The Great Recession - a Dose of Reality

As we blast through the remainder of 2011, the economic condition of both the U.S. and the world is seriously on everyone’s minds. Just today, the Marketplace Morning Report highlighted concerns that the global economy is not recovering (emphasis mine):

Jeremy HOBSON (Host): When you look at the number -- 0.1 percent growth, then you look at France, 0 percent growth, Japan, negative 1.3 percent, the U.S., 1.3 percent -- are we heading into a global recession here?

Simon TILFORD: I think in terms of the Western, developed industrial economies, we're in a depression, frankly. It's very hard to see where growth is going to come from over the next few years. Governments have tapped out, they can't borrow. Monetary policy is as loose as it can be, interest rates can't be cut any further. The bottom line is there's a massive amount of debt that needs to be addressed.

HOBSON: Well, how can we go from what economists called a global recovery, into, as you say, a depression?

TILFORD: I think all talk of recovery of the last 18 months has been exaggerated. Many developed economies still haven't recovered their pre-crisis levels of economic activity. The U.S. is marginally above its pre-crisis level; Germany is marginally above; France, the U.K., Italy, Japan, well short of pre-crisis levels of output.

It’s a stark view, and at odds with the mainstream line in the American media of late. Yet it seems to resonate will with the experiences of average Americans, and especially their intense interest in job creation and economic growth.

Of course in Washington, the Deficit and debt are still distracting America’s “leaders” from that job issue, especially the post deal finger pointing. Once S&P downgraded us from AAA to AA+, a lot of Republicans began to bandy about the notion that the downgrade was because the proposed spending cuts didn’t go far enough, nor did they have enough additional tax breaks included.

Sadly for the Republicans, S&P said no such thing the first time.

Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” Mukherji said.

“That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”

Called out on their behavior, Republican politicians began to try and roll back their message. Sadly, in the Internet age, nothing goes away, as this tracker points out. TPM documents 19 instances in the three months leading up to the debt “deal” where prominent Republicans publically dismissed the doom and gloom predictions oof just about everyone, all the while singing the ideas that SUPPLY Side solutions could solve a DEMAND Side problem.

How bad has the disconnect between the disease and cure gotten? First, consider that much of the federal deficit problem (which feeds the debt increase ) is really a tax cut problem in as much as keeping the Bush tax cuts on the books (which Republicans want) is the single biggest driver for the deficit for the next decade. Second, Second, add in the fact that businesses don’t need regulatory certainty, they need profit certainty – and the best way to increase profits is to slash costs/wages/workers while retaining productivity. Throw in a healthy dose of “Government can’t create jobs” either by paying people to do work or contracting for services (like highway repairs). Stir well. At the end, you end up with plans of action coming from the conservative side of the aisle that ignore revenues, destroy the social safety net, and significantly hobble both military readiness, and our ability to grow the economy.

All this could be avoided, however, if we do a few sensible things. We need to listen to Warren Buffet. One of the richest men in the world reports that his real annual tax burden is about 17%, far below the top marginal federal income tax rate of 35%. As he sees it, and I concur, the tax code is stacked with too many things he and his ultra rich friends can use to pay less taxes, while soaking his own employees with tax burdens of 20- 35%. If he’s willing to call an egg an egg, so should we be.

The Great Recession fuels a swing to the Right - the Debt Deal and what it means for Liberals

It will come as somewhat of a surprise to my regular readers that I’ve stayed silent on the debt ceiling crisis. Part of the reason has been my July schedule – two weeks of vacation, a week in the office, and then a professional trip to Alaska. The other part of the reason is that I long ago reached a conclusion that analyzing the sausage making is a waste of my time – having spent most of the last five years doing federal budget work I know all too well how much can change in a day.

But now a “deal” is out, and like Washington Post Columnist Matt Miller, I’m underwhelmed:

So this is what we’ve driven the global economy and America’s credit rating to the brink for?

This is why Republicans (who voted for the Paul Ryan plan that would add $5 trillion in red ink over the next decade) decided it was vital to not lift the debt ceiling to accommodate their own budget’s outsized debt?

This is the best the White House could salvage after inexplicably failing to insist that the debt ceiling be raised as part of December’s deal to extend the Bush tax cuts — which would have let the country avoid this unprecedented exercise in self-inflicted damage?

