio vaccines, MRI machines or antibiotics, fertilizers or pollution restraints, gasoline or wind power, or computer chips. They didn’t even know we’d need railroads.

Our view of human rights also changes. Slavery is now abhorrent to almost all, women are equal, those with birth defects require help, and very young children, we have learned, benefit greatly from educationally nourishing environments.

Most of this requires government, and President Obama recognizes this. His agenda, what we must now do “together,” includes climate change, equal rights for women and gays, gun control, and a sensible international policy for the times. He goes on, “So we must harness new ideas and technology to remake our government, revamp our tax code, reform our schools, and empower our citizens with the skills they need to work hard or learn more, reach higher. But while the means will change, our purpose endures.”

The means will indeed change, and the nation would do well to accept that truth, or it will not rise to the challenges of this new century. I originally titled my book The Purpose of Government. Maybe that would have been better. But the point remains the same. Shed ideology about government and fixed ideas and turn our attention to what must be done. Yes, my guess is it would mean bigger government. But so what?

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-posted from Rediscovering Government

The Roosevelt Institute is a nonprofit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/J. Scott Applewhite, File

The Simpson-Bowles Consensus Isn’t Common Sense. It’s Nonsense.

The Simpson-Bowles Consensus Isn’t Common Sense. It’s Nonsense.

Capping federal spending at 21 percent of GDP is arbitrary, shortsighted, and wrong for America.

The Simpson-Bowles budget-balancing plan seems to have become the common-sense standard for dealing with America’s future budget deficits. I’d say this move toward the right is dangerous to the future of the nation and essentially cruel—far more dangerous than the level of the deficit over the next 15 years. The commission, formally known as the Commission on Fiscal Responsibility and Reform, appointed by President Obama, achieves its deficit reduction by reducing government spending to do two-thirds of the job and raising taxes to do only one-third of the job. Even 50-50 would not be fair in such a low-tax nation. The commission proposed cuts in Social Security benefits of 15 percent for medium earners, for example.

But easily the most shortsighted objective is to hold federal spending to 21 percent of Gross Domestic Product into the future. How did they get this number? It is roughly the average level of federal spending since 1970. This is not a reasonable standard—it is not even a way to think about the issue. So where did the idea originally come from? The answer: the right-wing Heritage Foundation.

Now our most respected elder statesmen of the economy, Paul Volcker and Warren Buffett, are endorsing the 21-percent level in recent editorials. It may have been missed in Buffett’s piece, which endorsed a 30-percent tax on the rich, and correctly so. But he said it plain as day: “Our government’s goal should be to…spend about 21 percent of GDP.”

Oh my. Did they do any analysis at all about what that level would mean for retired, sick, and middle-income-to-poor Americans? Did it occur to them how vastly the U.S. economy has changed over those years? There are many more retirees, health care is more expensive and more extensive, the U.S. has chosen to fight costly wars, and its infrastructure and educational needs are dire.

The words of the wise oracles should not be taken seriously. One wonders whether Volcker would have run the Federal Reserve or Buffett picked stock on such skimpy analysis. They present no evidence, nor do I think they have done any research or even reading that shows that a 21-percent spending level will make the economy more efficient than, say, a 24-percent level of spending.

And they beat their chests as the exemplars of responsibility in an otherwise irresponsible America. Moreover, Pete Peterson, of course, is now financing a road tour for Bowles and Simpson to fight their great moral battle to get America’s budget under control—as a reminder, not by raising taxes significantly but by cutting social entitlements significantly. America cannot be run by men like these. America’s great moral battle is for social justice and adequate federal investment.

The heroic and correct analysis of the Simpson-Bowles plan has been done by Paul Van de Water of the Center on Budget and Policy Priorities. Some think of the CBPP as left-wing, but it is only mildly so. It makes deficit reduction a top priority, and its analysis is typically excellent.

Van de Water concludes that keeping federal spending at 21 percent of GDP would require deep cuts in Social Security, Medicare, and Medicaid over time, as well as virtually all other federal programs. He wrote this before the Budget Control Act and the sequester we now face, but its principles still apply.

Moreover, he reminds us that the Brookings Institution held panels on the future budget, and in general, centrists on those panels agreed that spending as a percent of GDP should be 23 to 25 percent 20 years from now. He thinks the Simpson-Bowles plan is simply wrong for America. In truth, Social Security is inadequate today, and Medicaid tragically so. The latter in particular needs building up.

