To add to what I said about a week and a half ago on how German conservatives say things that you would rarely hear an American Democrat say, Reuters had an excellent piece that highlights how different Europe really is. I recommend reading the whole article, but it is quite telling that the German Finance Minister warned that if Europe adopted US welfare standards “we would have a revolution, not tomorrow, but on the very same day.”
I finally got around to reading Paul Krugman’s piece in the New York Review of Books on austerity. In it, he gives a concise statement that explains very well what economic interests motivate the opposition to stimulus and deficit spending. It also makes clear what economic interests are not being served.
“As many observers have noted, the turn away from fiscal and monetary stimulus can be interpreted, if you like, as giving creditors priority over workers. Inflation and low interest rates are bad for creditors even if they promote job creation; slashing government deficits in the face of mass unemployment may deepen a depression, but it increases the certainty of bondholders that they’ll be repaid in full…It’s also worth noting that while economic policy since the financial crisis looks like a dismal failure by most measures, it hasn’t been so bad for the wealthy. Profits have recovered strongly even as unprecedented long-term unemployment persists; stock indices on both sides of the Atlantic have rebounded to pre-crisis highs even as median income languishes.”
In an interesting contrast between Western Europe and the US, German Chancellor Angela Merkel said today that financial markets need more regulation. Her party, the Christian Democratic Union, is the more conservative German party, yet gives at least some minimal commitment to the notion that the government should keep markets in check. Merkel said,
“Crises have blown up because the rules of the social market have not been observed…We have made progress but we are nowhere near a point where we could say that the kind of derailment that leads to market crises could not happen again and so the issue will again play a central role at the G20 meeting this year.”
Also interesting that she notes that markets have a social purpose and are not simply to be praised for their own sake.
“It is true that economies are there to serve people and that has by no means always been the case in recent years.”
Paul Krugman was on Morning Joe (video below) this week and put forth his standard arguments about job creation needing to take priority over deficits. (I encourage people to watch it for a thorough run-through of the basic Keynesian arguments.) The co-host, Joe Scarborough, wrote an opinion piece on Politico blasting Krugman. What strikes me is that the opinion piece is shoddy ranting that uses little evidence and mischaracterizes Krugman’s positions. Yet deficit scolds Simpson-Bowles praised the article. I don’t have time to run through everything, but a few key points:
1) The article is entitled “Paul Krugman vs. the world.” Krugman listed on his blog many of the mainstream economists who hold positions similar to him. Check it out for the details.
2) Scarborough blatantly oversimplifies Krugman’s position:
“Mr. Krugman suggested Medicare and Medicaid shortfalls should be ignored…saying that no one could predict the future of entitlements so there was no need to worry until the programs became insolvent.”
If you watch the show, while Krugman says he thinks it can’t be predicted with absolute certainty that Medicare/Medicaid spending will be unsustainable in the future, he does say it’s a “good bet.” Nowhere did he say that we need to wait until the entitlements can’t be paid out. He simply says that it is not something that needs to be addressed immediately given unemployment as a more pressing problem. Krugman may be right or wrong, but how does someone get taken seriously when they make silly oversimplifications?
Watching Krugman’s appearance though made me think that is important to make some major distinctions when discussing the debt issue. Future entitlement spending problems and the US debt are related issues, but are not the same. It is important to separate them, because it seems like the average person may think that unless we cut spending on entitlements our economy is going to tank, when in fact the situation is more complex. There is an issue of the sustainability of entitlement spending related to an increase in the size of the population dependent on Social Security and Medicare/Medicaid. This issue is about whether or not the government will be able to fund those programs.
During the presidential campaign, Romney said Obama would drive the US down the road to Greece in terms of its debt. Sen. John Cornyn made the same argument in an op-ed a could weeks ago, saying we need government spending cuts to avoid the “path of Greece, Italy, and Spain.” But it interesting that one never hears the argument applied to Japan, which, like China, holds about $1.1 trillion of US Treasury Bonds. The reason this is interesting is that Japan’s public debt is about 220% of its GDP, while the US is only about half of that. If the US is allegedly on the “path of Greece, Italy, and Spain” at rates of 137%, 117%, and 61% then shouldn’t Japan be on the brink and ready to dump US bonds for cash to pay off their debts? No one has made this argument because no one believes it. But if the soundness of an economy was simply a function of how much debt we owed, then it would be made all the time.
I just watched a great interview with Paul Krugman by Bill Moyers from a couple days ago (see below). Last summer I read Krugman’s book they mention, End This Depression Now, so this is all pretty familiar to me, but I still can’t help but feel furious that Republicans, and some centrist Democrats, are so intent on focusing on the issue of government debt while the suffering of actual human beings is given second tier status (and often negative status).
