Only a purblind ideologue could miss the pattern here. American employers — more than employers in other nations and more than American employers in earlier downturns — have imposed the costs of the recession and, increasingly, the costs of doing business, on their workers, and kept for themselves damn near all the proceeds from doing business.
What gives? Are American employers meaner than their European counterparts and American forebears? I doubt it. The difference is that American workers have markedly less power than their European counterparts and their American forebears.
That’s partly because unemployment remains so high here. More fundamentally, though, the U.S. private sector is almost entirely — 93 percent — nonunion. Unlike European workers, unlike their own parents and grandparents who lived in a much more heavily unionized America, U.S. workers are now powerless to stop their employers from pocketing all the change.
The source of this problem is outlined in two reports scheduled for release Monday from two very different organizations, the liberal Human Rights Watch, and Freedom House, an organization with a staunch Lane-Kirkland-esque antipathy toward authoritarian regimes left and right: Through the weakness of our labor laws, the reports say, private-sector American workers can no longer form unions. Human Rights Watch documents how corporations that are model (and highly profitable) employers in Europe and frequently collaborate with unions there descend to American employer norms — denying workers the right to join unions — when they come over here. Freedom House, citing the near-impossibility of forming unions in this country, laments that the United States cannot be classed among the 41 nations that afford their workers full freedoms.
A union-free America. Growth down a little, employment down a lot. Profits and productivity up, wages flat. Health-care costs up for workers, down for employers. The return of a thriving middle class? Dream on.
And a happy Labor Day, one and all.
And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.
In short, welcome to 1938.
The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion.
Consider Gallup polling from March 1938. Asked whether government spending should be increased to fight the slump, 63 percent of those polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.
Then came the war.
From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.
Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.
But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.
The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.
But the story of 1938 also shows how hard it is to apply these insights. Even under F.D.R., there was never the political will to do what was needed to end the Great Depression; its eventual resolution came essentially by accident.
I had hoped that we would do better this time. But it turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s, and are determined to repeat all the old mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.
But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here’s hoping we find those virtues in the not too distant future.
The political calculus is stunning. More than $1 trillion for the banks? No problem. But $10 billion for teachers and $16 billion to help the poor get healthcare? Only if it’s deficit-neutral and offset by other cuts to social spending. Never mind that many people using food stamps are already living through a depression or that food stamps are one of the most reliable ways to stimulate spending. The food stamp lobby doesn’t have quite the same pull as the Chamber of Commerce or US corporations—which have seen their profits rise by 36 percent this year and enjoy profit margins as a share of GDP that are near postwar records.
What happen to a government for the people by the people? Well, it is a government for the corporations by the corporations, which it always has been, but it just has come home to roost. Big banks if you are having a hard time, we will bail you out. Hey you, middle-class person trying to live a comfortable life, do you need some help? Well too f***ing bad, you don’t lobby well enough. Maybe someday, LOSER!
It’s Hard To Take The Fiscal Hawks Seriously: Testimony by Simon Johnson To The Senate Budget Committee. The following are key points made by Simon Johnson:
A. Short-term Prospects
5) The latest iteration of the unstable global credit cycle has done lasting damage to the United States. This is manifest in the following ways:
a) Long-term unemployment results in skill losses and lower productivity in the future. This undermines future growth prospects and it may shift up the “natural” rate of unemployment. So-called hysteresis in unemployment – meaning that it goes up fast but comes down slowly and not fully – has very much been a feature in the experience of other industrialized countries during recent decades. This is potentially now a major issue for the United States.
b) The credit disruption of 2008-09 is having a persistent impact on hiring decisions in the United States and Europe. Business equipment spending is recovering fast but firms are reluctant to add workers. Most of this uncertainty is due to firms not knowing if they will have consistent access to external financing. As a result, large nonfinancial firms are likely to carry less debt and more cash.
c) The damage to household balance sheets from the boom-bust in real estate will also likely persist; for example, the percent of homeowners with negative equity has stabilized, around 20 percent, but moved down only slightly over the past year. We should expect US households to save move as consequence and the personal savings rate is now around 6 percent of personal disposable income (compared with 3 percent during the early 2000s and closer to 2 percent in the run up to the crisis). This is a pattern we have seen in “balance sheet”-related recessions elsewhere.
d) There is a serious sovereign debt crisis in Europe. While the prospect of default by a eurozone country is not imminent, there is a shift to fiscal austerity across that continent, thus slowing growth further. Structural issues within the eurozone are unlikely to be resolved quickly, thus weakening the euro and limiting the potential for US exports. Resulting financial market instability can also still spread quickly to the US.
e) The financial crisis and its aftermath damaged US prestige and capacity for leadership around the world.