See, I’m one of those liberals who sit well to the Left of the President – who is a Centrist at best and a moderate Republican normally – and thinks we could have done better. I’ve written here and elsewhere before about how, at the gross analysis level, you can’t cut your way out of this debt cycle – you have to raise revenues as well. Yet the plan now going before the House and Senate (with less than stellar chances of passing IMHO) is all cuts.

Many in the media punditocracy will no doubt try to spin this as “the best a besieged president could do. Paul Krugman is not buying it:

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Glenn Greenwald isn’t buying it either, and he notes with a fairly strong factual basis that the deal reached is the deal Mr. Obama wants to reach:

It appears to be true that the President wanted tax revenues to be part of this deal. But it is absolutely false that he did not want these brutal budget cuts and was simply forced -- either by his own strategic "blunders" or the "weakness" of his office -- into accepting them. The evidence is overwhelming that Obama has long wanted exactly what he got: these severe domestic budget cuts and even ones well beyond these, including Social Security and Medicare, which he is likely to get with the Super-Committee created by this bill (as Robert Reich described the bill: "No tax increases on rich yet almost certain cuts in Med[icare] and Social Security . . . . Ds can no longer campaign on R's desire to Medicare and Soc Security, now that O has agreed it").

Last night, John Cole -- along with several others -- promoted this weak-helpless-President narrative by asking what Obama could possibly have done to secure a better outcome. Early this morning, I answered him by email, but as I see that this is the claim being pervasively used to explain Obama's acceptance of this deal -- he was forced into it by the Tea Party hostage-takers -- I'm reprinting that email I wrote here. For those who believe this narrative, please confront the evidence there; how anyone can claim in the face of all that evidence that the President was "forced" into making these cuts -- as opposed to having eagerly sought them -- is mystifying indeed. And, as I set forth there, there were ample steps he could have taken had he actually wanted leverage against the GOP; the very idea that negotiating steps so obvious to every progressive pundit somehow eluded the President and his vast army of advisers is absurd on its face.

As usual, Mr. Greenwald is correct in the larger context of his analysis, and that is one of my main (and saddest) beliefs about the current Administration. They were not outfoxed nor were they outsmarted – they got what they wanted, just as they did with “healthcare reform”, our horrific indefinite detention policy, extensions of the “Bush era” tax cuts, and host of other, Right of center policies.

What the President (and to a certain extent Congressional Republicans) ignore is that the Economy has both grown weaker over the last 4 or 5 decades, and that weakness is severly exacerbated by the trends of income inequality that have emerged. Simply put, as Wages at the Higher end of the Economy (80^th% and up) have grown significantly since the early 1970’s, wages for all the percentiles below have grown so slowly as to remain flat. This chart shows it well. Add in the fact that tax rates have actually gone down slightly since 1965 as a percentage of GDP, and it’s no wonder the government has the huge debt problem it has.

It’s also no wonder that the problem of that debt CAN’T be solved with a policy that severely reduces spending (even with slashes to entitlements and Defense/security expenditures). Such slashing is doubly disingenuous because it ignores responsibility for fiscal actions taken since 2000. If Republicans were to start all their discussions of what to do with the debt by owning this series of decisions, I might respect them more, even when I disagree with them:

The bottom line, however is this – the President has the deal he wants, Congressional Republicans have the deal they want, truly liberal Democrats are left out in the cold, and the fiscal condition of America’s middle and lower class households is about to get worse. What’s the starting line for that continued decline?

· 58% of Americans have a job

· 56% of Americans are covered by Health Insurance

· The median yearly wage in the United States is $26,261

· The Average American household is carrying over $75,000 in debt, including their mortgage

· Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975

· American families are approximately 7.7 trillion dollars poorer than they were back in early 2007

· Approximately 21 percent of all children in the United States were living below the poverty line in 2010

· According to Newsweek, close to 20 percent of all American men between the ages of 25 and 54 do not have a job at the moment

And lest anyone think the legislation (If it passes , consider this regarding the legislative branch:

The biggest problem here is that Congress is completely incapable of binding itself over time. And everyone knows it. There’s a name for the problem — legislative entrenchment — and a line of Supreme Court cases supporting it. And there’s Blackstone before that. (More here, if you want. But the headline is misleading, as the only significant loophole to legislative entrenchment is that one Congress can compel another to pay off its debts — not, shall we say, helpful in this situation.)

What one Congress enacts, another Congress can repeal. Always. This problem is often brushed aside, but it makes a lot of policy proposals ultimately silly the longer you look at them. Al Gore’s Social Security lockbox is the most infamous example, but unless I’m missing something really big, this one bids fair to surpass it.