And then the 21-percenters generally have the audacity to demand more investment in education and infrastructure. How?

Centrists had better get together and remind America, with analysis, pragmatism, and a keen sense of justice and America’s future, how deeply wrongheaded most of the basic principles of Simpson-Bowles are. This thinking has led to today’s fiscal cliff, and as a blueprint for the future it is both damaging to the economy and cruel for most Americans.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-posted from Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/Carolyn Kaster, File

To Solve The Jobs Emergency, Put Government To Work For Us

To Solve The Jobs Emergency, Put Government To Work For Us

As part of the series “A Rooseveltian Second-Term Agenda,” a reminder that creating more good jobs must be the president’s top priority.

The presidential victory of Barack Obama was an important vindication for the uses of government. The small-government ideologues were defeated, but now the nation must go farther and recognize government is indeed a job creator.

Let’s begin with the harsh facts: Neither policymakers nor the media fully understand or communicate that America has a jobs emergency. In his victory speech on election night, President Obama did not even cite job creation as one of his four main goals for the new term. Not only is unemployment high, but wages are stagnant and poverty is rising in an economic recovery. The evidence on the creation of low-wage jobs rather than high-wage jobs is almost frightening; the Roosevelt Institute’s own Annette Bernhardt has been a leader on this.

Our mainstream economists are not of much help. Many, though not all, are loath to blame globalization for low wages in America. We hear almost nothing from them regarding Wall Street’s role in wage suppression, although American business was obsessed with creating rising short-term profits to appease Wall Street, which rewarded such consistency with high stock prices. Add to this the pressures of LBOs, privatizations, and hostile takeover threats. Little is discussed of the role of the Federal Reserve in maintaining a tight monetary policy until the late 1990s, in my view suppressing wages as an objective. Finally, almost nothing is heard of the benefits of adequate demand, except in the current crisis, in creating productivity growth over the long run, even as China and Japan have clearly suffered secularly from a lack of demand.

All of these mainstream economists warmly support the view that skill-biased technology is the main cause of stagnating wages. But such technologies cannot explain the runaway of incomes at the top. Nor can they explain the lesser inequality in Europe, a place also subject to technological change.

In my view, we need a very aggressive, jobs-related agenda. This includes aggressive fiscal stimulus over the next two years amounting to as much as $500 billion and focused on infrastructure, aid to the states, and extending unemployment insurance. These will meet dire needs and also will have the most GDP bang for the buck.

The minimum wage should be raised to end poverty for all those who work full-time, and a living wage, or something close to it, should be demanded for all federal contracts.

Industrial policies to target critical new technologies should be aggressively pursued, which might require infant industry protection.

Policies to help our trading partners develop a progressive revolution, including higher wages, the right to labor organizing, and decent labor conditions should be emphasized. As reflected in the Trans-Pacific Partnership, the opposite is occurring. All emphasis is on protecting investors, very little on workers. This would also go some way to creating a more level playing field in trade.

A federal jobs-creating program, similar to those in the New Deal, should be undertaken, emphasizing construction jobs in public works, teaching, and care workers. Tax rates should be raised sharply on the well-off to ameliorate the temporary increase in the federal deficit. Such taxes will not reduce the GDP multiplier very much.

Wall Street pressure to cut wages must be softened. Business executive compensation must be more closely aligned to long-term results. The tax deduction on borrowing for LBOs, privatizations, and corporate takeovers should be sharply reduced or eliminated.

In addition to these immediate needs, there are three longer-term policies we must pursue. First, in three years or so, America will need a sharp tax increase. Its average tax rate, including federal, state, and local, is 10 percentage points below the OECD average. If that is reduced to five percentage points, it would raise nearly $1 billion more a year. There is little evidence such an increase would impede economic growth.

Second, any such tax increase should only partly be used to pay down the debt. It should be used to shore up major entitlements programs, develop a public option for health care, and increase infrastructure and education spending.

Finally, although educational deficiency is not the primary cause of the current wage problem, it will be in the long run. A major educational equalization campaign is necessary, which includes pre-K for all.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-posted from The Roosevelt Institute’s Next New Dealblog

The Roosevelt Institute is a nonprofit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/Charles Dharapak

Despite A Strong Debate, Obama Remains Vulnerable On The Economy

Despite A Strong Debate, Obama Remains Vulnerable On The Economy

The president found his voice in the second debate, but he still needs to make a clearer case for the progress he’s made.

