Larry Summers misses another important point

He's clueless about the consequences of inequality

From time to time, Larry Summers gets things very wrong. He hypothesized that women were largely underrepresented in the sciences at least partially because of innate gender differences.

He championed bank deregulation during the Clinton years ("...it would take a Republican Congress and the Clinton administration’s Robert Rubin and Larry Summers at Treasury to repeal Glass-Steagall."), a deregulatory step that others, including Ron Suskind, author of Confidence Men: Wall Street, Washington and the Education of a President, suggest had much to do with the economic collapse of 2008.

And, following that collapse, from which he seemed to have learned the wrong lessons, Summers, along with Tim Geithner, was one of the leading actors pushing bank and corporate bailouts and downplaying stimulus spending and infrastructure investment within the Obama administration.

As Dean Baker put it in "How Larry Summers' memo hobbled Obama's stimulus plan," posted on common dreams.org, "In short, while the data was crying out for more stimulus, the Obama administration openly embraced the need for deficit reduction, effectively slamming the door on the prospect of further stimulus. The basis for this original sin can be found in [Summers'] December memo, which, unfortunately, provided the administration's game plan long after it should have been clear that it had been superseded by events."

Susskind makes it clear that Summers' policy recommendations suffer, in part, from his high opinion of himself. "Instead of looking at [Summers'] record pockmarked with bad decisions, people see his extemporaneous brilliance and let themselves be dazzled. Summers' career has come to look, more and more, like one long demonstration of the difference between wisdom and smarts," Suskind wrote in Confidence Men.

But no matter the various judgments of history, Summers isn't going to go away. He blogs on economic and political issues for Reuters, gives lots of interviews and writes a lot of op-ed pieces. His latest piece, "American inequality goes beyond dollars and cents," ran in today's (June 9) Washington Post.

Summers' op-ed begins with a nod to Thomas Piketty's new book, Capital in the Twenty-First Century, which examines the growing inequality in income and wealth in the United States and around the world. "This is indeed a critical issue," Summers writes.

Later he observes that increasing "tax productivity" would not do "any noticeable damage to the prospects for economic growth," but quickly moves on from serious consideration of policy changes that might reduce inequality. Instead, he considers unequal outcomes in life expectancy and educational achievement, two areas in which Summers has never previously demonstrated much interest.

Nevertheless, he's happy to point out that differences in life expectancy for older people "more likely have to do with lifestyle and variations in diet and stress..." Summers also cites figures that make it clear that children from affluent families are exposed to many more "enrichment" experiences than are children from poor families, but, he concludes, that to address unequal outcomes we should not merely focus on inequality. "...it is crucial to recognize that measures to support the rest of the population in other ways are at least equally important," Summers writes, though he does not specify what those other "measures" might be.

In any case, what seems mightily important here is a point missed by Summers, but noted elsewhere by others, notably Paul Krugman and Robin Wells in "The Widening Gyre: Inequality, Polarization and the Crisis," which they wrote for inclusion in The Occupy Handbook, edited and compiled by Janet Byrne. Citing the work of political scientists Keith Poole, Howard Rosenthal and Nolan McCarty, Krugman and Wells argue that there's no separating inequality from the political polarization and gridlock of our time.

"Soaring inequality is at the root of our polarized politics," they wrote. That polarization has "made us unable to act together in the face of crisis. And because rising incomes at the top have brought rising power to the wealthiest, our nation's intellectual life has been warped, with too many economists co-opted into defending economic doctrines that were convenient for the wealthy despite being indefensible on logical and empirical grounds."

Krugman and Wells may not have been including Summers in their list of "co-opted economists," but given his demonstrated preference for bank deregulation and bailouts over significant stimulus spending, we should be forgiven for assuming Summers belongs on the list. Krugman and Wells see many of Obama's policy compromises with his intractable opponents in Congress as a direct result of inequality-linked political polarization.

In 2009, they wrote, "we arrived at a Keynesian crisis demanding a Keynesian solution--but Keynesian ideas had been driven out of the national discourse, in large part because they were politically inconvenient for the increasingly empowered 1 percent."

Summers would probably prefer not to be reminded that the policies he has advocated in the past have done little to protect ordinary Americans from economic hardship. His Post op-ed actually includes a shout-out to progressive economist Dean Baker, suggesting that Summers would like us to forget his track record. But we ought not forget--if we want to reduce income inequality (and political polarization), and if Hillary Clinton follows Obama to the presidency, we want to do our best to make sure that Larry Summers finds employment somewhere other than the federal government.

Buy a bit of economic justice

Raise the minimum wage

So, I've written the Washington Post, again. And, reliably, it does not appear that they will print my letter.

No matter. I almost prefer the opportunity to elaborate my point in a forum (this one) that I know will always make space for me and, from time to time, will be read by others.

In any case, here's what I wrote:

Editor,

I applaud Charles Lane's effort to broadly consider the merits of an increase in the minimum wage ("Better than minimum wage," Feb. 19). One quibble, though.

Lane reviews four of the possible effects of an increase that may minimize an employer's interest in cutting jobs when an increase in the minimum wage is mandated. But in concluding that an expansion of the earned income tax credit (EITC) is superior to an increase in the minimum wage, Lane appears to discount two of the potential benefits connected to an increase--lower turnover and higher organizational efficiency.

Why not capture those positives, too?. Get better at calibrating and regularizing increases in the minimum wage and spread the benefits of a broader EITC.

Jeff Epton

Brookland

But the truth is that I have more than one nit to pick with Lane's piece, and one happy observation to add, as well. I held back on the quibbles because the Post doesn't seem very receptive to extended critiques and I figured the one point--that Lane was posing an either/or choice when both would work--was substantial enough.

In any case, Lane's column kicks off with his characterization of Paul Krugman as a "liberal firebrand [who] is still economist enough..." to note that quickly raising the minimum wage by a substantial amount would create problems. This description ignores the fact that Krugman is also a Nobel Prize winner in economics and signals to the casual reader that Krugman is a partisan and Lane is not.

This is not good journalism. We are all partisans. Krugman is the one with the Nobel. With his characterization of Krugman the firebrand, Lane is also signaling from the beginning that he is going to come down in favor of some alternative to raising the minimum wage.

Applauding Lane for actually appearing to be carefully considering a minimum wage increase was a bit of sychophancy in the interest of getting the letter published. Say it didn't work, if you will. Say that sychophants will burn in hell, if you like, but I tried.

The issue my letter raises is that despite Lane's apparent willingness to consider all the pros and cons of raising the minimum wage, he actually dismisses two potential benefits pointed out in a study by John Schmitt of the Center for Economic and Policy Research (CEPR). Workforces that are compensated better at the low end may end up working with more enthusiasm and improved efficiency. In the long run, such improvements allow employers to recover costs. But Lane sees that potential benefit as less certain than the potential downsides, like the possibility of reduced employment overall, and fewer job opportunities for youth.

Indeed, Lane cites studies that show reduced unemployment for "young, low-skilled people" when the minimum wage goes up. That ought to be a genuine concern and should be addressed, even if the problem is not quite the one Lane defines. The fact is that many young people have been pushed out of the job market with increasing frequency as more older people, including those collecting Social Security, take part-time jobs just to make ends meet. Holding down the minimum wage doesn't serve either group.

There is a silver lining in Lane's column. He actually uses CEPR as a substantial source for his column. That's a big deal, and a credit to CEPR and to co-founders Dean Baker and Mark Weisbrot who have been a relentless voice for progressive economic policy. Lane has always been a centrist, at best, and has never seemed very willing to consider progressive policy options. But he does here, even if he ends up rejecting the idea of a minimum wage increase.

As George Lakoff tells us (a bit on Lakoff here), sometimes speech is action. Baker, Weisbrot and CEPR keep researching, writing and talking and have helped move the political discussion to the left.