Surprisingly, however, there may well be Democratic resistance, and principled resistance at that:

At a press conference held by members of the House Out of Poverty Caucus Rep. John Conyers (D-Mich), the second most senior member of the U.S. House, was pointed in his criticism of the White House regarding jobs and cuts to Social Security the President put on the table last week. “We’ve got to educate the American people at the same time we educate the President of the United States. The Republicans, Speaker Boehner or Majority Leader Cantor did not call for Social Security cuts in the budget deal. The President of the United States called for that,” Conyers, who has served in the House since 1965, said. “My response to him is to mass thousands of people in front of the White House to protest this,” Conyers said strongly.

Short Take - WaPo chat on Atheists in Politics

Today's Washington Post website had a really interesting web chat about atheism and politics. I think more such chats (and maybe a few well done probing articles) would accomplish several good things, not the least of which would be mainstream recognition of the importance of atheists in American Politics, as well as the shear numbers of peole who claim little to no religious belief in America. Some of the questioners seem not quite to get it, but I think it was a significant leap forward for a mainstream news outlet in a larger market to do the chat.

The Great Recession and Corporate Boldness: Why no American company will sacrifice profit for employees

Robert Samuelson comes so close today to understanding the paradox that is the modern economy(Emphasis mine):

So it’s a Catch-22: You can’t get hired unless you have experience; but you can’t get experience unless you’re hired. With technology changing rapidly, workers need to know more, even as their skills-support systems weaken. There is no instant cure for today’s job mismatch, but it might ease if America’s largest companies were a little bolder. Surely many of them — enjoying strong profits — could make a small gamble that, by providing more training for workers, they might actually do themselves and the country some good.

Yet, like every good "The Free Market Will Solve all ills" fiscal conservative, he fails to take in two important truths. First, private companies have NO responsibility to do the country any good, especially if it conflicts with their fiduciary responsibility to turn a profit for their owners. Quite the contrary, as we saw in the 2000's, companies need and want to maximize profits in the short term no matter the long-term sector damage. That way, the bosses can justify their big bonuses, which Ezra Klein points out are derived from part of our normal human psychology:

Study after study shows that people would prefer a medium-sized house in a neighborhood of small houses to a big house in a neighborhood of much bigger houses. What people really want isn't to have a big house, in other words, but to have a bigger house than their peers. Economists call products driven by this sort of status competition "positional goods." The less-technical term for this sort of behavior is "keeping up with the Joneses," and we all do it.

When you're talking about changes in CEO pay, you're not talking about changes in the money CEOs use to make ends meet. You're talking about changes in a compensation package that has long since become totally abstract. Making $50 million is nicer than making $40 million, but the things it's buying, and the things it's saying about you, are, at that point, positional: it's a display of worth, not the way you put food on the table. People sometimes ask what CEOs need with all this money. The answer is they don't need it. But they need to not be making less money than other CEOs. If they are making less, then what does that say about them?

Thus, nothing in these companies structure or economic function drives them to make the nation better by improving employment through training, hiring or anything else.

The second point Mr. Samuelson misses is that one key function of government is to overcome this mismatch between what a business needs to do to profit, and what society needs businesses to do to keep the economy flowing. One of the reason we have massive systems of public education (from pre-K to Graduate School through community colleges) is to train a workforce that can evolve to the needs of the changing economy. One of the reasons we have the Small Business Administration, and environmental regulations, and laws requiring the protection of jobs for military reservists is that history has shown that if companies are left truly unregulated, they will do things that physically harm their workers and our environment, and financially harm just about everyone, all in the name of profits.

So while I agree that it would be nice if those companies were a "little bit bolder." But they won't be, and nothing in our economy right now incentivizes them to be. And against that backdrop many conservatives, Mr. Samuelson included, want to continue to cut and eliminate those government functions that could actually remedy this situation.

UPDATE:

This editorial in the Wall Street Journal emphasizes my point - Boeing wants to move plants, presumably to save costs. But as the writer notes, it sends a signal that the kind of complicated machining and engineering needed to keep our aviation industry ahead of the pack is not highly economically valued.

Most depressing of all, Boeing's move would send a market signal to those considering a career in engineering or high-skilled manufacturing. It is a message that corporate America has delivered over and over: Don't go to engineering school, don't bother with fancy apprenticeships, don't invest in skills. No rational person wants to take on college or even community college debt to come out and work on the Dreamliner —which should be the country's finest product—for a miserable $14 an hour. If a single story in the news can sum up the reasons for America's global decline, it's the decision to build a Dreamliner that will gut the American dream.

