Is That all You Got?

In this Sunday’s New York Times[1] there was an article by Binyamin Appelbaum and Helen Cooper, which discussed the two major debate streams in the Obama White House.

On the one hand, it said, there were people like David Plouffe and William Daley, who want him to hover close to the center and do things that will get through the radical right wing fringe groups that seem to have taken over Congress. Things like patent reform for inventors and free trade agreements with Panama which might, maybe, eventually help the children or grand children of workers in the US who have been put out of work by free trade agreements with Panama. Workers are aghast at them, but big-business and the people whose re-elections they pay for like them a lot. AND they might have a chance at passing a Republican filibuster.

On the other hand, there are people like Gene Sperling, Mr. Obama’s chief economic adviser, who argues for what he calls BIG ideas like tax cuts for businesses that hire new workers. Now, tax cuts for businesses that hire people is not a bad idea (according to studies, they are the only tax cut that helps during a recession)

But the BIG question, it seems to me is: is this all you’ve got? Is it really the case that with the worst jobs recession in seventy years, and a possible future of decades of economic malaise and personal misery, is it really, really true that the only two options the President of the United States is considering are between doing nothing and doing almost nothing? We have 9.2 percent unemployment and 4.6 million homes that are near foreclosure. Is this all we are being offered? More tax cuts are considered a BIG idea? Is it a paucity of brains or of concern that causes this kind of vapid boring thinking? As Arianna Huffington notes in her recent book, Third World America, “Does anyone believe that the sense of urgency coming out of Washington (and here, I’d add the Obama White house) wouldn’t be wildly different if the unemployment rate for the top 10 percent of income earners was 31 percent?...Of course not---the sense of national emergency would b so great you’d hear air-raid sirens howling.”[2]

[1] “White House Debates Fight on Economy,” Binyamin Appelbaum and Helene Cooper (New York Times, August 13, 2011), p. A1.
[2] Arianna Huffington, third World America: How our Politicians are Abandoning the Middle Class and Betraying the American Dream (New York: Crown Publishers, 2010), p. 13.

Who owns America? Hint: It's not China
By Tom Mucha, Global Post

Truth is elusive.  But it's a good thing we have math.

Our friends at Business Insider know this, and put those two principles to work today in this excellent and highly informative little slideshow, made even more timely by the ongoing talks in Washington, D.C. aimed at staving off a U.S. debt default.

Here's the big idea:

Many people — politicians and pundits alike — prattle on that China and, to a lesser extent Japan, own most of America's $14.3 trillion in government debt.

But there's one little problem with that conventional wisdom: it's just not true. While the Chinese, Japanese and plenty of other foreigners own substantial amounts, it's really Americans who hold most of America's debt.
Here's a quick and fascinating breakdown by total amount held and percentage of total U.S. debt, according to Business Insider:

  • Hong Kong: $121.9 billion (0.9 percent)
  • Caribbean banking centers: $148.3 (1 percent)
  • Taiwan: $153.4 billion (1.1 percent)
  • Brazil: $211.4 billion (1.5 percent)
  • Oil exporting countries: $229.8 billion (1.6 percent)
  • Mutual funds: $300.5 billion (2 percent)
  • Commercial banks: $301.8 billion (2.1 percent)
  • State, local and federal retirement funds: $320.9 billion (2.2 percent)
  • Money market mutual funds: $337.7 billion (2.4 percent)
  • United Kingdom: $346.5 billion (2.4 percent)
  • Private pension funds: $504.7 billion (3.5 percent)
  • State and local governments: $506.1 billion (3.5 percent)
  • Japan: $912.4 billion (6.4 percent)
  • U.S. households: $959.4 billion (6.6 percent)
  • China: $1.16 trillion (8 percent)
  • The U.S. Treasury: $1.63 trillion (11.3 percent)
  • Social Security trust fund: $2.67 trillion (19 percent)
So America owes foreigners about $4.5 trillion in debt. But America owes America $9.8 trillion.

For a smart take on how President Obama and House Republicans should end gridlock over debt and deficits, see our new GlobalPost series The Negotiator, which features Wharton's negotiation guru Stuart Diamond.