There has been entirely too much celebrating about President Obama’s debate performance on Tuesday. He did very well, without a doubt. He won hands down. He didn’t get into the ring cold, and he showed that he knew his stuff—and that Romney really didn’t.

But the economy remains the ace in the hole for Romney and Ryan. We haven’t nearly recovered in terms of jobs, and that’s a tough fact to slide by. The unemployment rate rose rapidly in Bush’s last term to around 8 percent, then peaked in 2009 at 10 percent and slowly came down to its current level. So we are only back to the start of the Obama term. No one ever won the presidency with a 7.8 percent unemployment rate. And we know, as Romney keeps reminding us, that median family income is awful and that poverty is up.

Everyone knows this, and yet Obama did not have a good enough explanation of how much progress has been made. He sounded defensive. So Obama needs a strong, non-defensive explanation of his achievements, and one way to put it is what would have happened had Romney won the presidency in 2008. You’d have a 10 percent unemployment rate with Romney as president. Poverty would be way up. He’d be blaming Social Security and Medicare for all his problems, and he’d find economists to claim he was right. They might already be cutting these programs forever “in order to save them.” It’s triage — throw the elderly out of the boat and let everyone else eat the rations. People would be poorer. They would get less health care. Those in poverty would have fewer benefits. Is that the kind of America you want?

Odds are that Romney, if he put the Romney/Ryan plan into effect, would create a bigger deficit, too. That’s actually what we need, but a deficit based on tax cuts will create few jobs. (EPI ran some numbers based on Mark Zandi’s multipliers.) And if Romney did close the many tax holes he promises to, recession is almost guaranteed even as your taxes rise.

This concept is tough to communicate in a credible way. It just sounds like economists bickering. But there is a record out there: George W. Bush’s. His central economic policy was tax cuts for the rich, and he produced the slowest job growth of any president since the Depression. Romney will do that again. Promise.

Obama has to be clear: He stopped a Depression. He is getting the housing market to come back after the worst devastation since the early 1930s. Employment stopped falling. But he shows hesitation in critical areas. Will he protect Social Security and Medicare? If so, then say so. The other guys will cut it, even gut it. But is he vacillating too much here. The talk about Dodd-Frank doesn’t win him many points because most of America thinks the banks got away with murder. He needs a better way of talking about that. As for Obamacare, he is talking about its good points, but he needs to be bolder still. List them all, and list them fast.

And when he says Romney is lying, which is a deliberate motif of the Republican game plan, don’t say he lied with a smile. Say, “It makes me very sad and disheartened when the governor misleads the American people. It is unfair to you voters. And when challenged, my opponent will come back and tell you again, that’s not what his program is, or he never said that. Be proud of your claims, Governor Romney; don’t back off them to win over some in the middle of the pack. Tell them where you really stand.”

Finally, it is critical to be constructive about the uses of government. Tell America the only way the country will succeed and the economy will remain prosperous is if we bring everyone with us. Every American must be able to contribute to the economy with a good education and good health. Every region must have good, dependable transportation. Every part of America must breathe clean air. Government can do that.

Unfortunately, there is no third debate about domestic matters since the next one is on international events. But I bet we get back to the economy in the third debate. I hope so. Democrats have to realize that every time Romney says “just look at the record,” they are behind the eight ball. Obama needs a very clear, persuasive statement about how bad the economy was in 2009 and how much he did. He stopped the bleeding. The patient was in the hospital. Who put him there? The Republicans, with the same plan Romney is offering today. The patient is resuscitated. Jobs are coming back. The housing market has turned the corner. Everyone is still getting Social Security and Medicare. And now 30 million more will have health insurance.

Oops, I’ve already said all this. Sorry, readers. But why do I have to keep repeating it?

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-posted from Rediscovering Government

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/Carolyn Kaster

Obama Failed To Defend Government From Romney’s Bluster

Obama Failed To Defend Government From Romney’s Bluster

Obama failed to defend his policies or the positive role of government. But next time he’ll be ready.

President Obama lost the debate. A bad night’s sleep did not change my mind about that. But let’s be clear that, even if more relaxed and lucid, Romney was the same as ever. There is no “new Romney.” He dissimulated, did not address details, and refused to answer what few charges Obama brought up.