A better column on the minimum wage by Harold Meyerson ran in the Post on Feb. 20. In "A jump-start for wages," Meyerson points out that the lion's share of the benefits from productivity gains have been going to employers, not workers, since 1973. "The decoupling of wages from the fortunes of big business has been going on for the past 40 years," he writes.

Meyerson cites another study that may not have crossed Lane's desk. "As a January report by Cal-Berkeley economist Emmanuel Saez documents, while the income of the wealthiest 1 percent of Americans rose by 11.2 percent during the recovery years of 2009-11, the incomes of the bottom 99 percent declined by 0.4 percent. That's some recovery," he observes. Read the rest of Meyerson's column here.

The Indictment of Mitt Romney

This indictment of Mitt Romney, raising questions about his fitness to serve as president of the United States, is past due. Of course, the simple fact of one’s unfitness to serve, would not prevent Romney from serving—one need only review the case of George W. Bush or, for that matter, the hallowed Ronald Reagan, who napped away at least the last half of his presidency while functionaries like Ollie North got away with murder.

But I digress. This indictment will frame the case against Romney based on his political flip-flops and prevarications, his mid-twentieth century air (far too retro for the challenges of our time), and the devastating simple-mindedness of his political program, at least insofar as it can be determined.

To make this case, the indictment will call upon the recent opinion pieces of several knowledgeable journalists and economists. It should be noted that the likely response from the Romney campaign to this indictment, other than studied indifference, will be to disparage both journalists and economists in sweeping terms.

No matter. Those who investigate and judge the particulars as outlined in this indictment will recognize that ad hominem attacks on the individuals (and their professions) quoted here are in no way a merit-based refutation of their arguments.

There is “…an existing stereotype of Romney and Republicans as wealthy white businessmen, clinking wine glasses while bemoaning the irresponsibility of the help,” wrote Michael Gerson in a column in The Washington Post on Sept. 21. Gerson, who was a speechwriter for George W. Bush, and may very well be the person who coined the phrase “compassionate conservative,” centered his column, “Ideology without promise,” on what the video of Romney at a Boca Raton fundraiser in May revealed.

The problem, Gerson wrote, isn’t really its power to confirm the stereotype of Romney, after all, “few imagined Romney to be a closet populist.” The problem is what the video suggests about “Romney’s view of the nature of our [current] social crisis.” Gerson’s elaboration of that crisis delves into the ways that the decay of neighborhoods, widespread job losses, poverty and personal financial collapse devastate individual lives and whole communities, magnifying their vulnerability and make government activism and creative policymaking an absolute necessity.

The Romney revealed in the video, and the incessant Republican political assault on the federal government, makes them worse than irrelevant. “…a Republican ideology pitting the ‘makers’ against the ‘takers’ offers nothing. No sympathy for our fellow citizens. No insight into our social challenge. No hope of change. This approach involves a relentless reductionism. Human worth is reduced to economic production. Social problems are reduced to personal vices. Politics is reduced to class warfare on behalf of the upper class,” Gerson wrote, in what might be the most withering dismissal that will be written by a Republican about Romney and his campaign during this political season.

A day later the Post published a piece by Ezra Klein also focused on Romney and the 47-percent video. (Unfortunately, try that I might, I cannot locate a web version of this article available for free.) In his piece “Romney’s skewed view on personal responsibility,” Klein, formerly a business writer for the Post and now one of their most frankly liberal op-ed columnists, demolished Romney’s pay-no-income-tax dismissal of half of the country. “…more than 60 percent of [the 47 percent] were working and contributing payroll taxes—which means they paid a higher effective tax rate on their income than Romney does,” Klein wrote, adding that “an additional 20 percent were elderly.”

Worse than Romney’s dismissal of low-wage workers and retirees, Klein continued, was his description of who he needed to care about politically. “I’ll never convince them that they should take personal responsibility and care for their lives,” Romney said.

The horror here is that the people Romney dismisses are the people who must take more, not less, responsibility for their lives, Klein wrote. The time spent commuting on public transportation and wrestling with the scheduling difficulties that result, the time spent worrying about how to get one’s children into decent, affordable schools, the energy spent deciding on what to pay or what to buy in any given week, managing a budget with no give and with holes in the safety net below, takes an enormous amount of responsibility and energy. Mistakes of judgment will be made, Klein wrote, citing studies that vividly demonstrate how fraught and consequential are the lives and decisions of the 47 percent.

“Romney, apparently, thinks it’s folks like him who’ve really had it hard. ‘I have inherited nothing,’ the son of a former auto executive and governor told the room of donors.’ Everything Ann and I have, we earned the old-fashioned way.’ This is a man blind to his own privilege,” Klein concluded.

Also applicable here might be former Texas Governor Ann Richard’s observation about Bush, the father. “He was born on third base and thinks he hit a triple.”

In another piece in the Post that ran the same day as Klein’s piece, Colbert King made the case that the most damning thing about what Romney said privately in Boca Raton in May is how dramatically it undercuts what he said to the NAACP in public at their July convention. (King’s column, titled in the print edition, “Not buying what Romney is selling,” King quoted Romney’s apparently sincere sympathy for African Americans who live in a country where equal opportunity is not “an accomplished fact.” Because that is the case, our bad economy is not “equally bad for everyone. Instead, it’s worse for African Americans in almost every way,” Romney told the audience.

King detailed Romney’s claims to understanding and empathy. “We don’t count anybody out,” Romney said, “Support is asked for and earned, and that’s why I’m here today."

But, King wrote, the stuff Romney told the NAACP audience in July doesn’t square with the stuff he said privately in May to wealthy supporters at the Boca Raton event. “Romney, of course, was slurring more than the members of the NAACP, wrote King. “He also insulted retirees, college students, Americans with disabilities and people who work for a living for not much pay.”

In speaking to the Boca Raton donors, “witness Romney, the Chameleon, telling that crowd what they wanted to hear,” King wrote, in the process raising the implicit question: Why would an audience of political donors want to hear a presidential candidate dismiss 47 percent of the country?

Though an important question in its own right, it is nevertheless a digression from this indictment and will therefore be left to another time. Instead we will move on with the observations of economist Dean Baker, co-director of the Center for Economic and Policy Research (CEPR).

In “Romney pledges a Fed that will screw workers” posted on the Truthout website on Aug. 27^th, Baker detailed the ways that a strong (read overvalued) dollar results in lost manufacturing jobs and depressed wages in the United States, and a huge international trade deficit. But the strong dollar also confers enormous benefits on corporations and the wealthy.

“The arithmetic on this is striking. Productivity is projected to grow by more than 25 percent in the next decade. If workers get their share of productivity growth, this would imply an increase in annual income for the typical family of approximately $12,000 by 2022. On the other hand, with a Fed following Romney's strong dollar policy, workers in 2022 will be lucky if their wages are as high as they are today,” Baker wrote.

In furthering the indictment of Romney, it should be noted that Baker does not confine his scorn to Republicans, identifying Robert (“Wall Street”) Rubin, Bill Clinton’s Secretary of the Treasury, as a principal architect of strong dollar policy. “While the strong dollar may be a loser for most people, it does offer large benefits for people like Mitt Romney, Robert Rubin, and other members of the 1 percent,” Baker added.

“These people are all heavily involved in global business and their money goes further when buying into China, India, and elsewhere when the dollar is stronger.

"In addition, there are retail companies like Walmart that have set up low-cost supply chains in the developing world that depend on an overvalued dollar. Do you think they want to see the price of the goods they purchase overseas rise by 20 percent when measured in dollars? The same applies to manufacturing companies like General Electric, which produce most of what they sell in the United States overseas,” Baker continued.

Itemizing Romney’s obvious disinterest in the fate of so many people should not be concluded without a look at his apparent position on women and health care. Notwithstanding his obvious affection for his wife, Ann, whom he makes use of in his efforts to reach autoworkers (“my wife Ann owns two Cadillacs”), he seems unaware of the need to make policy for the majority of American households led by single moms or with both parents working.

