Robert B. Reich's Blog, page 142

The Oddness of the President's Upcoming Deficit-Reduction Plan

On Monday the President will offer ways to pay for his $467 billion American Jobs Act mostly by increasing taxes on the wealthy.

I'm all in favor, but it's an odd strategy. If any Republican was prepared to vote for the jobs bill, this will send him or her scurrying.

So if the President was never really serious about getting Republican votes in the first place — if his jobs bill and the tax increase on the wealthy were always going to be part of his 2012 election year pitch — why didn't he make his jobs bill big enough to do the job?

Here's another odd thing.

The deficit-reduction plan the President will present Monday to Congress's special supercommittee on the debt (now struggling to come up with $1.5 trillion in deficit reduction) will also propose some $2 to $3 trillion in additional deficit reduction over the next ten years — including changes in Medicare. 

According to the President's plan, those tax increases and spending cuts would go into effect in 2013.  

But there's a strong likelihood the American economy will still be anemic in 2013, if not on life support. Even if we avoid a double dip the jobs picture we'll almost certainly be terrible. Even if by some miracle job growth soared to the average monthly growth over the past decade, the unemployment rate wouldn't get back down to 6 percent until 2024.

When unemployment is still in the stratosphere, it would be insane to start cutting the deficit by $3 trillion to $4 trillion. That would push unemployment into outer space.

And in proposing such a huge deficit reduction package, the President continues to reenforce the Republican lie that the budget deficit is our biggest challenge — indeed, that we're in the fix we're in because government has become too big.

If the President wants to show his creds on deficit reduction, at least put in a trigger that begins to lower the deficit only when unemployment falls to 6 percent.

Our national crisis is joblessness and low wages, not the deficit.  

Two Cheers and One Jeer for the American Jobs Act

Two cheers for the President and his America's Jobs Act. Cheer Number One: In presenting it to a joint session of Congress, he sounded as passionate and determined as he's ever sounded.

Second cheer: He laid out the problem correctly and effectively. He explained why jobs and growth must be the nation's first priority now — not the federal deficit. The economy is in crisis. People are hurting. So government must act, and act quickly. It's irresponsible at a time like this to suggest that government should simply close down.

But a jeer because the jobs plan he presented isn't nearly large enough or bold enough to make a major dent in unemployment, or to restart the economy.

$450 billion sounds like a lot – and is more than I expected — but some of this merely extends current spending (unemployment benefits) and tax cuts (in Social Security taxes), so it doesn't add to aggregate demand.

The net new boost to the economy is closer to $300 billion. That doesn't approach even half the gap between what the economy is now producing and what it could produce at or near full employment.

And much that $300 billion is in the form of temporary tax cuts to individuals and companies. Some of these make sense — enlarging the Social Security tax cut, extending it to employers, and giving small businesses a tax holiday for new hires.

But temporary tax cuts haven't proven to be particularly effective in stimulating new spending in times of economic stress. People tend to use them to pay off debts or increase savings. Companies use them to reduce costs, but they won't make additional hires unless they expect additional sales – which won't occur unless consumers increase their spending.

That leaves some $140 billion for infrastructure – improving outworn school buildings, roads, bridges, ports, and so on. And $35 billion to help cash-starved states avoid more layoffs teachers. Both good and important but still small relative to the overall need.

Why did the President include so many tax cuts, and why didn't he make his proposal sufficiently large to make a real impact on jobs and growth? Because he crafted it in order to appeal to Republicans. To get it enacted, he needs their votes.

I'm having a dizzying sense of déjà vu. The first $800 billion stimulus (spread over two years) wasn't nearly large enough given the drop in aggregate demand. And half of it was in the form of tax cuts. The reason it wasn't bigger and contained so many tax cuts was to get Republican votes. But its apparent ineffectiveness — it saved around 3 million jobs, but that didn't save it from appearing to fail — made it harder for the White House to do anything more to stimulate the economy, and ward off what's likely to be a double dip.

That's been the heart of Obama's dilemma. Big and bold enough to make a difference, and Republicans are certain to reject it. Small and focused on tax cuts, and maybe Republicans will bite. But even if they sign on, what's the point of the exercise if it won't have a measurable effect on jobs and growth?

And why would they sign on this time, anyway?

Republican Senate leader Mitch McConnell scoffs "This isn't a job plan. It's a reelection plan." That's precisely the problem. McConnell and company have stated publicly that their number-one objective is to unseat Obama and regain the presidency in 2012. They don't want to give the President anything he could possibly claim as a victory. And they're not terribly worried if the economy stays awful through Election Day because that's the best way to fulfill their number-one objective.

The President would have done better with a plan that was big enough to make a real difference. And then, when Republicans rejected it, campaign on it.

So two cheers — for both the President's style and his words. And one jeer: He failed on substance and strategy. 