He opened with a brilliant debating tactic — really a war tactic: open a second front and retreat on the first one. Romney tacked to the middle. No, he won’t cut any taxes he can’t pay for. No, it isn’t a $5 trillion plan. Obama wasn’t ready and didn’t seem able to adjust. But what is the Romney policy? He never said. More upsettingly, Obama noticed but never truly pressed him on it.

In fact, Romney’s is the same old George W. Bush policy, and it didn’t work then. Obama got to this point, too, but didn’t bring it home strongly enough. Job growth was the slowest under Bush of any other postwar president. Obama said it. Doesn’t anyone remember his saying it? But Romney dissimulated again, because he can’t pull this grand four- or five-point strategy off, just like he couldn’t pay off his original tax cut program. Obama could have asked him how much he plans to cut tax rates. He would have dodged it, but in dodging it he would have looked more like the old Romney than the new, bold Romney. Obama could have pressed harder on the details of closing loopholes. He didn’t.

Romney ignored the facts time and again, a tried-and-true debating technique. Obama pointed out that in a Medicare voucher program with choice, the insurance companies will steal the elderly who are healthy and raise costs for Medicare, jeopardizing its future. Romney simply ignored the point and went on to say, as if Obama had said nothing, that Medicare would still be there under his voucher program and if it worked better, it would stand.

In his attacks on the role of government, he persistently said the private sector can do better. But private sector health care costs have risen faster than Medicare. Why is that? He pushed the old ideological sticking points. Government is bad, private enterprise good. No facts, mind you. Just shibboleths. Keep the federal government out of health care. Give it to the states. Should we keep the federal government out of Social Security and Medicare — both very popular government programs — too?

But if Romney’s bluster was strong, Obama lost the debate more than Romney won it. He seemed incapable of defending Obamacare. He couldn’t even counter the alleged Medicare theft of $716 billion well. He didn’t defend his green investments. Ninety billion dollars is not much when you consider Japan will probably spend nearly $500 billion on renewables. He only passingly defended his stimulus bill, repeating the error of neglect he has made for most of his administration. In fact, he hardly defended his record at all, for fear it reminds people that unemployment is still high, as is the deficit. The point is they’d both be higher under a Romney plan.

And what of the policies for 2013? Where was talk of Obama’s American Jobs Act? Why not say that Romney’s policies will bring you a recession, sure as you’re sitting there?

And what about bipartisanship, of which Romney bragged during his governorship in Massachusetts? Could Obama have pointed out that he couldn’t deal with Republicans who proclaim their first priority is to stop his re-election? Did any prominent Massachusetts Democrats threaten Romney that way?

Now, the media will start analyzing the Romney promises, and therein will lie some justice. He won’t be able to defend them except in the same general, non-detailed ways. The Democrats have to counter-attack. There will be plenty of room to do so.

And one other point: I think Obama will be ready next time. He went into the ring cold. Every boxer knows you have to warm up and break a sweat before the first bell. I think he learned. He almost got knocked out in the first round. Not again, I don’t think.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-Posted from Rediscovering Government

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Photo credit: AP/The Denver Post, Craig F. Walker

Central Banks Are Saving Democracy From Itself

Central Banks Are Saving Democracy From Itself

We may want more democratic control over the Federal Reserve, but its independence is allowing it to push back against austerity.

The Federal Reserve’s recent announcement of aggressive new policies is more than a little welcome. It involved a new round of quantitative easing focused on mortgage-backed securities, but more importantly, a statement that the Fed would keep rates low for a long time, even if the unemployment rate begins to fall markedly. In other words, the Fed will be more tolerant of rising inflation. A couple of points are clear and have been widely discussed:

First, more inflation is what this economy needs. It will reduce “real” interest rates down the road. It will also reduce the level of debt, which will now be paid off in somewhat inflated dollars. Lenders will pay the price; borrowers will benefit.

Second, the Fed is at last accepting its dual mandate, which is not only to keep inflation in check but also to keep unemployment in check as well. Inflation got almost all the focus since Paul Volcker’s reign in the early 1980s.

Third, inflation targeting as almost the sole purpose of any government policy is now either not applicable to current circumstances or never really was the answer to our prayers. The main claimant on the uses of either hard or soft inflation targeting was none other than Ben Bernanke himself. He was the champion of the Great Moderation, which held that less GDP volatility and low inflation were admirable ends in themselves — proof of a nearly perfectly managed economy.