“… the Republican Party [has] just spent two full years using their power across the country to get involved in women's medical decisions and gay people's lives, and ... Mitt Romney [has] repeatedly vowed to do the same if elected,” wrote Marge Baker, an executive vice-president at People for the American Way.

In “Romney toWomen: Stop worrying about your bodies and just trust me,” posted on the Huffington Post website, Baker added “Yes, the economy and jobs are hugely important issues in this election (though ones in which Romney doesn't exactly have an advantage). So is foreign policy, which one Romney advisor dismissed this week as a 'shiny object.' But so are the personal attacks that Romney and his allies are lobbing at women.”

There is much additional testimony that could be brought to bear for this indictment, but brevity matters and is sometimes decisive. The election likely will come long before Mitt Romney is called into court to face these charges. And the outcome of the election will likely make further action against Mitt a substantial waste of time and energy.

In the meantime, does anyone care to defend the guy who led a gang of school boys in an assault on an effeminate classmate, who went on vacation with his dog in a crate on the roof of his car, who includes a number of NASCAR owners among his good friends, and who has said that he would not lift a finger on behalf of 47 percent of the country? If so, please respond on this site.

Obama's State of the Union

Can the left live with it?

President Obama's speech last night was definitely not a leftist call to arms. But in the wake of a stinging electoral defeat for Democrats in November, it was, by and large, the speech Obama needed to give; and a speech well within his strike zone. One might have expected progressives to condemn Obama's caution, his willingness to concede space to Republicans with commitments to freeze discretionary spending, take on tort reform and and control Medicare spending, but attacks from the left, so far, are muted and seasoned with approval for some of the things he did say.

Nation writer John Nichols adopted a balanced tone in assessing the State of the Union speech. While noting Obama's declared intention to soften some regulations, continue supporting free-trade agreements, in general, and accommodate other Republican interests, Nichols also applauded Obama's forthright defense of Social Security and government investment in infrastructure.

"Obama has more political capital than he did in the weeks after the election .And he used it to defend Social Security -- rather then embrace calls for slashing benefits or experimenting with privatization – and to renew commitments to classic infrastructure investments in roads, bridges and transit, as well as 21st century projects such as high-speed rail and the development of national wireless networks," Nichols wrote.

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), noted that Obama's call for further controlling healthcare costs should be perceived as a way to defend, not attack Medicare. "In reference to Medicare and Medicaid, President Obama stuck to the facts and pointed out that the problem is the broken U.S. health care system, not inefficiencies in these programs. He noted the progress made in controlling health care costs in the Affordable Care Act, but acknowledged the need to go much further in containing costs," Baker said in a written statement released by CEPR today.

The statement also credits Obama with resisting "...the immense pressure from the financial industry and other opponents of Social Security and Medicare by refusing to call for large cuts in these programs in his State of the Union Address. Given the power of these groups, this would have been the easiest path for him to take. However, he instead insisted on the need to protect Social Security and to ensure that future generations of workers can also depend on it."

But Baker was clear about the speech's shortcomings: "The most disappointing aspect of the speech is that it largely skipped over the current economic crisis. This may reflect a view that there is little that Congress will agree to do to at this point. But it still is unconscionable to accept the idea that 25 million workers will go unemployed or under-employed, with millions more losing their home, because of the economic mismanagement by the country’s leaders."

He also took exception to Obama's continuing support for free trade, arguing that an over-valued dollar is the fundamental cause of the continuing U.S. trade deficits, "the largest imbalance in the economy today."

Robert Scheer's critique of the speech must rank among the best expressions of left-wing frustration with Obama's centrism. Scheer's post today on The Smirking Chimp dismisses the speech as "platitudinous hogwash." Obama ignored "... the depth of our economic pain and the Wall Street scoundrels who were responsible—understandably so, since they so prominently populate the highest reaches of his administration," Scheer wrote. "The speech was a distraction from what seriously ails us: an unabated mortgage crisis, stubbornly high unemployment and a debt that spiraled out of control while the government wasted trillions making the bankers whole."

Scheer's points are well-taken and only occasionally hyperbolic (the government spent $1 trillion on the Wall Street bailout, not "trillions"). Indeed, there are certainly more bankers and brokers in the Obama administration than there ought to be, but it won't be the presence of Wall Street big shots in the administration that will undermine any moves Obama makes to increase investment in infrastructure and high tech. Nor will they force Obama to compromise his defense of Social Security and Medicaid.

Republican opposition, of course, will be the first cause compromising Obama's ability to move forward with domestic infrastructure investments, with further action to control health care costs, with effective follow-up on Sec. of Defense Robert Gates proposed cuts in the military budget and other initiatives progressives wish to see. But a left that cannot refrain from unnuanced and relentlessly hostile critiques of Obama's performance and agenda could pose a further problem.

Right now most observers on the left seem willing to give Obama the benefit if the doubt. That comes as a little bit of a surprise, given the widespread perception that Obama and Congressional Democrats didn't go far enough with health care or squeeze out a bigger stimulus bill. But the odds are that the left was as chastened by the November election results as was Obama. If so, would it be too much to ask that a progressive follow-up include electing a few more progressives to Congress and organizing to take back a few Congressional districts from the Tea Party?

Achenbach for fun, Baker for the facts

Really, the debt is not a big problem


Joel Achenbach, author of a lot of "Why Things Are" and, sometimes, "Why Things Aren't" books, is generally great fun. Informative and humorous, he can tell funny, riveting stories about things that are generally neither fun or riveting. A recent example, "The Wow Factor: Reading between the pixels of the Hubble's latest images," which ran last December in the Washington Post, reads quick and easy and shares just enough science to make casual readers dangerous at dinner parties.

The Post frequently uses Achenbach to cover complex topical stories that need more than a little explaining, but his most recent story, "Will the debt break Washington?" tramples all over familiar ground, leaving behind little steaming piles of opinion valuable, perhaps, to farmers.

For primary source, Achenbach uses Bill Gross, founder of a large investment company, to pound what appears to be his main point, namely the national debt is "awful" and "hideous" and, in the worst case, either a Ponzi scheme or doomsday for future generations. None of this is actually true, but more to the point, none of it is helpful. If successfully reducing the debt becomes the highest immediate priority for Washington then several things happen along the way, including immediate and major tax increases, dramatic cuts in social programs, likely throwing the economy back into recession. If the hysteria around this issue should continue to grow, it seems plausible that banks and brokerage houses could even get their holy grail, the privatization of at least a portion of Social Security.

Achenbach also relies heavily on William Gale, an economist at the Brookings Institution, his source for the notion that large deficits now shift the cost of problem-solving onto future generations. But ultimately, Achenbach relies on himself. The new health care bill, which Achenbach admits will pay for itself, actually makes things worse "because its spending cuts and new taxes could have been used to reduce the deficit ... instead of being an offset for an entitlement expansion." In view of the prevailing notion that Congress routinely creates new programs without paying for them, the point is bizarre. After all, a program that pays for itself is, according to Brookings, most Republicans, and a host of pundits, a thing of beauty and the very definition of fiscal responsibility. In this case, the program that paid for itself also extends health coverage to another 25 million Americans, which ought to be celebrated as a tiny bit of social justice rather than disparaged as mere "entitlement."

Achenbach gives a little ground in his debt-is-coming, sky-is-falling assessment. "The latest news from the Treasury is hopeful: Tax revenues are slightly higher than anticipated so far this year. The TARP program to bail out financial firms has proved far less costly than expected. Investors from around the world still eagerly bid on Treasury notes at auction," he writes. And Achenbach does quote the far from panicky Peter Orszag, director of the Office of Management and Budget.