And to bone up on China's debt — another potentially big global economic headache — check out this interview with brainy-yet-coherent Northwestern University economist Victor Shih, who spoke with GlobalPost's David Case.
How Much Harm Will it Do?

Stan Duncan

Now that we have raised the debt ceiling (or paid off the hostage-takers, depending on your point of view) it might be a good time to review how much damage the deal will do to the economy, to the recovery, and to ordinary people trying to hold down jobs.

Before I try to total that up, here is a brief overview of how we got here. You can skip down if you already know all of this.

Where did it come from?
Our US debt itself (the fact that we have borrowed money) has been around for a long time, but the deficit (the fact that we spend more than we make) was pretty much eradicated during the Clinton years. When president Clinton left office we had a surplus of about $412 billion and we were on track for eventually paying down the total debt itself (which was about $8 trillion). When President George Bush left office eight years later, the entire surplus was gone. The deficit had grown to over $500 billion, and the debt was around $14 trillion.

Liberals and conservatives argue over how much influence President Clinton or the high tech explosion had to do with that, but the fact remains that we had a surplus during his administration. He raised taxes and social spending and unemployment went down. And when people are employed they pay taxes. Remember that part: when people are employed, their taxes pull down the deficit.

President Bush had two unfunded wars, three unfunded tax cuts (one in the spring of 2008 that no one talks about), an unfunded prescription drug program, and a recession. The unfunded programs and tax cuts were like paying money out and the recession kept money from coming in (actually the recession did both: tax revenue went down and expenditures for unemployment insurance, food stamps, etc. went up).

At the end of 2008 and the beginning of 2009 both the Bush and Obama administrations spent hundreds of billions in stimulus to help stave off an economic meltdown. However, a good amount of President Bush’s spending was in loans to Wall Street, which have been paid back, and much of Obama’s was for jobs, which came back in terms of workers paying taxes, so in the long run neither of their programs impacted the deficit in the way that the wars, tax cuts, the drug program and recession did. Economists differ on how much all of these things drove up the deficit (see my previous post on that), but by any estimate except Rush Limbaugh’s, when President Obama took office the US deficit had soared upwards by trillions of dollars.

To be fair, this description of the origin of the deficit comes mainly from economists and observers from the right, left and center. There is an alternative view from people like Senate Minority Leader, Mitch McConnell (R-Ky), who argues that the deficit is the result of the “out of control spending” of unnamed members of Congress (apparently Democrats) between 2000 and 2008, and the “Job-killing tax increases” that President Obama might be pushing on us one of these days. Even though evidence for this view is difficult to come by, it seems to be the predominant opinion held by the media, the White House, and both houses of Congress.

So, where are we now? 
At the beginning of 2011, the Republican leadership in Congress announced that they had kidnapped the debt ceiling and would not let it go free until they had been paid an astronomical ransom in cuts in social spending. And if the Obama administration did not agree to their demands, they would blow up the economy by refusing to allow the federal government to borrow money. That act would throw our tepid recovery back into a deeper recession, families and jobs would be ruined for decades, and our future as a global economic player would be in jeopardy. They didn’t really want to do it, they said, but they had no choice because otherwise somewhere a few decades from now there might come a time when someone might get hurt if they didn’t do it. (They didn’t put it in quite those terms, but you get the idea.)

It is a form of what I call “Economic Apocalypticism,” the belief that we need to cause a catastrophic human apocalypse right now, with pain, suffering, and hunger, in order to create a pure capitalist order generations from now for our grand children. As examples of this, look at the draconian cuts in social spending imposed on poor and developing countries in the 1980s by the IMF and the resulting rises in poverty, homelessness, and illiteracy. It is sometimes referred to as “Shock Treatment” by economists like Jeffrey Sachs and others. It means: cause agony and death for hundreds of thousands of innocent people right now on the gamble that their grandchildren might be able to claw their way back into a middle class life years from now. The theory was common currency in the economic development circles of two decades ago and is apparently also behind the death threats of Congressional Republicans today.