Never mind that growth in the late 1990s was supported by high-tech speculation in the stock market, or that growth in the early 2000s was supported by a housing bubble and crazy, risky practices on Wall Street. And forget that job growth was the worst of the postwar period under George W. Bush, even before the 2008 recession, and wages had been performing poorly for 30 years. It was all really great, said Bernanke, and only a few mainstream economists disagreed.

But there is another point that needs emphasis and is being passed over. This one is about democracy. Bernanke is acting aggressively because the American Congress and president are locked in an austerity embrace. Fiscal stimulus is now turning into de-stimulus. Even the president’s budget calls for fiscal restraint. The deficit bugaboo is strangling the world.

Those who want to make the Fed more subject to democratic control – and to a degree, I am sympathetic — should heed a lesson here. Democracy — that is, a democratically elected Congress and president — is choosing a damaging course of austerity. In Europe, it is far worse.

Needed policies are coming from America’s central bank, which was deliberately created as an independent entity. Note that it is Romney who is saying he wants Bernanke out of there and crying wolf about inflation. Bernanke, not subject to the whims of democracy, has had the courage to change his own thinking. He knows the consequences of tight policy now.

So what do we do? We should be a little modest about the universal benefits of democracy. For example, I think democracy may yet work to end the severest levels of austerity in Europe. People are mad. Governments are changing for the better. Demoracy in America is the only answer to an ever-richer and more powerful oligarchic class in the U.S., which wants to lower taxes, limit regulations, and cut government into ever smaller pieces.

But we must also deal with the disturbing fact that one of the least democratic of our institutions, the Fed, is the only one saving the day now. The same is true in Europe, where the European Central Bank is now acting intelligently, in contrast to the fiscal hawks dominated by the German policymakers and apparently supported by a majority of the German people. This issue is not simple.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Cross-Posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

The Left Doesn’t Need A Rand And The Right Shouldn’t Want Another Reagan

When we wish for modern incarnations of the right’s biggest idols, we feed into the myths surrounding them.

I am more than a little disturbed by all these pieces coming out about why the left has no Ayn Rand as a guide or how Ronald Reagan was a “socialist” compared to Paul Ryan. One has to be more than a little careful not to elevate these two icons to acceptable status. Let’s keep Ayn Rand in perspective. She was a talented mass market novelist who wrote David and Goliath myths about a super individualist versus the behemoth society. Her philosophy was not even second rate. Ronald Reagan did not save the economy; his legacy was a crumbling foundation for growth and a rising tide of injustice. It could be seen as a positive to fail to measure up to either of them.

The right’s portrayal of Paul Ryan as a Reaganite is not that far from the truth, but the right then goes on to mythologize and entirely distort the Reagan years. Under Reagan in the 1980s, wages stopped growing, productivity grew at historically slow rates, investment was soft, and the deficit never came down to the levels promised. That deficit was an albatross around the neck of George H.W. Bush, his successor. Meanwhile, deregulation was unloosed, only to be given further impetus by the Clinton administration. The right goes so far as to attribute the productivity boom of the second half of the 1990s — that is, after the Clinton tax hike — to Reagan. How can we take such claims seriously?

Does Ryan go much farther than Reagan did in terms of changing Medicare from a guarantee to a poorly financed premium program? Sure. Would he cut other programs to almost zero? Yes. Did Reagan? No, but probably because he couldn’t politically, not because he didn’t want to. Maybe Reagan had a more generous heart than Ryan’s — he was once a lefty and never a rich kid like Ryan, and his dad worked for the New Deal. But he played the race card in California and on his way to the White House. Is there anything uglier these days than his attacks on “welfare queens” were then?

In the end, Romney and Ryan are both preaching Reagonomics: cut taxes and worry about closing the deficit sometime in the future. Neither tells us the loopholes they’d close or the other programs they’d cut to allegedly meet their deficit targets. Their aim is to reduce the size of government, as was Reagan’s and Milton Friedman’s. The deficit is a secondary consideration, for all the blather about it.