Orszag tells him that he believes the Obama administration can balance the budget, excluding interest payments, by 2015. Orszag concedes that reducing the debt will require political action in the future, presumably some combination of tax increases and spending cuts, but his comments do not support Achenbach's next point, which establishes parallels between Greece, Iceland and the United States. In the upshot, should the largest economy in the world go the way of a tiny tax haven and one of Europe's weakest economies then, yes, I suppose Achenbach will have been proven right.

But how different his piece would have been had he asked Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) for his opinion. Fortunately, we can go directly to Dean for a progressive economist's view of the story Achenbach tells. Here's Dean's opinion, in its entirety from his "Beat the Press" blog:

"More Debt Fearmongering at the Washington Post

This piece includes the information that the national debt "totaled $8,370,635,856,604.98 as of a few days ago." Boys and girls are you impressed by that big number? Are you scared yet? This is Fox on 15th here -- they'll keep trying.

This sentence continues by telling readers that this number is not "even counting the trillions owed by the government to Social Security and other pilfered trust funds." How did the author determine that the trust funds were "pilfered." The government didn't do what he wanted it to with the money? Wow, that gives a reporter the right to say the money was "pilfered." Apparently it does at the Post.

The article does not include the views of any experts who do not view the debt as a serious problem. It presents an inaccurate assertion (in the context presented) from Brookings economist Bill Gale that the debt: "This [running up the debt] is all an exercise in current generations shifting burdens on future generations." Actually, the debt being run up at present is helping future generations by keeping their parents employed, improving the infrastructure and providing them with a better education. There is little or no real burden associated with this debt since much of the debt being issued is held by the Fed. The interest on these bonds is therefore paid to the Fed, which in turn refunds the money to the government.

Last week, the NYT reported that the Fed paid more than $47 billion in interest to the government. So, where is the burden on our children? If we do get the economy back to normal levels of output the deficit will be at a manageable level. Over the long-term, if we don't fix the health care system, we will face serious budget problems, but this is an argument about the need to fix our health care system, not about the deficit."

I probably could have confined my response to Achenbach to quoting Dean's opinion alone, but where's the fun in that? Joel Achenbach's got opinions, I got opinions, too.

The Budget Deficit and the National Debt Are Not the Problem

We all need more schooling on economic issues

and I say it ought to happen outside the classroom. My professors of choice? Dean Baker and Mark Weisbrot, the estimable co-directors of the Center for Economic and Policy Research (CEPR). But I begin today's self-taught lesson with a quick look at "Smart Debt, Dumb Debt -- There's a Difference," a column by E.J. Dionne in today's Washington Post.

"Because we never face up to how much we need government to do, there is a pathetic quality to our discussion of big deficits," writes Dionne. I have no particular quarrel with this statement or most of the rest of his column. But I am acutely aware that any discussion of the federal budget, the national debt and huge and vital programs like Social Security are extremely contested terrain. And when we get on that ground, most of us get quite emotional.

The debt, we hear, is a direct squandering of our children's future. Similarly, extended unemployment benefits, deficit spending, even social security, are transfers of wealth from hardworking people to irresponsible spendthrifts. Universal health coverage under Obama, it is said, is a trojan horse that will expand the socialist takeover of the country. Of course, most readers of this blog do not share such extreme perspectives, but they have their doubts, I am sure. These doubts are more often expressed in the form of a belief that social security will not be there when the gen-x and millenial generations need it. Or expressed as a belief that maybe the stimulus package didn't work or, perhaps, the amount of debt held by foreign investors is dangerously high.

Such doubts make a thorough discussion of federal spending difficult at any level. They may not move moderate Democrats and independents to sign up for tea parties, but they do undermine faith in a liberal understanding of government activism, and that uncertainty is channelled by Blue Dog Democrats who turn resistance to government initiatives into a political program, which in turn contributes to the apparent futility of Congress. So when E.J. Dionne calls us to a more rational discussion of government economics, I start looking for ways to ground the debate in a broader understanding of economic reality and government alternatives; I start looking at what Dean, Mark and CEPR can tell us. Here's some of what I found during today's search:

In "America's Public Debt: The Least of Our Worries," Weisbrot observes that the 2009 stimulus package (about $1 trillion) was far too small. Even the best estimates suggest that it has saved less than one-quarter of the 8.5 million jobs we've lost since the Great Recession began. Under the circumstances, deficit spending shouldn't be an issue, he writes:

"It is clear that there is no short-term problem with running large deficits in a weak economy: investors are buying up even long-term U.S. Treasury bonds at remarkably low real interest rates. Clearly the markets do not perceive that our government is heading into risky territory with its debt. Interest payments on the debt are currently just 1.4 percent of GDP."

In fact, more deficit spending is necessary, says Baker, in "The Budget Deficit Crisis Puzzle." More aggressive government action is the only way to create the jobs we need and stabilize the economy, Baker writes, putting to rest the notion that huge current deficits will permanently cripple the economy:

"...larger deficits will put many of our children's parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing...
In spite of the deficit hawks' whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country's history."

Elsewhere, Baker argues that the millenial generation will not be harmed by paying higher taxes to support baby boomer retirees. They face other problems, he writes:

"The projections from the Congressional Budget Office, the Fed and all other standard sources show that before-tax compensation will rise on average at the rate of about 1.4 percent a year. This means that after 20 years their compensation will be more than 30 percent higher than what workers get today. This means that even if they pay substantially higher taxes than workers today, they will still have substantially higher living standards.

The retirement of the baby boomers is likely to help millennials. It will reduce the supply of labor -- creating opening higher up on career ladders -- thereby allowing millennials to get better jobs with higher pay.

The real threat to millennial living standards are:

1) inequality -- the continuation of the recent trend where more money goes to the top of the income distribution;
2) a broken health care system -- protectionists in control of policy want workers to give all their money to insurers, drug companies, medical supply companies and highly paid specialists;
3) ecological problems -- if the people in Bangladesh can make our children pay for the damage we have done to their land and lives through global warming, then our kids may be in trouble;
4) incompetent economic policy -- if geniuses like Alan Greenspan and Ben Bernanke continue to control economic policy, then they may be able to create poverty even in a world of enormous potential affluence."

I could go on, but that likely would be a cruelty to those of you who have actually read this far. But I will end by suggesting that a full discussion of how to restructure federal spending is impossible without putting military spending on the table. I've written about militarism and military spending quite a lot. The dollars involved are huge, highly wasteful in terms of job creation, and encourage destructive interventions and even more wasteful expenditures to support those interventions. In the next decade the U.S. will spend at least $1.5 to $2 trillion to pay interest on that portion of the national debt that is directly caused by past military spending. Only those people who actually believe that the North Vietnamese attacked U.S. warships in the Tonkin Gulf with gunboats, or that Saddam Hussein had weapons of mass destruction, or that billions of dollars in military subsidies to Israel have enhanced national security, can sincerely argue that we ought to keep spending more than $1 trillion on our military every year.

Social Security Spending Helps the Economy

Military spending drives the deficit

I could have sworn that my 28th letter to the Washington Post, which follows here, would be the second one that they would publish. Alas, I was wrong, again, but it is the content that matters, not the quarrel. The letter focuses, once more, on how unhelpful it is to talk about the national debt and federal budget deficit without even acknowledging military spending. Dean Baker, of the Center for Economic and Policy Research (CEPR), also addressed the same opinion piece to which I'd responded. I've interspersed Baker's response, which ran in his weekly Beat the Press blog, in the text of my letter.

Editor,

So Robert Samuelson is calling on the Obama administration to be more open about future debt and deficit difficulties (“America’s Candor Gap,” Feb. 8), but his version of fiscal reality lacks some important details, as well. The federal government is projected to spend almost $46 trillion between 2011 and 2020, Samuelson writes, and $20 trillion will go to Social Security, Medicare and Medicaid. Such a “…budget is mainly a vehicle for transferring income to retirees from workers, who pay most taxes,” he continues.