The Democrats and the Obama administration inexplicably believed that the Republicans were not bluffing in their threats to destroy the economy, and moved into protracted hostage negotiations over how much to give up to keep them from killing the planet. Then, according to House Speaker John Boehner (R-OH), Congress agreed to ninety-percent of their demands, with an additional promise that a bi-partisan panel will be set up to decide how much more will be given to them later.

So, what is the damage?
Let’s begin by acknowledging that cuts in social spending will hurt the economy and drive up the deficit. We often hear that it will, of course, also cut the deficit, but not by as much as you think because the people you fire will no longer pay income or sales taxes. Firing people can lower the deficit, but it also to some degree increases it—that in addition to causing fear and pain to millions of innocent families. Cutting social spending in the middle of the worse job losses in seventy years is much like bleeding hemophiliacs to see if it will help them get well. It wasn’t successful in the 1200s, and it probably will not work today.

How much damage will it do? First, the debt reduction plan will cut $3 trillion from Federal spending over 10 years. That comes out to about $300 billion in spending reductions per year. The higher amounts of that, however, are set to be cut in future years so that people won’t feel as much of it before the elections, so for our present numbers let’s assume that only $100 billion will be cut next year.

So, deduct that $100 billion from our annual spending, which is presently around $3.5 trillion, and it will shrink the GDP by about 3%. (The math is 100/3,500.) That, by the way, is probably a bit low because it doesn’t take into account the “Multiplier effect.” Every time a dollar changes in hands there is a value added to it, which adds to the GDP. Direct Government expenditures can increase the GDP by anywhere from 1.20% to 1.75% (tax cuts, on the other hand, are usually a loss). So, the overall loss to the economy is probably larger than my simple equation.

According to a rule of thumb called “Okun's law,” if the GDP is depressed by 3%, then the unemployment rate should go up by about half that, or 1.5%. That is of course, assuming that only jobs will be cut and not waste, so to be fair, let’s assuming that in this first year we will only drive up unemployment by 1%.

Right now unemployment in America is 9.2%. Add another one percent to that and we get 10.2%. What this means is that the number of jobs lost by this act then, comes out to be about 1.5 million jobs next year. And that’s just at the start. More government-caused job losses are to come. Each year they will get larger; each year we will depress the GDP further and hurt families deeper.

Already cut backs in jobs and benefits on state and local levels are one of the major contributing factors in our high unemployment and low tax revenue and the first line of hurt will be state and local governments. One out of every three dollars of state spending comes from the federal government — $478 billion alone in 2010. That will definitely be cut. In the first half of 2011 almost all of the job gains in the private sector were lost again by firings in the public sector. From August 2008 to the present, over 577,000 jobs have been lost to government belt-tightening.

Some of the biggest items that are to be cut in the bill are spending on education and Medicaid for the poor That won't hurt many in Congress, who are generally richer than "average" Americans and prefer private schools for their children, but for the rest of us, it could be one more step in our national decline. Note that nearly every state government has already set its budget for the next two years assuming a certain amount of federal dollars to come in. With this bill, all of those programs will have to be cut back. Local governments will probably try to raise property taxes to raise revenue, but that would be one more drag on the housing market that’s already dragging the bottom. Many local municipalities are already filing for bankruptcy and that will accelerate depending on how fast Washington’s cuts begin impacting them.

As long as we believe that the pain and fear of our recession is not related to Wall Street gambling, Mortgage loan scandals etc., but out-of-control spending by God knows who in our pasts, and that the only way out of it is through cuts in taxes for the wealth and benefits for the poor, and that the only way to find God’s final realm for the next generation is by balancing our checkbook on the backs of the poor, the sick, the elderly and the very young, then we will continue to decline into what looks from this side as an abyss of madness and evil…but that’s just my opinion.

The Tea Party’s War on America

New York Times 
Op-Ed Columnist
August 1, 2011

You know what they say: Never negotiate with terrorists. It only encourages them.