Point #1: Our economy is still in extremely rough shape with unemployment at 7.8% and the Federal Reserve predicts it will be down to between 7.4-7.7% by the end of 2013. Obviously good that it is going down, but the pace is pretty awful.
Point #2: College graduates are likely to be permanently impacted by their lack of job experience. This recession/depression means people who can’t get jobs now are going to earn less and have more difficulty getting good jobs even when the economy returns to full employment. (The Economic Policy Institute has a good report on this).
Point #3: The debt-to-GDP ratio for the US is likely to be relatively stable assuming there is economic recovery. The poor state of the economy is actually decreasing government revenue and increasing its deficits. Furthermore, Japan’s debt-to-GDP ratio is around 220% while the US is less than half that . Is anyone predicting Japan becoming the next Greece?
Point #4: Given the first three points, why are people so obsessed with threatening to cause the US to default on its debts, cutting the retirement age for Social Security and stopping “big government” rather than doing something that will get the economy going again? I think a passionate committment to dismantling the welfare state is a reasonable explanation, as is demonstrated by the State of Maine’s Republican governor’s bid for welfare reform.
Via Democracy Now, I came across a truly horrid finding by a British organization, Institution of Mechanical Engineers. In a new report, they find that half, yes half, of the world’s food may not actually be consumed. This is truly unbelievable that the problem in the US is we have too many overweight kids, while people throughout the world (and for that matter in some poor parts of the US) people are malnourished. According to UNICEF(see the bottom right bullet of page 1), malnutrition contributes to the deaths of 2.6 million children under 5 every year. Somehow this is all tolerable.
Peter Singer, the famous ethics philosopher, has a very good project underway, based on his book The Life You Can Save to encourage people to give part of their incomes to organizations working to end extreme poverty. One reason I trust that it is a good project is that I emailed them once asking why the UN World Food Programme was not on their list of good organizations to give to. I received a reply (not sure if it was actually from Peter Singer) stating that they think the World Food Programme doesn’t actually help build infrastructure to help poor people be self-sustaining, but instead gives food as emergency aid, acting as more of a band-aid. Below is the table showing how much they recommend people to give based on their income. Their site also has a list of organizations they suggest give to.
(or, if you are not currently receiving an income, what you spend each year)
|Less than 105 000 USD||At least 1% of your income, getting closer to 5% as your income approaches 105 000 USD|
|105 001 USD – 148 000 USD||5%|
|148 001 USD – 383 000 USD||5% of the first 148 000 USD and 10% of the remainder|
|383 001 USD – 600 000 USD||5% of the first 148 000 USD, 10% of the next 235 000 USD and 15% of the remainder|
|600 001 USD – 1 900 000 USD||5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD and 20% of the remainder|
|1 900 001 USD – 10 700 000 USD||5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD, 20% of the next 1 300 000 USD and 25% of the remainder|
|Over 10 700 000 USD||5% of the first 148 000 USD, 10% of the next 235 000 USD, 15% of the next 217 000 USD, 20% of the next 1 300 000 USD, 25% of the next 8 800 000 USD and 33.33% of the remainder|
A December Forbes magazine piece states, “If the United States no longer needs access to Middle East oil under any foreseeable circumstances, then the priority Washington assigns to the region will plummet. ” Really? Looking at some basic stats seems to show a different picture. US consumption of Middle East oil is not the issue, but rather control over the world’s largest oil reserves, with the Middle East holding a majority of the world’s oil. Does anyone really think the US will let China, Russia or Europe have control over the the majority of the world’s oil?
Since I teach high school history, I thought I’d share a couple graphs I found for one of my classes. During the 1920’s, GNP per capita was increasing…
But gains were concentrated the top…
Calvin Coolidge and Herbert Hoover were the proponents of supply-side economics and “rugged individualism” from 1921-1932. Republicans spout the same ideas today. Look at 2007 in the graph above. Do we have any reason to think the superrich aren’t at it again?
A think tank in the UK has pointed out (as the IMF did in less vocal tones about Europe as a whole) that focusing on reducing government deficits is actually leading to greater debt. The UK has taken an approach of tax increases and spending cuts to keep debt from going too high. But the reduction in consumer spending from taxes and reduction in government spending has slowed economic growth, meaning that there is a smaller tax base from which to generate revenue. The typical Keynesian picture seems vindicated: the government should spend in hard times, and save in good times. Important to keep in mind here in the US when conservatives (and many Democrats too for that matter) talk about cutting government spending. Granted Republicans won’t raise taxes, but as I have repeated over and over on this blog, they aren’t serious about cutting deficits either. But for the sake of argument, let’s assume they did cut spending significantly. Especially if the economy is in its current state, then that would slow down growth, decreasing the tax base…you get the idea.