It’s easy to feel a bit disoriented out here on the West Coast, particularly here in Los Angeles. The third Sunday in January was breezy, in the eighties, with that impossibly deep blue sky, and of course you could stand on the beach and watch the surfers, and then turn your head and see the deep snow in the nearby mountains. Yeah, kids out here have been known to go snowboarding in the morning and surfing in the afternoon. They don’t care that this place is a bit of everything and not any one thing in particular. After all, the Stanley Cup has been out here for a year, even in this most un-Canadian of places – we had a damned good hockey team last time around, for no particular reason. In fact, now and then you see that irritating young fellow from London, Ontario – Justin Bieber – tooling around town in his all-electric supercar, that totally mirror-chrome Fisker Karma – which of course has no color in and of itself at all. It just reflects back the world around it. That’s probably symbolic. The kid’s music is like that, and that car was also a gift from Ellen DeGeneres, a woman of uncertain sexuality in the traditional sense. Nothing is settled out here. Justin Bieber moved on to a new all-white one-off Ferrari anyway – maybe he’s really Italian, not Canadian. One never knows out here.
Part of why one can feel disconnected out here is also geographic – the rest of America is far on the other side of those snowy mountains and a vast desert and more mountains – and three time-zones away. What happened on Wall Street and in Washington happened three hours ago, much of it while you were sleeping. That means this Sunday evening column will be posted when it’s actually Monday morning in the real world, on the day of Barack Obama’s second inauguration – or his fourth if you’re keeping score. Not that it matters. Everyone knows what to expect. He’ll give a speech about what he and the folks on his side believe must be done – immigration reform, tax reform, education reform, dealing with climate change given our new age of monster storms, and something about getting the economy working again – more jobs, good jobs, to restore what’s left of the middle class, so there are at least some customers for what the billionaire capitalists decide to produce. Those guys should pay their fair share in taxes too, by the way. There will also be the usual nod to what might be called Liberal Libertarianism – let gay folks be who they want to be, let women decide what’s best for their own bodies (and make sure they get paid the same as men), and stop picking on minorities and labor unions and so on. If no one’s hurting you, well, let them be – America need not be a nation of self-righteous busybodies and scolds, no matter what you think God told you privately, on the sly.
The only thing different this year might have to do with guns. The issue is gun control, or gun safety, or mass random violence, depending on how you want to frame things. It doesn’t matter. Obama will probably try to shame the Republicans, making them seem like brutal and murderous thugs for not even considering doing anything about what everyone knows is happening, while the Republicans, and the NRA which finances them, will no doubt portray Obama as a tyrant who wants to take away your guns, which you have a right to own, leaving you defenseless and emasculated and whatnot – and like a true patriot, you also might want to overthrow the government too. This should be interesting. Obama goes first here, with his inauguration speech.
The rest will be the usual, and of course Obama will vow that he will do something about the crushing national debt – but not end Social Security and Medicare and Medicaid, or abandon Obamacare and let those who want healthcare pay the big bucks to the right people for it or die. Everyone always talks about the crushing debt that will end America as we know it. Most of it comes from the two major wars we put on the Chinese Credit Card, and the massive Bush tax cuts that were never offset in any way, and Bush’s totally unfunded Medicare Part D thing, and by the economic collapse at the end of the Bush years, which devastated tax revenues. No income, no income tax. No property, because you lost your house to foreclosure, no property tax – and when corporations fail in a recession where no one has the money to buy anything, no corporate tax. Those three steady streams that funded government dried up. We were screwed. Obama’s spending, mostly stimulus to goose up demand a little, was a minor contributor to the debt, and that spending probably paid for itself. Still, Obama will say we do have to do something about the crushing national debt, which everyone knows is the most very awful catastrophic dire problem we face.
Everyone knows this. It’s obvious. Ask any economist who’s smart enough to have won the Nobel Prize in Economics, or don’t, because if you ask Paul Krugman, he’ll tell you that’s nonsense:
Such declarations are rarely accompanied by any argument about why we should believe this; it’s supposed to be part of what everyone knows. This is, however, a case in which what everyone knows just ain’t so. The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either – and the long-term outlook gets much more attention than it should.
This is simple stuff:
It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy – and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers: Revenue will rise while some categories of spending, such as unemployment benefits, will fall. Indeed, that’s already happening.