B. Contingent Liabilities from the Financial Sector
4) Most of this fiscal impact is not due to the Troubled Assets Relief Program – and definitely not due to the part of that program which injected capital into failing banks. Of the change in CBO baseline, 57% is due to decreased tax revenues resulting from the financial crisis and recession; 17% is due to increases in discretionary spending, much of it the stimulus package necessitated by the financial crisis; and another 14% is due to increased interest payments on the debt – because we now have more debt.
6) The Dodd-Frank financial reforms of 2010 are a modest step towards making the financial system safer, but these are unlikely to solve the problem of systemic risk. By all accounts, the internationally coordinated process of raising capital standards – and thus creating greater shareholder buffers against losses – is not making much progress; there will be little real change, much delay in implementation, and far too much “low quality” capital at the end of the day.
C. Risks of a Fiscal Crisis
4) For some commentators, the only possible response for the US is immediate austerity; this is the course being taken in the United Kingdom and parts of the Eurozone. If we continue to spend, the argument goes, markets will lose faith in our ability to repay our debts, interest rates will skyrocket, the dollar will collapse, and our way of life will be at an end. While this argument is plausible in the abstract, there is no reason for panic or precipitate action now.
8.) The things that do matter are taxes and entitlements. Therefore, the upcoming debate over the Bush tax cuts is of real importance. According to the CBO, extending the Bush tax cuts would add $2.3 trillion to the total 2018 debt. The single biggest step our government could take this year to address our structural deficit would be to let the tax cuts expire. Such a credible commitment to fiscal consolidation should reduce interest rates today, helping to stimulate the economy.
Paul Krugman writes:
Not long ago, anyone predicting that one in six American workers would soon be unemployed or underemployed, and that the average unemployed worker would have been jobless for 35 weeks, would have been dismissed as outlandishly pessimistic — in part because if anything like that happened, policy makers would surely be pulling out all the stops on behalf of job creation.
But now it has happened, and what do we see?
First, we see Congress sitting on its hands, with Republicans and conservative Democrats refusing to spend anything to create jobs, and unwilling even to mitigate the suffering of the jobless.
We’re told that we can’t afford to help the unemployed — that we must get budget deficits down immediately or the “bond vigilantes” will send U.S. borrowing costs sky-high. Some of us have tried to point out that those bond vigilantes are, as far as anyone can tell, figments of the deficit hawks’ imagination — far from fleeing U.S. debt, investors have been buying it eagerly, driving interest rates to historic lows. But the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything else — everything else, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.
The point is that a large part of Congress — large enough to block any action on jobs — cares a lot about taxes on the richest 1 percent of the population, but very little about the plight of Americans who can’t find work.
What lies down this path? Here’s what I consider all too likely: Two years from now unemployment will still be extremely high, quite possibly higher than it is now. But instead of taking responsibility for fixing the situation, politicians and Fed officials alike will declare that high unemployment is structural, beyond their control. And as I said, over time these excuses may turn into a self-fulfilling prophecy, as the long-term unemployed lose their skills and their connections with the work force, and become unemployable.
I’d like to imagine that public outrage will prevent this outcome. But while Americans are indeed angry, their anger is unfocused. And so I worry that our governing elite, which just isn’t all that into the unemployed, will allow the jobs slump to go on and on and on.
I ask again; when will our government stand up and take action?
Robert Kuttner-co-editor of The American Prospect and a senior fellow at Demos-writes:
But where is the high-profile Obama speech making clear that the top priority for now is putting America back to work, that deficit reduction will come when the economy is back on track — and that the budget will not be balanced on the backs of those who depend on Social Security, Medicare, and other key social outlays?
The misguided Erskine Bowles, with his austerity program, did not drop into the budget debate from Mars. He was appointed by Barack Obama.
The New York Times reported Sunday that Obama has been meeting with vulnerable Democratic members of Congress, offering to do anything to help them — including staying out of their districts. The front-page piece, by political reporter Jeff Zeleny, was headlined, “To Help Democrats in the Fall, Obama May Stay Away.”
Uh, why does this not sound like a winning political strategy? Maybe if Obama got serious about putting Americans back to work and explaining the real connection between an economic recovery and deficit politics, incumbent Democrats — and voters — might welcome the president into their districts.
The best POLITICAL strategy is to implement a direct jobs program–labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research. Along with the implementation of a direct jobs program, state aid must be implemented as well.
The main argument against state and local aid has been something of a they-made-your-bed take on the matter. “It’s a bad idea to bail out states from making the necessary decisions they need to make to increase and fix their structural deficit problems,” Rep. Paul Ryan told me Thursday (via Ezra Klein). The problem with that argument is states had a record amount of money in their rainy-day accounts.
