Every Monday and Friday morning when I pick up the New York Times, I immediately turn to the OP-ED page to see what liberal icon Paul Krugman is saying. In his most recent column, “Debt Is Good,” he says that “what ails the world economy right now is that governments aren’t deep enough in debt.” Here is my response to his argument:
“The federal government can (now) borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future.” Our public debt (on which we pay interest) is now $13 trillion or 74% of GDP, the highest since the end of WWII, as shown in the above chart from the Congressional Budget Office. It is likely that interest rates will soon begin to go up. Every 1% rise will increase interest payments on our already existing debt by $130 billion per year. Where are the hundreds of billions of new dollars for debt service going to come from in an already tight budget? The more we add to the debt, the worse this problem will become.
“Having at least some government debt helps the economy function better.” I agree! But $13 trillion is way beyond what is needed for this. It is outrageously excessive!
“What we need are policies that would permit higher (interest) rates in good times without causing a slump. And one such policy would be targeting a higher level of debt.” The problem here is the conceit of Keynesians, like Mr. Krugman, that monetary policy alone can restore us to economic and fiscal health. Rather than accepting that the economy has entered a “new normal” with a permanently slow growth rate of about 2% (as has been the case since the end of the Great Recession in June 2009), we need policy changes such as individual and corporate tax reform (revenue neutral to be sure) and changes in the Affordable Care Act and Dodd-Frank Act to remove their job killing features.
Anybody with an ounce of common sense knows that excessive borrowing will eventually lead to disaster. Mr. Krugman seems to think that by constantly ridiculing his opponents, he can get away with denying this simple truth.
I think of myself as a political moderate, conservative on fiscal matters and somewhat liberal on social issues. My blog posts are usually based on a recent newspaper article or think tank study presenting one side or the other of an important issue in an intelligent way. In other words, I seldom bother to refute what I consider to be dumb ideas. I assume that they will eventually die of their own dead weight. My favorite approach is to respond to an attractive article with which I may have a somewhat different point of view. Today’s New York Times has such an article, “Many Feel American Dream is Out of Reach, Poll Shows,” pointing out that 64% of a NYT Poll respondents think that it is possible to start out poor and become rich (see above chart), which opinion has dropped from 72% in 2009. The Poll also reports that:
81% of Americans have confidence in their own local banks whereas only 41% have confidence in Wall Street bankers and brokers.
52% think the economic system in the U.S. is basically fair, since all Americans have a chance to succeed, whereas 45% think it is unfair.
54% of Americans think that over-regulation of the economy, which interferes with economic growth, is a bigger problem than under-regulation, which may create an unequal distribution of wealth.
For almost two-thirds of Americans to be upbeat about the American Dream, after six or seven years of recession and slow recovery is to me a very positive sign. After a severe financial crisis, it is not at all surprising that “main street” bankers have a much higher favorability rating than “Wall Street” bankers.
Several months ago I reported on a survey taken by the progressive Global Strategy Group showing that 80% of voters consider economic growth more important than income inequality.
Both today’s NYT Poll and the previous GSG Survey are saying loud and clear that Americans put a high premium on economic growth and this is where our national leaders should be concentrating their time and energy. The new Republican majority in Congress has an almost historic opportunity to get this right. Let’s hope they don’t blow it!
Why has the recovery from the Great Recession of 2007 – 2009 been so slow? Many mainstream economists blame structural problems in the economy such as more global competition for business and technological progress which replaces people by machines. Other economists blame greatly increased government regulation since 2009 such as the Affordable Care Act in healthcare, The Dodd-Frank Act for finance and many new regulations from the Environmental Protection Agency. The economist Casey Mulligan, writing in yesterday’s Wall Street Journal, “A Recovery Stymied by Redistribution”, makes a case that government programs designed to alleviate the effects of the recession have made it deeper and more prolonged. Such actions include:
Long-term unemployment insurance
Looser restrictions on food stamps which do not require recipients to seek work
Mortgage assistance programs which set mortgage payments at “affordable” levels
New rules for consumer bankruptcy with special emphasis on current earnings
Mr. Mulligan’s point is that all of these new programs, like taxes, reduce incentives to work and earn.
But, by definition, structural effects are endemic and can’t be overturned. Also, some government reaction to the financial crisis, in order to prevent recurrence, was inevitable. And it is natural for the government to be responsive to the human misery caused by the recession. All of these points of view help us understand what has happened but don’t provide much guidance for boosting economic growth going forward.
The Great Recession was fundamentally caused by the bursting of the housing bubble which destroyed trillions of dollars of wealth for tens of millions of Americans. The recovery won’t speed up until many more millions of consumers feel comfortable in spending more money. We need to put more money in their pockets.
A very good way to accomplish this, as I have been saying over and over again, is through fundamental tax reform. The idea would be to lower individual income tax rates for everyone, and pay for this by closing the loopholes and deductions which primarily benefit the wealthy. This will put big bucks in the hands of the two-thirds of Americans who do not itemize their deductions. Since these are the middle and lower income wage earners whose wages have been stagnant for many years, they will spend this new income in their pockets thereby giving the economy a big boost.