Link to Livestream of Lecture at Drake University, September 8, 7pm CDT

http://www.ustream.tv/channel/drake-u-events

Tonight's Republican Debate: The 19th Century or the Stone Age?

Tonight a bevy of Republican presidential hopefuls hope to emerge as finalists. Rick Perry and Michele Bachmann will battle for the right-wing nut Tea Party finals. Mitt Romney and John Huntsman will position themselves for the moderate right-wing finals. The putative winners in both these rounds will take on each other in the months ahead. 

Nonetheless, listen tonight (if you can bear it) for anything other than standard Republican boilerplate since the 1920s — a wistful desire to return to the era of President William McKinley, when the federal government was small, the Fed and the IRS had yet to be invented, state laws determined worker safety and hours, evolution was still considered contentious, immigrants were almost all European, big corporations and robber barons ran the government, the poor were desperate, and the rich were lived like old-world aristocrats. 

In the late 1950s and 1960s, the Republican Party had a brief flirtation with the twentieth century. Mark Hatfield of Oregon, Jacob Javits and Nelson Rockefeller of New York, Margaret Chase Smith of Maine, and presidents Dwight Eisenhower and Richard Nixon lent their support to such leftist adventures as Medicare and a clean environment. Eisenhower pushed for the greatest public-works project in the history of the United States — the National Defense Highway Act, which linked the nation together with four-lane (and occasionally six-lane) Interstate highways. The GOP also supported a large expansion of federally-supported higher education. And to many Republicans at the time, a marginal income tax rate of more than 70 percent on top incomes was not repugnant.

But the Republican Party that emerged in the 1970s began its march back to the 19th century. Ronald Reagan lent his charm and single-mindedness to the charge but the foundations had been laid long before. By the time Newt Gingrich and his regressive followers took over the House of Representatives in 1995, social conservatives, isolationists, libertarians, and corporatists had taken over the GOP once again. 

Some Democrats are quietly rooting for Perry or Bachmann, on the theory that they're so extreme that they'll bolster Obama's chances for a second term and make it easier for congressional Democrats to scare Independents into voting for a Democratic House and maybe even Senate.

I understand the logic but I'd rather not take the chance. A Perry or Bachmann wouldn't just take us back to the 19th century. They'd take us back to the stone age. 

Romney's Jobs Plan

Mitt Romney unveiled his economic plan today.

It is unremarkable, to say the least.

He wants to lower corporate taxes and reduce regulations. This, he asserts will create jobs. Remember, corporations are now showing record profits. They're sitting on $2 trillion of cash. Why it is Romney believes they need more money and lower costs in order to create jobs is one of the wonders of the universe.

Romney does nothing for average working people. He'd eliminate capital gains taxes for anyone earning under $200,000 — but these are not average working people.

But Romney is not out of his mind. What he offers has been standard Republican fare for decades. It's not rabid right-wing populism, decrying immigrants (Bachmann) or the Fed and the federal income tax (Perry). It's not libertarian craziness (Paul). It's not logically incoherent (Palin).

In other words, Romney is way too reasonable for the current GOP.  

Why Inequality is the Real Cause of Our Ongoing Terrible Economy

THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody's Analytics. That should come as no surprise. Our society has become more and more unequal.

When so much income goes to the top, the middle class doesn't have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we've seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?

The economy won't really bounce back until America's surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke's Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.

Look back over the last hundred years and you'll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It's no mere coincidence that over the last century the top earners' share of the nation's total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs. The pay of graduates of prestigious colleges and M.B.A. programs — the "talent" who reached the pinnacles of power in executive suites and on Wall Street — soared.

The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.

Eventually, of course, the bubble burst. That ended the middle class's remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.

We might have enlarged safety nets — by having unemployment insurance cover part-time work, by giving transition assistance to move to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone.

Big companies could have been required to pay severance to American workers they let go and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same, so that all citizens could share in gains from trade.

We could have raised taxes on the rich and cut them for poorer Americans.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. (Only 27 percent of the unemployed are covered by unemployment insurance.) And it allowed companies to bust unions and threaten employees who tried to organize. Fewer than 8 percent of private-sector workers are unionized.

More generally, it stood by as big American companies became global companies with no more loyalty to the United States than a GPS satellite. Meanwhile, the top income tax rate was halved to 35 percent and many of the nation's richest were allowed to treat their income as capital gains subject to no more than 15 percent tax. Inheritance taxes that affected only the topmost 1.5 percent of earners were sliced. Yet at the same time sales and payroll taxes — both taking a bigger chunk out of modest paychecks — were increased.

Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance — which until then had been the servant of American industry — to become its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation's profits. By 2007, financial companies accounted for over 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.

Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government — Americans still wanted all the government services they had before, and then some — as against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public's growing cynicism about government's doing anything right.

Some say we couldn't have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans' average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers' pay has risen almost 30 percent. At the same time, the top 1 percent of German households now take home about 11 percent of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

THE real reason for America's Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people "with great economic power had an undue influence in making the rules of the economic game." With hefty campaign contributions and platoons of lobbyists and public relations spinners, America's executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

Yet the rich are now being bitten by their own success. Those at the top would be better off with a smaller share of a rapidly growing economy than a large share of one that's almost dead in the water.

The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America's vast middle class. The spending of the richest 5 percent alone will not lead to a virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including the United States, to become a net exporter.

Reviving the middle class requires that we reverse the nation's decades-long trend toward widening inequality. This is possible notwithstanding the political power of the executive class. So many people are now being hit by job losses, sagging incomes and declining home values that Americans could be mobilized.

Moreover, an economy is not a zero-sum game. Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts. The question is whether, and when, we will summon the political will. We have summoned it before in even bleaker times.

As the historian James Truslow Adams defined the American Dream when he coined the term at the depths of the Great Depression, what we seek is "a land in which life should be better and richer and fuller for everyone."

That dream is still within our grasp.

[I wrote this for today's New York Times]

Reddit Ask Me Anything

I'll be answering questions on Reddit for the next few hours here.

The Zero Economy

The Bureau of Labor Statistics reports today no jobs were created in August. Zero. Nada.

Well, not quite. The strike at Verizon reduced the labor force by 45,000. Minnesota government employees returned to work, adding 22,000. So in reality, America added 23,000 jobs. Almost zero.

In reality, worse than zero. We need 125,000 a month merely to keep up with population growth. So the hole continues to deepen.

Since this Depression began at the end of 2007, America's potential labor force – working-age people who want jobs – has grown by over 7 million. But since then the number of Americans with jobs has shrunk by more than 300,000.

If this doesn't prompt President Obama to unveil a bold jobs plan next Thursday, I don't know what will.

The problem is on the demand side. Consumers (whose spending is 70 percent of the economy) can't boost the economy on their own. They're still too burdened by debt, especially on homes that are worth less than their mortgages. Their jobs are disappearinig, their pay is dropping, their medical bills are soaring.

And businesses won't hire without more sales.

So we're in a vicous cycle.

Republicans continue to claim businesses aren't hiring because they're uncertain about regulatory costs. Or they can't find the skilled workers they need.

Baloney. If these were the reasons businesses weren't hiring – and demand were growing – you'd expect companies to make more use of their current employees. The length of the average workweek would be increasing.

But the length of the average workweek has been dropping. In August it declined for the third month in a row, to 34.2 hours. That's back to where it was at the start of the year – barely longer than what it was at its shortest point two years ago (33.7 hours in June 2009).

It's demand, stupid.

So what does a sane nation do when the consumers and businesses can't boost the economy on their own?

Government becomes the purchaser of last resort. It hires directly (a new WPA and Civilian Conservation Corps, for example). It helps states and locales, so they don't have to continue to slash payrolls and public services. (The help could be structured as a loan, to be repaid when unemployment drops to, say, 6 percent.)

And it hires indirectly — contracting with companies to rebuild our crumbling infrastructure, including school buildings, to take another example.

Not only does this create jobs but also puts money in the hands of all the people who get the jobs, so they can turn around and buy the goods and services they need – generating more jobs.

Get it? Not exactly rocket science.

So why don't Republicans get it? Either they're knaves – they want the economy to stay awful through next Election Day so Obama gets the boot. Or they're fools – they've bought the lie that reducing the deficit now creates more jobs.

Every time you hear anyone say we're "broke" or "can't afford to spend more," tell them we'll be in worse shape if we don't. If the economy remains dead in the water, the ratio of public debt to GDP balloons.

And remind them that the federal government can now borrow at fire-sale rates. Interest on the ten-year Treasury bill is 2 percent.

Do you hear me, Mr. President? Please — be bold next week. And if, as expected, Republicans refuse to go along, take it to the people. Mobilize the public. Use the bully pulpit. That's what you have it for.

One more thing, Mr. President. You also have to tackle inequality. When so much income and wealth continues to flow to the very top, America's vast middle class still won't have enough purchasing power to boost the economy. Priming the pump is necessary but won't be sufficient without enough water in the well.

Obama's Jobs Plan: Will He Offer Policy Miniatures or Give 'em Hell?

Next Wednesday President Obama will unveil his jobs plan.

He'll choose either Plan A or Plan B.

Plan A would be big enough to restart the economy (now barely growing) and reduce unemployment (which continues to grow). That means spending another trillion dollars over the next two years – rebuilding the nation's infrastructure, creating a new WPA and Civilian Conservation Corps, and lending money to cash-starved states and cities.