As long as American companies are willing to undercut their own workforces in pursuit of ever greater profits, Mr. Samuelson's ideal will never be considered, much less fulfilled.

Washington DC, Status Quo, and why the Great Recession is "Business as usual"

I'm not normally a fan of David Brooks - he's never going to come to the center enough for me to support most of his positions. But as a conservative columnist, he's remarkably willing to chastize both the Washington DC Power class, as well as his colleagues in the Chattering sub-class.

His latest column for the New York Times takes the former squarely on, noting that the housing collapse that brought on the Great Recession was partially the fault of one DC outfit doing business the normal way:

Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.

So just like we're not looking back on Torture, we won't prosecute this behavior - the lead up to the Great Recession was and still is the norm in our nation's capitol.

But the most devastating scandal in recent history involved dozens of the most respected members of the Washington establishment. Their behavior was not out of the ordinary by any means.

For that reason, the Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.

And that is perhaps the greatest tragedy of the Great Recession, apart from the job losses, the foreclosures, and the national decline. Across party lines, over more then a decade, the "Leaders" in Washington decided it was acceptable to have this go on. and thus wa sthe GReat Recession born.

Run, Republicans run!

Over at the Washington Post, Charles Krathammer asks the perennial Republican political questions:

The Republicans swept November’s midterm election by making it highly ideological, a referendum on two years of hyper-liberalism — of arrogant, overreaching, intrusive government drowning in debt and running deficits of $1.5 trillion annually. It’s not complicated. To govern left in a center-right country where four out of five citizens are non-liberal is a prescription for electoral defeat.

Start with Obama’s abysmal stewardship, root it in his out-of-touch social-democratic ideology, and win. That would create the strongest mandate for conservative governance since the Reagan era.

Just two problems - first, the Republicans can't lead anything - witness Newt Gingrich's campaign implosion, and Mitt Romney's "I really do believe the science of climate change but I'm going to run against everything else I ever did as Governor just because my record might anger the base." Second, all the Republicans are running on is the thin air of messaging as opposed to innovative ideas that will do anything for the country.

Relaxed regulatory climate that's good for business -tried that under the last Republican President and it left us with the worst Recession since the Great Depression. Lower marginal tax rates and get more economic growth - tried that under Reagan, and it took 8 years of Bill Clinton to change that course of the ship back to prosperity and surplus. Let private insurers run the healthcare system without government intervention or price control through negotiations? Tried that under Medicare's Drug benefit, also a Republican idea, and that single change led to the biggest jump in the national debt and deficit in my lifetime.

So sorry, Charlie, but your party is not offering me anything I want, need or can use. Its not offering the American People anything new, or worth retrying. Its not offering to actually do anything, other then preserve the jobs of the people whose backsides you prefer to kiss instead of coming up with an original idea.

The saddest thing of all, however, is that the Democrats are just as bad.

Refusing to advise and consent to a Presidential Appointee

In a further sign that some politicians are not connected to reality, it seems that Senator John Barrasso (R, Wyo.) is opposing the nomination of John Bryson to be the next Commerce Secretary (replacing Gary Locke, soon to be Ambassador to China):

Barrasso gave fellow Republicans a one-pager at their policy lunch Tuesday — with the heading "Mismatched: John Bryson & the Commerce Department" — citing his founding of the "extreme environmental organization" the Natural Resources Defense Council and his support of the cap-and-trade bill House Democrats passed in 2009.

"Instead of appointing a truly an economic leader, he has appointed an environmental extremist," Barrasso told reporters after the lunch.

Apparently Mr. Bryson's current stint as chairman of the board of BrightSource Energy, former as well as his former employment as president of the California Public Utilities Commission and as the former chairman, president and CEO of Edison International don 't qualify him as a businessman. In addition, with the National Oceanic and Atmospheric Administration (NOAA) making up approximately 65% of the Department of Commerce's budget in years we don't take the Census, having someone with environmental familiarity wouldn't be a bad idea either.

Of course, there's little love lost between NOAA and Republicans on the Hill these days, since NOAA administers the Endangered Species Act in marine waters of the U.S. Exclusive Economic Zone, and many Republican politicians want to ditch the ESA.

Still, you have to wonder why a politician wants to ditch someone whose actually qualified to lead both parts of the organization. Actually you don't - this is all about sticking it to President Obama.

H/t Ezra Klein at Wonkbook