As for why the left doesn’t have an Ayn Rand, I say thank goodness it doesn’t follow a great over-simplifier like her. Her sexually charged novels focusing on an individualist hero appealed to adolescents or those who still yearned for those years. Her economics were derived from her individualism. A Russian by birth, her thinking was animated by her loathing of Soviet totalitarianism — certainly understandable. But she became an ideologue, not a disinterested intellectual. She had no serious friendships with the likes of Hayek and collaborated with few schooled economists other than Murray Rothbard, who later left her circle. She was really more a cult leader than a thinker.

The nation turned conservative in the 1970s and began reading Rand, Hayek, and Friedman again. Milton Friedman’s writings really only caught on well after he published, but he was all over the mass media in the 1970s and won a Nobel prize, which would have been unlikely had it existed when he started out. These books were very accessible as part of the right’s appeal is the simplistic nature of its economics, all captured by a demand and supply curve that economists as far back as Alfred Marshall warned against taking too seriously. Today, the entire economy is portrayed as a supply and demand curve crossing at equilibrium. But we have cause and effect mixed up here. Americans became more conservative not due to the literature, but for a complex number of reasons.

But there have been great leftist successes. J.K. Galbraith was more articulate than any of these conservative authors and wrote major best sellers. The counter-culture of the 1960s was groomed on Marcuse and others. I myself as a student wrote a summary of such writing for the curriculum of Harvard Business School. Why is there no return to these kinds of authors—to Harrington, Rachel Carson, Betty Friedan, even Eldrige Cleaver? The answer is that the nation and its press are pretty conservative and seek books that reinforce these views.

Perhaps we will get a novel out of Occupy Wall Street that will move young people. I hope so. It seems ripe with possibilities. But there are other books to be read or at least dipped into. The most recent mass phenomenon was a book by French author Stephane Hessel called Time for Outrage! in English. It reportedly sold millions of copies and helped ignite the Arab and Spanish Spring. It is a highly accessible and moving and angry work. Robert Nozick was the popular libertarian philosopher of the 1970s, but John Rawls won the day among serious thinkers. A lot of writers have written about the importance of government recently. Stiglitz has written well about inequality.

So let’s not demand another Ayn Rand, who wrote essentially low-brow literature, or another Reagan, who is now mostly a mythological figure. Let’s keep our sights higher and avoid drawing the wrong conclusions from the right’s past success.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author ofAge of Greed.

Cross-Posted From Rediscovering Government

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Ignore The Deficit Hawks: Social Security Is Easy To Fix

On the 77th anniversary of Social Security, we’re celebrating what has made the program so important and why it remains vital today. Jeff Madrick explains why Social Security’s so-called fiscal crisis has been overblown and looks at the many simple solutions on the table. Read the rest of our coverage here.

Little is as distressing in the public discourse as the linking of the financial problems of Social Security and Medicare. It is a favorite ploy of the deficit hawks to claim we must reform our entitlement programs without distinguishing between the two. I am at a loss to explain this. It is clearly ideological — small government no matter who gets hurt. But Social Security payouts will rise from roughly 5 percent of GDP to 6 percent at worst down the road, while Medicare will rise by much more.

Nevertheless, poorly educated pundits, willing to believe the self-proclaimed centrist view that we cannot tax our way to solvency, demand Social Security reforms from selfish baby boomers. Monique Morrisey of the Economic Policy Institute does good work on this. Moreover, there is even a detailed Senate report on the issues that requires only a little updating. Maybe journalists should read it before they write about the subject. Its title is rather self-explanatory: “Social Security Modernization: Options to Address Social Security Solvency and Benefit Adequacy from the Senate.”

First, remember that Social Security provides nearly 60 percent of the elderly more than half of their income. Seventeen percent receive all their income from Social Security, mostly households headed by elderly women. Most remarkably, and it would be nice for young people to register this, the poverty rate measured by the federal government for the elderly was 35 percent in 1959. As Social Security became more generous, it was reduced to 10 percent, about where it stands today. This is one of the great social achievements of our time.

Now for that future financing gap. It’s true that payroll taxes won’t cover all the benefits to be paid in 25 years or so, as the ratio of the elderly to workers rises and life expectancy grows. But a more important and lesser known cause of this future gap is inequality of income. Taxes revenues are reduced because incomes have stagnated for so many. Due to an earnings cap above which taxes are not collected, now about $110,000 a year, combined with the rapid rise of incomes for high-end earners, some 17 percent of aggregate earnings are not covered by the payroll tax. In 1980, only 10 percent were not covered.