Joe Nocera 
Earl Wilson/The New York Times

These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people. Their intransigent demands for deep spending cuts, coupled with their almost gleeful willingness to destroy one of America’s most invaluable assets, its full faith and credit, were incredibly irresponsible. But they didn’t care. Their goal, they believed, was worth blowing up the country for, if that’s what it took.

Like ideologues everywhere, they scorned compromise. When John Boehner, the House speaker, tried to cut a deal with President Obama that included some modest revenue increases, they humiliated him. After this latest agreement was finally struck on Sunday night — amounting to a near-complete capitulation by Obama — Tea Party members went on Fox News to complain that it only called for $2.4 trillion in cuts, instead of $4 trillion. It was head-spinning.

All day Monday, the blogosphere and the talk shows mused about which party would come out ahead politically. Honestly, who cares? What ought to matter is not how these spending cuts will affect our politicians, but how they’ll affect the country. And I’m not even talking about the terrible toll $2.4 trillion in cuts will take on the poor and the middle class. I am talking about their effect on America’s still-ailing economy. 

America’s real crisis is not a debt crisis. It’s an unemployment crisis. Yet this agreement not only doesn’t address unemployment, it’s guaranteed to make it worse. (Incredibly, the Democrats even abandoned their demand for extended unemployment benefits as part of the deal.) As Mohamed El-Erian, the chief executive of the bond investment firm Pimco, told me, fiscal policy includes both a numerator and a denominator. “The numerator is debt,” he said. “But the denominator is growth.” He added, “What we have done is accelerate forward, in a self-inflicted manner, the numerator. And, in the process, we have undermined the denominator.” Economic growth could have gone a long way toward shrinking the deficit, while helping put people to work. The spending cuts will shrink growth and raise the likelihood of pushing the country back into recession. 

Inflicting more pain on their countrymen doesn’t much bother the Tea Party Republicans, as they’ve repeatedly proved. What is astonishing is that both the president and House speaker are claiming that the deal will help the economy. Do they really expect us to buy that? We’ve all heard what happened in 1937 when Franklin Roosevelt, believing the Depression was over, tried to rein in federal spending. Cutting spending spiraled the country right back into the Great Depression, where it stayed until the arrival of the stimulus package known as World War II. That’s the path we’re now on. Our enemies could not have designed a better plan to weaken the American economy than this debt-ceiling deal.

One thing Roosevelt did right during the Depression was legislate into being a social safety net to soften the blows that a free-market economy can mete out in tough times. During this recession, it’s as if the government is going out of its way to make sure the blows are even more severe than they have to be. The debt-ceiling debate reflects a harsher, less empathetic America. It’s sad to see.

My own view is that Obama should have played the 14th Amendment card, using its language about “the validity of the public debt” to unilaterally raise the debt ceiling. Yes, he would have infuriated the Republicans, but so what? They already view him as the Antichrist. Legal scholars believe that Congress would not have been able to sue to overturn his decision. Inexplicably, he chose instead a course of action that maximized the leverage of the Republican extremists.

Assuming the Senate passes the bill on Tuesday, the debt ceiling will be a nonissue until after the next election. But the debilitating deficit battles are by no means over. Thanks to this deal, a newly formed supercommittee of Congress is supposed to target another $1.2 trillion to $1.5 trillion in cuts by late November. If those cuts don’t become law by Dec. 23, automatic across-the-board cuts will be imposed, including deep reductions in defense spending.

As has been explained ad nauseam, the threat of defense cuts is supposed to give the Republicans an incentive to play fair with the Democrats in the negotiations. But with our soldiers still fighting in Afghanistan, which side is going to blink if the proposed cuts threaten to damage national security? Just as they did with the much-loathed bank bailout, which most Republicans spurned even though financial calamity loomed, the Democrats will do the responsible thing. Apparently, that’s their problem.

For now, the Tea Party Republicans can put aside their suicide vests. But rest assured: They’ll have them on again soon enough. After all, they’ve gotten so much encouragement.

A version of this op-ed appeared in print on August 2, 2011, on page A25 of the New York edition with the headline: The Tea Party’s War On America.