It seems that economic recovery really will be enough “to stabilize the fiscal outlook” in a way:
Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to GDP, the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.
The center calls for another $1.4 trillion in deficit reduction, which would completely stabilize the debt ratio; President Barack Obama has called for roughly the same amount. Even without such actions, however, the budget outlook for the next 10 years doesn’t look at all alarming.
There’s no problem now and only one, maybe, in the future:
Consider, for example, the case of Social Security. There was a case for paying down debt before the baby boomers began to retire, making it easier to pay full benefits later. But George W. Bush squandered the Clinton surplus on tax cuts and wars, and that window has closed. At this point, “reform” proposals are all about things like raising the retirement age or changing the inflation adjustment, moves that would gradually reduce benefits relative to current law. What problem is this supposed to solve?
Well, it’s probable (although not certain) that, within two or three decades, the Social Security trust fund will be exhausted, leaving the system unable to pay the full benefits specified by current law. So the plan is to avoid cuts in future benefits by committing right now to… cuts in future benefits. Huh?
Okay, you can argue that the adjustment to an aging population would be smoother if we commit to a glide path of benefit cuts now. On the other hand, by moving too soon we might lock in benefit cuts that turn out not to have been necessary. And much the same logic applies to Medicare. So there’s a reasonable argument for leaving the question of how to deal with future problems up to future politicians.
The debt-panic that’s happening now seems to be nonsense, or political posturing:
The deficit scolds dominating policy debate will, of course, fiercely resist any attempt to downgrade their favorite issue. They love living in an atmosphere of fiscal crisis: It lets them stroke their chins and sound serious, and it also provides an excuse for slashing social programs, which often seems to be their real objective.
Krugman is thinking another way:
It’s time to focus on other stuff – like the still-depressed state of the economy and the still-terrible problem of long-term unemployment.
Fix the economy and the debt thing will fix itself. Everyone is looking at something that just reflects back to them something that isn’t what you’re really looking at. It’s like staring at Justin Bieber’s snazzy mirror-car as it rolls by. What was that? You only saw your own face in the fender.
Yes, fix the economy and the debt thing will fix itself, but that’s easier said than done. Ask any economist who’s smart enough to have won the Nobel Prize in Economics and you might get different answers on how to do that, like this from Joseph Stiglitz:
The re-election of President Obama was like a Rorschach test, subject to many interpretations. In this election, each side debated issues that deeply worry me: the long malaise into which the economy seems to be settling, and the growing divide between the one percent and the rest – an inequality not only of outcomes but also of opportunity. To me, these problems are two sides of the same coin: with inequality at its highest level since before the Depression, a robust recovery will be difficult in the short term, and the American dream – a good life in exchange for hard work – is slowly dying.
Nothing is what it seems, and debt is the least of our problems:
Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena, when they are in fact intertwined. Inequality stifles, restrains and holds back our growth. When even the free-market-oriented magazine The Economist argues – as it did in a special feature in October – that the magnitude and nature of the country’s inequality represent a serious threat to America, we should know that something has gone horribly wrong. And yet, after four decades of widening inequality and the greatest economic downturn since the Depression, we haven’t done anything about it.
Then Stiglitz hammers home how inequality is the real issues here:
The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top one percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle – who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators – have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable – it was reliant on the bottom 80 percent consuming about 110 percent of their income.
There should be at least some customers for what the billionaire capitalists decide to produce. They can’t buy everything on credit either, and there are also these points:
Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.
Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks. The recent modest agreement to restore Clinton-level marginal income-tax rates for individuals making more than $400,000 and households making more than $450,000 did nothing to change this. Returns from Wall Street speculation are taxed at a far lower rate than other forms of income. Low tax receipts mean that the government cannot make the vital investments in infrastructure, education, research and health that are crucial for restoring long-term economic strength.
Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s – the last time inequality of income and wealth in the United States was so high – ended with the Great Crash and the Depression. The International Monetary Fund has noted the systematic relationship between economic instability and economic inequality, but American leaders haven’t absorbed the lesson.