But the solvency gap, as we might call it, is not very large, amounting to only 2.67 percent of GDP. How can that be closed? Pretty darned easily. For example, the cap can be eliminated. This would close almost the entire gap if high-end earners do not receive higher benefits. It will still close four-fifths of the gap if they do.

Another way to close the gap would be to raise payroll taxes by 1.1 percentage points, from 6.3 percent to 7.6 percent. This would entirely close the solvency gap. Or the tax could be raised by a little more than 1 percentage point in 2002 and another percentage point in 2052, also eliminating the solvency gap.

A combination would also work. If the cap were raised to cover 90 percent of all workers, for example, it would close about 25 percent of the gap. Thus, a tax increase to close the rest would be smaller. Alternatively, the payroll cap on employees could be limited to 90 percent and eliminated altogether for employers. This would just about eliminate the gap.

There are many other options and permutations, but any claim that a pragmatic increase in taxes cannot close the gap is utterly wrong.

Let’s also keep in mind that Social Security solvency is based on a 75-year forecast. Any increase in the rate of growth over what is expected will reduce the gap significantly. Now to really be pie in the sky, there is also the possibility of investing in the economy to enable it to grow faster—investing in infrastructure, education, and so on. More equality of income would also reduce the solvency gap. For those eager for major benefit cuts because we can’t be sure about growth, well, they can be quite modest if coupled with tax increases. But they are not necessary now!

Medicare is a different issue. In sum, the nation pays about twice as much for what it gets from health care than it should compared to other countries. This is the domestic problem of our time. I think Obamacare may start us down the road to control these costs, especially if we ultimately add a public option at something like Medicare rates. That’s where pundits and deficit hawks should focus their attention. Instead, they like picking on Social Security, our single greatest achievement. Why?

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author ofAge of Greed.

Cross-Posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

‘Romney Hood’ Is The Return Of Reagan’s Starve The Beast Strategy

‘Romney Hood’ Is The Return Of Reagan’s Starve The Beast Strategy

Romney may be running as the small government candidate, but his only real goal is to cut taxes.

The Tax Policy Center has carefully analyzed how much would come out of the pockets of the middle class and poor to support Mitt Romney’s top-heavy tax cuts for the rich. The numbers are appalling. But it’s likely Romney has no intention to pay for his tax cuts or to make his plan revenue neutral. Call it the Ronald Reagan feint.

Romney is promising tax cuts and believes that’s how he will get the vote. He probably thinks deep down that the tax cuts will generate more growth than anyone serious anticipates, just as Reagan did, but here’s no real evidence to support that, as much as his advisers try to claim otherwise. He says he is “supportive” of Paul Ryan’s budget, which will result in draconian cutbacks. But we shall see how often he talks about these details. He knows people don’t really believe what progressives say about these cuts, as Katrina vanden Heuvel has noted.

Romney is running an impressionistic campaign, not one of details. The impression is that he is for tax cuts and smaller government, which is appealing to many Americans. The details will come later, if they ever do.

Oddly enough, he is not genuinely running on austerity. Rather, he is the new leader of the old starve-the-beast school. Eventually government will be cut if taxes are cut first. That means he will use the austerity argument to chop up Social Security and Medicare to the degree he can when the time comes. And we may get some stimulus under Romney as president, but it will be the worst kind. We got stimulus under Reagan and George W. Bush, but tax cuts did not return America to a fast-growing, job-creating economy under Bush, and deficits were used under the tax-hating Reagan to create obstacles for new social programs and put heat on welfare. The nation never grew fast enough to bring the deficit down as a proportion of GDP in the 1980s and it left George H.W. Bush with a difficult agenda and still historically high unemployment.

Progressives should fight on the details, but they should also fight impressionistically on a bigger level. “Romney Hood” is effective because it is pitching the fight on tax breaks for the rich. Another effective criticism is that Romney is elitist. A third is that this approach was tried by George W. Bush and failed. On social programs, the Democrats show a weak hand when so many agree they need substantial cuts. Democrats have made austerity their big cause. Ironically, Romney, is in his offhand way, is just giving it lip service for now, when he is really just for tax cuts.