Republicans will oppose it, of course. They'll say the stimulus didn't work the first time (they're wrong – it saved 3 million jobs but it was way too small given the drop in consumer spending as well as budget cuts by states and cities), and we can't afford it (wrong again – the yield on 10-year Treasury bills is now 2 percent, meaning this is the best time to borrow. And if growth isn't restored soon, the debt/GDP ratio will balloon beyond belief). But their real hope is to keep the economy anemic through Election Day 2012 so voters will send Obama home.

That means the President would have to fight for it. He'd have to barnstorm the country, demanding Republican votes. He'd build his 2012 campaign around it, attacking the Republican "do nothing" Congress. He'd give 'em hell.

Plan B would be a bunch of policy miniatures that would have almost no effect on the economy or employment but would nonetheless be good things to do (extending the Social Security tax cut, extending unemployment benefits, reauthorizing the highway building trust fund, giving employers a tax incentive to hire the long-term unemployed, ratifying trade agreements).

Republicans will oppose it, of course. They'll say this is no time for new initiatives, that our biggest problem is the size of government, debt, and over-regulation. They've been saying almost exactly the same thing for eighty years.

The President would present each of his policy miniatures as a separate piece of legislation hoping to attract enough Republican votes to get something – anything – enacted and declare a victory. He'd then campaign as a leader who can "get things done," even though the economy is still a basket case.

Which will it be — Plan A or B? Early indications suggest Plan B. The President is now saying his upcoming plan will generate "up to a million jobs." But with 25 million Americans looking for full-time jobs that's chump change.

Bad choice.

At exactly the same time the President is laying out his jobs plan next Wednesday night, Republican presidential hopefuls will be holding their first big debate. The winner will be the one who comes off as the toughest fighter for average Americans.

The winner of the 2012 presidential election will be the person who comes off as the toughtest fighter for average Americans.

Earth to Obama: Remember Harry (Give 'em Hell) Truman.

Here's Truman's acceptance speech at the Philadelphia convention that nominated him prior to the 1948 election:

Senator Barkley and I will win this election and make those Republicans like it… We will do that because they are wrong and we are right… [T]he people know the Democratic Party is the people's party, and the Republican Party is the party of special interests and it always has been and always will be… The Republican Party… favors the privileged few and not the common, every-day man. Ever since its inception that Party has been under the control of special privilege, and they concretely proved it in the 80th Congress. They proved it by the things they did to the people and not for them. They proved it by the things they failed to do.

Give em hell, Barack.

Rick Perry's Secret Plan to Save Blue States from the Red States

Of all the nonsense Texas Governor Rick Perry spews about states' rights and the tenth amendment, his dumbest is the notion that states should go it alone. "We've got a great Union," he said at a Tea Party rally in Austin in April 2009. "There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that."

The core of his message isn't outright secession, though. It's that the locus of governmental action ought to be at the state rather than the federal level. "It is essential to our liberty," he writes in his book, Fed Up! Our Fight to Save America from Washington, "that we be allowed to live as we see fit through the democratic process at the local and state level."

Perry doesn't like the Federal Reserve Board. He hates the Internal Revenue Service even more. Presumably if he had his way taxpayers would pay states rather than the federal government for all the services and transfer payments they get.

This might be a good deal for Texas. According to the most recent data from the Tax Foundation, the citizens of Texas receive only 94 cents from the federal government for every tax dollar they send to Washington.

But it would be a bad deal for most other red states. On average, citizens of states with strong Republican majorities get back more from the federal government than they pay in. Kentucky receives $1.51 from Washington for every dollar its citizens pay in federal taxes. Alabama gets back $1.66. Louisiana receives $1.78. Alaska, $1.84. Mississippi, $2.02. Arizona, $1.19. Idaho, $1.21. South Carolina, $1.35. Oklahoma, $1.36. Arkansas, $1.41. Montana, $1.47, Nebraska, $1.10. Wyoming, $1.11. Kansas, $1.12.

On the other hand, fiscal secession would be a boon to most blue states. The citizens of California – harder hit by the recession than most – receive from Washington only 78 cents for every tax dollar they send to Washington. New Yorkers get back only 79 cents on every tax dollar they send in. Massachusetts, 82 cents. Michigan, 92 cents. Oregon, 98 cents.

In other words, blue states are subsidizing red states. The federal government is like a giant sump pump – pulling dollars out of liberal enclaves like California, New York, Massachusetts, and Oregon  – and sending them to conservative places like Montana, Idaho, Oklahoma, Arizona, Wyoming, Kansas, Nebraska, and the Old South.

As a practical matter, then, Rick Perry's fight to save America from Washington is really a secret plan to save blue states from red states.

Perry, it turns out, is a closet liberal.