Obama can talk all he wants in his inauguration speech about how he really does agree with the Republicans, and everyone else, about the awful debt crises, it’s just that he doesn’t agree with two Nobel Prize economists, and Stiglitz also tosses this in:
Children in other rich countries like Canada, France, Germany and Sweden have a better chance of doing better than their parents did than American kids have. More than a fifth of our children live in poverty – the second worst of all the advanced economies, putting us behind countries like Bulgaria, Latvia and Greece.
Our society is squandering its most valuable resource: our young. The dream of a better life that attracted immigrants to our shores is being crushed by an ever-widening chasm of income and wealth.
This is dismal stuff, but Stiglitz does not let up:
Economic inequality leads to political inequality and a broken decision-making process. Despite Mr. Obama’s stated commitment to helping all Americans, the recession and the lingering effects of the way it was handled have made matters much, much worse. While bailout money poured into the banks in 2009, unemployment soared to 10 percent that October. The rate today (7.8 percent) appears better partly because so many people have dropped out of the labor force, or never entered it, or accepted part-time jobs because there was no full-time job for them.
Helping the wrong people didn’t help at all, even if it saved the banking system, for what that’s worth:
Instead of pouring money into the banks, we could have tried rebuilding the economy from the bottom up. We could have enabled homeowners who were “underwater” – those who owe more money on their homes than the homes are worth – to get a fresh start, by writing down principal, in exchange for giving banks a share of the gains if and when home prices recovered.
We could have recognized that when young people are jobless, their skills atrophy. We could have made sure that every young person was either in school, in a training program or on a job. Instead, we let youth unemployment rise to twice the national average. The children of the rich can stay in college or attend graduate school, without accumulating enormous debt, or take unpaid internships to beef up their résumés. Not so for those in the middle and bottom. We are sowing the seeds of ever more inequality in the coming years.
We could have done something:
Market forces don’t exist in a vacuum – we shape them. Other countries, like fast-growing Brazil, have shaped them in ways that have lowered inequality while creating more opportunity and higher growth – countries far poorer than ours have decided that all young people should have access to food, education and health care so they can fulfill their aspirations.
That’s just not us:
Our legal framework and the way we enforce it has provided more scope here for abuses by the financial sector; for perverse compensation for chief executives; for monopolies’ ability to take unjust advantage of their concentrated power.
Yes, the market values some skills more highly than others, and those who have those skills will do well. Yes, globalization and technological advances have led to the loss of good manufacturing jobs, which are not likely ever to come back. Global manufacturing employment is shrinking, simply because of enormous increases in productivity, and America is likely to get a shrinking share of the shrinking number of new jobs. If we do succeed in “saving” these jobs, it may be only by converting higher-paid jobs to lower-paid ones – hardly a long-term strategy.
Globalization, and the unbalanced way it has been pursued, has shifted bargaining power away from workers: firms can threaten to move elsewhere, especially when tax laws treat such overseas investments so favorably. This in turn has weakened unions, and though unions have sometimes been a source of rigidity, the countries that responded most effectively to the global financial crisis, like Germany and Sweden, have strong unions and strong systems of social protection.
We don’t have those. We don’t like those. Stiglitz calls for 1) significant investments in education, 2) a more progressive tax system, and 3) a tax on financial speculation. Stiglitz says that would be a start. It seems that none of it is likely to happen.
Paul Krugman disagrees with him on one point anyway:
So am I saying that you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs? Well, yes. You don’t have to like it, but economics is not a morality play, and I’ve yet to see a macroeconomic argument about why it isn’t possible.
Inequality may work out fine, even if it’s unpleasant. Still, David Dayen offers this:
Stiglitz’ argument would serve as the basis of all economic policy in America if the system were just. Moreover, Stiglitz’ proposed solutions are popular with the majority of voters. They’re just not popular with the majority of lobbyists, wealthy campaign backers, and millionaire media cocktail party types.
There is a disconnection here, and it’s not just a Los Angeles thing. This place keeps you wondering what you just saw and even where you are – snow and palm trees and teenage stars in mirror-cars and everything three hours late. Back east, however, everyone is talking about a problem that isn’t a problem, or at least is fixing itself, and not talking about the problem that is the real problem. To that end, Dayen offers this:
My vote in the 2016 Presidential Primary will go to the candidate who offers Mr. Stiglitz (and/or Mr. Krugman) the role of chief economic adviser.
That doesn’t seem likely. Ted Nugent is available. No one’s seen him out here lately.