Of course, Romney as president will return to austerity to create pressure for cuts in key social services. He will not be able to make desperately needed social investment, and the nation will be seriously run down. But Romney’s trick in the election is to put austerity on a back burner and wait until he becomes president to address it. The opposition should make clear the consequences of such a president, but it needs to understand the battle of impressions as much as it does the battle of details. I write this as a details person myself. But the big issue is that tax cuts for the rich don’t mean prosperity for America. The history is clear, and so is the academic research.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author ofAge of Greed.

Cross-Posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

A Shameful Few Weeks Begs The Question: Where’s Government?

With the recent crises in the financial world, it’s clearer than ever that we need government to step up and address our problems.

There are certain periods in our history during which one can only sit back and wonder what the limits of astonishment really are. A couple of years since Dodd-Frank first passed, we have come through a period of such disrepute for business that one wonders why the working class has not risen as one — except, of course, because it is exhausted with efforts at reform that seem so futile. We have uncovered many disreputable and perhaps fraudulent business activities, but they essentially represent a failure of government.

Facebook’s initial public offering collapsed in price, leaving small investors holding the bag. Brokers took care of their big customers far better than their small ones. Where was the SEC?

New insider trading convictions, most recently of the widely respected Goldman Sachs director Rajan Gupta, show how rampant trading on insider information really is. The $6 billion losses at JPMorgan Chase by a department that was supposed to neutralize risk showed that trading risk is too profitable to be foregone voluntarily.

And now we find out that LIBOR is incontrovertibly rigged. Some may not realize that Barclays, which agreed to pay a $450 million fine, signed a Statement of Facts that admitted its traders rigged this key rate to make profits on positions, and collaborated with bankers/traders at other banks. Now we find out that Treasury Secretary Tim Geithner, while president of the New York Fed, was worried and even wrote British regulators about this. That’s nice. But why didn’t government — and Tim Geithner himself — actually do something about it? Are government regulators that feckless?

Of course, there was a certain political advantage in a LIBOR that could be fudged. LIBOR is the rate at which banks lend to each other. It should be nearly riskless, and is therefore used as such in many transactions. LIBOR was the basis, in fact, for up to 100 percent of subprime mortgages. It is often a key input into complex pricing models for securities like derivatives and collateralized debt obligations.

It could be that the Bank of England looked the other way when some bankers, including Barclays’s, lied and said they were paying a lower interest rate than they were in order to make it seem their credit was good. Especially in the fall of 2008, after Lehman’s collapse, governments wanted to calm the waters. Did the Fed also tolerate fudging the numbers?

Why wouldn’t they? The Treasury puts a better face on matters all the time, as does the White House, no matter who is president. PR is an integral part of government. Has the practice in this age of greed slid off onto regulatory agencies? Surely Ben Bernanke was overly optimistic about controlling any impending subprime wreckage in 2007 because he knew it was better to err on the side of Pollyanish hopes that risk precipitating a crisis. What better way to underplay a crisis than to let the banks do it for you?

But for all these remarkable events — and government failures — most disturbing is the ongoing demands for austerity that even President Obama himself makes. The president wants to extend tax cuts for all except those who make $250,000 or more. But he cannot make the case without saying we have to get our fiscal house in order. The nation is likely to need stimulus. But Obama bought into the budget balancing process so early on by appointing Bowles and Simpson to come up with a solution that there is no effective opposition to impending obtuse budget policies in late 2012 and 2013. The classic case is made by the CEO of Honeywell on the front page of the Financial Times. Seeking to blame Republicans and Democrats alike, the esteemed chairman and member of the Bowles-Simpson Commission claims that business has no confidence until this is resolved.

The truth is more simple. Uncertainly surrounds the possibility that the Republicans will hold up the government again, claiming they demand budget cutting. And Mitt Romney promises to do far more damage. There is no contest between the two, and let’s keep in mind that Obamacare, and even Dodd-Frank, contain very good measures that Romney would try to overturn.

As we end a bad few weeks and start a period of remedying the damage, let’s keep in mind that America’s fiscal problems in the near run are highly exaggerated. But even down the road, the problem is not what we spend, but the tax cuts we have been giving ourselves for 30 years. I will begin to believe the sincerity of arch deficit hawks when they argue for tax hikes, not only cuts in Medicare and Social Security. And so should the chairman of Honeywell and others of influence like him.

The myths of austerity economics are paralyzing the government and keeping the nation from getting its house in order. How may times can one say it? Not often enough, apparently.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author ofAge of Greed.

Cross-Posted From Rediscovering Government.

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.