Here’s Ben Bernanke:
Many states deal with revenue fluctuations by building up reserve — or “rainy day” — funds during good economic times. Measured as a percent of general fund expenditures, the aggregate reserve fund balances for all state governments stood at a record of about 12 percent at the end of 2006; the states represented by the SLC had accumulated above-average reserves of around 16 percent. These high reserve-fund balances were helpful in lessening the severity of spending cuts or tax increases in many states. Nevertheless, given the depth of the recent recession, even these historically high reserve-fund balances proved insufficient to buffer fully the budgets of most states.
When the economy turns around, unemployment moves closer to 6 or 7%, and states start to receive a tax revenue their so called structural deficit problems will vanish. Same goes for the federal government. Worry about jobs, not the long term deficit. The long-term deficit is dealt with when the economy is growing at a reasonable rate, say 4-5%.
Both political parties, if they are to win in November, must create jobs.
Sorry I had to steal the title. Anyways, Mitch McConnell thinks the Bush tax cuts didn’t grow the deficit, even though Bush economist said that although they agree with the tax cuts, they did not pay for themselves, and they did grow the deficit.
Republicans are entitled to their own opinions, but they’re not entitled to their own separate reality. When Republican Sen. Jon Kyl said on Fox News that tax cuts had no impact on the deficit, that was bad enough. But Senate Minority Leader Mitch McConnell grabs the wacko baton and sprints ahead when he tells TPMDC’s Brian Beutler that “there’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.”
Sen. McConnell might not believe the evidence provided by the Congressional Budget Office, theCommittee for a Responsible Federal Budget, the Joint Tax Committee, or the Brookings Institution, all of which concludes that the Bush tax cuts added to the deficit.
But surely he should believe President George W. Bush’s own Ph.D-wielding economists. Many of them have gone on the record to say that while they supported the tax cuts, they didn’t for one second believe they raised government revenue.
1) The Council of Economic Advisers’ Report to the President, 2003: “Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.”
2) The chair of CEA from 2003-2005, Greg Mankiw: “Some supply-siders like to claim that the distortionary effect of taxes is so large that increasing tax rates reduces tax revenue. Like most economists, I don’t find that conclusion credible for most tax hikes, and I doubt Mr. Paulson does either.”
3) He’s right! Hank Paulson, Bush’s last Treasury Secretary, doesn’t: “As a general rule, I don’t believe that tax cuts pay for themselves.”
4) That opinion was shared by Andrew Samwick, Chief Economist on Council of Economic Advisers, 2003-2004: “No thoughtful person believes that this possible offset [the Bush tax cuts] more than compensated for the first effect for these tax cuts. Not a single one.”…
5) … and Edward Lazear, chair of the Council of Economic Advisers in 2007: “I certainly would not claim that tax cuts pay for themselves.”
Larry Summers, the Director of the National Economic Council wrote today on The Huffington Post:
The lapse in extended unemployment insurance benefits at the end of May has resulted in 2.5 million jobless Americans exhausting their assistance. If we do not reinstate benefits by the end of the month, this number will grow to 3.2 million. These losses are exacting an enormous human toll on families who count on these benefits as they continue to search for jobs.
As the president recently remarked: “Lasting unemployment takes a toll on families, takes a toll on marriages, takes a toll on children. It saps the vitality of communities, especially in places that have seen factories and other anchoring businesses shut their doors. And being unable to find work – being able to provide for your family – that doesn’t just affect your economic security, that affects your heart and your soul. It beats you up. It’s hard.”
It is also bad for the economy. But unemployment insurance puts money in the pockets of the families most likely to spend the money – which in turn expands the economy and creates jobs. The nonpartisanCongressional Budget Office has identified increased aid to the unemployed as one of the two most cost-effective policy options for increasing economic production and employment.
Missed unemployment insurance payments since May total over $10 billion – enough to have created 100,000 jobs. An abrupt and premature withdrawal of relief is not only something families cannot afford, it is something that the economy cannot afford at a time when the economy is at a critical juncture. The economy is finally creating jobs, but not nearly fast enough to close the 8 million-job gap opened by the recession.
Opposing extending unemployment benefits will do nothing to put people back to work. It will not result in an increased number of job openings to apply for. And it will not result in a higher level of employment. What it will do is create a more difficult situation for thousands of families hit hardest by the economic crisis and cut off a powerful channel for spurring economic growth.
Take a look at this graph (via Ezra Klein).