But as income transfers go, Samuelson’s example is relatively benign. Most of the transfer in this instance is from younger workers to older ones and most of the money transferred is spent immediately on goods and services—a reliable exchange that helps to keep the economy going. And, as economist Dean Baker and others have pointed out (see a list of CEPR's many reports about Social Security here), if the cap on Social Security and Medicare taxes is raised, higher income professionals will bear more of the tax burden, making the income transfer even more positive for the economy.

But there is a less benign income transfer that Samuelson does not even mention: military spending of more than $1 trillion annually (the sum of Defense Department spending + national security spending + military spending in other departmental budgets + supplemental war spending + interest on that portion of the national debt attributable to deficit spending on the military in previous years). In fact, 25 percent of the six to eight trillion dollars that will be spent on interest on the national debt during 2011-2020 will be attributable to previous military spending.

Discussing the country’s fiscal hemorrhage without discussing the military budget falls far short of full disclosure.

***************************************************


Readers of this blog may find Dean Baker's report, "The Social Security Shortfall and the National Defense Shortfall" of particular interest.

Baker's response to the same column by Samuelson is here. More about the rise in Pentagon spending compared to the increase in spending for Social Security is here. Finally, it is worth noting that, in the last cited piece, Baker does not use the $1 trillion+ figure for military spending that I use because he includes only budgeted spending for the Department of Defense and does not include the additional spending itemized in my letter to the Post.

Economic Justice and Military Spending Cannot Coexist

The Fight We Must Win


Our next door neighbor's adult son has moved in with her. Two years ago, just before it was clear that the economic poop had well and truly hit the fan, he had moved out to a place of his own. Now, having lost his job, he's back. They're being careful with each other right now, as opposed to two years ago when we would hear them arguing almost nightly and it was clear that he had to move on and that they were out of patience with their shared living arrangements. I presume that it is only a matter of time before they begin finding the same old faults with each other.

Another friend has been having difficulties with his pre-teen son who suffers from a variety of emotional disorders and learning disabilities. He lives in a state that has never fully funded the service his son requires, but in the last year those services have been rationed more thoroughly than before and he finds that his family cannot get all the help that his son needs. He is considering moving to another state, but which one is flush with cash and fully funding the array of mental health, educational and social services he is seeking?

According to the Center on Budget and Policy Priorities (CBPP), 26 states that had plugged deficits at the beginning of this fiscal year, have discovered that they haven't plugged enough. New gaps have opened up and new cuts must be made before the end of this fiscal year. Almost all those states and at least a dozen must make further budget cuts in the next fiscal year, as well. (See CBPP's report here).

Given that federal stimulus spending helped many states fill recent deficits, and that there is no new stimulus spending on the horizon, it seems pretty obvious that state spending for health care, education, highways, public transportation, housing and emergency services for the poor and the unemployed will drop, even as the demands increase.

The $787 billion stimulus package passed in February has saved or created 640,000 jobs, CNN reported in October. But the economy has lost 7.3 million jobs since December 2007 (read the Bloomberg.com report here). With $1 trillion+ federal budget deficits, steady right-wing criticism of the first stimulus (second, countin the even more feeble Bush stimulus package), and uncertainty over the cost of health care reform, it will take a great deal of political courage for Congress and the President to propose and pursue further stimulus spending large enough to help.

But there's the rub. At this point in time, in a country with significant unmet social needs that is also fighting two (long) wars, any effective political leadership will have to be courageous. So, assuming the existence of such a quality, I once again offer military spending as the pot of silver (if not gold) to be placed on the table and redistributed according to the real needs of Americans, rather than the needs of empire.

As frequently happens, I cite the ever reliable Dean Baker at the Center for Economic and Policy Research (CEPR) for some of the facts that best support an argument for cutting military spending. "... the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run," Baker wrote in a recent column that appeared on-line at truthout.org.

The calculations Baker references are based on projections covering a 20-year period, so the actual current job losses from the military spending increases since 2000 are certainly lower, in the area, say, of half to three-quarters of a million jobs. But if the US had been saving those jobs over the last seven years, rather than bleeding them away, it would have had the impact of another stimulus bill; and likely a timelier and more effective one.

Unfortunately, President Obama has recently signed a defense spending bill that increases the military budget by about five percent. Though it is the accumulating, down-the-road impact of such spending increases that do the most harm, even a one percent decrease annually in the next three military budgets would have a small, positive and growing impact by 2012 and beyond, providing new stimulus to the domestic economy in the amount of, perhaps, $90 billion (the estimated total of annual one percent cuts, plus three to five percent in avoided annual increases). But the longer-term political impact of such cuts matters more than the immediate social benefits.

Winding down the wars in Iraq and Afghanistan will involve serious political fights. Resistance will come from members of Congress with large military bases and large numbers of workers in military production living in their districts. Weapons manufacturers and military contractors already spend huge and corrupting amounts of cash on lobbying and political contributions. But as the costs of empire and war erode our domestic economy and our manufacturing base, there is nothing to be gained by avoiding political fights about the direction of spending and everything to win.

The federal budget picks winners and losers and has been picking the military-industrial complex and corporate interests to win since the 1950s. Beginning the fight to pick new winners now--American workers, the domestic economy, social justice, et al.--is a surer way to reelect Obama and progressive Democrats in 2010 and 2012. Small gains now in cutting military spending will set the stage for bigger fights, larger cuts and, ultimately, peace dividends and economic justice in the years beyond 2012.

Health Care Reform Lurking

But Not Good Enough?

The Washington Post ran seven articles on health care, one on the front page, in an 18-page first section today. The coverage added up to more than 10 percent of the paper's first section. Hurricane Katrina may have been the last time that coverage of a single issue was so dominant in the Post, though I suppose I should check back issues to see if Michael Jackson's death might have made a similar footprint.

But the Post's focus is right on and the effort demands attention. In "Health Insurance Industry Spins Data in Fight Against Public Plan" writer David Hilzenrath says the industry is "cherry-pick[ing] the facts."

Citing an industry spokesperson who says the vast majority "of Americans are satisfied with their existing health coverage," Hilzenrath makes the editorially sound observation that the same poll shows that respondents also support "the creation of a public [health insurance] plan." Fetching additional data from another source, Hilzenrath observes that the public's apparent affection for their existing health insurance ought to be taken with a grain of salt. He writes:

"Those who described their health as "excellent" -- people who presumably had relatively little experience pursuing medical care or submitting claims -- were almost twice as likely as those in good, fair or poor health to rate their private health insurance as excellent."

In other words, if your health is good, and you're not relying on your insurance to keep you healthy, then you may not know if health care needs reforming (though one day, you will).. The percentage of those expressing approval for their existing insurance plans would also be lower if the 16 percent of Americans who don't have coverage were counted as at least neutral on the matter. Regardless, health insurers are likely the most powerful interest group at work on health care reform these days. And one reform, mandatory coverage, is naturally backed by health insurers.

The Post's front-page story "Like Car Insurance, Health Coverage May Be Mandated," explores the experience of mandated coverage in Massachusetts. In 2007, somewhere near 600,000 state residents, about 16 percent of the population, had no coverage. The state's health care reform required individuals to get coverage or pay a penalty, and required most employers to provide a coverage option or contribute to the overall cost. A year later, only three percent of residents were without coverage. Of that group about half paid the penalty rather than buy coverage, and "71,000 residents were exempted [from penalties] because they did not meet the minimum income levels."

A mandate will certainly benefit health insurers. If four out of every five Americans with no current coverage were to buy even $2,500 worth of health insurance (way below the current average premium), it would mean $80 billion a year in new revenue for the industry.