Let’s do it!
The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT. “The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.
Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.
The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?
The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.
With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?
The Congressional Budget Office has just issued the report ”The Budget and Economic Outlook: 2014 to 2024”, giving its usual objective and nonpartisan look at our prospects for the next ten years. My purpose today is to give a simple interpretation of its basic data. In my next post I will address the implications of this interpretation. The first chart above shows a forty year history of government deficit spending. The average deficit for this time period is 3% of GDP. From 1982 – 1987 the deficits were worse than this and from 2009 – 2013 they were much worse. The real problem is the accumulated deficits, i.e. the debt. The second chart above shows the public debt (what we pay interest on) all the way back to 1940 as a percent of GDP. As recently as 2008, the public debt was below 40% of GDP. Now it is 73% and climbing. This is very serious for two reasons. Right now our public debt is almost free money because interest rates are so low. But when interest rates return to their normal level of about 5%, interest payments will explode and be a huge drain on the economy. In addition, these CBO predictions assume continued steady growth of the economy. If and when we have a new recession or some other financial crisis, there will be much less flexibility available for dealing with it. Now look at the last two charts. The first one shows the rate of GDP growth since 2000 which has averaged about 2% since the end of the recession in June 2009 and is projected by the CBO to level off at this same rate over the next 10 years. This is an historically low rate of growth for our economy. The final chart shows the gradual decrease of the labor force participation rate over this same time period. These two graphs are related! When fewer people are working, the economy simply will not grow as fast.
High debt and slow growth are big problems for an economy. We’re falling more deeply into this perilous state of affairs all the time. We need to take strong measures to break out of this dangerous trap!
In a recent Washington Post column, “Government is Not Beholden to the Rich”, the economics writer Robert Samuelson shows that the federal government is actually “beholden to the poor and middle class. It redistributes from the young, well-off and wealthy to the old, needy and unlucky.”
For example, in 2006 “53% of non-interest federal spending represented individual benefits and healthcare. Of these transfers (nearly $1.3 trillion), almost 60% went to the elderly. Of the non-elderly’s $550 billion of benefits and healthcare, the poorest fifth of households received half. The non-elderly paid about 85% of the taxes, with the richest fifth covering two-thirds of that. If government taxes and transfers – what people pay and get – are lumped together, the average elderly household received a net payment of $13,900 in 2006; the poorest fifth of non-elderly households received $12,600. By contrast, the net tax payment for the richest fifth of non-elderly households averaged $66,000.”
A couple of months ago a Wall Street Journal Op Ed “Obama’s Economy Hits His Voters Hardest” by the economist Stephen Moore, points out that during the time period 1981 – 2008, the Great Moderation, income for black women was up by 81%, followed by white women up 67%, black men up 31% and, finally, white men up only 8%. Of course, all of these groups have lost income in the last four years, during the very weak recovery from the Great Recession.
The answer is clear. The best way to help low income people lift themselves up is not to redistribute even more government resources to them but rather to boost the economy to create more and better jobs. There are tried and true methods to get this done: tax reform (to encourage more risk taking and entrepreneurship), immigration reform (to provide more willing workers) and true healthcare reform (to get healthcare spending under control).
We need national leaders who understand how to make the economy grow faster and are able to stay focused on this urgent task.
Today’s Wall Street Journal has a story “Job Gap Widens in Uneven Recovery”, which shows how unbalanced the economic recovery is. For workers aged 25 and older, unemployment is only 6%, compared to the overall unemployment rate of 7.3%. But for the young, ages 16 – 24, unemployment is 15%. Since the end of the recession in June 2009, wages have risen by 12% for the highest paid 25% of all workers. For the lowest paid 25%, wages have only risen by 6% over this time period.
“Households earning $50,000 or more have become steadily more confident over the past year and a half. Among lower income households, confidence has stagnated. The gap in confidence between the two groups is near its widest ever. That isn’t only bad for those being left behind. It’s also hurting the broader recovery, because it means families are able to spend only on essential items. Consumer spending rose just .1% in September 2013, after adjusting for inflation.”
Unfortunately, this data is entirely consistent with other gloomy economic trends which I have been reporting on recently such as the threat of technology to the middle class, the increased competition from globalization, and the shrinking size of the labor pool because of baby boomer retirements.
The New York Times has a running series of articles on “The Great Divide” and how to address it. Here is a clear cut example of this divide: how older, better trained and more affluent Americans are recovering from the recent recession more quickly than the less well off. This evident unfairness is damaging to the health of our society. The question is how do we address it in an effective manner?
The basic problem is the overall slow growth of the economy, about 2% of GDP per year, since the recession ended in June 2009. There are many things that policy makers can do to speed up this growth if they were only able to set aside ideological differences. The best single action by far is tax reform, for both individuals and corporations, lowering overall rates in exchange for reducing deductions and loopholes which primarily benefit the wealthy.
Here is yet another reason why it is so important to speed up the growth of our economy. How exasperating that our national leaders cannot figure out a way to come to together and get this done!