Do you see anything wrong with what this graph is showing? If you don’t, I will tell you; it is the fact that the yellow line representing the unemployed is at 14 million, while the number of job openings, which is represented by the green line, is between 2-4 million. I am not that great at math by that is a difference of about 10 million. Ezra Klein writes:
“That giant gap consists of Americans who are unemployed, and couldn’t get a job even if they wanted to,” Indiviglio writes. “This emphasizes the need for Congress to extend unemployment benefits. It’s pretty clear that millions of Americans remain unemployed because the jobs aren’t there — not because they aren’t trying hard enough to find them. In fact, it’s not even close.
In a time of NO JOB OPENINGS, it only makes sense to give unemployment benefits so people have some type of an income, which in turn funnels money into the economy. Mark Zandi, an adviser to John McCain’s presidential campaign, estimated (pdf) that a dollar spent extending the Bush tax cuts (for the rich) would generate .32 cents of taxable economic activity, while a dollar spent on unemployment benefits would generate $1.61 of taxable economic activity (via Ezra Klein). Now is not the time to cut taxes, when unemployment benefits are way more beneficial for the economy.
The G20 communiqué, released after the Toronto summit on Sunday, made it quite clear that most industrialized countries now have budget deficit reduction fever (see this version, with line-by-line comments by me, Marc Chandler and Arvind Subramanian). The US resisted the pressure to cut government spending and/or raise taxes in a precipitate manner, but the sense of the meeting was clear – cut now to some extent and cut more tomorrow.
Now if you read my blog, you would see, right away, what is wrong in the previous paragraph–BUDGET DEFICIT REDUCTION FEVER. Now is not the time to worry about the budget. Now is the time to keep money flowing through out the economy. And now, the only entity with the ability to keep money flowing through out the economy is the federal government. Simon Johnson agrees:
This makes some sense if you think that the global economy is in robust health and likely to grow at a rapid clip – say close to 5 percent per annum – for the foreseeable future. With high global growth, it will matter less that governments are cutting back and unemployment will come down regardless. Taking this into account, the IMF is actually predicting (as cited prominently by the G20) that budget “consolidation” actually raise growth over a five-year horizon.
Since governments have caught the deficit reduction fever, which country will others rely on to prop up the global economy? That would be China since it has a healthy fiscal balance and has great influence on the world economy even though it only makes up 6%. This could end up being a costly bet in the long run. Simon Johnson explains:
If these economies all decide to reduce their budget deficits, what will drive global growth?The answer in Toronto was obvious: China. China is only about 6 percent of the world economy, measured using prevailing exchange rates, but it has a disproportionate influence on other emerging markets due to its seemingly insatiable demand for commodities. It also has a relatively health fiscal balance – and its fiscal stimulus, working mostly through infrastructure investment, did a great job in terms of buffering the real economy in the face of declining world trade in 2008-09.
Now, however, the Chinese government is trying to slow the economy down – there is fear of “overheating”, which could mean inflation or rising real wages (depending on who you talk to). Chinese economic statistics are notoriously unreliable, so reading the tea leaves is harder than for some other economies, but most of the leading indicators suggest that some sort of slowdown is now underway.
Talking to Chinese experts – I was in Beijing over the weekend – there are three major worries.
1) There is already a great deal of wasteful investment in infrastructure. At some level, there is a desire to clean this up and make it more sensible. This implies slower growth.
2) There is much discussion of “overcapacity” in the state sector. Again, there is interest in addressing this – although it is not an easy problem. In any case, this further lowers the incentive for state investment both directly and through various forms of subsidies to government-backed enterprises.
3) The incentives for local government officials have been heavily weighted towards boosting GDP growth; they move up (and presumably down) the government and party hierarchy based on how they do in this dimension. There is now a great deal of thinking that it would be better to also include other objectives, such as impact on the environment. This makes sense – air and water quality are hot issues – but it would also imply slower growth.
The irony, of course, is that China is also a leading candidate to be at the epicenter of the next boom. In a sense this is what the G20 would like, unless the boom becomes debt-based and unsustainable, as in emerging markets during the 1970s or Japan in the late 1980s.
The G20 is betting that China can keep its growth high enough to sustain the global economy while also not getting drawn into some sort of bubble – particularly one that would involve big Western banks. Given the nature of China and the volatility of global capital flows – international investors love you without limit, until the moment they leave you – this is quite a bet.
We should also not overestimate the ability of the Chinese government to fine tune its economy. To be sure, the authorities have done well both in terms of high average growth and in terms of managing the impact of regional and global cycles over the past 20 years. Can they really do so well indefinitely?
It is imperative that all the players in the global economy not bet 100% of their future on China. The countries with budget deficit fever must find a remedy, and fast.