No rational person who doesn't work for a health insurer wants to create a new revenue stream for companies primarily responsible for the way we ration health care, but a mandate could dramatically reduce a variety of health care costs, including uncompensated emergency and hospital care. The amount of possible savings is unclear, but it's probably on the order of more than $100 billion each year. Several websites provide data that suggest the savings could be much higher. (Here and here are two of those sites.)

Op-ed pieces by Michael Gerson (a former Bush II speechwriter), "Health Care's Sensible Center," and Harold Meyerson (the only mainstream columnist I know of who identifies himself as a socialist), "The Can't-Do Blue Dogs," take apparently opposite positions on how much compromising Democrats ought to be doing on the road to getting health care done. But both writers are clear that the debate is largely between various positions within the Democratic party.

In my view, Gerson makes two big errors in his column. The first is discounting what President Obama might accomplish in the upcoming month. Obama may be too wounded politically by the continuing recession, growing unemployment and "trillions of dollars in stimulus and bailouts" to provide good leadership, Gerson writes. He also quotes William Galston of the Brookings Institution, who told Gerson that Congressional opposition to "boosting taxes on the rich" eliminates that option, but if Obama does enter the political fray with a specific list of reform requirements, taxing households with annual incomes of, say, $350,000 or more, ought to be completely doable. A reform bill promoted by House Speaker Nancy Pelosi envisions raising more than half a trillion dollars from such a tax (see the details here).

On this point, Meyerson is clear. Taxes ought to (and probably would) be paid, if not for "the Blue Dogs' ... deference to wealth." But even though I am anxious to see Obama weigh in on the subject, Steven Pearlstein ("Imperfect Health Reform Still Beats the Status Quo") sees Obama as "boxed in" and "lashed to the mast" of predicted deficits in both health care and federal spending. But so far, Obama's commitment to not raising taxes has been limited to individuals making less than $250,000 per year. To most of us, such an income threshold seems to go way beyond the middle-class, but it still leaves the president free to endorse tax revenues like those advocated by Pelosi.

For me, no analysis of this issue would be complete without checking on what Dean Baker, co-director for the Center on Economic and Policy Research (CEPR), has to say. Accordingly, here's "Taxing Health Insurance Premiums and Subsidizing Health Care Providers," which ran yesterday on truthout. Taxing the health benefits of working people won't do, Dean writes, but changing the drug patent system and relaxing immigration rules limiting entry of qualified medical doctors would cut $200-300 billion in annual health care costs.

The problem with all of this, as Ruth Marcus writes in "The F-22 Model for Medicare," is that current health care arrangements have always worked pretty good for insurers, providers and the shrinking numbers of workers with employer-provided health coverage. This creates both a powerful lobby for the status quo and another group of voters who simply have not supported dramatic reform. To Marcus, this sounds uncomfortably close to the experience with the endlessly funded F-22 fighter jet.
The lineup of powerful members of Congress who fought to maintain production of the F-22 despite the opposition of President Bush, President Obama, Sen. McCain and several secretaries of defense kept the program going. But just yesterday, Congress finally pulled the plug on the F-22.

On the way to a final optimistic note, Marcus advocates another reform not mentioned in the other articles, improvements to MedPAC or the Medicare Payment Advisory Commission, advocated in some form by the Obama administration and some members of Congress. Establishing "a MedPAC on steroids" would create huge Medicare savings and, in the process, reduce health care costs overall. "Because Medicare is the 800-pound gorilla of health care, its reimbursement policies also drive payment arrangements between private insurers and providers," she writes.

And, speaking of the F-22 and other good ways to save tens, maybe hundreds, of billions of dollars in military expenditures, lets give Marcus the last word.

"The politics of health care make the F-22 fight look simple. It won't be easy to expand coverage in a way that controls costs.

But maybe, just maybe, the naysayers are premature."

La Quatorze Juillet Comes for Health Care

Power never concedes without a fight

Bastille Day is the French national holiday commemorating the 1789 storming of the Bastille, an armory and prison belonging to the King of France. The French Revolution, which began as a primarily bourgeois struggle against the power of the monarchy and the Catholic church, had barely begun at the time. But severe and widespread famine throughout France, as well as extreme autocracy and indifference to the suffering of ordinary working people, and finally the armed intervention of foreign powers, would move the revolution through a remarkable variety of stages. The by turns democratic, repressive, bloody, chaotic, creative and empowering developments during 10 years of revolution has made the French Revolution a metaphor for the use of all comers, a conservative cautionary tale, a story of heroic resistance to the mob, a nightmare of counter-revolution and a dream of liberty.

History is always subject to debate and challenge. In the end, we are all revisionists and ideologues; the best of us likely are those who are able to speak about the personal biases that bring them to prefer one version over another. The Wikipedia entry about the French Revolution here is a great opportunity to contemplate the many ways that a little knowledge might be a dangerous thing.

In the meantime, Bastille Day has also functioned as a personal mnemonic, helping me to remember my first official day at the University of Michigan. I took the train to Ann Arbor (back when Amtrak was a nightmare of the future) on July 14, 1965, heading for three days residence at East Quad and orientation for incoming freshmen. The debacle that was my educational career at UM needs acknowledging (and perhaps detailing at some later time), but that memory today led me (by a somewhat tortuous route) to this question: What contemporary Bastille most needs taking (and liberating)?

I asked my new friend, M, a related sort of question the other day. We must first of all move on health care, she responded. Had we been using the Bastille Day metaphor at the time, I'm quite sure she would have said that we need to liberate the health care system and make it ours. But how?

M believes that we can't do a thorough job of reforming health care or accomplishing other substantial progressive change without an accompanying change in the consciousness of privileged elites who must, she says, come to recognize that great wealth and excessive materialism are not a right and are an obstacle to a more just society.

Though M and I see eye-to-eye on many things, it was collective action--street heat--that opened the doors of the Bastille and reinforced Louis XVI's understanding that he must make compromise with the revolutionary impulse that would eventually doom the ancien regime. The reasons why Louis later lost his head need exploring, too, but the lesson of Bastille Day and (a myriad of other moments of dramatic political change) is, as Frederick Douglass put it:

"Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or both. The limits of tyrants are prescribed by the endurance of those whom they oppress."

Though Douglass here is talking tyrants, the point works even in a democracy, which in every instance still calls for a struggle with entrenched power. How, then, do we go about winning a struggle for substantial reform of the health care system against the entrenched power of insurance companies, corporate health care providers and those who are most highly rewarded for their work in the current system?

We begin by taking, as my friend Perry Hall says, "the language and the argument away from the reactionaries." A favorite argument of the congressional defenders (and others) of the current system is that government intervention in health care would end the rights of patients to choose their own doctors and to agree with their doctors on the medical care that would be appropriate for them. This argument comes from the same members of Congress who have passed laws to keep women and their doctors from arriving at conclusions of their own about abortion and, even, birth control. It boggles the mind that they might actually believe their own rhetoric, but that is not what matters.

We hear also and repeatedly about the staggering new costs that health care reform will impose. This argument comes from those who are quite happy with the staggering costs the status quo imposes and, as Dean Baker discusses in The Global Warming Lie Detector, do nothing about the staggering costs that war and weapons systems impose on taxpayers.

If the "limits of tyrants," and, by implication the possibilities for progressive change, are defined by the action of the people, then it follows that the people must trust their own understanding that our current health care system is too flawed, too expensive, too inefficient and too inaccessible to be maintained. Having trusted in the process by which we each arrived at such conclusions, we ought to be ignoring the propaganda deployed against us, and making our voices heard.

There must be a thousand ways for ordinary people to affect the direction of health care reform, but here's a few:

Go here for a list of "10+ things you can do." Number one on this list, unfortunately, is participate in a march on May 30, but even without that one, there are lots of possibilities here.

Send congress a copy of your medical bill. This site will help you do it.

Go to this site for a list of national health care campaigns and state connections you can make to focus your activism locally.

The important point, ultimately, is that the ancien regime will not fall without the action of ordinary people. There is a real opportunity here to make democracy work a little bit better. Even young, healthy people get old and get sick. Real health care reform will pay universal benefits.

Bubble Riders Got Richer

Poverty and Policy Problems for the Rest of US

My friend Alex Kotlowitz is nearly done with a magazine piece outlining the many ways the city of Cleveland has been devastated by the collapse of the housing market. Cleveland’s problems are on the devastating side of bad; a rust-belt city built around good union manufacturing jobs, suffering from hundreds of millions of dollars worth of lost wealth, eroding tax base and unmet needs.

The other day, Alex and I vigorously debated the proposition that sub-prime housing problems caused the collapse of the larger housing market. Though it wasn't really Alex's position, I have a hard time with even the suggestion that sub-prime mortgage holders somehow caused anything. But we were engaged in a discussion that could have continued indefinitely.

After all, Cleveland homeowner households had a much higher percentage of sub-prime mortgages than did most urban markets. At ground level in Cleveland the flood of mortgage defaults, abandoned housing, personal bankruptcies and business closings must look like a cataract unleashed when the tailings damn of sub-prime mortgages washed out. Alex ended the discussion, graciously suggesting that it might be fair to say that the housing bubble burst and the sub-prime mortgage market collapsed in some places almost simultaneously.

I pushed hard against the notion that defaults on sub-prime mortgages were a first cause of our current financial problems for a couple of reasons. One, I really do believe I’m correct here. And two, it freaks me out that some conservatives (and large numbers of ordinary folks traumatized by their own growing financial problems) think that the nasty habits of sub-prime mortgage holders are to blame for everything.

If such a perspective were to prevail, it could lead to all sorts of scary policy outcomes. Like bailout programs kinder to bankers than homeowners. Like scapegoating low-income folks because they wanted to be homeowners, too, and because they were innocent grist for the commercial and investment banking mills grinding out securitized mortgages at great profit. Like policies that abandon rather than bail out and invest in hard-hit urban communities.

Anticipating the possibility of bad policy outcomes is time well spent, but not if it molds an argument about facts, however elusive those facts might be. That night I hit the books, scanning Dean Baker’s new book, Plunder and Blunder, The Rise and Fall of the Bubble Economy, and coming to the conclusion that I had better clarify a few things, particularly as I have no wish to be regarded as a dogmatic idiot.

A decent understanding of Baker’s work (you can see lots of it at www.cepr.net/) might be to say that the collapse of the housing bubble and the subsequent loss of more than $1 trillion in wealth were caused by the inevitable collision of the forces that fueled the bubble in the first place with the forces that would pop it. Those forces included:

• Sustained and artificially low interest rates, primarily the work of the Fed under Greenspan;
• An artificially high dollar, primarily the result of export economies like China investing their cash in US Treasury Bonds in order to maintain American purchasing power and appetite for imported goods;
• Deregulation and bad regulation that allowed major financial actors driven by greed to develop, sell, swap, trade and insure a myriad of dubious services and securities;
• And job loss, especially high-paying manufacturing jobs, in the United States, caused by competition from cheaper imported goods and resulting in significant losses in household income concentrated in urban economies most dependent on manufacturing.

Though these essentially contradictory economic forces could co-exist for a period of time, they could not do so indefinitely. As the deflating of the bubble proceeded, the effects showed first in housing markets with a high percentage of sub-prime mortgages and adjustable rate mortgages (sub-prime or otherwise).

In not a few instances, households with sub-prime mortgages and ARMs had actually been steered into them in spite of the fact that they were qualified for cheaper and more stable conventional mortgages. Some qualified homebuyers simply received mortgages with disastrous terms lurking in escalating interest rates and onerous payoff conditions.

In other instances, borrowers sought and obtained ARMs that deferred principle and, even, interest payments, and created only temporarily affordable monthly mortgage payments. In the rush to securitize and sell mortgages, and collect the fees associated with midwifeing the securitized mortgage packages, lenders barely scrutinized borrowers.

In some cases, refinancing deadlines arrived for households with ARMs at the same time that job losses began increasing and home values in their communities began stagnating. With little or no equity in their homes, these households found new low-interest mortgages increasingly unavailable.

An honest reading of Plunder and Blunder wouldn’t likely lead anyone to the notion that a single first cause for our economic depression is identifiable. But Baker’s last chapter, “Learning from the Bubbles,” is full of quotable indictments of some of the villains, and they aren’t sub-prime mortgage holders.

“The financial industry’s conduct in the housing bubble was even worse,” Baker writes (pg. 141). “housing prices had sharply diverged from a 100-year trend…vacancy rates were at record highs…inflation-adjusted rents were not rising through most of the period of the housing bubble…some owners of rental units [converted] them to ownership units…Decreasing demand and increased supply lowers the price; what part of that reality did the highly compensated analysts fail to understand?”

Elsewhere, Baker neatly excoriates former Fed Board Chair Alan Greenspan. He also takes a swipe at the media, which he amply substantiates elsewhere.

“The leading villain in this story is Alan Greenspan. Greenspan mastered the art of currying the favor of the rich and powerful and held top economic positions under five presidents of both political parties. He also managed to gain a near cult-like following among the media. As a result, most of the public is largely unaware of how disastrous the Fed’s policies under his tenure were for the economy and the country (pg. 140).”

The cascade of terrible economic news that has characterized most of the last two years was almost inevitable. Except, of course, for the mega- and quasi-collapses of so many banking, insurance and brokerage giants that promoted the bubble in the first place.

The much ignored original sin here is the amount of wealth that was privatized in the form of dividends, salaries and bonuses during the bonanza years, leaving the now shaky financial giants without the resources to cover their losses. Almost to a man, or woman, the nouveau rich and richer of the last 15 years will get to keep what they took.

The rest of us will be left with the responsibility for developing, advocating and supporting fair, just and restorative polices, based on a clear understanding of what happened, and focused on communities where people live and work and engage the future.

Dean Baker and the Economic Right Stuff

If there is a more delightfully rational and straightforward economist around than Dean Baker of the Center for Economic and Policy Research, somebody needs to tell me. I don’t write much--I wish I could make myself do it more. But reading Baker’s stuff makes me want to package his ideas and analysis and get it out to a wider audience. My reliance on Dean for economic and political truth is so complete, I would be roadkill without him.

“Paulson and Bernanke spread the wealth around” is a recent and useful example of Dean’s thinking. He observes that when Barack told Joe the Plumber that he favored tax increases on incomes over $250,000 in order to spread wealth, the loudest responses were critical and adverse.

But, Dean writes, “fortunes will be made or lost depending on how this bailout money is used. For example, Secretary Paulson just agreed to lend another $20 billion of the Treasury's bailout money to Citigroup.

“In addition, the Federal Reserve Board agreed to guarantee up to $300 billion of presumably bad assets. This is an enormously valuable guarantee. If Citigroup had to arrange a comparable guarantee in the private market, it would almost certainly pay more than $30 billion a year.

“This decision sent Citigroup's stock soaring. In the week since the bailout was announced, Citigroup's stock more than doubled, adding more than $25 billion to the company's capitalization. (The government could have bought the bank outright with the money it lent to Citi.) This is great news for Citigroup's shareholders, who would be holding almost worthless stock if Mr. Paulson had not been so generous.

“Paulson's decision was also good news for Robert Rubin and other top executives at Citigroup. If the government had not stepped in, Citigroup would almost certainly be in bankruptcy and most of its highly paid executives would likely be out on the street.

“Creditors of Citigroup also benefited. If Citigroup went into bankruptcy, their loans would be frozen for a period of time while the court determined what percentage of Citi's debts could be paid. At the end of this process, many creditors would only receive back a fraction of what they are owed.

“The fact that money is being redistributed doesn't make it wrong to bail out Citigroup or any of the other companies now being aided by the various Fed and Treasury funds. We need to keep the financial system functioning. However, there is every reason in the world to be concerned about the extent to which these policies may be enriching the wealthy and well-connected at the expense of the rest of us.

“In the case of the Citi rescue, there was no obvious reason why the shareholders should not be wiped out. They understood (or should have) that when they bought shares of the company that they could lose their whole investment if the company was poorly managed and went bankrupt. Similarly, there is no obvious reason that the management that wrecked Citi should not be thrown out and replaced with a more competent and lower paid team.”

There is more of Dean, lots more at www.cepr.net. Be sure also to check out “Paper wealth and the economic crisis.”

Dean may not have a prime place in the rolodexes of power, but journalists and commentators need to rely on him more often. Ordinary folks already can and do.

Letter to the Washington Post, #11

Sebastian Mallaby’s April 21st column, “Housing Sense in Congress?” seems to be implying that it is homeowners who are to blame for the subprime meltdown. “Homeowners,” he writes, “have no moral claim to government assistance.”

Instead, Mallaby says that Congress ought to find ways to provide partial protection to the lenders who issued millions of sub-prime mortgages, then bundled and sold them to investors. In order to stabilize housing prices, the Federal Housing Administration ought to protect lenders from further losses, “if they agree to forgive part of a loan rather than kicking a family onto the street,” he writes.

In such a case, Mallaby notes, “homeowners would get a break, which is unfortunate.”

Such a break. The homeowners in question, who may have applied for and received one loan in their lives, will lose all their equity anyway. In most cases, these homeowners had little insight into what might go wrong and no idea that they were the recipients of unusual “subprime” loans.

But the lenders knew. And the lenders knew that such profitable loans were also risky. Now, Mallaby apparently believes that the lenders who profited greatly during the rise in housing prices are the ones with a “moral claim” on government action.

If Congress wishes to slow the freefall in market prices, a better option would be Own-to-Rent (OTR), a proposal first advanced by Dean Baker of the Center for Economic and Policy Research (CEPR).

OTR would require lenders to offer homeowners the opportunity to rent their home at fair market prices before beginning foreclosure proceedings. This would allow people to stay in their homes, stabilizing neighborhoods and forcing lenders and investors, who profited from the increase in housing prices, to bear the market consequences of the collapse in prices.

Jeff Epton
807 Taylor St., NE
Washington, DC 20017

202 506-7470

No Bailouts

The National Lawyers’ Guild used to have a T-shirt that quoted Shakespeare: “The first thing we do is kill all the lawyers.” It was a pointed tongue-in-cheek comment about the way some lawyers use the law to block social justice and change. Unfortunately, what was first a social observation, and later a leftist insight into the way entrenched interests use the law, has become a club with which to bash all lawyers.

Regardless, the recent moves by the Fed to protect banks against their own bad investment decisions put me in mind of the Shakespeare quote. As the current recession gathers momentum, what we need is a priority list for government action. Maybe lead the list off with, “the first thing we do is, we don’t bailout business.”

One of the Fed’s moves involves loaning investment banks up to $200 billion and allows banks to secure the loans by pledging securities they hold. Supposedly, the banks’ pledged collateral will be their most highly rated, mortgage-backed securities. AAA-rated, we are told.

On the news of the Fed’s move, the Dow-Jones average of industrial stocks achieved its largest single-day increase in five years. Despite appearances, the Washington Post’s Steven Pearlstein says this isn’t just a “bailout for Wall Street (A Bailout. For Everyone, Post, March 12).” Pearlstein says the move will help us all.

"…it is also a bailout…meant to prevent a financial and economic meltdown that drags everyone down with it,” Pearlstein writes, though he leaves out the specific ways in which working families will benefit.

For a different perspective on bailouts check Dean Baker’s book, “The Conservative Nanny State.” Baker, who is co-director of the Center for Economic and Policy Research (CEPR), argues that the government, contrary to popular belief, repeatedly uses its power to help banks and other businesses avoid the consequences of risk.

“…in a market economy lenders take risks when they make a loan [or buy mortgage-backed securities]. They should, in principle, understand this fact. Certainly, the highly compensated corporate executives that manage large banks and other financial institutions should understand that they take risks when they make their loans [or investments],” Baker writes.

That it is necessary for Baker to make the point at all, in a chapter about bankruptcy, suggests that corporations operating in our “free market” economy understand perfectly well that a government bailout is always a good possibility. The message cloaking the substantial benefits of these corporate bailout policies has been consistent since the phrase “what’s good for General Motors is good for America,” entered the vernacular. Pearlstein’s comments are merely the latest refinement.

But it seems more than possible that AAA-rated securities might not be that good, at all. That’s been the experience recently as even security-rating services have come under fire for their practices. That means the Fed’s decision has put the government in the position of guaranteeing $200 billion in investments that might be liquidated for less sometime in the future.

If jobs are at stake here, then for $200 billion the government could extend unemployment benefits, expand food stamp programs and begin investing in different jobs, like new and rebuilt mass transit, bridge repair and renewable energy. But the first thing we do is, we don’t bailout business.

An Economy and Budget That Works - Part Two, Social Security

Robert Samuelson is the Washington Post's go-to guy on economic issues, which means that he has a major role in defining orthodoxy on budget and policy issues. Yes, there are elected and appointed officials--President Bush, congressional leaders, Federal Reserve chairman Ben Bernake and others--who occupy command positions in defining the limits of debate about the economy, but as media figures go, Samuelson swings a lot of weight.

Samuelson has occupancy rights on prime turf--a weekly op-ed column in the Post and another column in Newsweek magazine. The options for challenging Samuelson's pronouncements are limited. A letter to the editor might do, but such a letter, if it gets published, gets less space than Samuelson does and comes after the fact. Why does this matter?

Well, one case in point might be a column Samuelson wrote earlier this week about Barack Obama, who Samuelson says, is not telling Americans the truth. "A truth-telling Obama might say: 'Spending for retirees--mainly Social Security, Medicare and Medicaid--is already nearly half the federal budget. Unless we curb these rising costs, we will crush our children with higher taxes," Samuelson wrote.

Social Security is a hobby horse of Samuelson's; its vulnerability, combined with the rising federal deficit allegedly comprise a poison pill that future generations will be forced to swallow by the inaction (read selfishness) of baby boomers. Obama's disinformation, Samuelson claims, includes a pledge not to "raise the retirement age" or reduce benefits to retirees. Obama's further proposal to provide tax relief to retirees making less than $50,000 annually shifts even "more of the tax burden to younger workers," says Samuelson.

But, as Dean Baker of the Center for Economic and Policy Research (CEPR) has pointed out repeatedly, the non-partisan Congressional Budget Office has calculated that Social Security will be able to pay current and future retirees through 2052 without any changes to the current tax structure (excepting gradual increases in payments to reflect cost of living increases). and the national budget deficit, a genuine problem for all of us, is an entirely separate issue from Social Security.

In fact, if the Social Security tax, currently the most regressive tax in the country--it falls more heavily on lower-income workers than on the wealthy--is raised to include a larger portion of the income of those making over $102,000 per year, it could extend the solvency of the Social Security system into the 22nd Century. (You can read more about Social Security at CEPR's website: http://www.cepr.net/index.php?option=com_issues&task=view_issue&issue=19&Itemid=22).

Ultimately, it is Samuelson's misleading perspective on Social Security that is the larger problem. Obama is being criticized for standing outside a perspective that is actually disabling. If the notion that Social Security is in deep trouble and that addressing the deficit is the foremost priority carries the day, government as an investor in working people will be sidelined. But implementing Obama's simple proposal will end the scaremongering about Social Security and create the political space for dealing with more immediate issues, like employment and fair trade agreements, climate change and the high human, political and financial cost of the US occupation in Iraq.

And the deficit? More than manageable if we reduce the annual rate of American military spending, which already exceeds spending by the rest of the world combined.